Financial Crisis News Center

House Passed Legislation Bringing Auditors of Brokerage Firms with Purview of PCAOB; Enhancing Foreign Regulatory Information Sharing

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Closing a statutory loophole revealed by the Madoff scandal, the House has passed legislation authorizes the PCAOB to flexibly examine the auditors of broker-dealers. Thus, the Wall Street Forum and Consumer Protection Act, HR 4173, would bring auditors of broker-dealers under the PCAOB oversight regime. The Board can inspect the auditors of broker-dealer financial statements; and will have investigatory, examination and enforcement authority over the auditors of broker-dealers. In addition, brokers and dealers would be brought into the Board’s funding scheme by paying a fee allocation in proportion to their net capital compared to the total net capital of all brokers and dealers that are not issuers, in accordance with the rules of the Board. The Act also authorizes the Board to refer an investigation concerning a broker or dealer’s audit report to the relevant self-regulatory organization. Moreover, the Board is authorized to share with the SRO all information and documents received in connection with an investigation or inspection without breaching its confidential status.

Regulators Seek Comments on New Basel Capital Proposals

This story appeared in Bank Digest.

The federal bank and thrift regulatory agencies are encouraging comments on Basel Committee on Banking Supervision proposals that aim to strengthen the resiliency of the banking sector through new capital and liquidity standards. The proposed changes include introduction of new standards for liquidity risk management, the addition of a leverage ratio to the Basel II framework, improvements to the quality and consistency of capital and strengthening of capital requirements for counterparty credit risk.

Basel Committee Seeks Comments on Strengthening Liquidity and Capital

John M. Pachkowski, J.D., Editor, CCH Federal Banking Law Reporter and Bank Digest; Author, Anti-Money Laundering and Bank Secrecy: Compliance and the USA PATRIOT Act; Co-Author CCH Financial Privacy Law Guide.

The Basel Committee on Banking Supervision has issued two consultative documents to address deficiencies in the operations and structure internationally active financial institutions that came to light in the global financial crisis.

House Reform Legislation Provides International Reach to Federal Securities Laws

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The rapid globalization of financial markets in recent years has cast into stark relief issues surrounding the international reach of US securities laws. Since the federal securities laws are silent on their international reach, federal courts have developed tests, including the conduct test, which focuses on the nature of the conduct within the US as it relates to carrying out the alleged fraudulent scheme

As part of a sweeping overhaul of US financial regulation, the House has passed legislation authorizing the SEC and the United States to bring civil and criminal law enforcement proceedings involving transnational securities frauds, which are securities frauds in which not all of the fraudulent conduct occurs within the United States and not all of the wrongdoers are located domestically. Specifically, the Wall Street Reform and Consumer Protection Act, HR 4173, would amend the Securities Act and the Exchange Act to provide that US district courts have jurisdiction over violations of the antifraud provisions that involve a transnational fraud if there is conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors.

Sobel Comments on Financial Regulatory Reform

By Gregg D. Killoren, J.D., CCH State Banking Law Reporter, Bank Digest and Individual Retirement Plans Guide.

Acting Assistant Secretary Mark Sobel, in a speech before the International Monetary Fund Conference on Restoring Financial Stability on Dec. 1, 2009, commented that policymakers face an urgent need to act on financial regulatory reform. He noted that supervisors and regulators did not adequately appreciate the risks of complex financial products and were hindered by their firm-by-firm approach that deprived them of a more encompassing view of systemic risk. To solve such shortcomings, Sobel observed that reform of national regulation was necessary, as the creation of a global regulator is not feasible. National regulators, working through standard-setting bodies, such as the Basel Committee, IOSCO, and IAIS have strengthened their collaboration, Sobel noted, and the strategy to strengthen the international financial system is working in his view.

Walker Report Recommends Creation of Board Risk Committee and Links Risk to Compensation

This story appeared in Jim Hamilton's World of Securities Regulation.

The Walker report on corporate governance and executive compensation contains far reaching and groundbreaking recommendations that very likely will be incorporated into UK legislation. The core principles of the Walker recommendations center on risk management, disclosure, and delinking excessive risk taking from compensation, including the creation of a board risk committee with real powers and a duty to provide meaningful information about risk in the company’s annual report.

At the same time, the Walker report supports the continued use of the comply or explain doctrine for corporate governance codes, as well as endorsing the unitary board structure. The report concluded that the two-tier model of separate executive and supervisory boards, such as in Germany, did not yield better outcomes than unitary boards in the crisis period.

Barnier Named New EU Commissioner for Internal Market and Services

This story appeared in Jim Hamilton's World of Securities Regulation

At a time when European financial regulation is at the threshold of significant legislative overhaul, the new Commissioner for the Internal Market and Services will be Michel Barnier of France. Currently, Mr. Barnier is a member of the European Parliament. He will be joining the second Barrasso Commission at a momentous time for EU securities and banking regulation. He will replace Commissioner Charlie McCreevy, under whose remit the most sweeping changes in financial regulation were proposed, including the regulation of hedge funds, credit rating agencies, and systemic risk. Before joining the European Parliament, Mr. Barnier was a member of the Prodi Commission, serving as Commissioner for Regional Policy.

With the G-20 emphasizing the need for a global regulatory response to the financial crisis, Mr. Barnier is aware of the challenges of globalization and the need to craft a harmonized cross-border response. In earlier remarks, he has noted that not long ago financial exchanges were nation-centric and, in all countries, capital exchanges were forbidden or restricted and the approval of the Ministry of Finance was needed before any capital could leave or enter a country. Noting that change now happens very quickly and abruptly, he recognizes the need for new paradigms and thus a need for a new governance.

Audit Committees Receive Guidance on Issues Arising from Financial Crisis

This story appeared in Jim Hamilton's World of Securities Regulation

As the financial crisis continues, audit committee are facing more and more challenges involving risk and uncertainties and valuing financial instruments. The UK Financial Reporting Council has issued guidelines to help audit committees navigate the issues. The FRC has oversight of corporate governance. In 2003, the FRC set up an independent group to clarify the role and responsibilities of audit committees, which culminated in the Smith Guidance for Audit Committees within the overall corporate governance code.

Bachus Seeks Information on AIG's Treatment of U.S. Regional Banks

This story appeared in Bank Digest.

Financial Services Committee Ranking Member Spencer Bachus, R-Ala., requested information from Treasury Secretary Timothy Geithner regarding the disparate treatment of U.S. banks and foreign institutions by insurance giant American International Group (AIG). In March, Bachus urged Financial Services Committee Chairman Barney Frank, D-Mass., to convene hearings in order to obtain facts and fully understand the consequences of AIG's bailout on U.S. banks. Since March, Bachus has also asked Secretary Geithner for information on why U.S. banks are being asked to take haircuts while foreign and domestic counterparties were made whole.

Fed Article Addresses Financial Crisis and Cross-Border Financial Flows

This story appeared in Bank Digest.

A Federal Reserve Bulletin article, written by Carol C. Bertaut and Laurie Pounder, of the Division of International Finance, examines the effects of the recent financial crisis, which began in August 2007, on cross-border financial flows. The article documents three major channels through which financial flows and associated portfolio positions were affected: (1) "flight to safety" shifts away from riskier securities and toward investments in safe and liquid markets, particularly U.S. Treasury securities; (2) unusual flows through the banking system resulting from a shortage of dollar liquidity abroad and a breakdown in interbank markets; and (3) a pullback from cross-border positions during the crisis.