The Business Law Association and the Dennis J. Block Center for the Study of International Business Law hosted a panel discussion on November 17th, entitled, “Regulation to the Rescue, or Too Little, Too Late?” to address the new Dodd-Frank legislation, which was recently signed into law. Sarah DeStefano ‘12, helped organize the event and introduced the panelists, BLS Centennial Professor of Law Roberta Karmel; Edward F. Greene, a partner at Cleary Gottlieb Steen & Hamilton LLP; and Warren Lee ’08, an associate with Linklaters LLP.
Professor Karmel briefly outlined the reasoning behind the new law and spoke about hedge fund registration requirements. The law changed the SEC’s longstanding relationship with hedge funds, now requiring them, with some exceptions, to be registered by summer, 2011. Many hedge fund companies must now hire a chief compliance officer, create a code of ethics, comply with custody and record keeping requirements, and be subject to examinations. The new law also requires the General Accounting Office to conduct studies and report on the feasibility of forming a self-regulatory organization (SRO). When asked by a student why the hedge funds would not want FINRA as their SRO, Karmel replied that FINRA has always been the regulator for broker-dealers, traditionally the competitors of hedge fund companies.
Edward Greene spoke on financial stability and the Volker Rule, which states that financial institutions cannot accept insured deposits and then trade with these funds. Greene eloquently outlined the comparisons between today’s economy and the market collapse of the 1930s and how the United States and the international community has responded to the financial crisis in both cases. The G7 of the 1930s became the G20, increasing the number of countries and global leaders participating. With the backing of the United States government, rather than the gold standard, its monetary policy created a “too big to fail” mindset. Greene addressed the “moral hazard” of a “too big to fail” belief system, stating that if the financial institutions are backed by the government, these institutions will always lend and be bailed out when they get into trouble. Citing the history of Freddie Mac and Fannie Mae, he pointed to other large institutions that survived near bankruptcy, were bailed out, and grew in size, creating greater still risks.
Warren Lee ’08 provided an insightful perspective, recalling his Law School days when he participated in a 2006 IBL event at which he and other students were guessing when a financial crisis might occur. Lee presented an overview of the different financial problems the United States has survived in the past 80 years. “Until now,” Lee said, “derivatives and derivatives traders have been virtually unregulated.” He highlighted the fact that Dodd-Frank grants broad regulatory jurisdiction over some securities-based swaps within a tiered system of institutions, leaving a large number of transactions to go unregulated—as was the case before.
The conclusion, the panelists surmised, is that the Dodd-Frank legislation does not adequately address the “moral hazard” of “too big to fail.” Panelists and audience members alike also questioned what aspects of the law might change in light of the new majority elected into Congress.
Aleksandr Altshuler ‘11, President of the Brooklyn Law School's Business Law Association, and Kevin Johannsen ‘11, its Vice President, who also helped plan the event, said, "The panel provided tremendous insight into the major issues surrounding the new financial regulatory reform in the U.S. As soon-to-be practitioners in the business law field, we felt it was important to learn about this new financial reform and how it is currently being viewed and dealt with in the field. While many tough questions concerning the law's efficacy remained unanswered, these are the types of difficult questions we will be wrestling with when we begin to practice law."