U.S. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS FACT SHEET:…

    U.S. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
    FACT SHEET: TREASURY RELEASES BLUEPRINT FOR A STRONGER REGULATORY
    STRUCTURE
    "We should and can have a structure that is designed for the world we live in, one that is more
    flexible, one that can better adapt to change, one that will allow us to more effectively deal with
    inevitable market disruptions and one that will better protect investors and consumers. The
    challenge is to evolve to a more flexible, efficient and effective regulatory framework ­ and that
    is the purpose of this Blueprint."
                                                             - Treasury Secretary Henry M. Paulson, Jr.


·   A strong financial system is vitally important - not for Wall Street, not for bankers, but for
    working Americans. When our markets work, people throughout our economy benefit ­
    Americans seeking to buy a car or buy a home, families borrowing to pay for college, innovators
    borrowing on the strength of a good idea for a new product or technology, and businesses
    financing investments that create new jobs. And when our financial system is under stress,
    millions of working Americans bear the consequences. Government has a responsibility to make
    sure our financial system is regulated effectively. And in this area, we can do a better job. In
    sum, the ultimate beneficiaries from improved financial market regulation are America's
    workers, families and businesses ­ both small and large.

·   Financial institutions play an essential role in the U.S. economy by providing a means for
    consumers and businesses to save for the future, to protect and hedge against risks, and to access
    funding for consumption or new investment opportunities.

·   The current regulatory framework for financial institutions is based on a structure that has been
    largely knit together over the past 75 years. It has evolved in an accretive way in response to
    problems without any real focus on overall mission: Congress established the national bank
    charter in 1863 during the Civil War, the Federal Reserve System in 1913 in response to various
    episodes of financial instability, and the federal deposit insurance system during the Great
    Depression. Changes were made to the regulatory structure in the intervening years in response
    to other financial crises (e.g., the thrift crises of the 1980s) or as enhancements (e.g., the Gramm-
    Leach-Bliley Act of 1999 ("GLB Act")), but for the most part the underlying structure resembles
    what existed in the 1930s.

·   The current U.S. financial regulatory framework includes:
       o Five federal depository institution regulators in addition to state-based supervision.
       o One federal futures regulator and one federal securities regulator. The United States also
           has additional state based supervision of securities firms as well as self-regulatory
           organizations with broad regulatory powers.
       o Insurance regulation is almost wholly state-based, with 50+ regulators. This structure
         raises a number of issues with an international dimension that can be inefficient and
         costly.

·   Last March, Treasury convened a blue-ribbon panel to discuss U.S. capital markets
    competitiveness. Industry leaders and policymakers alike agreed that the competitiveness of our
    financial services sector ­ and its ability to support U.S. economic growth ­ is constrained by an
    outdated financial regulatory framework.

·   Although Treasury began this effort a year ago, market conditions today provide a pertinent
    backdrop for this study's release and highlight the need to examine the U.S. regulatory structure.
    Recent events have also reinforced the direct relationship between balancing strong consumer
    protection and market stability on the one hand, and capital markets competitiveness on the
    other.

·   The United States is the world leader in financial services, so it is from this position of strength
    that we must constantly work to improve our system. Treasury's working assumption is that the
    United States is engaged in a global race-to-the-top, to achieve the optimal regulatory structure
    for the financial services industry. The optimal regulatory structure needs to attract capital based
    on its effectiveness in promoting innovation, managing system-wide risks, and fostering
    consumer and investor confidence.

·   Capital markets and the financial services industry have evolved significantly over the past
    decade. Globalization and financial innovation, such as securitization, have provided benefits to
    domestic and global economic growth; while highlighting new risks to financial markets.

·   These developments are pressuring the U.S. regulatory structure, exposing regulatory gaps and
    redundancies, and often encouraging market participants to do business in other jurisdictions
    with more effective regulation. As a result, the U.S. regulatory structure reflects an antiquated
    system struggling to keep pace with market developments while facing increasing challenges to
    anticipate and prevent today's financial crises.

·   Public input has been important to our work. In addition to the range of views present at our
    Capital Markets Conference in March 2007, Treasury published a request for public comment in
    the Federal Register in October. Response was solid as Treasury received hundreds of letters
    from investor advocates, state regulators, financial institutions and many others. All public
    comments were posted on the internet.

·   Treasury and prior Administrations previously pursued these studies with a long-term outlook for
    implementation. For example, both the Blueprint for Reform: The Report of the Task Group on
    Regulation of Financial Services (1984) and the Modernizing the Financial System:
    Recommendations for Safer, More Competitive Banks (1991) laid the foundation for many of the
    changes adopted in the GLB Act of 1999, including the concept of functional regulation.

