Financial Institutions April 2008 ALBANY AMSTERDAM ATLANTA BOCA RATON BOSTON CHICAGO DALLAS DELAWARE DENVER FORT LAUDERDALE HOUSTON LAS VEGAS LOS ANGELES MIAMI NEW JERSEY NEW YORK ORANGE COUNTY ORLANDO PHILADELPHIA PHOENIX SACRAMENTO SHANGHAI SILICON VALLEY TALLAHASSEE TAMPA TYSONS CORNER WASHINGTON, D.C. WEST PALM BEACH ZURICH Strategic Alliances with Independent Law Firms BERLIN BRUSSELS LONDON MILAN ROME TOKYO U.S. Treasury Department Proposes Sweeping Changes to Financial Services Regulatory Framework Banks, Thrifts, Credit Unions, Broker Dealers, Mortgage Companies, Insurance Companies and Investment Companies Should Take Notice On March 31, 2008, the U.S. Department of the Treasury ("Treasury") released its long-awaited "blueprint" that would have the effect of revamping much of the current financial services regulatory framework in the U.S. That framework has been knit together over the past 75 years. One of the most significant results of the proposals would be to broaden the authority of the Federal Reserve Board and its staff. Implementation would require action by the U.S. Congress to enact many of the proposals contained therein into law. Expressions of support and opposition to aspects of the proposals have already been heard. The ambitious proposals would affect most financial services firms in one way or another, including banks, thrifts, credit unions, securities broker dealers, investment advisers, mortgage companies, insurance companies, investment companies, commodities futures and trading firms, and payment systems operators. While the genesis of the "blueprint" began well over a year ago, some of the proposals were designed to be implemented immediately in light of recent events in the U.S. credit and mortgage markets. By releasing the "blueprint," the Bush Administration now leaves the ball in Congress' court to consider whether implementing legislation is appropriate. While portions of the proposals dealing with residential mortgage regulation can be expected to be addressed by Congress this year, it is not likely that the nonmortgage proposals the bulk of the "blueprint" will be adopted this year, if at all, as election years are not conducive to the passage of complex legislative proposals such as those contained in the "blueprint." The broad scope of the proposed "blueprint" involves far more than a mere "turf" war in which some regulators could gain authority or expand the scope of their "footprint," while other regulators have a reduced mission, are merged with other entities, or are eliminated. There are differences in orientation and approach that significantly affect how various agencies carry out their mission. Some regulators, GREENBERG TRAURIG, LLP ATTORNEYS AT LAW WWW.GTLAW.COM
such as bank regulators, are charged with protecting what is called the "safety and soundness" of an institution. Among other consequences of this approach, a regulator aware of negative information concerning a supervised firm tends to restrict access to the information to avoid causing a "run on the bank." Other regulators operate under a mandate to assure that all material information is made available to the public so that the free market can set a fair value on economic interests, and effectively weigh the risk of economic and investment decisions. The "blueprint" also will face very substantial issues of "federalism." The role of states in financial and economic regulation will be significantly impacted by the intrusion of federal regulation into areas traditionally reserved to the states. The creation of a federal role in the regulation of securities in 1933 was probably a minor dust-up compared to the impact of the proposals on oversight of mortgages, insurance, and other areas. While some industries have come to prefer the benefits of uniformity of regulation by a federal regulator, many industries much prefer working with divided and less powerful state regulators. The Proposals The scope of the "blueprint" is extremely broad, and one Alert cannot capture the full scope of the concepts included. More targeted Alerts will focus on specific issues and concepts. The purpose here is to focus on timing issues affecting the proposals. The "blueprint" breaks up its proposals into three categories short-term, intermediate and long-term and below we outline the highlights of each of these categories. We remain available to answer any questions that the Treasury "blueprint" proposals raise for your business. A. SHORT-TERM RECOMMENDATIONS 1. Mortgage Origination a. A new federal Mortgage Origination Commission (MOC) should be formed to evaluate, rate and report on the adequacy of each state's system for licensing and regulating mortgage originators. b. Federal legislation and/or the MOC should establish national licensing standards for all mortgage originators, such as mortgage lenders and mortgage brokers. c. The MOC should develop uniform minimum qualifications for state mortgage market participant licensing systems. d. The Federal Reserve should continue to have the sole responsibility over the drafting of national mortgage lending regulations. e. Federal enforcement authority over national mortgage lending laws should be enhanced, while state enforcement authority over independent mortgage originators should be clarified. 2. Fed Discount Window Availability to Non-Bank Borrowers a. Non-depository institutions should have access to the Federal Reserve discount window. b. Those non-depository institution borrowers would be subject to Federal Reserve examination to test the liquidity of the borrowing institution.
