[Senate Report 111-176]
[From the U.S. Government Publishing Office]


                                                       Calendar No. 349
111th Congress                                                   Report
                                 SENATE
 2d Session                                                     111-176

======================================================================
 
         THE RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2010

                                _______
                                

                 April 30, 2010.--Ordered to be printed

                                _______
                                

 Mr. Dodd, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 3217]

    The Committee on Banking, Housing, and Urban Affairs, 
having considered the original bill (S. 3217) to promote the 
financial stability of the United States by improving 
accountability and transparency in the financial system, to end 
``too big to fail'', to protect the American taxpayer by ending 
bailouts, to protect consumers from abusive financial services 
practices, and for other purposes, having considered the same, 
reports favorably thereon without amendment and recommends that 
the bill do pass.

                                CONTENTS

  I. Introduction.....................................................2
 II. Purpose and Scope of the Legislation.............................2
III. Background and Need for Legislation.............................39
 IV. History of the Legislation......................................44
  V. Section-by-Section Analysis of Bill.............................46
 VI. Hearing Record.................................................186
VII. Committee Consideration........................................203
VIII.Congressional Budget Office Cost Estimate......................203

 IX. Regulatory Impact Statement....................................227
  X. Changes In Existing Law (Cordon Rule)..........................230
 XI. Minority Views.................................................231

                            I. INTRODUCTION

    On March 22, 2010, the Senate Committee on Banking, 
Housing, and Urban Affairs marked up and ordered to be reported 
the ``Restoring American Financial Stability Act of 2010 
(RAFSA).'' RAFSA is a direct and comprehensive response to the 
financial crisis that nearly crippled the U.S. economy 
beginning in 2008. The primary purpose of RAFSA is to promote 
the financial stability of the United States. It seeks to 
achieve that goal through multiple measures designed to improve 
accountability, resiliency, and transparency in the financial 
system by: establishing an early warning system to detect and 
address emerging threats to financial stability and the 
economy, enhancing consumer and investor protections, 
strengthening the supervision of large complex financial 
organizations and providing a mechanism to liquidate such 
companies should they fail without any losses to the taxpayer, 
and regulating the massive over-the-counter derivatives market.

                II. PURPOSE AND SCOPE OF THE LEGISLATION

FINANCIAL STABILITY

    Title I establishes a new framework to prevent a recurrence 
or mitigate the impact of financial crises that could cripple 
financial markets and damage the economy. A new Financial 
Stability Oversight Council (Council) chaired by the Treasury 
Secretary and comprised of key regulators would monitor 
emerging risks to U.S. financial stability, recommend 
heightened prudential standards for large, interconnected 
financial companies, and require nonbank financial companies to 
be supervised by the Federal Reserve if their failure would 
pose a risk to U.S. financial stability.
    The Federal Reserve would establish and implement the 
heightened prudential standards and would have additional 
authority to require (with Council approval) a large financial 
company to restrict or divest activities that present grave 
threats to U.S. financial stability. With respect to bank 
holding companies, the heightened prudential standards would 
increase in stringency gradually as appropriate in relation to 
the company's size, leverage, and other measures of risk for 
those that have assets of $50 billion or more. This graduated 
approach to the application of the heightened prudential 
standards is intended to avoid identification of any bank 
holding company as systemically significant. These heightened 
prudential standards would also apply to the nonbank financial 
companies supervised by the Federal Reserve.
    A new Office of Financial Research within the Treasury 
Department would support the Council's work through financial 
data collection, research, and analysis.
    When Treasury Secretary Timothy Geithner presented the 
Administration's financial reform proposal at a Committee 
hearing on June 18, 2009, he highlighted several shortcomings 
of the current supervisory framework that left the government 
ill-equipped to handle the recent financial crisis: overall 
capital and liquidity standards were too low; regulatory 
requirements failed to account for the harm that could be 
inflicted on the financial system and economy by the failure of 
large, interconnected and highly leveraged financial 
institutions; and investment banks and other types of nonbank 
financial firms operated with inadequate government 
oversight.\1\ FDIC Chairman Sheila Bair testified on July 23, 
2009 that the ``existence of one regulatory scheme for insured 
institutions and a much less effective regulatory scheme for 
non-bank entities created the conditions for arbitrage that 
permitted the development of risk and harmful products and 
services outside regulated entities. . . . The performance of 
the regulatory system in the current crisis underscores the 
weakness of monitoring systemic risk through the lens of 
individual financial institutions and argues for the needs to 
assess emerging risks using a system-wide perspective.''\2\
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    \1\Testimony of Timothy Geithner, Secretary of the Treasury, to the 
Banking Committee, June 18, 2009.
    \2\Testimony of Sheila Bair, Chairman of the Federal Deposit 
Insurance Corporation to the Banking Committee, July 23, 2009.
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    These and other witnesses at Committee hearings relating to 
the financial crisis and financial reform have made the case 
for the type of framework established in this title to promote 
U.S. financial stability. Treasury Secretary Geithner called 
for the creation of a council of regulators chaired by the 
Secretary to identify emerging risks in financial institutions 
and markets, determine where gaps in supervision exist, and 
facilitate coordination of policy and resolution of disputes. 
He argued for new authority for the Federal Reserve to set 
stricter prudential standards for large, interconnected 
financial firms that could threaten financial stability, 
including financial firms that do not own banks.\3\ Federal 
Reserve Chairman Ben Bernanke called for a new prudential 
approach focusing on the stability of the financial system as a 
whole, with formal mechanisms to identify and deal with 
emerging systemic risks, and for more stringent capital and 
liquidity standards for large and complex financial firms.\4\ 
FDIC Chairman Sheila Bair recommended establishing an 
interagency council that would bring a macro-prudential 
perspective to regulation and set or harmonize prudential 
standards for financial firms to mitigate systemic risk.\5\ At 
the July hearing, SEC Chairman Mary Schapiro also testified in 
favor of establishing such a council with similar membership 
and authorities.\6\ Federal Reserve Board Governor Daniel 
Tarullo testified at the same hearing that there was 
substantial merit in establishing a council of regulators to 
conduct macroprudential oversight and coordinate oversight of 
the financial system as a whole.\7\ Former Comptroller of the 
Currency Eugene Ludwig argued at a September hearing that no 
single regulatory agency would be well suited to handle this 
function alone.\8\
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    \3\Testimony of Timothy Geithner, Secretary of the Treasury, to the 
Banking Committee, June 18, 2009.
    \4\Testimony of Ben Bernanke, Federal Reserve Board Chairman, to 
the Banking Committee, July 22, 2009.
    \5\Testimonies of Sheila Bair, Chairman of the Federal Deposit 
Insurance Corporation, to the Banking Committee, May 6 and July 23, 
2009.
    \6\Testimony of Mary Schapiro, Chairman of the Securities and 
Exchange Commission, to the Banking Committee, July 23, 2009.
    \7\Testimony of Daniel Tarullo, Federal Reserve Board Governor, to 
the Banking Committee, July 23, 2009.
    \8\Testimony of Eugene Ludwig, former Comptroller of the Currency, 
to the Banking Committee, September 29, 2009.
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    At a February 12, 2010 hearing, several witnesses spoke in 
favor of the creation of an independent National Institute of 
Finance (Institute). While the Office of Financial Research 
(Office) would be established in the Treasury Department under 
this title, the Office is very similar in key respects to the 
proposed Institute. Like the Institute, the Office would 
support the council of regulators charged with monitoring 
emerging risks to financial stability. The Office would not 
supervise financial institutions but would have regulatory 
authority with respect to data collection. The Office's 
structure is modeled on the proposed Institute, with two main 
components to fulfill its primary functions--the Data Center 
and Research and Analysis Center. The structure and funding of 
the Office are intended to ensure that the Office, like the 
Institute, would have the resources and ability to provide 
objective, unbiased assessments of the risks facing the 
financial system.

