Monthly Archives: October 2012

SEC Advisory Committee Weighs in on General Solicitation Rules

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In its first official recommendation, the Securities and Exchange Commission’s Investor Advisory Committee called for investor safeguards to be incorporated into a set of rules for the general solicitation and advertising of private offerings.

The JOBS Act, enacted last spring, directed the SEC to approve the use of mass marketing methods in private offerings. When the Commission came out with its draft rules at the end of August, Americans for Financial Reform and the Consumer Federation of America issued a joint statement deploring the absence of investor protections. Now the SEC’s Investor Advisory Committee has made the same point, laying out several specific remedies.

Under the committee’s recommendations, companies would have to outline their marketing plans in advance and take specific steps to verify that they are dealing with investors sophisticated enough to understand the risk and secure enough to afford it. The advisory committee also urged the SEC to post all solicitation materials in an online “drop box,” as a way of “‘crowdsourcing’ the public’s ability to inform the Commission of potential fraud.”

The advisory committee, established by the Dodd-Frank Act, includes representatives of hedge funds, private equity funds, and pension funds, as well as of the AFL-CIO, the AARP, and the Consumer Federation of America, among other groups. Its 21 members came out unanimously in favor of the recommendations.

The SEC, facing pressure from some JOBS Act supporters, had originally planned to expedite its rulemaking procedure. After protests from AFR, CFA, and others, chairman Mary Schapiro agreed to follow the standard practice of putting out a draft rule and allowing for public comment. Now that the Commission has received an outpouring of comments calling for stronger investor safeguards – including the comments of its own Investor Advisory Committee – maybe the Commission will decide to take these concerns seriously.

Too Big to Fail = Too Big to Exist?

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A number of former bank CEOs and bank regulators have said so. Now Federal Reserve governor Daniel Tarullo has joined the ranks of those arguing for a breakup of the biggest U.S. banks.

In a lecture at the University of Pennsylvania Law School, Tarullo pointed out that the top banks enjoy a continued aura of government-guaranteed invulnerability, which gives them a funding advantage and “reinforces the impulse to grow.” To counter this tendency, Congress might consider “specifying an upper bound,” Tarullo said.

The “idea along these lines that seems to have the most promise,” he went on, is a limit on nondeposit liabilities, possibly set at a percentage of U.S. gross domestic product. Such a formula would not only have “the virtue of simplicity,” Tarullo said, but also “the advantage of tying the limitation on growth of financial firms to the growth of the national economy and its capacity to absorb losses, as well as to the extent of a firm’s dependence on funding from sources other than the stable base of deposits…”

Tarullo’s approach, as the Wall Street Journal’s Victoria McGrane observed, “takes direct aim at the biggest U.S. banks, including J.P. Morgan Chase & Co., Bank of America, Goldman Sachs, and Citigroup, “all of which rely heavily” on the kind of funding that Tarullo would limit.

Tarullo is the Fed governor in charge of bank supervision and regulation. McGrane described him as “the highest-ranking regulatory official to call for limiting the size of banks.”

Senator Sherrod Brown (D-Ohio) has introduced legislation that includes a bank-size cap pegged to GDP, as Tarullo proposed.

Calling the Candidates Out on Financial Reform

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Two years ago, the Dodd-Frank and Affordable Care acts of 2010 were widely regarded as the biggest accomplishments of the Obama administration and the 111th Congress. Why, in the presidential race of 2012, do we hear so much about the first and so little about the second?

When he signed Dodd-Frank into law, President Barack Obama said it would not only “put a stop to a lot of the bad loans that fueled a debt-based bubble” but also “rein in the abuse and excess that nearly brought down our financial system.”

Mitt Romney promised to repeal the statute: writing tough rules for the financial sector, he explained, was like “pouring molasses” on the economy.

More recently, neither man has had a great deal to say about financial reform or about the continuing backroom battles over new restraints on derivatives trading, the independence of the new Consumer Financial Protection Bureau, and the implementation of the so-called “Volcker rule,” among other issues.

Hoping to draw the candidates out on these matters, Americans for Financial Reform sent a list of ten proposed questions to the moderators of the debates that get underway next Wednesday night in Denver, Colorado.

1. Should the Dodd-Frank Wall Street reform law be implemented or repealed? If you’d like to see it repealed, what would you do instead? Can you point to any particular pieces of the law that you would keep?

2. One of the centerpieces of Dodd-Frank was an effort to regulate the shadowy world of derivatives – the bet-like securities that played a huge role in bringing on the 2008 financial crisis by spreading the risks of bad mortgages to financial institutions around the world. Do you support or oppose current efforts to exempt substantial areas of the derivatives market from new regulations?

3. A number of former bankers, including Citicorp creator Sandy Weill, now argue for breaking up the big banks and restricting those with taxpayer insurance to relatively safe and traditional loan-making activities. What is your view?

4. The Dodd-Frank Act created a Consumer Financial Protection Bureau? Do we need a financial regulator whose focus and mission is consumer protection? What is your position on congressional proposals to limit the CFPB’s funding or independence?

5. Do you support the Volcker rule, which prohibits taxpayer-insured banks from engaging in excessively risky practices such as investing in hedge funds or trading derivatives?

6. Have the Justice Department and other federal law enforcers done enough to investigate and prosecute the bankers and lenders whose actions led to the financial meltdown? If not, what steps would you take to energize these efforts?

7. From the bailouts to financial reform, members of Congress on both sides of the aisle have said that Wall Street wields too much influence in Washington? Do you agree? If so, what would you do to reduce its political clout?

8. Financial sector profits account for nearly 30 percent of all corporate earnings, double the proportion of a few decades ago. Should this be a source of concern? What can be done about it?

9. Do you favor a financial transaction tax, or FTT, that would fall largely on high-speed traders and speculators? Proponents say that a small fee spread over many transactions could generate several hundred billion dollars a decade in revenue, limit high-speed trading and volatility, and help restore a long-term perspective to the investment world. Opponents argue that an FTT would interfere with market liquidity.

10. Do you agree with those who point to a financial-sector pattern of extravagant pay linked to short-term profits or stock gains as one of the drivers of the financial meltdown? What if anything should the federal government be doing about this problem?