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Statement No. 236
View related content: Financial Services
Statement No. 236
For Information Contact:
George J. Benston
Kenneth W. Dam
With the change of leadership in the incoming Congress, the Shadow Financial Regulatory Committee believes it would be useful to review and reiterate some financial agenda items that the Committee has considered at this and past meetings.
1. Section 404 of the Sarbanes-Oxley Act
In Statement No. 219 (May 16, 2005) on Evaluating Section 404 of the Sarbanes-Oxley Act concerning Internal Controls, we recommended a re-evaluation of Section 404, which requires public companies to assess, and have independent public accountants attest to, the effectiveness of internal controls. The Interim Report of the Committee on Capital Markets Regulation, issued on November 30, 2006, also criticizes the cost imposed on shareholders of Section 404. These costs are entirely too high for the benefits that might result, especially for small companies. The fees of auditing firms are high, in significant part due to the work they must do to avoid the liability they face from having to attest to the adequacy and effectiveness of a company’s internal controls. The SEC is now considering ways to reduce this cost to registrants, an effort that we applaud.
2. Government Sponsored Enterprises (GSEs)
On a number of occasions the Committee has considered public policy issues concerning Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system (the GSEs). Our Statement No. 216 of February 14, 2005 endorsed S. 190, legislation then before the Senate that would regulate the GSEs. Contrary to the assertions of the GSEs, legislation that would permit the new GSE regulator to reduce the size of the GSEs’ portfolios would have no significant that the new Congress will, at a minimum, conduct a review of the problems created by the GSEs’ size and dominance. This review is especially timely in view of the corporate governance issues reflected by the numerous regulatory, accounting and accountability issues raised in the past few years by the restatements to their financial statements required by their supervisory regulatory agency.
3. A Uniform National Policy on Privacy of Financial Information
In Statement No. 185 of December 9, 2002, the Committee recommended to the then incoming Congress that legislation be enacted to create a uniform national policy on privacy of financial information. We noted that states continued to enact such legislation. This process has continued since 2002, creating an increasingly chaotic set of inconsistent and sometimes conflicting measures, making it difficult and costly for financial services companies with national operations to operate efficiently. These costs raise consumer prices. We urge the new Congress to remedy this situation by preempting state laws on sharing financial information.
4. An Optional Federal Charter for Insurance Companies
The Committee first recommended the adoption of legislation creating an optional federal charter on May 7, 2001 (Statement No. 170) for insurance companies. The present system requires insurance companies to get the approval of their products, and in many cases their rates, in each state in which they do business, an unnecessarily costly and burdensome process that deprives consumers of the advantages of a single national insurance market. Dual chartering has worked well for banks. We recognize that this is a complex issue for which extensive hearings probably will be necessary. It is important, therefore, that the new Congress start the process of considering this legislation early in the session.
5. Industrial Loan Company Charters for Non-financial Firms
In Statement No. 224 (December 5, 2005), the Committee considered Wal-Mart’s application for an industrial loan company acquisition in Utah. In line with many past statements (Nos. 115, 118, 138, 142, 155, and 194), we expressed the view that the time had come to eliminate the longstanding barriers against combinations of banks and commercial firms in order to encourage new entry, competition, and beneficial takeovers of poorly run institutions in the financial services industry. The FDIC has placed a six-month moratorium, which ends in late-January 2007, on Wal-Mart’s application. This delay was due, we believe, to opposition in some Congressional circles, not so much because of a reasoned preference for continued separation of banking and commerce, but rather because of the prominence of Wal-Mart in issues concerning labor, the minimum wage and other issues not related to the financial services industry. Some bankers’ desire to avoid competition from Wal-Mart may also have played a role.
As long as the Wal-Mart matter remains unresolved, we fear that important reforms of our financial system will not occur. Consequently, the FDIC should not extend the moratorium beyond its current terminal date and should approve Wal-Mart’s application for deposit insurance. We note that several national retailers already own and operate industrial loan companies, so that there is little reasoned basis for allowing controversies over Wal-Mart’s employee relations and other unrelated issues to block banking reforms that would benefit consumers.
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