The Geithner Proposal David H. Lui Chief Compliance Officer

Overview The Paulson Proposal Geithner’s Whitepaper The Evolving Regulatory Framework Standards of Care: fueling change What’s next?

Restructuring the Regulatory Framework Market Stability Regulator Prudential Regulator Business Conduct Regulator

Paulson’s Blueprint for a Stronger Regulatory Structure »Authority to Gather Appropriate Information, Disclose Information, Collaborate with Other Regulators on Rule Writing, and Take Corrective Actions when Necessary »Will Replace Federal Reserve’s More Limited, Traditional Role as Supervisor of Financial Holding Companies »Has the Ability to Monitor Risks Across the Financial System Market Stability Regulator

Paulson’s Blueprint for a Stronger Regulatory Structure »Single Prudential Regulator Focusing on Safety and Soundness of Firms with Federal Guarantees »Regulation Applied to Individual Firms with Capital Adequacy Requirements, Investment Limits, Activity Limits and On-site Risk Management Supervision »Oversee Firms with Explicit Government Guarantees Prudential Regulator Market Stability Regulator

Paulson’s Blueprint for a Stronger Regulatory Structure »Monitor Business Conduct Regulation Across All Types of Financial Firms »Subsumes Most Roles of the SEC and CFTC and has Authority Over Rules »Eliminates Gaps in Oversight and Provide Effective Consumer and Investor Protection Business Conduct Regulator Prudential Regulator Market Stability Regulator

Restructuring the Regulatory Framework Market Stability Regulator Prudential Regulator Business Conduct Regulator Safety and Soundness

The Geithner Response: June 2009 Financial Crisis Becomes a Banking Crisis –Limited Impact on SEC Broad Outlines of Paulson’s Treasury Blueprint Still Visible SEC Dodges a Bullet web.pdf web.pdf

The Treasury Blueprint and the Geithner Proposal The Market Stability Regulator –Fed Control over Subsidiaries of Tier 1 FHC –Systemic Risk Management Role Prudential Regulator –National Bank Supervisor Business Conduct Regulator –Consumer Financial Protection Agency – Credit, Savings and Credit Products SEC Role

Creation of Financial Services Oversight Council Market Stability Regulator Becomes a Coordination Council Membership –Secretary of Treasury (Chair) –Federal Reserve Chair –Director of the New National Bank Supervisor –Director of New Consumer Financial Protection Agency –SEC Chairman –CFTC Chairman –FDIC Chairman –FHFA Director

New Financial Services Oversight Council Supported by “Full-Time Expert Staff at Treasury” Some Surprises: –Reduced Regulatory Role »Gathers Information Only –Refers Risk Items to Appropriate Regulators –Not Under Federal Reserve Leadership

New National Bank Supervisor The Treasury Blueprint’s “Prudential Regulator” Agency with Separate Status Within Treasury – Outlines Heightened Capital and Prudential Requirements for Banks and Bank Holding Companies –Takes over Prudential Responsibilities of OCC –Eliminates Thrift Charters (OTS) and brings them within NBS Jurisdiction –Federal Reserve and FDIC Continue to Oversee State Banks; NCUA Continues Role for Credit Unions New Office of National Insurance within Treasury to Gather Information and Develop Expertise in the Insurance Sector

New Consumer Financial Protection Agency Blueprint’s “Business Conduct Regulator” Not Focused on Safety and Soundness: Giving Consumer Protection an “Independent Seat at the Table in our Financial Regulatory System.” Can be “Assembled Reasonably Quickly from Discrete Operations of other Agencies.” Broad Jurisdiction to Protect Consumers in Consumer Financial Products and Services such as Credit, Savings, and Payment Products Heavy Banking Focus: Not Securities Regulation

Impact on SEC As Proposed Call to Tighten Oversight of Credit Ratings Agencies Call to Require Advisers to Private Funds to Register Desire to Reduce Susceptibility of Money Market Funds to “Runs” –Revision of Rule 2a-7 Coming Continued Mandatory Arbitration for Broker/Dealers? “Consistency” between IA/BDs regarding Fiduciary Duty Standard? IA Self-Regulatory Organization?

Investment Adviser SRO “the establishment of a self-regulatory framework for the investment advisory industry would enhance investor protection and be more cost-effective than direct SEC regulation. Thus, to effectuate this statutory harmonization, Treasury recommends that investment advisers be subject to a self-regulatory regime similar to that of broker-dealers.” Treasury Blueprint for a Modernized Financial Regulatory Structure (Paulson Proposal)

Potential SRO Structures Securities Industry Broker Dealers Investment Advisors FINRANew SROFINRA

* See John Walsh, Harvard International Law Journal, June 2008 Emergence of an Elastic Compliance Model Principles Based Compliance Institutions Based Compliance* Rules Based Compliance Activities are permitted so long as they do not violate specific rules “Show Me the Rule I’m Breaking!” Broad Principles defined by caselaw govern all Regulated Entities Equally Rule 10b-5 as an Example Complexity in the Marketplace Creates need for elastic regulatory model to mitigate Conflicts at larger firms without raising the bar so high that smaller firms can no longer compete

What’s Next? Hazards and benefits of predicting the future Whitepaper vs. legislation Silent on the role of the SEC – an ongoing conversation Who will regulate IAs? What will the impact be on hedge funds? Extending the conversation regarding mandatory arbitration

Questions?