Dodd Releases Huge Financial Reform Package. MND Initial Recap

Yesterday,rnjust one day shy of the second anniversary of the Bear Stearns collapse, SenatorrnChristopher J. Dodd (D-CT), chairman of the Senate Banking Committee, releasedrnhis long awaited proposal to overhaul the nation's financial regulations.  The changes, viewed by many as the mostrnsweeping since the Depression, are apparently backed by the Obamarnadministration.

Doddrnsaid that the overhaul is designed to stabilize the nation's financial systemrnin the hopes of preventing a repeat of the near collapse of major players inrnthe fall of 2008.  However, forces arernboth the right and the left appear ready to do battle over many parts of thernproposal.

Dodd had been working on thernproposal with one of the leading members of the committee, Senator Bob Corker (R-TN), but recently decided to finishrnthe proposals on his own.  Rankingrncommittee member Richard Shelby said he was in substantial agreement with aboutrn80 percent of the bill, however, none of the Republicans on the committee havernyet endorsed it.

Here are the chiefrnprovisions of the bill which Dodd has named RestoringrnAmerican Financial Stability

Establishment of a Consumer Financial Protection Bureau
This agency will be lead by an independent director appointed by the President and confirmed by the Senate.  In what promises to be one of the more controversial aspects of Dodd's proposal, the agency will be housed within and funded by the Federal Reserve.  The agency will be able to independently write rules for consumer protection that will cover banks and credit unions with more than $10 billion in assets and all mortgage-related businesses.  Included under its mandate will be lenders, servicers, mortgage brokers, payday lenders, debt collectors, consumer reporting agencies, and foreclosure prevention operators.  Banks that exceed the $10 billion asset benchmark will continue to be handled by the appropriate regulators.

The agency will establish an Office of Financial Literacy charged with educating the public about financial matters and a complaint hot line so consumers will have a single point to report problems with financial products.

Creation of a Financial Stability Oversight Council
This independent nine-member council will be chaired by the Treasury secretary and made up of regulators representing the Federal Reserve Board, the Securities and Exchange Commission (SEC), Office of Comptroller of the Currency (OCC), The Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), and the Commodity Futures Trading Commission (CFTC) and an independent member.  The council will have one responsibility; to act as an early warning system, identifying and responding to emerging risks throughout the financial system.

The Council will be charged with creating disincentives for financialrninstitutions becoming “too big to fail” by imposing rules forrncapital, leverage, and liquidity risk management and will be able to approve,rnwith a 2/3 vote, a Federal Reserve decision to require a large and complexrncompany to divest some of its holdings if it is deemed to pose a threat to thernfinancial stability of the company.  Thernbill specifies that this would be only as “a last resort.”  The Council would also be able to require,rnwith a 2/3 vote, that nonbank financial companies such as AIG be regulated by thernFederal Reserve if they pose a risk to financial stability.

The so-called Volker Rule will require that regulators implementrnregulations for banks, bank holding companies, and their affiliates to prohibitrnproprietary trading, investment in or sponsorship of hedge funds and privaternequity funds and to limit relationships with those funds.  Nonbank institutions under Federal Reservernsupervision will be subject to similar controls.

Large complex companies will have to periodically submit “funeralrnplans” for their rapid and orderly shutdown if the company should go underrnand penalties such as higher capital requirements will be imposed for failurernto do so.  Also, if the Federal Reserve,rnFDIC, and Treasury agree to put a company into liquidation, a three judgernfederal bankruptcy panel must convene and agree within 24 hours that a companyrnis insolvent.  Most large financialrncompanies will be resolved through the normal bankruptcy process.

The largest financial firms will be charged $50 billion for an upfrontrnfund that will grow over time and will be used for any liquidation.  The FDIC will be allowed to borrow from thernTreasury only for working capital for a liquidation and the government will bernfirst in line for repayment from the assets of the liquidated company.

The Federal Reserve's lender of last resort authority will be updatedrnto allow system-wide support to protect taxpayers from loss during a major destabilizingrnevent but will not be allowed to prop up individual institutions.

The Council will create an Office of Financial Research within thernTreasury Department which will support the council's work by collectingrnfinancial data and conducting economic analysis.  This office and related agencies will providernperiodic public reports and give testimony to Congress every year on emergingrnrisks to the economy.

