Bernanke Promises More Fed Action on Economy

On Friday, Fed Chairman Ben Bernanke said that the Federal Open Market Committee, the Fed panel that Bernanke leads and which sets interest rates, could make additional purchases of longer-term securities in order to prevent deflation. In regards to the overall state of the economy, Bernanke said “the pre-conditions for a pickup of growth in 2011 appear to remain in place, as banks increase lending, worries over the European sovereign debt-crisis abate and consumers increase their savings.”

SEC Votes to Give Shareholders “Proxy Access”

On Wednesday, the SEC Commissioners voted along party lines 3-2 to give shareholders what is commonly known as “proxy access,” which requires companies to include the names of all board nominees, even those not backed by the company, directly on the standard corporate ballots distributed before shareholder annual meetings. To win the right to nominate, an investor or group of investors must own at least 3% of a company’s stock and have held the shares for a minimum of three years.

Currently, shareholders who want to oust board members must pay for mailing separate ballots, as well as wage a separate campaign to win shareholder support. The new rule will be in place in time for the 2011 annual meeting season next spring.

However, the final rule did address concerns from the business community. Smaller companies will be exempt from complying with the rule for three years. Investors will be prevented from borrowing stock to meet the 3% threshold and will be restricted to nominating directors for no more than a quarter of a company’s board.

Financial Regulatory Reform Bill

On Tuesday, the Senate resumed its consideration of S. 3217 the Restoring American Financial Stability Act of 2010. The Senate passed an amendment sponsored by Sen. Bernie Sanders (I-VT) that would require the non-partisan Government Accountability Office to conduct an independent audit of the Board of Governors of the Federal Reserve System as well as an amendment by Sen. Chris Dodd (D-CT) that would require the Secretary of the Treasury to conduct a study on ending the conservatorship of Fannie Mae and Freddie Mac and reforming the housing finance system.

On Wednesday, the Senate passed three amendments to the bill. The first, offered by Senator Jeff Merkley (D-OR), would prohibit certain types of commission payments to loan originators and require greater oversight of lenders. The second, offered by Sen. Kay Bailey Hutchinson (R-TX), would maintain the role of the Federal Reserve Board of Governors as the supervisor of holding companies and state member banks. The final amendment that passed on Wednesday was offered by Sen. Jack Reed (D-RI). It would establish a specific consumer protection liaison for service members and their families.

On Thursday, the Senate adopted three more amendments. The first, sponsored by Sen. Al Franken (D-MN), would instruct the Securities and Exchange Commission to create a new self-regulatory organization that would choose, in a lottery or a rotation, which credit rating agency rated a new security. The second amendment which passed was sponsored by Sen. George Lemieux (R-FL). It would remove all references to credit ratings agencies from the statute effectively requiring federal regulators to develop their own standards for credit rather than relying on assessments from credit rating agencies. The third and most controversial amendment that passed was sponsored by Senator Dick Durbin (D-IL). Durbin’s amendment would empower the Federal Reserve to curb debit-card interchange, or “swipe” fees, charged to merchants for every card transaction.

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Financial Regulatory Reform Bill

On Wednesday, the Senate began its formal debate of amendments to the Restoring American Financial Stability Act of 2010 with nearly unanimous support for an amendment by Senator Barbara Boxer (D-CA) clarifying that taxpayers would not bear any losses from the liquidation of bankrupt firms. The Senate moved to consider a bipartisan proposal by Senators Dodd (D-CT) and Shelby (R-AL) to strip the bill of a $50 billion fund which would be filled upfront by the financial industry, that would cover the cost of closing down failing firms. Under the Dodd-Shelby deal, the Federal Deposit Insurance Corporation would liquidate faltering firms by borrowing money from Treasury to cover initial costs. The government would recover the costs by selling off the firm’s assets, with creditors and shareholders incurring losses. Other large banks could be assessed to pay for additional costs as a last resort. Also, creditors of a failing firm would be forced to pay back the government any money they received above what they would have gotten under a bankruptcy proceeding. Any seizure of a large, failing firm would require court approval to ensure that the government not shut down a company inappropriately. In addition, Congress would have to approve the use of federal debt guarantees, and regulators also would be able to ban management and directors of failed firms from working in the financial sector for a minimum of two years.

After voting on the Dodd-Shelby changes, lawmakers quickly approved two amendments put forward by Senator Olympia Snowe (R-ME), aimed at preserving the ability of small-business owners to use their homes as collateral and lightening regulatory burdens on small banks. The Senate then passed an amendment from Senator Jon Tester (D-MT) and Senator Kay Bailey Hutchison (R-TX.) that instructs the FDIC to set the premiums that banks pay based on an assessment of their overall risk.

After approval of these bipartisan measures, the Senate moved to consider more contentious amendments. Senator Shelby (R-AL) offered an amendment to curb the reach of the new consumer protection agency. The amendment was defeated along party lines. Under the Shelby plan, the FDIC would have had to sign off on the consumer rules, and funding for the division would come from fees assessed on nonbanks. And unlike the underlying bill, Republicans would maintain federal pre-emption of state consumer protection laws, which would prevent the financial industry from having to beat back proposals in 50 different states.