Legislation places limits on firms that pose systemic risk, creates enforcement agency to protect consumers
The House of Representatives passed today a comprehensive set of measures to modernize America’s financial regulations, hold large financial firms accountable and improve consumer protections. The package of reforms addresses the myriad causes – from predatory lending to unregulated financial trading – that led to last year’s financial crisis. The Wall Street Reform and Consumer Protection Act passed by a vote of 223 to 202.
“This legislation will help correct the regulatory failures that led to the near collapse of the financial markets last year,” said Rep. Levin. “Had this bill been in place last year, the federal government would not have been placed in the untenable position of either bailing out irresponsible firms like AIG or doing nothing, with the risk of a widespread panic that could send the entire economy over the cliff.
“The legislation also puts consumer protection on an equal footing with banking regulators to end predatory lending, prevent deliberately misleading ‘disclosures’ and end other industry abuses. We need to ensure that consumers have the information they need to understand the costs, benefits and risks of financial products so they can make informed decisions, and this legislation accomplishes just that.”
Details on the Wall Street Reform and Consumer Protection Act
Consumer Protections: Creates the Consumer Financial Protection Agency (CFPA), a new, independent federal agency solely devoted to protecting Americans from unfair and abusive financial products and services.
Ends Taxpayer-funded Bailouts and Prevents the Rise of Institutions that are “Too Big to Fail”: Establishes an orderly process for dismantling large, failing financial institutions like AIG or Lehman Brothers in a way that ends bailouts, protects taxpayers, and prevents contagion to the rest of the financial system. Creates a Systemic Dissolution Fund that can be used to help wind down failing financial institutions, but not to preserve them. The Fund will be pre-funded by assessments on financial companies with more than $50 billion in assets and by hedge funds with more than $10 billion in assets, thus ending the need for taxpayer-funded bailouts. Again, with enactment of this legislation, there are no more taxpayer-funded bailouts for failing institutions. If financial assistance is necessary for orderly dissolution, industry will pay for it.
Financial Stability Council: Creates an inter-agency oversight council that will identify and regulate financial firms that are so large, interconnected, or risky that their collapse would put the entire financial system at risk. These systemically risky firms will be subject to heightened oversight, standards, and regulation.
Executive Compensation: Gives shareholders a “say on pay” – an advisory vote on pay practices including executive compensation and golden parachutes. It also enables regulators to ban inappropriate or imprudently risky compensation practices, and it requires financial firms to disclose any compensation structures that include incentive-based elements.
Investor Protections: Strengthens the SEC’s powers so that it can better protect investors and regulate the nation’s securities markets. It responds to the failures to detect the Madoff and Stanford Financial frauds by ordering a study of the entire securities industry that will identify needed reforms and force the SEC and other entities to further improve investor protection.
Regulation of Derivatives: Regulates, for the first time ever, the over-the-counter (OTC) derivatives marketplace. Under the bill, all standardized swap transactions between dealers and “major swap participants” would have to be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring.
Mortgage Reform and Anti-Predatory Lending: Would incorporate the tough mortgage reform and anti-predatory lending bill the House passed earlier this year. The legislation outlaws many of the egregious industry practices that marked the subprime lending boom, and it would ensure that mortgage lenders make loans that benefit the consumer. It would establish a simple standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.
Reform of Credit Rating Agencies: Addresses the role that credit rating agencies played in the economic crisis, and takes strong steps to reduce conflicts of interest, reduce market reliance on credit rating agencies, and impose a liability standard on the agencies.
Hedge Fund, Private Equity and Private Pools of Capital Registration: Fills a regulatory hole that allows hedge funds and their advisors to escape any and all regulation. This bill requires almost all advisers to private pools of capital to register with the SEC, and they will be subject to systemic risk regulation by the Financial Stability regulator.
Office of Insurance: Creates a Federal Insurance Office that will monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis and undermine the entire financial system.