In what is called the Hotel California Provisions, large bank holdingrncompanies that have received TARP funds will not be able to avoid supervisionrnby the Federal Reserve by divesting themselves of their banks.

• The proposed law sets up clear lines of responsibilities for financialrninstitutions: the FDIC will regulate state banks and thrifts of all sizes andrnbank holding companies of state banks with assets under $50 billion. OCC will regulate nationalrnbanks and federal thrifts of all sizes and holding companies of national banksrnand thrifts with assets below $50 billion. rnThe Office of Thrift Savings is eliminated and no new charters will bernissued for federal thrifts. The Federal Reserve willrnregulate banks and thrift holding companies with assets over $50 billion. The Dual Banking System willrnbe preserved, leaving in place the state banking system that regulates mostrncommunity banks.

• Companies that sell products like mortgage-backed securities will bernrequired to retain at least 5 percent of the credit risk to ensure theyrn”won't sell garbage to investors.”rnThis requirement, however, would be waived if the underlying loans metrnstandards that reduce riskiness.

• The bill seeks to improve the competence of the SEC by creating a programrnto reward whistleblowers with up to 30 percent of the funds recovered when securitiesrnviolations are reported; mandating an annual assessment of the SEC's internalrnsupervisory controls, and it creates a committee of investors to advise the SECrnon its regulatory priorities and practices and an Investor Advocate to identifyrnareas where investors have significant problems with the SEC. It also requires that the SEC be self-fundedrnand no longer subject to annual appropriations.

• Strengthens the Federal Reserve through increased supervision and rulesrnto eliminate conflicts of interest.

The bill will give the Government Accountability Office the authorityrnto audit any emergency lending facility set up by the Federal Reserve and willrncreate a Vice Chairman for Supervision who will develop policy recommendationsrnregarding supervision and regulation for the Board and will report to Congressrnsemi-annually on supervision and regulation efforts.

Any company, subsidiary, or affiliate of a company that is supervisedrnby the Federal Reserve will be prohibited from voting for directors of thernFederal Reserve Banks and bans past or present officers, directors, andrnemployees from serving as directors.  Itrnalso mandates that the president of the New York Federal Reserve Bank bernappointed by the President and confirmed by the Senate rather than chosen byrnthe Bank's directors, six of whom are elected by member banks in the New Yorkrndistrict.

• Establishing an Office of Credit Rating Agencies within the SEC tornstrengthen regulation of credit rating agencies. The office will have the ability to levy finesrnon credit rating agencies and will be able to prohibit compliance officers fromrnworking on ratings, methodologies, or sales, require them to disclose theirrnmethodologies, their use of third parties for due diligence, and their ratingsrntrack records. It will also require ratingsrnanalysts to pass qualifying exams and undergo continuing education.

• Hedge funds that manage over $100 million will be required to registerrnwith the SEC as investment advisors and to disclose financial data needed tornmonitor systemic risk and protect investors.

• The bill seeks to bring transparency and accountability to thernDerivatives Market by provided the SEC and CFTC with authority to regulate over-the-counterrnderivatives and uses a joint rulemaking process with the Financial StabilityrnOversight Council stepping in if the two agencies can't agree.

It also requires Central Clearing and Exchange Trading for derivatives that canrnbe cleared, provides a role for regulators and clearing houses to determine whichrncontracts should be cleared and requires the SEC and CFTC to pre-approverncontracts before they can be cleared.

New rules would require margin for un-cleared trades in order to offsetrnthe greater risk they pose to the financial system, subject swap dealers andrnmajor participants to capital requirements, require data collection andrnpublication through clearing houses or swap repositories to improve marketrntransparency, and provide regulators with tools for monitoring and respondingrnto risks

• Shareholders will be given a say on executive compensation andrncorporate governance.

Shareholders of public companies will be given a non-binding vote onrnexecutive pay and will be granted proxy access to nominate directors.  Standards for listing a company's stock on anrnexchange will require that its compensation committee include only independentrndirectors and have authority to hire compensation consultants.  Companies will be required to set policies torntake back executive compensation if it was based on inaccurate financialrnstatements.

• Finally, the bill creates an Office of National Insurance within thernTreasury Department to monitor the insurance industry, coordinate internationalrninsurance issues, and require a study on ways to modernize insurancernregulations.

Senator Dodd said thisrnmorning on MSNBC that, while the bill does not take on any changes to FreddiernMac and Fannie Mae at this time, the issue clearly must be addressed.

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