Who Regulates Whom and How An Overview of U.S. Financia.docx
Risk Trends - Parkview Newsletter September 2010
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. 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. 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. 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