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Subtitle C is the weirdest piece of the administration's proposed Investor Protection Act of 2009 because a lot of it is a spanking for the SEC.
It has been nearly 5 years since Congress gave the SEC explicit regulatory oversight of credit rating agencies, but the agency has had trouble imposing any control. Despite being implicated in the Enron collapse and, of course, in the current financial unpleasantness, credit rating agencies have managed to avoid any substantive oversight. They have evaded regulation of the content of their ratings by arguing that ratings are opinions and therefore protected speech under the First Amendment. They are free from public disclosure obligations, beyond form NRSRO, because they have convinced regulators that secrecy is essential to their business.
This then, is why section 932 of Subtitle C requires that, "The Commission shall establish an office that administers the rules ... with respect to the practices of nationally recognized statistical rating organizations," and why the Commission is directed to "conduct reviews required by this paragraph no less frequently than annually," and to make "[a] report summarizing the key findings of the reviews ... available to the public in a widely discernible format." Most embarrassingly, section 936 orders the Comptroller General to write a report assessing "the extent to which the rulemaking of the Securities and Exchange Commission has carried out the provisions of this Act." Ouch.
Subtitle C also imposes new obligations on credit rating agencies. For starters, they must promulgate a written conflict-of-interest policy and elect a Chief Compliance Officer to police same. For more see this one-page summary from Morrison & Forester.
The SEC has a slew of rules out that cover much of the same territory. It isn't clear whether Subtitle C and the SEC's proposal are coordinated. The SEC has "deferred" its plan to reduce the reliance placed on the NRSRO classification. Subtitle C would put this program where it belongs - with the President's Working Group.
Today, I'm going to start looking at a neglected piece of the administration's reform proposal: title IX, the vast Investor Protection Act of 2009. The IPA is a grabbag of regulatory off-cuts ranging from asset-backed securitization reform to credit rating agency reform.
The centerpiece of Subtitle E, called "Improvements to the Asset-Backed Securitization Process," is the so-called "skin-in-the-game" regulatory fix. The idea is that the present securitization process provides no incentive for deal sponsors to create good-quality securities. The way sponsors make money is by getting fees. They pay themselves a fee for putting together the pool, for underwriting, and even for servicing the underlying debt. They don't invest. The sponsor is like a chef who won't eat at his own restaurant. The thinking is that if he has to eat what he peddles, his restaurant will improve.
So, section 952 of the IPA would require "securitizers" of ABS deals to retain 5% of the "risk." Securitizers would not be allowed to hedge this retained risk and the SEC would establish standards for the risk's "permissable forms" and "minimum duration."
The new law defines "securitizer" as an issuer or an underwriter. It cleverly hops right over the amorphous matter of trying to define "sponsor" and lands right where the sponsor gets its money - underwriting.
Of course, the ABS packagers, especially the residential mortgage monsters like Lehman and Bear Stearns *were* eating in their own restaurant. In fact, they were eating the leftovers (in the form of the lowest tranches of their offerings), and so, there's a funny sort of conversation that's been going on about whether the ABS sponsors were really avoiding the securities they created. What this argument boils down to is a disagreement about how stupid they were. Were they smart enough to know their ABS deals were crappy, but too stupid to get out in time, or were they completely oblivious to how risky these deals were? Skin-in-the-Game is only an effective deterrent if the ABS packagers are just a little stupid.
Subtitle E also gives the SEC power to create a disclosure obligation for ABS issuers that could not be extinguished by de-registering under section 15 and presumably would continue until the breaking of the world.
For a complete overview, see this Cadwalader memo and wonder along with them (and me) about why the law repeals s. 4(5) of the '33 Act.
Over the course of the last week, Treasury has become a virtual proposed-legislation factory – cranking out a new draft bill every few days. I haven’t spent a lot of time processing this legislative incontinence because their previous attempt at legislation-proposing, the Resolution Authority for Systemically Significant Financial Companies Act of 2009, sank without a trace. Treasury and the White House agree on what regulatory reforms we need, but standing between them is Congress. Without a congressional sponsor, Treasury’s reform agenda can’t move forward.
