Earlier today, Senate Banking Committee Chairman Chris Dodd (D-CT) released a revised draft of comprehensive financial regulatory reform legislation. Although Chairman Dodd had engaged in wide ranging negotiations with Senator Bob Corker (R-TN) over the past several weeks, the revised legislation was introduced without Republican support. Today's draft differs in many critical respects from the bill that Chairman Dodd released in November 2009, and is substantially different from legislation passed by the House of Representatives on December 11, 2009 (H.R. 4173, the Wall Street Reform and Consumer Protection Act).
Chairman Dodd plans to have the Committee begin its markup of his revised bill on Monday, March 22 at 4:00 p.m., and to continue as necessary with the goal of completing the markup by the end of the week. Emphasizing that he wants the Senate to "move quickly" to pass financial regulatory reform, Senate Majority Leader Harry Reid (D-NV) indicated that he wants to bring the bill to a vote on the Senate floor before the Memorial Day recess at the end of May. If this goal is met, the hope is that a conference committee will reconcile the House and Senate bills by the July 4 recess. Because the House and Senate bills are expected to be considerably different, a difficult conference is anticipated. Signaling his intention to protect the House bill, House Financial Services Committee Chairman Barney Frank (D-MA) stated that he wants all conference committee deliberations to be televised on C-SPAN.
Key aspects of Chairman Dodd's revised bill:
- Consumer Financial Protection Bureau. The revised legislation would establish the Consumer Financial Protection Bureau as an independent entity housed within the Federal Reserve. The Bureau would have the authority to write consumer protection rules for banks and nonbank financial firms offering consumer financial services or products. The Bureau also would have authority to examine and enforce regulations for banks and credit unions with greater than $10 billion in assets, all mortgage-related businesses (such as lenders, servicers, and mortgage brokers), and large non-bank financial companies (such as large payday lenders, debt collectors, and consumer reporting agencies). Banks with assets of $10 billion or less would be examined by their respective prudential regulator. In Section 1027 of the bill, there are also various exclusions from the Bureau's authority, including exclusions for insurance, accountants and tax preparers, attorneys, persons regulated by a state insurance regulator, merchants, retailers, other sellers of non-financial services, real estate brokerage activities, manufactured home retailers and modular home retailers. The bill generally prohibits the Bureau from defining the business of insurance as a financial product or service. The Bureau would be led by an independent Director who would be appointed by the President and confirmed by the Senate, and it would have an independent budget not subject to alteration by the Federal Reserve Board.
- Financial Stability Oversight Council. The bill would create the Financial Stability Oversight Council to identify, monitor, and address systemic risk. The Treasury Secretary would chair the council, which would consist of representatives from the Fed, SEC, CFTC, OCC, FDIC, FHFA, and the Consumer Financial Protection Bureau, and an independent member who has expertise in insurance. Nonbank financial firms deemed to pose a risk to the financial stability of the U.S. would be subject to regulation by the Fed upon a 2/3 vote by the Oversight Council. Similarly, by a 2/3 vote, the Oversight Council would have the authority, as a last resort, to require a large company to divest some of its holdings if it poses a grave threat to the financial stability of the U.S. Large bank holding companies that have received TARP funds would remain subject to Federal Reserve supervision and could not avoid such supervision by divesting their banks.
- Resolution Authority. The Financial Stability Oversight Council will monitor systemic risk and make recommendations to the Federal Reserve for heightened capital, leverage, liquidity, and risk management standards as companies grow in size and complexity. The bill also would require large, complex companies to periodically submit "funeral plans" for their rapid and orderly shutdown/wind-down in the event of economic failure. Companies that fail to submit acceptable funeral plans would be subjected to higher capital requirements along with activity and growth restrictions as outlined by the Oversight Council. The Treasury Department, the FDIC, and the Federal Reserve all must agree before a company could be placed into the liquidation process, and a panel of three bankruptcy judges must convene within 24 hours and agree that a company is insolvent for the resolution process to move forward. The bill would establish a $50 billion resolution authority fund to be used if needed for any liquidation. This fund would be paid for over time through assessments on the largest financial firms (bank holding companies with more than $50 billion in assets and any nonbank financial firms supervised by the Fed).
