Monthly Archives: January 2009

January 30, 2009

Four Key TARP Fixes

In our Winter ’09 issue of Proxy Disclosure Updates, we included a short piece on “Four Key TARP Fixes” that relate to executive compensation. With Congress likely to act very soon on fixing TARP – and executive compensation excesses – we hope that this short article will influence those that will be making these regulatory changes.

We have posted the article on a non-member page so that anyone can access it. Please tell your friends in Congress!

The Shameful Bonus Pool

President Obama had harsh assessment yesterday of reports that bonuses on Wall Street topped $18.4 billion in 2008. As noted in this New York Times article, he called the bonuses “shameful” and stated: “There will be time for them to make profits, and there will be time for them to get bonuses. Now’s not that time. And that’s a message that I intend to send directly to them, I expect Secretary Geithner to send to them.”

I believe that the President’s words evoke the theme that I and others have been talking about for the past several months – an extraordinary level of public anger over pay excesses. While the anger, rightly or wrongly, has largely been directed at Wall Street as a whole, the spillover effect is unquestionably going to impact other companies that have nothing to do with the credit crisis.

For some recent examples of how companies are dealing with salary and bonus in light of the economy – and in the face of public anger and scrutiny – be sure to check out Mark Borges’ Compensation Disclosure Blog on Try a no-risk trial or renew your subscription today.

One of the four key TARP fixes suggested in the piece noted above is that bonuses to the top five Senior Executive Officers of participating institutions should not be permitted in the event the company recently had layoffs of, e.g., 3% or more of the workforce over the past two or three years. In addition, all institutions would be subject mandatory disclosure of any bonuses granted to top executives while employees were laid off.

Our February Eminders is Posted!

We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Dave Lynn

January 29, 2009

Preserving Privilege: A Timely Reminder for 10-K Season

The recent federal district court decision in Roth v. AON Corporation (N.D. Ill. Jan. 8, 2009) serves as a good reminder of best practices for preserving the attorney-client privilege for drafts of SEC filings and related communications. As this Dorsey & Whitney memorandum notes, the court in Roth held that preliminary language in a draft 10-K and related communications that were sent to in-house counsel and other company employees for comment were protected by the attorney-client privilege, even though the Form 10-K was ultimately filed with the SEC. The court also held that the presence of non-lawyers on the distribution did not waive the privilege, because all of the other recipients were AON employees. Also notable was the court’s holding that the draft disclosure was protected even though it related to an operational matter, as opposed to a legal matter – the fact that the in-house legal counsel was consulted for legal advice was enough to maintain the privilege in this case.

The Dorsey & Whitney memo offers up these helpful tips to keep in mind when trying to protect draft SEC filings and the related communications:

1. Legal judgments and considerations are pervasive in producing most SEC filings. In-house or outside counsel should play a pivotal role in a public company’s disclosure controls and procedures and should be a party to all significant or sensitive communications and drafts. Courts will not extend the privilege shield to correspondence simply because it is addressed to a lawyer, but the shield can only apply if a lawyer is an addressee.

2. Communications to be shielded must only be exchanged among in-house or outside counsel and company employees. Including outsiders, such as the company’s outside auditors or other consultants, as recipients would generally waive the privilege.

3. Documents containing draft disclosures or discussion of related issues should be labeled “Preliminary Drafts” and “Confidential/Attorney-Client Privilege.” Such labeling will not necessarily mean that a court will ultimately find such documents to be protected, but it will evince an intent to apply the shield. These labels should also help to prevent unintended delivery to opposing parties in litigation discovery (as originally occurred in the Roth case).

4. E-mails relating to such drafts and discussion of related issues should also be so labeled.

Creating Plain English Disclosure

In preparing annual reports and proxy statements this year, I think that plain English will be more important than ever. As companies struggle to explain the fallout from the economy on their businesses, executive compensation programs and other matters, it will be important to focus on delivering the message in a way that investors, the press and the public can easily understand.

My colleague, Julie Hoffman, recently caught up with Lois Yurow, President of Investor Communications Services, in this podcast to discuss how to create securities disclosure documents in plain English, including:

– What is plain English?
– When does the SEC require public companies to provide disclosure in plain English?
– Why do some companies exceed plain English requirements?
– How much time and expense is involved in converting a document into plain English?
– Do you have any practice pointers for how companies can easily improve the readability of their disclosure?

