The Geithner ProposalThe Geithner Proposal

David H. LuiDavid H. Lui

Chief Compliance OfficerChief Compliance Officer

OverviewOverview

The Paulson Proposal

Geithner’s Whitepaper

The Evolving Regulatory Framework

Standards of Care: fueling change

What’s next?

Restructuring the Regulatory FrameworkRestructuring the Regulatory Framework

Market Stability Regulator

Prudential Regulator

Business Conduct Regulator

Paulson’s Blueprint for a Stronger Paulson’s Blueprint for a Stronger Regulatory StructureRegulatory Structure

» Authority to Gather Appropriate Information, Disclose Information, Collaborate with Other Regulators on Rule Writing, and Take Corrective Actions when Necessary

» Will Replace Federal Reserve’s More Limited, Traditional Role as Supervisor of Financial Holding Companies

» Has the Ability to Monitor Risks Across the Financial System

Market Stability Regulator

Paulson’s Blueprint for a Stronger Paulson’s Blueprint for a Stronger Regulatory StructureRegulatory Structure

» Single Prudential Regulator Focusing on Safety and Soundness of Firms with Federal Guarantees

» Regulation Applied to Individual Firms with Capital Adequacy Requirements, Investment Limits, Activity Limits and On-site Risk Management Supervision

» Oversee Firms with Explicit Government Guarantees

Prudential Regulator

Market Stability Regulator

Paulson’s Blueprint for a Stronger Paulson’s Blueprint for a Stronger Regulatory StructureRegulatory Structure

» Monitor Business Conduct Regulation Across All Types of Financial Firms

» Subsumes Most Roles of the SEC and CFTC and has Authority Over Rules

» Eliminates Gaps in Oversight and Provide Effective Consumer and Investor Protection

Business Conduct Regulator

Prudential Regulator

Market Stability Regulator

Restructuring the Regulatory FrameworkRestructuring the Regulatory Framework

Market Stability Regulator

Prudential Regulator

Business Conduct Regulator

Safety and Soundness

The Geithner Response: June 2009The Geithner Response: June 2009

Financial Crisis Becomes a Banking Crisis– Limited Impact on SEC

Broad Outlines of Paulson’s Treasury Blueprint Still Visible

SEC Dodges a Bullet

http://10.75.16.79:8080/docs/regs/FinalReport_web.pdf

The Treasury Blueprint and the Geithner Proposal

The Market Stability Regulator– Fed Control over Subsidiaries of Tier 1 FHC– Systemic Risk Management Role

Prudential Regulator– National Bank Supervisor

Business Conduct Regulator– Consumer Financial Protection Agency – Credit,

Savings and Credit Products

SEC Role

Creation of Creation of Financial Services Oversight CouncilFinancial Services Oversight Council

Market Stability Regulator Becomes a Coordination Council

Membership

– Secretary of Treasury (Chair)

– Federal Reserve Chair

– Director of the New National Bank Supervisor

– Director of New Consumer Financial Protection Agency

– SEC Chairman

– CFTC Chairman

– FDIC Chairman

– FHFA Director

New Financial Services Oversight CouncilNew Financial Services Oversight Council

Supported by “Full-Time Expert Staff at Treasury”

Some Surprises:

– Reduced Regulatory Role» Gathers Information Only

– Refers Risk Items to Appropriate Regulators

– Not Under Federal Reserve Leadership

New National Bank Supervisor New National Bank Supervisor

The Treasury Blueprint’s “Prudential Regulator”

Agency with Separate Status Within Treasury – Outlines Heightened Capital and Prudential Requirements for Banks and Bank Holding Companies

– Takes over Prudential Responsibilities of OCC– Eliminates Thrift Charters (OTS) and brings them

within NBS Jurisdiction– Federal Reserve and FDIC Continue to Oversee State

Banks; NCUA Continues Role for Credit Unions

New Office of National Insurance within Treasury to Gather Information and Develop Expertise in the Insurance Sector

New Consumer Financial Protection New Consumer Financial Protection AgencyAgency

Blueprint’s “Business Conduct Regulator”

Not Focused on Safety and Soundness: Giving Consumer Protection an “Independent Seat at the Table in our Financial Regulatory System.”

Can be “Assembled Reasonably Quickly from Discrete Operations of other Agencies.”

Broad Jurisdiction to Protect Consumers in Consumer Financial Products and Services such as Credit, Savings, and Payment Products

Heavy Banking Focus: Not Securities Regulation

Impact on SEC As ProposedImpact on SEC As Proposed

Call to Tighten Oversight of Credit Ratings Agencies

Call to Require Advisers to Private Funds to Register

Desire to Reduce Susceptibility of Money Market Funds to “Runs”

– Revision of Rule 2a-7 Coming

Continued Mandatory Arbitration for Broker/Dealers?

“Consistency” between IA/BDs regarding Fiduciary Duty Standard?

IA Self-Regulatory Organization?

Investment Adviser SRO

“the establishment of a self-regulatory framework for the investment advisory industry would enhance investor protection and be more cost-effective than direct SEC regulation. Thus, to effectuate this statutory harmonization, Treasury recommends that investment advisers be subject to a self-regulatory regime similar to that of broker-dealers.”

Treasury Blueprint for a Modernized Financial Regulatory Structure (Paulson Proposal)

Potential SRO Structures

Securities Industry

Broker Dealers Investment Advisors

FINRA New SROFINRA

* See John Walsh, Harvard International Law Journal, June 2008

Emergence of an Elastic Compliance ModelEmergence of an Elastic Compliance Model

Principles Based Compliance

Institutions Based Compliance*

Rules Based Compliance

Activities are permitted so long as they do not violate specific rules

“Show Me the Rule I’m Breaking!”

Broad Principles defined by caselaw govern all Regulated

Entities Equally

Rule 10b-5 as an Example

Complexity in the MarketplaceCreates need for elastic

regulatory model to mitigateConflicts at larger firms without

raising the bar so high thatsmaller firms can no longer compete

What’s Next?What’s Next?

Hazards and benefits of predicting the future Whitepaper vs. legislation Silent on the role of the SEC – an ongoing

conversation Who will regulate IAs? What will the impact be on hedge funds? Extending the conversation regarding mandatory

arbitration

Questions?Questions?