Dodd–Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (S. 3217, H.R. 4173) is legislation proposed by U.S Senate Banking Committee Chairman Chris Dodd. The stated aim of the legislation is:

To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

It forms part of the Obama financial regulatory reform plan of 2009.

Legislative history

On June 25, 2010, conferees finished reconciling the House and Senate versions of the bills and filed a conference report. The conference committee changed the name of the bill from the Restoring American Financial Stability Act of 2010.

On June 30, 2010, the House passed the conference report of 237-192.

The Senate passed the bill on July 15 by a vote of 60-39, sending the legislation to President Obama's desk.

Overview

The Stability Act of 2010 (Title I of this bill) proposes broad changes to the existing regulatory structure, such as creating a host of new agencies (while merging and removing others) in an effort to streamline the regulatory process, increasing oversight of specific institutions regarded as a systemic risk, amending the Federal Reserve Act, promoting transparency, and additional changes.

The new agencies are either granted explicit power over a particular aspect of financial regulation, or that power is transferred from an existing agency. All of the new agencies, and some existing ones who are not currently required to do so, are also compelled to report to Congress on an annual (or biannual) basis, to present the results of current plans and to explain future goals.

Of the new agencies, the Financial Stability Oversight Council, and its associated Office of Financial Research (created in this act) will probably foster the most significant changes to the Country’s financial system. Both are attached to the Treasury Department, with the Treasury Secretary being Chair of the Council, and the Head of the Financial Research Office being a Presidential appointment with Senate confirmation. The Council, consisting of the heads of the eight primary financial regulatory agencies plus an independent Presidential appointee (with insurance experience), is charged with maintaining the country’s financial stability. The Council can, in effect, draft any federal employee to work under its supervision. The Council can also strongly suggest (in some cases mandate) that financial regulatory agencies implement rules and policies as directed by the Council. The Financial Research Office, which provides support and the budget for the Council, is charged with assimilating and analyzing financial data, making the financial system more transparent. The Director of the Financial Research office has subpoena power. It appears that the creation of these two organizations within the Treasury Department will be transformational in the way the Country’s financial markets are managed, clearly making the Treasury Secretary the most powerful financial leader in the country.

Of the existing agencies, changes are proposed (ranging from new powers to the transfer of powers) in an effort to enhance the regulatory system. The institutions affected by these changes include most of the regulatory agencies currently involved in monitoring the financial system (FDIC, SEC, Comptroller, Federal Reserve, SIPC, FDIC, etc.), and the final elimination of the Office of Thrift Supervision.

Title 1 - FINANCIAL STABILITY

Financial Stability Act of 2010

The short title of this Title is the "Financial Stability Act of 2010"

Regulatory lines

The Stability Act divides the regulatory system into three distinct parts, with each part becoming the primary responsibility of a particular agency. The division is as follows:

• For state banks/thrifts with assets under $50 billion, the FDIC is responsible.
• For national banks/thrifts with assets under $50 billion, the OCC is responsible.
• All other banks/thrifts, Bank Holding Companies (and institutions deemed necessary) will be the responsibility of the Federal Reserve. Certain Non-Bank finincial companies and their subsidiaries will also be supervised by the Fed in the same manner and to the same extend as if they were a bank holding company.

Existing agencies

Office of Thrift Supervision

The legislation would abolish the Office of Thrift Supervision while splitting its responsibilities between various other agencies (principally the Currency Comptroller, FDIC, and the Federal Reserve). (Further described in Title III—TRANSFER OF POWERS TO THE Comptroller, the FDIC, and the FED)

Federal Reserve

Governance

The Federal Reserve Act is amended to change the New York Federal Reserve President to a Presidential appointment, with the advice and consent of the Senate, for a term of five years. Additionally, the eligibility for Federal Reserve bank governors is curtailed - no officers of any company subject to Federal Reserve oversight is allowed to vote for, or serve as, a Federal Reserve President.

Duties

The legislation also makes explicit the responsibility of the Federal Reserve to "[…] identify, measure, monitor, and mitigate risks to the financial stability of the United States."

Oversight

A new position is created on the Board of Governors, dubbed the "Vice Chairman for Supervision", who is appointed by the President with the advice and consent of the Senate for a term of 4 years. The Vice Chairman advises the Board in several areas and:

• serves in the absence of the Chairman,
• is responsible for developing policy recommendations to the Board regarding supervision and regulation of financial institution supervised by the Board,
• oversee the supervision and regulation of such firms,
• reports to Congress on a semiannual basis to disclose their activities and efforts, testifying before Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives

Additionally, the GAO is now required to perform several different audits of the Federal Reserve:

• a one time audit of any emergency lending facility established by the Federal Reserve since December 1, 2007 and ending with the date of enactment of this act
• a Federal Reserve Governance Audit that shall examine:
  • the extent to which the current system of appointing Federal reserve bank directors represents "the public, without discrimination on the basis of race, creed, color, sex or national origin, and with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers"
  • whether there are actual or potential conflicts of interest
  • examine each facilities operation
  • identify changes to selection procedures for Federal reserve bank directors or to other aspects of governance that would improve public representation and increase the availability if monitary information

Prudential Standards

The Fed is required to establish prudent standards for the institutions they supervise that inculde:

• (i) Risk-Bassed Capital Requirements and Leverage Limits
• (ii) liquidity requirements;
• (iii) overall risk management requirements;
• (iv) resolution plan and credit exposure report requirements; and
• (v) concentration limits.

The Fed may establish additional standards that include, but are not limited to:

• a contingent capital requirement
• enhanced public disclosure
• short-term debt limits

In addition, the Fed may require supervised companies to "maintain aminimum amount of contingent capital that is convertible to equity in times of financial stress."

Additional Plans and Reports

Companies supervised by the Fed will peroidically provide:."

• a plan for a rapid and orderly liquidation of the company in the event of material financial distress or failure,
• a credit exposure report describing the nature to which the company has exposure to other companies, and credit exposure can not exceed 25% of the capital stock and surplus of the company ."

