A 9/11-Style Independent Commission for Financial Regulatory Reform Looms on the Horizon

May 13, 2009

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is closely tracking government responses to the turmoil that has catalyzed a dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal and oversight issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on Congress’ expected creation of an independent commission to examine the domestic and global causes of the current U.S. financial and economic crisis.  While various bills have been introduced this Congress and last to create a commission or other entity to investigate the financial markets crisis, none have moved as standalone measures.  We called for the creation of a 9/11-style independent commission back in March,[1] and now it appears that Congress is poised to act.

Congress Acts to Create a Financial Crisis Inquiry Commission

The House and Senate have each acted to add language to a fraud enforcement bill that would create an independent bi-partisan financial crisis inquiry commission to investigate the domestic and global causes of the current financial and economic crisis in the United States.  On May 6, 2009, the House voted 367-59 to adopt its version of S. 386, the Fraud Enforcement and Recovery Act of 2009 ("FERA"), which is intended to provide the federal government with additional tools to investigate and prosecute mortgage fraud.  Cong. Rec. H5262-H5264 (May 6, 2009). 

On April 22, 2009, the Senate added a financial markets commission of its own to FERA.  Cong. Rec. S4591-S4592 (Apr. 22, 2009).  In a press release, Senators Johnny Isakson (R-GA) and Kent Conrad (D-ND), the co-sponsors of the Senate amendment to create the commission, stated that "[t]he only way to get an objective evaluation of where mistakes were made is to create an independent commission of experts to ask what went right, what went wrong and what could we have done to prevent this. We need a forensic audit of the laws of the United States as it relates to the financial markets and our economy."  See http://isakson.senate.gov/press/2009/042209finmkt.htm.  The Isakson/Conrad amendment was adopted by a vote of 92-2. 

At the same time it created a financial markets commission, the Senate also passed an amendment offered by Senators Byron Dorgan (D-ND) and John McCain (R-AZ) to establish a Senate select committee with full subpoena power to investigate the circumstances leading to the financial crises and to make recommendations for change.  The Dorgan/McCain amendment was adopted by voice vote.  The House did not pass a companion amendment.

Financial Crisis Inquiry Commission Key Provisions

Under both versions of FERA, a bipartisan financial crisis inquiry commission would be established and authorized to investigate, within an 18-month period, circumstances that led to the financial crisis.  The Commission would have subpoena power and the authority to refer evidence of any violation of existing laws by individuals or institutions to the U.S. Attorney General and state attorney generals.  On December 15, 2010, the Commission would submit a report to the President and Congress "containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States."  Other key provisions include:

Membership.  The House and Senate bills establish a 10-member Commission to be comprised of private citizens who may not be employed by any governmental entity.  The Chairman and Vice Chairman must be from different political parties and will be selected jointly by their party’s leaders.  Members are expected to be "prominent United States citizens with national recognition" (House version) and significant experience (both versions) in such fields as banking, regulation of markets, taxation, finance, economics, consumer protection, and housing.

Under the House version, Commission members would be appointed as follows:

  • Three members each appointed by the Speaker and Senate Majority Leader
  • Two members each appointed by the minority leaders in the House and Senate

Under the Senate version, Commission members would be appointed as follows:

  • Two members each appointed by the Speaker and Senate Majority Leader
  • One member each appointed by the minority leaders in the House and Senate
  • One member each appointed by the chairman and the ranking member of the Committee on Banking, Housing, and Urban Affairs of the Senate
  • One member each appointed by the chairman and the ranking member of the Committee on Financial Services of the House

Quorum; Vacancies.  Six members of the Commission will constitute a quorum.  Any vacancy on the Commission shall not affect its power, but shall be filled in the same manner in which the original appointment was made.

Staff.  Both the House and Senate legislation provide for the appointment of staff, for federal government employees to be detailed to the commission, and for the hiring of consultants.  What is interesting is that both bills require the commission chairperson and vice chairperson to agree upon the appointment of a director to head up the commission staff.  This is a divergence from, for example, the 9/11 Commission model where there was a lead staffer for commissioners of each party.