January-February Issue: Deal Lawyers Print Newsletter

This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Time to Install a Pill? Dealing With Rights Plans in a Down Market
– How the New Accounting Standards Will Impact M&A
– Lessons from the Meltdown: MAE Clauses
– Increasing Use of – and Great Opportunities – for Exchange Offers
– Portfolio Company Debt: “Loan to Own” to “Buying Your Own”
– The In-House Perspective: What We Want from Outside Counsel
– A 2008 Review: M&A and Proxy Fights

As all subscriptions are on a calendar-year basis, please renew now to receive this issue. If you’re not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue for free.

– Dave Lynn

January 28, 2009

Now Available: Model CD&A

Dave just completed a Special Supplement to the Jan-Feb ‘09 issue of The Corporate Executive. Since we expect many will be borrowing extensively from Dave’s excellent, up-to-the-moment model disclosures – inserting them into current drafts of proxy statements – we have posted the issue so that ’09 renewers can access the issue now (the full issue, including the Supplement, will be mailed to current ’09 subscribers later this week).

Renew Now: Those that renewed for ’09 received a link to the Supplement yesterday with instructions on how to access it; if you haven’t renewed yet, renew now to receive it immediately.

Try a No-Risk Trial Now: To have this Special Supplement rushed to you via email so you receive it today, try a no-risk trial for ’09 now – as the Supplement includes pieces on:

– Timely “Best Practice” Disclosures for Your Compensation Discussion and Analysis
– Implementing “Hold Through Retirement” for Equity Awards
– Our Hold-Through-Retirement Policy
– Revisiting Perquisites
– Reassessment of Our Perquisites
– Making the Most of Clawback Provisions
– Revisiting our Compensation Recovery Policy
– Evaluating the Need for Pensions and SERPs
– Our Review and Analysis of Pensions and SERPs
– Tax Implications
– Deductibility of Compensation for Tax Purposes

TARP’s Special Inspector General: Time for Disclosure

As noted in this Washington Post article, TARP’s Special Inspector General Neil Barofsky reportedly will request that each of the 300-plus companies receiving TARP funds provide disclosure as to how they have used those funds. These companies will also be requested to describe any oversight measures taken to comply with the newly revised executive compensation limitations (they were tweaked back on January 16th – too much going on to keep current on this blog!). The companies will have 30 days to respond – and they can be subpoenaed if they fail to comply.

This is not surprising given that it follows a similar disclosure deal that Barofsky cut with Citi and the automakers earlier this month when they got funds, limited attempts from banking regulators to wrestle disclosure from companies. More importantly from a political perspective, it follows two scathing reports from TARP’s watchdog about how the funds aren’t being tracked by Treasury, which led to questions from Congress – and an Obama representative responded last week two weeks ago with this letter to Congress promising more transparency in the TARP process.

Stephen Davis on Board-Shareholder Communications

In this podcast, Dr. Stephen Davis describes his thoughts about the Millstein Center’s paper: “Talking Governance: Board-Shareowner Communications on Executive Compensation,” including:

– What is the goal of your board-shareowner communications paper?
– What type of comments did you receive on the draft? What changes were made?
– Which board-shareholder communication model do you think is the most feasible in the near-term?
– What about the long-term?

Don’t forget to tune in for tomorrow’s NASPP webcast: “The Dark Side of Option Exchanges.” Try a NASPP no-risk trial for ’09 to catch this important program.

– Broc Romanek

January 27, 2009

The Textron Work Product Decision: Real Implications for Lawyers

Last week, the U.S. Circuit Court of Appeals for the First Circuit issued its highly-anticipated decision regarding work papers and privilege in US v. Textron. We have posted the decision and related memos in our “Attorney-Client Privilege” Practice Area.

Here are some thoughts from Stan Keller of Edwards Angell Palmer & Dodge:

The decision involves whether Textron’s tax accrual workpapers were
protected from discovery from the IRS as work product. From a lawyer’s perspective, the importance of the decision is whether work product protection was waived as a result of disclosure of the workpapers to the auditors.

The First Circuit decision may amount to an illusory victory for Textron with mischievous consequences. The Court holds that the tax accrual workpapers are entitled to work product protection, giving a broad reading to the requirement that they be prepared in connection with litigation, and that sharing them with the auditor does not automatically constitute a waive. So far so good.

