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September 11, 2009

Social Investment Forum Issues Framework for Reform of Financial Industry
    by Robert Kropp

Organization of socially responsible investors states its support for Obama Administration recommendations, while calling for mandatory environmental, social, and governance disclosure as well. -- Asserting that "action on financial reform must support good governance, transparency, stronger regulations for investor and consumer protection, and concerted attention on environmental and social issues within businesses and financial institutions," the Social Investment Forum (SIF) has produced a framework document which describes the organization's financial reform priorities.

The document, entitled Priorities for Financial Regulatory Reform, builds upon recommendations submitted by SIF to the incoming Obama Administration in January. The SIF document addresses as well recommendations included in a June publication by the US Department of the Treasury, entitled Financial Regulatory Reform: A New Foundation.

SIF's January submission to the Obama transition team called for effective regulation for the financial system to protect and further the public interest, disclosure of environmental, social, and governance (ESG) factors by all publicly traded companies, reform of shareowner rights regarding such issues as executive compensation and the nomination of corporate directors, more accountability in lending practices, and opportunities for homeowners facing foreclosure. spoke with Michael Lent, a Partner at Veris Wealth Partners, an investment advisory firm and SIF member. Lent is a member of the SIF policy committee, and worked closely with SIF CEO Lisa Woll on the preparation of the framework document.

"Our January letter to the Obama Administration was an effort to create a more sustainable financial system," Lent said. "It was intended to help implement a greater accountability for financial institutions, and corporations in general, in reporting on ESG factors."

The Treasury Department's report addressed some, but not all, of SIF's January recommendations. The report proposes regulations that would subject financial firms to robust supervision and regulation, provide enhanced supervision of financial markets, protect consumers and investors from financial abuse, provide the federal government with tools to manage financial crises, and improve international regulatory standards.

In its framework document, SIF states, "We…support the general direction and many of the specifics of the Obama Administration’s efforts to strengthen transparency, disclosure and regulation in the financial system." The SIF document describes seven priorities for financial reform.

To improve corporate governance, SIF calls for passage by the US Senate of the Corporate and Financial Institution Compensation Fairness Act of 2009, which would provide shareowners with an advisory vote on executive compensation. By a vote of 237-185, the House of Representatives passed the bill to amend the Securities Exchange Act in July. SIF also reiterated its support for rule amendments proposed by the Securities and Exchange Commission (SEC) relating to the rights of shareowners to nominate corporate directors.

"In general, we support the general direction that the SEC proposals have taken," Lent said.

Regarding the issue of corporate disclosure of ESG issues, the SIF document urges "the Administration to support this effort and to encourage the House and Senate to include mandatory ESG disclosure in their financial reform packages." The Treasury report does not directly address the issue of ESG disclosure. SIF noted that a proposal submitted to SEC Chairman Mary Schapiro in July, calling for "a uniform standard for mandatory ESG reporting using the Global Reporting Initiative’s (GRI) framework," has been signed by more than 80 domestic and international organizations.

Lent said, "ESG reporting requirements were left out of the Treasury report, but because it is of such importance to our members, we included it in our document."

Asked about the absence of ESG reporting in the Treasury report, Lent said, "I actually don't know why it isn't higher on Treasury's agenda. Perhaps they don't think it is critical for risk management, while we emphatically believe it is."

Lent continued, "There has been a dialogue about ESG disclosure between the new SEC under Chairman Schapiro and investor advocates."

Asked if any further steps have been taken by the SEC in response to SIF's July letter on ESG disclosure, Lent said, "They're studying it."

Both the SIF document and the Treasury report propose significantly increased oversight of all investment products, including hedge funds. The Treasury report states, "All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold should be required to register with the SEC under the Investment Advisers Act." According to the SIF document, "Hedge funds manage a substantial amount of funds using leverage and pose potential systemic risks to the financial system."

"Regulation of hedge funds is critically important, as is regulation of the derivatives market," Lent said. "Requiring that over-the-counter (OTC) derivatives be traded on exchanges improves transparency of the market, and is a positive direction."

Other regulatory improvements called for in the SIF framework document include providing the SEC with sufficient resources to "carry out its mission of oversight of the securities markets and of financial professionals in order to protect and advocate for investors," creation of a systemic risk regulator, and the creation of the proposed Consumer Financial Protection Agency.

The failure of credit rating agencies such as Moody's Investors Service and Standard and Poors (S&P) to accurately rate investments related to subprime loans is widely viewed as a significant contributing factor to the current economic crisis, and both the SIF document and the Treasury report address the need for improving their performance. The Treasury report calls for the development of regulatory regimes to effectively oversee credit rating agencies.

Regarding SIF's position on rating agencies, which states that "rating agencies need improved supervision and must be held to higher standards of accountability and changes must be made to their exemption of liability," Lent said, "Our position on rating agencies is that there needs to be more studies on the issues of conflict of interest and accountability."

According to Lisa Woll, SIF plans to follow up on publication of its framework document with a plenary session on financial reform at the SRI in the Rockies conference in October, ongoing meetings with the staff of key legislative committees related to financial reform, and the drafting of a letter relating to financial reform that SIF members can send to their Congressional representatives.

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