Off-Balance-Sheet Activities

In determining capital requirements for regulated organizations, off-balance-sheet activities shall be taken into consideration, being those things that create an accounting liability such as, but not limited to:"

• Direct credit substitutes in which a bank substitutes its own credit for a third party, including standby letters of credit.
• Irrevocable letters of credit that guarantee repayment of commercial paper or tax-exempt securities.
• Risk participations in bankers’ acceptances.
• Sale and repurchase agreements.
• Asset sales with recourse against the seller.
• Interest rate swaps.
• Credit swaps.
• Commodities contracts.
• Forward contracts.
• Securities contracts.

Financial Stability Oversight Council

Purpose

The Council is, in summary, tasked with identifying risks to the financial stability of the United States, promoting market discipline, and responding to emerging threats to the stability of the United States financial markets. At a minimum, it must meet quarterly. Specifically, there are three purposes assigned to the Council:

1. identify the rists to the financial stability of the United States from both financial and non-financial organizaitons
2. promote market discipline, by eliminating expectations that the Government will sheld them from losses in the event of failure
3. respond to emerging threats to the stability of the US financial system

Duties

In the course of pursuing its goal (in its entirety), the Council has several duties enumerated to it that can broadly be described as anything required to:

1. enhance the integrity, efficiency, competitiveness, and stability of United States financial markets
2. promote market discipline
3. maintain investor confidence

More specifically, the Council is to collating data (received from affiliated agencies, and optionally from the companies themselves) to assess risks to the financial system, monitor the financial services marketplace, make general regulatory recommendations to affiliated agencies reflecting a broader consensus, and it may also compel the Federal Reserve to assume an oversight position of certain institutions considered to pose a systemic risk. The Council is to monitor domestic and international regulatorary proposals and developments, and advise Congress in these areas. The Council and the associated Office of Financial Research (see below) are charged to facilitate information sharing and coordination among the member agencies and other Federal and State agencies regarding domestic financial services policy development, rulemaking, examinations, reporting requirements, and enforcement actions.

Membership

The Council has nine voting members, eight of whom already direct various agencies involved in the financial system, and one of whom is independent. The exact membership is as follows

• United States Secretary of the Treasury; also serves as Chairperson of the Council.
• Chairman of the Federal Reserve
• Comptroller of the Currency
• Director of the Bureau of Consumer Financial Protection (established in this act; see below)
• Chairman of the U.S. Securities and Exchange Commission
• Chairperson of the Federal Deposit Insurance Corporation
• Chairperson of the Commodity Futures Trading Commission
• Director of the Federal Housing Finance Agency
• Independent member (with insurance expertise); appointed by the President, with the advice and consent of the Senate, for a term of six years.

Unless otherwise specified, the Council shall make all decisions that it is authorized or required to make by a majority vote of the voting members then serving.

There are five nonvoting members who serve in an advisory capacity, they are ad-hoc members except the Council may go into the equivalent of Executive Session when discussing conficential supervisory information:

• Director of the Office of Financial Research (part of the Treasury Department and established in this act) who also acts as if they were the Council's Executive Director, the operating budget of the Council is through the Office of Financial Research
• Director of the Federal Insurance Office (part of the Treasury Department and established in this act)
• a State insurance commissioner, to be designated by a selection process determined by the State insurance commissioners, 2 year term
• a State banking supervisor, to be designated by a selection process determined by the State banking supervisors, 2 year term
• a State securities commissioner (or officer performing like functin) to be designated by a selection process determined by such State security commissioners, 2 year term

Resources

The Federal Advisory Committee Act, which limits the powers of advisory committees, does not apply to the council. The council has an almost unlimited budget in that the Council may draw on virtually any resource of any department or agency of the Federal government. Any employee of the Federal government may be detailed to the Council without reimbursement and without interruption or loss of civil service status or privilege. Any member of the Council who is an employee of the Federal Government serves without additional compensation. In addition, "An employee of the Federal Government detailed to the Council shall report to and be subject to oversight by the Council during the assignment to the Council, and shall be compensated by the department or agency from which the employee was detailed."

Additionally, "Any expenses of the Council shall be treated as expenses of, and paid by, the Office of Financial Research".

Authority

The Council has very broad powers to monitor, investigate and assess any risks to the US financial system. The Council has the authority to collect information from any State or Federal financial regulatory agency, and may direct the the Office of Financial Research, which supports the work of the Council, "to collect information from bank holding companies and nonbank financial companies". The Council monitors domestic and internatial regulatory proposals, including insurance and accounting issues, and advises Congress and the Federal Reserve on ways to enhance the integrity, efficiency, competitiveness and stability of the US financial markets.

On a regular basis, the Council is required to make a report to Congress describing the state of the US Financial System. Each voting member of the Council is required to either affirm that the Federal Government is taking all reasonable steps to assure financial stability and mitigage systemic risk, or describe additional steps that need to be taken.

Under specific circumstances, the Chairman of the Council (who is also the Secretary of the Treasury), with the concurrence of 2/3 voting members, may place nonbank financial companies or domestic subsidiaries of international banks under the supervision of the Federal Reserve if it appears that these companies could pose a threat to the financial stability of the US. The Federal Reserve may promulgate safe harbor regulations to exempt certain types of foriegn banks from regulation, with approval of the Council.

Under certain circumstances, the Council may provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agency, which the primary financial agency is obliged to implement – the Council reports to Congress on the implementation or failure to implement such recommendations.

Financial Reporting to the Council

The Council may, at its discretion, require any bank or non-bank financial institution with assets over $50 billion to submit certified resports as to the company's:

• financial condition
• systems in place to monitor and control any risks
• transactions with subsidiaries that are regulated banks
• the extent to which any of the company's activities could have a potential disruptive impact on financial markets or the overall financial stability of the country

GAO Audit of Council

The Comptroller General of the United States may audit the Council or anyone working for the Council, and may have access to any informaiton under the control of or used by the Council.

Office of Financial Research

Purpose

Established as a department within the Treasury, the Office is, in summary, tasked with providing administrative, technical, and other support services to the Council and its affiliated agencies.

