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StrategyDriven Podcast Series

StrategyDriven Editorial Perspective – Expanding Uncertainty in the U.S. Financial Sector, part 3

Major changes in any established regulation cause great uncertainty and the recent revisions made to the financial industry’s governance are no exception. Indeed, the law firm of Davis Polk & Wardwell estimates that 243 new rules will be developed by 11 different government agencies as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.1 What is misleading, however, is the notion that the act focuses only on the financial services industry. In reality, this ‘financial reform’ represents a Washington power grab that extends far beyond the confines of Wall Street and will undoubtedly affect almost all Americans.

StrategyDriven questions whether these intrusions into non-financial sector areas will really help prevent future meltdowns like that which took place in 2008. The fact that other sectors are included simply broadens the span of government control and scope of market uncertainty which will further hinder economic recovery and growth as these other sectors must now also come to grips with the regulatory changes; changes that are not likely to be defined for years to come.

Service Providers

While StrategyDriven has already spoken out against the quota system enacted under Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we have not yet discussed the breadth of organizations covered by this rule. Under this provision, Congress and the President extended the regulation not only to financial institutions but to the many organizations providing services to these institutions. Service organizations named within this section of the regulation include accountants and providers of legal services.2

The Dodd-Frank Wall Street Reform and Consumer Protection Act also increases the legal liability of service providers; assigning them vicarious liability for the legal wrongdoings of their regulated financial institution customers. Specifically, the act:

  • imposes vicarious liability on any service provider processing consumer financial transactions as ‘aiders and abettors’ for operational support in some cases
  • encourages employees of shared service centers and outsourcers to file claims of violation so that they can reap a bounty in an enforcement case
  • makes mere ‘recklessness’ the equivalent of a ‘knowing’ violation of 1) the Securities and Exchange Act of 1934, 2) the Investment Company Act, and 3) the Investment Advisers Act of 1940
  • extends the extraterritorial jurisdiction of U.S. courts in enforcement of U.S. securities laws3

Non-Depository Institutions

In its attempt to be all inclusive in financial matters, Congress and the President provided the Bureau of Consumer Financial Protection regulatory authority over non-depository organizations such as payday lenders, debt collectors, and consumer reporting agencies. In these cases, the Bureau is provided the authority to prevent unfair, deceptive, or abusive acts or practices although the Dodd-Frank Act is vague about what this actually means. The Bureau also has the authority to “require reports, conduct examinations, require certain record-keeping requirements, prescribe other rules to ensure that such entities are legitimate entities and are able to perform their obligations to consumers.”4

It is of particular interest to note that several non-depository institutions and activities having at least an equally significant financial impact to consumers were expressly excluded from this regulatory oversight including real estate brokerage activities, accountants, and tax preparers.5

Publicly Traded Companies

Congress and the President reached far beyond the financial sector with the executive compensation regulations contained within the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many of these provisions appear to continue the Obama Administration’s challenge to the fairness of executive compensation. New rules regarding executive compensation include:

  • Say-on-Pay
  • Compensation Committee Adviser Independence
  • Compensation Committee Member Independence
  • Pay Disparity Disclosure
  • Pay versus Performance
  • Clawback6

It goes without saying that greater transparency contributes to greater accountability and that is a good thing. However, StrategyDriven questions whether employees in general or members of Congress and the President would themselves be willing to be held to these standards; particularly the say-on-pay, pay versus performance, and clawback provisions. It is also worth noting that no provisions of the Dodd-Frank Act directly address the awarding of large ‘golden parachute’ payouts to failed executives upon their departure.

StrategyDriven Recommended Practices

The significant marketplace uncertainty created by the Dodd-Frank Wall Street Reform and Consumer Protection Act will not end anytime soon – the need to define 243 new rules will see to that. It is clear the impact of this law extends well beyond the boundaries of Wall Street and that it is important for all company leaders to understand how their organization may be affected. In addition to our previously recommended actions, StrategyDriven suggests organization leaders:

  • Assess the new and heightened liabilities and administrative costs associated with their financial industry work against the rewards resulting from this work, particularly if they are service providers to the financial services industry; making adjustments to their businesses as appropriate.
  • Consider how the new executive compensation provisions will impact the organization’s ability to attract and retain top executive talent.
  • Evaluate the need to adjust the compensation structure of the entire executive team and potentially that of all employees in order to maintain overall equity and balance given the new executive compensation rules.