However, the court then reasons that the auditor could be a conduit for the workpapers or their substance being turned over to an adversary, there being no auditor’s privilege and thus the auditor’s workpapers are subject to discovery, with the result that the work product protection could be waived. The case was remanded to the District Court to consider this further.

Couple this limitation with the audit documentation requirements of AS #3 and you have illusory work product protection.

Corp Fin Issues Updated Interpretations for Going Private Transactions and ’33 Act Rules

Close enough to getting them out by the end of the year as promised, Corp Fin issued two sets of new Compliance & Disclosure Interpretations yesterday – a ’33 Act set and a “going private” transaction set.

The ’33 Act set includes new interps as well as revised interps that were published just a few months ago. The going private set is the first update in that area since ’01. The bracketed date following each interp in both sets is the latest date of publication or revision.

More Regulatory Reform Ideas

Last week, as noted in this press release, the President’s Working Group on Finanical Markets issued two reports on the hedge fund industry: this report from the Asset Manager’s Committee and this report from the Investors’ Committee. The reports lay out best practices and recommendations for the hedge fund industry. We have been posting recommendations for reform of the financial regulatory structure in our “Regulatory Reform” Practice Area. By the way, here is Obama’s “American Reinvestment & Recovery Plan.”

The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

Don’t forget to tune in tomorrow for the Part II webcast – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!,” featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. This is the second of a two-webcast series, with the first one taking place last Wednesday (audio archive now available).

Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.

Act Now: As all memberships are on a calendar-year basis, you will not be able to access these webcasts if you haven’t renewed for ’09 – so please renew today. If you aren’t a member, try a no-risk trial for ’09.

– Broc Romanek

January 26, 2009

Facing Market Realities: NYSE Temporarily Lowers Market Cap Requirement

In its first accomodation for the current market environment, the NYSE filed a rule change (see the press release) with the SEC last week that would temporarily reduce the average market capitalization required under Section 802.01B of the NYSE’s Listed Company Manual from $25 million to $15 million.

Although the rule change has not been published by the SEC, the rule change will be effective upon filing – if the SEC waives a 30-day operative delay, which it is expected to do. This temporary reduction would apply through April 22nd (although the NYSE could extend the period if market conditions remain the same). We will be posting memos in our “Delisting” Practice Area.

There are quite a few NYSE companies for which this will be an important accommodation. Note that this approach by the NYSE is different than Nasdaq’s approach. As I understand it, the NYSE is not willing to totally waive or suspend listing standards as has been Nasdaq’s practice. Rather, the NYSE is looking to take this step of temporarily lowering the market cap standard.

Nasdaq Companies: Even Accommodations Don’t Help

If you do a recent search of Form 8-Ks for Nasdaq companies that use the term “delisting,” you will see that there are quite a lot of Nasdaq companies that are voluntarily delisting due to non-compliance (eg. Neopharm). These companies don’t appear to be taking the step of appealing a delisting notification, probably because there is no end in sight for the current market decline so there is nothing they can do to address stockholder’s equity or market capitalization requirements. These companies are not going into bankruptcy – but instead are now being traded on the OTC Bulletin Board, OTCQX market tier and the Pink Sheets.

Schapiro Is “In”

On Thursday, the US Senate confirmed Mary Schapiro as the new SEC Chair, as noted in this article. This followed Schapiro’s responses to Senator Carl Levin, in which she said she favored advisory votes on executive compensation and wanted to smaller companies to start complying with Section 404 of Sarbanes-Oxley (instead of continuing to grant them one-year exemptions from the law).

Having now observed a number of SEC Chairs over the years, I have found the proof is in the pudding – we really don’t know what a Chair will be like until they actually do something. Some Chairs who people thought might be great, turned out to be not so hot – and others people thought would be captured by industry, turned out to be quite good. Time is an excellent judge of SEC Chairs.

A few weeks ago, I conducted a poll regarding what you thought about Mary’s prospects as a SEC Chair. Here is a pie chart of the results:

funny pictures
moar funny pictures

– Broc Romanek

January 23, 2009

How Quickly Are Things Changing? eBay Sends 70 Tweets During Its Earnings Call

With the coming regulatory reform likely to be a whopper (the House passed the “TARP Reform and Accountability Act” on Wednesday; it’s not expected to go anywhere in the Senate though), I predict a huge host of changes this year beyond those required by law. For example, Corporate America will start catching up with the young folks online (my 14-year old lives for Facebook).

