The House is continuing Congress’ piecemeal rollback of the Dodd-Frank Act, a theme Alexander Sand and I explore in our recent article, Cutting Back: Revisions to Dodd-Frank Derivatives Rules. Although the House has targeted a number of Dodd-Frank provisions for regulatory relief, today I will focus on clearing and margin. At present, these requirements are not harmonized in that market participants that are exempt from clearing may nevertheless be forced to post margin when trading with swap dealers and major swap participants (the two types of market intermediaries that are subject to margin requirements under Dodd-Frank). Imposition of … Read more
If there is one simple lesson from the crisis that we all can embrace, it is that no financial institution in America should be so big or complex that its failure would put the financial system at risk.1 Congress wrote that simple lesson into law as a core principle of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).
Consequently, a fundamental change in our framework of regulation as a result of the crisis is to impose tougher rules on banking organizations that are so big or complex that their risk taking and distress could … Read more
Since AIG’s bailout in September 2008, the role of large, complex insurance firms in the global financial system has received much attention. Concern about the global operations, interconnectedness, and non-traditional activities of these large firms prompted the Financial Stability Board to formally designate 9 life and full insurance firms in six countries as Global-Systemically Important Insurers (G-SII) in July 2013. In the US, where insurance industry assets equal roughly half the size of total assets held by all financial institutions covered by the Federal Deposit Insurance Corporation, the Financial Stability Oversight Council has confirmed the designation of AIG, MetLife and … Read more
The SEC proposed its long-awaited compensation clawback rules under the Dodd-Frank Act. The proposed rules would require public companies to adopt and enforce compensation recovery policies that recoup from executive officers incentive compensation resulting from specified accounting restatements. Failure to comply with these rules would result in delisting by the applicable exchange.
Which companies would be covered? With very limited exceptions, the rules would apply broadly to all issuers with listed securities, including foreign private issuers, emerging growth companies, smaller reporting companies, controlled companies and issuers of listed debt whose stock is not also listed.
Which individuals would be covered? … Read more
Yesterday afternoon, Senate Banking Committee Chairman Richard Shelby (R-AL) released a discussion draft of “The Financial Regulatory Improvement Act of 2015” (the “Discussion Draft”). This proposed legislation would significantly amend certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), in particular the current regulatory framework for designating and regulating so-called systemically-important financial institutions, or “SIFIs.” In addition, the 216-page Discussion Draft would substantially broaden the Dodd-Frank safe harbor for “qualified mortgages” and includes a number of other notable provisions relating to the regulation of insurance companies, the structure and operation of the Federal Reserve System, and … Read more
On May 12, 2015, the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) jointly issued the CFTC’s final interpretation clarifying its interpretation concerning forward contracts with embedded volumetric optionality (“Final Interpretation”). The Final Interpretation appears to signal that, going forward, the CFTC will take a more relaxed view of which transactions constitute “forward contracts” that are not subject to regulation as swaps. This view should be helpful to many commercial parties entering into contracts that provide for volumetric optionality, which means the right to receive or deliver a commodity in an amount that is more or less … Read more
The debate over asset managers’ potential systemic risk has been ongoing for some years, with little agreement between the industry, US regulators, and global standard setting bodies. US regulators themselves have been divided – the SEC has in particular been skeptical that asset managers or individual funds can be the source of systemic risk of a magnitude akin to that posed by large banks.
Nevertheless, consensus is finally forming on the need to address specific risks of the industry. With the designation of asset managers as systemically important financial institutions (“nonbank SIFIs”) by the Financial Stability Oversight Council (“FSOC”) now … Read more
Bagehot, as in Walter Bagehot, was mentioned no less than seven times in the decision splitting the baby in the AIG trial. A nineteenth century British commentator, Bagehot was among the first to recognize that too little liquidity could wreak havoc on a financial system.  In a series of admonitions, known today as Bagehot’s dictum, he admonished central banks to lend freely to any solvent institution with good collateral, but at a penalty rate to minimize the attendant moral hazard. In invoking Bagehot, Judge Wheeler was in good company. Ben Bernanke and other leading policymakers regularly invoked … Read more
On April 30, 2015, the Commodity Futures Trading Commission (“CFTC”) approved for publication in the Federal Register proposed amendments to the trade option exemption (the “Proposal”) that would reduce reporting and recordkeeping requirements for trade option counterparties that are not swap dealers or major swap participants (“Non-SD/MSPs”). Notably, the Proposal would eliminate the annual Form TO filing requirement for Non-SD/MSPs in connection with their trade options, while requiring them to notify the CFTC’s Division of Market Oversight (“DMO”) if their trade options have, or are expected to have, an aggregate notional value in excess of $1 billion in any calendar … Read more
The AIG decision (actually, Starr International Co. v. The United States) has shocked many but for the wrong reason. Some commentators have focused on the ingratitude of Maurice Greenberg, AIG’s former CEO and the “architect” of its international insurance business. In their view, he should have been thankful for the $85 billion loan extended by the Federal Reserve Board (which still left AIG’s shareholders holding 20% of their stock). Ultimately, AIG’s shareholders did much better than their Lehman counterparts (who received nothing), but these issues of comparative fairness and Greenberg’s alleged chutzpah go mainly to the cosmetics and … Read more
On April 28, 2015, the Securities and Exchange Commission (“SEC”) announced that it awarded the maximum allowable award to a whistleblower under the Dodd-Frank whistleblower program in its first case involving alleged retaliation by an employer against an employee who reported suspected misconduct to the SEC. This award of 30 percent of the amount collected by the SEC in In the Matter of Paradigm Capital Management, Inc. and Candace King Weir equaled a payment of more than $600,000 to the employee who, according to the SEC, provided “key original information that led to the successful SEC enforcement action.”