Final Thoughts…

While the purpose of this editorial was to focus on the non-financial sector institutions included in the so-called ‘financial reform’ act we would be remiss for not identifying the unconscionable absence of Fannie Mae and Freddie Mac from this legislation. These two institutions played such a significant role in the financial collapse of 2008 that it is unreasonable to think Washington politicians wouldn’t conclude that some change in the regulation of these mortgage giants was needed. The fact that payday lenders and debt collectors are included in the Dodd-Frank Act and Fannie and Freddie excluded from meaningful regulatory change (Fannie and Freddie received two minor mentions in the 1,500 page Dodd-Frank Act)7 suggests Congress and the President are either not serious about preventing a future financial system meltdown or had their interests better served by the omission. Either way, the American public lost in this deal – $135 billion in outstanding debt to the American taxpayer as of this editorial’s publication.8

In the coming editions of the StrategyDriven Editorial Perspective, we’ll look at the potential impacts of several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act including:

  • impacts of ‘too large to fail’ provisions on market risk
  • proportionately larger burden of the new law on small companies

As always, we’ll provide our thoughts on how business leaders can best prepare for the implementation of the financial reform law and weather the storm in the long-term. We also hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Enacted into Law on July 21, 2010,” Davis Polk & Wardwell LLP, July 21, 2010 (http://www.davispolk.com/files/Publication/efb94428-9911-4472-b5dd-006e9c6185bb/Presentation/PublicationAttachment/efd835f6-2014-4a48-832d-00aa2a4e3fdd/070910_Financial_Reform_Summary.pdf)
  2. “Racial quotas as financial services reform?,” Horace Cooper, The Washington Times, July 15, 2010 (http://www.washingtontimes.com/blog/watercooler/2010/jul/15/racial-quotas-financial-services-reform/)
  3. “Dodd-Frank Financial Reform: New “Systemic Risks” for the BPO Industry,” Bierce & Kenerson, P.C., Outsourcing Law, July 30, 2010 (http://www.outsourcing-law.com/2010/07/dodd-frank-new-risks-for-bpo/)
  4. “Dodd-Frank Wall Street Reform and Consumer Protection Act – Scope of Coverage of the Bureau of Consumer Financial Protection,” Kilpatrick Stockton LLP, August 6, 2010 (http://www.kilpatrickstockton.com/en/Knowledge%20Center/Alerts%20and%20Podcasts/Legal%20Alerts/2010/08/Dodd%20Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act%20Scope%20of%20Coverage.aspx)
  5. ibid
  6. “Some Dodd-Frank Executive Compensation Action Items,” Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, The Harvard Law School Forum on Corporate Governance and Financial Regulation, August 12, 2010 (http://blogs.law.harvard.edu/corpgov/2010/08/12/some-dodd-frank-executive-compensation-action-items/)
  7. “Housing Policy’s Third Rail,” Gretchen Morgenson, The New York Times, August 7, 2010 (http://www.nytimes.com/2010/08/08/business/08gret.html?_r=1)
  8. “Bailout Recipients,” ProPublica, August 22, 2010 (http://bailout.propublica.org/list/index)
StrategyDriven Podcast Series

StrategyDriven Editorial Perspective – Expanding Uncertainty in the U.S. Financial Sector, part 2

Common sense suggests that individuals and organizations would only seek to borrow or be lent money that they could with reasonable assurance repay. In the wake of the housing market crash of 2008, we learned that financial institutions frequently provided mortgage loans to those they knew could not afford to repay them. Common sense certainly did not prevail and, in this case, contributed to the devastating economic conditions we now face.

Armed with this knowledge and experience, reasonable people would seek to avoid creating conditions that could lead the recurrence of such reckless lending and place at risk our entire financial system and economy. Indeed, only a little common sense is required. It would appear, though, that common sense is in short supply in Washington D.C.

Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act sign into law on July 21, 2010 by President Obama directs Federal regulators to allocate credit by race and gender rather than on a systematic evaluation of risk and financial soundness.1,2,3 Race and gender are simply not financial qualifiers. Thus, this dubious approach to lending will either result in the loan applications of qualified non-covered individuals being rejected or the extension of funds to covered individuals who cannot afford to repay the loans. The credit market will subsequently become too tight, stifling economic growth or too loose, creating a similar set of circumstances that caused the financial meltdown this legislation is intended to prevent.