Director

The President, with the advice and consent of the Senate, appoints the Director of the Office of Financial Research, for a term of six years. To the extent that is his duties are exclusively focused on the Council and the Office of Financial Research, the Director is in effect the executive director of the Council. The Director, in consultation with the Chairman of the Council (who is the Secretary of the Treasure) proposes the annual budget of the Office. The Director may set salaries of the Office’s employees “without regard to chapter 51 or subchapter III of chapter 53 of title 5, United States Code, relating to classification of positions and General Schedule pay rates”.

Financial Research Director's Subpoena Power

The Director has Subpoena power and may require from any financial institution (bank or non-bank) any data needed to carry out the functions of the office.

Financial Research Director's Independent Reports to Congress

The Direcor reports to and testifies before only the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services of the House of Representatives. Testomy shall be annual on the activities of the Office, including the work of the Data Center and the Research and Analysis Center and the assessment of significant financial and market developments and potential emerging threats to the fincial stability of the Country. These reports to Congress are independent of any political influence in that "No officer or agency of the United States shall have any authority to require the Director to submit the testimony... for approval, comment, or review prior to the submission of such testimony.".

Resources

Like the Council, the Office of Financial Research may request, from department or agency of the United States, "such services, funds, facilities, staff, and other support services as the Office may determine advisable. Any Federal Government employee may be detailed to the Office without reimbursement, and such detail shall be without interruption or loss of civil service status or privilege.".

Within the Treasury Department, there is a revolving fund, the "Financial Research Fund" into which all appropriations, fees, and assessments that the Office receives are deposited. Surplus funds may be invested. It is contemplated with within 2 years of establishment that the Office will be self-funding.

Authority

The Office has broad latitude in performing support services for both the Council and other Member Agencies, including data collection, applied research and essential long-term research, and developing tools for monitoring risk. The Office can also issue guidelines to standardizing the way data is reported, constituent agencies have three years to implement data standardization guidelines.

In many ways, the Office of Financial Research is to be operated without the constraints of the Civil Service system. For example, does not need to follow Federal pay scale guidelines (see above), and it is mandated that the office have:

• Traning and Workforce Development Plan that includes training, leadership development and succession planning
• Workplace Flexibility Plan that includes telework, flexible work schedules, job sharing, parential leave benefits and childcare assistance, domestic partner benefits
• Recruitment and Retention Plan

Data and Research & Analysis Centers

The Office is supported by two entities:

• the Data Center, which is tasked with collecting, validating and maintaining (and publishing some of) the data required to support the Council; which may be obtained from commercial data providers, publically available data sources and the financial entities supervised by state and Federal agencies; and
• the Research and Analysis Center, which is tasked with conducting independent analysis of available information to identify financially destabilizing effects, as well as shall develop and maintain independent analytical capabilities and computing resources:
  • to develop and maintain metrics and reporting systems for risks to the financial stability of the United States
  • to monitor, investigate, and report on changes in systemwide risk levels and patterns to the Council and Congress
  • to conduct, coordinate, and sponsor research to support and improve regulation of financial entities and markets
  • to evaluate and report on stress tests or other stability-related evaluations of financial entities overseen by the member agencies
  • to maintain expertise in such areas as may be necessary to support specific requests for advice and assistance from financial regulators
  • to investigate disruptions and failures in the financial markets, report findings, and make recommendations to the Council based on those findings;
  • to conduct studies and provide advice on the impact of policies related to systemic risk; and
  • to promote best practices for financial risk management.

Financial Research Fund

The Financial Research Fund is a quasi-revolving fund that the Office uses to fund its operations. All appropriations and assments are deposited into the Fund; surpluses may be invested. Funds are not subject to apportionment for any other purposes. Within 2-years of enactment, the Office should become self-funding. During the 2-year time following date of enactment, the Federal Reserve shall fund the Office.

Temporary Management Reporting

For a period of five years after enactment, the Office shall submit an annual report to the Senate Committee on Banking, Housing and Urban Affairs, and the House Committee on Financial Services, what amounts to a management report, including:

• Training And Workforce Development Plan - that includes:
  • identification of skill and technical expertise needs and action taken to meet the requirements
  • Steps taken to foster innovation and creativity
  • Leadership development and succession Planning
  • Effective use of technology by employees
• Workplace Flexibility Plan - that includes:
  • Telework
  • Flexible work schedules
  • phased retirement
  • reemployment annuitants
  • part-time work
  • job sharing
  • parential leave benefits and childcare assistance
  • domestic partner benefits
  • other workplace flexibilities
• Recruitment and Retention Plan - that includes:
  • the steps necessary to target highly qualified applicant pools with diverse backgrounds
  • streamlined employment application process
  • timely notification of employment applications
  • measures of hiring effectiveness

Title II - ORDERLY LIQUIDATION AUTHORITY

In addition to the supervised banks and insured depository institutions, Covered Financial Company that may be liquidated under this title include, insurance companies and non-bank financial companies not covered elsewhere. Once it is determined that a financial company satisfied the criteria for liquidation, if the financial company's board of directors does not agree, provisions are made for judicial appeal. Some procedures for Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) to liquidate companies are revised.

Risk Evaluation of Financial Institutions

In addition to the policies and procedures that are in place for the financial institutions covered by FDIC and SIPC, this title provides for the orderly liquidation of other financial institutions. Depending on the type of financial institution, different regulatory organizations may jointly or independently, by 2/3 vote, determine whether a receiver should be appointed for a financial company:

• In General - FDIC and/or the Federal Reserve
• Broker Dealers - Securities and Exchange Commission and/or the Federal Reserve
• Insurance Companies - Federal Insurance Office (created in this act) and/or the Federal Reserve

Provided that the Secretary of Treasury, in consultation with the President may also made a determination to appoint a receiver for a financial company. And the GAO shall review and report to Congress about the Secretary's decision.

