Draft Obama Administration White Paper on Financial Regulatory Reform

This post is by Luigi L. De Ghenghi, Randall D. Guynn, Ethan T. James, Arthur S. Long, Annette L. Nazareth, Lanny A. Schwartz, Margaret E. Tahyar, Gerard Citera, Robert Colby, Courtenay Myers, and Reena Agrawal Sahni of Davis Polk & Wardwell.

Editor’s UPDATE: The Obama Administration’s White Paper on Financial Regulatory Reform, which was released after preparation of this post, is available here.

This post, and the accompanying memorandum, summarizes the key proposals in the Obama Administration’s White Paper on Financial Regulatory Reform based on the “near final” draft White Paper posted by the Washington Post on June 16th. It has also been prepared in advance of the President’s news conference on June 17th and Secretary Geithner’s testimony on June 18th and assumes a reader that is familiar with U.S. regulatory reform. Readers are cautioned that there may be changes in the final version of the Obama White Paper. We will post a full memorandum with analysis and commentary in the coming days, but, in the meantime, we hope readers will find this factual outline helpful.

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Executive Summary
The five areas covered in the White Paper are:

1. Supervision and regulation of financial firms, including:

• creation of a Financial Services Oversight Council,
• identification of systemically important firms, which are called “Tier 1 FHCs,”
• enhanced standards for all banks and BHCs,
• BHC status for any firm owning a thrift, ILC, credit card bank, trust company, or other non-traditional bank,
• subjecting Tier 1 FHCs and firms owning non-traditional banks to non-financial activities restrictions in the BHC Act,
• merger of the OTS and OCC into a new National Bank Supervisor,
• registration and reporting requirements for most advisers of private pools of capital including hedge funds,
• establishment of an Office of National Insurance in Treasury, but no federal insurance charter, and
• stronger requirements for money market funds and government sponsored enterprises;

2. Regulation of financial markets, including:

• skin-in-the-game and compensation requirements for originators and sponsors of asset-backed securities,
• regulation of OTC derivatives and OTC derivatives dealers,
• proposal to harmonize futures and securities regulation, and
• enhanced oversight by the Federal Reserve over systemically important payment, clearing and settlement systemsand activities of major participants;

3. Consumer and investor protection, including:

• creation of a Consumer Financial Protection Agency with rule making, supervisory and enforcement authority over credit products,
• creation of a Financial Consumer Coordinating Council to advise on gaps in consumer and investor protection and to promote best practices, and
• other initiatives to bolster the authority of the SEC, FTC and to address retirement security;

4. Resolution authority and Section 13(3) authority, including:

• giving Treasury resolution authority over BHCs and Tier 1 FHCs modeled on the FDIC’s resolution authority over insured banks and thrifts, with the FDIC (or in the case of a group that is primarily a securities firm, the SEC) acting as receiver or conservator, and
• requiring the Federal Reserve to obtain prior approval from Treasury for all lending under Section 13(3); and

5. International regulatory standards and cooperation, including:

• support for existing G-20 and other initiatives, and
• rules for determining whether a foreign financial firm is a Tier 1 FHC.

Our memorandum, available here, provides a more detailed outline of the key proposals.

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