Issues Raised and Points of Contention Regarding Obama Regulatory Reform Plan

By W. Bernard Mason

The following are issues that have been or are anticipated to be raised and debated in the course of considering enactment of the Administration's regulatory reform proposals:

• The primary area of contention is assigning responsibility for systemic risk oversight. The Administration proposes the Federal Reserve assume this role, with oversight from a new Financial Services Oversight Council. Opponents argue the Fed will gain too much responsibility (may diminish Fed attention to other important matters such as monetary policy; also, the perception is the Fed failed in its regulatory responsibilities leading up to the crisis).
• Strong resistance could be offered to the proposal to separate consumer protection regulation from prudential supervision. Both the banking industry and federal banking agencies have raised objections to the proposal, arguing the two responsibilities are interconnected and would be weakened, disjointed, and less efficient if separated.
• Systemic resolution authority infrastructure and funding could be challenged as being an unfair cost and burden to healthy "Tier 1" holding companies.
• Requiring Treasury approval prior to the Federal Reserve pursuing action under its "systemic risk" authority could be viewed as political intervention in the regulatory process.
• Requiring hedge funds to register with the SEC could encounter resistance due to arguments that such entities played no role in the current crisis, and that hedge fund investors are financially sophisticated and need no assistance or oversight from the federal government.
• The plan to establish the Office of National Insurance could encounter criticism from a deeply divided insurance industry - some seeking a single federal insurance regulator and others opposing any federal oversight of the insurance industry.
• Proposal for comprehensive regulation of all derivatives could be viewed as insufficient; the proposal calls for trading of OTC derivatives through clearinghouses, but some argue for more stringent oversight by requiring trading through official exchanges.
• Proposals for credit rating agency reforms could be viewed as insufficient; opponents will argue that ratings agencies should be held more accountable for their decisions, since their actions were a primary factor in the current crisis.