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Counting on Social Security?

I care about our young people, and I wish them great success, because they are our hope for the future, and some day, when my generation retires, they will have to pay us trillions of dollars in social security.

— Dave Barry, America Writer and Humorist

Social Security began in 1935 and has evolved into a program that covers 98% of all workers and that pays benefits to one in six Americans. In 1940, when monthly benefits began, recipients numbered 222,000; today, more than 47 million people receive benefits. 35% of those over 65 rely solely on Social Security payments; one in three workers has no retirement savings other than Social Security; and 50% of Americans have $2,000 or less saved for retirement, according to Dallas Salisbury, president of the Alliance for Investor Education

This year, and for the first time in 25 years, Social Security is projected to take in less in taxes than it is spending on benefits: high unemployment and low wage inflation result in diminished payroll taxes; and older unemployed workers are opting to begin Social Security earlier. Is Social Security approaching insolvency? Can the baby boomers count on receiving their benefits? A recent USA Today/Gallup poll found that 60% of workers do not believe they will ever receive Social Security payments, and that 56% of workers and retirees thought that their Social Security benefits will eventually be cut.

In August, the 2010 OASDI Trustee Report was issued, taking a 75-year outlook on the financial stability of Social Security. During 2009, the Social Security trust fund increased to $2.54 trillion, a net increase of $122 billion (includes $118 billion of interest and $22 billion in income taxes that higher income retirees pay on their Social Security benefits). Some argue that the $118 billion in interest is not a legitimate source of income, as it is just the government borrowing from itself. Indeed, the $2.54 trillion trust is nothing more than an IOU from the government. What's going to happen when those IOU's are needed to begin paying benefits as the costs start to exceed all revenues sources, a scenario currently projected for 2025? Stephen C. Goss, chief actuary of the Social Security Administration, answers that the government will refinance the debt. In other words, it will sell new Treasuries to the public and use the proceeds to pay back the Social Security trust fund. The Treasuries held by the trust fund are guaranteed as to the principle and interest by the full faith and credit of the U.S. government, as are all publicly held Treasuries.

The Social Security's actuarial projected deficit is often confused with the U.S. budget deficit, but the fact is that the redemption of Treasury securities by the trust fund will not affect the U.S. government budget deficit. The Social Security trust fund is a stand-alone system, self-financed and prohibited by law from borrowing. Unlike the U.S. Treasury, the Social Security trust fund cannot run a deficit. Using, a rolling 75-year view of the trust fund and identifying problems earlier so that we can make adjustments as we go could help keep the trust fund solvent. If not, beginning 2025, the trust fund principle will be needed to make payments. By 2037, the trust fund is projected to be exhausted and the system will return to a pay-as-you-go system.

In their annual report, the Trustees outline the mathematical changes needed to bring the system into balance over the next 75 years. The projections are done based on high, intermediate and low-cost scenario. The latest projections under the intermediate-cost scenario would require either an increase in payroll taxes by 1.84% or a 12% reduction in benefits. Obviously, the longer we wait to fix the system, the more expensive it will get.

The solutions being discussed focus on increasing payroll taxes and the eligibility age for full benefits. President Obama has appointed a bipartisan deficit commission that is likely to address Social Security reform sometime after the midterm elections. For more information on options being discussed, you can view these reports:

In considering the potential solutions, I believe it is important to understand the cause of the underfunding, which is a lower ratio of workers to retirees. In the 1950's there were 16 workers contributing to Social Security for each retiree receiving benefits. Today, there are 3.3 workers for each retiree; by 2025, there are projected to be just two workers for each retiree. One obvious solution not being discussed much is to increase the number of workers. The U.S. is in a unique position in the world to be able to attract workers from other countries through immigration. We can even do it selectively, by making it easier for foreign students who graduate from our universities to receive work visas and even become citizens. There is much talk about closing our borders and not enough on making it easier to enter the U.S. legally, so that those immigrating become taxpayers as well! A more open legal immigration policy might even have the added benefit of reducing illegals.

As the solutions are being debated, what do we do about our own retirement? Clearly, we cannot wait for the government to solve our problems. Americans are responding by increasing savings as the Commerce Department reports a national personal savings rate of 5.8% (August, 2010) while just three years ago, the personal savings rate was 1.7%. While I do believe that Social Security will continue to pay benefits for many generations, I also know that Social Security is not enough. We must each take personal responsibility to plan for our future.

