|Sponsor||Rep. Frank, Barney|
|Date||June 30, 2010 (111th Congress, 2nd Session)|
|Staff Contact||Daris Meeks|
The House is scheduled to consider H.R. 4173 under an expected closed rule on Wednesday, June 30, 2010. The rule has not yet been reported by the Rules Committee.
Title I—Financial Stability
This title would create a new systemic risk regulator called the Financial Stability Oversight Council (Council). The Council would be charged with, among other things, identifying risk to the financial stability of the nation. The Council’s voting membership would consist of the following: the Treasury Secretary (who would serve as Chair), the heads of the Fed, OCC, the FDIC, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Housing Finance Agency, and the new Bureau of Consumer Financial Protection (Bureau), and an independent Presidential appointee having insurance expertise. A new Office of Financial Research would be a nonvoting member of the Council. Some Members may be concerned that the conference report would further empower the same regulatory agencies that missed the current financial crisis.
The Council would also be authorized, by a two-thirds vote of it members, to require that a nonbank financial company and a foreign nonbank financial company be supervised by the Fed. Some Members may be concerned that the conference report would further distract the Fed from its primary monetary policy mission. The Fed gets this promotion not withstanding the fact that it missed the signs leading to the current financial crisis and contributed to the housing bubble with artificially low interest rates. This provision sets up conflict among the federal agencies, future jeopardizing the financial system at the expense of the taxpayers.
The conference report would create an Office of Financial Research. The OFR would be required to collect data by subpoena, if necessary, and report to the Council members. The OFR would be funded by assessments on bank holding companies with at least $50 billion in assets and nonbank financial firms supervised by the Fed. Some Members may be concerned that the conference report would expand the reach of government by creating an office to monitor, record, and report on any financial transaction, including consumer transactions, that it deems appropriate (and without consent of the consumer). The OFR would also lack any oversight of its activities. Additionally, the assessment tax would increase costs for consumers. The CBO recently noted, “[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors...”
Title II—Liquidation Authority
The conference report would authorize liquidation proceedings to be initiated when the FDIC and the Fed, on their own initiative or at the request of the Treasury Secretary (in consultation with the President), make a written recommendation that such proceedings be commenced against the financial company. Where the financial company is a broker-dealer, or a financial company whose largest subsidiary is a broker-dealer, the Securities and Exchange Commission and the Fed would make the recommendation.
The conference report would authorize the Treasury Secretary to appoint the FDIC as receiver of covered financial institutions. The Treasury Secretary would be required to petition a US District Court for an order forcing the appointment if the covered financial institution does not acquiesce to the appointment voluntarily.
The FDIC would be authorized to borrow from the Treasury to establish an orderly liquidation fund in an amount not to exceed, during the first 30 days after the receiver is appointed, 10 percent of the total consolidated assets of the financial company and, thereafter, 90 percent of the fair value of the total consolidated assets of the financial company available to repay the fund. To repay the obligations within 5 years, the FDIC would be required to impose assessments on any creditor that received more than it would have received in liquidation through Bankruptcy. The conference report also authorizes the FDIC to impose risk-based assessments on financial firms with assets of $50 billion or more. Additionally, the conference report would provide the FDIC the authority to wipe out shareholders and management of firms, and determine how and when creditor would be paid. Some Members may be concerned that the FDIC and the Treasury Secretary would be authorized to use taxpayer funds to bailout financial institutions, and the FDIC, rather than an objective court with established rules, would be empowered to determine which creditors are made whole. Additionally, the assessment tax would increase costs for consumers and unfairly burden well managed firms.
The conference report would require FDIC debt guarantee programs to have the involvement of the Fed with the approval of the Treasury Secretary and Congress. Some Members may be concerned that the conference report further empowers the political class to determine whether a firm fails or succeeds.
Title III—Regulatory Reshuffling
The conference report would abolish the Office of Thrift Supervision (OTS). The transfer of its powers and duties would have to be done within one year after the conference report’s enactment. The conference report would transfer to the FDIC the authority to regulate all state savings associations. The OCC, which would be a bureau within the Treasury Department, would regulate all federal savings associations. The Fed would regulate all savings and loan holding companies and all nonbank subsidiaries of savings and loan holding companies.
