Financial Reform: Congress Takes on Accountability

The air of financial crisis that gripped Washington earlier this summer seems to be waning as health care reform and the gradually improving economy shift the focus of immediate concern.

Still, this fall promises to be plenty busy for financial regulators and lawmakers.  While thousands of Americans who lost their homes, their jobs or their retirement plans continue to fume, official Washington now turns its scrutiny to what went wrong and how to fix it.

Driving the process is President Obama’s proposal for sweeping financial regulatory reform contained in a 100-page document entitled “A New Foundation: Rebuilding Financial Supervision and Regulation.”  Both houses of Congress now start deliberations on turning those ideas into legislation. Treasury, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and other regulators also have an eye on reform at the same time they nurse the markets and the economy and try to rebuild confidence in the system.

In mid-July, when the economy was hanging more in the balance, members of the ERC Fellows program heard from three speakers deeply involved in trying to restore trust in government and the markets while building up infrastructure on the fly.  The sessions were a preview of the challenges and need for reform that Congress now will be taking up.

The Obama Administration talked early and often about its commitment to strong ethics and “tone at the top.” Attorney Norm Eisen, special counsel to the President for ethics and government reform, is the implementer-in-chief of that policy.  Everyone from the President down has been required to attend ethics training sessions, he said, and Eisen has been both chief ethics arbiter in the West Wing and enforcer of Obama’s decree that (with a few notable exceptions) lobbyists follow strict new rules meant to slow down the revolving door between public service and private gain.

At the SEC, which is charged with enforcing the rules on Wall Street, internal issues of staffing and technology have demanded attention at the same time the agency has been highly embarrassed by enforcement lapses, especially the Madoff scandal.  Kayla Gillan, a senior counselor to SEC Chair Mary Schapiro, laid out the commission’s rule-making agenda for taking on credit rating agencies, short sellers, pay-to-play practices, laxness in the municipal bond market and the need for greater disclosure as the basis for checks and balances among directors, management and investors in publicly traded companies. Measures to help investors hold directors more directly responsible are part of the mix. Internal changes, such as how investment advisors are examined and investigations are conducted, are intended to boost efficiency and strengthen the commission’s culture. The thread that binds both external and internal efforts together, she said, is “ethics and culture and tone at the top.”

The most vivid example of high-profile enforcement while assembling a team on-the-go came from Kevin Puvalnowski, deputy chief of staff to the special inspector general of TARP, the Troubled Asset Relief Program.  TARP, which didn’t exist until mid-2008, actually is an amalgam of 12 programs totaling $643 billion to date at the center of Washington’s emergency effort to buy up troubled mortgages, calm fears and defuse the panic then gripping the U.S. and global financial systems.  The Special IG is the cop on the beat, tracking the distribution and use of the funds using traditional audit and law enforcement techniques.  As of June 30, the office had 35 criminal and civil investigations in the works involving suspected accounting fraud, securities fraud, insider trading, mortgage servicer misconduct, mortgage fraud, public corruption, false statements, and tax investigations, according to TARP. “This is a monumental effort with very significant fraud vulnerabilities,” Puvalowski said. “It’s our job to promote transparency.”

From the White House to the frontline agencies, transparency and accountability have been a key message point since the billions started flowing out the door last year.  Now it’s Congress’s turn.  Companies and their chief ethics and compliance officers will want to monitor Hill developments closely.  Whether or not a company has received stimulus funds or bailout money, the extraordinary level of government intervention since last fall – when Bear Sterns was rescued and Lehman Brothers was not – obviously affects everyone.  If lawmakers were to embrace new measures of accountability – such as conflicts of interest among a company’s board, senior management and the government, or whether company culture encourages excessive risk-taking – in-house ethics and compliance officers might be facing new challenges.

Judging by the proposals on the table so far, Congress’s job will be to try to simplify and streamline financial regulation.  That may or may not include creation of a new super regulator, as the President and the Treasury secretary have suggested.  But it’s a safe bet that any legislative solution will be far-reaching, touching every corner of banking, the financial services industry and publicly traded companies in general, including corporate governance and the responsibilities of directors.

Whether Congress adds elements of ethical culture into the mix will be interesting to see.  Keep an eye on upcoming hearings in the Senate Banking and House Financial Services committees to see how the Administration’s and other proposals fare.  Specifically:

• A proposed new Financial Services Oversight Council of financial regulators;
• Expanded authority for the Federal Reserve to supervise all firms that could “pose a threat to financial stability;”
• Stronger capital requirements for all financial firms;
• A new Consumer Financial Protection Agency;
• A new National Bank Supervisor to oversee all federally chartered banks; and
• Say-on-pay provisions that would allow shareholders a voice on executive compensation.

For more information, go to http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit...