Financial Regulatory Reform Legislation
In a push to vote on regulatory financial reform before year end, there have been a number of Congressional hearings this month which are expected to continue through next month. As previously reported in earlier LRAs, the Obama Administration proposed a host of legislation to address financial regulatory reform including the creation of the Consumer Financial Protection Agency (CFPA). The House Financial Services Committee is working on a bill that would address the concerns of the Obama Administration, the financial community and consumers. The bill is not expected to include requirements for “plain vanilla” products as proposed under Obama’s plan.
There are many critics of the CFPA as well as other aspects of the Administration’s regulatory reform legislation like the abolishment of the thrift charter, merging the OCC and OTS and expanding oversight authority to the Federal Reserve. House Financial Services Committee Chairman Frank (D-MA) has indicated that the Federal Reserve would most likely share oversight powers with other regulatory agencies. In contrast, Senate Banking Committee Chairman Christopher Dodd (D-CT) favors the creation of a single regulator to oversee U.S. banks, calling the current system “an irrational system created by historical accident.” Despite media speculation, Sen. Dodd has yet to introduce legislation that would create such a “super regulator.”
Treasury’s Policy Statement on Capital and Liquidity Standards
On September 3rd, Treasury issued its policy statement, “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms,” to set forth core principles that Treasury believes should guide reform of the international regulatory framework. The guidance stated that capital requirements for all banking firms should be increased and capital requirements for financial firms that could pose a threat to overall financial stability should be higher than those for other banking firms. Further, Treasury has recommended that a comprehensive agreement on new international capital and liquidity standards should be reached by December 31, 2010 and should be implemented in national jurisdictions by December 31, 2012.
Financial Crisis Inquiry Commission
The Commission held its first public meeting on September 17th. Chairman Phil Angelides included in his opening remarks that the Commission expects to begin holding hearings by December and will seek records from government agencies, financial institutions and others. With a budget of $5 million, the bipartisan Commission has a broad mandate to investigate 22 separate financial issues and products as possible causes of the financial and economic crisis. One obstacle that the Commission may face is its own rules for issuing subpoenas. The law that created the Commission, which is split 6 to 4 in favor of Democratic-named members, specifies that subpoenas must be approved by at least one Republican-appointed member in order to be valid. The Commission must submit a report containing its findings to the President and Congress by December 15, 2010.
SEC Announces New Division
On September 16th, the SEC announced University of Texas School of Law Professor Henry T.C. Hu as Director of the newly-established Division of Risk, Strategy, and Financial Innovation. The new division combines the Office of Economic Analysis, the Office of Risk Assessment, and will perform the functions of those two offices, along with the following: 1) strategic and long-term analysis; 2) identifying new developments and trends in financial markets and systemic risk; 3) making recommendations as to how these new developments and trends affect the Commission’s regulatory activities; 4) conducting research and analysis in furtherance and support of functions of the Commission and its divisions and offices; and 5) providing training on new developments and trends and other matters.
Abu Dhabi Commercial Bank et. al. v. Morgan Stanley, Moody’s and S&P
Earlier this month, Judge Shira Scheindlin of the S.D.N.Y. court rejected the longtime claim that the First Amendment protected credit-rating firms from lawsuits. The judge ruled that the ratings of certain securities – those that were distributed to a limited number of investors – do not deserve the same free-speech protection as more general ratings of corporate bonds that were widely disseminated. Judge Scheindlin’s ruling is binding only on cases filed in the S.D.N.Y., but it could influence other judges. Two institutional investors, King County, Washington and Abu Dhabi Commercial Bank brought a class action to recover losses stemming from the liquidation of notes issued by a structured investment vehicle between October 2004 and October 2007. The plaintiffs’ brought 32 claims against 8 defendants all of which have been dismissed except for the common law fraud claims against Morgan Stanley, Moody’s Corp. and McGraw-Hill Cos. (parent company of Standard & Poor’s).
Havenstrite v. Hartford (Update)
Earlier this month in the ongoing COLI related identity misappropriation suit against Hartford, the plaintiffs in the matter filed their Motion to Class Certification. According to that motion, 24 employers were deposed and the plaintiff’s defined the putative class as employees of 12 of those employers. The employers were selected because they either 1) admitted that they did not inform their employees about the BOLI/COLI policies, or 2) there was no evidence that they notified their employees about the policies on their lives. Hartford has until October 16th to respond.
