Essay on "Most Important Pieces of U.S. Banking Financial Sector Legislation"

Essay 6 pages (2448 words) Sources: 1+

[EXCERPT] . . . .

U.S. Banking/Financial Sector Legislation in the Last 50 Years

The past half century has been a turbulent period in America's banking and financial sector history based on a need for news laws in an increasingly globalized marketplace. Although a number of important pieces of legislation were enacted during the period from 1960 to 2010, an argument can be made that the three most important were the Sarbanes-Oxley Act of 2002, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In support of this argument, this paper provides a review of the relevant literature concerning these three acts, followed by a summary of the research and important findings in the conclusion.

Review and Discussion

Sarbanes-Oxley Act 2002

1.

What were the problems/conditions giving rise to the legislation? Prior to July 2002, the accounting profession in the United States was largely self-regulated (Parles, O'Sullivan & Shannon, 2007). (Parles et al., 2007). According to Parles, O'Sullivan and Shannon, "This era ended in July 2002 [when] the Public Company Accounting Reform and Investor Protection Act of 2002, popularly known as Sarbanes-Oxley, became law. The law [was] enacted largely in response to the Enron and WorldCom scandals" (p. 38). This point is also made by Moberly (2007) who advises, "Whistleblowers played a significant role in revealing and disrupting corporate malfeasance at the beginning of the twenty-first century, as scandals at corporations such as Enron and WorldCom came to public light through the efforts of whistleblowing employees" (p. 65). In response to these and other accounting and governance issues that emerged during this period, lawmakers used the provisions of the Sarbanes-Oxley Act (hereinafter alternatively "the Act" or "SOX") to improve corporate transparency and governance standards in publicly held companies. As Moberly points out, "Congress recognized the importance of whistleblowing and included strong and unprecedented anti-retaliation protection for corporate employees as part of the Sarbanes-Oxley Act of 2002, the mammoth congressional reaction to these corporate scandals" (p. 66).

2.

What were the major provisions of the Act? Besides the aforementioned protections for whistleblowers, the Act also established new auditing and accounting standards for public companies (Mccarthy, 2004). The eleven salient sections of the Act provided new requirements for disclosure, enhanced review of disclosures, and a variety of changes to other rules and regulations affecting the banking and financial services industries. In this regard, Parles and her colleagues report that the Act "established new law, made changes to existing law, and affected Securities and Exchange Commission rule-making and stock market listing standards. [the Act's provisions affect accountants, lawyers, and many others who 'deal with public companies or issuers' [and] included many 'reforms aimed at improving and enhancing financial reporting and at regulating the accounting and audit professions'" (2007, p. 39).

3.

What were the significant effects or outcomes arising from the legislation? Some of the more significant effects of the Act was the successful reforms it achieved by focusing on auditor independence using Section 203 that requires the rotation of audit partners in charge of audit clients. The lead audit partners and audit partners responsible for audit review are now required to be rotated off following a 5-year period; moreover, these may be subjected to a so-called 5-year "time-out period" and other audit partners besides the lead or concurring partners are likewise subject to a 7-year rotation and a 2-year time-out period (Parles et al., 2007). Finally, Section 206 requires auditors going to work for an audit client in a key position to undergo a 1-year "cooling off" period (Parles et al., 2007). While the Act was directed at publicly held companies and their auditors only, Mccarthy (2004) reports that it has had an effect on the private sector as well. In this regard, Mccarthy notes, "Although most of the states' proposed legislation has not been passed into law, Sarbanes-Oxley is influencing the management of private companies and not-for-profits. Anecdotal evidence suggests that some not-for-profits are adopting Sarbanes-Oxley-based standards in anticipation of eventual state-level regulations" (2004, p. 37).

4.

