Chris Dodd has come out with his proposal for financial overhaul and its massive.
The 11 page document outlines in detail the Chairman’s intention to remake the U.S. financial system as a result of the financial crisis.
We’ve got the breakdown on the reform bill for you right here.
Summary: Restoring American Financial Stability
Create a Sound Economic Foundation to Grow Jobs, Protect Consumers, Rein in Wall Street, End Too Big to Fail, Prevent Another Financial Crisis
Two years ago today, Bear Stearns was collapsing. In the time since, Americans have faced the worst financial crisis since the Great Depression. Millions have lost their jobs, businesses have failed, housing prices have dropped, and savings were wiped out.
The failures that led to this crisis require bold action. We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them. We must create a sound foundation to grow the economy and create jobs.
HIGHLIGHTS OF THE NEW BILL
Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.
Ends Too Big to Fail: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed's authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
Advanced Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.
Transparency & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated - including loopholes for over-the-counter derivatives, asset- backed securities, hedge funds, mortgage brokers and payday lenders.
Federal Bank Supervision: Streamlines bank supervision to create clarity and accountability. Protects the dual banking system that supports community banks.
Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.
Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.
Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.
STRONG CONSUMER FINANCIAL PROTECTION WATCHDOG
The new independent Consumer Financial Protection Bureau will have the sole job of protecting American consumers from unfair, deceptive and abusive financial products and practices and will ensure people get the clear information they need on loans and other financial products from credit card companies, mortgage brokers, banks and others.
American consumers already have protections against faulty appliances, contaminated food, and dangerous toys. With the creation of the Consumer Financial Protection Bureau, they'll finally have a watchdog to oversee financial products, giving Americans confidence that there is a system in place that works for them -- not just big banks on Wall Street.
Why Change Is Needed: The economic crisis was driven by an across-the-board failure to protect consumers. When no one office has consumer protections as its top priority, consumer protections don't get the attention they need. The result has been unfair and deceptive practices being allowed to spread unchallenged, nearly bringing down the entire financial system.
The Consumer Financial Protection Bureau
Independent Head: Led by an independent director appointed by the President and confirmed by the
Independent Budget: Dedicated budget paid by the Federal Reserve Board.
Independent Rule Writing: Able to autonomously write rules for consumer protections governing all
entities -- banks and non-banks -- offering consumer financial services or products.
Examination and Enforcement: Authority to examine and enforce regulations for banks and credit unions
with assets of over $10 billion and all mortgage-related businesses (lenders, servicers, mortgage brokers, and foreclosure scam operators) and large non-bank financial companies, such as large payday lenders, debt collectors, and consumer reporting agencies. Banks with assets of $10 billion or less will be examined by the appropriate bank regulator.
Consumer Protections: Consolidates and strengthens consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, and Federal Trade Commission.
Able to Act Fast: With this bureau on the lookout for bad deals and schemes, consumers won't have to wait for Congress to pass a law to be protected from bad business practices.
Educates: Creates a new Office of Financial Literacy.
Consumer Hotline: Creates a national consumer complaint hotline so consumers will have, for the first
time, a single toll-free number to report problems with financial products and services.
Accountability: Makes one office accountable for consumer protections. With many agencies sharing
responsibility, it's hard to know who is responsible for what, and easy for emerging problems that haven't
historically fallen under anyone's purview, to fall through the cracks.
Works with Bank Regulators: Coordinates with other regulators when examining banks to prevent undue
regulatory burden. Consults with regulators before a proposal is issued and regulators could appeal regulations if they believe would put the safety and soundness of the banking system or the stability of the financial system at risk.
IMPROVING BANK REGULATION
The bill will streamline bank supervision with clear lines of responsibility, reducing arbitrage, and improve consistency and accountability. For the first time there will be clear lines of responsibility among bank regulators.
Why Change Is Needed: Today, we have a convoluted system of bank regulators created by historical accident. There are 4 federal banking agencies that oversee large systemically significant and small local national and state banks and federal and state thrifts.
Experts agree that no one would have designed a system that looked like this. For over 60 years, administrations of both parties, members of Congress across the political spectrum, commissions and scholars have proposed streamlining this irrational system.
Clear Lines of Responsibility: Replaces confusing regulation riddled with dangerous loopholes, with clear lines of responsibility.
FDIC: will regulate state banks and thrifts of all sizes and bank holding companies of state banks with
assets below $50 billion.
OCC: will regulate national banks and federal thrifts of all sizes and the holding companies of national
banks and federal thrifts with assets below $50 billion. The Office of Thrift Savings is eliminated,
existing thrifts will be grandfathered in, but no new charters for federal thrifts.
Federal Reserve: will regulate bank and thrift holding companies with assets of over $50 billion, where
the Fed's capital market experience will enhance its supervision. As a consolidated supervisor, the Federal Reserve can see risks whether they lie in the bank holding company or its subsidiaries. They will be responsible for finding risk throughout the system. The Vice Chair of the Federal Reserve will be responsible for supervision and will report semi-annually to Congress.
Dual Banking System: Preserves the dual banking system, leaving in place the state banking system that governs most of our nation's community banks.
CREDIT RATING AGENCIES
Establishes a new Office of Credit Rating Agencies at the Securities and Exchange Commission to strengthen regulation of credit rating agencies. New rules for internal controls, independence, transparency and penalties for poor performance will address shortcomings and restore investor confidence in these ratings.
Why Change Is Needed: Rating agencies market themselves as providers of independent research and in-depth credit analysis. But in this crisis, instead of helping people better understand risk, they failed to warn people about risks hidden throughout layers of complex structures.
Flawed methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency contributed to a system in which AAA ratings were awarded to complex, unsafe asset-backed securities - adding to the housing bubble and magnifying the financial shock caused when the bubble burst. When investors no longer trusted these ratings during the credit crunch, they pulled back from lending money to municipalities and other borrowers.
New Requirements and Oversight of Credit Rating Agencies
New Office, New Focus at SEC: Creates an Office of Credit Ratings at the SEC with its own compliance
staff and the authority to fine agencies. The SEC is required to examine Nationally recognised Statistical
Ratings organisations at least once a year and make key findings public.
Disclosure: Requires Nationally recognised Statistical Ratings organisations to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record.
Independent Information: Requires agencies to consider information in their ratings that comes to their attention from a source other than the organisations being rated if they find it credible.
Conflicts of Interest: Prohibits compliance officers from working on ratings, methodologies, or sales.
Liability: Investors could bring private rights of action against ratings agencies for a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source.
Right to Deregister: Gives the SEC the authority to deregister an agency for providing bad ratings over time.
Education: Requires ratings analysts to pass qualifying exams and have continuing education.
Reduce Reliance on Ratings: Requires the GAO study and requires regulators to remove unnecessary references to NRSRO ratings in regulations.
EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE
Strengthening Shareholder Rights
Giving shareholders a say on pay and proxy access, ensuring the independence of compensation committees, and requiring public companies to set policies to take back executive compensation based on inaccurate financial statements are important steps in reining in excessive executive pay and can help shift management's focus from short-term profits to long-term growth and stability.
Why Change Is Needed: In this country, you are supposed to be rewarded for hard work.
But Wall Street has developed an out of control system of out of this world bonuses that rewards short term profits over the long term health and security of their firms. Incentives for short-term gains likewise created incentives for executives to take big risks with excess leverage, threatening the stability of their companies and the economy as a whole.
Giving Shareholders a Say on Pay and Creating Greater Accountability
Vote on Executive Pay: Gives shareholders a say on pay with the right to a non-binding vote on executive
pay. This gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.
Nominating Directors: Gives the SEC authority to grant shareholders proxy access to nominate directors. Also required directors to win by a majority vote in uncontested elections. These can help shift management's focus from short-term profits to long-term growth and stability.
Independent Compensation Committees: Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants in order to strengthen their independence from the executives they are rewarding or punishing.
No Compensation for Lies: Requires that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don't comply with accounting standards.
SEC Review: Directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five- year period.