The conference report would also make the $250,000 deposit insurance increase permanent, applied retroactively to January 1, 2008. Some Members may be concerned that the conference report would protect the deposits above $100,000. Also, applying deposit insurance retroactively would benefit depositors of six banks that have already failed. Paying the uninsured deposits for a handful of depositors would set a bad precedent and undermine the discipline that well-functioning deposit insurance provides the financial system.
The conference report would increase the FDIC’s premium reserve ratio from 1.15 percent to 1.35 percent of estimated insured deposits by September 30, 2020 in order to offset the cost of the bill. The new premium increase would apply to banks with more than $10 billion in assets. Some Member may be concerned that the money in the Deposit Insurance Fund is supposed to cover depositors at failed institutions, not to fund government spending. The method for paying for the spending in the bill will impose an unnecessary tax on financial institutions to pay for new bureaucracies.
The conference report would create offices of Minority and Women Inclusion at the financial regulators agencies and securities agencies, to coordinate technical assistance to minority-owned and women-owned businesses and to promote diversity in the workforce of the regulators.
Title IV—Regulation of Advisers to Hedge Funds and Others
This conference report would require advisers to hedge funds and private equity funds to register with the SEC as investment advisers. Advisers to private funds with more than $150 million in assets under management would be exempt from registration but required to disclose financial data to the SEC for systemic risk purposes.
Advisers to venture capital funds would be excluded from registration and regulation, and family offices would be excluded from the definition of “investment adviser.”
The conference report would require private fund advisers to submit to the SEC and maintain reports and records for the assessment of systemic risk by the Financial Stability Oversight Council. These reports would include, among other things, the following: (1) amount of assets under management; (2) use of leverage; (3) counterparty credit risk exposures; (4) trading and investment positions; (5) type of assets held; and (6) trading practices.
The conference report would raise the threshold for investment adviser registration with the SEC from $30 million to $100 million in assets under management. Advisers with fewer assets under management could be subject to state registration requirements, if the state has an examination program.
The SEC would be able to issue regulations requiring independent public accountants to perform asset verification examinations on registered investment advisers who have custody of client assets.
The conference report establishes within the Treasury the Federal Insurance Office, headed by a Director appointed by the Secretary. Among other things, the FIO would be authorized to (1) monitor all aspect of the insurance industry, by the use of a subpoena if necessary; (2) recommend to the Council that it designate an insurer as an entity subject to stricter standards; and (3) assist the Secretary in administering the Terrorism Insurance Program.
The conference report would trigger preemption of state insurance measures only if the director determines the measure is inconsistent with an international insurance recognition agreement and directly results in treatment of a foreign insurer that is subject to such an agreement less favorably than a U.S. insurer.
The conference report would attempt to streamline the regulation of nonadmitted insurers, surplus lines of insurance and reinsurance by providing exclusive regulatory authority to an insured’s home state and promoting uniformity of requirements and standards among states.
Title VI—Regulation of Bank and Savings Association Holding Companies and Depository Institutions
The conference report would impose a three-year moratorium on new charters and changes in control of existing charters for credit card, industrial, or trust banks owned by a commercial firm.
The conference report would include the “Volker Rule” to prohibit depository institutions and their holding companies from engaging in proprietary trading of securities, including bonds, equities, derivatives, options, commodities or other financial instruments. Depository institutions and their holding companies would be permitted to make de minimus investments hedge funds and private equity funds under strict limitation, including investments limited to 3 percent or less of a bank's Tier 1 capital. Some Members may be concerned that the “Volker Rule” puts U.S. banks at a competitive disadvantage with foreign banks. Such a competitive disadvantage will likely result in more U.S. jobs lost as capital moves to foreign countries.
The conference report would authorize either the SEC or the Commodity Futures Trading Commission (CFTC) to oversee the regulation of over-the-counter derivatives, derivatives dealers, market participants, exchanges, execution facilities and clearinghouses. The Commissions would be required to consult and coordinate on rules and include the prudential regulators, to the extent possible, to assure regulatory consistency and comparability.
