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What's Next for Reforming Wall Street

May 21, 2010 - by Donny Shaw

As you’ve no doubt heard by now, the Senate officially passed their financial reform bill, the Restoring American Financial Stability Act, last night by a vote of 59-39. Four Republicans joined most Democrats in supporting it, and two Democrats broke rank from the left to vote against it.

They turned it into a substitute amendment to the House’s bill, so S.3217 is now H.R.4173 and we have two different versions of the same bill — one as passed by the House and one as passed by the Senate. The next step in getting the bill into law is for House and Senate leaders to convene a “conference committee” to iron out the differences between the two versions.

This is a critical step in the process. Although the two versions generally have the same shape and do many of the same things, there are some really significant differences in the details. For example, the Senate bill requires banks to spin off their derivatives trading activities into a separate entity that wouldn’t have access to Federal Reserve money. The House bill has no such requirement. This is a huge provision, and how it is resolved by the conference committee will have lasting ramifications for Wall Street and the economy at large. It’s looking like they might bring C-SPAN cameras into the conference committee room, so we will at least get to see the formal process shaping the final bill. Back-room deals will, of course, remain in the back rooms.

One important thing to know about the conference committee process is that it can only be used to resolve differences in the bills, not for expanding their scope. They can choose between provisions in the two versions or craft new compromises between differing provisions. But they can’t add language that goes beyond what is in either bill.

The Wall Street Journal has the best comparison (that I’ve seen) of the two versions of the bill. I’m copying it below because this is crucial information for following this crucial final step in the process.


Senate version

  • Consolidates responsibilities from seven agencies into a Bureau of Consumer Financial Protection within the Federal Reserve system to oversee products made available to consumers
  • Limits ability of mortgage lenders to assess penalities on borrowers who pay off the loan early
  • Prohibits paying brokers and loan officers more to steer borrowers to higher interest rates or certain risky features; commissions would be based on the size or number of loans originated

How House bill differs

  • Oversight would be independent of the Fed and exclude insurance companies, auto dealers and accountants, among others


Senate version

  • Creates Investment Advisory Committee within Securities and Exchange Commission
  • Creates Office of Investor Advocate within SEC to identify problems in dealing with SEC and provide assistance
  • Gives SEC the authority to grant shareholders proxy access to nominate directors
  • Requires directors to win by majority vote in uncontested elections
  • Gives shareholders the right to nonbinding vote on executive pay, excluding golden parachutes

How the house bill differs

  • Would require institutions with assets of at least $1 billion to disclose to regulators the structures of all incentive-based compensation


Senate version

  • Eliminates Office of Thrift Supervision
  • Federal Reserve Board would keep oversight of largest bank holding companies
  • State banks and holding companies would either be regulated by the Fed or FDIC
  • National banks with less than $50 billion in assets would be under Office of the Comptroller of the Currency
  • Banks would be generally barred from using their own capital to engage in speculative trades

How the house bill differs

  • Preserves the Fed’s and FDIC’s bank-supervision roles; calls for OTS to be absorbed by the OCC


Senate version

  • Hedge Funds: Requires investment advisers of hedge funds with $100 million or more in assets to register with the SEC
  • Derivatives: Requires that many derivatives and overthe- counter financial products be traded on regulated platforms
  • Securitizations : Requires companies that package loans into marketable securities to hold at least 5% of the credit risk
  • Requires issuers to disclose more information about and analyze the quality of underlying assets

How the house bill differs

  • Applies to funds with assets of $150 million or more; exempts venture-capital funds
  • Exempts many end users from mandatory central clearing
  • Exempts education, agriculture, veterans and small-business loans


Senate version

  • Creates Office of National Insurance within Treasury to monitor industry, recommending to the systemic-risk council insurers that should be treated as systemically important
  • Office would recommend ways to modernize insurance regulation, but it is explicitly not a new regulator

How the house bill differs

  • Proposes creation of a Federal Insurance Office with similar characteristics

Other Elements

Senate version

  • Creates office at SEC to administer credit rating agencies’ rules and practices
  • Creates Financial Stability Oversight Council, led by Treasury secretary, with nine voting members. Agency would identify systemic risks to the economy, promote market discipline and respond to emerging risks. It would also write regulations for risk-based capital, leverage and liquidity requirements

How the house bill differs

  • Also creates seven-member advisory board for credit raters
  • Large firms would pay into a $150 billion fund to manage the dissolution of failing firms considered systemically significant
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