The Securities Industry and Financial Markets Association (SIFMA) has issued a statement regarding the Obama Administration’s regulatory reform proposal:
“The financial turmoil of the last year revealed deep and serious flaws in our regulatory system,” says SIFMA President and CEO Timothy Ryan. “The financial services industry believes it is critical to our nation’s economy that we work with policymakers in Washington to enact comprehensive reform this year to improve the accountability, transparency, investor protection and oversight of financial markets.
“With their proposals today, the Administration has moved this critical debate from broad discussion to specific action – this is an important step forward,” Ryan says. “We have a once-in-a-generation opportunity to rebuild our regulatory structure so that our financial system is more stable, more resilient and better underpins a dynamic US economy. The public expects no less. SIFMA looks forward to working with the Administration and Congress to complete important reforms over the next several months.”
SIFMA has previously outlined a number of elements that are critical to a new regulatory structure. These include:
- The creation of a single financial stability supervisor, with oversight authority to make uniform rules for all financial institutions and markets to the extent necessary to reduce systemic risk and with exclusive consolidated supervisory authority over systemically important financial groups;
- The expansion of resolution authority to non-bank financial institutions so to wind-down those institutions that pose a systemic risk to the economy;
- The industry seeks a return to the basics and is making smart reforms to industry practices is areas such as securitization, tightening underwriting practices and increasing transparency to protect investors;
- New policies that bring greater regulatory transparency to the derivatives markets, while ensuring that derivatives continue to be widely available to serve their critical role of increasing credit availability to borrowers; and
- Guidelines for Compensation developed by the industry to better align long-term performance and effective risk management, because compensation should be aligned with the best interests of shareholders, the financial system and the economy.
For its part, FINRA – the Financial Industry Regulatory Authority – has expressed its views on the reform proposals, as outlined by FINRA Chairman and CEO Rick Ketchum at a luncheon in Washington, D.C. on June 17.
“The Obama administration has identified a number of key priorities, which include controlling systemic risks, tightening regulation of non-bank activities, enhancing protections for consumers, establishing a resolution mechanism for the resolution of systemically important financial holding companies, and improving regulation throughout the world,” Ketchum says.
“These are all important, but we should not lose sight of the key lessons from the past, which are that financial regulatory systems tend to stand still, while the financial industry is in a state of perpetual motion–constantly offering new products to new customers. One commentator has summed this up with the observation that ‘banking is the only industry where there is too much innovation, not too little,’ “he explains.
“This poses a fundamental challenge for regulators and policymakers. While the immediate task is to reform the regulatory architecture to address the many vulnerabilities in the financial system and help restore investor confidence, part of the long-term objective must be to create an architecture in which regulations can evolve to adapt to the inevitability of changed circumstances in the financial sector. If we simply look backward, we will be, in some sense, ‘fighting the last war.’ The real test will be whether the regulatory system can evolve along with the financial system and help to prevent the excesses that are destined to develop,” according to Ketchum.
“The inevitable result of mutual fund regulation has been the growth of hedge funds. The inevitable result of broker-dealer regulation has been unregistered high-frequency traders. The inevitable result of futures and options regulation has been the creation of the OTC swaps market. And the inevitable result of securities offering regulation has been the growth of private offerings and private capital,” he continues.
“The administration’s plan probably does the best it can to address this gap by filling regulatory voids in the OTC derivatives and hedge funds, and given the Fed cross-market systemic authority. But let me predict today that the next serious crisis will not come from Citibank or Bank of America, but from entities that today we would not recognize,” Ketchum cautions.
Regarding the proposed creation of a Consumer Financial Protection Agency, Ketchum says, “Instead, I believe a better approach would be to identify a set of common investor-protection principles and require each regulatory organization to both certify that it has developed rules that implement each of these principles and also to require them to actively work with the other relevant regulatory organizations to harmonize their rules to enhance consistent treatment.”
FINRA recommends the following:
- Every person who provides financial advice and sells a financial product is tested, qualified and licensed;
- Advertising for financial products and services is not misleading;
- Every product marketed to them is appropriate for recommendation to that investor;
- A full and comprehensive disclosure for the services and products being marketed that address, in plain English, the risks, including the worst-case risks, of the product; and
- Every person who is in the business of regularly providing financial advice is subject to a federally crafted fiduciary standard.