Dodd-Frank News Center

Bill Would Provide More Effective Oversight of Investment Advisers

This story appeared in Bank Digest.

Bipartisan legislation has been introduced to create more efficient and effective oversight of the retail investment advisory industry in response to a Securities and Exchange Commission study that revealed the agency lacks resources to adequately examine the nation's nearly 12,000 registered advisers. As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended a self-regulatory organization as one option for Congress to consider as it looks for ways to help the agency monitor the industry. The "Investment Adviser Oversight Act of 2012" would authorize one or more self-regulatory organizations for investment advisers funded by membership fees.

House Leaders Introduce Legislation Creating SRO for Investment Advisers

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

House Financial Services Committee Chairman Spencer Bachus (R-AL) and Rep. Carolyn McCarthy (D-NY), a leading member of the Committee, introduced bipartisan legislation to create a self-regulatory organization for the more efficient and effective oversight of the retail investment advisory industry. Chairman Bachus and Rep. McCarthy introduced their proposal in response to an SEC study that revealed the agency lacks resources to adequately examine the nation’s nearly 12,000 registered investment advisers.  As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended a self-regulatory organization as one option for Congress to consider as it looks for ways to help the agency monitor the industry. The Bachus-McCarthy bill would authorize one or more self-regulatory organizations (SROs) for investment advisers funded by membership fees.

FINRA Urges SEC to Create SRO for Investment Advisers Amid Fierce Debate Spurred by Dodd-Frank Study

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

FINRA has entered a fierce debate over Dodd-Frank’s call for an SEC study on enhanced examinations of investment advisers by urging the SEC to create a self-regulatory organization (SRO) for investment advisers. In a letter to the SEC, FINRA said that, given the Commission’s funding limits, it is unlikely that the SEC will be able to accomplish more frequent adviser examinations on its own. To deal with what FINRA called an ``intractable resource problem,’’ the SEC was urged to seek authority to establish an SRO for investment advisers to augment the government’s efforts in overseeing advisers. The debate over an SRO for advisers has intensified with industry associations voicing strong opposition to the idea.

SRO Envisioned by Senate Bill's Franken Amendment Could Revolutionize Assignment of Credit Ratings

This story appeared in Jim Hamilton's World of Securities Regulation.

The financial reform legislation passed by the Senate conducts a frontal attack on the conflict of interest problem by creating a board overseen by the SEC that will assign credit rating agencies to provide initial ratings for asset-backed securities and structured financial products on a rotating basis. This was a provision authored by Senator Al Franken and adopted as an amendment to the Senate bill. Within 180 days of enactment, the SEC must create a Credit Rating Agency Board, a self-regulatory organization, tasked with developing a system in which the Board randomly assigns a credit rating agency to provide a product’s initial rating. There is no comparable provision in the House bill.

Cardin-Grassley Amendment Extends Whistleblower Protections to NRSRO Employees

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Senate has approved an amendment to the financial reform package extending whistleblower protection to employees of credit rating agencies. The Cardin-Grassley Amendment adds whistleblower protections to employees of nationally recognized statistical rating organizations, NRSROs, which issue credit ratings that the SEC permits other financial firms to use for certain regulatory purposes. There are 10 NRSROs at present, including some privately held firms. The NRSROs played a large role in the financial crisis by o verestimating the safety of residential mortgage-backed securities and collateralized debt obligations and then by marking tardy but massive simultaneous downgrades of these securities, thereby contributing to the collapse of the subprime secondary market and the fire sale of assets, exacerbating the financial crisis. Remarks of Senator Cardin, Cong. Record, May 6, 2010, S3349.

Senate and House Financial Reform Bills Differ on Mandatory Arbitration

This story appeared in Jim Hamilton's World of Securities Regulation.

Historically, claims for violations of the federal securities laws were considered to be non-arbitrable based on the doctrine enunciated by the U.S. Supreme Court in Wilko v. Swan (U.S. Sup. Ct. 1953), 1952-1956 CCH Dec. ¶90,640. In Wilko, the Court held that an agreement to arbitrate claims under Section 12(a)(2) of the Securities Act was not enforceable. However, as arbitration gained increasing judicial favor, the Court began to chip away at the Wilko doctrine and in 1989 expressly overruled it. The Court ruled that a pre-dispute agreement to arbitrate an investor’s securities claims against a brokerage firm was enforceable in view of the strong federal policy favoring arbitration. Rodriguez v. Shearson/American Express, Inc. (U.S. Sup. Ct. 1989), 1989 CCH Dec. ¶94.407.

Manager Amendments to Senate Reform Bill Give Systemic Risk Regulator Derivatives Role and Streamline SRO Process

This story appeared in Jim Hamilton's World of Securities Regulation.

The Managers Amendment to the Senate Banking Committee draft reform bill gives the new Financial Stability Oversight Council veto power over SEC and CFTC exemptions from the derivatives regulation regime. For example, the amendment provides that the Commission can exempt a security-based swap only of if the Commission has provided a written notice to the Council describing the proposed exemption and the Council has not made a determination that the exemption would pose a threat to the stability of the US financial system The Council has 60 days to make such a determination.

Chairman Frank Circulates Draft Legislation Regulating OTC Derivatives

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Rep. Barney Frank, Chair of the Financial Services Committee, has introduced draft legislation regulating the OTC derivatives markets by mandating exchange clearing and trading for the majority of derivatives products while preserving the over-the-counter market for specialized derivatives. The Chair’s draft is designed to implement the broad goals of the Obama Administration to increase transparency and eliminate systemic risk in the OTC derivatives markets while at the same time protecting end users seeking to hedge their risks and preventing much of the U.S. derivatives market from being forced overseas.

Fed Proposes Changes to Valuation of TALF Collateral

This story appeared in Bank Digest.

The Fed has announced two changes to the procedures for evaluating asset-backed securities (ABS) pledged to the Term Asset-Backed Securities Loan Facility (TALF). First, it has proposed a rule that would establish criteria for the Federal Reserve Bank of New York(FRBNY) to determine the Nationally Recognized Statistical Rating Organizations (NRSROs) whose ratings are accepted for determining the eligibility of ABS to be pledged as collateral at the TALF. According to the Fed, the proposed rule, which would require a certain minimum level of experience in rating deals of any particular type, would likely result in an expansion of TALF-eligible NRSROs for ABS. It is intended to promote competition among NRSROs and ensure appropriate protection against credit risk for the U.S. taxpayer.

NYSE Proposes Significant Changes to Its Corporate Governance Listing Standards

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In a filing with the SEC, the NYSE has proposed significant changes to its corporate governance listing standards, in part to conform the standards to the requirements of Item 407 of Regulation S-K, which consolidates director independence and related corporate governance disclosure requirements under a single item. Essentially, the NYSE would eliminate each disclosure requirement currently included in the listing standards that is also required by Item 407 and incorporate directly into the standards the applicable disclosure requirement of Item 407. Upon SEC approval, the changes would take effect on January 1, 2010. Release No. 34-60653.