Obama Announces Plan for Financial Regulatory Reform

On Wednesday, June 17, President Obama announced a plan for financial regulatory reform.

The plan will require action by Congress.  It is divided into the following five sections:

• Promote robust supervision and regulation of financial firms.

This section of the plan proposes forming a Financial Services Oversight Council, consisting of the heads of various financial regulatory agencies, to identify systemic risks and improve interagency cooperation.  The plan would also give new authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, event those that do not own banks.  The plan specifically grants the Federal Reserve the authority to supervise all firms that could pose a threat to financial stability based on their size, leverage and interconnectedness to the financial system (calling such firms “Tier 1 Financial Holding Companies”).  It would impose strong capital standards for all financial firms and even higher standards Tier 1 Financial Holding Companies.  It would set up a National Bank Supervisor to supervise all federally chartered banks, taking over such duties from the Office of the Comptroller of the Currency.  The Office of Thrift Supervision would be rolled into the National Bank Supervisor.  In addition, the plan would require advisers of hedge funds and other private pools of capital of any significant size to register with the SEC.  The plan would also close loopholes in current regulations by requiring industrial loan companies to become bank holding companies and therefore be regulated by the Federal Reserve.  The Federal Reserve and the Federal Deposit Insurance Corporation would maintain their respective roles in the supervision and regulation of state-chartered banks.

• Establish comprehensive supervision of financial markets.

The plan proposes enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of credit rating agencies and a requirement that issuers and originators retain a financial interest in securitized loans.  The plan would regulate all over-the–counter derivatives.  The plan does not merge the Securities and Exchange Commission and the Commodities Futures Trading Commission, but requires that they make recommendations to Congress on how to eliminate differences in their statutes for similar financial products if such differences are not essential to achieving investor protection.  The plan would also grant the Federal Reserve authority to oversee certain payment, clearing and settlement systems. 

• Protect consumers and investors from financial abuse.

This section of the plan would institute a new Consumer Financial Protection Agency to protect consumers from unfair, deceptive and abusive practices by providers of credit, savings, payment and other financial products and services.  It proposes stronger regulations to improve the transparency, fairness and appropriateness of consumer and investor products and services.  The plan makes it clear that rules enacted by the new agency would not pre-empt tougher state consumer laws.

• Provide the government with the tools it needs to manage financial crises.

This section proposes a new regime, modeled on the existing Federal Deposit Insurance Company authority, to address the potential failure of a bank holding company or other nonbank financial firm when the stability of the financial system is at risk.  It also proposes revisions to the Federal Reserve’s emergency lending authority to improve accountability, requiring that the Federal Reserve Board receive prior written approval from the Secretary of the Treasury for emergency lending under its “unusual and exigent circumstances” authority.

• Raise international regulatory standards and improve international cooperation.

The plan proposes international reforms, including strengthening the capital framework, improving oversight of global financial markets, coordinating supervision of internationally active firms and enhancing crisis management tools.  The United States is paying a leadership role in efforts to coordinate international financial policy through the G-20, the Financial Stability Board and the Basel Committee on Banking Supervision, and the plan contemplates using this position to promote the foregoing initiatives.