ENDING ``TOO BIG TO FAIL'' BAILOUTS THROUGH THE ORDERLY LIQUIDATION 
        AUTHORITY

    Title II establishes an orderly liquidation authority to 
give the U.S. government a viable alternative to the 
undesirable choice it faced during the financial crisis between 
bankruptcy of a large, complex financial company that would 
disrupt markets and damage the economy, and bailout of such 
financial company that would expose taxpayers to losses and 
undermine market discipline. The new orderly liquidation 
authority would allow the FDIC, which has extensive experience 
as receiver for failed banking institutions, including large 
institutions, to safely unwind a failing nonbank financial 
company or bank holding company, an option that was not 
available during the financial crisis. Once a failing financial 
company is placed under this authority, liquidation is the only 
option; the failing financial company may not be kept open or 
rehabilitated. The financial company's business operations and 
assets will be sold off or liquidated, the culpable management 
of the company will be discharged, shareholders will have their 
investments wiped out, and unsecured creditors and 
counterparties will bear losses.
    There is a strong presumption that the bankruptcy process 
will continue to be used to close and unwind failing financial 
companies, including large, complex ones. The orderly 
liquidation authority could be used if and only if the failure 
of the financial company would threaten U.S. financial 
stability. Therefore the threshold for triggering the orderly 
liquidation authority is very high: (1) a recommendation by a 
two thirds vote of the Board of the Governors of the Federal 
Reserve System; (2) a recommendation by a two thirds vote of 
the FDIC; (3) a determination and approval by the Secretary of 
the Treasury after consultation with the President; and (4) a 
review and determination by a judicial panel.
    In order to protect taxpayers, large financial companies 
will contribute $50 billion over a period of 5 to 10 years to a 
fund held at the Treasury. This fund may only be used by the 
FDIC in the orderly liquidation of a failing financial company 
with the approval of the Treasury Secretary, and may not be 
used for any other purpose. The FDIC must first rely on these 
industry contributions if liquidity support is necessary to 
safely unwind the failing financial company and prevent a 
``fire sale'' of assets that could further threaten financial 
stability. The fund would help avoid damaging ``pro-cyclical'' 
effects by allowing large financial companies to contribute 
gradually when they can most afford to pay, not when a crisis 
has already erupted. If additional liquidity is necessary, the 
FDIC may obtain financing from the Treasury but only if such 
financing can be repaid by the proceeds of the assets of the 
failed financial company. Additional assessments on large 
financial companies may be imposed if necessary to ensure 100 
percent repayment of any funds obtained from the Treasury, and 
any financial company that received payments greater than what 
it otherwise would have received in bankruptcy will be assessed 
at a substantially higher rate. Taxpayers will bear no losses 
from the use of the orderly liquidation authority.
    The Committee hearing record provides significant support 
for establishing an orderly liquidation authority for large, 
complex bank holding companies and nonbank financial companies. 
On February 4, 2009, former Federal Reserve Chairman Paul 
Volcker gave the recommendations of the ``Group of 30'' (an 
international body of senior representatives from the public 
and private sectors and academia dealing with economic and 
financial issues), which included a call for U.S. legislation 
to establish a regime to manage the resolution of failed non-
depository financial institutions comparable to the process for 
depository institutions. The recommendations called for 
applying this regime ``only to those few organizations whose 
failure might reasonably be considered to pose a threat to the 
financial system.''\9\ On June 18, 2009, Treasury Secretary 
Timothy Geithner presented the Administration's financial 
reform proposal, which called for a new authority modeled on 
the FDIC's existing authority for banks and thrifts to address 
the failure of a bank holding company or nonbank financial 
company when the stability of the financial system is at risk.
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    \9\Testimony of Paul Volcker, former Federal Reserve Board 
Chairman, to the Banking Committee, February 4, 2009.
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    In testimony submitted on July 23 of 2009, FDIC Chairman 
Sheila Bair noted that large financial firms have been ``given 
access to the credit markets at favorable terms without 
consideration of the firms' risk profile. . . . Investors and 
creditors believe their exposure is minimal since they also 
believe the government will not allow these firms to fail.'' In 
her July statement and in testimony on March 19 and May 6, 
Chairman Bair discussed the limitations of current bankruptcy 
procedures as applied to large and complex bank holding 
companies and nonbank financial companies, and advocated for a 
new statutory authority for the credible orderly unwinding of 
such companies modeled on the FDIC's existing authorities. 
Chairman Bair argued that the resolution authority must be able 
to allocate losses among creditors in accordance with an 
established claims priority ``where stockholders and creditors, 
not the government, are in a first loss position.'' The 
testimony also discussed the merits of building up a fund over 
time in advance of a failure to provide working capital or to 
cover unanticipated losses in an orderly liquidation.\10\ This 
type of ``pre-funding'' would enable the government to impose 
charges on large or complex financial companies consistent with 
the risks they pose to the financial system, provide economic 
incentives for a financial company against excessive and 
dangerous growth, and avoid large charges during times of 
economic stress that would have undesirable ``pro-cyclical'' 
effects.
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    \10\Testimonies of Sheila Bair, Chairman of the Federal Deposit 
Insurance Corporation, to the Banking Committee, March 19, May 6, and 
July 23, 2009.
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    In his July 23, 2009 testimony, Federal Reserve Board 
Governor Daniel Tarullo also argued for a new resolution 
authority as a ``third option between the choices of bankruptcy 
and bailout.'' The testimony argued that allowing losses to be 
imposed on creditors and shareholders ``is critical to 
addressing the too-big-to-fail problem and the resulting moral 
hazard effects.''\11\ Former Comptroller of the Currency Eugene 
Ludwig also urged the Congress at a September 29, 2009 hearing 
to create a new resolution function for large, complex 
financial companies with financing provided by large financial 
companies.\12\
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    \11\Testimony of Daniel Tarullo, Federal Reserve Board Governor, to 
the Banking Committee, July 23, 2009.
    \12\Testimony of Eugene Ludwig, former Comptroller of the Currency, 
to the Banking Committee, September 29, 2009.
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LIQUIDITY PROGRAMS

    Title XI eliminates the ability of either the Federal 
Reserve or the Federal Deposit Insurance Corporation to rescue 
an individual financial firm that is failing, while preserving 
the ability of both regulators to provide needed liquidity and 
confidence in financial markets during times of severe 
distress. That is to say, this Title ends the potential for 
either regulator to come to the rescue of a future AIG, while 
reconfiguring the weapons in their financial crisis arsenals to 
increase accountability without diminishing their 
effectiveness.
    The Federal Reserve's emergency lending authority, under 
section 13(3) of the Federal Reserve Act, in the past allowed 
the Federal Reserve to make loans to individual entities like 
AIG. While such lending played an important role in ending the 
recent financial crisis, it also created potential moral 
hazard. If the Federal Reserve were to retain authority to make 
emergency loans to individual firms, then large, interconnected 
firms might increase their risk-taking behavior, since the 
Federal Reserve would be there to bail them out in a future 
financial crisis.
    By eliminating the ability to lend to individual 
institutions, and by requiring all emergency lending to be done 
through widely-available liquidity facilities that will be 
approved by the Treasury, monitored through periodic reports to 
Congress and by Comptroller General audits, and backed by 
collateral sufficient to protect taxpayers from loss, emergency 
lending by the Federal Reserve will not be a source of moral 
hazard.
    During the recent crisis the Federal Deposit Insurance 
Corporation (FDIC) used the ``systemic risk exception'' to its 
normal bank receivership rules to establish the Temporary 
Liquidity Guarantee Program (TLGP) on an ad hoc basis.
    By paying a TLGP insurance fee, federally insured 
depositories and U.S. bank, financial and thrift holding 
companies were able to issue unsecured short-term debt with a 
federal government guarantee.\13\ Many firms used this program, 
and its existence helped them to roll over needed short-term 
financing after a period in which the outstanding volume of 
financial commercial paper contracted sharply and discount 
rates spiked upward.\14\ At its peak usage level in May 2009 
the TLGP insured approximately $345 billion in outstanding 
debt. As of December 2009 the debt guarantee program had 
assessed $10.3 billion in guarantee fees.\15\
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    \13\The fees charged increase with the maturity of the debt, rising 
from 12.5 basis points for three-month debt to 100 basis points for 
debt with maturities of one year or more, with additional charges added 
under certain conditions. Eligible entities include: (1) FDIC-insured 
depository institutions; (2) U.S. bank holding companies; (3) U.S. 
financial holding companies; and (4) U.S. savings and loan holding 
companies that either engage only in activities that are permissible 
for financial holding companies under section 4(k) of the Bank Holding 
Company Act (BHCA) or have an insured depository institution subsidiary 
that is the subject of an application under section 4(c)(8) of the BHCA 
regarding activities closely related to banking. See http://
www.fdic.gov/regulations/resources/tlgp/index.html.
    \14\For data on outstanding volumes of financial commercial paper 
and discount rates for AA financial commercial paper see http://
www.federalreserve.gov/releases/cp/.
    \15\For data on outstanding volumes guaranteed see http://
www.fdic.gov/regulations/
resources/tlgp/reports.html.
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    Under the TLGP, the FDIC also established a program to 
guarantee non-interest bearing transaction accounts that exceed 
the deposit insurance limit. Participating insured depositories 
pay an annualized risk-based assessment ranging from 15 to 25 
basis points on transaction account amounts that exceed the 
current FDIC insurance amount of $250,000.
    This Title allows the FDIC to guarantee short-term debt 
during financial crises, but limits the guarantees to solvent 
banks and bank holding companies, restricts the conditions 
under which such support may be offered, increases 
accountability of the guarantee program, and eliminates the 
possibility that taxpayers will pay for any losses from the 
program.
    Under this Title no guarantee can be offered unless the 
Board of Governors of the Federal Reserve and the FDIC jointly 
agree that a liquidity event--essentially a breakdown in the 
ability of borrowers to access credit markets in a normal 
fashion--exists. The FDIC may then set up a facility to 
guarantee debt, following policies and procedures determined by 
regulation. The regulation is to be written in consultation 
with the Treasury. The terms and conditions of the guarantees 
must be approved by the Secretary of the Treasury.
    The Secretary will determine a maximum amount of 
guarantees, and the President will request Congress to allow 
that amount. If the President does not submit the request, the 
guarantees will not be made. Congress has 5 days under an 
expedited procedure to disapprove the request. Fees for the 
guarantees are set to cover all expected costs. If there are 
losses, they are recouped from those firms that received 
guarantees. Firms that default on guarantees will be put into 
receivership, resolution or bankruptcy. Any FDIC aid to an 
individual firm under the ``systemic risk exception'' will 
henceforth only be possible if the firm has been placed in 
receivership, and therefore the FDIC will no longer be able to 
provide ``open bank assistance'' using this exception.
    Hence FDIC debt guarantees will be available to help ease 
liquidity problems during financial crises, but will not be a 
source of moral hazard since the FDIC may guarantee only the 
debt of solvent institutions. Moreover, taxpayers are protected 
from any loss by the recoupment requirements.
    Title XI also makes important changes to Federal Reserve 
governance. It establishes the position of Vice Chairman for 
Supervision on the Federal Reserve Board of Governors. The Vice 
Chairman will have the responsibility to develop policy 
recommendations on supervision and regulation for the Board, 
and will report twice each year to Congress. The Federal 
Reserve is also given formal responsibility to identify, 
measure, monitor, and mitigate risks to U.S. financial 
stability. In addition, the Federal Reserve is formally 
prohibited from delegating its functions for establishing 
regulatory or supervisory policy to Federal Reserve banks.
    To eliminate potential conflicts of interest at Federal 
Reserve banks, the Federal Reserve Act is amended to state that 
no company, or subsidiary or affiliate of a company, that is 
supervised by the Board of Governors can vote for Federal 
Reserve Bank directors; and the officers, directors and 
employees of such companies and their affiliates cannot serve 
as directors. In addition, to increase the accountability of 
the Federal Reserve Bank of New York president, who plays a key 
role in formulating and executing monetary policy, this reserve 
bank officer will be appointed by the President, by and with 
the advice and consent of the Senate, rather than by the bank's 
board of directors.

