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The Geithner Proposal David H. Lui Chief Compliance Officer. Overview. The Paulson Proposal Geithner’s Whitepaper The Evolving Regulatory Framework Standards of Care: fueling change What’s next?. Restructuring the Regulatory Framework. Market Stability Regulator. Prudential Regulator.

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Presentation Transcript
overview
Overview

The Paulson Proposal

Geithner’s Whitepaper

The Evolving Regulatory Framework

Standards of Care: fueling change

What’s next?

restructuring the regulatory framework
Restructuring the Regulatory Framework

Market Stability Regulator

Prudential Regulator

Business Conduct Regulator

paulson s blueprint for a stronger regulatory structure
Paulson’s Blueprint for a Stronger Regulatory 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 regulatory structure1
Paulson’s Blueprint for a Stronger Regulatory 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

Market Stability Regulator

Prudential Regulator

paulson s blueprint for a stronger regulatory structure2
Paulson’s Blueprint for a Stronger Regulatory 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

Market Stability Regulator

Prudential Regulator

Business Conduct Regulator

restructuring the regulatory framework1
Restructuring the Regulatory Framework

Market Stability Regulator

Prudential Regulator

Business Conduct Regulator

Safety and Soundness

the geithner response june 2009
The 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 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 financial services oversight council
Creation of Financial 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 council
New 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 agency
New Consumer Financial Protection Agency

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 proposed
Impact 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
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

Investment Advisors

Broker Dealers

Potential SRO Structures

Securities Industry

FINRA

FINRA

New SRO

emergence of an elastic compliance model
Emergence of an Elastic Compliance Model

Broad Principles defined by

caselaw govern all Regulated

Entities Equally

“Show Me the Rule I’m Breaking!”

Institutions Based

Compliance*

Rules Based

Compliance

Principles Based

Compliance

Complexity in the Marketplace

Creates need for elastic

regulatory model to mitigate

Conflicts at larger firms without

raising the bar so high that

smaller firms can no longer compete

Activities are permitted

so long as they do not

violate specific rules

Rule 10b-5 as an Example

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

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