Prospects look brighter for the current crop of proposals. Of the four, two have already made the leap from suggestion to proposed legislation. The difference appears to be Barney Frank. Frank’s sponsorship transformed the Consumer Financial Protection Agency Act of 2009 into HR 3126. Frank has also elevated the administration’s say-on-pay proposal to bill status (HR 3269). Both bills have been referred to the House Committee on Financial Services, which Frank chairs. Rumor has it that Frank also doomed the resolution authority bill when he changed his mind about giving it support. Now that he’s on board, I assume we can expect the Private Fund Investment Advisers Registration Act of 2009 and the as-yet-unnamed credit rating agency bill to move forward, too.
It has been a big day. Yikes. Adding to the big-ness: the administration sent to the Hill the proposed text for a law creating the Consumer Protection Agency. This brand-new agency would wield tremendously broad power. A look at the definitions section of the 150-page bill uncovers a definition for consumer: "an individual." Also "defined," is "consumer financial product or service." Guess what that means - "a financial product or service used by a consumer."
Today, all my energy has gone into writing an article for Westlaw Business Legal Currents about the Treasury's resolution authority proposal.
It has been widely reported that within the next few weeks the administration will unveil a new, comprehensive financial markets regulatory scheme. Speculation about the scope of the proposal has been intense. In last week's New York Times, Stephen Labaton reported that the administration probably wouldn’t recommend rolling all four bank regulators up into one agency, but that a new agency for credit card and mortgage regulation was still a possibility. In the background, administration officials have been meeting with a constellation of experts to hammer out details. In one recent meeting, a group of academics, policy analysts and researchers was asked questions that provide some insight into the administration’s general approach. The questions, combined with recent news reports also suggest that the regulatory agenda has been finalized, but they’re still fighting about money and political turf.
The Treasury Department has previously aired two pieces of the puzzle: resolution authority and regulation of the over-the-counter derivatives market. The resolution authority proposal was outlined in a March 26th press release (TG-72). The press release asked Congress for an FDIC-like power to seize and dismember institutions deemed a risk to the entire financial system. Left unresolved was which agency would be the resolver. Resolution authority appears still to be on the table: the experts were asked where the administration could obtain the money to carry out resolutions of institutions that aren’t banks. The FDIC’s resolution process is paid for out of a fund derived from payments made by FDIC-insured institutions.
Secretary Geithner has carefully avoided answering questions about who would swing the sword of resolution, but he has stressed, on several occasions, the need for a new regulatory entity that could police institutions that pose a risk to the financial system generally. He has not, however, been specific about this new agency’s power or role. A number of players have leaped into that void. In late March, a bipartisan bill was introduced in the House and Senate (HR 1754, S 664) that would create a council composed of the heads of all the financial regulatory agencies. This group (called the Financial Stability Council) would be in charge of assessing systemic risk. This bill framed the terms of the debate – should systemic risk be overseen by a loose collection of regulators, or should there be a new agency? Sheila Baer at the FDIC and Mary Schapiro at the SEC (who would be members of a financial risk council, but would lose turf if a new agency were created) have, unsurprisingly, expressed approval of the council idea. The experts were also asked to weigh in on this question. Is a systemic risk council an acceptable compromise, they were asked, or do we need a new regulatory agency?
Over-the-counter derivatives regulation, on the other hand, seems squared away. On May 13th, Secretary Geithner sent a letter to Senator Harry Reid outlining the administration’s proposal for OTC derivatives regulation. According to a source with knowledge of the meeting, the experts were not asked about OTC derivatives regulation.
