InfoBytes Regulatory Restructuring Report, Issue Seven, August 7, 2009
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House Passes Executive Compensation Legislation; Senate Holds Hearing on Prudential Supervision Proposals
House Passes Executive Compensation Legislation. On July 31, three days after the bill was reported out of committee, the House of Representatives passed H.R. 3269, the "Corporate and Financial Institution Compensation Fairness Act of 2009," legislation that is a component of the larger financial regulatory reform effort currently being considered in Congress.
Among other things, the bill would generally amend the Securities Exchange Act to require a non-binding annual shareholder vote to approve the compensation packages of executive officers, and require companies to disclose golden parachute arrangements and require a shareholder vote to approve such arrangements. The bill also requires federal regulators to prescribe regulations relating to the structures of incentive-based compensation arrangements, including prohibiting arrangements that would threaten the safety and soundness of the institutions or that could have "serious adverse effects on economic conditions or financial stability." The bill would also establish independence standards for all company compensation committees. One amendment that was agreed to inserted language that prohibits rulemaking that would allow financial regulators to require recovery (i.e. clawback) of incentive-based pay under arrangements in effect on the date of enactment of the bill.
Senate Banking Committee Holds Hearing on Prudential Regulation Proposals. On August 4, the Senate Banking Committee held a hearing to examine the proposals to strengthen and streamline prudential banking supervision. Appearing as witnesses on the panel were heads of the various banking agencies, including FDIC Chairperson Sheila Bair, Comptroller of the Currency John Dugan, Acting Director of the OTS John Bowman, and Federal Reserve Board Member Daniel Tarullo. In their respective written testimonies, the witnesses supported various aspects of the Administration’s reform proposal that address prudential supervision. For example, all supported the creation of an oversight council dedicated to systemic risk (the "Financial Services Oversight Council"), as well as creating a structure to resolve systemically important institutions. Nonetheless, contrary to the position of the Obama Administration, each banking agency leader expressed serious concern about certain aspects of the proposal.
For example, to the specific issue of potential consolidation of federal regulatory agencies, the witnesses generally believed that while such proposals might help efficiency moving forward, it would not address any specific cause of the current crisis, and it would come at the expense of other benefits, including expertise and checks and balances in regulation. Mr. Bowman in particular argued against the elimination of the OTS and the federal thrift charter, stating that these changes would not address existing problems, and against eliminating the exemption preventing application of Bank Holding Company Act regulation to thrift holding companies, ILCs and credit card banks. During questioning, Ms. Bair responded to Chairman Dodd’s question on whether the proposal goes far enough by saying that she did not think the ability to choose a federal charter had any effect on the current crisis at all. Moreover, in her written testimony she stated that there is no "merit or wisdom in consolidating federal supervision of national and state banking charters into a single regulator for the simple reason that the ability to choose between federal and state regulatory regimes played no significant role in the current crisis." Instead, Ms. Bair argued that consolidation into a unified supervisor would harm the dual banking system - because the supervisor would naturally focus on the larger institutions to the detriment of smaller community banks - and undermine the effectiveness of the deposit insurance system. Ms. Bair used examples of some European countries such as Austria, Belgium, Hungary, Iceland, and the UK as single-regulator models that have experienced perhaps greater damage in the financial crisis than the US. On this issue, Mr. Dugan did support the consolidation of the OTS into the OCC, the elimination of the federal thrift charter, and the elimination of the thrift holding company and ILC exceptions to the BHC Act regulation, but conceded that because ILCs have not had the same issues, perhaps smaller ILCs could be exempt.
Mr. Tarullo stressed in both his written testimony and during questioning, that the key issue is addressing the "too big to fail" problem. He said that there are a variety of tools that are needed - from resolution authority, to greater transparency, to capital requirements - that would be needed moving forward. In addition, Mr. Tarullo urged that any legislation ensures oversight of every insured depository institution as well as every entity that owns an insured depository institution. Mr. Tarullo also reiterated support for the proposal to require all "systemically important financial firms" to be subject to consolidated supervision like the one embodied in the Bank Holding Company Act. Mr. Tarullo also supported closing the loophole for ILCs to avoid supervision under the BHC Act.
Mr. Dugan testified that he has major concerns with two key aspects of the reform proposal. Specifically, he criticized the proposed authority of the systemic risk regulator (the Fed) to override authority of the primary prudential banking supervisor, saying it goes "much too far." Secondly, while supporting the idea of a consumer protection agency, he urged against the elimination of uniform national consumer protection standards for national banks (i.e., federal preemption), and the corresponding transfer of all existing consumer protection examination and enforcement away from the federal banking agencies. He especially warned against allowing states the ability to enact different standards than what is created by a federal regulator.
Chairman Frank Gives Speech On Financial Regulatory Reform. On July 27, House Financial Services Committee Chairman Barney Frank spoke to the National Press Club regarding financial regulatory reform. In his remarks, Chairman Frank stated that he believed the House would pass a bill in October, and that the President would sign a bill before the end of the year. Chairman Frank highlighted certain aspects in particular, including executive compensation, requiring securitizers to retain risk on loans they securitize, increase leverage requirements, effective resolution of systemic firms, regulation of derivatives, and consumer protection. Regarding the proposed CFPA, Chairman Frank said that there are difficult jurisdictional issues, especially with regards to the FTC, and that the proposal may need to be modified to work out the coordination with the FTC. However, he reiterated that the FDIC, OCC and Federal Reserve should lose their consumer protection jurisdiction to the CFPA. Finally, Chairman Frank also stated that he does not expect to require the Federal Reserve to create a list of institutions that are "too big to fail" because it might incentivize companies on the list to act with less discipline rather than more discipline.