·   In this report, Treasury presents a series of short, intermediate and long-term recommendations
    for reform of the U.S. regulatory structure.
        o The short-term recommendations present actionable changes to improve regulatory
             coordination and oversight immediately, including:
                     Modernize the President's Working Group on Financial Markets ("PWG").
                     Create a New Federal Mortgage Origination Commission ("MOC") to
                     evaluate, rate, and report on the adequacy of each state's system for licensing and
                     regulation of participants in the mortgage origination process.
                    Clarify Liquidity Provisioning by the Federal Reserve to give the Federal
                    Reserve the information it needs during this temporary period. The PWG will
                    study the issue further.
          o The intermediate recommendations focus on eliminating some of the duplication of a
            functional regulatory system, but more importantly try to modernize the regulatory
            structure for certain financial services sectors within the current framework.
            Recommendations include:
                    Transition the Thrift Charter to a national bank charter because it is no longer
                    necessary to ensure sufficient residential mortgage loans are made available to
                    U.S. consumers. The Office of Thrift Supervision ("OTS") and the Office of the
                    Comptroller of the Currency ("OCC") would merge.
                    Create an Optional Federal Charter for Insurance to encourage a more
                    competitive U.S. industry.
                    Generate Unified Oversight for Futures and Securities by merging the
                    Commodity Futures Trading Commission ("CFTC") and the Securities and
                    Exchange Commission ("SEC") and their regulatory philosophies. The
                    distinction between these types of financial products is increasingly blurred.
          o Treasury also includes a long term model for discussion. This model holistically
            addresses the inadequacies of the current functional regulatory system.
                    An objectives-based regulatory approach best represents the optimal regulatory
                    structure for the future. The structure will consist of a market stability regulator, a
                    prudential regulator and a business conduct regulator with a focus on consumer
                    protection.



                             SUMMARY OF RECOMMENDATIONS

SHORT-TERM RECOMMENDATIONS

President's Working Group

   ·   The PWG, created in 1988, is the most useful interagency coordination tool for financial services
       regulation.

   ·   Treasury recommends modernizing the current PWG Executive Order to reinforce the mission
       and purpose of the group as an ongoing mechanism for coordination and communication on
       financial policy matters including systemic risk, market integrity, investor and consumer
       protection and capital markets competitiveness.

   ·   Treasury also recommends expanding the PWG membership to include the OCC, OTS and
       Federal Deposit Insurance Corporation ("FDIC").

Liquidity Provisioning by the Federal Reserve

   ·   Treasury recommends specific enhancements to the process of expanding access to Federal
       Reserve lending channels:
          o First, future lending to non-depository institutions should be calibrated and transparent.
          o Second, the Federal Reserve should have access to sufficient information on non-
              depository institutions with access to Federal Reserve loans. This could include on-site
              examinations or other means as determined by the Federal Reserve. The most important
              information relates to funding and liquidity.
   ·   This will provide a framework for oversight of non-depository institutions with temporary access
       to Federal Reserve lending while recognizing the differences between banks and non-banks.

   ·   These are difficult issues that should be addressed. The optimal structure tries to address some
       of these questions but we are learning more every day as the Federal Reserve is working with the
       primary dealers. The PWG should evaluate these issues.

Mortgage Origination

   ·   The high levels of delinquencies, defaults, and foreclosures among subprime borrowers in 2007
       and 2008 have highlighted gaps in oversight for mortgage origination.

   ·   Treasury's recommendation, which sets consistent national standards for all types of mortgage
       originators and improves enforcement at the federal and state levels, has three components:
           o Treasury recommends the creation of the MOC, a new federal commission led by a
               Presidential appointee, to evaluate, rate, and report on the adequacy of each state's
               system for licensing and regulating participants in the mortgage origination process.
               Federal legislation should establish (or provide authority for the MOC to develop)
               uniform minimum qualifications for state mortgage market participant licensing systems.
           o Treasury recommends that the Federal Reserve continue to write regulations
               implementing national mortgage lending laws.
           o Treasury recommends clarification and enhancement of the federal enforcement authority
               over these laws.


INTERMEDIATE-TERM RECOMMENDATIONS

Thrift Charter

   ·   Treasury recommends transitioning the federal thrift charter to a national bank charter over a
       two-year period. Treasury also recommends the merger of the OCC and the OTS during this
       period.

   ·   The thrift charter, now subject to significant competition in the mortgage finance market from
       several non-thrifts, has become obsolete.

