Letter Opposing S. 3217, the "Restoring American Financial Stability Act of 2010 (RAFSA)"
April 19, 2010
TO THE MEMBERS OF THE UNITED STATES SENATE:
The U.S. Chamber of Commerce, the world's largest business federation representing the interests of more than three million business and organizations of every size, sector, and region, opposes S. 3217, the "Restoring American Financial Stability Act of 2010 (RAFSA)," in its current form, because it fails to achieve the meaningful financial regulatory reform necessary to ensure productive capital markets and to fuel long-term economic growth and job creation. The Chamber looks forward to working with Congress to address these shortcomings, and to achieve meaningful financial regulatory reform legislation.
A. Adverse Impacts Upon Long-Term Job Creation
The broken financial regulatory structure has contributed to the loss of 8.2 million jobs in the recession. The Chamber estimates that more than 20 million jobs need to be created over the next ten years to replace those lost during the current recession and return the economy to prosperous growth. Appropriate financial regulatory reform will provide the efficient capital markets that supply the fuel needed to revive job creation. Regulatory reform that inhibits capital formation will harm the ability of the economy to reach its growth potential.
The Chamber is concerned that RAFSA, as currently drafted, would impede capital formation and job growth. Because of these potential adverse impacts on job creation, the Chamber opposes RAFSA as marked up by the Senate Banking Committee.
The financial crisis has highlighted problems that have existed within the U.S. financial system for quite some time. Before the crisis erupted, the Chamber called for a broad-based overhaul of the U.S. financial regulatory system as a means to increase the efficiency of capital markets and provide businesses with the opportunity to grow and expand. The Chamber was not alone in pointing to the fact that a patchwork system of regulation creates inefficient capital markets and thwarts the ability of the economy to grow.
While the Chamber supports the intent of RAFSA to reform the financial regulatory system, the positive elements of RAFSA are significantly outweighed by provisions that would only magnify and exacerbate flaws within the existing regulatory structure and hamper economic growth. The Chamber has concerns with the following provisions:
I. Consumer Protection
While the Chamber appreciates the Chairman's efforts to revise the consumer protection title, we remain strongly opposed to the creation of a new regulator with unchecked and unprecedented power that bifurcates the regulation of products from that of the safety and soundness of the institutions that offer them.
Specifically, the Chamber is concerned with the unfettered authority granted to the Director of the Bureau of Consumer Financial Protection – more authority than any other federal regulator. Unlike the Federal Trade Commission or the Securities and Exchange Commission, regulatory authority would not be exercised by a multi-member, bipartisan commission. Decisions by the Director could not even be overturned by the President, and Congress does not even have oversight over its budget.
Secondly, the Bureau would not regulate only banks or bank-like institutions; rather it would regulate hundreds of thousands of businesses. Due to vague and broad definitions, these businesses would be subject to regulation for engaging in "financial activity" even if only as a minor adjunct to a line of business that has nothing to do with consumer financial services or is a "service provider" as that term is defined in the statute.
Third, the lack of full preemption will continue to subject federally regulated institutions to state consumer protection laws. Because the legislation would allow states to enforce the CFPA and its regulations, without any supervisory control by the new federal agency, businesses would also be subject to varying interpretations of the statute by each state's Attorney General as well as the CFPA's regulations.
Lastly, the Chamber firmly believes that it is possible to find an approach to consumer protection that is consistent with promoting safety and soundness and vice versa. But this bill does not treat both goals equally; it elevates the new Director over safety and soundness regulators. On the heels of a near financial meltdown, this makes little sense.
Taken together, these elements of the Consumer Financial Protection Bureau would increase the uncertainty and costs associated with lending, and reduce the availability and affordability of credit for consumers and small businesses when they can least afford it. The Chamber urges the Senate to work towards a bipartisan solution that will address these areas of concern so that we can enhance consumer protections without jeopardizing economic growth.
II. Excessive Litigation Concerns
This legislation contains numerous provisions that would result in increased litigation. For example, the delegation of authority to state attorneys general to enforce the consumer protection title would likely result in a proliferation of new contingency fee agreements between various state AGs and their partners in the plaintiffs' class action trial bar. They will use this legislation as a way to file even more contingency fee based lawsuits that would result in a windfall for the plaintiffs' bar with little real benefit going to consumers. In addition, the ability granted to the Consumer Financial Protection Bureau as well as the SEC to regulate or ban predispute arbitration clauses will only serve to increase the number of cases going into the court system to no good end. The Chamber is also concerned about the expansion of private liability directed at the credit rating industry and the potentially negative impact it could have on access to credit.
Throughout this Congress, the Chamber has advocated for derivatives regulatory reform that enhances the transparency and stability of the derivatives markets while upholding the ability for corporate end-users to access the over-the-counter markets affordably. Unfortunately, the Chamber believes Title VII does not strike the right balance and would jeopardize responsible risk management practices within companies across the country.
Specifically, the Chamber urges the Senate to support a strong, clear exemption from central clearing and bilateral margining for end-users. The exemption should acknowledge that businesses hedging risk do not threaten the stability of the financial system and should not be forced to post cash collateral that would otherwise be used to grow the business, make productive investments, and create jobs.