The conference report would grant limited exemptions from the mandatory clearing and exchange trading requirements for commercial end-users of derivatives. While end-users can post non-cash collateral for un-cleared trades, regulators would have the authority to impose margin requirements on end-users for derivatives trades that are not cleared. Some Members may be concerned that allowing regulators to determine margin requirements will increase costs for end-users that would be passed on to consumers and divert capital from job creation and business growth.
The conference report would require banks to “spin off” some portions of their derivative trading operations into affiliates. The conference report would permit banks to continue using derivatives to hedge its risks, and the conference report would allow banks to keep swaps related to traditional banking—interest rates, foreign exchange swaps, etc. Other types of swaps would be done by an affiliate of the bank. The conference report would provide banks two years to comply. The conference report would impose new capital, margin, reporting and record-keeping rules on firms that engage in derivatives transactions. Also, the conference report would require data collection and publication through clearing houses or swap repositories. Some Members may be concerned that pushing certain activities out of heavily regulated banks would lead to less transparency and more risk in the financial sector. Members may also be concerned that the provisions may drive derivatives activities offshore and further hinder small business growth and stifle the competitiveness of the U.S. financial sector.
Title VIII—Payment, Clearing and Settlement Supervision
The conference report would authorize the Council to determine what companies would be FMU (financial market utilities). These FMUs, determined to be “systemically important,” would be subject to additional oversight. The FMUs would be required to meet risk management standards set by the Council.
Title IX—Investor Protections and Improvements to the Regulation of Securities
The conference report would expand the SEC’s enforcement authority and its ability to conduct investigations and impose liability on persons subject to the securities laws. The conference report would create a new Investor Advocate and an Investor Advisory Committee within the SEC to advise and consult with the SEC on, among other things, regulatory priorities, fee structures, effectiveness of disclosures, and investor protection. The conference report also updates the law governing the Securities Investor Protection Corporation.
The conference report would require the SEC to conduct a study of the effectiveness of existing standards of care for broker-dealers and investment advisers providing personalized investment advice and recommendations about securities to retail customers and authorizes the SEC to issue rules to impose a fiduciary duty on broker-dealers and investment advisers when dealing with retail customers.
The conference report would create an Office of the Whistleblower at the SEC and expands incentives and protections for whistleblowers providing information leading to successful SEC enforcement actions. Awards to whistleblowers would range from 10 percent to 30 percent of the amounts collected by the SEC in actions where the SEC obtained monetary sanctions exceeding $1 million. The conference report also works to protect the confidentiality of whistleblowers.
The conference report would authorize the SEC with the authority to restrict the use of pre-dispute arbitration agreements by brokers, dealers, municipal securities dealers, and investment advisers with customers. Some Members may be concerned that investment firms would be faced with increased litigation if the SEC bans mandatory arbitration clauses. The litigation costs would be passed on to consumers, making investment transactions more expensive.
The conference report would create an Office of Credit Ratings that would report to the SEC Chairman. The office would be authorized to issue new rules for internal controls, transparency, and penalties for non-compliance. The office would be required to examine the Nationally Recognized Statistical Ratings Organizations (NRSROs) at least once a year, and make its findings public. The NRSROs would be required to disclose their methodologies, use of third parties for due diligence, and their ratings track record. The conference report would also require the SEC to issue rules to prevent the sale and marketing considerations of NRSROs from influencing their ratings.
The conference report would require securitizers to retain an “economic interest” of not more than 5 percent in any portion of the credit risk for any asset that the securitizer transfers, sells or conveys to a third party.
The conference report would require all public companies to have an annual nonbinding shareholder votes on the annual compensation of the top five senior executives at least every three years. Additionally, the conference report would require all public companies to have a compensation committee composed solely of independent directors. The conference report would require federal regulators to monitor incentive-based payment arrangements of federally regulated financial institutions larger than $1 billion and prohibit incentive-based payment arrangements that the regulators determine to encourage inappropriate risks by providing an, employee, director, or principal shareholder of a financial institution with excessive compensation, fees, or benefits; or that could lead to material financial loss to the financial institution.