Reporting to Congress and the Public

When a financial institution is placed into receivership under these provisions, within 24 hours the Secretary shall report to Congress, and within 60 days there shall be a report to the general public. The report on the recommendation to place a financial company into receivership shall contain:

• an evaluation of whether the financial company is in default or in danger of default
• a description of the effect that the default of the financial company would have on financial stability in the United States
• a description of the effect that the default of the financial company would have on economic conditions or financial stability for low income, minority, or underserved communities
• a recommendation regarding the nature and the extent of actions to be taken under this title regarding the financial company
• an evaluation of the likelihood of a private sector alternative to prevent the default of the financial company
• an evaluation of why a case under the Bankruptcy Code is not appropriate for the financial company;
• an evaluation of the effects on creditors, counterparties, and shareholders of the financial company and other market participants
• an evaluation of whether the company satisfies the definition of a financial company under this section

Mandatory Terms and Conditions for all Liquidations

Unless otherwise stated, the FDIC is the liquidator for financial institutions who are not members of SIPC or banking members of the FDIC. In taking action under this title, the FDIC shall:

• determine that such action is necessary for purposes of the financial stability of the United States, and not for the purpose of preserving the covered financial company
• ensure that the shareholders of a covered financial company do not receive payment until after all other claims and the Fund are fully paid
• ensure that unsecured creditors bear losses in accordance with the priority of claim provisions described later in the act
• ensure that management responsible for the failed condition of the covered financial company is removed (if such management has not already been removed at the time at which the Corporation is appointed receiver)
• ensure that the members of the board of directors (or body performing similar functions) responsible for the failed condition of the covered financial company are removed, if such members have not already been removed at the time the Corporation is appointed as receiver
• not take an equity interest in or become a shareholder of any covered financial company or any covered subsidiary

Orderly Liquidation Fund

To the extent that the Act expanded the scope of financial firms that may be liquidated by the Federal Government, beyond the existing authorities of the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC), there needed to be an additional source of funds, independent of the FDIC's Deposit Insurance Fund, to be used in case of a non-bank or non-security financial company's liquidation.

Purpose

The Orderly Liquidation Fund is to be an FDIC-managed fund, whose purpose is to be used by the FDIC in the event of a covered financial company's liquidation that is not covered by FDIC or SIPC.

Capitalization

Initially, the Fund is to be capitalized over a period no shorter than five years, but no longer than ten; however, in the event the FDIC must make use of the Fund before it is fully capitalized, the Secretary of the Treasury and the FDIC are permitted to extend the period as determined necessary.

The method of capitalization is by collecting risk-based assessment fees on any "eligible financial company" - which is defined as "[…] any bank holding company with total consolidated assets equal to or greater than $50 billion and any nonbank financial company supervised by the Board of Governors." The severity of the assessment fees can be adjusted on an as-needed basis (depending on economic conditions and other similar factors) - in addition, the relative size and value of a firm is to play a role in determining the fees to be assessed.

The eligibility of a financial company to be subject to the fees is periodically reevaluated; or, in other words, a company that does not qualify for fees in the present, will be subject to the fees in the future if they cross the 50 billion line, or become subject to Federal Reserve scrutiny.

Assessments

To the extent that a covered financial company has a negative net work and its liquidation creates an obligation to the FDIC as its liquidator, the FDIC shall charge one or more risk-based assessment such that the obligation will be paid off within 60 months (5 years) of the issuance of the obligation.

The assessments will be charged to any bank holding company with consoidated assets greater than $50 billion and any nonbank financial company supervissed by the Federal Reserve. Under certain conditions, the assessment may be extended to regulated banks and other financial institutions.

Graduated Assessment Rate

Assessments are imposed on a graduated basis, with financial companies having greater assets and risk being assesssed at a higher rate.

Assessment Matrix

Assessments will be implemented according to a matrix that the Financial Stability Oversight Council recommends to the FDIC. The matrix shall take into account:

• Economic conditions - higher assessments during more favorable economic conditions
• Whether the institution is:
  • An insured depositary institution that is a member of the FDIC
  • a member of the Securities Investor Protection Corporation
  • an insured credit union
  • an insurance company, assessed pursuant to applicable State law to cover costs of rehabilitation or liquidation
• strength of its balance sheet, both on-balance sheet and off-balance sheet assets, and its leverage
• relevant market share
• potential exposure to sudden calls on liquidity percipitated by economic distress with, other financial companies;
• the amount, maturity, volatility, and stability of the liabilities of the company, including the degree of reliance on short-term funding, taking into consideration existing systems for measuring a company’s riskbased capital
• the stability and variety of the company’s sources of funding
• the company’s importance as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the financial system;
• the extent to which assets are simply managed and not owned by the financial company and the extent to which ownership of assets under management is diffuse
• the amount, different categories, and concentrations of liabilities, both insured and uninsured, contingent and noncontingent, including both on-balance sheet and off-balance sheet liabilities, of the financial company and its affiliates

Obligation limit

When liquidating a financial company under this title (as opposed to FDIC or SIPD) there is a maximum limit of the Government's liquidation obligation, ie. the Government's obligation can not exceed:

• 10% of the total consolidated assets, or
• 90% of the fair value of the total consolidated assets

Private funding

In the event that the Fund and other sources of capital are insufficient, the FDIC is authorized to buy and sell securities on behalf of the company (or companies) in receivership to raise additional capital.

Prohibition on Taxpayer Funding

Taxpayers shall bear no losses from liquiding any financial company under this title and any losses shall be the responsibility of the financial sector, recovered through assessments:

• Liquidation is Reqired for all financial companies put into receivership under this title
• All funds expended in the liquidation of a financial company under this title shall be recovered from the disposition of assets or assessments on the financial sector

Orderly Liquidation Authority Panel

Purpose

Established inside the United States Bankruptcy Court for the District of Delaware, the Panel is, in summary, tasked with evaluating the conclusion of the Secretary of the Treasury that a company is in (or in danger of) default. If the Panel concurs with the Secretary, the company in question is permitted to be placed into receivership; if they do not concur, the Secretary has an opportunity to amend and refile his or her petition.

Appeals

In the event that a Panel decision is appealed, the United States Court of Appeals for the Third Circuit has jurisdiction; in the event of further appeal, a writ of certiorari may be filed with the United States Supreme Court. In all appellate events, the scope of review is limited to whether the decision of the Secretary that a company is in (or in danger of) default is supported by substantial evidence.

Members

The Panel consists of three bankruptcy judges drawn from the District of Delaware, all of whom are appointed by the Chief Judge of the United States Bankruptcy Court for the District of Delaware. In his appointments, the Chief Judge is instructed to weigh the financial expertise of the candidates.