FASB Exposure Draft on Fair Value Measurements and Disclosures
On August 28th, FASB issued proposed updated accounting standards (Update). The proposed Update would affect all entities that are required to make disclosures about recurring and nonrecurring fair value measurements. The majority of the new disclosures and clarifications of existing disclosures would be effective for interim and annual reporting periods ending after December 15, 2009. However, sensitivity disclosures about Level 3 fair value measurements (fair value measurements using significant unobservable inputs) would be effective for interim and annual reporting periods ending after March 15, 2010. The deadline for comments on the proposed Update is October 12th.
California Probes Credit Rating Agencies
On September 17th, California Attorney General Jerry Brown issued subpoenas to S&P, Moody’s and Fitch as he launched an investigation of whether they violated state law with the ratings they provided on mortgage-backed securities. The investigation focuses on whether the agencies broke consumer protection and unfair business practice laws in California. The state has broad authority to bring suit in cases of false advertising and unfair competition. The agencies have to answer a series of questions by October 19, 2009 including: Whether the rating agencies failed to conduct adequate due diligence in the rating process; Whether the rating agencies gave high ratings to particular securities when they knew or had reason to know that high ratings were not warranted; Whether the rating agencies failed to comply with their own codes of conduct in rating certain securities; Whether the rating agencies made fraudulent representations concerning the quality or independence of their ratings; and Whether the rating agencies conspired with the companies whose products they rate to the detriment of investors.
NAIC Public Hearing on the Role of Rating Agencies in Insurance Regulation
On September 24th, the NAIC held a public hearing which was broken into three panels: 1) to explore the history and the traditional role of ratings in insurance regulation; 2) to explore what went wrong during the financial crisis with credit ratings, what changes credit rating agencies have made in response, and what still needs to be done to correct it; and 3) to discuss recommendations and alternatives to the traditional ratings system. Representatives from the major credit rating agencies participated in the hearing. Regulators are seeking to reduce their reliance on credit grades issued by rating firms after the subprime meltdown exposed weaknesses in residential mortgage-backed securities (RMBS) and other mortgage-related assets that were once awarded top AAA ratings. Life insurers suffered from soaring capital requirements as homeowner defaults increased and RMBS holdings were downgraded. Life insurers may win their fight for looser capital standards tied to RMBS. The NAIC is weighing a proposal by the American Council of Life Insurers that would eliminate the use of rating firms when calculating capital needs on RMBS holding and replace them with the views of “an independent third party.”
Today, the House Committee on Oversight and Government Reform has a scheduled hearing entitled, “Credit Rating Agencies and the Next Financial Crisis.”
SEC Unanimous Vote for More Oversight of Rating Agencies
On September 17th, the SEC voted to take several rulemaking actions to bolster oversight of credit rating agencies by enhancing disclosure and improving the quality of credit ratings. Some of the SEC’s actions to create a stronger, more robust regulatory framework for rating agencies included: adopting rules to provide greater information concerning the ratings histories and to enable competing credit rating agencies to offer unsolicited ratings for structured finance products, by granting them access to the necessary underlying data for structured products; reopening the public comment period to allow further comment on the SEC’s proposals to eliminate certain references to credit ratings; and voting to seek public comment on whether to amend SEC rules to subject rating agencies to liability when a rating is used in connection with a registered offering by eliminating a current provision that exempts rating agencies from being treated as experts when their rating are used that way. Comments on new rules and amendments will be due within 60 days after its publication in the Federal Register, which is expected shortly.
New Michael Moore Film References COLI
Michael Moore’s new anti-capitalism movie, ‘Capitalism: A Love Story,’ debuts this month. According to reviews (we have not yet seen it), the film includes antics such as Moore driving an armored truck to financial institutions like AIG and Goldman Sachs attempting to recover TARP funds owed to taxpayers. Apparently, the movie also references corporate-owned life insurance policies; depicting Wal-Mart Stores as profiting from a life insurance policy it took out on a young woman who died unexpectedly leaving behind a young family. The film opens nationwide on Friday, October 2nd.