The conference report would prohibit brokers who are not beneficial owners of a security from voting through company proxies unless the beneficial owner has instructed the broker to vote on the owner’s behalf.
The conference report would require the SEC to write rules allowing “proxy access” for shareholders, so that they can nominate candidates for an issuer’s board of directors, and to have such candidates listed on the issuer’s own proxy materials. In writing such rules, the SEC would be required to consider the burden on small issuers, and may issue exemptions from proxy access rules.
Issuers would be required to disclose in annual filings with the SEC why the issuer has chosen to have a single person, or different individuals, serve as CEO and Chairman of the board of the company.
The conference report would exempt small issuers (those with less than $75,000,000 in market capitalization) from the external audit of internal controls requirements of Sarbanes-Oxley Section 404(b), and requires studies on the impact of such an exemption and the exemption for mid-sized companies.
The conference report would maintain the role of the Appropriations Committees in setting the SEC’s annual budgets on and after FY2012. The conference report would also require the SEC's budget to be submitted to Congress concurrent with the earliest submission to the Office of Management and Budget and submitted unaltered by the President; builds in flexibility for multi-year budget authority and unanticipated needs; and authorizes graduated funding level increases for the SEC for FYs 2011-2015 from $1.3 billion to $2.25 billion.
Title X—Bureau of Consumer Financial Protection
The conference report would create the Consumer Financial Protection Bureau (CFPB) within the Fed. The CFPB would have jurisdiction over credit, savings, payment and other consumer financial products and services. The CFPB would be led by a Director appointed by the President with the advice and consent of the Senate; the Director would serve a five-year term. Some Members may be concerned that the CFPB’s flawed structure, one that repeats the structure of Fannie and Freddie failed former oversight regulator, would separate the consumer protection regulation from safety and soundness supervision and create a conflict between numerous existing agencies.
The conference report would authorize the CFPB to prescribe rules and regulations applicable to covered persons or service providers identifying unlawful unfair, deceptive or abusive acts or practices in connection with consumer transactions for a consumer financial product or service; consumer disclosure requirements for financial products and services, including model disclosures that would provide a safe harbor for covered persons; and rules requiring a covered person to make available to a consumer, upon request, information concerning the consumer financial product or service obtained from such covered person. Some Members may be concerned about the CFPB’s broad scope that it may go beyond the jurisdictional reach of all existing federal financial agencies, ultimately punishing consumers by increasing the cost of credit, limiting consumer choices, and destroying jobs by further restricting access to credit. The “abusive” standard is new and undefined.
The CFPB would be authorized to prohibit the use of mandatory predispute arbitration provisions. Some Members may be concerned that lenders would be faced with increased litigation if the CFPB bans mandatory arbitration clauses. The litigation costs would be passed on to consumers, making credit more expensive.
The conference report would require the CFPB to coordinate its supervisory activities with those conducted by prudential regulators and state bank supervisors. If a supervisory determinations by the CFPB conflicts with those of a prudential regulator, the conflicts are to be resolved by a panel consisting of a representative of the CFPB, a representative of the prudential regulator, and a representative of another banking agency. Some Members may be concerned that numerous government regulators input would make the work of private sector firms more inefficient, resulting in higher cost due to more government red tape and delays.
The conference report would retain the OCC’s authority to preempt state laws as applied to national banks, but such determinations must be made on a case-by-case basis. The conference report would authorize state attorneys-general to bring actions, and the Bureau would have the power to intervene.
Title XI—Federal Reserve System Provisions
The conference report would require the Fed to establish policies and procedures to ensure that emergency lending is used to provide liquidity to the financial system and not to aid failing financial companies. The conference report would also require the Treasury Secretary to approve Fed programs and facilities established under Section 13(3). The Fed would be required to provide initial and periodic reports to Congress on programs or facilities created under Section 13(3). The GAO would be authorized to conduct audits of credit facilities established under Section 13(3). The Fed must publish on its website GAO audit reports of Section 13(3) programs or facilities, annual financial statements prepared by an independent auditor and reports to Congress on Section 13(3) programs or facilities. Some Members may be concerned that the conference report would exempt monetary policy decisions, discount window operations, and agreements with foreign central banks from the scope of the audit.
