Risk & Compliance

Paulson Wants a Top Cop of Corporate Finance

Under the Treasury Secretary's proposal, the new Corporate Finance Regulator would look like a trimmed-down version of the SEC.
David KatzMarch 31, 2008

Tucked away among the five new regulators called for in U.S. Treasury Secretary Henry Paulson’s blue-sky blueprint for reforming the financial-services industry is an authority of special interest to CFOs: a Corporate Finance Regulator.

Under the long-range provisions of the U.S. Treasury’s Blueprint for Financial Regulatory Reform launched by Paulson on Monday, corporate finance executives in most kinds of companies would deal with a regulator very close to the Securities and Exchange Commission CFOs deal with today.

In the regulatory structure Paulson envisions over the long term, a Corporate Finance Regulator would hold sway over “the SEC’s current responsibilities over corporate disclosures, corporate governance, accounting and auditing oversight, and other similar issues,” according to the blueprint.

It’s seems that the Corporate Finance Regulator would be a stripped-down version of the SEC that senior finance executives know so well, however. That’s because Paulson wants to split off the SEC’s current functions as a regulator of secondary securities markets, broker dealers, exchanges, and the like. In an “intermediate term recommendation,” he proposed that the latter functions be merged with those of the Commodity Futures Trading Commission.

Besides the Corporate Finance Regulator, publicly held financial-services companies would have an added rulemaker—the Federal Reserve. The blueprint states that “given the significance of financial institutions to overall financial market stability and the importance of market discipline, enhanced public disclosures over and above the requirements applicable to other publicly traded companies would be important.”

Those added disclosures could be part of a separate section of the company’s financials or part of the company’s Management’s Discussion and Analysis, according to the blueprint, which states that the Fed should develop the plan for disclosures with the Corporate Finance Regulator.

As part of what Paulson called the “optimal financial regulatory model”—structural changes that could take years if they’re adopted at all—he proposed the appointment of three new financial-services rulemakers: “a regulator focused on market stability across the entire financial sector, a regulator focused on safety and soundness of those institutions supported by a federal guarantee, and a regulator focused on protecting consumers and investors.” Besides the Corporate Financial Regulator, he proposed that a federal insurance guarantor rule over banks covered by federal deposit insurance.

At the top of Paulson’s hierarchy, in the role of market stability regulator, is the Fed. Besides its familiar roles of installing monetary policy and supplying liquidity to banks, the Treasury Secretary wants the Fed to take on “a different, yet critically important regulatory role with broad powers focusing on the overall financial system.”

That role would be to guard against severe shocks to the financial system. In place of its more limited current role as supervisor of bank holding companies, the Fed “would have to be able to evaluate the capital, liquidity, and margin practices across the entire financial system and their potential impact on overall financial stability. The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability.”

The second top cop Paulson envisions would be a “prudential financial regulator.” In a role similar to the Office of the Comptroller of the Currency, that authority would focus “on regulation that ensures the safety and soundness of institutions with federal guarantees,” That regulator would combine all federal bank regulators into one and would operate under a single charter that combines all federal bank charters into one.

The “business conduct regulator” would be responsible for “vigorously” protecting consumers and investors, and achieving greater consistency among financial lines. The regulator “would assume many of the roles of the CFTC, the SEC, and the consumer protection and enforcement roles of our insurance and banking regulators,” Paulson said.

Further, in the not-too-distant future, the Treasury Secretary hopes to offer property-casualty and life insurance companies the option of being governed under a Federal Insurance Charter rather than under the current state regulatory system. The optional charter plan, which has been discussed in Congress for years, would provide big insurers with the chance to offer products nationally without the encumbrance of having to comply with 50 different sets of rules.