Functions of the Commission.  The Commission is to examine numerous enumerated possible causes of the current financial and economic crisis in the United States, including:

  • Fraud and abuse in the financial sector
  • Global imbalance of savings and international capital flows
  • Accounting practices
  • Tax treatment of financial products and investments
  • Credit rating agencies, including reliance on credit ratings by Federal financial regulators, and the use of credit ratings in financial regulations
  • Lending practices and securitization
  • Corporate governance
  • Short selling
  • Compensation structures
  • Quality of due diligence undertaken by financial institutions

The House bill added several topics that the Commission should address that are not included in the Senate version, including examining fraud and abuse towards consumers in the mortgage sector, focusing on credit default swaps, and the extent to which the legal and regulatory structure governing financial institutions creates the opportunity for financial institutions to engage in regulatory arbitrage. 

Under both the Senate and House versions, the Commission will also examine the specific causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Department of Treasury during the period beginning in August 2007 through April 2009.  Neither the Senate nor House bill define "major financial institution" or those institutions that were "likely to have failed" but for the receipt of exceptional Government assistance.

Powers of the Commission.  Both the Senate and House versions provide the Commission with the power to hold hearings, take testimony, receive evidence, and administer oaths.  Additionally, the Commission has the power to issue subpoenas.  The Senate version does not describe the process by which a subpoena may be issued.  The House version, however, specifically lays out the procedure, which requires the joint concurrence of the Chair and Vice Chair or an affirmative vote by a majority of the commission, which means that subpoenas could be issued on a purely partisan basis. 

Funding. The Senate and House versions differ over the authorization of appropriation.  The Senate version directs the Treasury Secretary to provide $5,000,000 to the Commission "out of money previously appropriated."  The House, on the other hand, authorizes appropriations to the Treasury Secretary of "such sums as are necessary to cover the costs of the Commission."

Six Observations

We close with six observations, as follows: 

  1. It looks like a commission is actually going to be created.  Although the House and/or Senate often pass legislative provisions only to drop them in conference, it is likely that this provision will survive.  There is very similar commission language attached to legislation passed by both chambers.  The commission concept received overwhelming support when voted on as a standalone measure in the Senate, including from the chairman and ranking member of the Senate Banking Committee.  And the President has indicated that he will sign legislation establishing a commission. 
  2. There is a question of whether House and/or Senate select committees will be established in addition to or in lieu of an independent commission.  It would seem that establishing both select committees and an independent commission would be overkill as the mandates would overlap considerably.  Plus, a select committee would likely be opposed by the leaders of the standing committees whose jurisdictions would be usurped by the select bodies.  Moreover, the House did not adopt language establishing a select committee.  Hence, it seems more likely that an independent commission will be created, but there is still the matter of how conferees will handle the select committee language if its sponsors initiate a full-court press to retain it. 
  3. There is also the matter of whether the commission, assuming it is established, will make recommendations for financial services regulatory reform or only report on its "findings and conclusions . . . on the causes of the financial and economic crisis in the United States."  On the one hand, the legislation carefully avoids charging the commission with making recommendations to Congress, presumably as a concession to the Senate Banking and House Financial Services Committees and likely the Administration, which do not want to wait for 18 months until the commission report is issued to move regulatory reform legislation through Congress.  On the other hand, it seems inconceivable that the commission would not make recommendations based on its 18-month inquiry into the financial markets crisis.  Indeed, floor debate on the legislation suggests that members of Congress anticipate the commission setting the stage for legislative reform of our regulatory system.[2] 
  4. A related issue is the extent to which the commission will slow down regulatory reform efforts.  In other words, will Congress wait for the commission report to inform its efforts?  Eighteen months seems like a long time to wait to begin legislating a new regulatory framework.  Nevertheless, time can move quickly in Washington.  Eight months have already gone by since Fannie Mae and Freddie Mac were placed in conservatorship.  And recall that the 9/11 Commission was established more than a year after the terrorist event and then took 18 months to issue its final report.  Congress then moved quickly to enact the most significant overhaul of our nation’s intelligence system in half a century.   

    Having said that, in the interim between the September 11, 2001 and the release of the report of the National Commission on Terrorist Attacks Upon the United States, Congress passed the law creating the Department of Homeland Security.  Similarly, Congress could well decide that it needs to legislate at least one piece of a new regulatory structure (e.g., new resolution authority and/or a systemic risk regulator) while waiting for the commission report to legislate the rest. 

