This morning at 5:40 a.m. Eastern, after several weeks of deliberations, the U.S. House and Senate Conferees approved the Conference Report that reconciles the House-passed and Senate-passed versions of comprehensive financial regulatory reform.
To view the final Conference Report, as adopted by the Conference Committee, click here.
This is the first in a series of summaries and commentaries that we will share over the coming days, including further detail on key elements highlighted in this alert. This alert provides a title-by-title overview of what the House and Senate are now being asked to adopt.
The Conference process
The Conference Report was drafted using a base legislative text that largely mirrored the Senate-passed version of financial regulatory reform legislation. Under the procedures adopted by Conference Committee Chairman Barney Frank (D-MA), for each title of the base text, the House Conferees drafted an Offer, and then had the opportunity to offer and vote on amendments to the House Offer. Once all proposed amendments were disposed of, the House Conferees then voted to adopt their Offer. Once adopted, the House sent its Offer to the Senate Conferees who then reviewed the House Offer and prepared their Counteroffer. Senate Conferees then had the same opportunity to make amendments to their Counteroffer before they adopted it and sent it back to the House Conferees. The back and forth process of House Offer and Senate Counteroffer continued until all differences between the House and Senate proposals were resolved.
Key provisions of the Conference Report
Set forth below is a title-by-title top line summary of the key provisions of the Conference Report. Note that the Conference Report does not propose substantive reforms to the Government Sponsored Enterprises, Fannie Mae and Freddie Mac. However, in Title 10, 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. Republican Members of the Conference Committee were sharply critical of the Committee's failure to take on the issue of GSE reform, arguing that the objectives of financial regulatory reform cannot be achieved without addressing the status and future of Fannie and Freddie. Democratic Members said that GSE reform was at the top of their agenda for the next session of Congress, but that the current bill could not be allowed to languish until these issues were resolved.
Title 1 - Financial Stability
Financial Stability Oversight Council The Conference Report 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 Federal Reserve, Securities and Exchange Commission ("SEC"), Commodity Futures Trading Commission ("CFTC"), Office of the Comptroller of the Currency ("OCC"), Federal Deposit Insurance Corporation ("FDIC"), Federal Housing Finance Agency ("FHFA"), the Consumer Financial Protection Bureau ("CFPB"), and the Chairman of the National Credit Union Administration ("NCUA"). The Financial Stability Oversight Council would have additional non-voting members, including the head of the new Federal Insurance Office, a state insurance commissioner, a state banking supervisor, and a state securities commissioner.
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 Financial Stability 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.
Higher capital, liquidity, and leverage requirements The Conference Report 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. The House and Senate Conferees adopted new capital requirements championed by Senator Susan Collins (R-ME) that would prevent certain financial institutions from including trust-preferred securities in calculating their Tier 1 capital. The compromise language allows institutions with less than $15 billion in assets to continue counting trust-preferred securities toward their capital requirements. However, all institutions with more than $15 billion in assets would have five years to phase out their use of trust-preferred securities in meeting their Tier 1 capital requirements.
Title 2 - Orderly Liquidation Authority
Funeral Plans 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 Conference Report would require large, complex companies to periodically submit "funeral plans" outlining how they would rapidly, and in an orderly manner, wind down their operations 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 Financial Stability Oversight Council.
Resolution process for nonbank firms The Treasury Department, the FDIC, and the Federal Reserve all must agree before a failed nonbank company could be placed into the liquidation process.
No prefunded resolution authority The Conference Report does not include a prefunded resolution authority. During the Conference proceedings, House and Senate Conferees took different positions with respect to how best - and when - to fund the proposed resolution authority for nonbank financial firms. House Conferees supported a pre-resolution funding assessment, whereas Senate Conferees pushed for a post-resolution assessment scheme. Noting that the Senate Conferees worked for several months to formulate the Senate-passed language on resolution authority, Senate Banking Committee Chairman Chris Dodd (D-CT) had argued strenuously that inclusion of the Senate-passed language was necessary to attract sufficient support in the Senate to pass the Conference Report.
Title 3 - Transfer of Powers to the Comptroller of the Currency, the FDIC, and the Fed
OTS merged into the OCC The Office of Thrift Supervision ("OTS") would effectively be merged into the Office of the Comptroller of the Currency, with certain OTS responsibilities and authorities also being transferred to the FDIC and the Fed. 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. The OTS would be merged into the OCC one year from the date of enactment of the bill, unless the Treasury Secretary opted to delay the transfer for up to an additional six months.
Increase in deposit insurance The Conference Report would permanently increase the maximum amount of deposit insurance for banks, thrifts, and credit unions to $250,000 per account. This increase would be made retroactive to January 1, 2008.
Title 4 - Regulation of Advisers to Hedge Funds and Others
SEC Registration Requirements Effective one year from the date of enactment of the bill, the Conference Report 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 Conference Report also would raise the assets threshold for federal regulation of investment advisers from $25 million to $100 million. The Conference Report also would require investment advisers to private equity firms with more than $150 million in assets under management to register with the SEC.
