On June 17, 2009, the Obama administration issued a "white paper" which proposes a sweeping reorganization of financial-market supervision. The plan would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded. The plan will undoubtedly be modified during the Legislative process. Banks in other countries have already objected to the proposed international effects.

Key pieces of the proposal include expanding the powers of the Federal Reserve to oversee the country's largest financial firms, granting the government the power to dismantle important companies that fall into trouble and creation of a new regulator for consumer-oriented financial products. The proposals also seek to overhaul the business of selling investments by requiring increased disclosures about securitizations and requiring credit rating agencies to disclose more information about their methodology in rating such securities. Some of the major administration proposals follow.

  1. Increased regulation of financial firms including:
  • A new Financial Services Oversight Council to identify emerging systemic risks;
  • New authority for the Federal Reserve to supervise all financial firms that could pose a threat to financial stability, even those that do not own banks;
  • Stronger capital and other standards for all financial firms, bank holding companies and non consumer banks such as industrial banks;
  • A new National Bank Supervisor to supervise all federally chartered banks;
  • Elimination of the federal thrift charter; and
  • Registration of advisors of all hedge funds and other private pools of capital with the SEC.  
  1. Increased supervision and regulation of the financial markets by:
  • Enhanced regulation of securitization markets, including new requirements for transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans;
  • Comprehensive regulation of all over-the-counter derivatives;
  • New authority for the Federal Reserve to oversee payment, clearing and settlement systems;
  • Issuance of Federal guidelines of executive compensation and providing for non binding shareholder votes on the same; and
  • Providing directors of money market funds with authority to stop runs by suspending redemptions or taking other actions.  
  1. Review and revision of current agencies including:
  • Continuation of the FDIC and the National Credit Union Administration (NCUA);
  • Review of future of Freddie Mac and the Federal Home Loan Banks;
  • Co-ordination of the authority of the SEC and CFTC; and
  • Authority for the FTC over data security and other banking related matters.  
  1. Preparation for future financial crises by creating:
  • A mechanism for unwinding large organizations such as AIG;
  • Creating a formal procedure to deal with crises to be initiated by any of Treasury, the Fed, the FDIC or the SEC but with final decisions made by Treasury; and
  • Authorizing the FDIC or in appropriate cases, the SEC to act as receiver.  
  1. Increasing consumer protection including:
  • A new Consumer Financial Protection Agency ("CFPA") to protect consumers from unfair, deceptive and abusive practices;
  • Stronger regulations to improve the transparency, fairness and appropriateness of consumer and investor products and services; and
  • Higher standards for providers of consumer financial products and services.  
  1. International cooperation by:
  • Clarification of international definitions of regulatory capital;
  • Standardization of international credit derivatives and markets; and
  • Suggesting other countries follow the US in requiring stricter financial oversight.

There are substantial concerns that arise out of the Obama Administration's proposals, and this Alert cannot begin to address them all here. By way of example, with respect to just the new CFPA, we expect substantial turf battles over inter-agency authority, and the lack of federal preemption will create a myriad of problems as financial institutions attempt to comply with what may well be conflicting CFPA and state regulations.