StrategyDriven Recommended Practices

The significant marketplace uncertainty created by the Dodd-Frank Wall Street Reform and Consumer Protection Act will not end anytime soon. It is clear that the law itself will create conditions that threaten the future stability of the U.S. financial markets. In addition to our previously recommended actions, StrategyDriven suggests organization leaders:

  • Monitor the market for indications of continued, extensive sub-prime lending and the use of other potentially new financial vehicles that provide individuals and companies with funds they cannot afford to repay.
  • Critically assess your organization’s financial standing and the risk involved with projects and ongoing operations; limiting borrowing to that which is reasonably prudent.
  • Be mindful of your organization’s portfolio of liabilities – lines of credits from suppliers, loans from financial institutions, bonds issued to stakeholders – when evaluating your company’s financial standing and the prudency of expanding is overall liabilities.
  • Honestly evaluate your customer’s ability to repay loans or lines of credit so to not place them and your company in a position of excessive financial risk.
  • Provide employees with financial advisory services benefits so to help them understand how to borrow responsibly.

Final Thoughts…

We cannot leave this topic without first addressing the issues of discrimination the Dodd-Frank Wall Street Reform and Consumer Protection Act creates. In a letter to Senate leaders, several members of the United States Commission on Civil Rights cite their belief that “the likelihood [this act] will in fact promote discrimination is overwhelming.” 4 And we at agree. Directing the establishment and reinforcement of quotas based on race and gender runs counter to our nation’s founding principle that all people are created equal. It puts in place a system by which people are judged based on their race and gender rather than on their capabilities, achievements, and the quality of their character.


“It would be unadvised to attempt to set up any one race above another, or one religion above another, or prescribe any on account of race, color or creed.” 5
 
Frederick Douglass
Our Composite Nationality
delivered December 7, 1869
Boston, Massachusetts


StrategyDriven believes only those societies and businesses embracing diversity and inclusion will realize great success. It is our assertion that all leaders should support the behaviors, systems, and policies that promote greater diversity and inclusion within society and its member organizations. In our opinion, quotas do not serve to promote diversity and inclusion but rather serve to create discrimination and divisiveness. It is simply not humanly possible to divine a quota that ensures all individuals will be treated equally according to his or her abilities, achievements, and character. Quotas therefore establish conditions where individuals from either the covered or non-covered class are not afforded equal opportunities which itself is discriminatory and engenders a resentment within those so discriminated that promotes a divisive environment. Thus, we believe Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act will serve to further divide our nation and our business community rather than ensure the fair inclusion of all individuals in the financial markets as was intended.

Again, StrategyDriven strongly believes in the power and strength of a diverse and inclusive marketplace and is committed to furthering its promotion. We hope you’ll take time to read our many Diversity and Inclusion articles to better understand what it means to be a truly diverse and inclusive business and promote such practices within your organization.

In the coming editions of the StrategyDriven Editorial Perspective, we’ll look at the potential impacts of several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act including:

  • extension of government control beyond direct players in the financial market
  • impacts of ‘too large to fail’ provisions on market risk
  • proportionately larger burden of the new law on small companies

As always, we’ll provide our thoughts on how business leaders can best prepare for the implementation of the financial reform law and weather the storm in the long-term. We also hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “Politicizing the Fed: Congress seeks more control over the 12 regional banks,” The Wall Street Journal, June 14, 2010 (http://online.wsj.com/article/SB10001424052748704575304575297130299281828.html)
  2. “Racial quotas as financial services reform?,” Horace Cooper, The Washington Times, July 15, 2010 (http://www.washingtontimes.com/blog/watercooler/2010/jul/15/racial-quotas-financial-services-reform/)
  3. “Race, Sex, and the Dodd-Frank Financial Regulation Bill,” Roger Clegg, The Federalist Society, July 12, 2010 (http://www.fed-soc.org/publications/pubid.1912/pub_detail.asp)
  4. “U.S. Commission on Civil Rights demands changes to Democrats’ financial reform bill,” Caroline May, The Daily Caller, July 14, 2010 (http://dailycaller.com/2010/07/14/u-s-commission-on-civil-rights-demands-changes-to-democrats-financial-reform-bill/)
  5. “Our Composite Nationality,” Frederick Douglass, TeachingAmericanHistory.org, December 7, 1869 (http://teachingamericanhistory.org/library/index.asp?document=2464)