In 2002, financial regulation was increased with the Sarbanes-Oxley Act. It was a regulatory reaction to the corporate scandals at Enron, WorldCom and Arthur Anderson. Sarbanes-Oxley also required top executives to personally certify corporate accounts. If fraud was uncovered, these executives could face criminal penalties. At the time, many were afraid this regulation would deter qualified executives from seeking top positions.
Many foreign countries blame lax U.S. financial regulations for the global credit crisis. In November 2008, the G-20 called on Washington to increase regulation of hedge funds and other financial institutions. (See U.S. Resists G-20 Summit Call)
Obama's Pledge to Increase Financial Regulations
Obama promised tougher regulations on insider trading in his economic campaign platform. He said he would streamline regulatory agencies, especially those that to oversee banks that borrow from the government, establish a financial market advisory group, improve transparency for financial disclosure, and crack down on trading activities that could manipulate markets.
Once elected, Obama put together an economic team that is in favor of more federal regulations. Obama appointed Former Federal Reserve Chairman Paul Volcker to head his Economic Recovery Advisory Board. Volcker has blamed the economic crisis on poor regulation of the financial sector, and is a well-known advocate of tougher restrictions.
The Securities and Exchange Commission (SEC) is at the center of Federal financial regulations. President Obama signaled his intent to increase regulation by appointing Mary Schapiro as the chair. One of the first things she did was to increase the regulations on the SEC itself.
The Obama Administration proposed Federal financial regulations to prevent another credit crisis. The Federal Reserve will be put in charge of companies, like AIG, that are too big to fail. The FDIC would be brought in to manage the company if it does head towards bankruptcy.
Financial Regulations Proposed in 2009
A new Consumer Financial Protection Agency would be formed to regulate risk in products from credit cards to mortgages. Bank regulations would be consolidated under a new National Bank Supervisor. Banks would have to increase their capital cushion.
Issuers of products sold on the secondary market would have to keep at least 5% of the value of their products sold. They would have new reporting requirements, as well. Credit rating agencies, such as Standard & Poor's and Moody, would face regulations designed to reduce conflict of interest. (Source: Reuters, Financial Initiatives, June 17, 2009)
