Calls have already come from the Treasury Department for some regulator to step up the oversight of investment banks to prevent another Bear Stearns-like fiasco. Now the Securities and Exchange Commission says it is just the agency to do so.
SEC officials fired off a series of remarks last week to that end, saying that the Commission has already begun changing its standards for measuring the adequacy of investment banks’ liquidity—and that it would do much more if regulatory reform goes its way.
Cox
The SEC or another regulator “must be given express authority to supervise the nation’s investment banks on a consolidated basis,” Chairman Christopher Cox said at a May 7 speech at the Security Traders Annual Conference. That same day, Erik Sirri, the SEC’s top regulator for trading and markets, jousted with Senate lawmakers over what the SEC could, and should, have done to prevent the Bear Stearns collapse in March.
Currently, no regulator in the federal government has explicit authority and responsibility for the supervision of investment bank holding companies with bank affiliates. The SEC relies on its authority under the Securities Exchange Act to determine net capital rules for the regulated broker-dealer subsidiaries of investment banks through its voluntary Consolidated Supervised Entities program.
Cox and Sirri said that Bear Stearns marked the first time a major investment bank that was “well-capitalized and amply liquid” experienced a crisis of confidence that resulted in a loss of financing, even though Bear was able to provide high-quality collateral that had a market value that exceeded the amount to be borrowed.
Cox said the legal concept in the Gramm-Leach-Bliley Act that investment banks should be able to operate outside of a statutory consolidated supervision regime “is no longer tenable in the wake of Bear Stearns. It is impossible for anyone to say that in this case, ‘The system worked.’”
Since the Bear Stearns meltdown, Cox said, the SEC is retooling the standards for measuring liquidity levels. It is also working with the Basel Committee on extending the existing capital adequacy standards to deal explicitly with liquidity risk.
The SEC has strengthened the liquidity requirements for banks in the Consolidated Supervised Entities program and is considering whether to lengthen the average term of secured and unsecured funding arrangements. The Commission is obtaining funding and liquidity information for all participating banks daily and is reviewing the amount of excess secured funding capacity for less-liquid positions.
Banks in the CSE program will begin public disclosure of their capital ratios computed under the Basel Standard later this year and phase in additional disclosure related to concentration of exposures after that. The Trading & Markets Division is also talking with banks about longer-term funding plans, including plans for raising new capital by accessing the equity and long-term debt markets.
Still, Cox said the statutory “no-man’s land” that continues nine years after the Gramm-Leach-Bliley Act “should not be tolerated indefinitely.” The SEC or another regulator “must be given the express authority, and a regime appropriately tailored to securities firms, to supervise the nation’s investment banks on a consolidated basis.”
While the Federal Reserve extended temporary access to its Primary Dealer’s Credit Facility to Bear Stearns and the other major investment banks, Sirri told a Senate sub-committee that “it remains for Congress to determine whether to provide more predictable access to an external liquidity provider and to harmonize any such measures with other aspects of the existing statutory scheme.”
Sirri
Sirri said the SEC is in talks with the Federal Reserve Bank of New York about the financial and liquidity positions of investment banks and issues related to use of the Primary Dealer’s Credit Facility. In addition, he said, the SEC and the Federal Reserve Board are developing a formal Memorandum of Understanding to provide a scope and mechanism for information sharing related to the PDCF and other areas of overlapping supervisory interest.
Chairman Cox has also requested dedicated funding and an expansion in staff for the Consolidated Supervised Entities program.
No Change on NYSE View of Broker Voting
While a controversial New York Stock Exchange rule proposal that would abolish so-called broker voting in uncontested director elections continues to languish at the Securities and Exchange Commission, the exchange’s Proxy Working Group is monitoring the use of proportional, or “mirror” voting, by some brokerage firms this proxy season.
Recently, governance newsletter Global Proxy Watch reported that the PWG “is mulling retracting straight abolition and permitting an alternative dubbed mirror voting,” which would have brokers cast uninstructed ballots in proportion to those cast by others. But the working group’s chairman, Larry Sonsini of the law firm Wilson Sonsini Goodrich & Rosati says that’s not the case.
Sonsini
“We haven’t changed our recommendation and neither has the NYSE board,” Sonsini tells Compliance Week. “The proposed rule amendment is still with the SEC … which is looking at it more in total picture of the effect on all shareholder communications.”
Sonsini tells Compliance Week the PWG’s current position “is to monitor the use of proportional voting this proxy season and wait for the SEC with respect to the proposed rule.” He says the group doesn’t currently plan to issue any recommendations on proportional voting, which he says “has some interesting aspects, but it also has some shortfalls.”
Sonsini says his group isn’t backing away from its recommendation for amending Rule 452. That rule allows brokers to cast ballots on routine matters—including uncontested director elections—for owners who don’t provide voting instructions by 10 days before an annual meeting.
Since brokers typically vote in favor of whatever companies recommend, governance activists denounce the practice as legal ballot stuffing. Business groups say eliminating broker voting in uncontested director elections would make it difficult for small and mid-size companies to make quorum for their annual meetings.
The NYSE filed a proposal in 2006 to amend Rule 452 so that brokers could not vote in director elections, and later revised it to exempt director elections for mutual fund companies. The exchange hoped to have a final rule in place for the 2008 proxy season. The proposal stalled at the SEC, however, amid an effort to revamp the entire system of proxy rules.
That effort has gone nowhere lately, as the Commission is under-manned. Chairman Christopher Cox has promised to revisit the issue as soon as the agency has a full complement of commissioners. The names of three new nominees—two Democratic and one Republican—are awaiting Senate confirmation.
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