Yesterday, the Investors’ Working Group (IWG), an organization formed in February 2009 and sponsored by the CFA Institute Centre for Financial Market Integrity and the Council of Institutional Investors, released a report entitled “U.S. Financial Regulatory Reform: the Investors’ Perspective.” The report emphasizes “strong investor safeguards are a prerequisite for market stability and integrity and a vibrant financial system.” Thus, the report offers an “essential roadmap” for the adoption of reforms that will make the U.S. financial regulatory system “more comprehensive, effective and responsive to the needs of investors.” The report advocates for both immediate improvements and longer-term solutions to modernize financial regulation, many, but not all, of which comport with recommendations reflected in the Obama Administration’s “New Foundation” proposals.
The IWG’s reform proposals include:
- Strengthening Existing Federal Regulators. The IWC recommends that federal regulators have “enhanced independence through long-term funding” and acquire additional knowledge and expertise to reinforce the existing regulatory framework.
- Closing the Gaps for Products, Players and Gatekeepers. The IWC proposes that (i) OTC derivative contracts be subject to comprehensive regulation, (ii) credit rating agencies be subject to greater accountability and oversight for their ratings, (iii) all investment managers be required to register with the SEC as investment advisers and make disclosures to regulators and investors on a regular basis, (iv) sponsors of asset-backed securities be required to improve the quality and timeliness of disclosures to investors, (v) the FASB and IASB improve accounting for derivatives, (vi) Congress give regulators the resolution authority the authority to restructure troubled non-bank financial institutions which are considered systemically significant, and (vii) a new agency be created to regulate consumer financial products.
- Improving Corporate Governance. Since the financial crisis “represents a massive breakdown in oversight at many levels, including at corporate boards,” the IWC recommends measures for investors to hold directors accountable and encourage investors to challenge executives making risky decisions. The IWC proposes that shareholders be provided with the right to place director nominees in a proxy and that the roles of chair and chief executive officer be separated to encourage independent leadership.
- Systemic Risk Oversight Board. The IWC proposes that Congress create an independent Systemic Risk Oversight Board which will “report to regulators any findings that require prompt action to relieve systemic pressures[,] report to Congress and the public on the status of the systemic risk [and recommend] steps regulators should take to reduce those risks.” According to the IWC, this Board will “fill an immediate void on systemic issues.” Notably, the IWC does not recommend that the Federal Reserve be assigned overarching responsibility as a financial stability regulator.