The US financial regulatory system was constructed piecemeal in response to a variety of historical events. The result of this ad hoc approach is a patchwork of jurisdictions that overlap in some areas but don’t cover other areas at all in others – a problem is known as “regulatory fragmentation.” On the evidence of the last few questions, regulatory fragmentation is still on the agenda. The experts were asked how much they thought regulatory fragmentation contributed to the current crisis. They were also asked to describe how well the existing system protects consumers and investors. Last week, a report from the Associated Press (“Fed Would Serve as Risk Regulator under Obama Plan,” AP Datastream, 5/28/09) described a draft regulatory scheme that would create two major regulatory agencies – one protecting consumers and one protecting investors. The investor protection agency would be created by merging the SEC and the CFTC. Merging or eliminating regulatory agencies has proved to be a reasonably hot political potato. Every agency, it seems, has a champion in Congress. These champions stand to lose power if their pet agency is curtailed. The New York Times article spent several paragraphs addressing the “political cost” of correcting regulatory fragmentation.
If I said "section 10(b) of the '34 Act," you'd know what I was talking about, but if I mentioned section 78j you probably wouldn't be sure, right? They're the same section, of course, but when securities law professionals talk about the '34 Act's anti-fraud provision they say 10(b), a designation that comes from chapter 404 of the laws of 1934 (48 Stat 881), and not 15 USCA 78j. The reason no one uses the United States Code citations for the securities laws is because they are so damned convoluted (the Trust Indenture Act, for example, is 15 U.S.C. § 77aaa – 77bbbb). Unfortunately, 10(b) isn't good enough for the Blue Book so sometimes we need to find the full citation.
The "find a securities document" tool on the Westlaw Securities Practitioner page will translate for you, but this post isn't about how to find the right citation, its about how this mess happened in the first place.
The United States Code is maintained and updated by a House department called the Office of the Law Revision Counsel (OLRC). They are also responsible for enacting the Code into positive law. The OLRC originated during what I like to call the “codification wars” of the nineteen-twenties. In 1919 Colonel E. C. Little, Chairman of the House Committee on the Revision of Laws, embarked on a project to codify federal statutes and enact them into positive law. Col. Little’s completed codification, organized into 60 titles, was passed by the House in 1920. It went on to the Senate and was killed. Why, the Senators wondered, would Little want to repeat the disaster of 1873? In 1873 Congress repealed all existing federal statutes and replaced them with a codification. The Revised Statutes of 1873 contained so many errors and that it had to be amended immediately in 1875 and again in 1877. The House was undeterred by the Senate’s qualms. It re-proposed and passed Col. Little’s codification twice more. Upon its second presentation, the Senate Committee on the Revision of Laws reported that the bill had 600 errors, omissions, and inaccuracies. The Senate Committee proposed a compromise in the form of a joint commission to revise the laws.
In the period between the 1873 codification and the 1919 attempt, commercial publishers had filled the gap. Both West and Thomson produced useful and frequently-updated codifications. The Senate asked these publishers to assist in producing an official codification. The resulting document, shortened to 50 titles, passed the House in 1926. The Senate remained unconvinced and refused to enact the bill. In the end, the Senate couldn't be convinced to replace existing statutes with a potentially error-filled codification. Instead, the Senate amended the bill to provide that the codification was “prima facie” evidence of the law and that existing statutes remained in force.
According to Peter LeFevre, the present Law Revision Counsel, this situation was meant to be a temporary fix giving the House Committee on the Revision of Laws (now charged with upkeep of the codification) time to rectify errors and begin piecemeal enactment of the United States Code as positive law. This temporary fix slowly calcified. In 1946 the committee was demoted to subcommittee. In 1974 it became a government agency of sorts. A 1974 law elevated the Law Revision Counsel from an officer of the House Judiciary Committee to the head of a separate office reporting to, and appointed by, the Speaker of the House. Three men have held the post since 1974: Edward Willet, Jr. (1975 – 1996), John R. Miller (1997 – 2004), and Peter LeFevre (2004 – present).
When Congress enacts a new law, lawmakers don’t normally consider where the law will fit in the Code. In its role as the Code’s custodian, the OLRC decides where laws go. Organizing and maintaining the Code is an enormous job that occupies most of the OLRC staff. Charles Zinn, Law Revision Counsel in the 1950’s, described the process as “a matter of opinion and judgment” driven by “where we think the average user will look.” LeFevre agrees that although the OLRC follows policies and precedent, the driving force behind placing a law in the Code is where people “will expect to find it.”
