Risk Trends
                                                              September 2010 Newsletter
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Page 2                                                                                    Risk Trends

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September 2010                                                                                    Page 3


Executive Compe...
Social Media Connections:

                                         One thing is certain - the global financial services i...
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Risk Trends - Parkview Newsletter September 2010

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Summary analysis of The Dodd Frank Wall Street Reform Act

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Risk Trends - Parkview Newsletter September 2010

  1. 1. Risk Trends September 2010 Newsletter Parkview Risk Advisors A boutique Risk Management Advisory services firm The Dodd Frank Wall Street Reform Act By: Steve Y. Lehrer and Uday M. Gulvadi The question on every one’s mind is – Will Faced with the biggest financial and economic crisis since the Great this important Depression, the President signed the Dodd-Frank Wall Street Reform and legislation succeed in Consumer Protection Act (the “Act”) on July 21, 2010. This Act seeks to preventing the next address some of the root causes and dire consequences of the financial meltdown – a lack of accountability on Wall Street, pyramid schemes of financial crisis or is it huge proportions, the collapse of major banks, mortgage crises, the loss of just a knee jerk approximately eight million jobs, diminishing personal savings and the worst reaction to the present financial situation since the great depression. one? A diverse range of reactions to the Act has been seen from the financial services community, investors, consumers and tax payers. The question on every one’s mind is – Will this important legislation succeed in preventing the next financial crisis or is it just a knee jerk reaction to the present one? History tells us that financial crises and recessions have been occurring throughout the last century or so at regular intervals. Nearly a decade ago, we were faced with a number of history’s worst corporate financial reporting frauds. These frauds affected not only the investors, but also the respective company’s management, staff and the auditors. The impacts were felt both domestically and globally. As a result, in 2002 our government passed the Sarbanes-Oxley Act (SOX), which was done in the hopes of rebuilding the public and investor confidence and trust. The jury is still out on whether SOX has been able to accomplish its objectives of preventing financial reporting frauds. In the current scenario, the Act introduces, among many items, increased regulation of banks and other financial institutions, creation of a Financial
  2. 2. Page 2 Risk Trends Stability Oversight Council, attempts to address systemic risk and end “too big to fail” bailouts. The following are highlights of the Act: Protecting the consumer The Act calls for the creation of a new independent watchdog. This group will be housed at the Federal Reserve and is granted the authority to ensure that the American consumer is given complete and accurate information needed when shopping for mortgages, applying for credit cards, and other financial products. The act also sets out to protect consumers from hidden fees, abusive terms, and deceptive practices. Eliminating Bailouts for Companies Considered “Too Big” The Act ensures that taxpayers will no longer be forced to bail out financial firms that threaten the economy through the creation of a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards The Act ensures that and supervision to protect the economy and American consumers, taxpayers will no longer investors and businesses. be forced to bail out financial firms that Identifying and Mitigating Systemic Risk threaten the economy A newly created Financial Stability Oversight Council will focus on through the creation of identifying, monitoring and mitigating systemic risks posed by large, a safe way to liquidate complex financial firms as well as products and activities that spread failed financial firms risk across firms. The council will make recommendations to regulators for increasingly stringent rules on companies that grow large and complex enough to pose a threat to the financial stability of the United States. Transparency & Accountability over Exotic Instruments The SEC and the CFTC will regulate Exotic instruments. Centralized clearing houses will play a larger role in clearing trades. Regulators will monitor risk over this large and complex market. Risky and abusive loopholes will be eliminated.
  3. 3. September 2010 Page 3 Executive Compensation Compensation committees will achieve objectivity and independence as shareholders will be granted a say on compensation, proxy access and corporate affairs with a non-binding vote on executive compensation and golden parachutes. Public companies will also be required to implement policies for retrieving executive compensation, which may be based on fraudulent, unreliable or inaccurate financial statements. Protecting the Investors The Act provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses. Investor Protections will be enhanced through the encouragement of whistleblowers, SEC management reform, investment advice, new advocates for investors, and funding. Enforce Existing Regulations Regulators will be strengthened with adequate oversight and be empowered to aggressively pursue fraud, conflicts of interest and system manipulation, which benefits special interests, all at the expense of American families and businesses. Empowering the Federal Reserve The Federal Reserve will oversee the larger, more complex holding This reform is the most companies with assets over $50 billion and other systemically sweeping set of changes to significant financial firms, where their expertise in capital markets will America's financial come into play. This new role will come with new responsibilities, but regulatory system since the also new transparency and efforts to eliminate conflicts of interest. 1930s. This reform is the most sweeping set of changes to America's financial regulatory system since the 1930s. The Act aims to restore American financial stability, shine a brighter light on some complex financial products, build a solid foundation for growing jobs, protect consumers, enhance oversight on Wall Street, and attempts to prevent another major financial crisis. The Act covers the entire financial services industry including bank holding companies, insurance companies, investment banks, credit card issuers, broker-dealers, hedge funds and private equity funds. Despite this, some of the detailed and specific rulemaking has been left to the various regulatory bodies empowered by the Act to do so. Continued...
  4. 4. Social Media Connections: One thing is certain - the global financial services industry will Blogs continue to evolve and create innovative products, services, http://riskadvisor.wordpress.com business practices, even legal structures in a bid to gain competitive http://governanceadvisor.wordpress.com advantage and boost profits. Ultimately, the success of the Act will depend on how effectively the regulatory agencies, especially the Twitter Financial Stability Oversight Council can keep pace with these innovations, understand the risks that they might represent and http://twitter.com/Risk_Advisor then act in concert to preempt and prevent the next financial crises Website or at least significantly reduce its magnitude and potential impact. www.parkviewconsult.com Parkview Risk Advisors A division of Parkview Enterprises, LLC Parkview Risk Advisors is a boutique regional risk management advisory firm that partners with public and private companies to help sharpen focus on their strategic goals and objectives and help mitigate the risks that might prevent achievement of those goals. As thought leading experts in corporate governance, risk management and strategic internal audits we help you identify and manage your emerging opportunities and risks. Our services include: • Internal Audit • Corporate Governance • Risk Management • Governance Risk Compliance (GRC) Integration • Sarbanes Oxley Compliance • Information Technology • Forensic Accounting • Anti Money Laundering • Training and Workshops Send questions and comments to: slehrer@parkviewconsult.com ugulvadi@parkviewconsult.com

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