Posted on 11/08/2009 6:02:40 AM PST by Born Conservative
U.S. Rep. Paul E. Kanjorski, D-11, Nanticoke, wants to reform the regulatory structure of the U.S. financial services industry.
So he has introduced four pieces of legislation that would reform credit-rating agencies, protect investors, address private funds - such as hedge funds and private equity, which were unregulated in the past - and create a federal insurance office.
Mr. Kanjorski, chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, is also the second-ranking member of the House Financial Services Committee.
Credit-rating agency
Mr. Kanjorski said he introduced the credit-rating agency legislation because of the role they played in the current financial crisis and because a good portion of the financial services industry is not regulated. That lack of regulation, Mr. Kanjorski said, led to the financial meltdown last fall that led to the recession.
"When a bond or security is put on the market, the brokerage house has to hire an agency to rate it," Mr. Kanjorski explained. "These rating agencies gave ratings that were not legitimate."
The incorrect ratings led to customers buying stocks and bonds at highly inflated prices.
"Who pays the price? The users," Mr. Kanjorski said. "These credit-rating agencies are paid by the issuers. The more bonds they could sell, the more money they would make. If the agency gives a high rating, it makes the instrument easier to sell. The large brokerage houses make more money if the bond is legitimate."
These agencies further used the same faulty assumption as so many others, he said, that real estate prices would never go down.
The legislation would affect entities such as Moody's and Standard and Poor's - the agencies that rate financial companies - not Experian, one of three firms that does credit rating of individuals.
Credit rating agencies play an integral role in our markets, Mr. Kanjorski said. Even though they operate as independent firms, they hold quasi-regulatory powers. Investors around the world also heed their words.
"But it's a conflict of interest," he said. "It's like the home team paying the refs, or the winning attorneys paying the judge and jury."
To correct these problems, Mr. Kanjorski said his legislation would achieve a balance between improving the regulatory oversight of credit rating agencies, while also creating incentives for investors to recognize that "caveat emptor" is still the ultimate rule for any financial transaction.
Under the reforms, rating agencies will remain independent. The SEC will not rule on the methods used for determining ratings, but it will ensure that rating agencies follow their internal procedures. The changes additionally require new duties for compliance officers at each rating agency to monitor and manage the many conflicts of interest inherent in this industry.
This summer, the Obama Administration released what Mr. Kanjorski considers a promising proposal to reform rating agency regulation. Mr. Kanjorski incorporated several provisions from that document into his discussion draft, including reforms aimed at enhancing the oversight of the rating agencies by the Securities and Exchange Commission and requiring new disclosures about how issuers pay rating agencies.
To get at the conflicts of interest created by the issuer-pays model, Mr. Kanjorski has also proposed a new idea: Making the rating agencies responsible for each others' ratings through collective liability.
"We can promote accountability in credit ratings through the threat of liability," he said. "We have increased the liability, and created the need for due diligence."
This reform will hopefully motivate the respective rating agencies to police one another and release reliable, high quality ratings. Mr. Kanjorski's legislation also includes other new reforms, such as the establishment of boards with independent directors.
Other legislation
Mr. Kanjorski has also drafted three other pieces of legislation aimed at tackling key parts of reforming the regulatory structure of the U.S. financial services industry: The Investor Protection Act, the Private Fund Investment Advisers Registration Act and the Federal Insurance Office Act.
The congressman says he has revised and significantly enhanced the Investor Protection Act and the Private Fund Investment Advisers Registration Act proposed by the Obama Administration this summer. Many of the shortcomings and loopholes laid bare by the current financial crisis will be addressed in them, he said.
The Investor Protection Act will better protect investors and increase the funding and enforcement powers of the US Securities and Exchange Commission (SEC).
