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
Rather than immediately putting in place regulatory fixes for some of
the problems that contributed to the financial
crisis, the two bills each call for dozens of studies that will
effectively delay for up to two years the possibility of addressing
those problems through new laws or industry regulations.
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.”
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
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
“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
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
“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.