- Volcker Rule. The Dodd draft does not immediately impose new restrictions on proprietary trading and hedge fund ownership (frequently referred to as the Volcker Rule) -- but mandates a study of the proposed restrictions by the Financial Stability Oversight Council. The bill directs the prudential regulators to implement regulations for banks, their affiliates, and bank holding companies barring such proprietary trading based upon the Oversight Council's study and recommendations.
- Executive Compensation and Corporate Governance. The bill would provide shareholders with a non-binding vote on executive compensation ("a say on pay"). To promote independence, compensation committees would be required to include only independent directors and such committees would have the authority to hire compensation consultants. Companies also would be required to establish policies to recover executive compensation if this compensation was based on inaccurate financial statements that do not comply with accounting standards. The SEC would be authorized to grant shareholders proxy access to nominate directors, and directors would be required to win a majority vote in an uncontested election.
- Prudential bank regulation. In an effort to prevent regulatory arbitrage, the bill would streamline regulatory authority for national and state banks and federal and state thrifts. The FDIC would regulate state banks and thrifts of all sizes and bank holding companies of state banks with consolidated assets less than $50 billion. The OCC would regulate national banks and federal thrifts of all sizes and the holding companies of national banks and federal thrifts with consolidated assets less than $50 billion. The OTS would be eliminated, and the Fed would regulate bank and thrift holding companies with consolidated assets of over $50 billion.
- Derivatives. The bill includes placeholder language on derivatives taken largely from Chairman Dodd's November draft. Chairman Dodd indicated that he expects Sen. Jack Reed (D-RI) and Sen. Judd Gregg (R-NH) will soon reach agreement on substitute language on derivatives, which they will offer as an amendment during the Committee markup with Chairman Dodd's support. In addition, the Senate Agriculture Committee is also considering language related to derivatives, given its oversight role of the commodities markets and the Commodities Futures Trading Commission (CFTC).
- Hedge funds and investment advisers. The bill would require hedge funds that manage over $100 million to register with the SEC as investment advisers and to disclose financial data needed to identify systemic risks. The bill also would raise the assets threshold for federal regulation of investment advisers from $25 million to $100 million. Subjecting such smaller investment advisers to state supervision will allow the SEC to focus its resources on newly registered hedge funds.
- Insurance. The bill creates the Office of National Insurance within the Treasury Department to monitor the insurance industry, coordinate international prudential insurance issues, and conduct a study and report to Congress recommendations on ways to modernize insurance regulation. The legislation also provides targeted regulatory relief for surplus lines and non-admitted insurance.
- Credit Rating Agencies. The bill would require Nationally Recognized Statistical Ratings Organizations to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record. Compliance officers would be barred from working on ratings methodologies or sales. Investors could sue ratings agencies for a knowing or reckless failure to investigate the facts or obtain analysis from an independent source. The SEC would be authorized to deregister an agency for providing bad ratings over time.
- Fiduciary Standard. The bill requires a study on whether brokers who give investment advice should be held to the same fiduciary standard as investment advisers, that is, to act in their client's best interests.
- Securitization and credit risk retention. Federal bank regulators and the SEC would be required to set rules that securitizers retain not less than 5% of the credit risk for any asset transferred, sold, or conveyed by a securitizer through the issuance of an asset-backed security. The risk retention requirement could be reduced to less than 5% of the credit risk for an asset that is transferred if the originator of the asset meets underwriting standards that indicate to the satisfaction of the regulator that a loan within the asset class has a reduced credit risk.
- Federal Reserve Bank Governance. The revised legislation would prohibit any company, subsidiary, or affiliate of a company that is supervised by the Federal Reserve Board to vote for directors of Federal Reserve Banks; and their past or present officers, directors and employees cannot serve as directors. The bill would also make the President of the New York Federal Reserve Bank a Presidential appointee subject to Senate confirmation, unlike the current practice where the President of the New York Fed is chosen by the bank's directors, six of whom are elected by member banks in that district.