On March 15, the Chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, Christopher Dodd (D-Connecticut), unveiled a long-awaited financial reform proposal – The Restoring American Financial Stability Act of 2010 – intended to overhaul the nation’s financial regulatory system. Although the bill represents a scaled-back version of what the U.S. House passed in December 2009 and the original plan Senator Dodd introduced late last fall, Republican support for the measure, so far, is missing.

The Highlights:

Key components of Senator Dodd’s proposal, which has been described as the most sweeping overhaul of financial regulations since the Great Depression, include:

  • Creating a new Consumer Financial Protection Bureau within the Federal Reserve;  
  • Creating a nine-member Financial Stability Oversight Council that will focus on identifying and monitoring system risks;  
  • Incorporating “wind down” reforms for liquidating large, complex financial companies;  
  • Consolidating and re-defining bank oversight;  
  • Instituting oversight of over-the-counter derivatives and hedge funds;  
  • Creating an Office of National Insurance to monitor the insurance industry and an Office of Credit Rating Agencies within the Securities and Exchange Commission to strengthen the regulation of credit rating agencies;  
  • Expanding shareholder rights with respect to executive compensation and corporate governance; and  
  • Assigning new responsibilities to the Federal Reserve.  

An overview of some of the more significant provisions is provided below.

The Consumer Financial Protection Bureau. Senator Dodd’s legislation creates a new independent Consumer Financial Protection Bureau charged with “protecting American consumers from unfair, deceptive and abusive financial products and practices” and ensuring “people get the clear information they need on loans and other financial products from credit card companies, mortgage brokers, banks and others.”

This new consumer agency, with a director appointed by the President for a five-year term, would be part of the Federal Reserve and would have the authority to:

  • Autonomously write rules for consumer protections that would govern all entities – banks and non-banks – offering consumer services or products;  
  • Examine and enforce regulations for banks and credit unions with assets of more than $10 billion and all mortgage-related businesses (lenders, servicers, mortgage brokers, and foreclosure scam operators) and large non-bank financial companies, such as large payday lenders, debt collectors, and consumer reporting agencies; and  
  • Handle a number of consumer protection issues currently handled by the Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and the Federal Trade Commission (FTC).  

The Financial Stability Oversight Council. Senator Dodd’s proposal establishes a new Financial Stability Oversight Council that would focus on identifying, monitoring and addressing systemic risk posed by large, complex financial firms as well as products and activities that spread risk across firms. Relying on the work of the new Office of Financial Research within the Treasury Department to serve as an early warning system for systemic risk, the nine-member Council would make recommendations to regulators for increasingly stringent rules for firms that have grown large and complex enough to pose a threat to the financial stability of the nation. The criteria to be used to determine when an entity” qualifies” for monitoring by the Council is not clearly defined in the legislation.

The Council would be chaired by the Treasury Secretary and would include the following regulators: the Federal Reserve Board, the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), the OCC, the FDIC, the Federal Housing Finance Agency (FHFA), and the new Consumer Financial Protection Bureau.

Paramount to the Council’s responsibility would be to monitor systemic risk and make recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management, and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system. The Council would be given the authority to regulate non-bank financial companies and to break up large, complex companies. Senator Dodd’s proposal specifically authorizes the Council to:

- Require, with a 2/3 vote, non-bank financial companies that would pose a risk to the financial stability of the U.S. if they failed to be regulated by the Federal Reserve; and

- Approve, with a 2/3 vote, a Federal Reserve decision to require a large, complex company to divest some of its holdings if it poses a grave threat to the financial stability of the United States.

Senator Dodd’s legislation also includes a provision that many refer to as the “Volcker Rule,” which would require regulators: to implement regulations, based on recommendations made by the Council, for banks, their affiliates and bank holding companies and prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds and to limit relationships with hedge funds and private equity funds. Non-bank financial institutions supervised by the Federal Reserve also would have restrictions on their proprietary trading and hedge fund and private equity investments.

“Wind Down” Reforms. Senator Dodd’s legislation outlines a new mechanism for seizing and liquidating large, complex financial companies by instituting a bankruptcy-like process. The most noteworthy wind down provision requires the largest financial firms to pre-fund a pool of $50 million that would be used to finance the dismantling of a bank or other systemically important firm.