I asked LeFevre why the securities laws have such difficult citations. He didn’t know, but he told me that laws are added to titles in chronological order, unless they are related to laws that have already been enacted. The securities laws are squeezed into Title 15 of the US Code between Chapter 2 and Chapter 3. Chapter 1 contains antitrust laws: the Sherman Act of 1890, followed by the Clayton Act of 1914. Chapter 2 contains the Federal Trade Commission Act of 1914 and Chapter 3 contains the Trade-Mark Act of 1905.
Why are the securities laws of 1933 – 1940 jammed in between the FTC Act and the Trade-Mark Act? The answer lies in the Securities Act of 1933. When Congress enacted the ’33 Act, the first of a series of planned securities laws, it charged the Federal Trade Commission with enforcing the Act. A year later Congress enacted the Securities Exchange Act of 1934, which created the Securities and Exchange Commission. The ’34 Act removed the securities laws, including the ’33 Act, from the jurisdiction of the FTC and placed them within the oversight of the SEC. Unfortunately, the ’33 Act had already been placed in the Code, right next to the FTC Act. Instead of moving the ’33 Act, the Law Revision Counsel decided to let things stand and proceeded to cram all of the securities laws in the space between the FTC Act and the Trade-Mark Act. To add insult to injury, in 1946 Congress enacted the Lanham Act and repealed Chapter 3.
To learn more about the Office of Law Revision Counsel, visit its website. The legislation governing the OLRC may be found at 2 U.S.C. 285 – 285g. Those interested in the positive codification process should read Charles Zinn’s address to the Law Librarians’ Society of Washington, D.C. at, 45 Law Libr. J. 2 (1952) and Richard J. McKinney’s excellent “United States Code: Historical Outline and Explanatory Notes."
On May 20th, the President signed FERA, or the Fraud Enforcement and Recovery Act of 2009, and it became Public Law 111-21. As noted by Gibson Dunn in this post on the Harvard Corporate Governance Blog, language creating a financial crisis investigating committee made its way into the final verison. Also worth a look is Gibson Dunn's financial crisis update page.
On the same day, the President also signed the Helping Families Save Their Homes Act of 2009 (now Public Law 111-22). Besides combatting foreclosure, the law contains restrictions, including conflict of interest rules, on investors wishing to participate in the PPIP program. For more detail, see this post on Jim Hamilton's World of Securities Regulation blog.
Sticking with Jim Hamilton for the moment - he also notes that Richard Durbin proposed a bill called the The Excessive Pay Shareholder Approval Act (S. 1006) which would amend the '34 Act to require super-majority shareholder approval of compensation that is more than 100 times average employee compensation. So, there you go - that's the defintion of excessive.
Well, not lies exactly - the Corporate Counsel blog analyzed a report in Bloomberg that the SEC is considering a 1 percent threshold for its shareholder access proposal and found the report not credible.
Since we're talking about the Corporate Counsel blog and things that might not be as they seem, Corporate Counsel blog has also posted a draft of Charles Schumer's Shareholder Bill of Rights. Wachtell Lipton has already issued a memo in criticizing the bill (via Race to the Bottom) *sigh*.
Yesterday I was listening to a West Legal Ed Center program called "Reviving Securitization," and I was struck by how much of the discussion was about fear of doing business with the government. Entities that invest in asset-backed securities are nervous about two bills making their way through Congress. Both laws aim to do the same thing: make it easier to modify mortgages that have been securitized. To accomplish this, they give mortgage servicers (the intermediary agencies that administer the underlying mortgages) more flexibility to restructure mortgages. The idea is that servicers won't renegotiate mortgages because they're afraid of being sued by ABS investors (like pension plans and hedge funds).
The first bill, HR 1106 - the Helping Families Save Their Homes Act, has passed the House and is currently before the Senate Banking Committee. It contains a section called the "Servicer Safe Harbor" which immunizes servicers from suit for modifying mortgage terms. What really has investors agitated is a section that retroactively defeats a clause that appears in most securitization agreements. Most agreements (called pooling and servicing agreements) have a clause that allows the investor to force the servicer to buy back securities under certain circumstances. Servicers see this clause as a threat that hamstrings their ability to renegotiate mortgages. Investors see this clause as a brake on abusive servicer practices.
