Congress finally getting serious about regulating financial institutions
Finally, in the past two weeks, bills have been moving out of the committee, including a bill to reform credit-rating agencies, a bill to require most hedge funds and private-equity funds to register with the SEC, and a bill to create a new consumer financial-protection agency. The committee is now ready to take up the most difficult task -- a bill to make sure taxpayers will never again have to bail out Wall Street.So let's take a closer look at the changes you can expect if they pass the House and make it to the Senate unchanged.
First, here are some of the key changes that the credit rating agency reform bill would make:
• Clarify consumers' ability to sue credit-rating agencies (or Nationally Recognized Statistical Rating Organizations), and clarifies that Securities and Exchange Commission regulations or state regulations do not afford a defense against civil anti-fraud actions.
• Require supervision of NRSROs and authorizes the SEC to sanction supervisors who fail to do so.
• Require each NRSRO to make up at least one third of its board with independent directors who oversee policies and procedures aimed at preventing conflicts of interest and improving internal controls.
• Mitigate conflicts of interest that arise from the issuer-pays model for compensation. Currently, the issuer of the bond pays for the rating, which often creates conflicts and potential conflicts of interest.
• Require greater public disclosure about the internal operations of NRSROs, so the public will better understand who pays for the ratings reports.
Changes outlined by the bill related to hedge funds and private-equity funds include:
• Mandate registration for all private advisers to private pools of capital regulators, to clarify how these entities operate and whether their actions pose a threat to the financial system as a whole.
• Require new record-keeping and disclosure for private advisers, so regulators can evaluate both individual firms and entire market segments that currently have no meaningful regulation, without posing undue burdens on those industries.
• Set basic ground rules for advisers to hedge funds, private equity firms, single-family offices, and other private in order for them to continue to play in our capital markets. Regulators will have authority to examine the records of these previously secretive investment advisers.
And the change that consumers want most: the creation of the Consumer Financial Protection Agency, which would:
• Be responsible for rule-making, examination, and enforcement of financial institutions that provide consumers with financial products and services.
• Address any unfair, deceptive, and abusive acts and practices that the agency identifies.
• Examine banks and non-bank institutions for compliance with the consumer banking laws, and enforce against violations of those standards.
The act would also creates a Consumer Financial Protection Oversight Board and a Consumer Advisory Board.
The Oversight Board would include the Chairmen of the Federal Reserve, the FDIC, the NCUA, and the FTC as well as the head of the new National Bank Supervisor, the Secretary of HUD, and the Chairman of the Liaison Committee of Representatives of State agencies to the Financial Institutions Examination Council. The director would appoint five members from the fields of consumer protection, fair lending and civil rights, or from financial institutions that primarily serve underserved communities.
The Consumer Advisory Board would be a panel of experts selected by the director to represent the interests of providers and consumers of financial products
How quickly these bills will move through Congress is anyone's guess. Congress often passes major legislation like this after rushing it through just before it adjourns for the holidays. At this rate, legislators will need to follow that usual tactic if the bills are going to pass Congress and get to the President's desk this year.
Lita Epstein has written more than 25 books, includingReading Financial Reports for Dummies and Trading for Dummies.