``THE VOLCKER RULE''

    Section 619 of Title VII prohibits or restricts certain 
types of financial activity--in banks, bank holding companies, 
other companies that control an insured depository institution, 
their subsidiaries, or nonbank financial companies supervised 
by the Board of Governors--that are high-risk or which create 
significant conflicts of interest between these institutions 
and their customers.
    Banks, bank holding companies, other companies that control 
an insured depository institution, their subsidiaries, or 
nonbank financial companies supervised by the Board of 
Governors will be prohibited from proprietary trading, 
sponsoring and investing in hedge funds and private equity 
funds, and from having certain financial relationships with 
those hedge funds or private equity funds for which they serve 
as investment manager or investment adviser. A nonbank 
financial institution supervised by the Board of Governors that 
engages in proprietary trading, or sponsoring or investing in 
hedge funds and private equity funds will be subject to Board 
rules imposing capital requirements related to, or quantitative 
limits on, these activities.\16\
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    \16\These firms will be supervised by the Board of Governors 
because their failure could threaten overall financial stability.
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    The incentive for firms to engage in these activities is 
clear: when things go well, high-risk behavior can produce high 
returns. In good times these profits allow firms to grow 
rapidly, and encourage additional risk-taking. However, when 
things do not go well, these same activities can produce 
outsize losses.
    When losses from high-risk activities are significant, they 
can threaten the safety and soundness of individual firms and 
contribute to overall financial instability. Moreover, when the 
losses accrue to insured depositories or their holding 
companies, they can cause taxpayer losses. In addition, when 
banks engage in these activities for their own accounts, there 
is an increased likelihood that they will find that their 
interests conflict with those of their customers.
    The prohibitions in section 619 therefore will reduce 
potential taxpayer losses at institutions protected by the 
federal safety net, and reduce threats to financial stability, 
by lowering their exposure to risk. Conflicts of interest will 
be reduced, for example, by eliminating the possibility that 
firms will favor inside funds when placing funds for clients. 
The prohibitions also will prevent firms protected by the 
federal safety net, which have a lower cost of funds, from 
directing those funds to high-risk uses. Moreover, they will 
restrict high-risk activity in those nonbank financial firms 
that pose threats to financial stability.
    The prohibitions also will reduce the scale, complexity, 
and interconnectedness of those banks that are now actively 
engaged in proprietary trading, or have hedge fund or private 
equity exposure. They will reduce the possibility that banks 
will be too big or too complex to resolve in an orderly manner 
should they fail.
    In testimony submitted to the Committee, Neal Wolin, Deputy 
Secretary of the Treasury, stated that ``Proprietary trading, 
by definition, is not done for the benefit of customers or 
clients. Rather, it is conducted solely for the benefit of the 
bank itself. It is therefore difficult to justify an 
arrangement in which the federal safety net redounds to the 
benefit of such activities.'' Wolin noted that the role of 
proprietary trading and ownership of hedge funds, and their 
associated high risk, contributed to the crisis when banks were 
forced to bail out those operations. Wolin testified, ``Major 
firms saw their hedge funds and proprietary trading operations 
suffer large losses in the financial crisis. Some of these 
firms `bailed out' their troubled hedge funds, depleting the 
firm's capital at precisely the moment it was needed 
most.''\17\
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    \17\Testimony by Neal Wolin, Deputy Secretary of the Treasury, to 
the Senate Banking Committee, 2/2/10.
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    Paul Volcker, former Federal Reserve Board Chairman, 
discussed the benefits to the market from the prohibition and 
the impact on systemic risk: ``Curbing the proprietary 
interests of commercial banks is in the interest of fair and 
open competition as well as protecting the provision of 
essential financial services.'' Volcker added that the proposal 
was ``particularly designed to help deal with the problem of 
``too big to fail' and the related moral hazard that looms so 
large as an aftermath of the emergency rescues of financial 
institutions[.]''\18\
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    \18\Testimony by Paul Volcker, former Federal Reserve Board 
Chairman and Chairman of the President's Economic Recovery Advisory 
Board, to the Senate Banking Committee, 2/2/10.
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THE BUREAU OF CONSUMER FINANCIAL PROTECTION

    The Committee has documented in numerous hearings over the 
years the failure of the federal banking and other regulators 
to address significant consumer protection issues detrimental 
to both consumers and the safety and soundness of the banking 
system.\19\ These failures, which are described in more detail 
below, led to what has become known as the Great Recession in 
which millions of Americans have lost jobs; millions of 
American families have lost trillions of dollars in net worth; 
millions of Americans have lost their homes; and millions of 
Americans have lost their retirement, college, and other 
savings.
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    \19\``The need could not be clearer. Today's consumer protection 
regime just experienced massive failure. It could not stem a plague of 
abusive and unaffordable mortgages and exploitative credit cards 
despite clear warning signs. It cost millions of responsible consumers 
their homes, their savings, and their dignity. And it contributed to 
the near-collapse of our financial system. We did not have just a 
financial crisis; we had a consumer crisis.'' Testimony of Michael 
Barr, Assistant Secretary of the Treasury for Financial Institutions, 
to the Senate Committee on Banking, Housing, and Urban Affairs, July 
14, 2009.
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Structural Problems with Current Consumer Regulation

    The current system of consumer protection suffers from a 
number of serious structural flaws that undermine its 
effectiveness, including a lack of focus resulting from 
conflicting regulatory missions, fragmentation, and regulatory 
arbitrage.
    To begin with, placing consumer protection regulation and 
enforcement within safety and soundness regulators does not 
lead to better coordination of the two functions, as some would 
argue. As has been made amply apparent, when these two 
functions are put in the same agency, consumer protection fails 
to get the attention or focus it needs. Protecting consumers is 
not the banking agencies' priority, nor should it be. The 
primary mission of these regulators ``in law and practice,'' as 
Assistant Secretary of the Treasury Michael Barr testified, is 
to ensure the safe and sound operations of the banks. Because 
of this, former Director of the Office of Thrift Supervision 
(OTS) Ellen Seidman testified, ``[consumer] compliance has 
always had a hard time competing with safety and soundness for 
the attention of regulators. . . .''\20\ In fact, as Assistant 
Secretary Barr pointed out, bank regulators conduct consumer 
protection supervision with an eye toward bank safety and 
soundness by, for example, trying to protect the banks from 
reputation and litigation risks rather than examining how 
products and services affect consumers. ``Managing risks to the 
bank does not and cannot protect consumers effectively. This 
approach judges a bank's conduct toward consumers by its effect 
on the bank, not . . . on consumers.''\21\
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    \20\Testimony of Ellen Seidman, former Director of the Office of 
Thrift Supervision, to the Banking Committee, March 2, 2009.
    \21\Testimony of Michael Barr, July 14, 2009.
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    This may lead, as some witnesses before the Committee 
testified, to an emphasis by the regulators on the short term 
profitability of the banks at the expense of consumer 
protection.\22\
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    \22\Testimony of Patricia McCoy, George J. and Helen M. England 
Professor of Law, University of Connecticut to the Banking Committee, 
hearing on March 3, 2009 and testimony of Travis Plunkett, Legislative 
Director of the Consumer Federation of America to the Banking 
Committee, July 14, 2009.
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    The current system is also too fragmented to be effective. 
There are seven different federal regulators involved in 
consumer rule writing or enforcement. Gene Dodaro, Acting 
Comptroller General, testified that ``the fragmented U.S. 
regulatory structure contributed to failures by the existing 
regulators to adequately protect consumers and ensure financial 
stability.''\23\ This undermines accountability.
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    \23\Testimony of Gene Dodaro, Acting Comptroller General of the 
United States, February 4, 2009.
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    This fragmentation led to regulatory arbitrage between 
federal regulators and the states, while the lack of any 
effective supervision on nondepositories led to a ``race to the 
bottom'' in which the institutions with the least effective 
consumer regulation and enforcement attracted more business, 
putting pressure on regulated institutions to lower standards 
to compete effectively, ``and on their regulators to let 
them.''\24\
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    \24\Testimony of Michael Barr, July 14, 2009.
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A More Effective Approach

    This legislation creates the Bureau of Consumer Financial 
Protection (CFPB), a new, streamlined independent consumer 
entity housed within the Federal Reserve System. The CFPB will 
be focused on ensuring that consumers get clear and effective 
disclosures in plain English and in a timely fashion so that 
they will be empowered to shop for and choose the best consumer 
financial products and services for them.
    The new CFPB will establish a basic, minimum federal level 
playing field for all banks and, for the first time, 
nondepository financial companies that sell consumer financial 
products and services to American families. It will do so 
without creating an undue burden on banks, credits unions, or 
nondepository providers of these products and services.
    The CFPB will help protect consumers from unfair, 
deceptive, and abusive acts that so often trap them in 
unaffordable financial products. The CFPB will stop regulatory 
arbitrage. It will write rules and enforce those rules 
consistently, without regard to whether a mortgage, credit 
card, auto loan, or any other consumer financial product or 
service is sold by a bank, a credit union, a mortgage broker, 
an auto dealer, or any other nondepository financial company. 
This way, a consumer can shop and compare products based on 
quality, price, and convenience without having to worry about 
getting trapped by the fine print into an abusive deal.
    The legislation ends the fragmentation of the current 
system by combining the authority of the seven federal agencies 
involved in consumer financial protection in the CFPB, thereby 
ensuring accountability.
    The CFPB will have enough flexibility to address future 
problems as they arise. Creating an agency that only had the 
authority to address the problems of the past, such as 
mortgages, would be too short-sighted. Experience has shown 
that consumer protections must adapt to new practices and new 
industries.

Mortgage Crisis

          The fundamental story of the current turmoil is 
        relatively easy to tell. It began early in this decade 
        with a weakening of underwriting standards for subprime 
        mortgages in the U.S. Subprime, alt-A and other 
        mortgage products [which] were sold to people who could 
        not afford them and in some cases in violation of legal 
        standards.\25\
---------------------------------------------------------------------------
    \25\Testimony of Eugene Ludwig to the Banking Committee, October 
16, 2008.
---------------------------------------------------------------------------
        --Eugene Ludwig