Did the legislation fix the problem or condition that it was intended to fix? One of the fundamental problems that resulted in the creative accounting and corporate shenanigans that led to the passage of the Act in the first place was largely fixed by the provisions of the Act. In this regard, Parles and her colleagues report that, "The lack of auditor independence is viewed as a significant contributor to the major corporate scandals mentioned earlier. SOX clearly focuses on this issue with Section 201, which constrains potential auditor conflicts through measures intended to enhance auditor independence" (2004, p. 44). In addition, the Act provided new stipulations concerning the need for approval by the audit committee when there are potential conflicts of interest involved (Parles et al., 2007). Some observers suggest that the problems that were intended to be fixed by the Act were too broad-based to be remedied in one fell swoop, but suggest that the Act represents a good start in the right direction. In this regard, Leinicke et al. conclude that, "Sarbanes-Oxley won't eliminate all fraud. Time will tell how much 'good' will come from it" (2004, p. 44).

5.

Were there any significant unintended consequences of the Act? Some critics of the Act argue that many of its provisions are redundant and are creating unnecessary costs for responsible accounting firms and banks that were already complying with its new requirements. For instance, the senior vice-president and CFO of UNOVA Inc., notes, "Additional procedures have to be performed that are not value-added and they scream out bureaucracy and added costs. It will be a lot of time and effort to prove what we've already been doing" (quoted in Coustan, Leinicke, Rexroad & Ostrosky, 2004 at p. 44). Moreover, while the Act was targeted at publicly held companies and their auditors, other financial services organizations have also been affected by the provisions of the Act as well. For example, Mccarthy reports that, "Midsize and small firms' adjustments to the compliance requirements imposed directly by Sarbanes-Oxley or indirectly by their clients' responses to the act include a spectrum of changes such as heightened monitoring of the regulatory environment, vetting prospective audit clients by committee and meeting staffing needs as workloads intensify" (2004, p. 37). To some extent, these additional requirements are working in favor of some financial services firms. For instance, Mccarthy also notes that, "The act even has presented practitioners with a new type of engagement opportunity: the second-CPA-firm role to document and test public companies' internal controls for entities they do not audit" (2004, p. 37).

6.

Why did you include this piece of legislation in your list?

The Act is widely regarded as being one of the most important pieces of legislation in the nation's history. For instance, Moberly emphasizes that, "Scholars praise the whistleblower protections of the Sarbanes-Oxley Act of 2002 as one of the most protective anti-retaliation provisions in the world" (p. 66). Likewise, Parles and her associates enthuse, "The Act has been described as the most sweeping and significant change in securities law since the 1930's" (2007, p. 39).

Gramm-Leach-Bliley Financial Services Modernization Act of 1999

1.

What were the problems/conditions giving rise to the legislation? The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (hereinafter "the Act") was enacted in response to inefficiencies and inequities in the financial services market in the United States prior to the turn of the century (Gup, 2000).

2.

What were the major provisions of the Act? The Act allows American and foreign banks to affiliate with insurance companies, eliminated the remaining restrictions on the Glass-Steagall Act concerning affiliations between banks and securities firms, and generally expanded the scope of services that were allowed to be provided, but banks are now required to obtain Financial Holding Company status to engage in these expanded financial activities (Alexander, Dhumale & Eatwell, 2006). In addition, the Act amended the Bank Holding Company Act of 1956 to allow financial holding companies to provide a complete range of financial services through subsidiaries, including commercial banking, merchant banking, and insurance underwriting and brokerage (Gup, 2000). Beyond the foregoing, the Act also expanded the regulatory authority of the Federal Reserve System's board of governors by designating them as the overall regulators of the financial holding companies and restricting the new services that were allowed to be conducted in operating subsidiaries of national banks rather than in affiliates of bank holding companies (Gup, 2000).

3.

What were the significant effects or outcomes arising from the legislation? According to Gup (2003), the Act has significantly enhanced the competitiveness of U.S. commercial banks compared to other domestic and foreign financial institutions.

4.

Did the legislation fix the problem or condition that it was intended to fix? Yes, the Act succeeded in allowing commercial banks in the U.S. To engage in securities and insurance activities and for financial services firms to likewise compete by offering certain banking services (Walter, 2004).

5.

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