Title 5 - Insurance
Federal Insurance Office The Conference Report would establish the Federal Insurance Office ("FIO") within the Treasury Department. Originally named the Office of National Insurance, the FIO would monitor all aspects of the insurance industry, including identifying issues or gaps in regulation that could contribute to systemic risk and recommending to the Financial Services Oversight Council that it designate an insurer as an entity subject to heightened regulation. The FIO also would coordinate Federal efforts and develop Federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors and assisting the Secretary in negotiating International Insurance Agreements on Prudential Measures. The Conference Report requires that the U.S. Trade Representative ("USTR") and the relevant Congressional Committees (House Financial Services, House Ways & Means, Senate Banking, and Senate Finance) be included in the process by which the Treasury Department negotiates, finalizes, and enforces international insurance agreements. Treasury and the USTR would jointly negotiate any such agreements.
Surplus and Non-Admitted Insurance The legislation also provides targeted regulatory relief for surplus lines and non-admitted insurance.
No Optional Federal Charter included. The Conference Report provides for a study on U.S. and global reinsurance markets, but does not otherwise address the issue of an optional federal charter for insurance.
Title 6 - Prudential Regulation of Bank and Savings Association Holding Companies and Depository Institutions
Volcker Rule The Conference Report would establish a modified version of the so-called Volcker Rule, and generally prohibit banks from engaging in proprietary trading or holding or obtaining an interest in a hedge fund or private equity fund. However, each bank would be permitted to invest up to 3% of its Tier 1 capital in hedge funds and private equity funds. A bank's interest in any single hedge fund or private equity fund may not exceed 3% of the assets of that fund. Nonbank financial firms that are subject to the Fed's supervision would be subject to additional capital requirements and quantitative limits with respect to their proprietary trading or investments in or sponsorship of a hedge fund or private equity fund.
The Financial Stability Oversight Council is directed to study and make recommendations on the implementation of these provisions within six months of the enactment of the bill. These provisions generally become effective two years after the date of enactment of the bill or 12 months after the Financial Stability Oversight Council issues its final rules, whichever date is earlier. Banks and any nonbank financial firms subject to the Fed's supervision have two years from the date upon which these provisions become effective within which to bring their activities and investments into compliance. The Fed may extend this two year period for up to one year at a time with no more than a total of three years of such extensions. An extension of up to five years of the time for any required divestiture may be granted by the Fed in cases where an entity has an ownership interest in an illiquid fund.
Title 7 - Derivatives
Derivatives regulation The Conference Report would provide for federal regulation of the derivatives markets. The Conference Report includes language requiring most derivatives trades to go through a clearinghouse and be exchange-traded. The Conference Report 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 Conference Report would also prohibit federal assistance to any swaps entity with respect to any swap. This prohibition on federal assistance does not prevent a bank from having or establishing an affiliate swaps entity as long as the bank is part of a bank holding company and the affiliated swaps entity complies with Sections 23A and 23B of the Federal Reserve Act and such other requirements as their regulator may impose. After consulting with the CFTC or the SEC, the bank's regulator may permit the bank up to 24 months to divest or spin off a swaps entity. In establishing the appropriate period for such divestiture or spinoff, the bank regulator shall consider the potential impact of the divestiture on the bank's mortgage lending, small business lending, job creation, and capital formation versus the potential negative impact on depositors and the FDIC insurance fund.
Title 8 - Payment, Clearing, and Settlement Systems
Financial market utilities The Conference Report clarifies the authority of the Federal Reserve to prescribe risk management standards for various activities of financial market utilities, and outlines the circumstances under which a particular financial market utility may be provided with access to the Fed's discount window.
Title 9 - Investor Protection and Improvements to the Regulations of Securities
SEC jurisdiction over certain foreign conduct The Conference Report extends the SEC's enforcement jurisdiction to cover significant steps in furtherance of a violation even if the securities transactions occur outside the U.S. and to cover foreign conduct that has a foreseeable substantial effect within the U.S.
Fiduciary Duty The Conference Report requires the SEC to conduct a study within six months on whether brokers who give investment advice should be held to the same fiduciary standard as investment advisers, namely, to act in their client's best interests. The study includes criteria to guide the SEC's consideration of these issues, and gives the SEC the authority, once the study is released, to conduct rulemaking and impose such a fiduciary duty on broker dealers if the SEC considers it warranted.
Credit rating agency selection process The Conference Report would require the SEC to conduct a two year study of the feasibility of creating a panel to randomly assign qualified credit rating agencies to issuers, instead of the current issuer-selects system. After the completion of the SEC's study, the credit rating agency assignment panel would be established unless the SEC objects and develops what it considers to be a more practicable approach to address the perceived and actual conflicts of interest in the issuer-selects system.
Credit rating agency transparency/liability The Conference Report 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 Conference Report also provides whistleblower protections for employees of Nationally Recognized Statistical Ratings Organizations.
