Capital Markets Reform Group Update
July 2009
Authors:
Daniel F. C. Crowley
dan.crowley@klgates.com
+1.202.778.9447
Edward G. Eisert
edward.eisert@klgates.com
+1.212.536.3905
David H. Jones
Capital Markets Reform:
The Marathon Starts with a Sprint
The Obama Administration unveiled its much-anticipated capital markets reform
proposal, titled Financial Regulatory Reform – A New Foundation: Rebuilding
Financial Supervision and Regulation, on June 17, 2009 (see K&L Gates Alert The
Obama Plan for Financial Services Regulatory Reform: A New Foundation or An
Ambitious Renovation?). Since that time, there has been a torrent of executive and
legislative activity that implicates a broad range of financial services issues.
david.jones@klgates.com
+1.704.331.7481
Philip J. Morgan
philip.morgan@klgates.com
+44.(0)20.7360.8123
Mary C. Moynihan
molly.moynihan@klgates.com
Consumer Financial Protection Agency
On June 30, 2009, the Administration released details regarding the Consumer
Financial Protection Agency (CFPA), including proposed legislative language to
create the new agency. Shortly thereafter, on July 8, 2009, House Financial Services
Committee Chairman Barney Frank (D-MA) introduced H.R. 3126, the Consumer
Financial Protection Agency Act of 2009, which largely mirrors the Administration’s
proposed legislative language.
+1.202.778.9058
Lawrence B. Patent
lawrence.patent@klgates.com
+1.202.778.9219
Karishma Shah Page
karishma.page@klgates.com
+1.202.778.9128
K&L Gates is a global law firm with
lawyers in 33 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
The CFPA is one of the key elements of the Obama Administration’s financial
regulatory reform package (see K&L Gates Alert Singularity of Purpose: Is Looking
Out for Consumers Too Narrow a Mission?). The purpose of the agency would be to
promote transparency, simplicity, fairness, and accountability for consumer financial
products and services other than those regulated by the Securities and Exchange
Commission (SEC) and the Commodity Futures Trading Commission (CFTC). To
this end, the independent agency would have a range of powerful rulemaking,
information-gathering, supervisory, and enforcement tools, fundamentally changing
how financial products and services are regulated in the United States (see the
upcoming K&L Gates Alert Million Dollar Baby: The Consumer Financial
Protection Agency Act of 2009). As just one example, H.R. 3126 would give the
CFPA the authority to impose high civil money penalties; in certain cases, the
penalties could be as high as $1 million per day.
The House Financial Services Committee has held a number of hearings on the
subject of consumer protections. Notably, at the House Financial Services Domestic
Monetary Policy and Technology Subcommittee hearing on July 16, 2009, Federal
Reserve Board Governor Elizabeth Duke testified in support of leaving consumer
protection rule writing functions within the Federal Reserve. Chairman Frank had
planned to hold a markup on H.R. 3126 by the end of July, but on July 21 announced
that the markup would be postponed until September in order to give consumer
activists a chance to ramp up their grassroots lobbying in members' districts over the
recess.
Investor Protection Act of 2009
On July 10, 2009, the Obama Administration delivered proposed legislative text,
titled the Investor Protection Act of 2009, to Congress.
Capital Markets Reform Group Update
The proposed legislation complements the CFPA
bill by enhancing the SEC’s ability to protect
investors. More specifically, the draft legislation
would:
•
Provide the SEC with the authority to establish
fiduciary standards of conduct for all brokers,
dealers and investment advisers in providing
advice about securities; in addition, the SEC
would be empowered to examine and ban
certain forms of compensation schemes;
The proposed legislation would eliminate the
private adviser exemption in the Investment
Advisers Act of 1940. The legislation would
instead require de facto that all investment advisers
with more than $30 million of assets under
management register with the SEC. Once registered
with the SEC, investment advisers to private funds
will be subject to:
•
Regulatory reporting requirements, including
confidential reporting of the amount of assets
under management, borrowings, off-balance
sheet exposures, counterparty credit risk
exposures, and trading and investment
positions;
•
Give the SEC the authority to restrict or limit
mandatory arbitration;
•
Authorize the SEC to pay awards to
whistleblowers and expand whistleblower
protections;
•
Disclosure requirements to investors, creditors,
and counterparties;
•
Harmonize liability standards, including those
related to aiding and abetting securities fraud;
•
Conflict-of-interest and anti-fraud prohibitions;
and
•
Provide the SEC with the authority to remove
regulated persons from all aspects of the
securities industry rather than just a specific
segment;
•
SEC examination and enforcement authority
and recordkeeping requirements.
•
Enhance disclosure requirements; and
•
Establish a permanent Investor Advisory
Committee to advise the SEC’s regulatory
priorities.
