Dodd Gets the Ball Rolling on Financial Overhaul; Unveils Sweeping Legislation

Taking a pivotal step towards the enactment of comprehensive financial regulatory reform, this afternoon Senate Banking Committee Chairman Christopher Dodd (D-CT) released the Restoring American Financial Stability Act of 2010, which includes broad revisions to legislation that Dodd introduced in November and represents the base bill for a full committee markup that is slated to begin next week.

The introduction of the Dodd bill comes amidst increasingly protracted negotiations between the chairman and his fellow banking committee members Richard Shelby (R-AL) and Bob Corker (R-TN), which were halted before both sides could hash out bipartisan compromises on several significant policy issues—including the authority of a proposed Consumer Financial Protection Bureau and a newly-created process for winding down large and interconnected financial institutions. But according to Dodd, the Senate’s dwindling timeline for action was the most immediate factor driving his decision; while others are viewing Dodd’s move as an effort to ramp up the political pressure on Senate Republicans by bringing the debate out in the open.

Below are the bill’s highlights:

Consumer Protection—an independent Consumer Financial Protection Bureau will be housed at the Federal Reserve; have a director appointed by the president and confirmed by the Senate; will write rules for consumer protections governing banks and non-banks that offer consumer financial services or products; will have a new Office of Financial Literacy and also a consumer hotline.

Ends “Too Big to Fail”—creates a safe way to liquidate firms; imposes “tough new capital and leverage requirements that make it undesirable to get too big;” updates the Fed’s authority to allow system-wide support but not “prop-up individual firms;” and establishes rigorous standards and supervision.

Systemic Risk—the nine member Financial Stability Oversight Council would “identify and address systemic risks posed by large, complex companies, products and activities before they threaten the stability of the economy;” on a 2/3 majority vote could authorize the Fed to regulate non-bank financial companies posing risk to the financial stability of the United States.

Transparency and Accountability for Exotic Instruments—closes loopholes that allowed risky and abusive practices, “including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers, and payday lenders;" hedge funds would be required to register with the SEC as investment advisers; also creates a new office at Treasury to monitor the insurance industry.

Federal Bank Supervision—streamlines bank supervision and protects the dual banking system that supports community banks.

Executive Compensation and Corporate Governance—provides share-holders a “say-on-pay” with a non-binding vote on executive compensation; SEC could grant shareholders proxy access to nominate directors; implements standards for independent compensation committees; public companies would be required to take back executive compensation that was based on inaccurate and non-compliant financial statements; SEC to clarify compensation disclosure requirements.

Credit Rating Agencies—provides new rules for transparency and accountability for credit rating agencies to protect investors and businesses; creates a new Office of Credit Ratings at the SEC.

Strengthens Enforcement of Existing Regulations—strengthens oversight and enforcement in an effort to root out financial fraud, conflicts of interest, and manipulation of the system; gives GAO audit authority over any Fed emergency lending facility; the president of the New York Fed would be appointed by the president and confirmed by the Senate.


Summary:  Restoring American Financial Stability (PDF)

Full Text:  Restoring American Financial Stability Act of 2010 (PDF)