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News February 9, 2009 Issue

Frank Lays Out Legislative Priorities

On February 3, House Financial Services Committee Chairman Barney Frank (D-MA) laid out the legislative priorities for his Committee. Frank described a four-part plan:

Systemic risk. The first step, said Frank, is to establish a systemic risk regulator. The "biggest problem" facing the U.S. economy is systemic risk, he said. Currently, there are "too few constraints" on the major financial institutions, and therefore they can incur too much risk. For that reason, Frank said that he is inclined to recommend the establishment of a systemic risk regulator to constrain excessive risk-taking. "There is an emerging consensus … that probably the Federal Reserve will be given the power to do systemic risk regulation, covering all forms of financial activity and it will have some flexibility as to what the reach is," he said. While this will involve giving "powers that do not exist" to the federal government, it would not involve taking powers away from the SEC, CFTC, and banking regulators.

During the Q&A portion of the press conference, Frank was asked how "excessive" risk taking would be defined. "That is going to be up to the Fed," he replied.

Frank predicted that the systemic risk regulator would "get a lot more information" from hedge funds. On that score, Frank recalled that after the SEC’s hedge fund rule had been struck down by the court in Goldstein v. SEC, he had introduced a hedge fund manager regulation bill. At the time, however, the consensus was "anti-regulatory," he said. "So I deferred to the President’s Working Group" and did not push the bill. Now, however, there is recognition that there needs to be "complete transparency" from hedge funds.

Investor protection. The second part of Frank’s plan will involve revisiting the investor and consumer protections offered by the SEC and other federal agencies. The question of whether the SEC, CFTC, and banking agencies need to be "buffed up" and coordinated, he said, will be considered during that part of the reform effort. Frank emphasized that investor protection can no longer be viewed as something necessary for lower income investors. The federal securities laws have long assumed that "if you are rich you must be smart," he said, pointing out that hedge funds are limited to investors who meet a minimum threshold. Recently, however, some of the most sophisticated people have been harmed. Investor protection issues will be addressed across the board, he said, perhaps by establishing a Financial Product Safety Commission.

Frank said he had already moved forward on merging the SEC and CFTC. "I did make a proposal to the Chairman of the Agriculture Committee but he did not accept it," he said. The proposal, he explained, would have reallocated jurisdiction of commodities by allowing the Ag Committee to retain oversight of "everything that is edible," he said. "We’d get everything else."

The third and fourth steps in Frank’s plan would address housing reform and debt relief for highly-indebted countries.