The Geithner ProposalThe Geithner Proposal
David H. LuiDavid H. Lui
Chief Compliance OfficerChief Compliance Officer
OverviewOverview
The Paulson Proposal
Geithner’s Whitepaper
The Evolving Regulatory Framework
Standards of Care: fueling change
What’s next?
Restructuring the Regulatory FrameworkRestructuring the Regulatory Framework
Market Stability Regulator
Prudential Regulator
Business Conduct Regulator
Paulson’s Blueprint for a Stronger Paulson’s Blueprint for a Stronger Regulatory StructureRegulatory Structure
» 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
Market Stability Regulator
Paulson’s Blueprint for a Stronger Paulson’s Blueprint for a Stronger Regulatory StructureRegulatory Structure
» 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
Prudential Regulator
Market Stability Regulator
Paulson’s Blueprint for a Stronger Paulson’s Blueprint for a Stronger Regulatory StructureRegulatory Structure
» 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
Business Conduct Regulator
Prudential Regulator
Market Stability Regulator
Restructuring the Regulatory FrameworkRestructuring the Regulatory Framework
Market Stability Regulator
Prudential Regulator
Business Conduct Regulator
Safety and Soundness
The Geithner Response: June 2009The Geithner Response: June 2009
Financial Crisis Becomes a Banking Crisis– Limited Impact on SEC
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– Fed Control over Subsidiaries of Tier 1 FHC– Systemic Risk Management Role
Prudential Regulator– National Bank Supervisor
Business Conduct Regulator– Consumer Financial Protection Agency – Credit,
Savings and Credit Products
SEC Role
Creation of Creation of Financial Services Oversight CouncilFinancial Services Oversight Council
Market Stability Regulator Becomes a Coordination Council
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 CouncilNew Financial Services Oversight Council
Supported by “Full-Time Expert Staff at Treasury”
Some Surprises:
– Reduced Regulatory Role» Gathers Information Only
– Refers Risk Items to Appropriate Regulators
– Not Under Federal Reserve Leadership
New National Bank Supervisor New National Bank Supervisor
The Treasury Blueprint’s “Prudential Regulator”
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 New Consumer Financial Protection AgencyAgency
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 ProposedImpact on SEC As Proposed
Call to Tighten Oversight of Credit Ratings Agencies
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
Continued Mandatory Arbitration for Broker/Dealers?
“Consistency” between IA/BDs regarding Fiduciary Duty Standard?
IA Self-Regulatory Organization?
Investment Adviser SRO
“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.”
Treasury Blueprint for a Modernized Financial Regulatory Structure (Paulson Proposal)
Potential SRO Structures
Securities Industry
Broker Dealers Investment Advisors
FINRA New SROFINRA
* See John Walsh, Harvard International Law Journal, June 2008
Emergence of an Elastic Compliance ModelEmergence of an Elastic Compliance Model
Principles Based Compliance
Institutions Based Compliance*
Rules Based Compliance
Activities are permitted so long as they do not violate specific rules
“Show Me the Rule I’m Breaking!”
Broad Principles defined by caselaw govern all Regulated
Entities Equally
Rule 10b-5 as an Example
Complexity in the MarketplaceCreates need for elastic
regulatory model to mitigateConflicts at larger firms without
raising the bar so high thatsmaller firms can no longer compete
What’s Next?What’s Next?
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?Questions?
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