At a hearing of the House Financial Services Capital
Markets, Insurance, and Government-Sponsored
Enterprises Subcommittee on July 14, 2009, SEC
Chairman Mary Schapiro indicated that the SEC is
willing to work with the Administration and
Congress as the reform proposals move forward.
Private Fund Investment Advisers
Registration Act of 2009
On July 15, 2009, the Administration continued to
move forward with its regulatory reform agenda
when it released proposed legislative text of the
Private Fund Investment Advisers Registration Act
of 2009 (see the upcoming K&L Gates Alert on the
proposal).
In addition, the legislation would require the SEC to
share data from adviser reports with the Federal
Reserve and Financial Services Oversight Council,
to help those entities assess systemic risk. In cases
where private funds are deemed to pose a systemic
risk, they would be supervised and regulated as Tier
1 Financial Holding Companies by the Federal
Reserve.
It has been reported that, after the release of the
Administration’s proposal, SEC Chairman Schapiro
remarked that advisor registration may be
insufficient. She suggested that it may need to be
supplemented by fund registration.
Executive Compensation
The Administration released draft legislation
pertaining to say-on-pay and compensation
committees on July 16, 2009. Just one day later,
Chairman Frank circulated a broader discussion
draft on executive compensation, titled the
Corporate and Financial Institution Compensation
Fairness Act of 2009, to House Financial Services
Committee members.
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Capital Markets Reform Group Update
The discussion draft contains four major
components:
•
Say-on-Pay: Requires all public companies to
hold an annual shareholder advisory vote on
compensation and a shareholder advisory vote
on golden parachutes;
•
Independent Compensation Committee
Requirement: Requires all public companies to
have a compensation committee made up of
independent directors and that compensation
consultants satisfy independence criteria
established by the SEC;
•
Incentive Based Compensation Disclosure
Requirements: Requires all financial institutions
to disclose compensation structures that include
any incentive-based elements; and
•
Compensation Standards for Financial
Institutions: Requires federal regulators to
proscribe inappropriate or imprudently risky
compensation practices as part of solvency
regulation.
Chairman Frank has stated that the House Financial
Services Committee will be marking up legislation
on executive pay sometime during the week of July
20, 2009.
Moving Forward
The Obama Administration is expected to continue
filling in the details of its regulatory reform plan at
much the same speed. The pattern where the
Administration’s release of its proposed legislative
language is followed in short order by the House’s
release of largely similar legislation is also expected
to continue and is indicative of the high level of
coordination that is taking place between the White
House and Capitol Hill. Chairman Frank has
scheduled a number of tentative hearings and
markups through the end of July; additional hearings
and markups will continue into the fall, after
Congress returns from its August recess.
Chris Dodd (D-CT) has been working primarily on
health care reform. As a result, it is likely that the
House will continue its fast-paced consideration of
the Obama proposals on a piecemeal basis, with
many of the details hammered out by Chairman
Frank and the House Financial Services Committee.
When the Senate Banking Committee turns its
attention to the reform effort later this year or early
next year, it is expected that it will largely assemble
the legislation into an omnibus bill and will not be
amenable to modification of the bill.
In addition, on July 15, 2009, Congressional leaders
announced the ten members who will form the
Financial Crisis Inquiry Commission to investigate
the financial crisis (see K&L Gates Alerts Fraud
Enforcement and Recovery Act of 2009 and A
Congressional Investigation of Wall Street Looms).
Former California State Treasurer Phil Angelides
will serve as Chairman and former Ways and Means
Committee Chairman Bill Thomas will serve as
Vice-Chairman. However, the Commission, styled
after the Pecora Commission of the 1930s, is not
required to release its report until December 15,
2010. As such, the Commission’s findings, along
with other issues left unresolved by the Obama
Administration’s regulatory reform plan, such as the
federal regulation of insurance and the merger of the
SEC and CFTC, may provide an opening to extend
the regulatory reform effort into the next Congress.
K&L Gates has established a Capital Markets
Reform Group that consists of designated partners
in each of the firm’s relevant practice areas across
the full spectrum of capital markets issues. By
coordinating across all of these disciplines, K&L
Gates will be able to provide unequaled service and
insights to firm clients as these new laws and
implementing regulations are written (see K&L
Gates Newsstand K&L Gates Launches Capital
Markets Reform Group).
Notably, the Senate focus has been on other issues.
In the absence of Senate Health, Education, Labor,
and Pensions Committee Chairman Ted Kennedy
(D-MA), Senate Banking Committee Chairman
July 2009
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Capital Markets Reform Group Update
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©2009 K&L Gates LLP. All Rights Reserved.
July 2009
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