Transcript Wolters Kluwer CLS Master

The Geithner Proposal
David H. Lui
Chief Compliance Officer
Overview
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The Paulson Proposal
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Geithner’s Whitepaper

The Evolving Regulatory Framework

Standards of Care: fueling change
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What’s next?
Restructuring the Regulatory Framework
Market Stability
Regulator
Prudential
Regulator
Business Conduct
Regulator
Paulson’s Blueprint for a Stronger
Regulatory Structure
Market Stability
Regulator
» Authority to Gather Appropriate Information,
Disclose Information, Collaborate with Other
Regulators on Rule Writing, and Take Corrective
Actions when Necessary
» Will Replace Federal Reserve’s More Limited,
Traditional Role as Supervisor of Financial Holding
Companies
» Has the Ability to Monitor Risks Across the
Financial System
Paulson’s Blueprint for a Stronger
Regulatory Structure
Market Stability
Regulator
Prudential
Regulator
» Single Prudential Regulator Focusing on Safety and
Soundness of Firms with Federal Guarantees
» Regulation Applied to Individual Firms with Capital
Adequacy Requirements, Investment Limits,
Activity Limits and On-site Risk Management
Supervision
» Oversee Firms with Explicit Government
Guarantees
Paulson’s Blueprint for a Stronger
Regulatory Structure
Market Stability
Regulator
Prudential
Regulator
Business Conduct
Regulator
» Monitor Business Conduct Regulation
Across All Types of Financial Firms
» Subsumes Most Roles of the SEC and CFTC
and has Authority Over Rules
» Eliminates Gaps in Oversight and Provide
Effective Consumer and Investor Protection
Restructuring the Regulatory Framework
Market Stability
Regulator
Prudential
Regulator
Safety and
Soundness
Business Conduct
Regulator
The Geithner Response: June 2009

Financial Crisis Becomes a Banking Crisis
– Limited Impact on SEC
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Broad Outlines of Paulson’s Treasury Blueprint
Still Visible

SEC Dodges a Bullet

http://10.75.16.79:8080/docs/regs/FinalReport_
web.pdf
The Treasury Blueprint and
the Geithner Proposal

The Market Stability Regulator
–
–
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Prudential Regulator
–

National Bank Supervisor
Business Conduct Regulator
–
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Fed Control over Subsidiaries of Tier 1 FHC
Systemic Risk Management Role
Consumer Financial Protection Agency – Credit,
Savings and Credit Products
SEC Role
Creation of
Financial Services Oversight Council
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Market Stability Regulator Becomes a Coordination Council
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Membership
– Secretary of Treasury (Chair)
– Federal Reserve Chair
– Director of the New National Bank Supervisor
– Director of New Consumer Financial Protection Agency
– SEC Chairman
– CFTC Chairman
– FDIC Chairman
– FHFA Director
New Financial Services Oversight Council

Supported by “Full-Time Expert Staff at Treasury”
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Some Surprises:
– Reduced Regulatory Role
» Gathers Information Only
– Refers Risk Items to Appropriate Regulators
– Not Under Federal Reserve Leadership
New National Bank Supervisor

The Treasury Blueprint’s “Prudential Regulator”
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Agency with Separate Status Within Treasury – Outlines
Heightened Capital and Prudential Requirements for
Banks and Bank Holding Companies
– Takes over Prudential Responsibilities of OCC
– Eliminates Thrift Charters (OTS) and brings them
within NBS Jurisdiction
– Federal Reserve and FDIC Continue to Oversee State
Banks; NCUA Continues Role for Credit Unions

New Office of National Insurance within Treasury to
Gather Information and Develop Expertise in the
Insurance Sector
New Consumer Financial Protection
Agency

Blueprint’s “Business Conduct Regulator”

Not Focused on Safety and Soundness: Giving
Consumer Protection an “Independent Seat at the Table
in our Financial Regulatory System.”

Can be “Assembled Reasonably Quickly from Discrete
Operations of other Agencies.”

Broad Jurisdiction to Protect Consumers in Consumer
Financial Products and Services such as Credit, Savings,
and Payment Products

Heavy Banking Focus: Not Securities Regulation
Impact on SEC As Proposed

Call to Tighten Oversight of Credit Ratings Agencies
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Call to Require Advisers to Private Funds to Register

Desire to Reduce Susceptibility of Money Market Funds to
“Runs”
– Revision of Rule 2a-7 Coming
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Continued Mandatory Arbitration for Broker/Dealers?
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“Consistency” between IA/BDs regarding Fiduciary Duty
Standard?

IA Self-Regulatory Organization?
Investment Adviser SRO
Treasury Blueprint for a Modernized
Financial Regulatory Structure
(Paulson Proposal)

“the establishment of a self-regulatory framework for
the investment advisory industry would enhance investor
protection and be more cost-effective than direct SEC
regulation. Thus, to effectuate this statutory
harmonization, Treasury recommends that investment
advisers be subject to a self-regulatory regime similar to
that of broker-dealers.”
Potential SRO Structures
Securities Industry
Investment
Advisors
Broker Dealers
FINRA
FINRA
New SRO
Emergence of an Elastic Compliance Model
“Show Me the Rule I’m Breaking!”
Broad Principles defined by
caselaw govern all Regulated
Entities Equally
Institutions Based
Compliance*
Rules Based
Compliance
Principles Based
Compliance
Complexity in the Marketplace
Activities are permitted
Creates need for elastic
so long as they do
not
regulatory
model toRule
mitigate
10b-5 as an Example
violate specific
rules at larger firms without
Conflicts
raising the bar so high that
* See John Walsh, Harvard
International
Law
Journal,
2008 compete
smaller
firms
can
no June
longer
What’s Next?
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Hazards and benefits of predicting the future
Whitepaper vs. legislation
Silent on the role of the SEC – an ongoing
conversation
Who will regulate IAs?
What will the impact be on hedge funds?
Extending the conversation regarding mandatory
arbitration
Questions?