House Passes Financial Reform Bill

The U.S. House of Representatives approved a major overhaul of the rules governing the country’s financial system on Wednesday in a 237–192 vote that fell mainly along partisan lines, according to the New York Times. All but three Republicans voted against the measure due to concerns of government overreach, the paper said.

Congressional Democrats and Republicans disagreed over how, exactly, to offset the costs of some of the bill’s provisions, according to the Washington Post, with Democrats favoring a fee on banks with more than $50 billion assets and hedge funds with more than $10 billion in assets, a sum that would have raised about $19 billion, said the Post. Republicans balked at this idea though, favoring instead the use of funds from the Troubled Asset Relief Program, a debate they eventually won, the Post said.

The bill, HR 4173, itself is massive -- totaling 2,300 pages -- and seeks to govern a diverse array of topics. Among its many provisions would be the establishment of a new government agency within the Federal Reserve called the Consumer Financial Protection Bureau (CFPB), according to a bill summary provided by the House Financial Services Committee.

CPAs are excluded from additional regulatory oversight via the CFPB in a provision that states, “the bureau may not exercise any rulemaking, supervisory, enforcement, or other authority over any person that is a certified public accountant, permitted to practice as a certified public accounting firm, or certified or licensed for such purpose by a state" when performing or offering to perform “customary and usual accounting activities, including the provision of accounting, tax, advisory, or other services that are subject to the regulatory authority of a state board of accountancy or a federal authority.”

The bureau would be tasked with providing clear information and preventing abusive practices in areas such as credit cards, payday loans and home mortgages. CFPB, according to the bill summary, would have the ability to autonomously write rules for consumer protections governing all financial institutions -- banks and nonbanks -- that offer consumer financial services or products. It would also take over consumer protection responsibilities that are currently being handled by the Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision, Federal Deposit Insurance Corporation (FDIC), Federal Reserve, National Credit Union Administration (NCUA), the Department of Housing and Urban Development (DHUD), and Federal Trade Commission (FTC).

The legislation would also establish a 10-member Financial Stability Oversight Council, composed of representatives from the Federal Reserve, the Securities and Exchange Commission (SEC), the Commodities Future Trading Commission (CFTC), the OCC, the FDIC, the Federal Housing Finance Agency (FHFA), the National Credit Union Administration and the new CFPB, the summary noted. It would be chaired by the Treasury secretary.

The council would have the power to, with a two-thirds vote, place a nonbank financial company under control of the Federal Reserve if it determines that the company represents a threat to the U.S. financial system, according to the summary. The Federal Reserve could, in turn, recommend that a company under its supervision divest some of its holdings in the interests of financial stability, a decision that would then need to be approved by the council with another two-thirds vote, the summary said.

Addressing the “Too Big to Fail” Issue

The legislation would also seek to address the “too big to fail” problem by instituting what has come to be called the “Volcker Rule” -- named for former Fed chair Paul Volcker -- which, according to the summary, is intended to prohibit banks and their affiliated companies from engaging in proprietary trading, investing and sponsoring hedge funds and private equity funds. However, last-minute congressional negotiations produced a version that partially lifts the ban, allowing banks and their propriety companies to invest up to 3 percent of their capital in such funds, according to Bloomberg News.

The summary, however, referred to these changes as a strengthening of the rule, saying that the 3 percent exception is for cases when investors are required to have some personal stake in the outcome of their financial ventures.

Another aspect of the legislation would require large, complex financial institutions to submit plans for a rapid and orderly shutdown should the company go under, which the summary called “funeral plans.” The bill summary also said that the legislation clearly states that taxpayers would not be responsible for saving failing financial companies, nor would they cover the costs of their liquidations.

The FDIC would only be able to borrow the amount of funds needed to liquidate a company that it expects can be repaid from the assets of the company being liquidated, the summary said, and wouldn’t be able to guarantee debt without getting approval from the Treasury secretary and two-thirds of the oversight council. The Federal Reserve, meanwhile, would be barred from using its emergency lending authority to bail out an individual company.

The Federal Reserve would also be subject to a one-time audit of the emergency lending it conducted during the financial crisis by the Government Accountability Office (GAO), the details of which would be published on the central bank’s website by Dec. 1, the summary continued. In the future, the GAO would have the authority to audit the Fed’s discount window lending and open market transactions.

Increased Oversight

If signed into law, the bill would also increase oversight of the derivatives market. The new rules would give the SEC and CFTC the power to regulate over-the-counter derivatives and will require that derivatives be traded at central clearing houses, which would need to collect and publish data on their activities, said the summary. Meanwhile, the SEC and the CFTC would need to pre-approve derivatives contracts from these clearing houses before they can be cleared for trading, said the summary.

Credit rating agencies would also be subject to more oversight under the proposed new rules, many of which would be enforced by the newly created Office of Credit Ratings within the SEC, which has its own compliance staff and the authority to fine agencies, according to the summary. The SEC would create a new mechanism to prevent issuers of asset backed-securities from picking the agency they think will give the highest rating, said the summary, and would have the authority to deregister an agency if they provide bad ratings over time, the summary continued. Ratings agencies would be required to disclose their methodologies, their use of third parties for due-diligence efforts and their ratings track records, the summary noted.

The bill would also allow investors to bring private lawsuits against ratings agencies for “reckless failures to conduct reasonable investigations of the facts” or to obtain analysis from an independent source, said the summary. Further, in order to prevent conflicts of interest, compliance officers would be prohibited from working on ratings, methodologies or sales, and it would require the agencies to conduct a one year look-back review when an employee from such an agency goes to work for the obligator or underwriter of a security or money market instrument subject to ratings by that agency, the summary said. The agency would also be required to file a report with the SEC when certain ratings agency employees go to work for an entity that that agency has rated in the previous 12 months.

In addition, the summary said the bill would also eliminate the Office of Thrift Supervision and establish an Office of Minority and Women Inclusion, which would coordinate technical assistance to minority-owned and women-owned businesses and seek diversity in the regulatory workforce.

The completed legislation will now go before the Senate for consideration where a vote will be scheduled sometime after Congress returns from its weeklong Independence Day recess, the Los Angeles Times reported. Should the bill be signed into law, it will bring about the biggest rewrite in financial regulations since the Great Depression, the Times said.