March 31, 2008
The Big Reorg
Posted by David Zaring

Can Treasury really reorganize American oversight comprehensively - and extend supervision to investment banks and maybe even hedge funds?  Here is the report, and here's the text of Paulson's speech.  Also with great early reactions, here's Larry Ribstein and Elizabeth Nowicki.  Below, I go through the proposal point by point from an administrative law perspective, with every qualification about the quick and cursory nature of this analysis applicable.

Although, as we will see below, Treasury will need legislation to do most of what it wants to do, it has also requested comments on its blueprint in the Federal Register, much as it might for any advanced notice of proposed rulemaking.

If the more unified financial regulator is supposed to be based on the so-called "President's Working Group," formalizing that institution and maybe building on its domestic responsbilities (it was created to engage in international regulatory cooperation thought the Financial Stability Forum) is administratively easy. Paulson says: "We should formalize the current informal coordinating practice among the US regulatory community by amending and enhancing the Executive Order which created the PWG."  And executive orders are not reviewable by federal courts.

What about the so-called Mortgage Original Commission?  Paulson: "This commission, the MOC, would be led by a director appointed by the President. The Commission membership would include federal banking regulators and appropriate state representation."  That is an exceedingly odd administrative structure (though there's nothing illegal about it, probably, the DC area transit authority is composed of state and federal officials).  It will take legislation.

Paulson: "we recommend the creation of a federal charter for systemically important payment and settlement systems and that these systems should be overseen by the Federal Reserve."  That's new, will take legislation, and is a real expansion of the Fed's supervisory power.

Merging the CFTC and SEC will of course take legislation, but note Paulson's European view on rules v. standards: "The market benefits achieved in the futures area should be preserved and we do not want to lose the CFTC's principle-based process for market exchange oversight."  Translation: I don't want this to be an SEC takeover, because even if American exchanges are losing listings after SOX, the futures markets are doing great.  The blueprint has a number of other suggestions for the SEC, including one deregulatory one that could be done by rulemaking: generally exempting "Exchange Trading Funds" from SEC oversight.  Treasury is worried that US mutual funds are not competitive: "Treasury also notes the inability of the U.S. fund industry to market successfully on a global basis shares of U.S. registered investment companies because of a variety of issues, including [] tax..... This limits investor choice and the growth and competitiveness of the U.S. fund industry."

Oddly, the states regulate insurers - which in other countries are the biggest and most sophisticated financial institutions around.  Insurers hate having 50 state rules.  But surely this administration's commitment to federalism will mean that Paulson wouldn't ... oh: "There have been numerous attempts to modernize the regulatory structure for insurance. At this time, it seems clear that the way forward is to give insurers the ability to elect for federal regulation."  Legislation required.  I think a lot of people think this reform is overdue, but check out Larry Ribstein's "state competition leads to races to the top" view: "In brief, our proposal is based on corporate-type jurisdictional choice ... with modifications that recognize the greater demand for consumer protection in the insurance context."

What about the end of independent S&L regulation? "With the elimination of the federal thrift charter, the OTS would be closed and its operations would be assumed by the OCC."  That will require legislation, but note that it would be legislation reorganizing and combining two offices in the Treasury Department, which you'd think would be the sort of thing to which Congress might defer to the Secretary.

Okay, this post is long already.  That's an overview, anyway. 

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