Mr. Market, meet Mr. Regulator

Today President Obama signed into law the far-reaching expansion of federal regulation of US banking and capital markets. The overhaul has been brewing in Washington since the financial crisis in 2008 – and the 848-page heft of the Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF here) may have something to do with the two years spent crafting it. The law orders new rules governing banks and investments, creates new agencies, and grants regulatory powers here, there and everywhere.

Supporters say it will protect investors and consumers, prevent abusive and risky behaviors by the bad boys on Wall Street, and avert future financial meltdowns.

President Obama cited eternal benefits for the Act he signed: “The American people will never again be asked to foot the bill for Wall Street’s mistakes [emphasis added].” Never again, of course, is Washington-speak that promises the latest patch in the roof will keep out the rain at least until after the next election. OK, that’s cynical. But financial crises have recurred every few years – over centuries and centuries – despite many previous regulatory fixes. Never again? Well …

For investor relations professionals trying to figure out what this wave of regulation means to us and the financial markets where we work, a few resources:

The New York Times story “Financial Overhaul Signals Shift on Deregulation” (July 15) offers an understandable overview and historical perspective on passage of the overhaul. The Times calls the new law “a catalog of repairs and additions to the rusted infrastructure of a regulatory system that has failed to keep up with the expanding scope and complexity of modern finance.”

A Wall Street Journal piece “Congress Overhauls Your Portfolio” (July 17) takes a “micro” view, looking into how regulatory expansion may affect individual or institutional investors – and companies.

“Several provisions promise to give investors a louder voice in policy-making circles and corporate boardrooms,” the WSJ says. Among the coming attractions: a new Office of the Investor Advocate at SEC to assist retail investors; an Investor Advisory Committee, also at SEC, watching out for investors’ interests; a mandate for the SEC to allow major shareholders access to corporate proxies to nominate directors; and nonbinding “say on pay” votes for shareholders.

Lawyers are weighing in with interpretations, too. On the Harvard Law blog on corporate governance and financial regulation, a partner in the firm of Davis Polk Wardwell LLP says this isn’t just about banks or Wall Street giants:

This legislation will affect every financial institution that operates in this country, many that operate from outside this country and will also have a significant effect on commercial companies. As a result, both financial institutions and commercial companies must now begin to deal with the historic shift in U.S. banking, securities, derivatives, executive compensation, consumer protection and corporate governance that will grow out of the general framework established by the bill. …

By our count, the bill requires 243 rulemakings and 67 studies. … U.S. financial regulators will enter an intense period of rulemaking over the next 6 to 18 months, and market participants will need to make strategic decisions in an environment of regulatory uncertainty.

Davis Polk has made its memorandum available online as a PDF. This 123-page “brief,” as the lawyers like to say, offers a rundown of all of the Dodd-Frank Act’s provisions and their implications for market participants. By scanning the Table of Contents, which hyperlinks into the narrative, you can see where you fit in.

What you can’t see is where all the rulemaking and wrangling will lead. In a few years, all of us probably will be running into financing deals that can’t be done, or reports that must be filed, or language that must be used – thanks to the 2010 Act.

Who knows what unintended consequences – such as increased costs of capital or even the genesis of our next “bubble and bust” cycle – may lurk amid the unknowns of the new law? I’m sure there is good in the Act, but also plenty of uncertainty.

Feel free to share your comments – pro, con or otherwise – by clicking below. And good luck with financial reform as it applies to your business.

© 2010 Johnson Strategic Communications Inc.

Advertisements

Tags: , , , ,

2 Responses to “Mr. Market, meet Mr. Regulator”

  1. Tweets that mention Mr. Market, meet Mr. Regulator « IR Café -- Topsy.com Says:

    […] This post was mentioned on Twitter by irbloggers, MeetTheStreet. MeetTheStreet said: You: Mr. Market, meet Mr. Regulator: http://bit.ly/cZ8WgO […]

  2. Stefan Pettersson Says:

    Thanks for posting this. Yes, we can be sure that there will be unintended consequences. I guess Basel II is partly to blame for the last financial crisis in that it encouraged banks to move risky assets off their balance sheets.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: