TheCorporateCounsel.net

April 6, 2009

Regulatory Principles from Last Week’s G-20 Meeting

By all accounts, last week’s G-20 summit seemed to promote quite a bit of agreement on ways to move forward to turn around the global economy and reshape the financial regulatory framework. In many ways, the G-20 meeting served as an important “deadline” for member countries to get their regulatory reform proposals lined up so that they could be discussed with other world leaders. Last Thursday, the G-20 leaders issued this communiqué outlining, among other things, the key principles under which changes to financial regulation will be implemented. The leaders called for greater consistency and systematic cooperation among countries, which will be implemented through, among other initiatives:

– a newly established Financial Stability Board, as a stronger successor to the Financial Stability Forum (FSF), which will seek to provide early warnings of macroeconomic and financial risks;

– reshaped regulatory systems that will allow authorities to identify and take account of macro-prudential risks;

– extended regulation and oversight over systemically important financial institutions, instruments and markets, including systemically important hedge funds;

– standards for internationally consistent, high quality and sufficient bank capital (once the recovery is assured);

– high quality global audit standards, including improved standards for “valuation and provisioning;”

– an end to bank secrecy and tax havens; and

– oversight over credit rating agencies.

Perhaps the most interesting focus of the G-20 for me was their pledge to deal with compensation issues at financial institutions. In this Declaration, which provides more details on the broad G-20 principles, the leaders appeared to recognize compensation issues as a global problem and endorsed FSF principles on dealing with compensation at significant financial institutions. The principles require that:

1. Boards of directors of firms play an active role in the design, operation and evaluation of compensation schemes;

2. Compensation arrangements, including bonuses, properly reflect risk, and that the timing of compensation payments be sensitive to the time horizon of risks (i.e., payments should not be made in the short term when the risks occur over the long term); and

3. Firms publicly disclose clear, comprehensive and timely information about compensation, so that stakeholders (including shareholders) are timely informed and can “exercise effective oversight.”

The EU’s Role in Financial Regulation

In anticipation of the G-20 meeting, the European Council rolled out a plan to significantly expand the European Union’s role in regulating the financial system across Europe. As discussed in this memo from Cleary Gottlieb, a new European financial supervisory body could be up and running by the end of 2010, helping to coordinate the regulatory efforts of member states. Further, the EU’s plans call for legislative proposals that will help fill gaps in the regulatory structure and create a framework for regulating retail financial services. Echoing efforts in the US, the EU will direct efforts toward regulating hedge funds and credit rating agencies, revisiting capital requirements, addressing compensation issues and providing for centralized clearing of derivatives. All of these efforts appear to be on a very fast track, with further recommendations on a number of these principles expected over the next couple of months.

Skirting the EESA/ARRA Exec Comp Limitations?

This Washington Post article from over the weekend notes how the Administration has been “engineering its new bailout initiatives,” so that participating firms can avoid limitations imposed on executive compensation contemplated by the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. The article notes that a number of programs through which bailout funds are distributed are using special entities, so that funds are provided only indirectly from the government. Also noted is the Obama Administration’s decision to reverse the Bush Administration’s efforts to apply the executive pay limits to the originators of the assets participating in the TALF program (which was finally launched at the beginning of March).

Efforts to craft programs around the executive compensation limits reflect what appears to me to be a legitimate concern that the imposition of the pay limits may, in some circumstances, undermine bailout efforts by discouraging participation. While executive pay reform is important and we can’t ignore the level of public anger over the topic, it seems that there should be some flexibility in applying the limitations outside of a direct investment context. My hope is that Congress doesn’t try to reverse these decisions for the purpose of achieving short-term political gains, because we are still in a time where some level of regulatory flexibility is needed on these issues.

– Dave Lynn