"We will examine the SEC," Mr. Kanjorski said. "A very large, all-encompassing study of the SEC's existing programs will be done, which will reconstitute a cleanup of errors in the agency for the last 25 years. "
The reforms are aimed at preventing situations like the Bernard Madoff Ponzi scheme from happening again. Mr. Madoff, financier and chairman of the NASDAQ Stock Exchange, admitted to turning his wealth management business into a Ponzi scheme, and defrauded thousands of investors of millions of dollars.
"Madoff sparked complaints for 15 years, but they never got over the third level of the SEC, and there are 10 levels," Mr. Kanjorski said.
The Private Fund Investment Advisers Registration Act will force many more financial providers to register with the SEC.
Mr. Kanjorski said many financial firms skirt government oversight and get away like bandits, but now the advisers to hedge funds, private equity firms and other private pools of capital would become subject to more scrutiny by the SEC.
"About 56 percent of the institutions and entities who lost on Wall Street were not regulated by any body," Mr. Kanjorski said. "Everybody was registered and identified in the 1930s."
Earlier this year, Mr. Kanjorski introduced bipartisan legislation to create a federal insurance office, which was backed by the Obama Administration and included in its proposals for financial services regulatory reform.
Mr. Kanjorski said this legislation would "fill a gap" in the federal government's knowledge base on financial activities.
"Insurance companies protect more assets than banks," he said. "They are totally regulated by the states, but the federal government has no regulation."
The lack of regulation of insurance entities led to one of the most devastating situations from the recent financial crisis.
"AIG Insurance had a little office in London that sold financial products," Mr. Kanjorski said. "That little office caused a deficit of $2.8 trillion Our government had to pump in $200 million to prevent a total collapse of the economics of America and Europe. That one, little company had 400 people - but no regulator."
Obama, SEC recommendations
Mr. Kanjorski said he introduced the four pieces of legislation based on recommendations made by the Obama Administration and chairman of the Securities and Exchange Commission (SEC), Mary Schapiro.
"Chairman Schapiro made 42 legislative recommendations, which the congressman was pleased to receive," said John Nester, a spokesman for the SEC. "She asked for an increase in funding, because the number of securities professionals and firms the SEC is charged to regulate is far more than the SEC budget."
The SEC is responsible to oversee 30,000 entities and 1,000 investment advisers, which represent a 32 percent increase over the last four years, Ms. Schapiro said. She also said there are 8,000 mutual funds containing $9 trillion in assets, 3,000 broker-dealers and 170,000 branch offices, which is 67 percent more than 2005 - over two-thirds. Also, add in 11,700 public companies that have to be overseen.
At the same time, Ms. Schapiro said the SEC has "experienced three years of flat or declining budgets, which have forced a 10 percent cut in the SEC workforce, and a significant reduction in the agency's investment in new systems."
Contact the writer: jdino@standardspeaker.com
At a glance
U.S. Rep. Paul E. Kanjorski, D-11, Nanticoke, has introduced legislation to restructure and better regulate aspects of the U.S. financial services industry. Here are some of highlights of his bills:
Investor Protection Act
- Protecting investors and righting wrongs. The financial crisis exposed the perils of deregulation. The Investor Protection Act will right these wrongs by reforming the Securities and Exchange Commission to strengthen its powers, better protect investors, and efficiently and effectively regulate our securities markets.
- Comprehensive securities review and reorganization. The failures to detect the Bernard Madoff and R. Allen Stanford financial frauds demonstrate deep deficiencies in the existing securities regulatory structure. An expeditious, independent, comprehensive study of the entire securities industry by a high-caliber body will identify reforms and force the SEC and other entities to put in place further improvements designed to ensure superior investor protection.
- Enhanced SEC enforcement powers and funding. By doubling the authorized funding for the SEC over five years and providing dozens of new enforcement powers and regulatory authorities, the SEC will be able to enhance its enforcement programs and gain the tools needed to better protect investors and police today's markets.
- Fiduciary duty. Every financial intermediary who provides advice will have a fiduciary duty toward their customers. Through a harmonized standard, broker-dealers and investment advisers will have to put customers' interests first.