    This financial crisis was precipitated by the proliferation 
of poorly underwritten mortgages with abusive terms, followed 
by a broad fall in housing prices as those mortgages went into 
default and led to increasing foreclosures. These subprime and 
nontraditional mortgages were characterized by relatively low 
initial interest rates that allowed borrowers to obtain loans 
for which they might not otherwise qualify.\26\ However, after 
2 or 3 years, the rates would jump up significantly--by as much 
as 30 to 40 percent or more, according to the testimony of 
Michael Calhoun, President of the Center for Responsible 
Lending (CRL).\27\ The great majority of the payment-option 
adjustable rate mortgages (option ARMs) resulted in significant 
negative amortization, so that many borrowers owed more on 
their mortgages after several years than when the mortgages 
were initially sold.
---------------------------------------------------------------------------
    \26\It is important to note that the vast majority of subprime 
mortgages were used to refinance existing mortgages rather than to 
purchase a home. According to data collected by the Center for 
Responsible Lending (``Subprime Lending: A Net Drain on 
Homeownership,'' CRL Issue Paper #14, March 27, 2007), 62% of subprime 
loans made from 1998 through 2006 were refinances; only 9% were for 
first time home purchase loans (11% in 2006 was the highest figure). In 
other words, even before the foreclosure crisis hit, subprime loans did 
not make a substantial contribution to new homeownership. Rather, they 
put existing homeowners at greatly increased risk of losing their 
homes. Indeed, according to CRL, as of early 2007, there was a net loss 
in homeownership of over 900,000 households, a figure that has 
certainly increased greatly since the CRL paper was written. FDIC Vice 
Chair Marty Gruenberg made this point in a speech in New York on 
January 8, 2008, when he said:
---------------------------------------------------------------------------
        ``[i]t has been said that a lot of these homes were 
      bought on a speculative basis and people who did that don't 
      deserve help. That is true of some. But it is important to 
      understand that the majority of subprime mortgages were 
      refinancings of existing homes. In other words, these were 
      homes in which the homeowner was living, with mortgages 
      that the homeowner was paying and could afford. In many 
      cases the homeowner was encouraged or induced to refinance 
      into one of these subprime mortgages with exploding 
      interest rates that the homeowner couldn't afford.
---------------------------------------------------------------------------
    \27\Testimony of Michael Calhoun, President of the Center for 
Responsible Lending, to the Subcommittee on Housing, Transportation, 
and Community Development of the Banking Committee, June 26, 2007.
---------------------------------------------------------------------------
    According to testimony heard in the Committee in late 
2006,\28\ and again in early 2007,\29\ many of these loans were 
made with little or no regard for a borrower's understanding of 
the terms of, or their ability to repay, the loans. At a 
September 20, 2006 Subcommittee hearing, Subcommittee Chairman 
Bunning said ``it is not clear that borrowers understand [the] 
risks'' associated with these mortgages, a conclusion borne out 
both by a study by the Federal Reserve Board and the Consumer 
Federation of America (CFA). As Allen Fishbein, then Director 
of Housing Policy at the CFA, testified:
---------------------------------------------------------------------------
    \28\The Housing and Transportation and Economic Policy 
Subcommittees of the Banking Committee held two hearings on the issues 
arising from the increase in nontraditional mortgage lending: September 
13, 2006 and September 20, 2006.
    \29\See Banking Committee Hearings on February 7 and March 22, 
2007.

          Consumers today face a dizzying array of mortgage 
        products that are marketed and promoted under a range 
        of products names. While the number of products has 
        exploded, there appears to be little understanding by 
        many borrowers about key features in today's mortgages 
        and how to compare or even understand the differences 
        between these products.
          A 2004 Consumer Federation of America survey found 
        that most consumers cannot calculate the payment change 
        for an adjustable rate mortgage. . . . all respondents 
        underestimated the annual increase in the cost of 
        monthly mortgage payments if the interest rate 
        [increased] from 6 percent to 8 percent. . . . Younger, 
        poorer, and less formally educated respondents 
        underestimated by as much as 50 percent.\30\
---------------------------------------------------------------------------
    \30\Testimony of Allen Fishbein, Director of Housing Policy at the 
Consumer Federation of America, to the joint Subcommittees, September 
20, 2006. Mr. Fishbein is currently Assistant Director for Policy 
Analysis, Consumer Education and Research at the Federal Reserve Board.

    Fishbein also cited a Federal Reserve study of ARM 
borrowers that found that 35 percent of them did not know the 
maximum amount their interest rate could increase at one time; 
44 percent did not know the maximum rate they could be charged; 
and 17 percent did not know the frequency with which the rate 
could change.\31\
---------------------------------------------------------------------------
    \31\Testimony to the joint Subcommittee hearing, September 20, 2006 
citing January, 2006 Federal Reserve Study, written by Brian Buck and 
Karen Pence, ``Do Homeowners Know Their House Values and Mortgage 
Terms?''
---------------------------------------------------------------------------
    Finally, Fishbein cited a focus group of exotic mortgage 
borrowers organized by Public Opinion Strategies. It found that 
these consumers were ``surprised by the magnitude of the 
payment shock'' once rate sheets with the various mortgage 
option terms were shown to them. Lower-income borrowers, in 
particular, called the payment increases ``shocking.'' Fishbein 
explained that these lower-income borrowers ``were less 
informed about the payment increases and debt risks of non-
traditional mortgages, with some noting they ``wish they had 
known more.'''\32\
---------------------------------------------------------------------------
    \32\Testimony of Allen Fishbein, September 20, 2006.
---------------------------------------------------------------------------
    In that same hearing, Senator Sarbanes said that:

          Too often . . . loans have been made without the 
        careful consideration as to the long-term 
        sustainability of the mortgage. Loans are being made 
        without the lender documenting that the borrower will 
        be able to afford the loan after the expected payment 
        shock hits without depending on rising incomes or 
        increased appreciation.

    Several months later, as the problem worsened, Chairman 
Dodd noted in a March 22, 2007 hearing that:

        . . . a sort of frenzy gripped the market over the past 
        several years as many [mortgage] brokers and lenders 
        started selling these complicated mortgages to low-
        income borrowers, many with less than perfect credit, 
        who they knew or should have known . . . would not be 
        able to afford to repay these loans when the higher 
        payments kicked in. (emphasis added).

    Underscoring this point, the General Counsel of Countrywide 
Financial Corporation, one of the biggest subprime lenders in 
2007, acknowledged in response to a question from Chairman Dodd 
that ``about 60 percent of the people who do qualify for the 
hybrid ARMs would not be able to qualify at the fully indexed 
rate''\33\ (that is, at the rate a borrower would have to pay 
after the loan reset, even assuming interest rates did not 
rise). Another witness, Jennie Haliburton, an elderly resident 
of Philadelphia, Pennsylvania who lived on a fixed income of 
social security benefits, had been sold such a mortgage and was 
facing a jump in her mortgage payment to 70 percent of her 
income. The Department of Housing and Urban Development 
considers payments by consumers of more than 50% of income for 
shelter to put those consumers at ``high risk'' of losing their 
homes.
---------------------------------------------------------------------------
    \33\See Banking Committee hearings on March 22, 2008.
---------------------------------------------------------------------------
    This testimony clearly demonstrates that the lenders were 
aware that borrowers would need to refinance their loans or 
sell their homes when the mortgages reset, thereby generating 
additional fees for the brokers and lenders. This was, in the 
words of Martin Eakes, Chief Operating Officer of the Self-Help 
Credit Union, ``a devil's choice.''\34\
---------------------------------------------------------------------------
    \34\Testimony of Martin Eakes, Chief Operating Officer of the Self-
Help Credit Union, to the Committee, February 7, 2007.
---------------------------------------------------------------------------
    The Committee heard some discussion as to what institutions 
were most responsible for originating these loans. There is 
little doubt that nondepository financial companies were among 
the largest sellers of subprime and exotic mortgages. However, 
insured depositories and their subsidiaries were heavily 
involved in these markets. According to data compiled by 
Federal Reserve Board Economists, 36 percent of all higher-
priced loans in 2005 and 31 percent in 2006 were made by 
insured depositories and their subsidiaries. Those numbers jump 
to 48 percent and 44 percent when bank affiliates are 
included.\35\ This illustrates that being under the supervision 
of a federal prudential regulator did not guarantee that 
mortgage underwriting practices were any stronger, or consumer 
protections any more robust. As noted, the regulators allowed 
this deterioration in underwriting standards to take place in 
part to prevent the institutions they regulate from getting 
priced out of the market.
---------------------------------------------------------------------------
    \35\Neil Bhutta and Glenn Canner, ``Did CRA Cause the Mortgage 
Market Meltdown,'' Federal Reserve Bank of Minneapolis, March 9, 2009.
---------------------------------------------------------------------------
    Unfortunately, many of these mortgages were packaged by big 
Wall Street banks into mortgage-backed securities (MBS) and 
sold in pieces all over the world. Because of the unaffordable 
and abusive terms of the loans, these mortgages became 
delinquent at the highest rates since mortgage performance data 
started being collected over 30 years ago, leading, in turn, to 
increasing foreclosures, decreasing housing demand, and a 
widespread decline in housing prices. Once housing prices fell, 
families who might otherwise have been able to refinance their 
mortgages were unable to do so because they found themselves 
``underwater,'' owing more on their mortgages than the home is 
worth at that time.
    As a result, the MBS into which these now non-performing 
mortgages were bundled lost significant value, helping lead to 
the systemic collapse from which we are currently suffering.

Effect on Minorities

          The mortgage lending system is deeply flawed. . . . 
        The crisis is having a disproportionate impact on 
        African American families, Latino families, low income 
        families. And that disproportionate impact is not 
        explained away by factors that would ordinarily justify 
        such a problem.\36\
---------------------------------------------------------------------------
    \36\Testimony of Wade Henderson, President and CEO of the 
Leadership Conference on Civil Rights, to the Subcommittee on Housing, 
Transportation, and Community Development hearing, June 26, 2007.
---------------------------------------------------------------------------
        --Wade Henderson

    Regrettably, the Committee heard a lot of testimony 
outlining how mortgage originators targeted minorities for 
subprime mortgages even when these borrowers might have 
qualified for lower cost prime mortgages. In fact, according to 
a study conducted by the Wall Street Journal, as many as 61 
percent of those receiving subprime loans ``went to people with 
credit scores high enough to often qualify for conventional 
loans with far better terms.''\37\ Under the Home Mortgage 
Disclosure Act (HMDA), the Federal Reserve collects data on 
``high cost'' mortgage lending, defined as mortgage loans which 
are 3 points above the Treasury rate. According to HMDA data 
released in 2007 by the Federal Reserve, 54 percent of African-
Americans and 47 percent of Hispanics received high cost 
mortgages in 2006. Only 18 percent of non-Hispanic whites 
received high cost mortgages. The Federal Reserve study found 
that borrower related factors, such as income, accounted for 
only one sixth of this disparity. CRL did a study of the 2004 
HMDA data which controls for other significant risk factors 
used to determine loan pricing, such as income and credit 
scores. The CRL study found that African-Americans were more 
likely to receive higher-rate home-purchase and refinance loans 
than similarly-situated white borrowers, and that Latino 
borrowers were more likely to receive higher-rate home purchase 
loans than similarly-situated non-Latino white borrowers.\38\
---------------------------------------------------------------------------
    \37\``Subprime Debacle Traps Even Very Credit-Worthy, Wall Street 
Journal, December 3, 2007.
    \38\CRL, ``Unfair Lending: The Effect of Race and Ethnicity on the 
Price of Subprime Mortgages,'' May 31, 2006.
---------------------------------------------------------------------------

Failure of the Safety and Soundness Regulators

          It has become clear that a major cause of the most 
        calamitous worldwide recession since the Great 
        Depression was the simple failure of federal regulators 
        to stop abusive lending, particularly unsustainable 
        home mortgage lending.\39\
---------------------------------------------------------------------------
    \39\Testimony of Travis Plunkett, Legislative Director of the 
Consumer Federation of America to the Banking Committee, July 14, 2009.
---------------------------------------------------------------------------
        --Travis Plunkett

    Underlying this whole chain of events leading to the 
financial crisis was the spectacular failure of the prudential 
regulators to protect average American homeowners from risky, 
unaffordable, ``exploding'' adjustable rate mortgages, interest 
only mortgages, and negative amortization mortgages. These 
regulators ``routinely sacrificed consumer protection for 
short-term profitability of banks,''\40\ undercapitalized 
mortgage firms and mortgage brokers, and Wall Street investment 
firms, despite the fact that so many people were raising the 
alarm about the problems these loans would cause.
---------------------------------------------------------------------------
    \40\Testimony of Patricia McCoy to the Banking Committee, March 3, 
2009.
---------------------------------------------------------------------------
    In 1994, Congress enacted the ``Home Ownership and Equity 
Protection Act'' (HOEPA) which states that:

        the Board, by regulation or order, shall prohibit acts 
        or practices in connection with--

          (a) Mortgage loans that the Board finds to be unfair, 
        deceptive, or designed to evade the provisions of this 
        section; and

          (b) Refinancing of mortgage loans that the Board 
        finds to be associated with abusive lending practices 
        or that are otherwise not in the interests of borrower.

