Tag: Consumer protection

A Framework for Understanding Financial Institutions

Robert Merton is Professor of Finance at the MIT Sloan School of Management. This post is based on an article authored by Professor Merton and Richard Thakor, also of the Finance Group at the MIT Sloan School of Management.

Many financial intermediaries provide “credit-sensitive” financial services—the effective delivery of these services depends on the credit-worthiness of the provider. This potential sensitivity of the perceived value of the intermediary’s services to the intermediary’s credit risk has important ramifications. In the paper, Customers and Investors: A Framework for Understanding Financial Institutions, which was recently made publicly available on SSRN, we examine how this affects the design of contracts between intermediaries and their customers, and how it illuminates ubiquitous features in a wide variety of contracts, institutions, and regulatory practices.


DC Circuit Vacates SEC’s Application of Dodd-Frank Provision

Darrell S. Cafasso is a partner in the Litigation Group at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Cafasso, Stephen H. Meyer, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

On July 14, 2015, the U.S. Court of Appeals for the District of Columbia Circuit (the “DC Circuit”) held that the Securities and Exchange Commission (the “SEC” or “Commission”) could not employ certain remedial provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”) to retroactively punish an investment adviser for conduct that occurred prior to enactment of the Act. The court’s decision not only casts doubt on numerous similar punishments previously levied by the SEC based on pre-enactment misconduct, but could provide a basis for institutions to object to certain sanctions sought by the Consumer Financial Protection Bureau (the “CFPB”).


The Case for Consumer-Oriented Corporate Governance, Accountability and Disclosure

The following post comes to us from Shlomit Azgad-Tromer of Tel Aviv University—Buchmann Faculty of Law.

When offering securities to the public, corporations must comply with an exclusive informational regime that allows speech only within the uniform boundaries determined by the SEC. Corporations must use a standardized method for financial audit and report, and disclose in plain and simple English any material fact of interest to a potential buyer. But when offering the public other products, corporations are entitled to speak freely to consumers as they wish, under the wide wings of the freedom of commercial speech, constrained merely by the ban on misrepresentation and fraud. Why are investors better protected than consumers? Why does our legal system choose to provide consumers of investments better information to secure their freedom of choice?


Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications

John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School.

The 2010 Dodd-Frank Act mandated over 200 new rules, bringing renewed attention to the use of cost-benefit analysis (CBA) in financial regulation. CBA proponents and industry advocates have criticized the independent financial regulatory agencies for failing to base the new rules on CBA, and many have sought to mandate judicial review of quantified CBA (examples of “white papers” advocating CBA of financial regulation can be found here and here). An increasing number of judicial challenges to financial regulations have been brought in the D.C. Circuit under existing law, many successful, and bills have been introduced in Congress to mandate CBA of financial regulation.


Consumer Financial Protection: A New Paradigm

The following post comes to us from Karen Petrou, co-founder and managing partner of Federal Financial Analytics, Inc., and is based on a FedFin white paper by Ms. Petrou.

In this post, Federal Financial Analytics, Inc. (FedFin) recommends steps the Consumer Financial Protection Bureau (CFPB) and other regulators can and should take to make their rules simpler, clearer, less burdensome and—critically—more enforceable. This paper is not a call for “cutting the red tape,” a mantra that has all too often meant eviscerating critical consumer protections. It is, rather a how-to on ways to cut through the daunting morass of consumer-protection standards that have only grown worse in the wake of the financial crisis.

We note not only ways to restructure rules to meet these goals, but also how to do so without losing the clarity essential to legal integrity and supervisory effectiveness. We also describe recent efforts by U.S. bank regulators to curtail problematic products (e.g., payday lending) by limiting it at banks, leaving wide swaths of the financial sector (sometimes called “shadow banks”) free to engage in predatory practices unless the bank-centric rules choke them off (uncertain), state regulators intervene (problematic) or federal rules across the sector are quickly enacted (so far unseen).


SEC Adopts Final Amendments to Broker-Dealers Rules

The following post comes to us from Eric R. Fischer, partner in the Business Law Department at Goodwin Procter LLP, and is based on a Goodwin Procter Financial Services Alert by Peter W. LaVigne.

On July 30, 2013, the SEC adopted final amendments (the “Final Amendments”) to the financial responsibility rules for broker-dealers (SEC Release No. 34-70072) (the “Release”). The Final Amendments make changes to the net capital, customer protection, books and records, and notification rules for broker-dealers. The SEC first proposed the rule changes in March 2007 and re-opened the public comment period on May 3, 2012. The Final Amendments will be effective 60 days after publication in the Federal Register (about the week of October 14) (the “Effective Date”). This article summarizes the principal elements of the Final Amendments.