The second bill, S 376 - the Real Estate Mortgage Investment Conduit Improvement Act of 2009, (The REMIC Improvement Act) would control the activities of REMICs by taking away their tax-exempt status. The government classifies certain real estate investment securitization entities as tax exempt (REMICs) to promote investment in the residential mortgage sector. The REMIC Improvement Act takes away REMIC status when the pooling and servicing agreement has the tyoe of buy-back provision discussed above.
If either of these laws is enacted, the lawyers will be busy. As Dechert put it in a recent memo, "all pooling and servicing agreements will need to be reviewed ... we expect that the great majority ... may need to be amended." This kind of government modification of previously settled rights is becoming more common. At the beginning of the year, Congress used an amendment to the Emergency Economic Stabilization Act to change the terms of all the TARP loan agreements. Last week, the President used moral suasion to abrogate the rights of Chrylser's senior debt holders.
It made me wonder - how much will this uncertainty affect how investors gauge risk? Lucky for me, there's a ready-made example from the last economic catastrophe. In 1933 and 34, mortgage default hit an all-time high. To keep people in their homes, 27 states passed foreclosure moratoria. These laws were challenged as a violation of the contract clause, but in 1934 the Supreme Court found that the economic emergency warranted a little clause-stretching (Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 1934). Taking away the foreclosure remedy "appear[s] to have reduced the supply of loans and made credit more expensive for subsequent borrowers." (Wheelock, Changing the Rules, Federal Reserve Bank of St. Louis Review, November / December, 2008)
I'm sure there's an explanation - it might be strategic, or legal or maybe even psychological. In any case, it happended again last week - members of Congress introduced new bills that look exactly like existing bills.
One is a golden oldie. I think there are three bills out there already that propose repealing the Commodity Futures Modernization Act, but S 961, proposed on May 4th and titled the "Authorizing the Regulation of Swaps Act," is the most thorough. It has a section that looks like the Popular Name Table for the CFMA (USCA-POP) and repeals every section. Its later provisions underline that the law is meant to allow the SEC, the CFTC and a bunch of other agencies to regulate swaps. It then defines "swap agreement" and "purchase and sale" for swap purposes.
HR 2253 follows the more recent trend of emplanneling investigative committees. The "Financial Markets Commission Act" creates a bipartisan committee of seven with a three million dollar budget. The Commission has a year to prepare a report examining "all the causes ... of the current financial and economic crisis ... and the deterioration of the credit and housing markets." The panel is instructed to pay special attention to the role of the Fed, the SEC, the CFTC, FNMA and credit rating agencies.
Meanwhile, S 896 the "Helping Families Save Their Homes Act of 2009," which passed the Senate on May 6th, was the subject of frantic 11th-hour amending:
S Amdt. 1020 and 1021 - Allows Comptroller General to audit the Federal Reserve
S Amdt. 1038 - Provides greater oversight of PPIP
S Amdt. 1039 - Creates a TARP warrant liquidation process
Other amendments which didn't make the cut:
S Amdt. 1026 - Forbidding use of TARP money to buy common stock
S Amdt. 1030 - TARP repayments used for deficit reduction (hello John Thune!)
If you're thinking about playing the lottery today, may I suggest the numbers 1, 3 and 7. The latest update of the financial crisis legislation spreadsheet turns up six bills (count 'em!) that add a new section 137 to the Emergency Economic Stabilization Act (EESA). There is unanimity about the need for section 137, but there is some difference of opinion about what section 137 should do. All of the proposals involve TARP repayments. Here's a summary of what the various 137's would do:
HR 2009 - allow immediate TARP repayment
HR 2118 - "additional" TARP repayment procedures
HR 2119 - assign TARP repayments to debt reduction
HR 2063 - assign TARP repayments to debt reduction
S 862 and S 869 (introduced on the same day by the same sponsor) assign TARP repayments to debt reduction
If this were a democracy, debt reduction would have a slight edge. John Thune voted twice, but I'm only counting one of them. This isn't Chicago (that was a joke - no, wait ... two jokes! That's the joke limit for this post).
