Financial Regulatory Reform Bill

On Friday, at 5:40 a.m. EST, the House and Senate conferees approved the conference report of the over 2,000-page financial regulatory reform bill, thus ending two weeks of negotiations and a 20 hour marathon final session. Below is a summary of major issues addressed in the legislation. Note, however, that the final conference report language is not yet available. Accordingly, this list should not be considered exhaustive.

Consumer Financial Protection Bureau: The bill creates a newly housed Bureau under the Federal Reserve with authority to regulate all consumer financial products sold by banks and other institutions. Banks with less than $10 billion in assets are subject to CFPB rules, but prudential regulators will cover such banks’ examination and enforcement.

Deposit insurance: The bill changes the assessment base to “assets minus tangible capital.” It also permanently increases deposit insurance coverage to $250,000, retroactive to Jan. 1, 2008, and it extends the Transaction Guarantee Program through 2012.

Bank Tax: The bill’s spending is offset by revenue generated by authorizing a special assessment on financial institutions with more than $50 billion in assets, and hedge funds with more than $10 billion in assets. The FDIC will be charged with collecting the fees, which could total up to $19 billion over the next five years.

Federal Preemption of State Law: The conferees approved language relating to preemption of state laws that would allow the Office of the Comptroller of the Currency (OCC) to preempt state laws if they “prevent or significantly” interfere with the business of banking.

SOX Section 404(b) exemption: The conferees approved a provision that would permanently exempt companies with less than $75 million in market capitalization from complying with the Sarbanes-Oxley Act’s Section 404(b) auditor attestation requirements.

Volcker Rule: The conferees agreed to a modified version of the Volcker Rule that would ban certain types of proprietary trading. The provisions also cap a depository bank’s  investment in private equity or hedge funds at 3 percent of the institution’s tangible private equity.

Risk retention: The conferees approved a provision that subjects lenders to a 5 percent risk retention requirement on securitized loans sold into the secondary market, but also included a safe harbor for traditionally underwritten residential mortgage loans.

Capital Requirements: The amendment sponsored by Senator Susan Collins (R-ME) regarding capital requirements for financial institutions originally would have excluded trust-preferred securities and other financial instruments from holding company Tier 1 capital. However, the conferees agreed to grandfather existing trust-preferred securities for all bank holding companies with less than $15 billion in total assets. Holding companies with more than $15 billion in total assets would have five years to comply with the measure, including a three-year phase-in period.

Interchange Fees: The amendment sponsored by Senator Richard Durbin (D-IL) regarding interchange fees would direct the Federal Reserve to set rates on debit-card interchange fees. The Fed would also be required to consider the cost of protecting against fraud when determining whether fees are “reasonable and proportional.” Merchants would also be allowed to offer discounts for certain payment types.

Derivatives: The conferees approved a provision to allow derivatives to be used by banks and corporate end users to hedge their own risks without clearing requirements. However, banks are required to conduct non- hedging swaps in separately capitalized subsidiaries of the holding company. End users are required to clear all non-hedging swaps through clearing exchanges with additional margining and capital requirements.

The House and Senate are expected to begin considering the conference reports in their respective chambers early next week. Further updates will be sent when the final language is released.

More Information

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
1 202 508 6172

Kip Wainscott, Associate Attorney
1 202 508 6353