Developments Of Note
House Financial Services Committee Chairman Barney Frank Introduces The Financial Stability Improvement Act Of 2009 To Address Systemic Risk And Other Financial Regulatory Reforms Massachusetts Releases Final Data Security Rule Goodwin Procter Sponsors Third Annual Private Equity Investing In Banks Symposium OCC Allows Use Of Collectively Owned LLCs For Banks' OREO Bank Pleads Guilty In First Criminal Prosecution Based On Failure To File CTRs Bank Regulators Issue Policy Statement On Workouts Of Commercial Real Estate Loans SEC Staff Issues Additional Guidance On The Treatment Under Rule 14a-8 Of Stockholder Proposals Relating To Risk And Stockholder Proposals Addressing CEO Succession Planning Other Items Of Note
Supreme Court Hears Oral Argument For Review Of Seventh Circuit Decision In Harris Associates FTC Postpones Compliance Date Of Identity Theft Red Flags Rule Until June 1, 2010 Goodwin Procter Issues Client Alert On House Legislation Regulating Derivatives Trading FRB'S Temporary Exemption From Section 23A Restrictions For Funding To Replace Tri-Party Repo Market Funding Expired On October 30, 2009 DEVELOPMENTS OF NOTE House Financial Services Committee Chairman Barney Frank Introduces The Financial Stability Improvement Act Of 2009 To Address Systemic Risk And Other Financial Regulatory Reforms House Financial Services Committee Chairman Barney Frank introduced a discussion draft of the Financial Stability Improvement Act of 2009 (the "Act"), which addresses the regulation of systemic risk and the resolution of systemically important financial institutions. The Act also contains important provisions regarding thrift and industrial loan company charters, credit risk retention in connection with securitization transactions and the merger of the OTS into the OCC. The Act incorporates several pieces of the financial regulatory reform legislation proposed by the Obama Administration that were discussed in the July 28, 2009 Alert and the August 4, 2009 Alert.
The House Financial Services Committee has already held hearings on the Act, which included testimony by the Treasury Secretary and the heads of each of the federal banking agencies. Chairman Frank has scheduled a markup of the Act next week and hopes to have a vote on the Act as early as this week.
Financial Services Oversight Council. The Act would create the Financial Services Oversight Council (the "Council"), which would identify financial companies and financial activities that pose a threat to financial stability, and would subject those companies and activities to heightened prudential oversight, standards and regulation. The Council would also subject systemically important financial market utilities and payment, clearing and settlement activities to heightened oversight, standards and regulation. The Treasury Secretary would serve as the chair of the Council, whose other members would include the Chairman of the FRB, the Comptroller of the Currency, the Director of the OTS until it would be merged into the OCC, the Chairman of the FDIC, the Chairman of the SEC, the Chairman of the CFTC, the Director of the Federal Housing Finance Agency and the Chairman of the National Credit Union Administration. A state insurance commissioner and a state banking supervisor would also serve as non-voting members of the Council for terms of no longer than two years. The Council is designed to have the ability to coordinate responses by these member agencies to mitigate identified threats to financial stability and would annually report to Congress on significant financial market developments and potential emerging threats to the stability of the financial system.
The Council would not conduct examinations or enforce applicable laws with respect to any one institution, but would instead focus on identifying issues that threaten the broader economy. Rulemaking, examination and enforcement authority over systemically important financial institutions would be vested in the FRB. Although the FRB would write and enforce new regulations for systemically important financial institutions, the Council would advise Congress on financial regulation, monitor companies and activities that should be subject to tougher standards and issue formal recommendations that particular agencies should adopt. The federal financial agencies would be required to provide a written explanation to the Council within 60 days following such a recommendation stating the actions it had taken in response to the recommendation or the reason it did not adopt the recommendation. In the event of a dispute among agencies, the Act would allow the Council to make a binding decision. Under the original proposal by the Obama Administration, the interagency council could have advised the FRB or other regulators, but had no power over them.
The Council would not be an agency of the federal government and accordingly would not be subject to the Administrative Procedures Act, Freedom of Information Act or other such statutes governing the procedures of federal agencies. The Act also provides that the Council would not be subject to the Federal Advisory Committee Act. The staff of the Council would be detailed from the Treasury Department and other agencies. Funding for the Council would be provided equally from its voting members.
Systemic Risk Oversight And Regulation. The Act subjects financial firms or activities that pose significant risks to the financial system to heightened, comprehensive scrutiny by federal regulators. Such heightened standards would be imposed through a variety of options intended to be tailored to the specific threat posed to the financial system, as opposed to a "one size fits all" approach. The Administration and the House Financial Services Committee stated that regulators' "inability to see developments outside their narrow 'silos' allowed the current crisis to grow unchecked." Accordingly, the Act is designed to ensure constant communication and the ability to look across markets for potential risks through enhanced information gathering and sharing requirements for the Council and for all financial regulators, including the SEC and CFTC. The Council and the FRB would have the authority to require the submission of periodic and other reports from any financial company for the purpose of determining whether the company or a financial activity or market it participates in pose a threat to financial stability. The FRB would have the ability to recommend that the other federal financial regulators adopt heightened prudential standards for activities that are identified as posing a threat to U.S. financial stability or to the U.S. economy. The FRB would have back-up authority to step in if regulators do not act quickly to address developing problems identified by the Council.
As discussed above, the Act provides that the FRB would have rulemaking, examination and enforcement authority over systemically important financial institutions. The Act also provides that the FRB would have additional authorities to regulate systemically important payment, clearing and settlement systems. The...