Title III—TRANSFER OF POWERS TO THE Comptroller, the FDIC, and the FED

Enhancing Financial Institution Safety and Soundness Act of 2010

The short title of this Title is the Enhancing Financial Institution Safety and Soundness Act of 2010

The Office of Thrift Supervision had traditionally been responsible for the supervision of Savings and Loan holding company functions as well as some non-bank holding companies. In the previous 1980’s period of financial difficulty, the office had been disbanded and the following day reconstituted under a different name. This time, the office is being dismembered and functions transferred to several other regulatory agencies.

Transferred to the Federal Reserve

• supervision of savings and loan holding companies and any subsidiary (other than those that take deposits, ie. banks,
• rulemaking authority related to supervision
• rulemaking authority relating to transactions specified under section 11 of the Home Owners’ Loan Act (12 U.S.C. § 1468)

Transferred to the Comptroller of the Currency

• supervision of Federal Savings Associations
• rulemaking authority related to supervision

Transferred to the FDIC

• supervision of state savings associations

Office of the Comptroller of the Currency

The position of the Comptroller of the Currency is changed to the Office of the Comptroller of the Currency, which is charged with assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction. The Comptroller of the Currency designates a Deputy Comptroller who is responsible for the supervision and examination of Federal Savings associations.

Permanent Increase in Deposit Insurance

The amount of deposits insured by the FDIC is perminantly increased from $100,000 to $250,000.

Office of Minority and Women Inclusion

Each of the financial regulatory agencies represented on the Council shall establish an Office of Minority and Women Inclusion that shall be responsible for all matters of the agency relating to diversity in management, employment, and business activities.

The director of each office shall develop standards for:

• equal employment opportunity and the racial, ethnic, and gender diversity of the workforce and senior management of the agency;
• increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency, including standards for coordinating technical assistance to such businesses; and
• assessing the diversity policies and practices of entities regulated by the agency.
• advise the agency administrator on the impact of the policies and regulations of the agency on minority-owned and women-owned businesses

Title IV - REGULATION OF ADVISERS TO HEDGE FUNDS AND OTHERS

Private Fund Investment Advisers Registration Act of 2010

The short title of this Title is the Private Fund Investment Advisers Registration Act of 2010

In general, this Title increases the reporting requirements of investment advisors, and limits the ability of these advisory to exclude informaiton in reporting to the various Federal government agencies.

However, there is an exemption in reporting for Venture Capital Fund Advisors, certain advisors with assets under management under $150 million, and Family Offices (as defined by the Commission).

Accredited Investor Standard

An Accredited Investor is any natural person with a net worth (or joint net worth with spouse) over a 4-year period, that averages more than $1 million, excluding the value of the primary residence. The Commission may adjust this threshold value from time to time.

Qualified Client Standard

The Commission shall, every five years, adjust for the effects if inflation, that any factor used in rule or regulation be in multiples of $100,000.

Directed Reports to Congress

The GAO is directed to study and report to Congress:

• the appripriate criteria for determining the financilal thresholds or other criteria needed to qualify for accredited investor, witin 3-years.
• the feasibility of forming a self-regulatory organization for private funds, within 1-year.

The Commission is directed to study and report to Congress:

• Short Selling, including feasibility, benefits and costs of real time short sale publications and well as a voluntary pilot program for reporting

Title V - INSURANCE

Federal Insurance Office Act of 2010

The short title of this Title is the Federal Insurance Office Act of 2010.

Office of National Insurance

Purpose

Established within the Department of the Treasury, the Office is, in summary, tasked with:

• monitoring all aspects of the insurance industry (except health insurance, some long-term care insurance, and crop insurance), including the identification of gaps in reglation of insurers that could contribute to financial crisis
• monitor the extent to which traditionally underserved communities and consumers, minorities, and low-and moderate-income persons have access to affordable insurance (except health insurance)

make recommendations to the Financial Stability Oversight Council about insurers which may pose a risk, and to help any state regulators with national issues

• Administer the Terrorism Insurance Program
• Coordinate international insurance matters
• determine whether State insurance measure are preempted by covered agreements (states may have more stringent requirements)

Director

The Office is headed by a director who is appointed for a career-reserved term by the Secretary of the Treasury.

State-Based Insurance Reform

Nonadmitted and Reinsurance Reform Act of 2010

Short Title: Nonadmitted and Reinsurance Reform Act of 2010

The States may enter into a compact to establish procedures to allocate among the States the premium taxes paid to an insured's home State. After 2-years, a State may not collect any fees "fees relating to licensing of an individual or entity as a surplus lines broker in the State unless the State has in effect at such time laws or regulations that provide for participation by the State in the national insurance producer database"

Title VI—IMPROVEMENTS TO REGULATION…

TITLE VI—Improvements to Regulation of Banks and Savings Association Holding Companies and Depository Institutions

Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010

Short title: Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010

Moratorium some FDIC Deposit Insurance

In general, there is a moratorium on approval of FDIC deposit insurance received after November 23, 2009, for an industrial bank, a credit card bank, or a trust bank that is directly or indirectly owned or controlled by a commercial firm. And the Comptroller General of the US is instructed to conduct a study of the stability of the financial system.

Changes Related to Banks

Requirements to be Well Capitalized and Managed

The Bank Holding Company Act, as well as other related acts, are amended to include the requirement that they be both well capitalized as well as well managed. The criteria for being "well managed" is not specified.

State Chartered Banks treatment of Derivatives

An insured State bank may engage in a derivative transaction only if the law with respect to lending limits of the State in which the insured State bank is chartered takes into consideration credit exposure to derivative transactions.

Limitation of Asset Purchase from Insiders

In general, "an insured depository institution may not purchase an asset from, or sell an asset to, an executive officer, director, or principal shareholder of the insured depository institution, or any related interest of such person… unless—

• (A) the transaction is on market terms; and
• (B) if the transaction represents more than 10 percent of the capital stock and surplus of the insured depository institution, the transaction has been approved in advance by a majority of the members of the board of directors of the insured depository institution who do not have an interest in the transaction."