    As early as late 2003 and early 2004, Federal Reserve staff 
began to ```observe deterioration of credit standards''' in the 
origination of non-traditional mortgages.\41\ Yet, the Federal 
Reserve Board failed to meet its responsibilities under HOEPA, 
despite persistent calls for action.
---------------------------------------------------------------------------
    \41\Banking Committee document, ``Mortgage Market Turmoil: A 
Chronology of Regulatory Neglect'' prepared by the staff of the Banking 
Committee, March 22, 2007.
---------------------------------------------------------------------------
    As Professor McCoy noted in her testimony to the Committee, 
``federal banking regulators added fuel to the crisis by 
allowing reckless loans to flourish.'' Professor McCoy points 
out that the regulators had ``ample authority'' to prohibit 
banks from extending credit without proof of a borrower's 
ability to pay. Yet, she notes, ``they refused to exercise 
their substantial powers of rule-making, formal enforcement, 
and sanctions to crack down on the proliferation of poorly 
underwritten loans until it was too late.''\42\
---------------------------------------------------------------------------
    \42\Testimony to the Banking Committee, March 3, 2009.
---------------------------------------------------------------------------
    Finally, in July of 2008, long after the marketplace had 
shut down the availability of subprime and exotic mortgage 
credit, and much of prime mortgage credit not directly 
supported by federal intervention, the Federal Reserve Board 
issued rules that would likely prevent a repeat of the same 
kinds of problems that led to the current crisis.
    Where federal regulators refused to act, the states stepped 
into the breach. In 1999, North Carolina became the first State 
to enact a comprehensive anti-predatory law. Other States 
followed suit as the devastating results of predatory mortgage 
lending became apparent through increased foreclosures and 
disinvestment.
    Unfortunately, rather than supporting these anti-predatory 
lending laws, federal regulators preempted them. In 1996, the 
OTS preempted all State lending laws. The OCC promulgated a 
rule in 2004 that, likewise, exempted all national banks from 
State lending laws, including the anti-predatory lending laws. 
At a hearing on the OCC's preemption rule, Comptroller Hawke 
acknowledged, in response to questioning from Senator Sarbanes, 
that one reason Hawke issued the preemption rule was to attract 
additional charters, which helps to bolster the budget of the 
OCC.\43\
---------------------------------------------------------------------------
    \43\Banking Committee hearing, April 7, 2004.
---------------------------------------------------------------------------
    Two recent studies by the Center for Community Capital at 
the University of North Carolina document the damage created by 
this preemption regulation. The two studies found that:

          (1) States with strong anti-predatory lending laws 
        exhibited significantly lower foreclosure risk than 
        other States. A typical State law reduced neighborhood 
        default rates by as much as 18 percent;
          (2) Loans made by lenders covered by tougher State 
        laws had fewer risky features and better underwriting 
        practices to ensure that borrowers could repay;
          (3) Mortgage defaults increased more significantly 
        among exempt OCC lenders in States with strong anti-
        predatory lending laws than among lenders that were 
        still subject to tougher State laws. For example, 
        default rates of fixed-rate refinance mortgages made by 
        national banks not subject to State laws were 41 
        percent more likely to default and purchase-money 
        mortgages made by these banks were 7 percent more 
        likely to default than loans those banks made prior to 
        preemption; and
          (4) Risky lending by national banks more than doubled 
        in some loan categories (fixed-rate refinances) after 
        preemption than before, 11 percent to 29 percent.\44\
---------------------------------------------------------------------------
    \44\``The APL Effect: The Impacts of State Anti-Predatory Lending 
Laws on Foreclosures,'' by Lei Ding, et al; University of North 
Carolina, March 23, 2010 and ``The Preemption Effect: The Impact of 
Federal Preemption of State Anti-Predatory Lending Laws on the 
Foreclosure Crisis,'' by Lei Ding et al, March 23, 2010.

    In remarkably prescient testimony, Martin Eakes warned in 
2004 that the OCC's action on preemption ``plants the seeds for 
long-term trouble in the national banking system.'' He went on 
---------------------------------------------------------------------------
to say:

          Abusive practices may well be profitable in the short 
        term, but are ticking time bombs waiting to explode the 
        safety and soundness of national banks in the years 
        ahead. The OCC has not only done a tremendous 
        disservice to hundreds of thousands of borrowers, but 
        has also sown the seeds for future stress on the 
        banking system.\45\
---------------------------------------------------------------------------
    \45\Testimony of Martin Eakes to the Banking Committee, April 7, 
2004.

    In sum, the Federal Reserve and other federal regulators 
failed to use their authority to deal with mortgage and other 
consumer abuses in a timely way, and the OCC and the OTS 
actively created an environment where abusive mortgage lending 
could flourish without State controls.

Other Consumer Financial Products and Services

    Though the problems in the mortgage market have received 
most of the public's attention, consumers have long faced 
problems with many other consumer financial products and 
services without adequate federal rules and enforcement. 
Abusive lending, high and hidden fees, unfair and deceptive 
practices, confusing disclosures, and other anti-consumer 
practices have been a widespread feature in commonly available 
consumer financial products such as credit cards. These 
problems have been documented in numerous hearings before the 
Banking Committee and other Congressional Committees over the 
years.
    Credit Cards. For example, credit card companies have long 
been known to provide extremely confusing disclosures, making 
it nearly impossible for consumers to understand the terms for 
which they are signing up. Card companies have engaged in 
extremely aggressive marketing, such that from 1999 to 2007 
creditor marketing and credit extension increased at about two 
times the rate as credit card debt taken on by consumers.\46\
---------------------------------------------------------------------------
    \46\Testimony of Travis Plunkett to the Banking Committee, February 
12, 2009.
---------------------------------------------------------------------------
    Moreover, typical credit card companies and banks engaged 
in a number of abusive pricing practices, including double-
cycle billing, universal default, retroactive changes in 
interest rates, over the limit fees even where the consumer was 
not notified that a charge put him or her over the allotted 
credit limit, and arbitrary rate increases.
    Despite the growing problems, federal banking regulators 
did very little. As Adam Levitin, Associate Professor of Law at 
Georgetown University Law Center explained to the Committee at 
a February, 2009 hearing,

          The current regulatory regime for credit cards is 
        inadequate and incapable of keeping pace with credit 
        card industry innovation. The agencies with 
        jurisdiction over credit cards lack regulatory 
        motivation and have conflicting missions. . . .\47\
---------------------------------------------------------------------------
    \47\Testimony of Levitin, Associate Professor of Law at Georgetown 
University Law Center to the Banking Committee, February 12, 2009.