- Whistle-blower bounties. A whistle-blower bounty program will create incentives to identify wrongdoing in our securities markets and reward individuals whose tips lead to successful enforcement actions. With a bounty program, there will effectively be more cops on the beat in securities markets.
- Ending mandatory arbitration. Because mandatory arbitration has limited the ability of defrauded investors to seek redress, the SEC will gain the power to bar these clauses in customer contracts.
- Closing loopholes and fixing faulty laws. The Bernanrd Madoff fraud revealed that the Public Company Accounting Oversight Board lacked the powers it needed to examine the auditors of broker-dealers. The $65 billion Ponzi scheme also exposed faults in the Securities Investor Protection Act, the law that returns money to the customers of insolvent fraudulent broker-dealers. The Investor Protection Act closes these loopholes and fixes these shortcomings.
Private Fund Investment Advisers Registration Act
- Everyone registers. Sunlight is the best disinfectant. By mandating the registration of private advisers to hedge funds and other private pools of capital, regulators will better understand exactly how those entities operate and whether their actions pose a threat to the financial system as a whole.
- Better regulatory information. New record keeping and disclosure requirements for private advisers will give regulators the information needed to evaluate both individual firms and entire market segments that have until this time largely escaped any meaningful regulation, without posing undue burdens on those industries.
- Level the playing field. The advisers to hedge funds, private equity firms, single-family offices and other private pools of capital will have to obey some basic ground rules in order to continue to play in capital markets. Regulators will have authority to examine the records of these previously secretive investment advisers.
Federal Insurance Office Act
- Federal insurance expertise. Insurance plays a vital role in the smooth and efficient functioning of the economy, but the credit crisis highlighted the lack of expertise within the federal government regarding the industry, especially during the collapse of American International Group and last year's turmoil in the bond insurance markets.
A Federal Insurance Office will provide national policy makers with access to the information and resources needed to respond to crises, mitigate systemic risks, and help ensure a well-functioning financial system.
- International coordination. Although America's insurance markets still operate on a state-by-state basis, today's markets are global. The Federal Insurance Office will provide a unified voice on insurance matters for the United States in global deliberations.
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This idiot is only pissing in the wind. Once Zer0 rams healthcare down our throats nobody will have anything left over to invest.
And blah, blah, blah.
More of your socialist, tyrannical runaway government hard at work destroying our freedoms and the free enterprise system folks!
Is it time yet, Claire?
” increase the funding and enforcement powers of the US Securities and Exchange Commission (SEC). “ Yeay, more money for the bureaucracy that brought us naked shorting and the Bear Raids that nearly collapsed the world’s financial system....oh goody.
And don’t forget...
The SEC couldn’t find Madoff when he was under their own bed!
And they have not yet figured out that the Goldman Sachs/Warren Buffett deal had to be an insider deal.
And the meeting in Russia...
Seems as though they have a few loose ends to work on as it is.
Just a few.
Impy reveals sweeping changes to the partisan compostion of the next congress, Kanjorski not on list of returning members.
Vote for Lou ping
So, they're saying they don't want Obama to run the ratings agencies.
Uh-oh.
November 7, 2009, the day we began watching the United States crumble like the World Trade Buildings, by implosion!
Kanjorski lost my support when he voted for cap and trade, and his vote for PelosiCare reinforces my position that we need to replace him in 2010.
How about this? http://republicans.financialservices.house.gov/index.php?option=com_content&task=view&id=860&Itemid=43
(I used to vote for him back in the 80’s and 90’s; he had an A rating by the NRA, but then I saw him at the post-impeachment “pep rally” on the White House lawn, and he got the sign of the cross from me at the ballot box after that)
Time to take off the gloves. Time to put signs in your yards that say
Kanjorski
voted to kill
your Grandma
HR 3962
Will make kids start asking questions of the parents. Some will get angry but some might wake up. Will really piss off Kanjorski
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