Financial Services Regulatory Reform Update: The House Is Moving Fast, and the Senate Is Racing to Catch Up

November 24, 2009

Both Houses of Congress have significantly stepped up the pace on financial services regulatory reform legislation proposed this summer by the Obama Administration. Any financial services company, or any company that uses financial services products and services, will be significantly affected by this legislation and should take this opportunity to weigh in on provisions that affect its business.

The US House Financial Services Committee spent the last month approving many pieces of the Administration’s comprehensive proposals for regulatory reform of the financial services industry, which are summarized below. The House leadership will decide how to package these bills and will attempt to pass them in some combination in December.

The House “pieces” of financial services regulatory reform include:

  • The Corporate and Financial Institution Compensation Fairness Act, which requires that any proxy, consent, or authorization for an annual shareholders meeting provide for a separate shareholder vote to approve executive compensation for named executive officers;
  • The Consumer Financial Protection Act, which creates an additional financial services regulatory agency with supervisory, examination, and enforcement authority over consumer financial products and services;
  • The Financial Stability Improvement Act, which addresses concerns about financial services companies that might be, or become, “too big to fail” by imposing a new, sweeping regulatory regime;
  • The Private Fund Investment Advisers Registration Act, which requires advisers to most onshore and offshore private funds to register with the SEC, but carves out advisers to certain foreign private funds and small business investment companies; exempts certain advisers to venture capital funds and private funds, although they would still be subject to SEC recordkeeping and reporting requirements; and requires advisers to maintain and file records with the SEC in order to determine whether a particular fund poses a systemic risk;
  • The Investor Protection Act, which imposes a fiduciary duty on brokers, dealers, and investment advisers to act in the best interest of the customer without regard to compensation; authorizes oversight of any investment adviser who has any legal or financial connection with a broker; and requires the registration of municipal financial advisers and imposes upon them a fiduciary duty;
  • The Over-the-Counter Derivatives Markets Act, which imposes complex new regulations on swap transactions, dealers, and participants;
  • The Accountability and Transparency in Rating Agencies Act, which allows investors to sue agencies that “knowingly or recklessly” fail to review key information in their ratings; requires each agency to have a board with at least one-third independent directors to prevent conflicts of interest; and contains requirements designed to mitigate the conflicts of interest that arise out of the issuer-pays model for compensating rating agencies; and
  • The Federal Insurance Office Act, which would establish an office in Treasury to monitor insurance issues, coordinate Federal efforts on national and international insurance issues, and advise other regulators on real or potential systemic issues.

House committee chairman Frank also said he wants to include a provision on “cramdown,” a court-ordered reduction of the secured balance due on a home mortgage loan, granted to a homeowner who has filed for personal bankruptcy. This could happen before House floor consideration of these bills.

Senate Banking Committee Chairman Dodd prefers a comprehensive legislative approach as the best way to drive regulatory reform forward. After negotiations broke down with senior Republican committee member Richard Shelby, Chairman Dodd released his new 1139 page draft last week (bill; summary). The Senate committee will begin to act in earnest during the first week of December; Chairman Dodd wants to secure committee approval before the end of 2009.

The legislative efforts to reregulate the financial services industry are the most sweeping since the 1930s, and represent comprehensive changes from current law. McGuireWoods Consulting can advise clients on how this legislative effort might affect their businesses and work with clients to ensure that their concerns can be heard and addressed.