  5. Congressional debate suggests that the commission is intended to be bipartisan.  Nevertheless, it is structured such that its authorities can be exercised by the commissioners selected by Democratic leaders, even without consent from any Republican commissioners.  The financial markets crisis would not seem to be an inherently partisan area of inquiry.  However, the commission’s exercise of its investigative powers, including the possible issuance of subpoenas, bears watching, particularly if subpoenas are issued to former Administration officials or to private sector persons or entities. 
  6. A related issue is how the commission’s work will affect existing investigations.  Currently, a host of congressional committees (most notably, the Senate Permanent Subcommittee on Investigations and the House Committee on Oversight and Government Reform), the Congressional Oversight Panel created by the Emergency Economic Stabilization Act ("EESA"), the TARP Special Inspector General, also created by the EESA, and the Government Accountability Office, are conducting investigations, audits, or other inquiries, holding hearings, and issuing reports relating to the financial markets crisis.  We expect that this activity will continue but that, eventually, the commission’s activities are likely to supersede those of the other bodies in terms of influencing public and policy-maker opinion.  Almost inevitably, there will be overlap among the activities of these various oversight bodies and turf battles are likely.  A number of financial services firms and individuals are likely to hear from multiple oversight bodies and a coordinated and managed response will be important.  


  [1]   See Michael Bopp and John F. Olson, "Create a 9/11 Commission for Financial Reform", Roll Call (March 3, 2009).

  [2]   See, e.g.,  Statement of Congressman Larson (D-CT), who sponsored legislation to create an independent commission.  Explaining his rationale, he stated, "Why?  So we can build a regulatory framework for this century that protects the American worker and that protects the American investor."  Cong. Rec. H5265 (May 6, 2009).  Similarly, Senator Conrad (D-ND), who sponsored the Senate commission amendment with Senator Isakson (R-GA), noted, "This is not a finger-pointing exercise:  this is an exercise to determine, on a fair and objective basis, what occurred and what can be done to prevent it form happening again."  Cong. Rec. S4544 (April 22, 2009). 

Gibson, Dunn & Crutcher LLP

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)
John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)
Amy L. Goodman
– Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)
Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)
Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com)

Securities Law and Corporate Governance Expertise
Ronald O. Mueller
– Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)
K. Susan Grafton – Washington, D.C. (202- 887-3554, sgrafton@gibsondunn.com)
Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)
Lewis Ferguson – Washington, D.C. (202- 955-8249, lferguson@gibsondunn.com)
Barry Goldsmith – Washington, D.C. (202- 955-8580, bgoldsmith@gibsondunn.com)
John H. Sturc
– Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)
Dorothee Fischer-Appelt – London (+44 20 7071 4224, dfischerappelt@gibsondunn.com)
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Adam H. Offenhartz – New York (212-351-3808, aoffenhartz@gibsondunn.com)
Mark K. Schonfeld – New York (212-351-2433, mschonfeld@gibsondunn.com)

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)
Christopher Bellini – Washington, D.C. (202- 887-3693, cbellini@gibsondunn.com)
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Corporate Expertise
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Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)
Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, stsacoumis@gibsondunn.com)
Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)
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C. William Thomas, Jr.
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Private Equity Expertise
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Private Investment Funds Expertise
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Jennifer Bellah Maguire – Los Angeles (213-229-7986, jbellah@gibsondunn.com
)

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Fred Pillon – San Francisco (415-393-8241, fpillon@gibsondunn.com)
Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)
Michael F. Sfregola – Los Angeles (213-229-7558, msfregola@gibsondunn.com)
Andrew Lance – New York (212-351-3871, alance@gibsondunn.com)
Eric M. Feuerstein – New York (212-351-2323, efeuerstein@gibsondunn.com)
David J. Furman – New York (212-351-3992, dfurman@gibsondunn.com)

Crisis Management Expertise
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Bankruptcy Law Expertise
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Tax Law Expertise
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Charles F. Feldman – New York (212-351-3908, cfeldman@gibsondunn.com)
Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)
Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com)
Amber Busuttil Mullen – Los Angeles (213-229-7023, amullen@gibsondunn.com

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