Yesterday, just one day shy of the second anniversary of the Bear Stearns collapse, Senator Christopher J. Dodd (D-CT), chairman of the Senate Banking Committee, released his long awaited proposal to overhaul the nation's financial regulations.  The changes, viewed by many as the most sweeping since the Depression, are apparently backed by the Obama administration.

Dodd said that the overhaul is designed to stabilize the nation's financial system in the hopes of preventing a repeat of the near collapse of major players in the fall of 2008.  However, forces are both the right and the left appear ready to do battle over many parts of the proposal.

Dodd had been working on the proposal with one of the leading members of the committee, Senator Bob Corker (R-TN), but recently decided to finish the proposals on his own.  Ranking committee member Richard Shelby said he was in substantial agreement with about 80 percent of the bill, however, none of the Republicans on the committee have yet endorsed it.

Here are the chief provisions of the bill which Dodd has named Restoring American Financial Stability

Establishment of a Consumer Financial Protection Bureau
This agency will be lead by an independent director appointed by the President and confirmed by the Senate.  In what promises to be one of the more controversial aspects of Dodd's proposal, the agency will be housed within and funded by the Federal Reserve.  The agency will be able to independently write rules for consumer protection that will cover banks and credit unions with more than $10 billion in assets and all mortgage-related businesses.  Included under its mandate will be lenders, servicers, mortgage brokers, payday lenders, debt collectors, consumer reporting agencies, and foreclosure prevention operators.  Banks that exceed the $10 billion asset benchmark will continue to be handled by the appropriate regulators.

The agency will establish an Office of Financial Literacy charged with educating the public about financial matters and a complaint hot line so consumers will have a single point to report problems with financial products.

Creation of a Financial Stability Oversight Council
This independent nine-member council will be chaired by the Treasury secretary and made up of regulators representing the Federal Reserve Board, the Securities and Exchange Commission (SEC), Office of Comptroller of the Currency (OCC), The Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), and the Commodity Futures Trading Commission (CFTC) and an independent member.  The council will have one responsibility; to act as an early warning system, identifying and responding to emerging risks throughout the financial system.

The Council will be charged with creating disincentives for financial institutions becoming "too big to fail" by imposing rules for capital, leverage, and liquidity risk management and will be able to approve, with a 2/3 vote, a Federal Reserve decision to require a large and complex company to divest some of its holdings if it is deemed to pose a threat to the financial stability of the company.  The bill specifies that this would be only as "a last resort."  The Council would also be able to require, with a 2/3 vote, that nonbank financial companies such as AIG be regulated by the Federal Reserve if they pose a risk to financial stability.

The so-called Volcker Rule will require that regulators implement regulations for banks, bank holding companies, and their affiliates to prohibit proprietary trading, investment in or sponsorship of hedge funds and private equity funds and to limit relationships with those funds.  Nonbank institutions under Federal Reserve supervision will be subject to similar controls.

Large complex companies will have to periodically submit "funeral plans" for their rapid and orderly shutdown if the company should go under and penalties such as higher capital requirements will be imposed for failure to do so.  Also, if the Federal Reserve, FDIC, and Treasury agree to put a company into liquidation, a three judge federal bankruptcy panel must convene and agree within 24 hours that a company is insolvent.  Most large financial companies will be resolved through the normal bankruptcy process.

The largest financial firms will be charged $50 billion for an upfront fund that will grow over time and will be used for any liquidation.  The FDIC will be allowed to borrow from the Treasury only for working capital for a liquidation and the government will be first in line for repayment from the assets of the liquidated company.

The Federal Reserve's lender of last resort authority will be updated to allow system-wide support to protect taxpayers from loss during a major destabilizing event but will not be allowed to prop up individual institutions.

The Council will create an Office of Financial Research within the Treasury Department which will support the council's work by collecting financial data and conducting economic analysis.  This office and related agencies will provide periodic public reports and give testimony to Congress every year on emerging risks to the economy.