If you are still working, the first best course is to contribute the maximum you can to a retirement plan through your employer. If there is no retirement plan where you work, start your own IRA (before-tax contributions) or Roth IRA (after-tax contributions). Earmark part of every raise to saving and don’t forget to build up your after-tax savings as well.

If you are nearing retirement, it's especially important to get help. Keep in mind that most people will see their net worth double or triple in the five-year period up to retirement. Understanding the different payment options within the Social Security program will help you to maximize the benefits you are entitled to receive.

If you are retired, and particularly if you retired recently, it's likely that you have many years ahead of you, so it is very important that your savings not retire when you do. And, don't overlook options you may still have to change the way you receive your Social Security. If your income and savings are still not enough, it's important to find out sooner rather than later, as a small decrease in spending now may help avoid drastic reductions later. If your savings are more than enough, then planning will help you minimize estate taxes and maximize what you are able to pass on to your heirs.

How much do you need to save? The answer depends on many individual factors: lifestyle, age, health and longevity. There is no one rule of thumb so I encourage you to seek the advice of a Certified Financial Planner to help you come up with a plan tailored to you.

Bulls and Taxes and Bears, Oh My!

October 2010

While the bulls and the bears are back and forth in the stock market, one thing is for sure…taxes are on the rise. Between the expiration of the Bush tax cuts in 2011 and the unearned income Medicare contribution tax in 2013, the highest income tax bracket will rise by 13% for ordinary income while investment income tax rates will rise between 24% and 189%! How will these tax increases affect you and what can you do about them?

Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

— Ronald Reagan

The debate has been raging as to whether to extend the Bush tax cuts, let them lapse or selectively extend them for those with income under $250,000. President Obama favors the latter. Congressmen, facing very tough mid-term elections, have post-poned the decision to a lame duck Congress when they return in November. The path of least resistance is to let the Bush tax cuts expire, which in effect raises taxes for everyone. But, most believe there will be a partial extension of the Bush tax cuts, limited to income under $250,000.

So what changes will we see? Certainly not just a return to the days of a 39.6% top tax rate: we must not forget that the Obama Health Care and Education Reconciliation Act of 2010 also raises tax rates.

Moreover, beginning in 2013, the "unearned income Medicare Contribution Tax" will take effect. That 3.8% rate will be in addition to any other taxes and will be assessed on the lesser of:

  • Net investment income, or
  • the excess of modified Adjusted Gross Income over the threshold amount.

To understand what this means, we first need to define the terms.

Net Investment Income

Net Investment Income is defined in this legislation as:

  • Interest
  • Dividends
  • Annuity payments received (taxable portion)
  • Royalties
  • Rents
  • Gross income derived from a passive activity
  • Gross income from a business of trading financial instruments or commodities

Normal investment expenses that typically are deductible would be allowed to be netted from the above gross income to arrive at the Net Investment Income.

What is not included in Net Investment Income is:

  • Income to which employment taxes were already applied, and
  • Distributions from retirement plans.

Income from deferred compensation plans is not specifically addressed but most believe it will not be included.

Modified Adjusted Gross Income

This now means the Adjusted Gross Income (from the front page of your tax return) plus net income excluded under the foreign owned income exclusion.


The threshold amount is:

  • Married, filing jointly $250,000
  • Married, filing separately $125,000
  • Single and Head of Household $200,000

The threshold amounts are not indexed for inflation.

Calculating the tax
Single Taxpayer12344+ RMD
(A) Modified AGI300,000250,000225,000150,000220,000
(B) Less Threshold200,000200,000200,000200,000200,000
(C) Income above threshold (A-B)100,00050,00025,000020,000
(D) Net Investment Income040,00035,00050,00050,000
Subject to 3.8% tax (lesser of C or D)040,00025,000020,000

The lesser of the Net Investment Income and the amount that the Modified AGI exceeds the threshold is subject to the Medicare Contribution Tax.

  1. While the income is above the threshold, there is no net investment income.
  2. All the net investment income is subject to the 3.8% tax.
  3. Only the net investment income above the threshold is subject to tax.
  4. A Modified AGI below the threshold results in no Medicare contribution tax.

However, watch out for the Medicare tax cross-over zone. In example 4, if Sam's pension ($100,000) and net investment income ($50,000) was increased by a $70,000 IRA Required Minimum Distribution (even though the RMD itself is not subject to the Medicare contribution tax) the net investment income would be pushed into the taxable zone.

