Despite bad weather, Congress appears to be moving forward with financial services reform. On Tuesday, February 9, House Financial Services Committee Chairman, Barney Frank issued a statement regarding the financial industry and the need for increased consumer protection in the U.S. financial industry. A comprehensive update and Chairman Frank's statement is available at Perkins Coie's Update Page.
On Wednesday, December 2, 2009, the House of Representatives Financial Services Committee passed two significant acts, the Financial Stability Improvement Act and the Federal Insurance Office Act, both of which are aimed at increasing federal regulation over the financial services industry. Both bills have been referred to the full House for consideration.
A brief summary of the legislation is at the following link: . http://www.perkinscoie.com/news/pubs_detail.aspx?publication=2411&op=updates
With the recent flurry of legislative activity focused on reform of the regulatory framework for financial institutions and the financial markets, the Perkins Coie Financial Services Practice is pleased to bring you the Financial Services Bulletin. This bulletin highlights recent legislative activity impacting financial services and financial institutions. We plan to publish future bulletins as new legal developments are announced. The Bulletin is available at the following link: www.perkinscoie.com/news/pubs_detail.aspx .
Sen. Dodd rolled out his vision of consumer financial services regulatory reform this week and, among other things, it threatens to further consolidate oversight of banks into a single federal agency.
Maloney-Frank bill will implement credit card reforms immediately upon enactment
In a 39-29 vote, on October 22, 2009 the House Financial Services Committee approved legislation (H.R. 3126) establishing an independent federal agency charged with overseeing financial products and services. Under the legislation, the Consumer Financial Protection Agency (CFPA) would be an independent agency headed by a Presidentially-appointed and Congressionally-approved Director appointed to a five year term. The CFPA's responsibilities would include rulemaking, examination and enforcement of financial institutions that provide consumers with financial products and services. The rulemaking authority of the Federal Reserve Board and other Federal banking regulator agencies under current consumer banking laws would transfer to the CFPA.
A press release from Committee Chairman Barney Frank states that, in addition to having enforcement and broad examination powers, "the agency will closely monitor the marketplace for any new financial products or services that could potentially harm consumers as well as the larger economy. Once the agency identifies these threats or abuses, it will have the power to write rules that can regulate, restrict or ban them. It will also have the power to establish guidelines so that companies issue clear and fair disclosures to customers on products such as credit cards and mortgages. "
The proposed CFPA includes an Office of Fair Lending and Equal Opportunity responsible for enforcement of the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA), and coordinating with other federal agencies regarding fair lending matters.
The Committee vote is only the first step in what is likely to be a long process towards the creation of a new consumer financial services oversight agency. Many issues remain, including exemptions for small banks, the remaining scope of the Federal Reserve Board's authority, enforcement powers, and preemption. The CFPA also faces strong opposition from many corners, including from the American Bankers Association.
The Federal Reserve Board on Thursday proposed significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit (HELOCs). These changes, offered for public comment, reflect the result of consumer testing conducted as part of the Board's comprehensive review of the rules for home-secured credit. The amendments would also provide new consumer protections for all home-secured credit.
Press Release with links to proposal: http://tiny.cc/TenbM
On July 21, 2009, House Financial Services Committee Chairman Barney Frank said that he will postpone a previously planned vote on legislation to create a new federal consumer protection agency until after the August recess. The new agency was included in the Obama administration's June 2009 proposal to overhaul the financial sector as an oversight body charged with protecting consumers of mortgages, credit cards and other financial products. The Washington Post has reported praise for the proposed new agency from consumer protection groups, and sharp criticism from several industry groups, who argue that that the proposed agency will cause increase costs for consumers and further exacerbate the patchwork nature of current financial sector regulation.
Today, the Obama administration unveiled its proposal for financial regulatory reform. The five policy objectives outlined in the proposal include: 1) promoting supervision and regulation of financial firms, 2) establishing supervision and regulation of financial markets, 3) increasing protections for financial consumers, 4) improving tools for managing financial crises, and 5) establishing international regulatory standards and stepping-up international cooperation. The plan’s major proposals are discussed below:
1. Supervision and Regulation of Financial Firms
The administration proposes the creation of a new Financial Services Oversight Council, which would identify emerging systemic risks and push for interagency cooperation. The plan would also give the Federal Reserve broad supervisory powers over businesses that it believes could pose a threat to financial stability. Further, administrative changes include: creating a new national Bank Supervisor to supervise all federal chartered banks, dismantling the federal thrift charter and certain loopholes that allow some depository institutions to avoid bank holding company regulations, and requiring advisors of all hedge funds to register with the SEC. The plan also suggests more stringent capital and prudential standards for all financial firms, especially larger, interrelated firms.
2. Regulation of Financial Markets
The administration recommends enhanced regulation of securitization markets, including new requirements for market transparency, tighter regulation of credit rating agencies, and a mandate that issuers and originators retain a financial interest in securitized loans. The plan also proposes comprehensive regulation of all OTC derivatives. The administration again pushes to expand the authority of the Federal Reserve, suggesting the Fed oversee payment, clearing, and settlement systems for the financial market.
3. Consumers and Investor Protections
The administration proposal creates a new Consumer Financial Protection Agency, charged with overseeing consumer protection in credit, savings, and payments markets. In addition, the plan calls for tighter regulations for all providers of consumer financial products and services, including those provided separately from banking.
4. Tools for Managing Crises
The administration requests revisions to the Federal Reserve's emergency lending authority to manage and/or prevent crises in the financial sector, including malfunctions in those non-bank financial institutions whose collapse could cause systemic consequences.