    To illustrate this point, research shows that from 1997 to 
2007 the OCC took just 9 formal enforcement actions regarding 
violations of the Truth in Lending Act with regards to credit 
cards or other consumer lending.\48\ In fact, the Comptroller 
of the Currency wrote a letter objecting to certain parts of 
the Federal Reserve Board's proposed regulation on credit cards 
on safety and soundness grounds.\49\
---------------------------------------------------------------------------
    \48\Testimony of Michael Calhoun to the U.S. House of 
Representatives Committee on Financial Services, September 30, 2009.
    \49\Letter from Comptroller of the Currency John Dugan to the Board 
of Governors of the Federal Reserve System, August 18, 2008.
---------------------------------------------------------------------------
    Even after President Obama signed the Credit Card 
Accountability, Responsibility, and Disclosures Act (CARD Act) 
into law, credit card companies sought ways to structure 
products to get around the new rules, highlighting the 
difficulty of combating new problems with additional laws, 
while underscoring the importance of creating a dedicated 
consumer entity that can respond quickly and effectively to 
these new threats to consumers.
    Overdrafts. Similar problems have been revealed by the 
Committee's examination of overdraft fees.\50\ Overdraft 
coverage for a fee is a form of short term credit that 
financial institutions extend to consumers to cover overdrafts 
on check, ACH, debit and AMT transactions. Historically, 
financial institutions covered overdrafts for a fee on an ad 
hoc basis. With the growth in specially designed software 
programs and in consumer use of debit cards, overdraft coverage 
for a fee has become more prevalent.
---------------------------------------------------------------------------
    \50\Banking Committee hearing, November 17, 2009.
---------------------------------------------------------------------------
    A consumer normally qualifies for overdraft coverage if his 
or her account has been open for a specified period (usually 
six months), and there are regular deposits into the account. 
If those criteria are met, most financial institutions 
automatically enroll consumers in overdraft coverage without 
the consumer's knowledge or choice. ``Consumers do not apply 
for . . . this credit, do not receive information on the cost 
to borrow [these funds], are not warned when a transaction is 
about to initiate an overdraft, and are not given the choice of 
whether to borrow the funds at an exorbitant price or simply 
cancel the transaction.''\51\
---------------------------------------------------------------------------
    \51\Testimony of Jean Ann Fox, Director of Financial Services at 
Consumer Federation of America to the Banking Committee, November 17, 
2009.
---------------------------------------------------------------------------
    Once overdraft coverage for a fee has been added to an 
account, some financial institutions do not allow consumers the 
option of eliminating the coverage, although other more 
consumer friendly alternatives like overdraft lines of credit 
or linking checking and savings accounts are available.
    Many consumers who are enrolled in these programs without 
their knowledge find themselves subject to high fees of up to 
$35 per transaction even if the overdraft is only a few cents. 
In some cases, consumers have been charged multiple fees in one 
day without being notified until days later. Most institutions 
also charge an additional fee for each day the account remains 
overdrawn. Some financial institutions will even re-arrange the 
order in which they process purchases, charging for a later, 
larger purchase first so that they can charge repeated 
overdraft coverage fees for earlier, smaller purchases.
    The result has been that American consumers paid $24 
billion in overdraft fees in 2008\52\ and $38.5 billion in 
overdraft fees in 2009.\53\ CRL also found that nearly $1 
billion of those fees would come from young adults and that 
$4.5 billion would come from senior citizens.
---------------------------------------------------------------------------
    \52\Testimony of Michael Calhoun, November 17, 2009.
    \53\Julianne Pepitone, ``Bank overdraft fees to total $38.5 
billion,'' CNNMoney.com, http://money.cnn.com/2009/08/10/news/
companies/bank_overdraft_fees_Moebs/index.htm. August 10, 2009.
---------------------------------------------------------------------------
    In addition, the Federal Deposit Insurance Corporation 
(FDIC) found that a small percentage (12%) of consumers 
overdraw their account five times per year or more. For these 
consumers, overdraft coverage is a form of high cost short term 
credit similar to a payday loan. For example, a consumer 
repaying a $20 point of sale debit overdraft in two weeks is 
effectively paying an APR of 3,520%.\54\
---------------------------------------------------------------------------
    \54\FDIC Study of Bank Overdraft Programs, November, 2008.
---------------------------------------------------------------------------
    For many years, the Federal Reserve and other regulators 
have been aware of the abusive nature of overdraft coverage 
programs. In fact, an Interagency Guidance in 2005 called 
overdraft coverage programs ``abusive and misleading.'' 
Nonetheless, the Federal Reserve has only issued modest rule 
after modest rule to address these programs. Despite years of 
concerns raised, it was not until November of last year that 
the Federal Reserve adopted another modest rule on overdraft 
coverage that would prohibit financial institutions from 
charging any consumer a fee for overdrafts on ATM and debit 
card transactions, unless the consumer opts in to the overdraft 
service for those types of transactions. Much more needs to be 
done in this area to protect consumers and rein in abusive 
practices.
    Debt Collection. The Committee has similar concerns 
regarding the record of abusive, deceptive and unfair practices 
by debt collectors. The Fair Debt Collection Practices Act 
(FDCPA) was passed by Congress to regulate debt collection 
activities and behavior, but despite the existence of the act, 
debt collection abuses proliferate. In the last five years, 
consumers have filed nearly half a million complaints with the 
Federal Trade Commission about debt collection practices. These 
complaints include numerous reports of behavior in violation of 
the act, including: debt collectors threatening violence, using 
profane or harassing language, bombarding consumers with 
continuous calls, telling neighbors or family about what is 
owed, calling late at night, and falsely threatening arrest, 
seizure of property or deportation. The FTC receives more 
complaints from consumers about debt collectors than any other 
industry. Despite these complaints, in the last five years, the 
FTC has only filed nine debt collection cases.
    In addition to concerns about debt collection tactics, the 
Committee is concerned that consumers have little ability to 
dispute the validity of a debt that is being collected in 
error. The FDCPA provides that, if a consumer disputes a debt, 
the collector is required to obtain verification of the debt 
and provide it to the consumer before renewing its collection 
efforts. The FDCPA does not, however, specify what constitutes 
``verification of the debt,'' with the result that many 
collectors currently do little more than confirm that their 
information accurately reflects what they received from the 
creditor. The limited information debt collectors obtain in 
verifying debts is unlikely to dissuade them from continuing 
their attempts to collect from the wrong consumer or the wrong 
amount, so that an aggrieved consumer has virtually no 
protection against erroneous efforts to collect.
    Debt collectors who are unsuccessful in collecting on a 
debt may use attorneys to file frequent lawsuits that they are 
not prepared to litigate, and which may not be factually valid, 
with the expectation that a large number of consumers will 
default or will not be prepared to defend themselves. Abuses in 
these suits have been documented in numerous press reports\55\ 
and by the FTC as well as by consumer advocates. The FTC found 
that ``the vast majority of debt collection suits filed in 
recent years has posed considerable challenges to the smooth 
and efficient operations of the courts.''\56\ This deluge of 
debt collection suits means the following abusive debt 
collection practices can occur: filing collection suits against 
the wrong people; filing suits past the statute of limitations; 
collection attorneys not having any proof of the debt sued upon 
and falsely swearing they do; suing for more than is legally 
owed; and laundering a time-barred debt with a new judgment. 
Most of these cases result in default judgment, often with 
little or no evidence to support the debt, because the debtor 
is intimidated and does not show up. Once a creditor obtains a 
judgment, the effects can be sustained and devastating, 
regardless of whether the consumer actually owed on the 
underlying debt. Despite the FDCPA, the FTC in February of 2009 
issued a report stating that debt collection litigation 
practices appear to raise substantial consumer protection 
concerns.
---------------------------------------------------------------------------
    \55\``Debtors' Hell'' 4-Part Series, Boston Globe, July 30-August 
2, 2006.
    \56\``Collecting Consumer Debts: The Challenges Of Change,'' 
Federal Trade Commission, February 2009, p. 55.
---------------------------------------------------------------------------
    Payday Lending. Payday loans are small, short-term cash 
advances made at extremely high interest rates. Typically, a 
borrower writes a personal check for $100-$500, plus a fee, 
payable to the lender. The loan is secured by the borrower's 
personal check or some form of electronic access to the 
borrower's bank account, and the full amount of the loan plus 
interest must be repaid on the borrower's next payday to keep 
the personal check required to secure the loan from bouncing.
    The average loan amount for a payday loan is $325, and 
finance charges are generally calculated as a fee per hundred 
dollars borrowed. This fee is usually $15 to $30 per $100 
borrowed. The average interest rate for a payday loan is 
between 391% and 782% APR for a two-week loan. Payday loans 
cost consumers over $4.2 billion in fees each year.
    Cash-strapped consumers who must borrow money this way are 
usually in significant debt or living on the financial edge. A 
loan can become even more expensive for the borrower who does 
not have the funds to repay the loan at the end of two weeks 
and obtains a rollover or loan extension. Many borrowers must 
devote 25 to 50 percent of their take-home income to repay the 
payday loan, leaving them with inadequate resources to meet 
their other obligations. This often leads to a succession of 
new payday loans for that family.\57\ An additional fee is 
attached each time the loan is extended through a rollover 
transaction. The high rates make it difficult for many 
borrowers to repay the loan, thus putting many consumers on a 
perpetual debt treadmill where they extend the loan several 
times over. For example, if a payday loan of $100 for 14 days 
with a fee of $15 were rolled over three times, it would cost 
the borrower $60 to borrow $100 for 56 days. Loan fees can 
quickly mount and could eventually become greater than the 
amount actually borrowed. The typical payday borrower renews 
his or her loan multiple times before being able to pay the 
loan in full, and ends up paying $793 for a $325 loan.\58\
---------------------------------------------------------------------------
    \57\Leslie Parish and Uriah King, Phantom Demand, Center for 
Responsible Lending, July 9, 2009.
    \58\King, Uriah, Parrish, Leslie, and Tanki, Ozlem. ``Financial 
Quicksand.'' Center for Responsible Lending. November 30, 2006.
---------------------------------------------------------------------------
    If the borrower defaults on the loan, serious financial 
consequences can occur. Loans secured by personal checks or 
electronic access to the borrower's bank account can endanger 
the banking status of borrowers. The lender can deposit the 
customer's personal check, which would result in additional 
fees from the bank for insufficient funds if it did not clear 
the borrower's checking account and could result in the 
consumer being identified as a writer of bad checks. Requiring 
consumers to turn over a post-dated check can subject consumers 
to coercion or harassment by illegal threats or coercive 
collection practices. For example, consumers have reported 
being threatened with jail for passing a bad check, even when 
the law specifically says they cannot be prosecuted if the 
check bounces.
    Auto Dealer Lending. Auto loans constitute the largest 
category of consumer credit outside of mortgages. Today, there 
is more outstanding auto debt ($850 billion) than there is 
credit card debt in this country. Auto dealers finance 79% of 
the purchases of cars in the United States. Auto dealers 
actively market and price borrowers' loans. They also routinely 
mark up loan rates that are higher than the borrower would need 
to pay to qualify for the credit, and, like mortgage brokers or 
bankers, the auto dealers collect a significant portion of the 
excess finance charges that result from that markup, similar to 
a yield spread premium.\59\ In addition, auto dealers often 
charge origination fees and may use the financing transaction 
as a way to sell other unrelated products (warranties and 
credit insurance, for example) to unsuspecting buyers. Unlike a 
mortgage broker, however, auto dealers are the legal creditors.
---------------------------------------------------------------------------
    \59\Raj Date and Brian Reed, Auto Race to the Bottom; Free Markets 
and Consumer Protection in Auto Finance, November 16, 2009.
---------------------------------------------------------------------------
    As with mortgages, borrowers are simply unaware of the 
incentives pushing the auto dealers to charge buyers higher 
interest rates. Auto dealers have a history of abusive and 
discriminatory lending. In a letter to Chairman Dodd and 
Ranking Member Shelby, the Leadership Conference on Civil 
Rights (LCCR) explains that:

        detailed research by academics earlier this decade on 
        millions of auto loans revealed that auto dealers were 
        far more likely to mark up the loan rates of 
        minorities. Class actions revealed discrimination at 
        GM, Toyota, Ford dealerships, among others. As a 
        result, courts ordered most major car finance companies 
        to cap rates . . . though the orders expire soon.\60\
---------------------------------------------------------------------------
    \60\Letter to Chairman Dodd and Ranking Member Shelby from the 
Leadership Conference on Civil Rights, December 3, 2009. The letter 
explains that ``minority car buyers pay significantly higher dealer 
markups [for auto loans] than non-minority car buyers with the same 
credit scores.'' (Emphasis in original).