Trust or Estate

The 3.8% tax may apply to irrevocable trusts and estates, but with slightly different rules. The tax would be assessed on the lesser of:

  • Undistributed net investment income, or
  • the excess of Modified Adjusted Gross Income over the threshold amount.

The threshold for trusts and estates is the dollar amount that falls within the highest tax bracket for the year -- $11,200 for 2010. To the extent that investment income is distributed, it would be reported on the beneficiary's tax return and subject to the Medicare Contributions Tax on the beneficiary's return at a much higher threshold than the trust. For trusts with multiple beneficiaries, income-spreading could minimize the impact of this tax.

The Medicare Contributions Tax does not apply to tax-exempt trust such as 501(c)(3) charitable trusts and charitable remainder trusts.

In the case of a Grantor trust, the tax will not apply: income will be reported on the Grantor's return, where the exposure to the Medicare Contributions Tax will be calculated and assessed, if applicable.

Tax Impact

By 2013, the highest income tax bracket will be significantly higher. Assuming the Bush tax expires, the top income tax brackets will rise by 13% for ordinary income while investment income tax rates will rise between 24% and 189%!

Top Income Bracket201020112013% Increase
Ordinary Income39.6%39.6%39.6%13%
Long-Term Cap Gains15%20.0%23.8%59%
Interest, ST Cap Gains, NQ Dividends35%36.6%43.4%24%
Qualified Dividends15%39.6%43.4%189%

Taxes affect behavior and there will be no exception here. Investment income will be hit hard, which reduces the return for the level of risk assumed. How will investors respond? We believe Blue Chip dividend paying stocks and interest producing corporate bonds and even CD’s won’t look so attractive. It is possible that investors will move out on the risk curve to favor small to mid size growth companies.

There may be an increased interest in tax-deferred and tax-free investment vehicles and strategies. While some of these may make sense for part of your portfolio, be sure they make sound business sense apart from the tax motive and fit into your master financial plan.

Tax Planning Advice

Working with a financial planning advisor becomes more important than ever. I am not talking about a broker who just brings you investment ideas, but someone who helps you articulate what is most important to you, analyzes your cash flow, and runs stress-tested projections to see how different planning ideas may work out (using Monte Carlo simulations). Most importantly, the advisor should proactively monitor your situation and recommend necessary adjustments.

    Strategies to mitigate or eliminate the tax:
  1. reducing Net Investment Income
  2. reducing Modified AGI
  3. managing the cross-over zone.

Those who will benefit most from tax planning strategies will be taxpayers approaching or exceeding the threshold ($200,000 for singles and $250,000 for married filing jointly) and those who are likely to cross over the threshold.

    Potential options for reducing Net Investment Income
  • Change passive to active income, if possible
  • Utilize tax-free investments
    • Roth IRA's
    • Roth 401k's
    • Health Savings accounts
    • Cash Value life insurance
    • Municipal bonds
    • 529 plans
    Potential options for reducing Modified AGI
  • Shift timing of income by contribution to tax deferred accounts
    • 401K plans
    • Deferred Compensation plans
    • Fixed Annuities
  • Convert IRA's to Roth IRA's
  • Accelerate withdrawals from IRA's in lower-income years prior to Required Minimum Distributions.

While not avoiding the Medicare Contribution Tax, shifting income from qualified dividends to long-term capital gains can lower taxes.


As tax rates rise with the expiration of the Bush tax cut and the coming of the Medicare Contribution Tax, the importance of tax planning increases. Those with taxable income over $250,000 (married) and $200,000 (single) and for those likely to be at that level intermittently should proactively in explore their options.

An analysis of your current investment portfolio can uncover opportunities to help maximize your total after tax returns.

Of course, the tax planning strategies you consider should make sense for your portfolio and align with your overall objectives (i.e. be sure the tax tail doesn't wag the dog). Cost benefit analysis, cash flow analysis and probability analysis (Monte Carlo simulations) are important tools to evaluate the short and long term benefits--as well as the risks of various tax strategies. Seek out a financial planning advisor who can help you evaluate strategies and opportunities that are right for you.

The hardest thing in the world to understand is the income tax.

— Albert Einstein

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. View expressed in this newsletter may not reflect the views of FSC Securities Corporation. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. FSC Securities Corporation does not offer tax or legal advice. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining value.

