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Washington and the Year Ahead
Joanne Medero
Managing Director
The opinions expressed are as of March 2012 and may change as subsequent conditions vary.
The regulatory landscape is changing
Ongoing reform has impact across the financial services industry and the global capital markets
Public policy issues impacting investors
Sovereign fiscal issues
Private funds
Systemic risk oversight
Fiduciary standards
Derivatives and commodities
Market structure issues
Money market funds
Retirement issues
Exchange traded funds
Insurance regulation
Volcker rule
Distribution models
Tax issues
Credit rating agencies
Housing
Corporate governance
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Framework for U.S. financial reform
White House
President
Barack Obama
Legislators
Chief of
Staff
Office of
Management
and Budget
National
Economic
Council
Jacob Lew
Jeffery Zients
(Acting)
Gene Sperling
Leadership
House
Speaker
John Boehner
Minority Leader
Nancy Pelosi
Regulators
Treasury
Tim Geithner
Fed
Ben Bernanke
FDIC
OCC
Marty Gruenberg
(Acting)
John Walsh
(Acting)
CFTC
Mary Schapiro
Gary Gensler
Edward DeMarco
(Acting)
Majority Leader
Harry Reid
Minority Leader
Mitch McConnell
Select Committees
SEC
FHFA
Senate
DOL
Hilda Solis
House Financial Services
Spencer Bachus
Barney Frank
House Ed and Workforce
John Kline
George Miller
Senate Banking
Tim Johnson
Richard Shelby
Senate Agriculture
Debbie Stabenow
Pat Roberts
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Framework for regulatory oversight and reform in 2013
Who will be elected President in November 2012?
3
Money market mutual funds in U.S.
Major reform milestones
Sep 2008
Reserve Fund “broke the buck”
Feb 2010
SEC adopted Rule 2a-7 amendments
May 2010
Rule 2a-7 amendments took effect
Nov 2010
President’s Working Group on MMFs released
report on possible reforms
Jan 2011
Comment letters on President’s Working Group
report filed with SEC
Mar 2011
SEC proposed rules to eliminate certain
references to credit ratings in MMF forms and
disclosures
May 2011
SEC held “Money Market Funds and Systemic
Risk” public roundtable
Aug 2011
Bipartisan group from House Financial Services
Committee sent letters to SEC expressing
opposition to NAV
Q2 2012
Proposed rule expected from SEC
Broad spectrum of structural solutions
Status
Quo
Rule 2a-7 enhancements are
sufficient
Redemption
Fees
Institute economic incentive to
discourage runs
NAV
Buffer
Establish NAV buffer (or cushion)
within individual MMF portfolios
Subordinated
Share Class
Create new share class to co-exist
with common shares
Special Purpose
Entity
House buffer outside individual
portfolio(s)
Hybrid
Approach
Employ combination of prior three
options
Floating
NAV
Eliminate stable NAV and find new
market equilibrium
Substantial reduction in MMF assets has wider implications given their
role in providing short-term financing for corporations and municipalities
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Retirement plans in the spotlight
Corporate DB Pension Plan Funding Levels
Municipal pension plans underfunded
• Discount Rate
128%
122%
• Amortization Period
• States beginning to re-negotiate
100%
83%
Corporate Defined Benefit funding
91%
87% 89%
• Pension Protection Act of 2006
97%
104%
78%
82%
80%
• Preservation of Access to Care for Medical
Beneficiaries and Pension Relief Act of 2010
• Many U.S. companies – Boeing, Ford Motor Co.,
Honeywell, 3M, and UPS – making contributions to
DB plans
• American Airlines discontinuing DB plan
Defined Contribution Plans
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Milliman, “The Milliman 100 Pension Funding Index”; as of December 2010
State pension reform status
• DOL final rule on fee disclosure with increased
service and compensation details required
• DOL leading efforts on TDF disclosure; SEC also
involved
• SEC-CFTC follow-on study for stable value
Social Security
• Projecting to be “exhausted” by 2037
Reduced
benefits
VT
NH
Increased
employee
contributions
Both
No reforms
MA
RI
CT
NJ
DE
MD
Source: The Pew Center on the States, based on data collected by the National Conference of State
Legislatures. Data from 2010.
