When offering securities to the public, corporations must comply with an exclusive informational regime that allows speech only within the uniform boundaries determined by the SEC. Corporations must use a standardized method for financial audit and report, and disclose in plain and simple English any material fact of interest to a potential buyer. But when offering the public other products, corporations are entitled to speak freely to consumers as they wish, under the wide wings of the freedom of commercial speech, constrained merely by the ban on misrepresentation and fraud. Why are investors better protected than consumers? Why does our legal system choose to provide consumers of investments better information to secure their freedom of choice?
Posts Tagged ‘Consumer protection’
The 2010 Dodd-Frank Act mandated over 200 new rules, bringing renewed attention to the use of cost-benefit analysis (CBA) in financial regulation. CBA proponents and industry advocates have criticized the independent financial regulatory agencies for failing to base the new rules on CBA, and many have sought to mandate judicial review of quantified CBA (examples of “white papers” advocating CBA of financial regulation can be found here and here). An increasing number of judicial challenges to financial regulations have been brought in the D.C. Circuit under existing law, many successful, and bills have been introduced in Congress to mandate CBA of financial regulation.
In this post, Federal Financial Analytics, Inc. (FedFin) recommends steps the Consumer Financial Protection Bureau (CFPB) and other regulators can and should take to make their rules simpler, clearer, less burdensome and—critically—more enforceable. This paper is not a call for “cutting the red tape,” a mantra that has all too often meant eviscerating critical consumer protections. It is, rather a how-to on ways to cut through the daunting morass of consumer-protection standards that have only grown worse in the wake of the financial crisis.
We note not only ways to restructure rules to meet these goals, but also how to do so without losing the clarity essential to legal integrity and supervisory effectiveness. We also describe recent efforts by U.S. bank regulators to curtail problematic products (e.g., payday lending) by limiting it at banks, leaving wide swaths of the financial sector (sometimes called “shadow banks”) free to engage in predatory practices unless the bank-centric rules choke them off (uncertain), state regulators intervene (problematic) or federal rules across the sector are quickly enacted (so far unseen).
On July 30, 2013, the SEC adopted final amendments (the “Final Amendments”) to the financial responsibility rules for broker-dealers (SEC Release No. 34-70072) (the “Release”). The Final Amendments make changes to the net capital, customer protection, books and records, and notification rules for broker-dealers. The SEC first proposed the rule changes in March 2007 and re-opened the public comment period on May 3, 2012. The Final Amendments will be effective 60 days after publication in the Federal Register (about the week of October 14) (the “Effective Date”). This article summarizes the principal elements of the Final Amendments.
Rule 15c3-1—Net Capital Rule
Rule 15c3-1 under the Exchange Act (the “Net Capital Rule”) requires a broker-dealer to maintain, at all times, a minimum amount of net capital depending on the nature of its business. The capital standard in the rule is a net liquid assets test, which imposes standardized deductions (or “haircuts”) on securities, with less-liquid securities subject to deeper haircuts. The Rule also does not allow certain items to be included in net capital and requires certain other items to be included as liabilities. Amendments to the Net Capital Rule include the following:
The New Era of Swaps Market Reform
This hearing is occurring at an historic time in the markets. The CFTC now oversees the derivatives marketplace — across both futures and swaps. The marketplace is increasingly shifting to implementation of the common-sense rules of the road for the swaps market that Congress included in the Dodd-Frank Act.
For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.
For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins next month.
For the first time, the public will benefit from specific oversight of swap dealers. As of today, 71 swap dealers are provisionally registered. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation. The full list of registered swap dealers is on the CFTC’s website, and we will update it as more entities register.
Four years ago, this nation was suffering from a near-collapse of our financial system.
While there are differences of opinion as to what was the most significant trigger, a bi-partisan Senate Committee report — known as the Levin-Coburn Report — asserted that the crisis was the result of “high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
While this period of our history will be written and re-written over and over again, Congress and the Administration knew that the status quo was unacceptable. So together they passed landmark legislation to address many of the issues that were highlighted by that tumultuous period.
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a vital and comprehensive response to the financial crisis — an event that devastated the American economy, cost the American people trillions of dollars and millions of jobs, and undermined the confidence that our financial system requires if it is to thrive and support a growing economy.
The sweeping scope of this financial reform legislation sometimes obscures the fact that, despite its breadth, it is rooted in a handful of sound principles that should have been more firmly in place before the crisis, and whose embrace serves to make markets more stable and efficient. Simple principles like. . . .
The impact of Dodd-Frank—like the U.S. financial industry it regulates—is greater than the sum of its parts. Dodd-Frank seeks to oversee and regulate financial markets as a whole, by increasing regulation of individual companies with the potential to compromise market stability, as well as implementing regulation of certain areas of the financial services sector previously not subject to federal supervision and regulation. Dodd-Frank also addresses consumer protection, through the creation of a new agency with broad consumer protection powers and new rules governing residential mortgage markets.
In comments regarding the impact of this historic legislation, Timothy Geithner, Secretary of the Department of Treasury, noted that “By almost any measure, the U.S. financial system is in much stronger shape” than it was prior to enactment of Dodd-Frank.  However, a huge amount of change still lies ahead. In the short run, uncertainty regarding the impact of Dodd- Frank on operations, capital and liquidity levels, costs and revenue, and increased litigation and enforcement risk, will continue to impact strategic decisions and valuations of financial institutions of all types and sizes. The long-term impact of the legislation is uncertain, although it could quite possibly usher in a new era of accelerated consolidation in the financial services industry.
