By: Edward Wyatt; Sewell Chan contributed reporting.
March 17, 2010
When in doubt, conduct a study.
That, in short, is the regimen prescribed by both the House and the Senate bills proposing a regulatory overhaul of the banking and financial industries.
Overly optimistic credit ratings and investors' dependence on the credit rating agencies, for example, were shown to have contributed to the subprime mortgage mess. But the Senate and House bills call for four to six separate studies of up to 30 months' duration of how credit ratings agencies work, how they are compensated and what can be done to make their ratings more relevant to investors.
Regulators have been investigating some of these same matters, and issuing new directives about them, since at least the early 1990s.
Several of the studies focus on proposals that are vigorously opposed by banking industry groups or Wall Street firms, like a change that would make stock brokers subject to the same fiduciary standards as financial advisers -- that is, to act in the best interest of their customers.
The Senate bill calls for a new study even though the Securities and Exchange Commission commissioned a similar report in 2008. At the same time, the new bill leaves the S.E.C. with no power to act on the subject of either review.
Opponents of new regulations say that the prescribed studies are warranted because they can help derail overly burdensome rules that can strangle growth, particularly for small companies, which often lack the resources required to meet the demands of regulators.
In the House bill, therefore, there is a call for a study of how regulations affect small businesses, and another to examine the definition of ''small.''
Christopher J. Dodd, the chairman of the Senate Banking Committee, who introduced the bill, told committee members on Tuesday to submit proposed amendments by Friday afternoon, and said the committee would begin considering those changes on Monday.
Consumer advocates say they believe that too often studies are used to push an issue down the road, perhaps with the hope of never having to address it.
Representative Barney Frank, the chairman of the House Financial Services Committee, said there was truth to that, but political realities often dictate that studies be included.
''If you shoot them down, the other side will say, 'What, are you afraid of, the facts?' '' Mr. Frank said. ''Occasionally it is a legitimate thing, but mostly it is political folderol.''
The House bill, which was passed last year, is more laden with requirements for studies -- at least 38 of them, to be conducted by the Government Accountability Office, the S.E.C., the Treasury Department, or the proposed systemic risk council, which would include members representing at least 10 federal agencies. The Senate bill calls for roughly two dozen studies.
The problem with lengthy studies is that they delay regulatory changes, which can end up hurting investors, said Lynn E. Turner, formerly the chief accountant for the S.E.C. He said that after the Enron collapse, some members of Congress wanted to include legislation in the 2002 Sarbanes-Oxley Act that would restrict the use of off-balance sheet entities, which were a central part of the Enron fraud.
Instead, Congress opted for a study, which the S.E.C. delivered in 2005, recommending several accounting and reporting changes to provide more transparency on company financial statements.
The recommendations were largely unheeded by Congress, Mr. Turner said, and a few years later, similar problems contributed to the collapse of Lehman Brothers.
Some of the proposals for studies are so specific that they raise questions about whose interests are being watched over.
Other studies address issues that have been debated in the financial industry for years, like proposals over whether individual investors should be required to use arbitration to settle disputes with brokers, rather than having access to the courts. ''I think there have been hearings and testimony and lawsuits over this year for years,'' said Lauren K. Saunders, a lawyer at the National Consumer Law Center.
Barbara Roper, director of investor protection for the Consumer Federation of America, said some of the studies could provide useful information to regulators, like the proposed review of financial literacy and mutual fund advertisements called for in the Senate bill.
''They are designed to bring attention to areas where the S.E.C. does currently have the authority to improve the nature of disclosures,'' Ms. Roper said. But, she added, ''some of these studies are clearly designed to create the impression that Congress is doing something about the problem when in fact they won't.''
Now that they have a Senate proposal to focus on, consumer and banking organizations began their lobbying efforts in earnest Tuesday. Hundreds of members of the American Bankers Association had come to Washington for a previously scheduled industry meeting, and the trade group lost no time in urging them to contact their senators.
The banking group opposes the removal of the Federal Reserve Board's authority over some of its current state-chartered members and it objects to some of the consumer protection measures in the bill.
Carmen Balber, Washington director for Consumer Watchdog, a nonprofit education and advocacy group, also opposes some of the consumer provisions, but for the opposite reason, saying they do not go far enough. Some of those provisions are subject to study as well.