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From Securities Regulation Daily, October 9, 2015

Hillary Clinton unveils sweeping plan to rein in Wall Street

By Lene Powell, J.D.

Saying the Republican playbook would erase gains made since the financial crisis and bring back old and dangerous ways of doing business, a broad-based plan announced by Democratic presidential candidate Hillary Clinton would go beyond defending Dodd-Frank reforms to take new steps to curb systemic risk and crack down on bad actors. The plan would impose a “risk fee” on the largest financial institutions that would scale with the amount and riskiness of debt, and would put in place a raft of new requirements for the “shadow banking” system. The plan would also impose a tax that targets harmful high-frequency trading and make a number of changes to hold corporations and individuals accountable for financial wrongdoing, including proposed legislation to clarify the elements of insider trading.

Systemic risk. Clinton’s plan would go further than higher capital requirements already imposed on the largest banks to charge a graduated risk fee on the liabilities of financial institutions that have more than $50 billion in assets or are designated by regulators for increased oversight. The fee would scale higher for firms with more and riskier debt, but would not be applied to insured deposits. The goal is to discourage financial institutions from relying on excessive leverage and “hot” short-term money. The plan would also require large financial firms to demonstrate to regulators that they can be managed effectively, with explicit statutory authorization for regulators to require firms that do not show this to reorganize, downsize, or break apart. Additionally, compensation would be deferred for senior management and material risk takers at banks and systemically important non-banks, with compensation reduced for losses that threaten the institution’s financial health.

Taking aim at the shadow banking sector, the Clinton plan said financial dangers can lurk in the activities of hedge funds, investment banks, and other non-bank financial companies. The plan would impose margin and collateral requirements on repurchase agreements and other securities financing transactions and would enhance public disclosure requirements for these transactions. In addition, leverage restrictions and liquidity requirements would be strengthened for broker-dealers and reporting requirements would be increased for hedge funds and private equity firms. Clinton’s proposal would also review recent amendments to money-market fund rules, step up disclosure for exchange-traded products, and enhance the authority of the Financial Stability Oversight Council (FSOC). The plan would “fully enforce” the Volcker rule by cracking down on the use of evasive business structures and would reinstate the partly repealed swaps “pushout rule” which limited banks’ use of certain kinds of derivatives instruments.

Regarding high-frequency trading, which authorities have said contributed to the 2010 Flash Crash, the plan would impose a tax that targets trading strategies that involve excessive levels of order cancellations. Clinton also called on the SEC to pursue equity market reforms to ensure that markets are not putting the interests of high-frequency traders and dark pools ahead of the investing public and corporate issuers.

Holding bad actors accountable. The plan floats a number of specific proposals to step up financial enforcement, holding both individuals and corporations for breaking the law. The plan would:

  • Require large financial institutions to pay part of major civil or criminal fines from the incentive-based pay of culpable employees;

  • Empower regulators to require that senior executives lose their jobs when particularly egregious misconduct happens on their watch;

  • Unify and expand employment bars for those convicted of financial crimes across the entire financial services industry;

  • Extend the statute of limitations for major financial fraud to 10 years;

  • Propose legislation to clarify the elements of insider trading, specifically to spell out what “personal benefit” means, and to provide that insider trading does not require knowledge that the tipper disclosed the inside information for personal benefit;

  • Reduce the overuse of deferred prosecution and non-prosecution agreements to limited circumstances where there are good reasons to use them;

  • Require that firms admit wrongdoing and the underlying facts as a condition of settlements;

  • Increase transparency for corporate settlements;

  • Restrict SEC waivers for repeated egregious conduct;

  • Increase maximum penalties for SEC and CFTC enforcement actions; and

  • Increase caps for FIRREA whistleblowers.

To give authorities the resources to use all this new muscle, the Clinton plan would increase funding for the DOJ, SEC, and CFTC, noting that the CFTC has an annual budget of just $200 million to police a derivatives market of over $400 trillion. To increase regulator independence, the plan would also make funding for the SEC and CFTC independent of the annual appropriations process, to bring the funding process in line with other financial regulators.

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