FSOC, America’s Front Line of Defense Against Future Financial Crises, Continues Examination of Asset Management: The Financial Stability Oversight Council (FSOC) plays a vital role in preventing financial crises like the one that engulfed our nation in 2008. FSOC is the only governmental body responsible for (1) monitoring the entire financial system for emerging risks regardless of which agency, if any, has jurisdiction, and (2) identifying, analyzing, and taking steps to limit risks posed by systemically significant nonbank financial companies, the biggest threats in the so-called “shadow banking system.” In discharging these missions, FSOC has focused on gathering the data it needs to perform fact-based assessments of risk.
At its most recent meeting, FSOC issued an update on its review of asset management products and activities. The FSOC announced that it was establishing a working group to look more closely into hedge fund leverage. The new group will examine data and look at risk factors including counterparty exposures and trading strategies.
While we are still reviewing the report, it nonetheless appears to confirm that the FSOC is following a thorough and methodical approach in assessing the risks posed by asset managers. The report provides insight into the areas of FSOC’s focus, including liquidity and leverage risk in the asset management sector. In addition, the FSOC’s proposals for gathering data from private funds confirm that the FSOC is committed to increasing transparency in our shadow banking system.
Finally, a New Rule Proposal on Executive Compensation: At long last, out-sized compensation on Wall Street that rewarded excessive and irresponsible risk-taking may soon be reined in. The new rule to be jointly re-proposed by the federal financial regulatory agencies (with the National Credit Union Administration in the lead, to be followed by the FDIC, the OCC, the Federal Reserve Board, the Securities and Exchange Commission and the Federal Housing Finance Agency) takes a whack at cutting incentive-based executive compensation down to size.
This move is a welcome, if long overdue, step. When the rule-making process started in 2011, Better Markets submitted a comment letter to the SEC highlighting our concerns with the original proposal. Compensation arrangements that incentivized high-risk behavior on Wall Street contributed to the financial crisis that engulfed this country in 2008, and changing those incentive structures is one of the most important reforms remaining to be finalized.
Unfortunately, it has taken almost six years to get to this point, even though compensation has been a well-known contributor to systemic risk for a long time and even though the Dodd-Frank Act required the financial regulators to address the problem.
The re-proposed rule differs from the initially proposed rule in several important ways. It enhances the requirements for the very largest financial institutions; expands the category of covered person to include “significant risk-takers;” requires more senior executive compensation to be deferred over a longer period; and strengthens the Board oversight provisions.
In particular, both high-level executives and “risk-takers” will be subject to new policies allowing the firm to recover or “claw back” compensation for seven years in cases of fraud, deception, or other misconduct. The “claw back” will be in effect for seven years, longer than the three or four-year time frames currently in effect at most big banks. While this is an important enhancement, we will look closely at the triggering events under the claw back provision and ask whether they should be limited to actions involving intentional misconduct After all, if “C” suite executives at gigantic, global too-big-to-fail financial firms are held only to an intentional misconduct standard, then the claw back provision will create a relatively weak deterrent against excessive risk-taking.
We are still reviewing the rule and will be commenting on it, but it is clearly an important step forward. Few things are more important than aligning compensation with risk and ensuring that executives and others at financial firms suffer the consequences when they engage in excessive risk-taking for profit. The days of reckless and irresponsible “I’ll be gone; you’ll be gone” attitudes — where few worried about the build-up of risk from toxic securities, derivatives, and trades because they pocketed their bonuses and were long gone before their deals blew up — must end.
The Long Awaited Final Release of the DOL Fiduciary Duty Rule Is a Major Milestone, But the Opposition Continues: The release of the Department of Labor’s (DOL) final rule to address conflicts of interest in retirement investment advice closed a 40-year old loophole that was costing Americans tens of billions of dollars each year in retirement savings. The final rule requires brokers and other financial advisers giving retirement advice to put their clients’ best interest first. That should be non-controversial and financial firms and advisers should have fully embraced and supported it. No such luck.
While finalizing this rule is considered a historic win that will help tens of millions of Americans saving for retirement, industry opposition is still strong. Most recently, the House Education and the Workforce Committee passed a resolution under the Congressional Review Act, along strictly party lines, that would block the DOL’s new fiduciary rule. It is expected to go to the House floor next week. The Senate is expected to follow suit, but consideration of such a measure has not been scheduled.
Even if the rule survives action on the Hill, it is likely to face a challenge in court. Opponents of the rule are weighing their litigation options and reportedly grooming their strategy.
All of these developments are disappointing but not unexpected. As they unfold, we hope the American people will be paying special attention as members of both houses of Congress will have to show exactly where they stand: Are they putting Wall Street first or protecting millions of American families on Main Street trying to save for a secure and dignified retirement?
The financial firms that profit from the unfair status quo have waged a fierce, no-holds-barred war against the DOL rule. Join us in the fight to protect hardworking American families by supporting us here and by staying informed at our coalition’s website: www.saveourretirement.com.