The Department of the Treasury Blueprint for a Modernized ...



From PLI’s Course Handbook

Understanding the Securities Laws 2008

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the department of the treasury

blueprint for a modernized

financial structure

Norman D. Slonaker

Sidley Austin LLP

The Department of the Treasury

Blueprint for a Modernized Financial Structure

Norman D. Slonaker

Sidley Austin LLP

The Department of the Treasury

Blueprint for a Modernized Financial Structure

Overview

1 On March 31, 2008, the U.S. Department of the Treasury released its Blueprint for a Modernized Financial Regulatory System.

2 The Blueprint contains short-term, intermediate-term and long-term recommendations to improve the current financial institution regulatory system.

3 The Blueprint introduces the concept of an “optimal regulatory framework” which would be objectives-based rather than the current function-based system.

Current Regulatory System

1 The current regulatory system was adopted over the last 100 years largely in hurried responses to financial crises.

2 Major Banking Regulation:

1 National Bank Act of 1863

2 Federal Reserve Act of 1913

3 Federal Home Loan Bank Act of 1932

4 Banking Act of 1933 (Glass-Steagall Act)

5 Federal Deposit Insurance Act of 1933

6 Bank Holding Company Act of 1956

7 Gramm-Leach-Bliley Act of 1999

3 Major Securities and Futures Regulation:

1 Securities Act of 1933

2 Securities Exchange Act of 1934

3 Commodity Exchange Act of 1936

4 Investment Company Act of 1940

5 Investment Advisers Act of 1940

6 Commodity Futures Trading Commission Act of 1974

7 Futures Trading Act of 1982

8 Sarbanes-Oxley Act of 2002

4 Insurance Regulation:

1 McCarran-Ferguson Act of 1945

2 State Regulation

3 State Guarantee Funds

5 Self Regulatory Organizations

1 NFA

2 FINRA

3 Stock and Commodity Exchanges

Drivers of the Treasury Proposal

1 The current regulatory system, largely based on outdated laws and regulations, has not kept pace with the nature of modern financial markets.

1 Globalization of markets

2 Maturing foreign financial markets

3 Improvements in information technology and information flows

4 New and complex financial products and trading strategies

5 Convergence of financial service providers and financial products

6 Institutionalization of capital markets

2 The current regulatory system of separate agencies across functional lines (banking, insurance, securities and futures) has resulted in:

1 No single regulator with all the information and authority to monitor systemic risk and coordinate action throughout the financial system

2 Jurisdictional disputes among the agencies

3 Regulatory redundancies

4 Inefficiency and loss of U.S. competitive advantage

Treasury Recommendations - In the spirit of promoting market stability and consumer protection

1 Short-term Recommendations

1 Enhance and modernize the President’s Working Group on Financial Markets (“PWG”) as a coordinator of financial regulation policy

• Currently the PWG consists of the heads of Treasury, the Fed, the SEC and the CFTC

• The recommendation would extend membership to the heads of the OCC, FDIC and OTS and permit consultation with other entities

• Broaden the focus of the PWG beyond financial markets to coordinate and communicate financial policy for the whole financial sector – not just financial markets

• Mitigate systemic risk to the financial system

• Enhance financial market integrity

• Promote consumer and investor protection

• Support capital markets efficiency and competitiveness

2 Establish a Mortgage Origination Commission

• Evaluate, rate and report on the effectiveness of State licensing and regulation of mortgage market participants

• Create uniform minimum licensing qualification standards for state mortgage market participants

• Address gaps in mortgage origination oversight

3 The Fed would retain authority to adopt regulations to implement national mortgage lending laws and the Truth in Lending Act

4 Clarify and enhance enforcement authority over federal laws regulating lending

5 Liquidity provisioning by the Fed

• Establish guidelines for the Fed’s future use of the discount window to lend to non-depository institutions