Investigation is also on the agenda. H. Res 251 directs Treasury to cough up communication with AIG, HR 1929 would create a committee to investigate Fannie Mae and Freddie Mac and H Res 345 would create a committee to "make a complete and thorough investigation" of the financial crisis.
Finally, HR 1880 would give Treasury oversight over the insurance industry through an Office of National Insurance.
On Sunday, the Wall Street Journal published an overview of Charles Schumer's proposed corporate governance bill. The draft, which the reporters saw but Schumer did not release, focuses on increasing the power of shareholders. The alleged bill hasn't yet been introduced. The article also suggests that Barney Frank may be writing a competing bill, but based on this interview in Barron's (via Compliance Ex) his focus seems to be more on reform of regulatory agencies.
The securities law are, essentially, remedial. Since the crash of 1929 precipitated the '33 Act and the '34 Act, financial scandals have preceded new laws.
Browsing through the titles of proposed securities legislation (see the spreadsheet) I saw language implying remedies on the way - "responsibility," "integrity," "reform" (twice) "transparency" (twice) and, "accountability" (three times).
Looking back, I noticed that the laws that get blamed for causing the financial crisis described themselves with the word "modernization" - The Commodity Futures Modernization Act of 2000 (CFMA) and Gramm-Leach-Bliley, or the Financial Services Modernization Act of 1999 (GLB).
Because I'm curious that way, I decided to use the federal securities legislative history database (FSEC-LH) on Westlaw to see if modern has always stood for less regulation and "reform" for more.
Forms of the word modernize appear only 31 times in FSEC-LH. The first occurrences are recent and are associated with stronger regulation. The Senate Report (S Rep 101-300) accompanying The Market Reform Act of 1990 says the law addresses "a number of critically important areas where legislation is needed to modernize the SEC's authority to protect investors." In his signing statement for the Futures Trading Practices Act of 1992 (FTPA, 1992 WL 457484), which reinforced the Commodity Exchange Act, George Bush describes FTPA as a "modernization of our financial laws". When modernization next raises its visage it is associated with the Financial Services Competitiveness Act of 1995 (HR Rep 104-127) - the first draft of GLB. The word eventually makes its way to the title; to the CFMA and then it vanishes.
Transparency and accountability appear to be analogous to modernization. They haven't previously been used in the titles of securities bills.
Starting in the late 1980's the titles of securities bills start to change from being purely descriptive, Securities Act, to something a bit more aspirational, Securities Litigation Uniform Standards Act. This is part of a general trend. Before the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) the word reform does not appear in any bill titles, but following the collapse of the savings and loan system and the stock market crash of 1989 there's a string:
* The Penny Stock Reform Act (PL 101-429)
* The Market Reform Act of 1990 (PL 101-432)
* The Limited Partnership Rollup Reform Act (PL 102-254)
* The Government Securities Reform Act (PL 102-722)
All of laws listed above strengthened securities regulation.
In honor of National Library Week, I am publishing a list of financial-crisis related bills that have been proposed during the last two Congressional sessions. It is my intention to update this list on a weekly basis.
On Monday, Barney Frank spoke at the Kennedy School at Harvard and laid out his plan for regulatory reform. His main points are in line with the administration's, though his outlook is not as broad:
* A ban on 100 percent securitization of loans.
* Elimination of the “perverse incentives” in a system that pays enormous bonuses for good results but exacts no penalty for disastrous ones.
* Resolution authority.
* Control of systemic risk.
On a less informative, but more entertaining, note - he also had an argument with a law student in the audience.
A PLAN!
