Friday, June 25, 2010

Reform Rendevous

The intense negotiations on Capital Hill over the past couple of weeks appear to have little import for small cap companies. Congress has large banks and their seemingly insatiable appetite for risk in their sights. Even the smaller financial institutions are not likely to be changed very much by the proposed restrictions on derivatives trading. The so-called Volcker Rule, if it remains a part of the legislation, could trigger the spin-off of some of the largest bank trading operations. Smaller regional banks are simply not significant players in the proprietary trading.

Smaller mortgage lenders and banks may be unduly impacted by the proposed consumer protection agency that will oversee investment and loan products offered to the public. Compliance could be more onerous and costly for smaller operations, not to mention the U.S. taxpayer, who will have to pay for the administrative costs of the agency in whatever form it might take.

We also note the so-called proxy access provision, which ensures that shareholders can nominate directors to public company boards. Corporate lobbyists have opposed proxy access as it is feared that activist investors will use this approach to exert influence over board composition. Their fears might not be unfounded. That is, after all, what access is all about - influencing the board of directors. From the investors perspective - and the U.S. taxpayer who paid for the TARP fund - a little more influence over decisions in the board room is a good thing. In the last few years directors of U.S. companies have shown an unusual proclivity to do little more than pick up their meeting check and have lunch.

It is not certain yet what will be included in the final bill. There still appears to be considerable opposition to financial reform of any kind. As with health care reform, Republicans have turned their backs on the process, leaving Democrats to argue among themselves. Nonetheless, Congress is expected to have a rendevous with financial reform this next week.

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