Alert March 10, 2009

ICI Publishes White Paper on Financial Services Regulatory Reform

The Investment Company Institute published a white paper entitled Financial Services Regulatory Reform:  Discussion and Recommendations.  The white paper offers a number of recommendations on how to strengthen and modernize regulatory oversight of the financial services industry. 

Systemic Risk Regulator.  The white paper recommends that Congress create a “Systemic Risk Regulator” to identify, monitor and manage risks to the financial system as a whole.  The Systemic Risk Regulator should have responsibility for: (1) monitoring the financial markets broadly; (2) analyzing changing conditions in domestic and overseas markets; (3) evaluating the risks of practices as they evolve and identifying those that are of such nature and extent that they implicate the health of the financial system at large; and (4) acting to mitigate such risks in coordination with other responsible regulators.  The white paper suggests that a Systemic Risk Regulator could be given the authority to identify financial institutions that are “systemically significant” and to oversee those institutions directly.  The white paper cautions, however, that the Systemic Risk Regulator should not be structured to simply add another layer of bureaucracy or to displace the primary regulator(s) responsible for capital markets, banking or insurance.

Capital Markets Regulator.  The white paper also recommends creating a single independent federal regulator responsible for oversight of US capital markets, market participants, and all financial investment products.  According to the white paper, this “Capital Markets Regulator” should combine the functions of the SEC and the CFTC, and would serve as the first line of defense with respect to risks across the capital markets.  As the regulatory standard setter, the Capital Markets Regulator should have the authority to address gaps in regulation relating to hedge funds, derivatives, and municipal securities, and to harmonize the legal standards applicable to investment advisers and broker-dealers.  In the area of hedge funds, the white paper proposes that the Capital Markets Regulator be authorized to provide oversight over hedge funds and other unregulated pooled products with respect to, at a minimum, their potential impact on the capital markets (e.g., require nonpublic reporting of information such as investment positions and strategies that could bear on systemic risk and adversely impact other market participants).  In the area of derivatives, the white paper proposes that the Capital Markets Regulator have clear authority to adopt measures to increase transparency and reduce counterparty risk of certain over-the-counter derivatives, while not unduly stifling innovation.  In the area of municipal securities, the white paper proposes that the Capital Markets Regulator be granted expanded authority over the municipal securities market, and use this authority to ensure that investors have timely access to relevant and reliable information about municipal securities offerings.

Banking and Insurance.  The white paper includes several other recommendations for reforms in response to the financial crisis.  While acknowledging regulation of the banking industry is not a primary focus of the ICI, the white paper nevertheless recommends that Congress consider consolidating the regulatory structure of the banking industry to clarify regulatory missions, eliminate duplicative regulatory agencies, and achieve a more rational regulatory structure.  The white paper also supports authorizing an optional federal charter for insurance companies to create a comprehensive approach for insurers operating in national and often international markets.

President’s Working Group on Financial Markets (the “PWG”).  The white paper recommends that the Executive Order authorizing the PWG, whose membership consists of the heads of the Treasury Department, the Federal Reserve, the SEC and the CFTC, provide for a broader scope of coordination and information sharing among those regulatory bodies.