Regulations Regarding Capital Levels

"In establishing capital regulations pursuant to this subsection, the Board shall seek to make such requirements countercyclical, so that the amount of capital required to be maintained by a company increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the company."

Trading with Hedge Funds and Private Equity Funds

The Bank Holding Company Act of 1956 (12 U.S.C. § 1841, et seq.) is amended in several areas, among them being:

Limitations on Relationships with Investment Funds

In general, no bank that has a direct or indirect relationship with a hedge fund or private equity fund, "may enter into a transaction with the fund, or with any other hedge fund or private equity fund that is controlled by such fund" without disclosing the full extent of the relationship to the regulating entity, and assuring that there are no conflicts of interest.

Study of Bank Investment Activities

All financial regulatory agencies will be participating in a study that examines Federal and State laws regarding how banks may invest their funds. Study to be completed in 18 months.

Title VII—WALL STREET TRANSPARENCY AND ACCOUNTABILITY

Wall Street Transparency and Accountability Act of 2010

The short title of this Title is the Wall Street Transparency and Accountability Act of 2010

Subtitle A—Regulation of Over-the-Counter Swaps Markets

Included in this section are the credit default swaps that were the subject of several bank failures circa. 2007. Financial instruments have the meanings given the terms in section 1a of the Commodity Exchange Act (7 U.S.C. § 1a)

Regulatory Authorities Consultation

The Commodity Futures Trading Commission and the Security and Exchange Commission are required to consult with each other before implementing any rulemaking or issuing orders regarding several different types of security swaps.

No Government Bailouts of Swaps Entities

"Except as provided otherwise, no Federal assistance may be provided to any swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity"

Part II Regulation of Swap Markets

Transactions covered include those transaction commonly known as—

• an interest rate swap;
• a rate floor;
• a rate cap;
• a rate collar;
• a cross-currency rate swap;
• a basis swap;
• a currency swap;
• a foreign exchange swap;
• a total return swap;
• an equity index swap;
• an equity swap;
• a debt index swap;
• a debt swap;
• a credit spread;
• a credit default swap;
• a credit swap;
• a weather swap;
• an energy swap;
• a metal swap;
• an agricultural swap;
• an emissions swap; and
• a commodity swap;

Study of Carbon Markets

An "Interagency Group" is constituted to the oversight of existing and prospective carbon markets to ensure an efficient, secure, and transparent carbon market, including oversight of spot markets and derivative markets. Members include:

1. The Chairman of the Commodity Futures Trading Commission (referred to in this section as the "Commission"), who shall serve as Chairman of the interagency group.
2. The Secretary of Agriculture.
3. The Secretary of the Treasury.
4. The Chairman of the Securities and Exchange Commission.
5. The Administrator of the Environmental Protection Agency.
6. The Chairman of the Federal Energy Regulatory Commission.
7. The Commissioner of the Federal Trade Commission.
8. The Administrator of the Energy Information Administration.

Subtitle B - Regulation of Security-Based Swap Markets

Gramm-Leach-Bliley, the Investment Company Act of 1940 and other Acts are amended in several places to allow for regulation of Security-based swaps

Title VIII—PAYMENT, CLEARING, AND SETTLEMENT SUPERVISION

Payment, Clearing, and Settlement Supervision Act of 2010

Short title: Payment, Clearing, and Settlement Supervision Act of 2010

Title IX - INVESTOR PROTECTIONS AND IMPROVEMEMTS TO THE REGULATION OF SECURITIES

Investor Protection and Securities Reform Act of 2010

The short title of this Title is the "Investor Protection and Securities Reform Act of 2010"

Investor Advisory Committee

Purpose

Established within the Securities and Exchange Commission, the Committee is, in summary, tasked with advising the, § on regulatory priorities and proposing new initiatives so-as-to promote investor confidence. When the Committee issues a report to the SEC, the latter is required to respond with a public statement assessing the report and disclosing what (if any) action it plans to take; however, the, § is not obligated to take any action.

Members

The Committee is composed of 12-22 members, all of whom serve four-year terms. The exact membership is as follows:

• Investor Advocate (see below)
• A representative for the State securities commissions
• A representative for senior citizens
• At least ten, no more than twenty, individuals (appointed by the SEC) from a variety of interest groups

The Committee positions (chairman, vice-chairman, etc.) are elected by the Committee as a whole, and serve three year terms.

Office of the Investor Advocate

Purpose

Established within the Securities and Exchange Commission, the Advocate is, in summary, tasked with ensuring that all investors (notably retail investors) are well served by the, § and other relevant SRO's.

Duties

Concurrent with his or her normal duties, the Advocate is further directed to report to Congress twice per year: not later than June 30 of each year to present a plan for the upcoming fiscal year, and not later than December 31 of each year to present documentation of the preceding fiscal year.

Eligibility

The Advocate is appointed by the Chairman of the SEC, and is directed to have experience in "[…] advocating for the interests of investors in securities and investor protection issues, from the perspective of investors." Additionally, the Advocate is unable to be employed by the, § during their tenure, or for two years afterward.

Bureau of Consumer Financial Protection

Purpose

Established within the Federal Reserve System, the Bureau is, in summary, tasked with regulating consumer financial products and services in compliance with federal law.

Relationship with the Federal Reserve

The Federal Reserve Act notwithstanding, the Federal Reserve is specifically prohibited from:

• Interfering with matters before the Director
• Directing any employee of the Bureau
• Modifying the functions and responsibilities of the Bureau
• Impeding an order of the Bureau
• Subjecting the Bureau to review

The Bureau is subject to financial audit by the GAO, and must report to the Senate Banking Committee and the House Financial Services Committee on a bi-annual basis. Additionally, the Financial Stability Oversight Council may issue a "stay" to the Bureau with a 2/3 vote; the Council's decision can, in turn, be appealed.

Director

The Bureau is headed by a director who is appointed by the President, with the advice and consent of the Senate, for a term of five years.

Units

The Bureau is directed to create several "units", a list of which follows:

• Research
• Community Affairs
• Complaint Tracking and Collection

Subsidiaries

• Office of Fair Lending and Equal Opportunity - ensures equitable access to credit.
• Office of Financial Literacy - promote financial literacy among consumers.