Over the last couple of days, Timothy Geithner demonstrated that the administration does, indeed, have a regulatory reform plan. The plan’s overall design, as described in Treasury press release TG-72, identifies four goals:
• Control of systemic risk
• Protection of consumers and investors
• Elimination of gaps in the regulatory system
• International coordination
These goals are familiarly vague (Geithner avers they originate in a fuzzy speech the President delivered at the Cooper Union) until you consider what Geithner did next. He went before the House Financial Services Committee and carefully outlined concrete steps for controlling systemic risk:
1. A single regulator responsible for systemic stability
2. “Substantially” more conservative capital requirements for systemically important institutions
3. Registration of large hedge funds and their advisers.
4. A comprehensive framework of oversight and disclosure for OTC derivatives
5. New SEC rules to protect the liquidity of the money markets
6. A resolution mechanism for entities posing a systemic risk
Then he offered actual proposed legislation for step #6! The proposed “Resolution Authority for Systemically Significant Financial Companies Act of 2009” (RASSFCA?) is modeled on the FDIC’s resolution authority and is aimed at institutions that fall outside the existing FDIC regulation regime.
RASSFCA
First, although the administration's plan will probably make the Treasury Department the systemic risk regulator - the One Agency, if you will - much has been made of Geithner's refusal to identify the who will wield resolution power (Geithner Ducks Key Question, American Banker 2009 WLNR 5704049) it seems kinda obvious, doesn't it?
The proposed resolution authority bill creates a mechanism that would work this way: if, after a somewhat convoluted process of inter-agency wrangling, it can be shown that a covered institution is:
• in danger of becoming insolvent and
• its insolvency will have serious adverse effects on “economic conditions or financial stability” in the United States, and
• emergency action would mitigate those effects,
The Fed would be empowered to use a number of emergency action tools. The tools range from loaning money to placing the company in receivership so that it can be unwound (are you listening, AIG?). Insolvency is broadly defined. “Serious adverse effects” isn’t defined at all. Receivership terminates bankruptcy proceedings, the rights of stockholders, and in an emergency, Hart-Scott-Rodino.
Next?
One can only assume this is the first salvo in a legislative bombardment. Over the next few weeks, expect to see proposed legislation for each of the points on the list above. Regulation of hedge funds gets particularly in-depth treatment in recent releases, so maybe that's next?
Before Tim Geithner could get out even the first installment of his legislative masterwork, Congressional Republicans beat him to the punch by unveiling an all-in-one regulatory reform proposal called the Financial System Stablization and Reform Act of 2009 (FSSRA). On the 23rd, Susan Collins introduced FSSRA in the Senate (S. 664) and three days later, Mike Castle introduced it in the House (HR 1754).
The Council
FSSRA does a whole bunch of stuff, but the majority of the bill is devoted to creating the Financial Stability Council - a "systemic risk monitor for the financial system of the United States". The Council would be composed of the Secretary of the Treasury and the chairs of the Board of the Federal Reserve, the FDIC, the National Credit Union Administration, the SEC and the CFTC, and headed by a Chairperson appointed by the President.
The Council would review all regulatory actions from a slew of agencies with financial-system related oversight. It would also: oversee systemic risk policy (including capital and solvency requirements), consult with foreign regulators, and review "new financial instruments".
Other
FSSRA also:
* gives the CFTC the power to regulate credit default swaps,
* forces investment bank holding companies reorganize under the Bank Holding Company Act (wait, who are we talking about here?),
* directs the SEC to finalize rules designating central CDS clearinghouses, and
* abolishes the Office of Thrift Supervision (its duties get transferred to the Office of the Comptroller of the Currency).
The Senate Judciary Committee has issued a report (SR 111-10) on The Fraud Enforcement and Recovery Act of 2009 (S. 386, FERA). Follow this link to see conclusions and changes made.
Two weeks ago, Reuters reported that the SEC was going to consider reinstating the Uptick Rule. Congress may beat them to the punch. On the 16th Edward Kaufman introduced S. 605 (C.R. S3121) which would require the SEC to reinstate the Uptick Rule. The bill has been referred to the Senate Banking Committee. S. 605 would also give long-term investors priority over short sellers, outlaw naked short selling and shorten the share delivery window to three days.
