Yesterday, Senate Banking Committee Chairman Chris Dodd (D-CT) released draft financial regulatory reform legislation. The Dodd bill parallels the recently passed House bill (H.R. 4173) in many respects, but there are some important differences that would have to be hammered out in conference. Of course, material changes to the Dodd bill are likely before a Senate bill can get to conference. Key differences from H.R. 4173 include:
Systemic Risk Regulator. Consistent with the proposal in H.R. 4173, the Dodd bill would establish an interagency systemic risk council. In the Dodd bill, council decisions would require a two-thirds vote (whereas H.R. 4173 would require a majority vote). Heightened prudential standards would apply only to bank holding companies with $50 billion or greater in assets.
Federal Reserve Authority. The Dodd bill would change the Fed’s supervisory authority beyond that provided for in H.R. 4173. The Fed would retain the authority to regulate only those bank holding companies with $50 billion or more in total consolidated assets. The Fed would gain authority over systematically significant nonbank financial institutions. The Fed’s jurisdiction also would extend to any entity that received TARP assistance, that is a bank holding company with $50 billion or more in total consolidated assets as of January 1, 2010, and that, after January 1, 2010, ceases to be a BHC. In addition, there would be substantial changes in the corporate governance of the Federal Reserve Banks.
Resolution Process. The Dodd bill creates an “orderly resolution authority” under which the FDIC would be appointed as receiver for any financial institution whose failure is deemed systemically risky by Treasury, the Fed and the FDIC, and that is determined to be insolvent by a three-member panel of bankruptcy judges. (The FDIC would appoint the SIPC as receiver for brokers or dealers.) The resolutions would be funded by an Orderly Liquidation Fund at Treasury, into which financial institutions supervised by the Fed would contribute $50 billion up front through risk-based assessments.
Volcker Rule. The Dodd bill incorporates the Volcker Rule, a recent administration proposal that would prohibit banks, their affiliates and bank holding companies from proprietary trading, investment in and sponsorship of hedge funds and private equity funds. Nonbank financial institutions supervised by the Fed also would have restrictions on their proprietary trading and hedge fund and private equity fund investments.
Agency and Charter Reorganization. The Dodd bill would (i) expand the OCC’s jurisdiction to include all national bank holding companies and all federal thrifts and their holding companies, (ii) expand the FDIC’s jurisdiction to include all state-chartered banks and their holding companies and (iii) abolish the OTS. The bill also abolishes the federal thrift charter, but grandfathers existing federal thrifts.
Consumer Protection. The Dodd bill would establish a Consumer Financial Protection Bureau that would be housed within the Fed (as opposed to the independent agency created by H.R. 4173). The Bureau would be headed by an independent director appointed by the President and confirmed by the Senate.
Preemption. Under the Dodd bill, state laws would be enforceable if they are not inconsistent with federal law and afford greater protection to the consumer. However, state law would be preempted if it would have a discriminatory effect on a national bank compared to state-chartered banks.
Investor Protection. Unlike H.R. 4173, the Dodd bill does not include a new fiduciary duty for retail broker dealers or investment advisors. Instead, it directs the SEC to conduct a study of the effectiveness of existing legal and regulatory standards of care.
Derivatives. The Dodd bill largely reflects the previous Dodd draft from November. However, Senators Jack Reed (D-RI) and Judd Gregg (R-NH) are drafting a substitute amendment to trading and other issues that may be offered during mark-up.
Hedge Funds. The Dodd bill would require hedge funds that manage over $100 million to register with the SEC, while H.R. 4173 sets the threshold for registration of hedge funds at $150 million.
Corporate Governance. The Dodd bill omits two provisions that are included in H.R. 4173. The Dodd bill would not require (i) shareholder ratification of classified boards of public companies or (ii) an advisory shareholder vote on golden parachutes.
The Dodd bill also includes provisions that address other areas, including, among others, credit rating agencies, executive compensation, insurance and credit risk.