In … Read more
On April 29, 2015, the SEC issued a proposing release regarding the so-called “pay versus performance” disclosure mandated by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules would require certain companies registered under Section 12 of the Securities Exchange Act of 1934 (excluding, for example, emerging growth companies and foreign private issuers) to disclose in both tabular and narrative or graphical format the relationship between “actually paid” named executive officer (“NEO”) compensation and total shareholder return (“TSR”) performance in their proxy statements.
The proposed rules require each company to provide tabular … Read more
It has long been assumed that shareholders’ rights in the United States diminished considerably through the 20th century as a result of a competition among states to attract and retain corporations. More recently, various commentators have disputed the significance of this “race to the bottom,” (or “to the top,” depending upon one’s view of the efficiency of the rules that were displaced during such a race). They say the traditional focus on developments in state corporate law is misleading because it overlooks the substantial growth in federal influence over corporate law since the 1930s and particularly since the early … Read more
Last week, along with our co-authors Kate Andrias and Michael Barr of the University of Michigan Law School, we filed an amicus brief on behalf of fifteen professors of law and finance in MetLife v. Financial Stability Oversight Council. MetLife has challenged the FSOC’s determination that the company’s distress could threaten U.S. financial stability—and, thus, that MetLife should be subject to Federal Reserve supervision. The case, which is currently before the federal trial court in Washington D.C., represents the first major challenge to an FSOC designation. Our brief explains why the court should reject this challenge.
Our brief reflects … Read more
Let me begin by thanking the organizers for inviting me to participate in this important dialogue on the role of finance in society. The financial sector is vital to the economy. A well-functioning financial sector promotes job creation, innovation, and inclusive economic growth. But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues.
Unfortunately, in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage. Leverage, interconnectedness, and maturity and … Read more
Thank you, David, for that kind introduction. I am very honored to address the Garrett Institute, one of the most important programs in the country for corporate and securities lawyers, and to be in David’s home territory of Northwestern Law School where he served as Dean before going on to serve as a very distinguished Chairman of the SEC in the late 1980s.
Although the Garrett Institute was established 35 years ago to honor former SEC Chairman Ray Garrett, Jr., I really first came to learn about him when I did a bit of research for a speech I gave … Read more
On March 25, 2015, the Conference of State Bank Supervisors (“CSBS”) and the American Association of Residential Mortgage Regulators (“AARMR”) issued for a 90-day public comment period a proposed set of baseline prudential regulatory standards for nonbank mortgage servicers and a set of enhanced prudential standards for large complex nonbank mortgage servicers.
CSBS and AARMR believe increased state prudential regulation of nonbank mortgage servicers would better protect borrowers, investors, and stakeholders; enhance effective regulatory oversight and market discipline; and improve standards of transparency, accountability, risk management, and governance.
The proposal marks the culmination of the work of the CSBS’s Mortgage … Read more
The 2007-2009 financial crisis was a watershed event that shook the confidence of people around the globe in the stability of the international financial system. The crisis demonstrated a failure of market discipline and the government responses only exacerbated this problem by confirming the long-standing expectation that some firms – particularly globally active financial companies – were too big or interconnected to fail.
In response, international standard setters and national authorities have sought to create a more resilient financial system while fashioning statutory frameworks and strategies to make the resolution of so-called systemically important financial institutions (“SIFIs”) possible.
The U.S. … Read more
On March 26, 2015, the Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) announced that it will be considering rules imposing significant structural limitations and other requirements on payday and similar loans: (1) short-term (45 days or less) loans to consumers; and (2) longer-term (more than 45 days) high-interest rate personal loans (more than 36% measured by an “all in” annual percentage rate (APR) that is more inclusive than the Truth in Lending Act APR) where a lender has the right to collect from the customer’s paycheck or bank account, or where a non-purchase money loan is secured by … Read more
Financial panics are pernicious, but they can be countered with government guarantees of panic-prone debt. In the wake of the crisis, however, Congress has stripped regulators of this sort of guarantee power, motivated in large part by concerns that such powers could exacerbate moral hazard. In a new article, The Moral Hazard Paradox of Financial Safety Nets, I suggest that the moral hazard impact of guarantee authorities in the current system is ambiguous – indeed, it is plausible that guarantee authorities could reduce the (net) cost of moral hazard arising from expectations of government intervention. This supports the view … Read more