Regulatory Changes Affecting the Financial Industry are Coming
The U.S. Senate recently passed a landmark bill containing extensive regulatory changes affecting the financial industry. The bill, passed by the Senate with a vote of 59 to 39, will be reconciled with a similar bill passed by the U.S. House of Representatives last December. A conference committee, to consist of members from both the Senate and the House, is being formed and will be assigned the responsibility of ironing out the differences between the Senate and House versions of the bill before the final draft of the bill is submitted to President Obama to be signed into law. Some of the groundbreaking proposed regulatory changes included in the Senate version of the bill, and notable differences between the Senate and House versions of the bill, are as follows:
New Consumer Financial Protection Agency
The bill would create a new consumer financial protection agency. The House version of the bill would establish the agency as a stand-alone agency separate from the Federal Reserve that would be subject to annual budget appropriations approved by Congress. By housing the agency under the Federal Reserve, the Senate version of the bill limits future Congressional oversight. The new agency would be responsible for setting and enforcing rules addressing abusive practices associated with mortgage and consumer lending and the issuance of credit cards. The agency is to be funded through fees assessed on banks.
Government Power to Break Up Large Failing Financial Firms
The bill would grant the government the power to break up and liquidate large failing financial firms. The bill is designed to accomplish this process without transferring any of the associated costs to taxpayers. The House and Senate differ on how the cost of liquidating a failed financial firm is to be funded. The House version of the bill establishes a $150 billion prepaid fund to be established through the assessment of a fee on large banks. The Senate version of the bill would fund the costs through a tax assessed on the financial industry, only after a failed financial firm has been liquidated.
New Financial Stability Oversight Council
The bill would create a new financial stability oversight council. The council would include the Treasury Secretary, the Chairman of the Federal Reserve, the Comptroller of the Currency, the director of the newly formed consumer financial protection agency, the head of the Securities and Exchange Commission (SEC), the head of the Federal Deposit Insurance Corporation, the Director of the Federal Housing Finance Agency and an independent appointee of the President. The council’s function would be to recognize threats to the economy. This includes identifying failing companies whose failure could potentially trigger a financial crisis. This council would also be given the authority to veto any rules established by the newly formed consumer financial protection agency. The House version of the bill would give the council the authority to impose restrictions on a financial firm if the council believes the firm has taken on too much risk, including requiring the firm to set aside additional capital. The Senate version of the bill leaves this type of power to the Federal Reserve. Additionally, the Senate version of the bill assigns the responsibility of running the council to the Treasury Secretary while the House version of the bill assigns the responsibility to the Chairman of the Federal Reserve.
New Oversight on the Trading of Derivatives
The bill would establish new oversight on the trading of derivatives. The bill would require most derivatives to be traded on a public exchange and cleared by a third party, rather than just being sold by banks to their customers. In addition, the Senate version of the bill would require large banks to spin off their derivative operations to a subsidiary of the bank. Failure to comply with this provision would result in the denial of access for the bank to the Federal Reserve’s emergency lending window.
Restrictions on Proprietary Trading of a Bank’s Investments
The bill would impose restrictions on proprietary trading of a bank’s investments. The restrictions are designed to limit the trading of investments held by a bank conducted specifically to increase the bank’s bottom line. Further restrictions could limit the types of investments banks are allowed to purchase. These restrictions are designed to limit a bank’s ability to put its capital at risk by “playing the markets.”
New Guidelines Regarding the Rating of Investment Securities
The bill would establish new guidelines regarding the credit ratings of investment securities. Agencies that rate securities would have to disclose their methodologies utilized in assigning their ratings to securities. This provision is intended to make the process used to rate securities more transparent to the public, and could open these agencies up to lawsuits if their methodology excludes pertinent analysis. Another provision in the bill would establish a panel appointed by the SEC to determine how to independently match ratings agencies with entities that need securities rated.
Auto Dealer Exemption
The House version of the bill currently contains a provision that would exempt auto dealers who originate loans from oversight by the newly formed consumer financial protection agency. The Senate has not yet voted on this provision and it could subsequently be removed from the final version of the bill.
If you have any questions regarding the financial reform bill, please contact Mike Shamblin or Matt Neilson at (800) 270-9629. As the legislative process progresses, we will be providing additional updates including a summary of the final version of the financial reform bill once signed into law.
