An “investors’ working group” co-chaired by former Securities and Exchange Commission heads William Donaldson and Arthur Levitt Jr. has called for new Financial Accounting Standards Board rules on off-balance-sheet transactions and securitizations to be implemented “without delay.”

Without elaborating on the standards, it urged FASB to resist efforts to weaken accounting in those areas. In May, FASB decided to require companies to disclose more about how they consolidate variable-interest entities and classify the transfer of financial assets as a sale. Later, the board  issued a standard in June that eliminated qualifying special-purpose entities.

The investors’ group also said sponsors should fully disclose the maximum potential loss arising from exposure to off-balance-sheet asset-backed securities and be required to maintain “a meaningful residual interest in their securitized products.”

In a stark mea culpa at a press conference on Wednesday, Levitt also rued the SEC’s inaction on the regulation of derivatives trading. “Clearly we should have called for a clearinghouse in 1994,” Levitt said when asked about the history of derivatives markets. “It’s one of the great regrets of my years in Washington.

“Standardized derivatives should trade on regulated exchanges and be cleared centrally, according to the investors’ working group, because central clearing alone would not provide the price discovery, transparency, and regulatory oversight that exchange trading would.

Only truly customized derivatives contracts between “highly sophisticated” counterparties would be traded over the counter. At least one of the parties would have to certify and be prepared to demonstrate that it is entering the contract to hedge actual business risks. The SEC and the Commodity Futures Trading Commission would oversee the changes. “It’s imperative that the SEC and the CFTC get together on the areas of responsibility [for each agency], and that should be validated by Congress,” Donaldson said.

At the same time, the group is calling for the Obama administration to slow the pace of regulatory changes to the U.S. banking system and to widen the scope of any reform efforts. A 28-page report issued by the group on Wednesday calls the Obama administration’s regulatory reform plan “a start,” but says a bolder set of measures to strengthen investor and consumer protections and check systemic risks to the financial system is needed.

The group’s recommendations take a more aggressive stance on several fronts, including regulation of over-the-counter derivatives; holding credit- rating agencies to standards of accountability; overseeing systemic risk; and granting investors a wider role in corporate governance.

At a press conference on Wednesday, Donaldson and Levitt took pains not to criticize the Obama administration’s proposals. But they did indicate that more debate and investigation was needed. The [desire] we have to act immediately is a mistake,” Donaldson said, adding that action should await the finding of the Congressional Financial Crisis Inquiry Commission. “This is not to say certain pieces couldn’t be done right now. But to have a total moving of the deck chairs would be premature.”

Echoed Levitt: “We never really adequately defined the problem. We have concerns about moving pell-mell into new regulations without understanding what brought us to this point.”

The Financial Crisis Inquiry Commission is a 10-member panel modeled on the bipartisan commission that investigated the Sept. 11, 2001, terrorist attacks, and chaired by former California state treasurer Phil Angelides. The commission’s report is not due until December 2010, but Angelides has said that the administration and Congress should not wait for the report before moving ahead with a regulatory revamping of banking.

The investors’ group’s greatest differences with the Obama administration and other reform proposals are in the area of systemic risk oversight of financial services. Endowing the Federal Reserve with the powers of systemic risk regulation – as the administration has proposed — would be a mistake, the group says, giving too much power to “an agency whose credibility has been damaged by its own part in the financial cataclysm.” It would also “heap too much responsibility on the Fed’s already full plate.” The group also opposes the President’s plan for a hybrid advisory council that would consist of the heads of key financial regulators, claiming it would be ineffectual.

Instead, the group proposes creating an independent watchdog called the Systemic Risk Oversight Board, which would be appointed by the president and have a full-time staff, none of which have connections to governmental agencies or financial institutions. The board would collect and analyze information on exposures, practices and products of financial institutions and recommend steps that existing regulators should take to reduce systemic risks. The SROB could, but would not necessarily, evolve into becoming a full-fledged regulatory agency.

 Donaldson conceded that “the systemic risk area is one we need immediate action on.”

The group’s report also calls for Congress and the administration to wean nationally recognized statistical rating organizations off the “issuer-pays” business model and make them more accountable for “sloppy performance.” Proposals include having fees earned by NRSROs vest for of a period of time equal to the average duration of the bonds and basing fees on the performance of the original ratings and changes to those ratings over time; requiring NRSROs to create an executive-level compliance officer position to consistently disclose conflicts of interest; and eliminating the effective exemption from liability provided to credit-rating agencies under the Securities Act of 1933. 

As a proponent of “shareowner-driven market discipline,” the group reiterated investor calls for changes to the election of directors, the right of shareholders to place director nominees on a company’s proxy, and giving shareowners an annual advisory vote on executive compensation.

 It also called for stock exchanges to adopt listing standards around the ties between compensation consultants and management. These consultants should minimize and disclose when they are providing other services to management, such as benefits administration, that lead to conflicts of interest and “contribute to a ratcheting-up effect for executive pay.”

 In addition, federal clawback provisions on executive pay need to be strengthened, the group’s report said. In particular, the group said that while the Sarbanes-Oxley Act of 2002 allows boards to go after unearned CEO income, the act’s language is too narrow. “It applies only in cases where misconduct is proven — which occurs rarely because most cases result in settlements where charges are neither admitted nor denied — and only covers CEO and CFO compensation.”

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