Consumer Advisory Board

Purpose

Established within the Bureau of Consumer Financial Protection, the Board is, in summary, tasked with assisting the Bureau and informing them of emerging market trends.

Membership

The Board is appointed by the Director of the Bureau, with no less than six members being recommended by regional Federal Reserve Presidents.

Title X—BUREAU OF CONSUMER FINANCIAL PROTECTION

Consumer Financial Protection Act of 2010

The short title of this Title is the "Consumer Financial Protection Act of 2010."

Title XII—IMPROVING ACCESS TO MAINSTREAM FINANCIAL INSTITUTIONS

Improving Access to Mainstream Financial Institutions Act of 2010

The short title of this Title is the "Improving Access to Mainstream Financial Institutions Act of 2010"

Purpose

The purpose of this section is to provide incentives that encourage low- and medium-income people to participate in the financial systems. Organizations that are eligible to provide these incentives are 501(c)(3) and 26 U.S.C. § 501(a) tax exempt organizations, federally insured depository institutions, community development financial institution, State, local or tribal governments.

Programs

Multiyear programs of grants, cooperative agreements, etc. are available to

• to enable low- and moderate-income individuals to establish one or more accounts in a federal insured bank
• make micro loans, typically under $2,500
• provide financial education and counseling

Title XIV—MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT

Subtitle A - Residential Mortgage Loan Origination Standards

This section makes changes to Truth in Lending Act (15 U.S.C.)

Subtitle D - Office of Housing Consuling

Expand and Preserve Home Ownership Through Counseling Act

The short title of this Subtitle is the "Expand and Preserve Home Ownership Through Counseling Act"

Subtitle F - Appraisal Activities

Property Appraisal Requirements

A creditor may not extend credit for a higher-risk mortgage to a consumer without first obtaining a written appraisal of the property with the following components:

• Physical Property Visit - including a visit of the interior of the property
• Second Appraisal Circumstances - creditor is to obtain a second appraisal, with no cost to the applicant, if the original appraisal is over 180 days old or if the current acqusition price is lower than the previous sale price

Licensed Appraiser Defined

A certified or licensed appraiser is someone who:

• is certified or licensed by the State in which the property is located
• performs each appraisal in conformity with Uniform Standards of Professional Appraisal Practice and title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989

Regulations

The Federal Reserve, Comptroller of the Currency, FDIC, National Credit Union Administration Board, Federal Housing Agency and Burreau of Consumer Financial Protection (created in this law) shall jointly prescribe regulations.

Automated Valuation Models

This provision provides for the use of Automated Valuation Models to be used to estimate collateral value for mortgage lending purposes.

Quality Standards

Automated valuation models shall adhere to quality control standards designed to

• ensure a high level of confidence in the estimates produced by automated valuation models;
• protect against the manipulation of data;
• seek to avoid conflicts of interest;
• require random sample testing and reviews; and
• account for any other such factor that those responsible for formulating regulations deem appropriate

Regulations

The Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration Board, the Federal Housing Finance Agency, and the Bureau of Consumer Financial Protection, in consultation with the staff of the Appraisal Subcommittee and the Appraisal Standards Board of the Appraisal Foundation, shall promulgate regulations to implement the quality control standards required under this section that devises Automated Valuation Models.

Enforcement

• Residential and 1-to-4 unit single family residential real estate are enforced by: Federal Trade Commission, the Bureau of Consumer Financial Protection, and a State attorney general
• Commercial enforcement is by the Financial regulatory agency that supervised the financial institution originating the loan

Broker Price Opinions

Broker Price Opinions may not be used as the primary basis to determine the value of a consumer's principal dwelling; but valuation generated by an automated valuation model is not considered a Broker Price Opinion.

Real Estate Settlement Procedures

The standard settlement form (commonly known as the HUD 1) may include, in the case of an appraisal corrdinated by an appraisal management company, a clear disclosure of:

• the fee paid directly to the appraiser by such company
• the administration fee charged by such company

GAO Appraisal Study

Within one year, the Government Accountability Office shall conduct a study on the effectiveness and impact of various appraisal methods, valuation models and distribution channels, and on the home valuation code of conduct and the appraisal subcommittee.

Subtitle H - Miscellaneous Provisions

• It is the sense of the Congress that significant structural reforms of Fannie Mae and Freddie Mack are required
• GAO is commissioned to study current inter-agency efforts to reduce mortgage forclosure and rescue scams and loan modification fraud.
• HUD is commissioned to study the impact of defective drywall imported from China from 2004 through 2007 and their effect on foreclosures.
• Additional funding for Mortgage Releaf and Neighborhood Stabilization programs ($1 billion each)
• HUD to establish legal assistance for forclosure-related issues with $35 million authorized for fiscal years 2011 through 2012.

Title XV—MISCELLANEOUS PROVISIONS

In keeping with Congressional tradition of including items of priority for authors of the bills, but have little or no relevance to the bill, the following sections have been added:

Restriction on US Approval of Loans issued by International Monetary Fund

The US Executive Director at the International Monetary Fund is instructed to evaluate any loan to a country if

• The amount of the public debt of the country exceeds the annual gross domestic product of the country
• the country is not eligible for assistance from the International Development Association

and to oppose any loans unliekly to be repaid in full.

Disclosures on Conflict Materials in or Near the Democratic Republic of the Congo

• The, § is mandated to create rules that address potential Conflect materials (ex. Blood Diamond) and to assess whether materials originating in or near the Democratic Republic of the Congo are benefiting armed groups in the area.
• The Secretary of State and Administrator of the United States Agency for International Development are required to develop a strategy to address the linkages between human rights abuses, armed groups, mining of conflict minerals, and commercial products, and promoted pease and security in the Democratic Republic of the Congo.

Reporting on Mine Safety

Requires the, § to report on mine safety by gathering information on voilations of health or safety standards, citations and orders issued to mine operators, number of flagarant violations, value of fines, number of mining-related fatalities, etc., to determ whether there is a pattern of violations.