Investments in stocks of small and mid size companies may involve additional risks. They typically have a higher risk of failure, and are not as well established as larger blue-chip companies. Historically, small and midsize company stocks have experienced a greater degree of market volatility than the overall market average.

A Roth IRA distribution is qualified if you've had the account for at least five years and/or the distribution is made after you've reached age 59 1/2 made prior to age 59 1/2 may be subject to a federal income tax penalty. If converting a traditional IRA to a Roth IRA, you will owe ordinary income tax on any previously deducted traditional IRA contributions and on all earnings. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary we suggest that you discuss tax issues with a qualified tax advisor.

Depending upon the municipal bond offered, alternative minimum tax and state/local taxes may apply.

Financial Reform or Foundation for the Next Crisis?

July, 2010

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act that he says will end many of the practices that led to the worst recession in the U.S. since the Great Depression. This is Obama's second major domestic reform of the year, after health care.

The stated purpose of this legislation is to:
  • Protect Consumers from abusive financial services practices
  • Rein in Wall Street by improving accountability and transparency in the financial system.
  • End "Too Big" to fail and taxpayer funded bailouts

The Senate Committee on Banking, Housing and Urban Affairs added to this "We must create a sound foundation to grow the economy and create jobs."

Is it possible to achieve such lofty goals and what will be the unintended consequences?

For a summary of the bill click here

Potential Impact

This law is ambitious, but despite its 2,319 pages, is only a template. A vast number of details are left to regulators, such as the 67 studies to be conducted and some 243 new detailed rules to be written. How regulators write these rules (estimated to take two years or more) and how they and future administrations decide to enforce them will dictate the impact on financial institutions, businesses and, ultimately, consumers. I believe this legislation is on a spiraling path towards more government oversight and control, and ever more bureaucrats.

Not only is it important to understand what is in this bill, but what is noticeably absent. It does not address the problems faced by Fannie Mae and Freddie Mac, despite the fact that these two entities helped fuel the housing bubble and were recipients of $150 Billion in Federal bail-out monies. The Farm Credit System, a group of banks and cooperatives that lend money to farmers and rural land owners, will not be subject to the oversight other banks will have thanks to their lobbyists and the help of the Senate Agriculture Committee. (While the Farm Credit System has not made the front page during the current crisis, they did receive a government bailout back in 1987, to the tune of $1 billion. Of course, that seems like chump change now.) Additionally, car loans are exempt from the new law despite the fact that such loans are notoriously subject to abuse; such an exemption is all the more notable, given the sizable bailout of the car manufacturer industry.

The new law is intended to help prevent another financial system crisis of the magnitude we experienced in 2008. Unfortunately, no bill can anticipate every possible crisis and its causes. There have been many financial crises in the past, of varying severity, and there will be others, either in spite of or as an unintended consequences of certain rules contained in this legislation. After all, many point to the government policies put in place to stimulate the economy through housing in the wake of the tech bubble as the cause of this crisis. The pressure was on Washington to do something about the 2008 financial crisis, so they moved at record speed to pass a broad-reaching and complex set of laws. In my opinion, this legislation is a knee-jerk response to the high degree of anxiety felt by Americans and is not well thought out. We can only hope that this legislation will not be the cause of the next crisis.

That said, I believe there are some good reforms in the law, such as the establishment of exchanges for derivatives. The increased standardization should bring down the cost of trading and increase volume, so the falling profit margins will be offset by volume. Moreover, with contracts cleared centrally, the current required reserves will be reduced.

The resulting increase in jobs from this legislation will be from a growing bureaucracy, more lobbyists and compliance staffs. The two major agencies created by this bill, the Consumer Financial Protection Agency and the Financial Stability Oversight Council, are only a start. The additional offices added to existing agencies (Office of Financial Research, Office of Housing Counseling, Federal Insurance Office, Office of Minority & Women), the 67 studies and the 243 detailed rules would expand government employment considerably. Additionally, as the bureaucrats begin writing the rules, the lobbyists will be out in force to help shape the outcome. Of equal concern will be the increase of corporate accountants and attorneys to keep track of and comply with the new rules. Unfortunately, this type of job growth is counter-productive to the growth of the economy, as increase in spending by the government must come from the taxpayers (hence higher taxes). In addition, businesses will incur higher compliance cost—which, of course, can reduce productivity, increase overall costs passed on to consumers, and reduce profitability to its shareholders. How high can the costs rise?

