03.18.2010

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Updates

On Monday, March 15, 2010, Senator Christopher J. Dodd (D-CT), Chairman of the Senate Banking, Housing and Urban Affairs Committee, released a draft of a financial services reform bill entitled "Restoring American Financial Stability Act of 2010."  This legislative proposal is a companion to a similar bill that was passed by the House of Representatives in December 2009.  House Financial Services Committee Chairman Barney Frank (D-MA) issued a statement welcoming Dodd's bill and signaling a willingness to work on a solution acceptable to both houses of Congress. 

The Dodd bill contains numerous provisions, the most significant of which are highlighted below.

  • Establishment of Consumer Financial Protection Bureau.  The bill would establish a new, independent Consumer Financial Protection Bureau, housed at the Federal Reserve and tasked with protecting American consumers from unfair, deceptive, and abusive financial products and practices.  The Bureau would be led by an independent director appointed by the President and confirmed by the Senate.
  • Establishment of Financial Stability Oversight Council.  The bill would also create the Financial Stability Oversight Council.  The Council would focus on identifying, monitoring, and addressing systemic risks in the financial system.  The Council would authorize regulators to break up large, complex companies if the Council determined that the companies posed a grave threat to the financial stability of the United States.  The Council would have the authority to provide for the regulation of nonbank financial companies if the lack of such regulation would pose a risk to the financial stability of the United States.  The Council would also make recommendations for increasingly strict rules for capital, leverage, and other requirements as a company's size and complexity increased and would act to provide greater transparency of emerging risks.  In addition, the largest financial firms would be assessed a fee of $50 billion in the aggregate to create an upfront fund to be used in the event of any liquidation. The Federal Deposit Insurance Corporation would also guarantee the debt of solvent insured banks and thrifts and their holding companies only if the institutions complied with a series of tests designed to prevent bank runs and satisfied other criteria.
  • New Method for Winding Down "Too Big To Fail" Financial Institutions.  The bill would create a method for closing large companies without threatening the overall economy by:
    • Allowing the Financial Stability Oversight Council to monitor systemic risk and make recommendations for stricter rules as companies grow in size and complexity;
    • Requiring these companies to periodically submit plans for their immediate and orderly shutdown should such action become necessary; and
    • Setting forth formal liquidation procedures. 
  • Limits on Relationships With Funds.  The bill would require the implementation of the "Volcker Rule" for banks and bank holding companies, which would prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and otherwise limit the relationships with such funds. 
  • Elimination of Loopholes for Risky Financial Practices. The bill would eliminate provisions that currently allow risky and abusive practices to go unregulated, such as loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers, and payday lenders.  These changes would be achieved by closing regulatory gaps, requiring central clearing and exchange trading for derivatives, requiring safeguards for un-cleared trades, and improving market transparency. 
  • Reorganization of Bank Supervision.  The bill would reorganize bank supervision by identifying clear lines of regulatory responsibility for the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal
    Reserve, and by improving consistency and accountability.  The bill would preserve the dual banking system, leaving in place the state banking regulatory system.
  • Registration and Reporting for Large Hedge Fund Managers.  The bill would require the managers of hedge funds with assets exceeding $100 million to register with the Securities and Exchange Commission and to disclose financial data necessary to assess systemic risk and protect investors.
  • Establishment of Office of Credit Rating Agencies.   The bill would establish the Office of Credit Rating Agencies at the Securities and Exchange Commission.  This office would be tasked with examining Nationally Recognized Statistical Ratings Organizations at least annually and making its findings public.  Nationally Recognized Statistical Ratings Organizations would have to disclose their methodologies and other data regarding their ratings.  Investors would have a private right of action against rating agencies for a knowing or reckless failure to conduct a reasonable investigation.  The Securities and Exchange Commission would be authorized to deregister a rating agency for providing bad ratings over time.
  • Monitoring of Insurance Industry.  The bill would establish a new office within the Treasury Department to monitor the insurance industry and to coordinate international insurance issues.
  • Company Assumption of Risk of Mortgage-Backed Securities.  Companies selling products such as mortgage-backed securities would generally be required to retain a portion (at least 5%) of the credit risk associated with those securities and to provide greater disclosure and analysis about the underlying assets.
  • Oversight of Municipal Securities.  The bill would increase oversight of municipal securities by requiring the registration of municipal advisors with the SEC and by mandating that a majority of the members of the Municipal Securities Rulemaking Board be investors and public representatives.
  • Changes to Executive Compensation and Corporate Governance Practices.  The bill would require many changes to existing executive compensation and corporate governance practices, including providing for a mandatory advisory vote by the shareholders on executive compensation ("say on pay"), allowing shareholders to use proxy mechanisms to nominate directors, requiring majority voting for all uncontested director elections, requiring all companies listed on the national stock exchanges to maintain the independence of the compensation committee, requiring public companies to set policies to recover executive compensation that is later found to be based on inaccurate financial statements, and directing the Securities and Exchange Commission to clarify disclosures relating to compensation.

  • Strengthening of the SEC and Federal Reserve.  The bill would also include numerous provisions aimed at bolstering and strengthening the Securities and Exchange Commission and the Federal Reserve. The Senate Banking, Housing and Urban Affairs Committee will begin its markup of the bill on Monday, March 22.

 

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