Mortgage Meltdown

SEC Chair Shapiro Calls For Greater Regulation Of ABS

In a recent speech (here), SEC Chairwoman Mary Shapiro urged greater regulation and legislation of Asset Backed Securities because there are "gaps" in regulation of ABS.  The current disclosure-based regime was designed to deal with issuers in actively-managed businesses, Shapiro said, which are not as suitable for ABS, which are less liquid, and are based on underlying pooled assets.  On the legislative front, Shapiro envisioned an entirely new act directed solely at securitizations, which would allow Congress to "specifically tailor solutions for these investment vehicles, much like the Investment Company Act of 1940" -- the law specifically directed at mutual funds.  Although her speech lacked specifics, Shapiro stated that "[s]uch a statute could set minimum requirements for the pooling and servicing agreements, such as requiring strong representations and warranties about the assets being securitized and procedures for ensuring those representations and warranties are followed. That's in addition to the disclosure requirements of the Securities Act, which would continue to apply when ABS securities were offered and sold."

House Passes Sweeping Financial Reform Bill

Given Congress' recent work, one might think that our representatives are being paid by the word.  Following on the heals of the 2,000+ page health care bill, the House of Representatives on Friday passed a sweeping financial and securities regulatory reform bill that checks in at 1,279 pages.  The bill touches virtually every aspect of the financial services industry, and there is a similar bill working its way through the Senate. 

So in an effort to distill down the 1,279 pages, here are some highlights of the "Wall Street Report and Consumer Protection Act of 2009," H.R. 4173 (full text available here) :

• Creation of a Consumer Financial Protection Agency to oversee consumer protection in financial products ranging from credit cards to mortgages.
• Creation of a new Financial Stability Council to regulate and potentially unwind financial institutions that are "too big to fail."  This includes an FDIC-type charge on large banks to set aside $150 billion for possible costs of this new regulation and potential failure of such a large institution.
• Creation of a single federal banking regulator.
• Creates a Federal Insurance Office within the Treasury Department, although it would have more of a monitoring and advisory role - the front-line regulation of insurance companies would still lie with the States (at least initially).
• Introduces various regulatory reforms for trading derivatives and credit default swaps, including requiring dealer banks and major swap traders to trade some of their routine products on transparent platforms and steer the swaps into clearinghouses, which guarantee trades;
  giving the SEC and CFTC new police powers for over-the-counter derivatives and lets the CFTC set trading limits on swaps that play a role in setting market prices; imposing new capital, margin, reporting, record-keeping and business conduct standards on swap dealers and major swap traders; and preventing bank dealers and major traders from collectively owning more than a 20% controlling stake in swap clearinghouses or trading platforms.
• Requires hedge funds and private equity funds to register with the SEC
• It doubles SEC funding over five years.
• Gives shareholders an advisory vote on executive pay in connection with proxy voting each year.
• Allows the SEC to prohibit arbitration clauses in broker or investment advisor agreements for claims brought by customers of the broker for violations of the securities laws.
• Extends aiding and abetting liability for claims brought by the SEC for violations of the Securities Act of 1933 and the Investment Advisors Act of 1940.  It DOES NOT overrule the Supreme Court's Stoneridge decision, and permit aiding and abetting cases brought by private litigants under the Securities Exchange Act of 1934.
• Clarifies the extra-territorial reach of U.S. securities laws, and expressly permits claims brought by foreign purchasers of securities on foreign exchanges as long as conduct in the U.S. substantially furthers the securities violation or conduct outside the U.S. has a foreseeable substantial affect inside the U.S.
• Expands the SEC's subpoena power in civil cases, allowing service nationwide and exempting the SEC from certain requirements of Rule 45 that other litigants must meet (and which are usually for the protection of non-party witnesses).

They sure have been busy in Washington.  Once the bill is reconciled with the version still moving through the Senate, the myriad of new regulations should also keep compliance personnel, general counsel, and their outside lawyers busy as well.