More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Treasury Secretary Timothy Geithner told lawmakers on Wednesday that while the reforms put in place to strengthen the nation’s financial system since the financial crisis have indeed helped—such as requiring banks to hold more capital and the fact that credit is expanding—the biggest threat to the U.S.’s financial stability now is the ongoing European crisis.
“The ongoing European crisis presents the biggest risk to our economy,” he said. “The economic recession in Europe is hurting economic growth around the world, and the ongoing financial stress is causing a general tightening of financial conditions, exacerbating the global slowdown.”
Geithner presented to the House Financial Services Committee on Wednesday the Financial Stability Oversight Council’s (FSOC) second annual report on financial market and regulatory developments, potential threats to financial stability, and recommendations to strengthen the financial system.
During his two-and-a-half hours before the committee, Geithner fielded questions from lawmakers on everything from the LIBOR scandal to whether the Glass-Steagall Act should be brought back to the fiscal cliff that looms at year-end.
Rep. Spencer Bachus, R-Ala., chairman of the committee, criticized FSOC, stating that when financial reform was debated by Congress two years ago, "Republicans suggested an alternative that would have consolidated the number of regulators." Instead, he said, the Dodd-Frank Act passed by Congress "eliminated one regulator, kept the others, added three more, and put them on the Financial Stability Oversight Council."
Congress was told, he said, that this "'supercommittee' of regulators was needed to act as an early warning system that would perceive threats far off in the distance and take action before these threats could metastasize into crises that bring down our economy."
But, he argued, "regulators appear to be so preoccupied writing these new rules [under Dodd-Frank] that they’re missing the basics—like safeguarding segregated customer funds and protecting investors from Ponzi schemes and other financial frauds" and regulators have also failed "to protect the customers of MF Global and Peregrine Financial Group. Now there are questions about why regulators didn’t take concrete action to stop LIBOR manipulation."
But Rep. Barney Frank, D-Mass., ranking member of the committee, shot back that the problem "for the American economy is not too much regulation," also citing European woes. Said Frank: "What we're being told now is the problem is not enough freedom by those who caused this economic" crisis. "What's too complicated for them to understand was their own razzle-dazzle activity."
Geithner gave lawmakers a list of achievements the nation has made to repair and reform the financial system after the 2008 financial meltdown, which he said has “helped produce a stronger and more resilient system.” They included:
- Banks have been forced to substantially increase the amount of capital they hold, so that they are able to provide credit to the economy and absorb losses in the future. Tier 1 common capital levels at our country’s banks are up by $420 billion, or 70%, from three years ago. The ratio of tier 1 common equity to risk-weighted assets at these institutions increased from 6% to over 11% during this period.
- The nation has forced a significant reduction in overall leverage in the financial system. Financial sector debt has dropped by more than $3 trillion since the crisis, and household debt is down $900 billion.
- Banks are funding themselves more conservatively, relying less on riskier short-term funding.
- The size of the “shadow banking system”—which had been a key source of financial stress during the crisis—has fallen substantially, by several trillion dollars.
- The government has closed most of the emergency programs put in place during the crisis and recovered most of the investments made into the financial system, which were originally expected to result in a loss to taxpayers of several hundred billion dollars. The TARP bank investments have already produced a profit for the taxpayer of more than $19.5 billion, and on current estimates will generate an overall profit of approximately $22 billion.
- Credit is expanding, and the cost of credit has fallen significantly from the peaks of the crisis. Commercial and industrial lending at commercial banks increased 10% in 2011 and increased at an annual rate of 11% in the first five months of 2012.
However, Geithner told lawmakers that “we have a long way to go to repair the damage in the housing market,” and conceded that the economy “is not growing fast enough and unemployment is still too high.”
Geithner did say, too, that all FSOC members support Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro’s efforts to address certain weaknesses in the money-market fund industry, namely the lack of a mechanism to absorb a sudden loss in value of a portfolio security and the incentive for investors to redeem at the first indication of any perceived threat to the value or liquidity of the fund.
FSOC, he said, recommends that the SEC “publish structural reform options for public comment and ultimately adopt reforms that address money-market funds’ susceptibility to runs.” FSOC further recommends, he said, “that, where applicable, its members align regulation of cash management vehicles similar to MMFs within their regulatory jurisdiction to limit the susceptibility of these vehicles to run risk.”
Dodd-Frank created the FSOC, which includes voting members from the following bodies: the secretary of the Treasury, who chairs FSOC; chairman of the Federal Reserve; the comptroller of the currency; director of the Consumer Financial Protection Bureau (CFPB); chairman of the Securities and Exchange Commission; chairman of the Federal Deposit Insurance Corp. (FDIC), chairman of the Commodity Futures Trading Commission (CFTC); director of the Federal Housing Finance Agency (FHFA); chairman of the National Credit Union Administration Board, and an independent member with insurance expertise.