Since the moment the Democrat-controlled Congress passed the sweeping financial regulation bill in mid-2010, Republicans began talking about repeal. Many were against some of its more controversial measures. So last week, when they unveiled legislation to nullify several aspects of the bill, advocates of financial reform might have feared they would try to dismantle the legislation. Instead, the changes they suggest are at worst benign and at best pretty good ideas.
One bill would make five changes, which are summed up nicely by a Wall Street Journal article. Another intends to make a revision to the Consumer Financial Protection Bureau. Let's consider each of these proposals.
Eliminate New Rating Agency Liability Standard
The regulation bill intended to make the rating agencies like Moody's, Standard and Poor's, and Fitch liable for the accuracy of their ratings. Before, their ratings were considered opinions and were protected by the First Amendment. When the new rule was set to take effect, the agencies refused to rate securities and the market for some debt nearly seized. That caused the Securities and Exchange Commission to indefinitely nullify the rule.
So really, all this provision would do is make the SEC's move official. This would be a good thing, as investors should become less reliant on the rating agencies. But if the agencies could be sued for bad ratings, then investors would only become more dependent on them instead of doing their own work to understand the securities.
End-User Exemption for Derivatives
When the regulation bill was being finalized one provision slipped through the cracks. Due to a way the House changed the bill's language, it required smaller Main Street firms who use derivatives to satisfy costly margin requirements. Some Democratic Senators objected to this change, and House Democrats said that the issue could be fixed after the bill passes.
Nine months later, it still hasn't been fixed, however. Republicans hope to do that here. This would be a good thing for businesses that use derivatives for purposes like to achieve greater certainty for their costs. It would not provide speculators with a loophole.
Exempt Private Equity Fund Managers From SEC Registration
Some small- and mid-size funds have complained that SEC registration is costly and doesn't serve any clear purpose. They're probably right, as there certainly aren't any systemic worries about private equity funds and only sophisticated investors generally invest in such funds. It's unclear how this registration would improve the market.
Increasing the SEC Registration Threshold to $50 Million From $5 Million
Following much the same theme, Republicans want to prevent smaller companies from having to deal with the red tape and expense that comes with SEC registration. Again, this is probably reasonable, as $50 million companies are still relatively small and probably would have an easier time getting money for investment without having to deal with SEC paperwork.
Strike Compensation Disclosure Requirement
Another rule in the bill forces "publicly traded companies to disclose the median annual total compensation of all employees and calculate a ratio of how employee compensation compares with that of the chief executive," explains the Wall Street Journal's summary. It's hard to see how this does much to help financial stability. If shareholders are worried about compensation structure, then they can vote to demand better clarity themselves. Killing this requirement doesn't clearly make the market safer, but doing so wouldn't make the market more dangerous either.
A Five Member Commission for the New Consumer Bureau
Instead of dismantling the Consumer Financial Protection Bureau, House Financial Services Chairman Spencer Bachus (R-AL) has offered legislation that would make it slightly less controversial. The current framework puts only one person in charge of the Bureau. This differs from the conventional approach, which provides regulators with a chairperson and board. The Federal Reserve, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Securities and Exchange Commission, and others all have several commissioners or board members who weigh in on big decisions. This is actually the way the House's version of the financial reform bill initially intended to create the Bureau's leadership structure, but the Senate's version with more concentrated power won out.
Of these six changes, three would have strong positive benefits, one would probably help, and two would have a neutral effect on the market at worst. That's a pretty good score as far as Congressional legislation goes. It should be taken seriously by the Senate and the White House, as the Republicans really aren't humming a strictly partisan tune by pursuing these changes.
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