In addition to many significant regulatory provisions, the conference report text of the proposed Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of provisions in Title IX (Investor Protections and Improvements to the Regulation of Securities) which, if enacted, would have a significant impact on securities litigation and enforcement. Other proposed provisions were considered and discarded during the conference committee process. The highlights of the conference report text as it now stands include:
Private Cause of Action for Aiding and Abetting Violations Rejected. Efforts by some lawmakers to overturn well-settled Supreme Court authority by creating a private cause of action for aiding and abetting violations of the Securities Exchange Act of 1934 proved unsuccessful. The conference report text, at Sections 929M-929O, instead augments the SEC’s existing authority to pursue civil enforcement actions alleging aiding and abetting of violations of the Exchange Act by lowering the requisite state of mind to encompass “reckless,” in addition to “knowing,” acts, and by empowering the SEC to pursue actions premised on “knowingly or recklessly” aiding or abetting violations of the Securities Act of 1933, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. Section 929Z of the conference report text requires the Comptroller General to conduct a “study” analyzing the impact of authorizing a private right of action for aiding and abetting violations of the federal securities laws.
(Editor’s Note: This post is based on a letter sent by Hal S. Scott, R. Glenn Hubbard and John L. Thornton of the Committee on Capital Markets Regulation, an independent and nonpartisan research organization dedicated to improving the regulation and enhancing the competitiveness of the U.S. financial system, to the Chairmen and Members of the House Financial Services Committee and the Senate Banking, Housing and Urban Development Committee.)
The Committee on Capital Markets Regulation (“Committee”) has, since its establishment in 2005, provided empirical, independent research dedicated to improving the regulation of U.S. capital markets. In May 2009, the Committee published its report entitled, The Global Financial Crisis: A Plan for Regulatory Reform, setting out 57 recommendations for enhancing the soundness and effectiveness of the U.S. financial regulatory framework.  As part of its recommendations, the report sets out the Committee’s proposals for reforming the U.S. regulatory architecture to make it more robust and better designed to address the needs of investors and consumers of financial services. In this context, we felt that it would be useful to set out our position on the Administration’s proposal— presently embodied in H.R. 3126, the Consumer Financial Protection Agency Act of 2009 (Act)—that would establish the Consumer Financial Protection Agency (CFPA) as a dedicated agency for regulating and overseeing consumer protection issues in the provision of financial services. Where appropriate, we also make reference to the revised discussion draft of H.R. 3126 (revised discussion draft), proposing changes in the CFPA bill, circulated by Chairman Frank to the House Committee on Financial Services on September 22, 2009. 
From the outset, the Committee wishes to emphasize that establishing an independent regulatory agency for consumer and investor protection is one option the Committee believes deserves serious consideration; the other option, in our view, would be to incorporate this function as a division of a new consolidated regulatory agency. The Committee’s position on the Administration’s proposal, outlined below, is premised on the understanding that an independent agency would be created along the lines of H.R. 3126.
(Editor’s Note: This post is based on an article from Lombard Street.)
On June 30, 2009, the Obama Administration delivered to Congress the draft Consumer Financial Protection Agency (CFPA) Act of 2009. On July 8, House Financial Services Committee Chairman Barney Frank unveiled the Consumer Financial Protection Agency Act of 2009 (HR 3126), which shares key features with the President’s proposal. The proposal to create a new agency to police consumer financial products has been the subject of much debate. My goal, in this article, is to sort out and evaluate the different critiques levied against the proposed CFPA Act, in light of the underlying case for a new agency charged with the regulation of Consumer Financial Products (CFPs). To that end I begin by recounting the arguments for a CFPA. I then examine the critiques of the CFPA Act, reframed as challenges or counterarguments to the arguments for a CFPA. I conclude that there is broad agreement on the need for institutional reform, which would include a CFPA. At the same time, there is much disagreement about what mandate and authority the CFPA should have. I end with an optimistic note, suggesting that even a CFPA with less power than envisioned in the proposed Act could do much good. Specifically, I argue that a presumably less controversial section of the proposed CFPA Act – the section establishing a consumer right to access information – could promote efficiency and consumer welfare in the market for CFPs.
A. The Case for a CFPA
I begin by recounting the main reasons for the creation of a new federal agency with the mandate and authority to police consumer financial products.  A new agency is needed because (1) market forces fail to maximize welfare in important CFP markets, and (2) the current regulatory structure that was supposed to deal with this market failure has proved inadequate. I discuss these two elements in turn.
1. Market Failure
The proposed CFPA Act is a solution to a problem – excessively risky CFPs, or, more accurately, CFPs that impose underappreciated risks on consumers. The claim is that market forces have not worked to constrain CFP risks. This claim is based on theoretical arguments about the limits of market discipline in the CFP context. More importantly, the claim is supported by empirical evidence that many consumers do not make informed, welfare-maximizing choices in CFP markets. …continue reading: The Consumer Financial Protection Agency: Sorting the Critiques