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July 19, 2010
Passage of Financial Reform Bill Applauded by Sustainability Investors
    by Robert Kropp

Bill as passed by Senate includes provision for proxy access but not a majority voting standard.

Last Thursday, Congress finally made official the response of the US government to the conditions that brought about the financial crisis, as by a vote of 60-39 the Senate passed financial regulatory reform legislation. Three Republicans joined all but one Democrat in voting in favor of the bill, which signaled the end of decades of deregulation of the financial industry.

The bill contains a version of the so-called Volcker Rule, which will require banks to spin off their derivatives trading business. The trading of derivatives will also be subject to federal oversight. A new regulatory council will be responsible for monitoring systemic risk in the economy, and a process for the liquidation of "too big to fail" banks is included as well.

The bill also creates a regulatory bureau within the Federal Reserve responsible for protecting consumers of financial products.

For investors, the bill includes a provision for proxy access, which gives the Securities and Exchange Commission (SEC) authority to adopt a process by which shareowners may submit alternate slates of candidates for corporate boards of directors. The bill also provides for mandatory nonbinding shareowner votes on executive compensation, although it mandates such a vote every three years, instead of annually.

The bill increases the oversight of credit rating agencies, whose inflated ratings of mortgage-backed securities misled investors into believing that such securities were credit-worthy. The bill allows for lawsuits to be filed by investors against credit rating agencies.

In response to the passage of the bill, Lisa Woll, CEO of the Social Investment Forum (SIF), said, "The fact that financial reform accomplished many of the priorities of socially responsible and sustainable investors is another sign that the key principles that have been at the core of our work for years are being widely embraced. The financial markets, investors and consumers will be better off as a result of the action taken by the Senate and House of Representatives."

However, some of the financial reforms called for by SIF and other sustainability investors did not make it into the final version of the bill. A majority voting standard for the election of directors, which is, according to Peter DeSimone, the Director of Programs at SIF, "Is a basic democratic principle, and one that would restore accountability in the market without costing the US taxpayer anything," was not included.

Self-funding of the SEC was not included either. As the SIF
press release stated, "As a result of this legislation, the SEC will have to conduct numerous studies and write many more new rules…SIF and its members will continue to call on Congress to provide enough funding to the SEC so that it can be an effective regulator."


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