In what is called the Hotel California Provisions, large bank holding companies that have received TARP funds will not be able to avoid supervision by the Federal Reserve by divesting themselves of their banks.

  • The proposed law sets up clear lines of responsibilities for financial institutions: the FDIC will regulate state banks and thrifts of all sizes and bank holding companies of state banks with assets under $50 billion. OCC will regulate national banks and federal thrifts of all sizes and holding companies of national banks and thrifts with assets below $50 billion.  The Office of Thrift Savings is eliminated and no new charters will be issued for federal thrifts. The Federal Reserve will regulate banks and thrift holding companies with assets over $50 billion. The Dual Banking System will be preserved, leaving in place the state banking system that regulates most community banks.
  • Companies that sell products like mortgage-backed securities will be required to retain at least 5 percent of the credit risk to ensure they "won't sell garbage to investors." This requirement, however, would be waived if the underlying loans met standards that reduce riskiness.
  • The bill seeks to improve the competence of the SEC by creating a program to reward whistleblowers with up to 30 percent of the funds recovered when securities violations are reported; mandating an annual assessment of the SEC's internal supervisory controls, and it creates a committee of investors to advise the SEC on its regulatory priorities and practices and an Investor Advocate to identify areas where investors have significant problems with the SEC. It also requires that the SEC be self-funded and no longer subject to annual appropriations.
  • Strengthens the Federal Reserve through increased supervision and rules to eliminate conflicts of interest.

The bill will give the Government Accountability Office the authority to audit any emergency lending facility set up by the Federal Reserve and will create a Vice Chairman for Supervision who will develop policy recommendations regarding supervision and regulation for the Board and will report to Congress semi-annually on supervision and regulation efforts.

Any company, subsidiary, or affiliate of a company that is supervised by the Federal Reserve will be prohibited from voting for directors of the Federal Reserve Banks and bans past or present officers, directors, and employees from serving as directors.  It also mandates that the president of the New York Federal Reserve Bank be appointed by the President and confirmed by the Senate rather than chosen by the Bank's directors, six of whom are elected by member banks in the New York district.

  • Establishing an Office of Credit Rating Agencies within the SEC to strengthen regulation of credit rating agencies. The office will have the ability to levy fines on credit rating agencies and will be able to prohibit compliance officers from working on ratings, methodologies, or sales, require them to disclose their methodologies, their use of third parties for due diligence, and their ratings track records. It will also require ratings analysts to pass qualifying exams and undergo continuing education.
  • Hedge funds that manage over $100 million will be required to register with the SEC as investment advisors and to disclose financial data needed to monitor systemic risk and protect investors.
  • The bill seeks to bring transparency and accountability to the Derivatives Market by provided the SEC and CFTC with authority to regulate over-the-counter derivatives and uses a joint rulemaking process with the Financial Stability Oversight Council stepping in if the two agencies can't agree.

It also requires Central Clearing and Exchange Trading for derivatives that can be cleared, provides a role for regulators and clearing houses to determine which contracts should be cleared and requires the SEC and CFTC to pre-approve contracts before they can be cleared.

New rules would require margin for un-cleared trades in order to offset the greater risk they pose to the financial system, subject swap dealers and major participants to capital requirements, require data collection and publication through clearing houses or swap repositories to improve market transparency, and provide regulators with tools for monitoring and responding to risks

  • Shareholders will be given a say on executive compensation and corporate governance.

Shareholders of public companies will be given a non-binding vote on executive pay and will be granted proxy access to nominate directors.  Standards for listing a company's stock on an exchange will require that its compensation committee include only independent directors and have authority to hire compensation consultants.  Companies will be required to set policies to take back executive compensation if it was based on inaccurate financial statements.

  • Finally, the bill creates an Office of National Insurance within the Treasury Department to monitor the insurance industry, coordinate international insurance issues, and require a study on ways to modernize insurance regulations.

Senator Dodd said this morning on MSNBC that, while the bill does not take on any changes to Freddie Mac and Fannie Mae at this time, the issue clearly must be addressed.