NEW YORK -- An investors' advocacy group is challenging the Obama Administration and Congress to do more for the needs of average investors.
The Investors' Working Group, led by veteran regulators Arthur Levitt Jr. and William H. Donaldson, both former chairmen of the Securities and Exchange Commission, has published a long list of recommendations that closely resembles the administration's ideas and similar studies, but focuses primarily on the needs of investors.
"Too often, the complexities of the regulatory system and the institutions it is supposed to police benefit institutions, dealers and traders at the expense of investors and consumers," said the IWG report, titled "Report on the Financial Regulatory Reform: The Investor's Perspective."
The group stressed that bold reforms are needed to restore investor confidence in the financial markets, and this will require both immediate fixes and carefully considered, long-term solutions for systemic risk oversight.
"Often, the regulatory focus seems to be on what is in Wall Street's best interest, not investors' best interest," said Gregory Smith, general counsel of the Colorado Public Employees' Retirement Association and co-chair of the Council of Institutional Investors. "The inclusion of investor voices is vital to this discussion."
Sponsored by the CFA Institute Centre for Financial Market Integrity and the Council of Institutional Investors, the IWG is a non-partisan group of investors, former regulators and representatives of investor and consumer interests. Unlike other similar reports on financial regulation that promote the needs of financial institutions and players, Levitt said the IWG offers a unique, investor-centric perspective.
"Politics and special interests often get in the way of doing what's right for investors," said Levitt, who chaired the SEC from 1993 to 2001. "The IWG's inclusive, pragmatic and balanced approach to understanding other proposals and what investors truly need has resulted in a series of actionable recommendations with a longer-term view toward more comprehensive regulatory structure, stronger oversight, and better-governed companies."
Levitt said the current financial climate is a result of nearly 20 years of industry deregulation. Since 1980, governmental oversight was gradually abandoned in favor of the ability of markets to self-police and self-correct.
"The investor was sorely disadvantaged by the power of business groups that persuaded Congress we were an over-regulated society," he said. In order to restore this balance, the will to regulate must be restored, he said.
"This light-touch federal regulation has met with disastrous results, as has starving agencies of needed resources," the IWG report said. "Although the will to regulate cannot be legislated, Congress can encourage vigorous regulation through general oversight and its specific role in providing advice and consent regarding nominees to head financial regulatory agencies."
Specifically, the report recommends improving corporate governance, creating an independent systemic risk oversight board, strengthening the current federal agencies that police financial institutions and markets, as well as filling in the gaps in the regulatory architecture in these areas to include oversight of OTC derivatives, securitized products, mortgage originators, non-bank financial institutions and nationally recognized statistical ratings organizations.
"The financial crisis represents a massive breakdown in oversight at many levels, including at corporate boards," the report said. "Investors need better tools to hold directors accountable so they will be motivated to challenge executives who pursue excessively risky strategies."
Boards should give shareholders more voting rights, including the ability to put board member nominees on the ballot, Levitt said. Additionally, directors should be elected by the majority of votes cast, which Levitt said will invigorate board elections.
Addressing Systemic Risk
"Clearly, the current system of regulation is not designed to monitor the scope of financial risk, nor is it able to communicate the extent of risk," said Donaldson, who chaired the SEC from 2003 to 2005. "The IWG strongly seeks more investor protections and a system of checks and balances for managing systemic risk."
"Restructuring the hodgepodge of financial regulators and key financial institutions is clearly an imperative, regardless of how politically arduous the task," the report said. "Policymakers need to map out a path toward a more rational, less conflicted financial system."
The Obama Administration should focus on the creation of an independent systemic risk oversight board, rather than a systemic risk regulator, Donaldson said, but added that the oversight board could develop into a regulator in time.
"Creating a new regulator at this point is premature," he added.
In order for the members of a systemic risk oversight board to focus on their new role, they should be full-time and not tied to any other government agencies or duties, Donaldson said.
"They should have the authority to gather all the information they deem necessary, and be responsible for reporting their findings to regulators, as well as make periodic reports to Congress and the public," he said. This oversight board should also communicate with overseas authorities to monitor global systemic risk.
Financial regulatory agencies in general should be strengthened to become more independent of the industries they supervise and they should be well-funded in order to attract and retain staff members who have a deep knowledge and expertise of complex products and rapid financial innovation, the report said.
"Resistance to regulation in these often highly lucrative areas is likely to be intense," the report said. "[Regulatory] staff should be rewarded for asking tough questions, pursuing difficult cases and thinking outside the bounds of conventional wisdom."
Federal regulators must stay on top of innovative new products and practices and seek to bring them under their jurisdiction, the report said. "One important lesson of the recent crisis is that as financial products and services proliferate and become more complex, they often fall through the regulatory cracks."
"The task before policymakers is challenging, but it presents an opportunity to create a more stable, transparent and adaptable U.S. financial market," Donaldson said. "We look forward to advising members of Congress and the Obama Administration on what steps are needed to ensure regulation serves the needs of investors, consumers and the broader financial system."
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