At the Economic Club of Washington on June 22, Chairman of the Business Roundtable and Verizon Communications CEO, Ivan Seidenberg expressed his opinion about what is coming out of Washington: "In our judgment, we have reached a point where the negative effects of the proposed policies are simply too significant to ignore...By reaching into virtually every sector of economic life, government is injecting uncertainty into the market place and making it harder to raise capital and create new businesses."

In my opinion, while some aspects of this bill will result in much-needed improvements, its ambiguous, over-reaching rules and regulations will significantly hamper the recovery of our economy. Ronald Reagan once said that the closest thing to eternal life on Earth is a federal program, as "they never end."

While we do expect the economy to recover, the impact of this legislation will impede its pace and, more importantly, prevent it from reaching its potential. We will need to be watchful in the coming months and years as this legislation is implemented, changing the rules of the game to create opportunities in certain areas while ending them in others. As investors, we must be vigilant in identifying the companies and industries that benefit, along with those who will suffer...for every cloud has a silver lining and it's our job is to find it.


2010 Financial Reform Bill

AKA Dodd-Frank Wall Street Reform and Consumer Protection Act

Protect Consumers
New Consumer Protection Agency

The Consumer Financial Protection Bureau (CFPB) will be formed in one year with broad powers to write rules and ban certain financial products. Its jurisdiction will include mortgages, credit cards, student loans, payday lenders and debt collection, while car loans and loans through the Farm Credit System are exempted. The CFPB will also oversee the enforcement of federal laws intended to ensure the fair, equitable and nondiscriminatory access to credit for individuals and communities. The CFPB will be under the Federal Reserve, with a director appointed by the President and confirmed by the Senate, although the Financial Stability Oversight Council can override CFPB. The CFPB is also charged with creating an Office of Financial Literacy, with a toll-free hotline for consumer complaints.

Mortgage regulations

Within two years, there will be more mortgage protections by holding mortgage brokers and loan originators responsible for ensuring that borrowers can afford their mortgage and get the right product for their needs. Lenders will be required to verify the income and assets of borrowers. The law prohibits financial incentives for selling more expensive loans and bans prepayment penalties on all but the most basic mortgages; in addition, any prepayment penalty mortgage must also be presented with a non-penalty alternative. Variable-rate loans must include disclosures as to the maximum a borrower could end up paying. Lenders who sell off riskier loans to investors must retain a 5% ownership stake.

Within a year there will be new home-appraisal rules, with the aim of ensuring appraiser independence. There will also be a study of reverse-mortgage loans, to determine whether stronger consumer protections are needed.

Housing Counseling

Establishes an Office of Housing Counseling within HUD to promote homeownership and provide housing counseling.

Credit and Debit Cards

An individual will be able to access their credit scores for free if turned down for a loan or a job, in addition to the credit report available once a year from the three big credit bureaus (at Annual CreditReport.com).

The Federal Reserve is charged with creating rules to cap the fees that debit card issuers can charge merchants. The hope is that retailers will offer discounts for debit card use. More likely, however, is that banks will raise other fees as their profit margins on these products get squeezed. In addition, merchants may set a $10 minimum purchase for credit card use. And colleges and federal agencies will be allowed to set maximums for credit card charges they accept.

Student Loans

Private student loans from banks as well as student loans from for-profit career colleges will fall under the oversight of the CFPB. Private loans often carry variable rates with no cap, and lack the consumer safeguards that federal student loans provide, such as deferment options, forgiveness programs and affordable repayment plans. Within the CFPB, a Private Education Loan Ombudsman will give students a central place for help with private student loans.

Rating Agencies

The SEC has two years to produce a study to mitigate conflicts of interests at the biggest rating agencies; otherwise, a board will be created to match rating agencies with debt issuers. Investors are allowed to sue credit rating agencies if they recklessly failed to review information used in developing a rating.


Federal deposit insurance limits will be permanently raised to $250,000 per account. The prohibition against paying interest on demand deposits is repealed.

Executive Compensation

The SEC is directed to enact new "say on pay" rules for public company compensation and golden parachutes. The new rules are expected within six months and enable shareholder to have an advisory vote on such pay practices. It will also require companies to provide charts comparing stock performance with executive compensation over a five-year period and require corporate compensation committees be comprised solely of independent directors, with the authority to hire consultants. The "pay czar" will have the authority to ban what is deemed to be inappropriate compensation practices and to require financial firms to disclose any compensation structure with incentive-based elements.