State Bank Oversight

   ·   Treasury recommends the rationalization of direct federal supervision of state-chartered banks.
       Treasury recommends a study be conducted to streamline the regulation of state-chartered banks
       with a federal guarantee by either the Federal Reserve or the FDIC.

   ·   Rationalization in this area would result in a more efficient and less duplicative regulatory
       system.

Payment Systems

   ·   Treasury recommends the creation of a federal charter for systemically-important payment and
       settlement systems. The Federal Reserve should have primary oversight responsibilities for such
       systems.

   ·   Existing payment systems would benefit from coordinated regulation.
Insurance

   ·    Treasury recommends the establishment of a federal insurance regulatory structure to provide for
        the creation of an Optional Federal Charter. This structure is similar to the current dual-
        chartering system for banking. An Office of National Insurance within Treasury should oversee
        this federal regulatory structure.

   ·    Treasury also recommends that, as an intermediate step, Congress establish an Office of
        Insurance Oversight within Treasury to establish a federal presence in insurance for international
        and regulatory issues.

   ·    These reforms would provide more effective, efficient, and consistent regulation for national
        insurers and would enhance product choice and innovation.

Futures and Securities

   ·    Treasury recognizes the convergence of the futures and securities markets and the need for
        reform and unified oversight and regulation of the futures and securities industries.

   ·    Treasury recommends a merger of the CFTC and the SEC.

   ·    Treasury recommends the following changes to reform the SEC's process for the securities
        market to prepare for the merger:
           o The adoption of core principles for exchanges and clearing agencies.
           o An expedited self-regulatory organization ("SRO") rule approval process.
           o General exemption under the Investment Company Act for already actively trading
               exempted products, such as exchange traded funds, to improve the new product approval
               process consistent with SEC investor protection standards.
           o New Congressional legislation to expand the Investment Company Act to permit a new
               global investment company.

   ·    Treasury recommends statutory changes to harmonize the regulation and oversight of broker-
        dealers and investment advisers offering similar services to retail investors. Treasury also
        recommends that investment advisors be subject to a self-regulatory regime similar to that of
        broker-dealers.


LONG-TERM OPTIMAL REGULATORY STRUCTURE RECOMMENDATION

Overview of the Optimal Model

   ·    The current system of functional regulation, which maintains separate regulatory agencies across
        segregated functional lines of banking, insurance, futures, and securities, is largely incompatible
        with today's financial markets. Functional regulation has several fundamental problems,
        including the lack of a single regulator to monitor systemic risk.

    ·   Treasury is seeking an objectives-based approach designed to address particular market failures
        by focusing on three key goals:
            o Market stability regulation to address overall conditions of financial market stability.
            o Prudential financial regulation to address issues of limited market discipline caused by
               government guarantees.
           o Business conduct regulation (linked to consumer protection regulation) to address
             standards for business practices.

   ·   Three distinct regulators would focus exclusively on financial institutions: a market stability
       regulator (i.e., the Federal Reserve), a new prudential financial regulator (roles of the OCC, OTS
       and National Credit Union Administration ("NCUA")), and a new business conduct regulator
       (most roles of the CFTC and SEC, and some roles of bank regulators).

Market Stability Regulator

   ·   The Federal Reserve would have the responsibility and authority to gather appropriate
       information, disclose information, collaborate with the other regulators on rule writing, and take
       corrective actions when necessary to ensure overall financial market stability. To fulfill its
       responsibilities to gather information, the Federal Reserve would have authority to join in
       examinations with the prudential and business conduct regulators.

   ·   This new role will replace the Federal Reserve's more limited, traditional role as the supervisor
       of financial holding companies, bank holding companies, and certain state-chartered banks.

   ·   The Federal Reserve would have the ability to monitor risks across the financial system.

Prudential Regulator

   ·   A single prudential regulator focusing on safety and soundness of firms with federal guarantees,
       similar to the OCC, but with appropriate authority to deal with affiliate relationship issues.

   ·   Prudential regulation in this context would be applied to individual firms, and it would operate
       like the current regulation of insured depository institutions, with capital adequacy requirements,
       investment limits, activity limits, and direct on-site risk management supervision.

   ·   The prudential regulator would oversee firms with explicit government guarantees.

Business Conduct Regulator

   ·   A new business conduct regulator would monitor business conduct regulation across all types of
       financial firms. Business conduct regulation in this context includes key aspects of consumer
       protection such as rule writing for disclosures, business practices, and chartering / licensing of
       certain types of financial firms.

   ·   The new business conduct regulator subsumes most roles of the SEC and CFTC and has
       authority over rules such as mortgage disclosure.

   ·   This framework would eliminate gaps in oversight and provide effective consumer and investor
       protection.



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