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March 10, 2016

Financial Reform Newsletter: March 10, 2016

Yes, Financial Reform is Working: Better Markets’ President and CEO, Dennis Kelleher, published an Op Ed this week entitled “Financial Reform is Working.”  He noted that, notwithstanding stress, distress and turmoil in the markets over the last several months, the biggest banks in the US are doing pretty well. The reason for that, he spelled out, is because of the new financial reform rules: capital, liquidity, Volcker Rule, stress tests, derivatives margin and clearing as well as the living wills process.

Mr. Kelleher observed “that’s not enough and more needs to be done, but it simply cannot be denied that the U.S. financial system and its biggest SIFIs are stronger and more resilient than they were in 2008, thanks to the rules the Dodd-Frank Act required.”  He went on to note:
“None of that is to suggest that the battle for financial reform is over, that Dodd Frank has been fully and effectively implemented, or
that it’s time to declare victory over financial crises. Even though the SIFIs are safer thanks to the Dodd-Frank Act, these same institutions have fought–and they continue to fight–the regulators’ efforts to finish the Dodd-Frank Act rules and then implement and enforce them.
“And it may well be that before the jobs, homes, savings and livelihoods of all Americans are truly protected from the next financial crisis, we may need comprehensive structural reforms, like size caps on the biggest banks, re-instating Glass-Steagall or even breaking up the largest banks.
“But in the meantime, we should realize that all of us–including the too-big-to-fail banks themselves–can breathe a little easier in this stressful environment, thanks to the Dodd-Frank Act.”
Last week the Senate Banking Committee’s Securities, Insurance and Investment Subcommittee held an important hearing on “Regulatory Reforms to Improve Equity Market Structure.” Chairman Mike Crapo (R-ID) and Ranking Mark Warner (D-VA) led the hearing, with Senators Elizabeth Warren (D-MA) and Joe Donnelly (D-IN) participating. The witnesses were Mr. Steve Luparello, Director of Securities and Exchange Commission’s Division of Trading and Markets and Mr. Rick Ketchum, Chairman and CEO of Financial Industry Regulatory Authority (FINRA). In his opening remarks, Chairman Crapo reminded everyone that the “Flash Crash” is still “fresh on people’s minds, and other market events have raised concerns about market resiliency and integrity.”
As Senator Warner pointed out, there is an urgent need for the SEC to have a viable Consolidated Audit Trail, which will enable it to effectively, comprehensively and in real time monitor the markets, protect investors, stop abuses and investigate illegal conduct.  The SEC announced its intention to do this more than six years ago, but the markets and investors are still waiting. In applauding Ranking member Senator Warner, Better Markets noted that:
“A consolidated audit trail will be the night vision goggles that enables the SEC to see into the opaque and fragmented securities markets, and track and find those who abuse the system and investors.  It is an inexcusable failure not to have, in 2016, a comprehensive consolidated audit trail enabling it to accurately and efficiently track activity in our markets.”
Sen. Warner also called for a holistic review of the issues and markets, including darks pools, the exchanges and other alternative trading systems.  It’s past time that regulators unpack the unnecessarily complex structure of the equity markets today and again put investor interests first.
Senator Warren raised questions whether the self-regulatory model like FINRA is working in the financial markets. She reviewed the findings of an important new study showing that roughly 7% of financial advisers, regulated by FINRA, have misconduct records, and that prior offenders are five times as likely to engage in new misconduct as the average financial adviser, and that about 44% of those fired for their misconduct are reemployed in the financial services industry within a year.

Sen. Warren noted that the “findings suggest that some firms ‘specialize’ in misconduct and cater to unsophisticated consumers.” She asked what FINRA is doing to protect investors from receiving advice from people with a history of misconduct. Mr. Ketchum said FINRA cares a great deal about addressing recidivism by examining these incidents and disbarring people. Senator Warren responded that apparently FINRA’s work is insufficient since the study shows that currently over 15% of the advisers that work at firms like Oppenheimer & Co, Wells Fargo Advisers and UBS Financial Services have misconduct records.


A Key Anniversary Raises Important Accountability Questions for Attorney General Lynch: Attorney General Loretta Lynch testified before the Senate Judiciary Committee, just one day after the ninth anniversary of the infamous subprime lender New Century Financial Corporation’s announcement that it would stop originating new mortgages. Nine years ago, New Century was one of the nation’s largest and most predatory subprime lenders and much of its business was fraud and its executives are about to get off scott free. As Better Markets said, that’s wrong and DOJ should act:
“Just one year from today, New Century’s executives will be popping champagne corks to celebrate because the ten-year statute of limitations applicable to their fraud will have lapsed. The same will soon be true for the executives from scores of other firms who committed egregious frauds in 2007 and 2008 that contributed to the financial crisis. Time is running out for Attorney General Lynch and DOJ to do what they have repeatedly said they intend to do: prosecute executives for their role in causing the worst financial crash since the Great Depression.” 
“The American people want to know if DOJ will end the double standard of justice and bring accountability to the high-ranking financial executives who broke the law, caused the 2008 crash, and cost tens of millions of hardworking Americans their jobs, homes, savings, and so much more. So far, not one high-ranking executive has been criminally charged despite overwhelming evidence of illegal conduct, much of which is known by DOJ and documented throughout its many slap-on-the-wrist settlements with the biggest financial institutions. The statute-of-limitations clock is ticking, and DOJ must act now.”


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