Rule 15c3-1—Net Capital Rule

Rule 15c3-1 under the Exchange Act (the “Net Capital Rule”) requires a broker-dealer to maintain, at all times, a minimum amount of net capital depending on the nature of its business. The capital standard in the rule is a net liquid assets test, which imposes standardized deductions (or “haircuts”) on securities, with less-liquid securities subject to deeper haircuts. The Rule also does not allow certain items to be included in net capital and requires certain other items to be included as liabilities. Amendments to the Net Capital Rule include the following:


CFTC’s Progress on Wall Street Reform

Gary Gensler is chairman of the Commodity Futures Trading Commission. This post is based on Chairman Gensler’s testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, available here.

The New Era of Swaps Market Reform

This hearing is occurring at an historic time in the markets. The CFTC now oversees the derivatives marketplace — across both futures and swaps. The marketplace is increasingly shifting to implementation of the common-sense rules of the road for the swaps market that Congress included in the Dodd-Frank Act.

For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.

For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins next month.

For the first time, the public will benefit from specific oversight of swap dealers. As of today, 71 swap dealers are provisionally registered. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation. The full list of registered swap dealers is on the CFTC’s website, and we will update it as more entities register.


Dodd-Frank Principles and Provisions

Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Schapiro’s remarks at the George Washington University Center for Law, Economics and Finance Regulatory Reform Symposium, available here. The views expressed in this post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Four years ago, this nation was suffering from a near-collapse of our financial system.

While there are differences of opinion as to what was the most significant trigger, a bi-partisan Senate Committee report — known as the Levin-Coburn Report — asserted that the crisis was the result of “high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”

While this period of our history will be written and re-written over and over again, Congress and the Administration knew that the status quo was unacceptable. So together they passed landmark legislation to address many of the issues that were highlighted by that tumultuous period.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a vital and comprehensive response to the financial crisis — an event that devastated the American economy, cost the American people trillions of dollars and millions of jobs, and undermined the confidence that our financial system requires if it is to thrive and support a growing economy.

The sweeping scope of this financial reform legislation sometimes obscures the fact that, despite its breadth, it is rooted in a handful of sound principles that should have been more firmly in place before the crisis, and whose embrace serves to make markets more stable and efficient. Simple principles like. . . .


Reflections on Dodd-Frank: A Look Back and a Look Forward

Editor’s Note: The following post comes to us from Lee A. Meyerson, a Partner who heads the M&A Group and Financial Institutions Practice at Simpson Thacher & Bartlett LLP, and is based on the introduction of a Simpson Thacher compendium, available here. This post is part of a series following the first anniversary of the Dodd-Frank Act which was July 21, 2011, other Dodd-Frank posts are available here.

The impact of Dodd-Frank—like the U.S. financial industry it regulates—is greater than the sum of its parts. Dodd-Frank seeks to oversee and regulate financial markets as a whole, by increasing regulation of individual companies with the potential to compromise market stability, as well as implementing regulation of certain areas of the financial services sector previously not subject to federal supervision and regulation. Dodd-Frank also addresses consumer protection, through the creation of a new agency with broad consumer protection powers and new rules governing residential mortgage markets.

In comments regarding the impact of this historic legislation, Timothy Geithner, Secretary of the Department of Treasury, noted that “By almost any measure, the U.S. financial system is in much stronger shape” than it was prior to enactment of Dodd-Frank. [1] However, a huge amount of change still lies ahead. In the short run, uncertainty regarding the impact of Dodd- Frank on operations, capital and liquidity levels, costs and revenue, and increased litigation and enforcement risk, will continue to impact strategic decisions and valuations of financial institutions of all types and sizes. The long-term impact of the legislation is uncertain, although it could quite possibly usher in a new era of accelerated consolidation in the financial services industry.


The Impact of Financial Reform on Securities Litigation and Enforcement

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, Peter C. Hein, Eric M. Roth and Olivia A. Maginley. Additional posts relating to the Dodd-Frank Act are available here.

In addition to many significant regulatory provisions, the conference report text of the proposed Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of provisions in Title IX (Investor Protections and Improvements to the Regulation of Securities) which, if enacted, would have a significant impact on securities litigation and enforcement. Other proposed provisions were considered and discarded during the conference committee process. The highlights of the conference report text as it now stands include:

Private Cause of Action for Aiding and Abetting Violations Rejected. Efforts by some lawmakers to overturn well-settled Supreme Court authority by creating a private cause of action for aiding and abetting violations of the Securities Exchange Act of 1934 proved unsuccessful. The conference report text, at Sections 929M-929O, instead augments the SEC’s existing authority to pursue civil enforcement actions alleging aiding and abetting of violations of the Exchange Act by lowering the requisite state of mind to encompass “reckless,” in addition to “knowing,” acts, and by empowering the SEC to pursue actions premised on “knowingly or recklessly” aiding or abetting violations of the Securities Act of 1933, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. Section 929Z of the conference report text requires the Comptroller General to conduct a “study” analyzing the impact of authorizing a private right of action for aiding and abetting violations of the federal securities laws.


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