Case in point: On Wednesday, eBay’s Richard Brewer-Hay (the guy behind eBay’s “Ink Blog”) sent a total of approximately 70 tweets during an eBay earnings call (it’s hard to pinpoint the exact number; it depends if you count “retweets”). It’s pretty amazing to witness a play-by-play of what is happening during the earnings call. Talk about real-time disclosure!

I’ll leave aside the legal analysis of this activity for another day as I’m still agape over how this could alter the disclosure playing field. Yes, earnings calls are now available via audio streaming (ie. webcast) – but for those that like the written word and don’t want to wait for a transcript, this is a pretty remarkable development. Third-party services have done similar things with earnings calls, but not anyone in-house that I’ve seen.

However, as Dominic Jones shares with his LinkedIn group (see below for more on that):

In my view, live tweeting is *not* a worthwhile practice or good use of Twitter. As you will be able to see for yourself, it creates a lot of noise and is difficult to follow. Here’s a predefined search on Twitter that shows you only the twitter messages relevant to eBay’s earnings announcement (not how the average twitter user would see them). However, much more effective is how eBay is now treating its quarterly earnings announcements on its corporate news blog. They’ve set up a new page that posts a summary of the earnings release, links to the webcast replay, access to past earnings releases AND links to news articles about the company’s results. This is an interesting development.

Essentially, eBay is targeting different audiences with the blog version of its earnings announcements than it does with its traditional IR website. I’m not sure this is a good idea, and eventually I expect that the IR website will begin to reflect the blog. As it stands, the blog people at eBay are doing a better job communicating the company’s results than the IR people. That’s something the IR profession needs to think about.

Welcome to Dominic Jones, Co-Editor of

Hat tip to Dominic Jones of IR Web Report fame for pointing out this eBay eye-opener! Not only is Dominic on the cutting-edge of issues related to the intersection of IR and technology, he is tremendous as an investigative reporter. I’m very excited to announce that he recently agreed to join me as Co-Editor of and he wrote the lead article in the Winter ’09 issue that we just posted. It’s entitled “Online Annual Reports and Proxy Statements: What’s Wrong And How to Fix It.” Remember is absolutely free – you just need to sign up.

For those interested in IR matters, I recommend that you request to join Dominic’s new LinkedIn Group, “Investor Relations 2.0.”

I’m heading to San Diego on Tuesday so I can witness Northwestern’s “Annual Securities Regulation Institute” for the first time. If you’re heading that way, let me know and we can break bread. I’m tempted to tweet during it, but may take notes the old-fashioned way and report back…

The Obama Administration’s Promising Push to Modernize

Just after Barack Obama was sworn-in as President on Tuesday, the White House website underwent a make-over as noted in this NY Times piece. Although there has been a lot of fanfare over the White House’s new blog and YouTube channel, the real power that the Obama Administration will bring to government is the leveraging of social media and other technologies to get better ideas from a larger collective and to communicate regulatory changes and interpretations more effectively.

Ever since Obama won the election, his transition team has hit the ground running here in DC – and I have heard that they promptly requested that all federal agencies provide them with information regarding their technological capabilities. It could be that the Obama Administration will force all the agencies to weave social media and other technologies into their daily activities in the near future.

Some pretty exciting stuff – and it may well make some of the ideas expressed in the SEC’s “21st Century Disclosure Initiative” seem quaint before you know it. On the other hand, the reality is that this is the government we are talking about. As this Washington Post article suggests, it’s not going to be easy for the new Administration to do what they are used to with technology.

January-February Issue of The Corporate Counsel

We recently mailed the January-February issue of The Corporate Counsel to the printers. This issue includes pieces on:

– Annual Proxy Season Practice Tips
– The FAS 5 Treaty—Impact of Recent and Coming Changes in Accounting Standards
– S-K 403 Disclosure of Negative Pledge
– Reverse Split Uptick?
– A Few Thoughts on Form 12b-25
– Staff Reverses/Clarifies That 8-K Item 5.02(b) Not Triggered by Director’s Required Tender of Resignation
– Schedule 13D/G—CSX and Other Uncertainties—Time for Staff Input
– New CDI Now Says Plan Should Be Filed As S-8 Exhibit
– Two Recent Restricted Stock Staff Letters
– Get Ready for More Short Sale Regulation

Act Now: Get this issue on a complimentary basis when you try a 2009 no-risk trial today. As all subscriptions are on a calendar-year basis, renew now to continue receiving upcoming issues during a time of great change.

– Broc Romanek

profile counter myspace

January 22, 2009

Model Compensation Risk Disclosures

Dave and Mark Borges just wrapped up – and we have just posted the Winter 2009 issue of our quarterly “Proxy Disclosure Updates” Newsletter, which is free for all those that try a no-risk trial to Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide.”

This critical issue provides analysis, practice pointers – and model disclosures – regarding executive pay risks, a new type of disclosure that all companies will need to address in the wake of EESA and other regulatory responses to the crisis. The issue also provides new analysis regarding disclosures of pledged and hedged shares.

Try No-Risk Trial Now: Order now so we can rush a non-blurred copy of this first issue to you today – as well as a copy of the 1000-page Treatise; note there is a reduced rate if you are ’09 member of If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.

When you order the Treatise, not only do you get a hard copy mailed to you, you also get access to an e-version on And you also get access to the quarterly Updates newsletters that make up the “Lynn, Romanek & Borges’ Executive Compensation Annual Service.”

SEC Chair Chris Cox is History

Apparently, SEC Chair Chris Cox resigned on Inauguration Day, even though it didn’t make news until later yesterday – and the SEC still hasn’t issued a press release! Which is pretty ironic given how Cox was fascinated with media coverage during his tenure. Elisse Walter will serve as Acting Chair until the Senate votes on Schapiro’s nomination…

From FEI’s “Financial Reporting” Blog: Here is the White House memo, in which White House Chief of Staff Rahm Emanuel expressed the Obama Administration’s desire to review all new and pending regulations. Among the points in the memo are that: with certain exceptions, no proposed or final regulations should be sent for publication in the Federal Register unless reviewed by a department or agency head appointed or designated by President Obama, and agencies are instructed to consider extending the effective date of pending regulations by 60 days.

The SEC Issues “21st Century Disclosure Initiative” Blueprint

Meeting the timeframe promised, the SEC unveiled its “Report of the 21st Century Disclosure Initiative” last week. As set forth in earlier draft plans, the Report is a high-level blueprint for a new disclosure framework that would result in companies no longer filing lengthy disclosure documents. Instead, companies would maintain an online ‘company file’ with interchangeable parts.

In calmer times, this might be an exciting development (as I’ve blogged about before). These days, it seems like a misdirected focus. The SEC is under heavy attack – and in some cases, for good reason. Time to hone in on substance, not form. Please save our markets.

Online Surveys & Market Research

– Broc Romanek

January 21, 2009

More Proxy Season Practice Pointers

We just posted the “Winter ’09 Issue” of (we are maintaining this publication as complimentary thru ’09 as a “Thank You” to our loyal members in a down economy). The “Winter ’09” issue includes articles on:

– Online Annual Reports and Proxy Statements: What’s Wrong and How to Fix It
– The Birth of “Video Annual Reports:” A Substitute for the Written Word?
– Disclosure of Committee Membership When Members Have Changed
– A Practical Approach to Updating Committee Charters

If you’re not yet a member of, simply provide your contact information in this sign-up form and gain free and immediate access to the issue. If you signed up last year, your ID/password will continue to work – if you forgot what those are, go here to get a reminder.

Broadridge’s New Beneficial Notice and More

Gearing up for Year Two of voluntary e-proxy, Broadridge has designed a new notice for beneficial owners as well as a “Go Green” envelope that should help educate investors. We have posted samples in our “E-Proxy” Practice Area.

In addition, Broadridge has built a “Shareholder Education” website, which they intend to make available from their proxy voting pages (eg. This supplements an online tool that companies can use to create their own beneficial notice online. That tool will soon be enhanced to enable companies to create their proxy cards. Tune in on February 5th for our webcast – “How to Implement E-Proxy in Year Two” – featuring Lyell Dampeer of Broadridge, Carl Hagberg, two proxy solicitors (Tom Ball and Paul Schulman) and Keir Gumbs.

The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

Don’t forget to tune in today for the webcast – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!,” featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. This is the first of a two-webcast series, with the second one taking place the following Wednesday, January 28th.

Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.

Act Now: As all memberships are on a calendar-year basis, you will not be able to access these webcasts if you haven’t renewed for ’09 – so please renew today. If you aren’t a member, try a no-risk trial for ’09.

– Broc Romanek

January 20, 2009

Inauguration: Firsthand Sights & Sounds

Here are a few videos I took this morning as me and my family braved cold weather to join approximately 2 million others:

Obama Announced on Jumbotron

Yes, Crowded Even by Lincoln Memorial

Frozen Potomac River: Doesn’t Get This Cold Often

– Barak Romanek

January 16, 2009

The Schapiro Confirmation Hearing

Yesterday, the US Senate held a 90-minute confirmation hearing for Mary Schapiro to determine if she will be the next SEC Chair. Here are articles from Washington Post, NY Times and WSJ (and here is the WSJ Blog’s play-by-play of the hearing). Among other things, Mary said she may:

– Increase power of large shareholders to nominate directors and shape governance practices
– Pursue legislation to increase auditor oversight
– Consider changing IFRS transition timetable
– Act more aggresively against fraud
– Study short-selling impact
– Continue plan to register hedge funds
– Revamp how securitie are rated

Nasdaq Increases Compliance Period for “Market Capitalization Requirement”

On Wednesday, Nasdaq filed an immediately effective rule change with the SEC, which extends the compliance period which a listed company gets when it fails to comply with the market value of listed securities requirement – what they used to call the “market capitalization requirement” – from 30 to 90 days, making it consistent with the compliance period allowed for companies that fail the “market value of publicly-held shares” requirement. While this likely was done partially in response to market conditions, the old 30-day compliance period was too short in any market environment.

The Latest Cross-Border Deal Developments

With the dealmaking environment facing unforeseeable challenges – and the SEC making the biggest batch of changes to its cross-border in years, practitioners are grappling with how these deals will now change. Learn from these experts how cross-border deal practices are evolving and how they differ from the past in Thursday’s webcast, “Implementing the New Cross-Border Rules“:

– Christina Chalk, Senior Special Counsel, Division of Corporation Finance’s Office of Mergers & Acquisitions
– Frank Aquila, Partner, Sullivan & Cromwell LLP
– Peter King, Partner, Weil, Gotshal & Manges LLP
– Alan Klein, Partner, Simpson Thacher & Bartlett LLP
– Greg Wolski, Partner, Ernst & Young LLP

Renew Now: As all memberships are on a calendar-year basis, you need to renew now to access this webcast. If you’re not a member, try a no-risk trial for 2009.

GAO Report: Laying Down Ground Rules for Financial System Reform Debate

With Treasury’s financial system overhaul proposal already on the table (in addition to remarks by other government officials, e.g., Ben Bernanke), the GAO issued a report last week detailing a framework that can be used for evaluating these and future proposals to modernize the financial regulatory system.

In the report, the GAO reviews various market developments over the last century and how they have revealed gaps and limitations in the existing regulatory system, and then sets out nine characteristics (the framework) that should be reflected in any new regulatory system. The GAO hopes that by applying the framework to a proposed financial system reform, the benefits and trade-offs involved will become apparent.

According to the report, any regulatory system that Congress would implement should:

1. Have clearly defined and relevant regulatory goals.

2. Have comprehensive regulation of activities that pose risks to consumer protection and financial stability, while recognizing that not all activities will require the same level of regulation.

3. Have a mechanism for identifying, monitoring and managing risks to the financial system.

4. Be adaptable and forward-looking to respond to market innovations/changes and include a mechanism for evaluating potential new risks to the system.

5. Provide efficient oversight of financial services by eliminating overlapping federal regulatory missions while effectively achieving the goals of regulation.

6. Include consumer and investor protection as part of the regulatory mission.

7. Provide regulators with independence, prominence, authority and accountability.

8. Ensure that similar institutions, products, risks and services are subject to consistent regulation, oversight and transparency.

9. Have adequate safeguards that allow financial institution failures to occur while limiting taxpayers’ exposure to financial risk.

Next up is Treasury’s (EESA-required) recommendations on “the current state of the financial markets and the regulatory system,” due April 30, 2009. Keep up-to-date with these happening in our “Credit Crunch” Practice Area.

– Broc Romanek