B. INTERMEDIATE RECOMMENDATIONS 1. Thrift Charter a. The federal savings bank charter would be eliminated because of purported "significant competition" in the mortgage finance market from non-thrift lenders. b. The Office of Thrift Supervision would merge into the Office of the Comptroller of the Currency. c. Federal savings banks would be given two years to convert their charters into national bank charters. 2. Federal Supervision of State-Chartered Banks a. Treasury recommends a study be conducted to streamline the federal supervision of state-chartered banks by either the FDIC or Federal Reserve. b. One approach would be to place all state bank examination responsibilities with the FDIC. 3. Securities Broker Dealers and Futures Firms a. In light of the convergence of securities and futures markets, the Commodities Futures and Trading Commission would merge into the SEC. b. The SEC should issue a rule to update and streamline the self-regulatory organization ("SRO") rulemaking process to recognize the market and product innovations of the past two decades. The SEC should consider streamlining and expediting the SRO rule approval process, including setting deadlines for the SEC to publish SRO rule filings. c. As part of that merger process, the SEC would be asked to implement a general exemptive rulemaking under the Investment Company Act of 1940 to permit the trading of those products already actively trading in the United States or foreign jurisdictions. d. Treasury also recommends new legislation to expand the Investment Company Act to permit a new "global" investment company. e. New statutory changes should be made to harmonize the regulation and supervision of securities broker dealers and investment advisers offering similar services to retail investors, such as subjecting investment advisers to an SRO regime similar to that of broker dealers. 4. Insurance a. For over 135 years, states have primarily regulated insurance firms with little federal regulatory involvement. b. Treasury recommends the formation of a federal insurance regulatory structure to permit a dual insurance system similar to the dual state-federal banking system. c. Under this structure, insurance companies could opt for a federal insurance charter instead of a state charter. This would provide for a system of federal chartering, licensing, regulation and supervision of insurers, reinsurers, insurance agents and insurance brokers. d. An Office of National Insurance within Treasury would regulate and supervise federal insurance companies, reinsurers, agents and brokers and implement federal regulation of such firms and individuals nationwide.
e. Treasury also recommends the formation of an Office of Insurance Oversight (OIO) within Treasury. OIO would address international regulatory issues such as reinsurance collateral and promote international insurance regulatory policy in the United States. 5. Payment Systems a. Treasury recommends the creation of a federal charter for "systemically important" payment and settlement systems. b. The Federal Reserve would regulate and supervise such payment and settlement systems and have the discretion to determine which payment and settlement systems are "systemically important." C. LONG-TERM RECOMMENDATIONS 1. According to Treasury, the current system of functional regulation i.e., different federal regulatory agencies covering different financial sectors such as banking, insurance, securities and futures is not compatible with today's global financial markets. 2. Three different consolidated regulators would be envisioned as a long-term solution: (a) a market stability regulator, which would be the Federal Reserve; (b) a new prudential financial regulator; and (c) a new business conduct regulator. a. Market Stability Regulator i. The Federal Reserve would assume this role by gathering information, collaborating with other regulators on rulemakings, and taking corrective actions when necessary to ensure overall financial market stability. ii. As part of this responsibility, the Federal Reserve would have authority to examine institutions regulated by the prudential and business conduct regulators. b. Prudential Regulator i. A single prudential regulator would focus on safety and soundness of firms with federal guarantees, similar to the OCC, but with authority to deal with affiliates of the regulated institution on an enterprise-wide basis. ii. Activity limits would be placed on insured depository institutions similar to those limits currently applicable to national banks. c. Business Conduct Regulator i. A new business conduct regulator would monitor activities regulation for all U.S. financial services firms. ii. The new business conduct regulator subsumes most roles of the SEC/CFTC and authority over rules such as mortgage disclosure
This GT Alert was written by Carl Fornaris, Steve Felsenstein and Robert Dinerstein. Questions about this information can be directed to: Carl Fornaris at 305.579.0626 (fornarisc@gtlaw.com) Steve Felsenstein at 215.988.7837 (felsensteins@gtlaw.com) Robert C. Dinerstein at 212.801.2212 (dinersteinr@gtlaw.com) Albany 518.689.1400 Amsterdam + 31 20 301 7300 Atlanta 678.553.2100 Boca Raton 561.955.7600 Boston 617.310.6000 Chicago 312.456.8400 Dallas 214.665.3600 Delaware 302.661.7000 Denver 303.572.6500 Fort Lauderdale 954.765.0500 Houston 713.374.3500 Las Vegas 702.792.3773 Los Angeles 310.586.7700 Miami 305.579.0500 New Jersey 973.360.7900 New York 212.801.9200 Orange County 714.708.6500 Orlando 407.420.1000 Philadelphia 215.988.7800 Phoenix 602.445.8000 Sacramento 916.442.1111 Shanghai 86 (21) 6122 1123 Silicon Valley 650.328.8500 Tallahassee 850.222.6891 Tampa 813.318.5700 Tysons Corner 703.749.1300 Washington, D.C. 202.331.3100 West Palm Beach 561.650.7900 Zurich + 41 44 224 22 44 This Greenberg Traurig Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer s legal qualifications and experience. Greenberg Traurig is a trade name of Greenberg Traurig, LLP and Greenberg Traurig, P.A. 2008 Greenberg Traurig, LLP. All rights reserved.