Securitization 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 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" that meet certain minimum standards, for which the 5% securitization risk retention requirement could be reduced (even to 0%)
Executive Compensation The Conference Report 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.
Corporate Governance and Proxy Access The SEC would be authorized to grant shareholders proxy access to nominate directors, and to require that issuers follow certain procedures for such proxy access. The Conferees indicated that they expect the SEC to consider requiring that a shareholder hold a certain minimum amount of shares and that he hold such shares for a certain time period as conditions of obtaining proxy access. Directors also would be required to win a majority vote in an uncontested election.
Title 10 - Consumer Financial Protection Bureau
Consumer Financial Protection Bureau The Conference Report would establish the CFPB as an independent entity housed within the Federal Reserve. The CFPB would have the authority to write consumer protection rules for banks and nonbank financial firms offering consumer financial services or products. The CFPB 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. There are also various exclusions from the CFPB's authority, including exclusions for auto dealers, 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 Conference Report generally prohibits the Bureau from defining the business of insurance as a financial product or service. The CFPB 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.
Interchange Fees. For transactions involving debit cards issued by banks with assets over $10 billion, the Conference Report would require that any interchange fee charged on the transaction must be reasonable and proportional to the cost incurred by the bank in processing the transaction. Merchants would be allowed to offer customers discounts for the use of cash, checks, and debit cards, and to set a $10 minimum for credit card transactions without penalty from the card networks. Card networks would be prohibited from requiring that their debit cards are processed exclusively on one network, and the amendment does not include any language that would allow for discrimination against debit or credit cards based upon the issuer of the card.
Title 11 - Federal Reserve
GAO audit of the Fed The Government Accountability Office ("GAO") would be authorized to conduct a one-time audit of the Fed's Section 13(3) emergency lending that took place during the financial crisis, and to audit 13(3), discount window lending, and open market transactions on a going forward basis. The GAO may not audit the Fed's monetary policy operations.
Federal Reserve Bank governance The GAO would be directed to study the current system for appointing Federal Reserve Bank directors, to assess whether there are actual or potential conflicts of interest, and to identify measures that could improve Reserve Bank governance. The Conference Report would end the current system in which the representatives of member banks are entitled to vote in the election of their Regional Fed Bank President.
Title 12 - Improving Access to Mainstream Financial Institutions
Access to banking services The Conference Report would authorize the Treasury Department to establish programs designed to make banking services more accessible to unbanked and underbanked communities.
Title 13 - Pay It Back Act
TARP authorization reduced. The Conference Report includes a requirement that the authorization for TARP be reduced from $700 billion to $550 billion.
Title 14 - Mortgage Reform and Anti-Predatory Lending
Mortgage reform and anti-predatory lending The Conference Report includes various mortgage reform and anti-predatory lending provisions. Mortgage originators may only issue mortgages to those with an ability to repay the loan, and may only propose modifications to a mortgage that provide a net tangible benefit to the borrower. The Conference Report also restricts mortgage originator compensation and yield spread premiums by clarifying that mortgage compensation can only be financed if all originator compensation is paid by the borrower (not third parties) and the borrower pays the entire fee by financing it. The Conference Report also allows borrowers in a foreclosure action to offset from the outstanding balance due on their mortgage any damages incurred for violation of the ability to repay and yield spread premium standards.
Unemployed homeowner relief The Conference Report would provide $1.5 billion in emergency mortgage relief for unemployed homeowners and additional funding for the Neighborhood Stabilization Program.
Revenue raising provisions The Congressional Budget Office estimates the overall cost of the Conference Report to be approximately $22 billion. To satisfy House rules that any non-emergency spending be fully offset by revenue raised, the Conference Report would authorize the Financial Stability Oversight Council to raise a total of $14 billion over five years by making assessments (collected by the FDIC) on financial institutions with over $50 billion in assets and hedge funds with over $10 billion in assets. All assessments collected for these purposes would be held in a dedicated escrow fund for 25 years. Any funds remaining after 25 years would be used to reduce the national debt.
Title 15 - Miscellaneous Provisions
International Monetary Fund (IMF) The Conference Report 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 Conference Report 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.
Next steps
With the adoption of the Conference Report by the Conference Committee, the Conference Report must now be passed by both the House and Senate before it can be sent to the President to be signed into law. The Conference Report may not be amended by either body. The House is currently expected to take up the Conference Report on June 29, with the Senate to take up and vote on passage of the Conference Report later that week.
For more information, contact one of the following Sonnenschein attorneys or professionals or your regular Sonnenschein professional.
These materials should not be considered as, or as a substitute for, legal advice and they are not intended to nor do they create an attorney-client relationship. Because the materials included here are general, they may not apply to your individual legal or factual circumstances. You should not take (or refrain from taking) any action based on the information you obtain from this document without first obtaining professional counsel and you should not send us confidential information without first speaking to one of our attorneys and receiving explicit authorization to do so.
