Cindy Williams writes: The interests of long-term investors such as pension funds can be advanced by regulation that reduces the misalignment between companies and their investors, and within the investment chain. My view on the latest U.S. regulatory developments is that much is yet to be done to reach this goal.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. The Bill only partially addresses a number of the major issues for reform:
- Dodd Frank requires regulations to be written to prohibit pay arrangements that encourage inappropriate risk-taking amongst employees, directors or principal shareholders of financial institutions with assets over $ 1 billion. Which agencies are to develop these regulations? The SEC, the Federal Reserve, the OCC, the FDIC, among others. I don’t need to be a cynic to predict that lobbyists will print money and that the status quo will be tweaked at best.
- Dodd-Frank seeks increased transparency and improved clearing requirements for derivatives transactions. Regulatory authority is still split between agencies, though, a situation that has led to regulatory arbitrage and jurisdictional turf battles in the past. The Bill promotes central clearing only for derivatives transactions that use “standard contracts”. This could leave a wide swath of transactions not being centrally cleared. Given the size of the global derivatives market--$ 615 trillion notional value at last count—this gap is of concern.
- Dodd-Frank tries to address the moral hazard of financial institutions that are too big to fail. Certain non-bank financial companies and bank holding company with assets over $ 50 billion will be designated “systematically important”, and subjected to enhanced prudential standards. These include more stringent risk-based capital, leverage and liquidity requirements. These are promising developments that might help address the risk of future booms and busts exacerbated by the shadow banking system. I agree with those commentators who are concerned that even with new resolution authority in the Federal Deposit Insurance Corporation (FDIC), though, institutions that are too big to fail are too big to exist.
Excess leverage, tax incentives privileging debt over equity, speculative commodities investments raising the price of food—these are only some of the issues that haven’t even been raised in this Bill. I hope for regulatory structures that do more than solve last year’s problems, and that provide incentives to better connect financial markets to long-term economic innovation. Long-term investors could—and should--help to put such issues back on the world’s regulatory agenda.
Cindy Williams is a Professor of Law at the University of Illinois College of Law.
This article is part of our NSFM opinion series, in which participants propose specific steps towards real and sustainable market reform. Contributors write in a personal capacity. NSFM participants are invited to contribute to the series. Please contact Ebba Schmidt or Frank Jan de Graaf for further information.