• Enhance current temporary liquidity provisioning process

• Process should be calibrated and transparent

• Appropriate conditions should be attached to lending

• Provisions should be in place to ensure adequate information flows to the Fed

• Focus on liquidity and funding issues

6 PWG should consider broader regulatory issues associated with non-depository institutions’ access to the Fed window

2 Intermediate-term Recommendations

1 Phase-out the federal thrift charter and merge OTS into the OCC over a 2 year transition period

2 Rationalize direct federal supervision of state-chartered banks – Should it be the Fed or the FDIC?

3 Create a federal charter for systemically important payment and settlement systems with primary Fed oversight, such as

• DTC

• SWIFT

4 The SEC should:

• Adopt core principles for clearing agencies and exchanges

• Update and streamline the SRO rulemaking process to recognize market and product innovations and expedite the approval process

• Provide a general exemption under the Investment Company Act of 1940 for products already actively traded in the U.S. or abroad, such as ETFs

• Propose legislation to permit a new global investment company

5 Harmonize the regulation and oversight of broker-dealers and investment advisers

6 Subject investment advisers to an SRO regime

7 Ultimately merge SEC and CFTC to provide unified oversight and regulation

8 Establish a joint CFTC-SEC task force to tackle complexities of the ultimate merger

9 Establish a new agency to focus on investor protection, market integrity and overall financial system risk reduction

10 Clearing agency and market SROs should be permitted to self-certify rulemakings to the SEC

11 Congress should create an Office of Insurance Oversight, within the Treasury Department, making the federal government the sole regulator of “international insurance issues”

12 Establish an optional federal charter (“OFC”) for insurance companies

• Provide for federal chartering, licensing, regulation and supervision of insurers, reinsurers and producers (agents and brokers), and abolish rate regulation for federally chartered insurers

13 The OFC would specify authorized lines of insurance, but an insurer could not be authorized for both life insurance and property and casualty insurance

14 Create an Office of National Insurance, within Treasury, to regulate companies with an OFC

3 Long-term Recommendations

1 The optimal regulatory structure would be objectives-based across all types of financial institutions with three distinct regulators that focus on:

• Market stability regulation

• Prudential financial regulation

• Conduct of business regulation

2 This approach would rationalize the federal chartering of financial institutions into:

• FIDI – Federal Insured Depository Institutions

• FII – Federal Insurance Institutions

• FFSP – Federal Financial Services Providers

3 Market stability regulator

• This would be the Fed through an expansion of its present role.

• This role would be conducted through implementation of monetary policy and provision of liquidity to the financial system.

• This regulator would have the responsibility and authority to gather information from financial institutions, disclose information to the market, collaborate with other regulators on rulemaking, and take necessary corrective action.

4 Prudential financial regulator

• This regulator would oversee financial institutions with some explicit government guarantees, such as federal deposit insurance and state-established insurance guarantee funds.

• This regulator would focus on capital adequacy, investment limits, activity limits, and risk management supervision.

• The focus of holding company and affiliate regulation would be on protecting the assets of the insured institution.

• This regulator would be responsible for chartering new Federal Insured Depository Institutions and Federal Insurance Institutions.

5 Business conduct regulator

• This regulator would monitor business conduct regulation across all types of financial institutions and products.

• This regulator would be responsible for chartering and licensing financial service providers.

• It would also set national standards for business conduct and key aspects of consumer protection:

• Disclosure

• Sales and marketing practices

• Anti discrimination

Additional Agencies:

1 Federal Insurance Guarantee Corporation

1 Reconstitute the FDIC to both administer deposit insurance and, if one is created, the Federal Insurance Guarantee Fund

• Set risk-based premiums

• Charge ex-post assessments

• Act as receiver for failed institutions

2 Corporate Finance Regulator

1 Responsible for corporate oversight in public securities markets – corporate disclosures, corporate governance, accounting and auditing oversight

2 Applicable to all publicly traded companies and securities

3 The SEC would continue to perform this function

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