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Volcker rule
Many banking entities have initiated corporate restructuring transactions in advance of final Volcker Rule
• Sales, spin offs, and eliminations of proprietary trading units, private capital investments, and hedge funds
• Includes transactions by Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley
Proposed rule, issued in October 2011, threatens to adversely impact financial markets in numerous ways
Restricts ability of
banking entities to
engage in “market
making activities,”
hold inventory, and
commit capital
Reduces liquidity,
particularly in fixed
income and
derivatives markets,
and less liquid portion
of equity markets
Wider spreads,
higher transaction
costs, and diminished
returns for investors
Higher cost of capital
for issuers
Negative for
broader economy,
job creation, and
U.S. global
competitiveness
Captures wide variety
of non-U.S. funds,
including traditional
long-only fixed
income and equity
funds, under
definition of ‘covered
fund’
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Fiduciary standards
SEC, in January 2011, released Dodd-Frank mandated study on brokers and
investment advisers
• Recommends harmonizing standard of care owed to retail investors
• Advocates preserving investor choice among services, products, and fee structures
CFTC and SEC rules on swap dealer business conduct requirements
• Apply to swap dealers and major swap participants engaging with “special entities,” including
municipalities and public and private pension plans
• CFTC rule final and effective in Fall 2012
• SEC has proposed rule, but no date set yet for final
Dodd-Frank expanded definition of “municipal adviser”
• Requires more entities to register and imposes fiduciary duty on advisers
DoL, in December 2010, released unexpected rule proposal on ERISA fiduciary
standards
• Proposed revision of rules governing circumstances in which provision of “investment advice” to ERISA
plan or its participants and beneficiaries would make provider ERISA fiduciary
• Proposed vast expansion in number of persons and entities considered to have fiduciary duties
• DoL, in September, announced plan to withdraw and re-propose in response to pressure from industry,
Congress, and the Administration
Overlapping and conflicting rules will hinder investors’
ability to manage risk and will create compliance challenges
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Exchange traded funds
Regulatory bodies examining potential risks in ETFs
Date
Affiliate
Publication Title
• Use of leverage / inverse leverage
Apr 2011
IMG
Global Financial Stability Report
• Counterparty risk
Apr 2011
BIS
“Market structures and systemic risks of exchange
traded funds”
Apr 2011
FSB
“Potential financial stability issues arising from
recent trends in ETFs”
Jul 2011
ESMA
“Policy orientations and guidelines for UCITS
exchange traded funds and structured UCITS”
Sep 2011
ESRB
Response to July 2011 ESMA Discussion Paper
• Use of synthetic strategies
• Securities lending within ETFs
BlackRock recommendations for greater transparency and consistent regulation
•
Clear labeling of product structure and investment objectives
•
Frequent and timely disclosure for all holdings and financial exposures
•
Clear standards for diversifying counterparties and quality of collateral
•
Disclosure of all fees and costs paid, including those to counterparties
•
Universal trade reporting for all equity trades, including ETFs
8
Future of government sponsored entities
Administration has released a series of housing-related
proposals in State of the Union address and subsequent
speeches
BlackRock Guiding Principles
•
Several bills related to GSE reform have been introduced
in Congress
•
“Reforming America's Housing Finance Market — A Report
to Congress”
•
• Released by Treasury and HUD in February 2011
• Affirmed that Fannie Mae and Freddie Mac will be wound down in
responsible manner, at deliberate pace…
• …however, failed to make definitive recommendation for future role
of federal government in housing market
– Option 1: Privatized system with government insurance role
limited to providing assistance to targeted borrowing groups
– Option 2: Option 1 plus government guarantee mechanism that
would be established, but only scaled up during crisis
– Option 3: Option 1 plus continuous catastrophic reinsurance
program guaranteed by government used to back primary
guarantees sourced solely with private capital
•
•
•
•
•
•
•
Preserve government guarantee of mortgage
pass-throughs
While format of guarantee and entity providing
guarantee may take one of several forms, it is
important for the government to get paid for providing it
Eliminate current portfolio holdings and limit future
purchases
Define conservative underwriting standards
Establish loan limits by geographic markets
Focus on “plain vanilla” programs
Transparency is beneficial at all levels of process
Eliminate uncertainty over investors’ rights
Clarity of delivery in housing affordability programs
Provide support for multi-family housing
Public debate on future role of GSEs will be extensive,
but no major legislation expected before 2013
9
Dialogue with investors more critical than ever
Support client education efforts and demonstrate thought leadership
Public Policy on blackrock.com
Google search: “BlackRock Public Policy”
URL: http://www2.blackrock.com/global/home/PublicPolicy/PublicPolicyhome/index.htm
Getting Housing Finance
Back on Track
Money Market Funds:
Potential Capital Solutions
Equity Market Trading
in Europe
10
This material is provided as an educational tool and should not be considered investment advice. BlackRock cannot be
held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication
or from any other source mentioned. BlackRock is not engaged in rendering any legal, tax or accounting advice. Please
consult with a qualified professional for this type of advice.
The opinions expressed are as of March 2012 and may change as subsequent conditions vary. The information and
opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be
reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of
future results. There is no guarantee that any forecasts made will come to pass. Any investments named within this
material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material
is at the sole discretion of the reader.
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© 2012 BlackRock, Inc. All rights reserved.
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