Following several weeks of floor debate, on May 20, by a 59-39 vote, the Senate passed S. 3217, the Restoring American Financial Stability Act, as amended. S. 3217 is a comprehensive financial regulatory reform bill that includes provisions to consolidate existing consumer protection authorities into a new Consumer Financial Protection Bureau, establish a council to monitor and address systemic risk, implement a resolution authority to end the problem of firms being considered "too big to fail," and regulate derivatives markets. The bill also dramatically transforms the role of the credit rating agencies and makes some changes in corporate governance, such as giving shareholders a "say on pay." Despite the protests of many Republican Senators, the bill does not address the future of the Government Sponsored Enterprises, Fannie Mae and Freddie Mac. Given the number of amendments considered, the final text of the bill as amended is not yet available in a single document. To view S. 3217 and amendments to the bill, see http://thomas.loc.gov/cgi-bin/bdquery/z?d111:s.03217:
All Democrats present and voting supported final passage, other than Senator Maria Cantwell (WA) and Senator Russ Feingold (WI). All Republicans present and voting opposed final passage, other than Senator Scott Brown (MA), Senator Susan Collins (ME), Senator Charles Grassley (IA), and Senator Olympia Snowe (ME).
Now that the Senate has passed its bill, it must be reconciled with H. R. 4173, the House-passed financial regulatory reform bill. A formal conference committee is expected to be appointed, a process which last occurred on a financial services bill when the Sarbanes-Oxley bill was enacted in 2002. The Senate will seek to appoint its conferees on Monday, May 24. If conferees are appointed, votes also are expected, starting at 5:30 p.m. on Monday, on two non-binding motions to instruct the conferees in their negotiations with the House. One of the motions to instruct will be offered by Senator Sam Brownback (R-KS), and is likely to include language that would direct the Senate conferees to seek to exempt auto dealers from the jurisdiction of the Consumer Financial Protection Bureau. The other motion to instruct will be offered by Senator Kay Bailey Hutchison (R-TX) and concerns proprietary trading. Democrats have predicted that they will produce a conference report that will win the approval of both the House and Senate and that this bill will go to the President for his signature before the 4th of July.
Here are the key provisions of S. 3217:
- Consumer Financial Protection Bureau. S. 3217
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. There would be a specific consumer
protection liaison for members of the armed services and their
families.
- Federal preemption of state law. S. 3217 would
allow state attorneys general to sue national banks for failure to
comply with state laws or for violating regulations issued by the
proposed Consumer Financial Protection Bureau. The bill also would
restore the Barnett Bank standard that give the Office of
the Comptroller of the Currency more flexibility in preempting
certain state enforcement suits on a case-by-case basis.
- Credit score. The bill requires that credit
bureaus provide consumers with their numerical credit score if the
credit score was contained in a credit report and used to deny
credit to a consumer.
- 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.
- Leverage and risk-based capital requirements.
The bill mandates minimum leverage and risk-based capital
requirements for insured depository institutions, depository
institution holding companies, and for nonbank financial firms
identified by the Financial Stability Oversight Council for
supervision by the Federal Reserve.
- 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 not
establish a pre-funded resolution authority fund.
- Volcker Rule. S. 3217 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. The OTS would be
merged into the OCC. The Fed would retain its supervision of bank
holding companies and state-chartered banks, and with the
dissolution of the OTS, become the supervisor of savings and loan
holding companies.
- Deposit insurance. The bill would redefine the
way the FDIC calculates the deposit insurance premiums that it
charges insured depository institutions by basing such premiums on
the risks posed by those institutions.
- Derivatives. The bill provides for federal
regulation of the derivatives markets, and prohibits banks from
proprietary trading in derivatives. The bill includes language
requiring most derivatives trades to go through a clearinghouse and
be exchange-traded. The bill also would require the regulators to
impose more stringent capital and margin requirements on those
derivatives not required to be traded on an exchange. There are
limited exemptions from these expanded regulations for certain
commercial end users of derivatives. The bill includes a ban on
federal governmental assistance to any swap entity by barring
advances from any Federal Reserve credit facility, discount window,
or from loan or debt guarantees by the FDIC.
- 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
$24 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.
- 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.
- Interchange fees. The bill would require that
fees charged to businesses by all banks with at least $10 billion
in assets for accepting debit cards are reasonable and proportional
to the costs incurred. The bill also would limit payment card
networks from imposing restrictions on businesses that accept
payment cards.
- 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 agency transparency/liability.
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. The bill
also provides whistleblower protections for employees of Nationally
Recognized Statistical Ratings Organizations.
- Credit rating agency selection. The bill would
establish a new system in which an issuer's credit rating
agency is randomly assigned to the issuer by an independent board
that draws upon a pool of qualified credit rating agencies. The
bill also would remove several statutory references to credit
ratings, thereby drastically reducing the "Good Housekeeping
seal of approval" effect said to arise from current statutory
and regulatory references to these ratings.
- 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. The federal banking agencies, the HUD Secretary, and the
Director of the Federal Housing Finance Agency are directed to
jointly define a category of "qualified residential
mortgages," which would be exempt from the 5% securitization
risk retention requirement.
- Mortgage lending standards. The bill amends
the Truth In Lending Act by requiring lenders to determine whether
a borrower has a reasonable ability to repay a mortgage before the
lender makes such a mortgage.
- Yield spread premiums. The bill prohibits
compensation to a loan originator that varies based on the terms of
the loan, other than the principal amount. Yield spread premiums
are prohibited.
- Fannie Mae and Freddie Mac. The bill does not
propose substantive reforms to the Government Sponsored
Enterprises, Fannie Mae and Freddie Mac. It does require a study by
the Treasury Department on the feasibility and desirability of
ending the conservatorships of Fannie and Freddie and on the future
of the housing finance system.
- Federal Reserve transparency. The GAO is
authorized to conduct an audit of the Fed's emergency lending
programs, but may not audit the Fed's monetary policy
operations.
- Federal Reserve Bank governance. The
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.
- International Monetary Fund (IMF). S. 3217
would require the U.S. Executive Director of the IMF to determine
whether IMF loans to countries whose national debt exceeds their
GDP will be repaid. If it is determined that a prospective loan is
unlikely to be repaid, then the U.S. Executive Director is
instructed to oppose having the IMF provide the loan.
- Congolese minerals. The bill requires annual disclosures to the SEC by listed companies if the extraction of cassiterite, columbite-tantalite, wolframite and gold from the Democratic Republic of Congo is necessary to the functioning or production of a product the company manufactures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