In addition, derivatives legislation should provide end-users the certainty that it will be applied prospectively, acknowledging that existing contracts were negotiated according to the law and market practices at the time of transaction.
Lastly, increases in capital charges should be based on actual risk of loss and aimed at promoting the safety and soundness of the financial system, and should not be assessed to penalize the use of OTC derivatives or otherwise create an incentive to centrally clear transactions.
IV. Corporate Governance
The Chamber opposes the inclusion of the corporate governance provisions in RAFSA as embodied in Title IX, subtitles E and G. Corporate governance has traditionally been within the purview of state law and allowed shareholders and directors to determine the best governance structures for a company. The governance provisions of RAFSA would federalize corporate law, place large activist investors at the head of the line, and allow them to use governance procedures as a means to gain leverage and advance agendas wholly unconnected to the management of a company. This one-size-fits-all approach would distract directors from managing a company, lessen shareholders voice in proposals and director elections, and continue to disenfranchise retail shareholders.
V. Systemic Risk and Resolution Authority
a. Systemic Risk Council, Duplicative Regulation and "Too Big to Fail"
The Chamber supports the formation of a Council, made up of functional regulators, the Federal Reserve, and the Treasury Department, to monitor systemic risk. Greater access to comprehensive market and industry information would assist the Council in identifying emerging threats to America's financial stability. The Chamber also believes that functional regulators, rather than the Federal Reserve, should play the predominant role in ensuring greater oversight over the activities of large, non-bank financial institutions.
A "one-size-fits-all" approach will not produce more effective oversight. In this regard, the Chamber opposes bank-like regulation for large, non-bank institutions. Shoehorning nonbank institutions into a banking regulatory framework would disrupt how these institutions compete in and out of their industry. Instead, an institution's functional regulator should have authority to set heightened standards that provide appropriate safeguards yet support the various business models of non-bank institutions.
RAFSA also preserves the "too big to fail" concept to the detriment of all market participants. Designating firms for special prudential regulation would inevitably create a list of "too big to fail" institutions. Some companies would become safer bets than others and receive funding and other advantages.
Regulators should have appropriate tools to address systemically risky activities, including setting capital and liquidity standards. However, the Chamber opposes actions that would place a government imposed ceiling on the growth of U.S. companies. Placing a defined or arbitrary cap on the size of U.S. businesses would deter the growth of domestic companies and decrease America's economic competitiveness in relation to foreign markets.
b. Potential Regulation of Non-Financial Companies
Many companies use financing arms to facilitate the ability of customers to purchase goods and services, or own banks to reduce operational costs. These functions are important for main-line companies in a 21st century economy.
While the Chamber believes that systemic risk monitoring is an important function, we oppose setting duplicative standards for holding companies and subsidiaries, including the requirement to have finance subsidiaries of industrial companies regulated like depository institutions, with the corresponding restrictions. Greater coordination among regulators should result in regulatory, oversight, and examination processes that are streamlined to avoid duplication – not a new two-tiered system of standards.
Such a result would adversely impact economic growth and job creation.
c. Resolution Authority
The goal of enhanced resolution authority should be to accelerate the orderly dissolution of failing firms, not to sustain them. With the right tools, the Chamber believes institutions can be allowed to fail without threatening the overall stability of U.S. markets. No company should operate on the expectation that they will receive financial assistance if they get into trouble. This resolution authority must set clear and specific guidelines that provide predictability and transparency for all market participants. Ultimately, the existing bankruptcy process, with its predictable rules, should be relied on to the greatest extent possible. By supporting a weakened company with government cash infusions for an extended period of time, the government would create competitive inequities in the marketplace. The Chamber also opposes the creation of a prepaid resolution fund. This would increase the risk of bailouts because the means for doing so would already be readily available and almost earmarked for that purpose. Healthy companies that weather tough economic times should not have to pay for the government's costs of keeping a failing competitor in operation so it can be sold or dissolved.
d. The Volcker Rule
The Chamber believes that the intent of the proposed Volcker rule to stabilize the financial sector is a good one. However, the rule itself may be too restrictive for a growing economy and the prohibition of certain activities by financial institutions may place U.S. capital markets at a distinct competitive disadvantage. Accordingly, the Chamber suggests that other pro-growth tools be used by regulators, such as heightened capital requirements and liquidity standards, to achieve the intent of the Volcker Rule.
VI. Bank Tax
The Chamber urges the Senate to reject any efforts to establish a tax on banks, similar to that proposed by the Obama Administration earlier this year. Imposing a tax on the banks has the potential to raise the costs for consumers or reduce the capital of financial institutions which would ultimately depress the potential lending capacity of our financial system. A reduction of lending capacity would deprive businesses of the capital that they desperately need in order to spur job growth and economic expansion.
While the Chamber has significant concerns regarding RAFSA and opposes it in its current form, we look forward to working with members of the Senate to improve this legislation.
R. Bruce Josten