(The news featured
below is a selection from the news covered in Federal Securities Law Reporter,
which is distributed to subscribers of Federal
Securities Law Reporter.)
Treasury
Proposes Massive Overhaul of US Financial Services Regulation
The
Treasury Department has proposed the most complete overhaul of federal financial
regulation since the current regulatory structure was erected in the 1930s. The
proposal would create new federal regulators for market stability, business
conduct, corporate finance and prudential finance. In the short term, the
Treasury Department recommends legislation merging the SEC and CFTC under a
principles-based regime.
As proposed, a new Market Stability Regulator would be the Federal Reserve
Board, while the Prudential Financial Regulator would assume the role of the
current federal prudential regulators, the Office of the Comptroller of the
Currency (OCC) and Office of Thrift Supervision (OTS). The SEC's current
regulatory and enforcement duties over financial institutions would be assumed
by the Business Conduct Regulator, while the Commission's responsibilities over
corporate disclosures, corporate governance, and accounting oversight would be
assumed by the Corporate Finance Regulator.
The Treasury Department model represents an objectives-based regulatory approach
currently used by Australia and the Netherlands; and a rejection of the unitary
regulator model used by the United Kingdom's Financial Services Authority. The
Treasury Department also rejected the functional regulation model enshrined in
the Gramm-Leach-Bliley Act.
The current system of functional regulation with separate regulators maintained
across segregated lines of banking and securities and futures results in an
environment in which no single regulator has either enough information or
sufficient authority to monitor systemic risk or broad dislocations across the
financial system. As the Market Stability Regulator, the Federal Reserve would
be given broad powers to focus on the overall financial system. The Federal
Reserve could gather and disclose information, collaborate with other regulators
on rulemaking, and take corrective action to preserve market stability.
The Federal Reserve would have access to detailed information about
SEC-regulated financial institutions and their holding companies in order to
assess their impact on market stability, and would also be authorized to mandate
additional disclosure for federally chartered financial institutions. Similarly,
the Federal Reserve would be empowered to require financial institutions to
limit their risk exposures to certain asset classes or certain types of
counterparties.
Payment and settlement systems are the mechanisms used to transfer funds and
financial instruments between financial institutions and between financial
institutions and their customers. Currently, there is no uniform payment and
settlement system, resulting in an idiosyncratic system. As proposed, a single
federal payment and settlements regime under Federal Reserve supervision would
be established.
The Prudential Financial Regulator would focus on financial institutions with
express government guarantees, such as federal deposit insurance. It is also
envisioned that the government sponsored enterprises would eventually come under
prudential regulation, because the federal government has charged them with a
specific mission.
The Business Conduct Regulator (CBRA) would be responsible for all financial
products in order to bring consistency where overlapping requirements currently
exist. The CBRA would also charter and license a wide range of financial
services providers, such as broker-dealers, hedge funds, private equity funds,
venture capital funds and mutual funds. The establishment of a federal charter
would result in the creation of national standards for financial capacity,
expertise, and other requirements that must be satisfied to enter the business
of providing financial services. These firms would also have to remain in
compliance with the standards and provide regular updates on financial
conditions to CBRA and the Federal Reserve Board.
CBRA would have broad authority over securities and futures firms and their
markets, including operational ability, professional conduct, testing and
training, fraud and manipulation, and duties to customers, such as best
execution and suitability. Given the scope of CBRA's duties, the Treasury
Department plan envisions an important role for SROs, particularly in the areas
of rulemaking, compliance and enforcement.
Because the original reason for bifurcating the regulation of securities and
futures no longer exists, the Treasury Department plan recommends an SEC-CFTC
merger to provide unified oversight and regulation of the futures and securities
industries. Recognizing the need to preserve the principles-based regulation
embraced by the CFTC, the proposal recommends that the SEC prepare for the
merger by taking a number of specific steps.
The SEC should use its exemptive authority to adopt core principles to apply to
securities clearing agencies and exchanges, according to the plan. These core
principles should be modeled after the core principles adopted for futures
exchanges and clearing organizations under the Commodity Futures Modernization
Act. The SEC should also issue rules updating and streamlining the SRO
rulemaking process to recognize the market and product innovations of the past
two decades. The rules should include a firm time limit for the SEC to publish
SRO rule filings and expand the type of rules deemed effective upon filing,
including trading rules and administrative rules. The SEC should also streamline
the approval process for any securities products common to the marketplace,
similar to what the Commission has done for certain derivatives securities
products, according to the Treasury proposal.
An updated, streamlined, and expedited approval process will allow U.S.
securities firms to remain competitive with the over-the-counter markets and
international institutions. The plan also recommends that the SEC should use its
exemptive power under the Investment Company Act to allow the trading of
products already being actively traded in non-U.S. jurisdictions. Similarly,
Congress should expand the Investment Company Act to allow the registration of a
new global investment company.
Legislation merging the SEC and CFTC would need to include many items. For
example, the Treasury Department believes the legislation should, consistent
with the Commodity Futures Modernization Act, statutorily permit all clearing
agency and market SROs to self-certify all rulemaking measures, except those
involving corporate listing and market conduct standards, which would then
become effective upon filing. The SEC would retain its right to abrogate the
rulemaking measures at any time. In addition, merger legislation would have to
harmonize differences between futures regulation and federal securities
regulation, including margin and segregation rules, insider trading,
broker-dealer insolvency, customer suitability, short sales, SRO mergers,
implied private rights of action, the SRO rulemaking approval process, and the
agency funding mechanisms.
Due to the complexities and nuances of the differences in futures and securities
regulation, according to the plan, legislation should establish a joint CFTC-SEC
staff task force with equal agency representation with the mandate to harmonize
these differences. In addition, the task force should be charged with
recommending the structure of the merged agency, including its offices and
divisions. Finally, the legislation would have to deal with the continuing
convergence of the services provided by broker-dealers and investment advisers
within the securities industry.
|