Issues Update
CalPERS Signs On to Letter Backing Corporate Governance Reforms
June 8, 2010
CalPERS and 20 other public pension plans wrote to a pair of key lawmakers to urge them to keep corporate governance provisions in the final version of the financial regulations reform bill.
The House and Senate have each passed versions of reform legislation and now must merge the two bills. Both measures include provisions that would give shareholders the ability to cast advisory votes on executive pay packages and would clarify the authority of the SEC to issue rules that would enable shareholders to put director nominees on proxy ballots.
The letter to Rep. Barney Frank, D-Mass., and Sen. Christopher Dodd, D-Conn., the sponsors of the House and Senate bills, states that the proxy access measure “will provide investors with the necessary tool to achieve appropriate transparency, accountability, and management of risk at the corporate level.”
“It will take the combination of strengthened oversight by both regulators and investors to restore and maintain the integrity and effectiveness of our capital markets and the accountability of its participants,” the letter states.
The House and Senate bills are generally similar – with a focus on ending “too big to fail” and providing oversight of “systemic risks” – but some important differences must be worked out, including:
- The House bill would create a free-standing agency to watch over consumer financial products, while the Senate bill would house such an agency within the Federal Reserve and make its rules subject to the veto of a council of regulators. Dodd drafted this measure after negotiations with Republican Sens. Richard Shelby of Alabama and Bob Corker of Tennessee. Neither man voted for the bill, so it is probably unlikely that Senate Democrats will defend the proposal during talks with the House.
- Both bills would require derivatives to be traded on exchanges and approved by a clearinghouse, but the Senate version would require banks to spin off derivatives activities in order to remain banks. There is some wariness, even outside of the GOP caucuses, about this last provision, leading some to suggest that it is not unlikely that it will be dropped or weakened.
- The House bill includes a $150 billion fund to be used to wind down failing firms. Republicans successfully opposed the inclusion of a similar $80 billion fund in the Senate bill, arguing that it would, essentially, make the practice of the federal government bailing out firms permanent. The Obama administration does not support the fund and Frank appears unlikely to push for it.
- Both bills would allow investors to sue credit rating agencies – who are blamed by many for contributing to the financial crisis by failing to sound the alarm on the deeply troubled mortgage-backed securities market – but the Senate bill would also empower the Securities and Exchange Commission to create a board that could assign credit rating agencies to rate specific asset-backed securities.
- Neither bill would immediately enact the White House-backed “Volcker rule” – which would prohibit banks from engaging in certain investment activities unless the activities directly benefited their customers – but the Senate legislation authorizes a study of the issue and gives regulators the power to address the issue after the study’s completion.
The House-Senate conference committee that is to produce a compromise bill is expected to meet for the first time on Thursday and to begin its substantive work next week. Democratic leaders hope to have both chambers vote on the new bill and send it to the president by July 4.
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