Reporting on Payments by Oil, Gas and Minerals in Acqusition of Licenses

The Securities Exchange Act of 1934 is amended to require disclosure of payments relating to the acqusition of licenses for expliration, production, etc., where "payment" includes fees, production entitlements, bonuses, and other material benefits.

Study on Effectiveness of Inspectors General

Comptroller General is commissioned to assess the relative independence, effectiveness, and expertise of presidentially appointed inspectors general and inspectors general of Federal entities.

Study on Core Deposits and Brokered Deposits

The FDIC is instructed to conduct a study to evaluate:

• the definition of core deposits for the purpose of calculating the insurance premiums of banks;
• the potential impact on the Deposit Insurance Fund of revising the definitions of brokered deposits and core deposits to better distinguish between them;
• an assessment of the differences between core deposits and brokered deposits and their role in the economy and banking sector
• the potential stimulative effect on local economies of redefining core deposits; and
• the competitive parity between large institutions and community banks that could result from redefining core deposits.

Title XVI—SECTION 1256 CONTRACTS

A Section 1256 Contract refers to a section of the Section 1256 of the Internal Revenue Code that described tax treatment for any regulated futures contract, foreign currency contract or non-equity option. To calculate capital gains or losses, these trades have traditionally been marked to market on the last business day of the year.

This section says that a "section 1256 contract" shall not include:

• any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract
• swap form of a derivative, such as interest rate swaps, currency swaps, etc.

Reaction

Chris Dodd, who proposed the legislation, has classified the legislation as "sweeping, bold, comprehensive, [and] long overdue". In regards to the Federal Reserve and what he regarded as their failure to protect consumers, Dodd voiced his opinion that "[…] I really want the Federal Reserve to get back to its core enterprises […] We saw over the last number of years when they took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure. So the idea that we're going to go back and expand those roles and functions at the expense of the vitality of the core functions that they're designed to perform is going in the wrong way." However, Dodd pointed out that the transfer of powers from the Federal Reserve to other agencies should not be construed as criticism of Fed Chairman Ben Bernanke, but rather that "[i]t's about putting together an architecture that works."

With regards to the lack of bipartisan input on the legislation, Dodd alleged that had he put together a "[…] bipartisan compromise, I think you make a huge mistake by doing that. You're given very few moments in history to make this kind of a difference, and we're trying to do that." Put another way, Dodd construed the lack of Republican amendments as a sign "[…] that the bill is a strong one."

Richard Shelby, the top-ranking Republican on the Senate Banking Committee and the one who proposed the changes to the Federal Reserve governance, voiced his reasons for why he felt the changes needed to be made: "It's an obvious conflict of interest […] It's basically a case where the banks are choosing or having a big voice in choosing their regulator. It's unheard of." Democratic Senator Jack Reed agreed, saying "The whole governance and operation of the Federal Reserve has to be reviewed and should be reviewed. I don't think we can just assume, you know, business as usual."

Barney Frank, who has proposed his own legislative package of financial reforms in the House, did not comment on the Stability Act directly, but rather indicated that he was pleased that reform efforts were happening at all - "Obviously the bills aren't going to be identical, but it confirms that we are moving in the same direction and reaffirms my confidence that we are going to be able to get an appropriate, effective reform package passed very soon."

Ed Yingling, president of the American Bankers Association, regarded the reforms as haphazard and dangerous, saying "To some degree, it looks like they're just blowing up everything for the sake of change […] [i]f this were to happen, the regulatory system would be in chaos for years. You have to look at the real-world impact of this."

During a Senate Republican press conference on April 21, 2010, Richard Shelby reported that he and Dodd were meeting "every day", and were attempting to forge a bipartisan bill. Shelby also expressed his optimism that a "good bill" will be reached, and that "we're closer than ever." Saxby Chambliss echoed Shelby's sentiments, saying "I feel exactly as Senator Shelby does about the Banking Committee negotiations.", but voiced his concern about maintaining an active derivatives market and not drive financial firms overseas. Kay Hutchison indicated her desire to see State banks have access to the Federal Reserve, while Orrin Hatch had concerns over transparency, and the lack of Fannie and Freddy reform.

Congressional Budget Office

On April 21, 2010, the CBO released a cost-estimate of enacting the legislation. In its introduction, the CBO briefly discussed the legislation and then went on to generally state that it is unable to assess the cost of financial crises under current law, and added that estimating the cost of similar crises under this legislation (or other proposed ideas) is equally (and inherently) difficult: "[…] CBO has not determined whether the estimated costs under the bill would be smaller or larger than the costs of alternative approaches to addressing future financial crises and the risks they pose to the economy as a whole."

In terms of the impact on the Federal budget, the CBO estimates that deficits would reduce between 2011–2020, but largely in part due to the risk-based assessment fees levied in order to initially capitalize the Orderly Liquidation Fund; after which, the majority of revenue for the Fund would be drawn primarily from interest payments. Due to this, the CBO projects that eventually the money being paid into the Fund (in the form of fees) would be exceeded by the expenses of the Fund itself. Additionally, the CBO points out that the reclassification of collected fees by various government agencies has the effect of boosting revenue.

The cost estimate also raises questions about the time-frame of capitalizing the Fund - their estimate took the projected value of fees collected for the Fund (and interest collected on the Fund) weighed against the expected expense of having to deal with corporate default(s) until 2020. Their conclusion was it would take longer than 10 years to fully capitalize the Fund (at which point they estimated it would be approximately 45 billion), although no specifics beyond that were expressed.

The projection was a $5 billion or more deficit increase in at least one of the ten-year periods starting in 2021.

See also

• Financial crisis of 2007–2010

External links

• Enrolled Final Version (HR 4173)
• Financial Reform Legislation - Full text of legislation.
• Financial Reform Summary - Summary of the legislation.
• Senate Banking Committee Report on RAFSA
• Senate Passes Sweeping Financial Reform Bill - video report by Democracy Now!
• Americans for Financial Reform Letters and Statements about the bill Americans for Financial Reform Letters and Statements about the bill
• Davidoff, Steven M. (July 15, 2010). "Finding a Good Financial Bill in 2300 Pages". Dealbook. New York Times.