Political Insight and Analysis From The Wall Street Journal's Capital Bureau
President Barack Obama on Wednesday described his proposals as a “sweeping overhaul of the financial regulatory system” on a scale not seen since the Great Depression. The official White House document, titled “A New Foundation: Rebuilding Financial Supervision and Regulation,” runs 89 pages in length. Washington Wire condensed the full proposal to a more manageable series of bullet points.
For the regulation of financial firms, the proposal:
Creates Financial Services Oversight Council, which would coordinate activities among regulators, replacing the President’s Working Group.
Ensures that any financial firm big enough to pose a risk to the financial system would be heavily regulated by the Federal Reserve, including regular stress tests.
Says the Fed will have to “fundamentally adjust” its current supervision to more closely watch for systemic risks.
Allows the Fed to collect reports from all U.S. financial firms that meet “certain minimum size thresholds.”
Gives the Fed oversight over parent companies and all subsidiaries, including unregulated units and those based overseas.
Says the Treasury will re-examine capital standards for banks and bank-holding companies.
Tells regulators to issue guidelines on executive compensation, with the goal of aligning pay with long-term shareholder value, including a re-examination of the utility of golden parachutes.
Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks.
Forces industrial banks, non-bank financial firms and credit-card banks to become more traditional bank holding companies subject to federal oversight.
Kills the SEC program that supervised Wall Street investment banks.
Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms.
Subjects hedge funds to new requirements in areas such as record keeping, disclosure and reporting. The oversight would include assets under management, borrowings, off-balance sheet exposures.
Urges the SEC to give directors of money-market mutual funds the power to suspend redemptions, and take other action to strengthen regulation of money-market mutual funds to prevent runs.
Beefs up oversight of insurance by creating an office within the Treasury to coordinate information and policy.
Kicks off a process by which the Treasury and the Department of Housing and Urban Development will figure out the future of mortgage giants Fannie Mae, Freddie Mac and the federal home-loan banks, which could include winding them down, returning them to the private sector or refashioning them as public utilities.
For the regulation of financial markets, the proposal:
Brings the markets for over-the-counter derivatives and asset-backed securities into a regulatory framework, strengthens regulation of derivatives dealers and forces trades to be executed through public counterparties, such as exchanges
Toughens the regulatory regime, including more conservative capital requirements and tougher rules on counterparty credit exposure.
Strengthens laws designed to protect “unsophisticated parties” from trading derivatives “inappropriately.”
Gives the Fed more power over the infrastructure that governs these markets, such as payment and settlement systems.
Harmonizes the powers and authority of the SEC and CFTC to avoid conflicting rules relating to the same products or time-wasting turf battles over who should regulate what.
Tells the SEC and the CFTC to deliver a progress report by September.
Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products.
Directs regulators to “align” participants’ compensation with the long-term performance of underlying loans.
Urges the SEC to continue its efforts to improve the transparency and standardization of securitization markets and recommends the SEC have clear authority to require reporting from issuers of asset-back securities.
Urges the SEC to strengthen its regulation of credit-rating firms, including disclosing conflicts of interest, better differentiating between structured and unstructured debt and more clearly stating the risks of financial products.
Tells regulators to reduce their reliance on credit-rating firms.
For regulations protecting consumers and investors, the proposal:
Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.
Gives the new agency power to write rules and levy fines based on a wide range of existing statutes.
Proposes new authority for the Federal Trade Commission over the banking sector, in areas such as data security.
Creates an outside advisory panel to keep an eye on emerging industry practices.
Says the new agency should play “a leading role” in educating consumers about finance.
Gives the new agency authority to ban or restrict mandatory arbitration clauses.
Improves transparency of consumer products and services disclosures.
Says the new regulator should have authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.
Proposes the government “do more” to promote these simple products.
Beefs up the agency’s power to regulate unfair, deceptive or abusive practices.
Imposes “duties of care” that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.
Regulates overdraft protection plans, treating them more like credit credit-card cash advances.
Promotes access to credit in line with community investment objectives.
Strengthens SEC’s framework for investor protection by expanding the agency’s powers to beef up disclosures to investors, establish a fiduciary duty for broker-dealers who offer advice and expand protection for whistleblowers, including a fund that would pay for certain information.
Requires non-binding shareholder votes on executive compensation packages.
Requires certain employers to offer an “automatic IRA plan” for employee retirement, with investment choices prescribed by regulation or statute.
Urges exploration of ways to improve participation in 401(k) retirement plans
To give the government more tools to manage crises, the proposal:
Creates a mechanism that allows the government to take over and unwind large, failing financial institutions.
Creates a formal process for deciding when to invoke this power, which could be initiated by the Treasury, Fed, FDIC or SEC.
Gives authority to make the final decision to the Treasury, with the backing of other regulators.
Gives the Treasury the authority to decide how to fix such a failing firm, whether through a conservatorship, receivership or some other method.
Taps the FDIC to act as conservator or receiver, except in the case of broker dealers or securities firms, in which case the SEC would take over.
Amends the Fed’s emergency lending powers to require prior written approval by the Treasury Secretary.
In the international sphere, the proposal:
Recommends international regulators strengthen their definition of regulatory capital to improve the quality, quantity, and international consistency of capital.
Recommends that various international bodies implement the Group of 20 recommendations, including requiring banks to hold more capital in good times to protect against downturns.
Urges that national authorities standardize oversight of credit derivatives and markets.
Recommends national authorities improve cooperation on supervision of globally interconnected financial firms.
Recommends regulators improve the way firms are unwound when they straddle borders.
Recommends strengthening the Financial Stability Board.
Urges other countries to follow the U.S. lead and: subject systemically significant companies to stricter oversight; expand regulation of hedge funds; review compensation practices; tighten rules governing credit-rating firms.
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