    In meetings with Banking Committee staff, the National 
Automobile Dealers Association (NADA) argued that the current 
rate cap imposed by the courts mitigate the need for CFPB 
rulemaking to protect consumers. To the contrary, this history 
of discriminatin indicates the need for careful oversight into 
the future, particularly as the court orders expire over the 
next several years.
    As with mortgage bankers and brokers, auto dealers use an 
``originate to sell'' model which results in the car dealers 
receiving upfront compensation for originating the loans, 
without regard to the ongoing performance of the loan. And, 
unlike mortgages, very few people ever refinance car loans, 
even if they find out that they have been charged above-market 
rates. As a result, auto dealers have a significant incentive 
to steer borrowers to the highest rate loans they can, without 
borrowers ever being aware of the backdoor transaction.
    In addition to minorities and lower-income borrowers, 
military personnel are among those whom are frequently 
exploited by auto dealers. For that reason, Clifford Stanley, 
the Under Secretary of Defense for Personnel and Readiness, 
``welcome[s] and encourage[s] CFP[B] protections'' for service 
members and their families ``with regard to unscrupulous 
automobile sales and financing practices. . ..'' Under 
Secretary Stanley writes that the oversight of auto financing 
by the CFPB for service members will help reduce concerns they 
have about their well-being. He goes on to say:

          The Department of Defense fully believes that 
        personal financial readiness of our troops and families 
        equates to mission readiness.\61\
---------------------------------------------------------------------------
    \61\Letter from Under Secretary of Defense to Clifford Stanley to 
Assistant Secretary of the Treasury, Michael Barr. February 26, 2010.

    Similarly, The Military Coalition, a consortium of 
nationally prominent military and veterans organizations 
representing more than 5.5 million current and former service 
members and their families supports CFPB regulation of auto 
dealers with regard to auto lending. In a letter to the 
Chairman and Ranking Member, the Coalition notes that auto 
financing is ``the most significant financial obligation for 
the majority of service members.'' It goes on to say that 
``including auto dealers financing . . . in the financial 
reform bill will provide greater protections for our service 
members and their families'' by protecting them from reported 
abuses such as bait and switch financing, falsification of loan 
documents, failure to pay off liens, and packing loans with 
other products.\62\
---------------------------------------------------------------------------
    \62\Letter to Chairman Dodd and Ranking Member Shelby from The 
Military Coalition, April 15, 2010. The Coalition includes 31 members, 
including the Veterans of Foreign Wars, the Military Order of the 
Purple Heart, the National Guard Association of the U.S., the Non 
Commissioned Officers Association of the U.S.A., the Iraq and 
Afghanistan Veterans of America, and others.
---------------------------------------------------------------------------
    Access to automobile financing on fair terms is very 
important to American families, particularly to low-income 
families. Studies indicate that access to a reliable automobile 
is an important factor for finding and keeping jobs, especially 
as more and more jobs are being created outside of city 
centers. Writing in New England Community Developments, Signe-
Mary McKernan and Caroline Ratcliffe of the Urban Institute 
note that:

        providing low-income families with less burdensome 
        auto-financing alternatives and helping them avoid the 
        subprime loan market can lead to better credit scores 
        and increase the likelihood that low-income families 
        become integrated into the formal financial sector.\63\
---------------------------------------------------------------------------
    \63\Signe-Mary McKernan and Caroline Ratcliffe, ``Asset Building 
for Today's Stability and Tomorrow's Security,'' New England Community 
Developments, Federal Reserve Bank of Boston, 2009, Issue 2.

    However, despite the abuses in this sector, and the urgent 
need for better consumer protections, the federal government 
has not done enough to address these issues. ``Given the 
widespread nature of the problem [with auto lending] revealed 
in the academic studies and private litigation, the current 
structure has failed to effectively police auto finance.''\64\ 
That is one of the reasons, according to the LCCR, the CFPB is 
needed.
---------------------------------------------------------------------------
    \64\Letter to Chairman Dodd and Senator Shelby by the LCCR, 
December 3, 2009.
---------------------------------------------------------------------------

STRENGTHENING AND CONSOLIDATING PRUDENTIAL SUPERVISION

    Title III seeks to increase the accountability of the 
banking regulators by establishing clearer lines of 
responsibility and to reduce the regulatory arbitrage in the 
financial regulatory system whereby financial companies 
``shop'' for the most lenient regulators and regulatory 
framework. ``One clear lesson learned from the recent crisis 
was that competition among different government agencies 
responsible for regulating similar financial firms led to 
reduced regulation in important parts of the financial system. 
The presence of multiple federal supervisors of firms that 
could easily change their charter led to weaker regulation and 
became a serious structural problem within our supervisory 
system.''\65\
---------------------------------------------------------------------------
    \65\``Financial Regulatory Reform: A New Foundation'', 
Administration's White Paper, June 2009.
---------------------------------------------------------------------------

Need to Consolidate Fragmented Banking Supervision

    Title III rationalizes the fragmented structure of banking 
supervision in the U.S. by abolishing one of the multiple 
banking regulators, consolidating supervision of state banks in 
a single federal regulator, and consolidating supervision of 
smaller bank holding companies (those with assets of less than 
$50 billion) so that the regulator for the bank or thrift will 
also regulate the holding company. For the largest bank and 
thrift holding companies, the Board will be the consolidated 
holding company supervisor. The Board will thus focus its 
supervisory responsibilities on the larger, more interconnected 
bank and thrift holding companies (which will include, but not 
be limited to, those companies whose failures potentially pose 
risk to U.S. financial stability) where its experience in 
capital and global markets can best be applied. By 
consolidating its supervision over these holding companies, the 
Board can pursue risks wherever they may emerge within the 
company (including its subsidiaries) and will ultimately be 
responsible for the sound operation of the entire organization.
    The Committee heard repeated testimony that the U.S. 
financial regulatory system is more a product of history and 
responses to various crises, than deliberate design. According 
to the GAO, it has not kept pace with major developments in the 
financial marketplace. In testimony before the Committee on 
September 29, 2009, the GAO testified in favor of decreasing 
fragmentation in the system (beyond the Administration's 
proposal to abolish the OTS), reducing the potential for 
differing regulatory treatment, and improving regulatory 
independence.\66\
---------------------------------------------------------------------------
    \66\Testimony of Richard J. Hillman, Managing Director Financial 
Markets and Community Investment, GAO, to the Banking Committee, 9/29/
09.
---------------------------------------------------------------------------
    At the same hearing, former Comptroller of the Currency, 
Eugene Ludwig, testified that, ``We must dramatically 
streamline the current alphabet soup of regulators'', citing 
the needless burden on financial institutions of the 
duplicative and inefficient system, the fertile ground that 
multiple regulatory agencies create for regulatory arbitrage, 
and the serious gaps between regulatory responsibilities.\67\
---------------------------------------------------------------------------
    \67\Testimony of Eugene Ludwig to the Banking Committee, 9/29/09.
---------------------------------------------------------------------------
    The Committee heard testimony from Richard Carnell, Fordham 
Law School professor and former Treasury Assistant Secretary 
for Financial Institutions, that our current bank regulatory 
structure is needlessly complex and costly for banks. He 
maintained that its overlapping jurisdictions and 
responsibilities undercut regulators' accountability. And, it 
encourages regulators to compete with each other for 
``regulatory clientele'' thereby creating an incentive for 
laxity in supervision.\68\
---------------------------------------------------------------------------
    \68\Testimony of Richard Carnell to the Banking Committee, 
September 29, 2009.
---------------------------------------------------------------------------
    These sentiments were echoed by Martin Baily, senior fellow 
with the Brookings Institution, and former Chairman of the 
Council of Economic Advisers, who testified about the need for 
increased accountability among regulators. In speaking about 
competition among regulators Baily said, ``The serious danger 
in regulatory competition is that it allows a race to the 
bottom as financial institutions seek out the most lenient 
regulator that will let them do the risky things they want to 
try, betting with other people's money.''\69\
---------------------------------------------------------------------------
    \69\Testimony of Martin Baily to the Banking Committee, September 
29, 2009.
---------------------------------------------------------------------------
    The Committee also heard testimony that the number of 
banking regulators could be reduced by creating a single 
federal regulator for state chartered banks, in contrast to the 
current scheme in which the Federal Reserve and the FDIC each 
supervise certain state banks. According to Comptroller of the 
Currency, John Dugan, ``Today there is virtually no difference 
in the regulation applicable to state banks at the federal 
level based on membership in the [Federal Reserve] System and 
thus no real reason to have two different federal regulators. 
It would be simpler to have one. Opportunities for regulatory 
arbitrage--resulting, for example, from differences in the way 
federal activities restrictions are administered by one or the 
other regulator--would be reduced. Policy would be 
streamlined.'' Dugan went on to state the importance of 
ensuring the FDIC maintain a window into day-to-day banking 
supervision, which would be less of a problem for the Board if 
it maintained holding company supervision.\70\
---------------------------------------------------------------------------
    \70\Testimony of John Dugan to the Banking Committee, August 4, 
2009.
---------------------------------------------------------------------------
    Dugan identified further opportunity for regulatory 
consolidation. He testified there was little need for separate 
holding company regulation where the bank is small or where it 
is the holding company's only, or dominant, asset. 
``Elimination of a separate holding company regulator thus 
would eliminate duplication, promote simplicity and 
accountability, and reduce unnecessary compliance burden for 
institutions as well. The case is harder and more challenging 
for the very largest bank holding companies engaged in complex 
capital market activities, especially where the company is 
engaged in many, or predominantly, nonbanking activities, such 
as securities and insurance.'' In those cases, Dugan 
recommended maintaining the role of the Board as the holding 
company supervisor.\71\
---------------------------------------------------------------------------
    \71\Id.
---------------------------------------------------------------------------
    In his September 2009 testimony, Baily echoed Dugan's 
remarks that there was no good case for the Board to continue 
to supervise smaller bank holding companies. That regulation 
should be moved to the prudential regulator. Indeed public data 
from the banking regulators from year end 2009 demonstrate that 
in almost all instances of banking organizations with less than 
$50 billion in assets, the vast majority of assets are in the 
depository institution. According to Federal Reserve Board 
Governor Daniel Tarullo, ``When a bank holding company is 
essentially a shell, with negligible activities or ownership 
stakes outside the bank itself, holding company regulation can 
be less intensive and more modest in scope.''\72\
---------------------------------------------------------------------------
    \72\Testimony of Daniel Tarullo to the Banking Committee, August 4, 
2009.
---------------------------------------------------------------------------
    Title III adopts a number of these recommendations for 
consolidating bank supervision to enhance the accountability of 
individual regulators, reduce the opportunities for depository 
institutions to shop for the most lenient regulator, reduce 
regulatory gaps in supervision, and limit inefficiencies, 
duplication and needless regulatory burdens on the industry. 
Title III does so by abolishing the OTS in accordance with the 
Administration's financial reform proposal.