SEC AND IMPROVING INVESTOR PROTECTIONS
Every investor -- from a hardworking American contributing to a union pension to a day trader to a retiree living off of their 401(k) -- deserves better protections for their investments. Investors in securities will be better protected by improving the competence of the SEC.
Why Change Is Needed: The Madoff scandal demonstrated just how desperately the SEC is in need of reform. The SEC has failed to perform aggressive oversight and is unable to understand some of the very companies it is supposed to regulate. And investors have been used and abused by the very people who are supposed to be providing them with financial advice.
SEC and Beefed Up Investor Protections
Encouraging Whistleblowers: Creates a program within the SEC to encourage people to report securities
violations, creating rewards of up to 30% of funds recovered for information provided.
SEC Management Reform: Mandates an annual assessment of the SEC's internal supervisory controls and a GAO study of SEC management.
Investment Advice: Requires a study on whether brokers who give investment advice should be held to the same fiduciary standard as investment advisers -- should be required to act in their clients' best interest.
New Advocates for Investors: Creates the Investment Advisory Committee, a committee of investors to advise the SEC on its regulatory priorities and practices as well as the Office of Investor Advocate in the SEC, to identify areas where investors have significant problems dealing with the SEC and provide them assistance.
Funding: The self-funded SEC will no longer be subject to the annual appropriations process.
Companies that sell products like mortgage-backed securities are required to retain a portion of the risk to ensure they won't sell garbage to investors, because they have to keep some of it for themselves.
Why Change Is Needed: Companies made risky investments, such as selling mortgages to people they knew could not afford to pay them, and then packaged those investments together, called asset-backed securities, and sold them to investors who didn't understand the risk they were taking. For the company that made, packaged and sold the loan, it wasn't important if the loans were never repaid as long as they were able to sell the loan at a profit before problems started. This led to the subprime mortgage mess that helped to bring down the economy.
Reducing Risks Posed by Securities
Skin in the Game: Requires companies that sell products like mortgage-backed securities to retain at least
5% of the credit risk, unless the underlying loans meet standards that reduce riskiness. That way if the investment doesn't pan out, the company that packaged and sold the investment would lose out right along with the people they sold it to.
Better Disclosure: Requires issuers to disclose more information about the underlying assets and to analyse the quality of the underlying assets.
STRENGTHENING THE FEDERAL RESERVE
The Federal Reserve will oversee the larger, more complex holding companies with assets over $50 billion and other systemically significant financial firms, where their expertise in capital markets will come into play. With this new role will come new responsibilities, but also new transparency and efforts to eliminate conflicts of interest.
Strengthening the Federal Reserve
Transparency: GAO will have authority to audit any emergency lending facility set up by the Federal
Reserve under section 13(3) of the Federal Reserve Act.
Financial Stability Function: The Board of Governors of the Federal Reserve will now have a formal
responsibility to identify, measure, monitor, and mitigate risks to U.S. financial stability.
Oversight Accountability: Creates a Vice Chairman for Supervision, a member of the Board of Governors
of the Federal Reserve designated by the President, who will develop policy recommendations regarding supervision and regulation for the Board, and will report to Congress semi-annually on Board supervision and regulation efforts.
Eliminates Conflicts of Interest in Reserve Bank Governance: No company, subsidiary or affiliate of a company that is supervised by the Federal Reserve Board will be allowed to vote for directors of Federal Reserve Banks; and their past or present officers, directors and employees cannot serve as directors. Currently the member banks elect directors, who choose the Federal Reserve Board president. Federal Reserve supervisory functions are carried out through the Federal Reserve Banks.
Increases Accountability at the New York Federal Reserve Bank: The president of the New York Federal Reserve Bank will be appointed by the President of the United States, with the advice and consent of the Senate. The New York Federal Reserve president is a permanent member of the Federal Open Market Committee, the Bank executes open market operations and is an important source of information on capital markets, and the Bank supervises many important bank holding companies. However, the president of the New York Federal Reserve Bank is currently chosen by the Bank's directors, 6 of whom are elected by member banks in that district.