Too Big To Fail
Agency heads to monitor risk

Chaired by the Treasury Secretary, the Financial Stability Oversight Council is formed immediately to monitor systematic risk in the financial system. The Treasury, along with federal regulatory agencies and an independent member appointed by the President, are charged with identifying firms that threaten stability and subject them to tighter oversight by the Federal Reserve and with break up firms that pose an urgent threat—to be accomplished through an "orderly liquidation" process instead of bankruptcy or bailouts. So the same process used for banks will apply more broadly to non-banks.

The costs will be covered in the short term by a Treasury credit line, then recouped by sales of the liquidated firms assts. For the remaining shortfall, there will be certain claw-backs of creditor payments that exceed liquidation value, along with assessments on large financial companies in a complex assessment scheme that requires the "riskiest" to pay more.

The Stability Council will also make recommendations to the Federal Reserve for increasing strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with more regulation on those considered the riskiest.

The Council will have the ability to approve a Federal Reserve decision to break up large, complex companies, but only as a last resort. It will also have the ability to require non-bank financial companies that pose a risk to U.S. financial stability to submit to supervision by the Federal Reserve.

Leveling the playing field

The legislation initially included two requirements in order to offset the advantages that the too-big-to-fail banks have over smaller banks:

  • A bank tax on the largest banks to encourage them to shrink, and to pay for the clean up of the large banks that fail. This provision was removed as a concession to get the bill passed.
  • The second is to require banks to have more capital and liquidity to make a collapse less likely. Higher capital requirements are included in this bill with the amount left to the regulators to determine.
Rein in Wall Street
Study to identify needs

The SEC will conduct a study of the entire securities industry to identify needed reforms in the wake of the Madoff and Stanford Financial ponzi schemes.

Exchanges for Derivatives

Because of their leverage and lack of transparency, derivatives pose a threat to the financial system. Requiring most derivatives now traded dealer-to-dealer to be traded on public exchanges or passed through clearing houses will lessen the risk that one dealer's failure will bring others down. The SEC is charged with developing the necessary rules within one year.

Regulate Hedge funds

Requires hedge funds and private equity firms overseeing $150,000,000 or more in capital to register with the SEC, subjecting them to systemic risk regulation by the Financial Stability Oversight Council. At the same time, it shifts to state supervision those Registered Investment Advisors with assets under management under $100 million (from $30 million).

New Insurance Agency

Creates a Federal Insurance Office to monitor all aspects of the insurance industry, with an emphasis on identifying gaps in the existing regulation that could contribute to a systemic crisis. Currently, insurance is regulated by each state.

Credit Rating Agencies

Addresses the role that credit rating agencies played in the economic crisis and charges the regulators to create rules to reduce conflicts of interest and market reliance on credit rating agencies. Also imposes a liability standard on the agencies.


The Commodities Futures Trading Commission will establish a whistleblower bounty program, with incentives to identify wrongdoing in the securities markets and to reward individuals whose tips lead to successful enforcement actions.

Volker Rule

The "Volker Rule," based on the proposal from former Federal Reserve Chairman Paul Volcker, restricts banks from making certain investments deemed to be speculative. Banks will have two years to wind down their proprietary trading activities. Insurance companies will retain limited trading privileges and banks will be able to invest three percent of their Tier 1 capital in hedge/private equity funds. Banks will be allowed to trade interest-rate, foreign exchange and high-quality credit swaps, while commodity, equity and non-investment-grade credit contracts must go into separate affiliates. This rule will affect fewer than 10% of all swaps, as foreign-exchange swaps comprise the majority of the market.


As part of the Treasury, a new Federal Insurance Office will be created to gather information about the insurance industry, including access to affordable insurance products by minorities, low and moderate income earners and underserved communities. Additionally, the office will monitor systemic risk in the insurance industry.

Minorities and Women

A new Office of Minority and Women Inclusion will be formed at federal banking and securities regulatory agencies will address employment and contracting diversity matters, coordinate technical assistance to minority-owned and women-owned businesses, and seek diversity in the workforce.

Regulating the Regulators

The Federal Reserve will now be subject to audits by the GAO regarding emergency lending, discount window lending and open market transactions. Additionally, by Dec. 1, details of all emergency lending that took place during the financial crisis will be published on the Federal Reserve website.