The conference report would direct the GAO to conduct audits of all loans and other financial assistance provided by the Fed beginning December 1, 2007 through the date of enactment through the emergency programs created under Section 13(3) of the Federal Reserve Act (e.g., TALF); and the governance of the Federal Reserve bank system, including selection, appointment and election of Federal Reserve directors and the establishment and operation of loan and financial assistance facilities described above.
The conference report would direct the Fed to publish on its website information on all loans and financial assistance provided from December 1, 2007, through the date of enactment pursuant to emergency programs created under Section 13(3) of the Federal Reserve Act.
The conference report would require FDIC debt guarantee programs to have the involvement of the Fed and must be approved by the Treasury Secretary and Congress.
Title XII—Improving Access to Mainstream Financial Institutions
The conference report would authorize the Treasury Secretary to establish multiyear demonstration programs to provide low-cost, small loans to consumers designed to compete with payday lenders.
Title XIII—Pay It Back Act
The conference report would reduce the authorization under the Troubled Asset Relief Program to $475 billion. Some Members may be concerned that the reduction is effectively an offset for new spending created by the legislation, rather than debt reduction.
Additionally, the conference report would require the proceeds from the sale of Fannie Mae, Freddie Mac and Federal Home Loan Bank debt purchased under its emergency authority and unused amounts under the American Recovery and Reinvestment Act to be used for the sole purpose of deficit reduction.
Title XIV—Mortgage Reform and Anti-Predatory Lending Act
Among other things, the conference report would set minimum standards for mortgages requiring that consumers have the ability to repay at the time the mortgage is consummated.
Title XV—Miscellaneous Provisions
The conference report would require the President to direct the U.S. Executive Director of the IMF to evaluate any proposed loan to a country if the public debt of that country exceeds its GDP and oppose the loan if is unlikely to be repaid.
The conference report would require disclosure to the SEC by all persons otherwise required to file with the SEC for whom minerals originating in the Democratic Republic of Congo and adjoining countries are necessary to the functionality or production of a product manufactured by such person. Such a public disclosure report by the person would be required to describe the measures taken to exercise due diligence on the source and chain of custody of such materials, the products manufactured, and other matters; requires an independent audit of the report.
The conference report would require the SEC to require those public companies engaged in extractive industry activities (the commercial development of oil, natural gas, or minerals) to include information about payments they or their subsidiaries, partners or affiliates have made to a foreign government for such development in their annual reports and post this information online.
The conference report would require public companies engaged in coal or other mining activities to disclose mine safety violations in their SEC filings.
The conference report would also include a Sense of the Congress statement about the conflict in Congo and requires certain securities disclosures.
On June 25, 2010, by a party line vote, an agreement was reached by the House and Senate conference committee on financial reform. However, the conference report would continue to expose taxpayers by making bailouts permanent and codifying the "too big to fail" status for select Wall Street firms. The conference report would continue the practice of using taxpayer funds as the initial source to bailout troubled firms. The conference report would also make permanent the subjective standard regarding the treatment of creditors (e.g., Chrysler and GM) by authorizing the FDIC to determine how and when creditors of a failed firm would be paid. The conference report would also expand the reach of government in the marketplace by creating several new intrusive government offices and agencies, including a Consumer Financial Protection Bureau and a Consumer Office of Financial Research, charged with collecting data on transactions carried out by any financial company in our economy.
On June 29, 2010, the House and Senate conferees reconvened to address strong concerns over the legislation's $19 billion budget shortfall reflected in the conference report's pay-for provisions. Senator Dodd offered to the House conferees an alternative pay-for provision. The new provisions would strike the "Financial Crisis Special Assessment & Fund" and would replace it with a provision to increase in the FDIC's insurance premium reserve ratio from 1.15 percent to 1.35 percent and would terminate TARP program obligations from $700 to $475 billion.