NEWS
Basic Principles
1. Regulation Based Upon Activities, Not Actors and Scaled to Size and Complexity
a. Regulatory scrutiny should be triggered based upon any of the
following: the overall scale of market participants, relative
importance in a given market or markets, complexity of corporate
structure and complexity of financial instruments used for
investment or dealer purposes.
b. All participants undertaking the similar activity should be treated
equally – for example, proprietary trading by financial institutions
should not be treated in a disparate manner than trading by any
other kind entity
c. While the regulator should have broad and flexible authority to
determine the basis upon which it wants to include systemically
significant entities, it should be clear and transparent in disclosing
the criteria upon which it seeks to include a specific market
participant.
2. Companies Which Perform Systemically Significant Functions Should Be
Included
a. The new regulator should have the authority to examine and
discipline market players such as Credit Rating Agencies, financial
guarantors, etc., based on the importance of the integrity of their
functions to the financial system as a whole.
3. Follow The Activities Wherever the Corporation Stashes Them
a. Regulatory authority should be able to follow transactions and
activities within a given enterprise regardless of where in the
corporate structure the activity takes place.
4. Greater Scrutiny Based Upon Complexity Of Corporate Structure or Financial
Products
a. Greater regulatory scrutiny should be borne by those complex
enterprises — not just in the sense of adding additional functional
regulation for each new piece of a diversified company but
including a material increase in the Federal regulatory oversight
exercised by this new systemic regulator.
b. Entities should come under the ambit of the new regulator based
upon the complexity and opacity of the instruments that they
underwrite, produce, deal or invest.
5. Greater Scrutiny Based Upon the “Triple Play” – being an originator,
underwriter/securitize, investor in the same asset
a. Greater regulatory scrutiny should be borne by those entities that
endeavor to achieve the trifecta: that is, to own the “means of
production” of an asset as well as to act as a dealer in financial
instruments created from those assets and as a direct investor in
those instruments or assets – in other words, if a company were a
mortgage originator, a dealer in mortgage backed securities and an
investor for its own account in mortgage backed securities – that
would trigger oversight by this systemic regulator not only of the
individual activities but also the management of the inherent
conflicts of interest between those vertically integrated pieces.
6. Regulator Enforces Transparency and Practices It
a. The regulatory structure should include reviews of how accurately
entities make required disclosures of their true financial condition
to their shareholders and/or counterparties and investors.
b. Regulator too should be transparent; it should annually disclose the
entities under its regulatory ambit and the reason for inclusion; it
should be accountable to Congress and the public; it should model
disclosure of disciplinary/enforcement actions on those of the SEC
or CFTC (not the opaque bank regulators).
Key Questions
1. How is this different than the Fed’s current authority?
The Federal Reserve Board has plenary authority over bank
holding companies and, since 2000, over financial services holding
companies. What new powers will this regulator be granted that
the Fed hadn’t held for years over existing banks, for example?
How will this new regulator exercise its authority differently than
the Fed does currently, for example?
2. What are the metrics for inclusion under this new regulator’s authority?
How will this new regulator identify and disseminate the basis
upon which one can come under the new regulators’ authority?
3. How will the regulator interact with “functional” regulators?
The current functional regulation system has proven to disastrously
poor when placed under any type of stress; cooperation and
coordination amongst regulators of diversified and complex
companies has been virtually non-existent; will this new regulator
be required to rely upon the functional regulator for examination of
various activities?
4. How will the regulator oversee or examine entities and activities for which there
is no functional regulator?
Will the new regulator assume responsibility for conduct relating
to any OTC derivatives activities, all of which from interest rate
swaps to CDOs to credit default swaps appear to fall outside the
ambit of any specific regulator? Will this new regulator have the
authority to enforce best practices in terms of disclosures to
investors in OTC products? What about unregistered hedge funds?
How will the regulator make assessments of companies for which
there is no functional regulator?
5. How will this new regulator be made accountable for its actions and inactions?
The Fed’s structure is unlike any other in government and is, other
than the US Supreme Court, perhaps the least accountable for its
behavior; it appears to be a fait accompli that this new regulator
will be housed at the Fed in Washington, but should those new
powers trigger a broader review and reform of the Fed to make its
actions more transparent and to be able to hold it accountable
commensurate with the huge economic power with which it may
be vested.
James S. Chanos
Chairman, Coalition of Private Investment Companies
March 20, 2009