5. International Regulatory Standards and International Cooperation
Finally, the administration proposes that international regulatory standards be tightened to support domestic efforts and oversee global financial markets, while coordinating supervision of internationally active firms.
In sum, the administration is proposing a significant restructuring of the regulatory system, creating several new agencies or agency powers including: a Financial Services Oversight Council, the Consumer Financial Protection Agency, the National Bank Supervisor, the Office of National Insurance within Treasury to achieve national coordination in the insurance sector, and increasing the powers of the Federal Reserve. This restructuring is likely to spur a heated debate in Congress, centering on the benefits and detriments of governmental regulation of the financial sector.
(Special thanks to Suleen Lee and Kathleen Stetsko for their contributions to this post.)
On Wednesday, the Obama administration is expected to unveil a long-anticipated revamp of federal financial sector regulations. It is anticipated that the plan will call for sweeping changes to the oversight of financial markets, empowerment of federal regulators, and limits on the amount of risk that can be extended by financial companies. The proposed changes would also enable the government to boost consumer protections and push for changes in loan securitization. Through this plan, the administration hopes to prevent future crises and to increase oversight of the biggest financial players, whose collapse would severely threaten other institutions and the economy.
While the plan has scaled back from its initial aim to consolidate various regulatory agencies, the proposal includes creating a council of regulators with broader coordinating responsibility across financial systems. After its unveiling, the administration's proposal will be debated in Congressional hearings on Thursday.
(Special thanks to Suleen Lee and Kathleen Stetsko for their contributions to this post. )
In the wake of the subprime crisis and mortgage meltdown, on May 20, 2009, President Obama signed The Fraud Enforcement and Recovery Act ("FERA"). Among other provisions, the new law provides federal law enforcement with additional resources to combat mortgage and financial fraud, and authorizes federal prosecutors to prosecute anyone who fraudulently obtains funds under the American Recovery and Reinvestment Act or Troubled Asset Relief Program.
The law also creates a "9/11"-style commission comprised of outside experts with authorty to review the causes of the economic crisis and recommend changes. The "Financial Crisis Inquiry Commission" will have subpoena power to bring in individuals for investigation and questioning. FERA grants the Commission authority to refer evidence of wrongdoing to the U.S. attorney general and state attorneys general.
Further information about FERA is available in an article ("Obama Signs Fraud Enforcement and Recover Act in Effort to Combat Mortgage and Financial Fraud") published by Perkins Coie attorney Joel Levin.
The Securities Exchange Commission has proposed new rules to increase the oversight of investment advisors who retain custody of client assets. The proposed measures come in the wake of what many have termed as a lack of SEC regulation and enforcement that enabled ponzi schemes and other investment fraud to thrive in recent years.
The SEC’s newly proposed regulations include yearly “surprise” audits performed by independent public accountants in order to verify the sanctity of client assets under an investment advisor’s custody. Advisers would be required to disclose the identity of the independent public accountant that performs its surprise audit in public SEC filings, and amend these filings to reflect changes in accountants. In addition, when an adviser or an affiliate directly holds client assets, a custody control review would have to be conducted by a PCAOB-registered and inspected accountant.
The proposed amendments would further require all other custodians holding client assets to directly deliver custodial statements directly to the clients, rather than through investment advisers. These additional safeguards are meant to deter advisers from preparing false account statements, and increase the likelihood that clients discover any discrepancies between the custodial statements and statements from their investment advisors.
The public comment period on these proposed rule amendments will be open for 60 days after their publication in the Federal Register. The full text of the proposed rule amendments have yet to be published.
On May 6, the House of Representatives voted overwhelmingly to pass, with amendments, a Senate bill to improve enforcement of securities fraud, financial institutions fraud and mortgage fraud. The bill also addresses fraud related to federal assistance and relief programs. According to a summary of the bill posted on the CCH Financial Crisis News Center, the Fraud Enforcement and Recovery Act of 2009 ("FERA") expands the scope of securities fraud provisions and extends the prohibition against defrauding the federal government to the TARP program and to the stimulus bill. Among other elements of the bill, FERA implements significant improvements to fraud and money laundering statutes to strengthen the government's ability to combat the increase in fraud activities within the financial services sector.
A key element of the bill is an expanded budget for the U.S. Department of Justice to investigate and prosecute financial fraud. Specifically, the bill authorizes appropriations to the Attorney General for FY2010-FY2011 for investigations, prosecutions, and civil and administrative proceedings involving federal assistance programs and financial institutions. The bill requires that the DOJ use an appropriate percentage of such funds to investigate mortgage fraud. Similar additional appropriations are authorized for the U.S. Postal Service, the Inspector General for the Department of Housing and Urban Development (HUD), the U.S. Secret Service, and the Securities and Exchange Commission (SEC):
The bill also proposes the creation of a "9/11" style commission called the "Financial Markets Inquiry Commission," which would undertake a bipartisan examination of the mortgage crises and other issues that led to the current financial crisis. Senate co-sponsors of the amendment to create the Commission, Senators Johnny Isakson (R-GA) and Kent Conrad (D-ND), issued a release stating that “the only way to get an objective evaluation of where mistakes were made is to create an independent commission of experts to ask what went right, what went wrong and what could we have done to prevent this. We need a forensic audit of the laws of the United States as it relates to the financial markets and our economy.”
The bill now returns to the Senate, where the Senate can agree to the House amendments or ask for a conference to compromise on the differences in the two bills. Assuming agreement, the bill will move to the president for consideration.
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