Other “wind down” provisions:

  • Require large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under;  
  • Create a liquidation mechanism for the FDIC to unwind failing, systemically significant financial companies; and  
  • Require Treasury, FDIC and the Federal Reserve to unanimously agree to put a company into the liquidation process.

The legislation also proposes to update the Federal Reserve’s 13(3) lender of last resort authority to allow system-wide support for healthy institutions or systemically important market utilities with sufficient collateral. Unless the disclosure meets a 12-month delay exception, the Board must begin reporting within seven days of extending loans and must also disclose borrowers, collateral, and amounts borrowed unless doing so would defeat the purpose of the program.

The debt of solvent insured banks and thrifts and their holding companies can be guaranteed by the FDIC under the bill, as long as all of the following are met:  

  • The Federal Reserve Board and the Financial Stability Oversight Council determine that there is a threat to financial stability.  
  • The Treasury Secretary approves terms and conditions and determines a cap on overall guarantee amounts.  
  • The President activates an expedited process for Congressional review of the amount and use of the guarantees.  
  • Fees are set to cover all expected costs, and losses are recouped from users of the program.  
  • Consolidating Bank Oversight. Senator Dodd’s bill consolidates bank oversight and refines bank supervision. The oversight plan, however, preserves the dual banking system, leaving in place the state banking system that governs most community banks. The plan eliminates the Office of Thrift Savings and provides for the following supervision:  
  • The FDIC would regulate state bank and thrifts of all sizes and bank holding companies of state banks with assets of less than $50 billion.  
  • The OCC would regulate national banks and federal thrifts of all sizes and holding companies of national bank and federal thrifts with assets of less than $50 billion.  
  • The Federal Reserve would regulate bank and thrift holding companies with assets of more than $50 billion and would be responsible for finding risk throughout the system.  

Executive Compensation and Corporate Governance. The proposal significantly expands shareholder rights with respect to executive compensation and corporate governance.

Under the Senator’s proposal, shareholders would have the right to a non-binding vote on executive pay and the SEC would be given the authority to grant shareholders proxy access to nominate directors. Exchange listing standards would require that compensation committees include only independent directors, and compensation committees would have authority to hire compensation consultants.

Public companies would be required to set policies to take back executive compensation if it was based on inaccurate financial statements, and the SEC would be required to clarify the disclosures relating to compensation, including requiring companies to provide information that would compare executive compensation with stock performance over a five-year period.

New Responsibilities for the Federal Reserve:

As previously noted, the Federal Reserve would oversee the larger, more complex holding companies with assets of more than $50 million and other systemically significant financial firms under the proposal. As a result, the Federal Reserve’s responsibility would be formalized to identify, measure, monitor and mitigate risks to U.S. financial stability. The most significant reforms relate to the Federal Reserve’s governance structure and include:

  • Requiring that the president of the New York Federal Reserve Bank be appointed by the President, with the advice and consent of the U.S. Senate.  
  • Creating a vice-chairman for supervision, to be designated by the President; the vice-chairman will be a member of the Federal Reserve’s Board of Governors.  
  • Prohibiting a company, subsidiary or affiliate of a company that is supervised by the Federal Reserve Board from voting for directors of the Federal Reserve Banks and limiting such company’s past and present officers, directors or employees from serving as directors of such Banks.


While financial institutions should begin to understand the specific reforms applicable to their industry, the fate of this particular proposal remains unclear. Chairman Dodd has expressed an interest in moving this legislation through his Committee before Congress adjourns for its two-week Easter recess on March 26.

Republicans continue to express concerns with both the substantive measures included in Senator Dodd’s proposal and the timing for the bill’s consideration. Republicans formally announced their concern in a letter to Senator Dodd which stated, in part: “Given the sheer magnitude and complexity of the financial reform package you … introduce[d], this legislation will inevitably have a substantial impact on our financial system and overall economy…Accordingly, we urge you to allow for sufficient time to review the language.”

The U.S. House passed its own version of financial reform – “The Wall Street Reform and Consumer Protection Act” in December 2009.

The Restoring American Financial Stability Act of 2010 is available at: http://banking.senate.gov/public/index.cfm?FuseAction=Issues.View&Issue_id=630c2b4a-ef2a-9ff3-5e79-bbe3c26422da

A summary of the bill’s provision is also available at: http://banking.senate.gov/public/index.cfm?FuseAction=Issues.View&Issue_id=df4ed571-d028-1654-578c-931fd9e0de5b