Abolishing the OTS

    The OTS is responsible for regulating state and federal 
thrifts, as well as their holding companies.\73\ The thrift 
charter suffered disproportionate losses during the financial 
crisis. According to FDIC data, 95 percent of failed 
institution assets in 2008 were attributable to thrifts 
regulated by the OTS. These losses were predominantly 
attributed to the failures of Washington Mutual and Indy Mac 
Bank.\74\ From the start of 2008 through the present, 73 
percent of failed institution assets were attributable to 
thrifts regulated by the OTS, even though the agency supervised 
only 12 percent of all bank and thrift assets at the beginning 
of this period.
---------------------------------------------------------------------------
    \73\The OTS currently regulates 694 federal thrifts and 63 state 
thrifts.
    \74\In its reports of the Washington Mutual and IndyMac failures, 
the inspectors general offices of the Treasury and FDIC cited numerous 
shortcomings with OTS supervision. With over $300 billion in total 
assets, Washington Mutual was OTS's largest regulated institution and 
represented as much as 15 percent of OTS's total assessment revenue 
from 2003 to 2008. The inspectors general found that, despite the 
multiple findings by OTS examiners of weaknesses at Washington Mutual, 
the OTS consistently gave the bank a high composite rating (CAMELS--
capital, assets, management, earnings, liquidity, and sensitivity to 
risk) and Washington Mutual was thus considered well-capitalized until 
its closure. They further concluded that OTS did not adequately ensure 
that the thrift's management corrected examiner-identified weaknesses, 
that the agency failed to take formal enforcement action until it was 
too late, and that the OTS never instituted corrective measures under 
``prompt corrective action'' (PCA) to minimize losses to the Deposit 
Insurance Fund because the OTS never properly downgraded the bank's 
CAMELS rating that would have triggered PCA. Evaluation of Federal 
Regulatory Oversight of Washington Mutual Bank, Report No. EVAL-10-002, 
April 2010.
    In the case of IndyMac, the Treasury Inspector General found that 
the OTS did not identify or sufficiently address the core weaknesses 
that ultimately caused the thrift to fail until it was too late. As in 
the case of Washington Mutual, the Inspector General found that the OTS 
gave IndyMac inflated CAMELS ratings, and, that it failed to follow up 
with bank management to ensure that corrective actions were taken. The 
Inspector General also found that the OTS waited too long to bring an 
enforcement action against the bank. Material Loss Review of IndyMac 
Bank, FSB (OIG-09-032).
---------------------------------------------------------------------------
    In its White Paper on reforming the financial regulatory 
system, the Administration argues that advances in the 
financial services industry have decreased the need for federal 
thrifts as a specialized class of depository institutions 
focused on mortgage lending.\75\ Additionally, the White Paper 
points out that the thrift charter ``created opportunities for 
private sector arbitrage'' of the regulatory system and that 
its focus on residential mortgage lending made it particularly 
susceptible to the housing downturn.\76\ The fragility of the 
charter is borne out by the statistics, including the fact that 
total assets of OTS-supervised thrifts declined by 36 percent 
between 2006 and 2009, compared to an increase of 11 percent in 
all FDIC-insured banks and thrifts for the same time period.
---------------------------------------------------------------------------
    \75\``Financial Regulatory Reform: A New Foundation'', June 2009.
    \76\Id. The OTS was also the consolidated supervisor of AIG because 
AIG was a thrift holding company. To date, AIG's failure has cost the 
U.S.government over $180 billion.
---------------------------------------------------------------------------
    Thus the bill does not permit the chartering of any new 
federal thrifts and disbands the OTS. Title III apportions the 
responsibility to regulate thrifts and thrift holding companies 
among the FDIC, the OCC and the Federal Reserve, and ensures 
that all OTS employees are transferred to the FDIC and the OCC.
Consolidating Federal Supervision of State Banks and Smaller Bank 
        Holding Companies
    It also consolidates federal supervision for state banks in 
the FDIC. As of yearend 2009, the FDIC regulated 4,941 state 
banks ranging in size from less than one billion dollars in 
assets to more than $100 billion in assets, compared to the 844 
banks the Federal Reserve supervised. In addition to the state 
banks the FDIC supervises, the agency has on-site dedicated 
examiners at the largest banks. The FDIC also conducts targeted 
supervisory activities at specific Federal Reserve regulated 
banks over $10 billion. These institutions present complex risk 
profiles and activities and operations that include 
international operations, securitization activities, and 
trading books with material derivatives exposures. Thus, the 
FDIC has ample experience in supervising banks of all sizes, 
including large, complex organizations.
    And Title III gives the prudential regulators--the FDIC and 
the OCC--the responsibility for supervising the holding 
companies of smaller, less complex organizations where nearly 
all of the assets in the holding companies are concentrated in 
the depository institutions these agencies already regulate. 
The Board, however, will retain its supervisory responsibility 
for the larger bank holding companies and for the larger thrift 
holding companies, thus ensuring that the Board continues to 
have a window into day-to-day supervision.
Focusing the Federal Reserve System on its Core Functions
    The crisis exposed the shortcomings of the Federal Reserve 
System--mainly that it has too many responsibilities to execute 
well.\77\\78\ Currently, the Federal Reserve is responsible for 
conducting monetary policy, policing the payment system, 
serving as the lender of last resort, supervising state member 
banks, regulating all bank holding companies, and writing most 
of the consumer financial protection rules.
---------------------------------------------------------------------------
    \77\The Committee heard testimony about the failures of the Federal 
Reserve in executing its consumer protection functions, as well as in 
identifying the risks in bank holding companies. Martin Eakes, CEO of 
Self-Help and CEO of the Center for Responsible Lending, testified to 
the Committee in November 2008, ``The Board has been derelict in the 
duty to address predatory lending practices. In spite of the rampant 
abuses in the subprime market and all the damage imposed on consumers 
by predatory lending--billions of dollars in lost wealth--the Board has 
never implemented a single discretionary rule under HOEPA outside of 
the high cost context. To put it bluntly, the Board has simply not done 
its job.''
    \78\Speaking to its failures in identifying risk, Orice Williams, 
Director of Financial Markets and Community Investment at the 
Government Accountability Office, testified to the Committee in March 
2009, ``Although for some period, the Federal Reserve analyzed 
financial stability issues for systemically important institutions it 
supervises, it did not assess the risks on an integrated basis or 
identify many of the issues that just a few months later led to the 
near failure of some of these institutions and to severe instability in 
the overall financial system.''
---------------------------------------------------------------------------
    Chairman Dodd and other members of the Committee repeatedly 
expressed concerns during hearings about the many 
responsibilities of the Federal Reserve and about the need to 
preserve the Federal Reserve's primary focus on its core 
function of monetary policy. The Chairman also expressed 
concerns that so many diverse functions could ultimately 
threaten the independence of the Federal Reserve's monetary 
policy. Chairman Dodd said, ``Some have expressed a concern--
which I share, by the way--about overextending the Fed when 
they have not properly managed their existing authority, 
particularly in the area of protecting consumers.''\79\ The 
Chairman also said, ``I worry that over the years loading up 
the Federal Reserve with too many piecemeal responsibilities 
has left important duties without proper attention and exposed 
the Fed to dangerous politicization that threatens the very 
independence of this institution.''\80\ Ranking Member Shelby 
stated, ``The Federal Reserve already handled monetary policy, 
bank regulation, holding company regulation, payment systems 
oversight, international banking regulation, consumer 
protection, and the lender-of-last-resort function. These 
responsibilities conflict at times, and some receive more 
attention than others. I do not believe that we can reasonably 
expect the Fed or any other agency [to] effectively play so 
many roles.''\81\
---------------------------------------------------------------------------
    \79\Statement of Chairman Chris Dodd, hearing of the Banking 
Committee, 12/3/09.
    \80\Statement of Chairman Chris Dodd, hearing of the Banking 
Committee, 2/4/09.
    \81\Ranking Member Richard Shelby, Banking Committee hearing, 6/18/
09.
---------------------------------------------------------------------------
    In response to a question from Ranking Member Shelby, 
Former Federal Reserve Chairman Paul Volcker agreed that the 
Federal Reserve's conduct of monetary policy could be 
undermined if the Fed assumed additional responsibilities.\82\ 
Chairman Volcker further testified, ``You will have a different 
Federal Reserve if the Federal Reserve is going to do the main 
regulation or all the regulation from a prudential standpoint. 
And you'll have to consider whether that's a wise thing to do, 
given their primary--what's considered now their primary 
responsibilities for monetary policy. They obviously have 
important regulatory functions now, and maybe those functions 
have not been pursued with sufficient avidity all the time. But 
if you're going to give them the whole responsibility, for 
which there are arguments, I do think you have to consider 
whether that's consistent with the degree of independence that 
they have to focus on monetary policy.''\83\
---------------------------------------------------------------------------
    \82\Banking Committee hearing, ``Modernizing The U.S. Financial 
Regulatory System,'' 2/4/09.
    \83\Testimony of Former Federal Reserve Board Chairman Paul Volcker 
to the Banking Committee, February 9, 2009.
---------------------------------------------------------------------------
    To narrow the focus of the Federal Reserve to its core 
functions, the bill strips it of its consumer protection 
functions,\84\ and its role in supervising a relatively small 
number of state banks, as well as smaller bank holding 
companies. However, the Committee was persuaded that because of 
the Federal Reserve's expertise and its other unique functions, 
it should play an expanded role in maintaining financial 
stability.\85\ Thus, Title III assigns the Federal Reserve the 
responsibility for the supervision of bank and thrift holding 
companies with assets over $50 billion. (Other aspects of the 
bill that address financial stability enhance the Federal 
Reserve's oversight of systemically important payment systems, 
direct the Federal Reserve to apply heightened prudential 
standards to large bank holding companies, and give the Federal 
Reserve supervisory responsibilities over designated nonbank 
financial companies.) To ensure the Federal Reserve can focus 
on these and its other essential responsibilities, the bill 
assigns the regulation of state member banks and smaller bank 
holding companies to other federal regulators. The bill 
therefore strikes an important balance in providing the Federal 
Reserve with enhanced authority to maintain financial 
stability, while at the same time, reducing its 
responsibilities for areas that are not central to its mission.
---------------------------------------------------------------------------
    \84\In proposing to take away the Federal Reserve's authority to 
write and enforce consumer protection rules Secretary Geithner called 
this authority a ``preoccupation and distraction'' for the Federal 
Reserve in testimony to the Banking Committee, June 18, 2009.
    Martin Baily, Senior Fellow of Economic Studies at the Brookings 
Institution, stated in testimony during a hearing in September 2009 
that the Federal Reserve Board's added focus on consumer protection 
took time from properly doing the rest of its job: ``I think the thing 
that the Federal Reserve has done well is monetary policy . . . they 
certainly haven't done a great job on prudential regulation and I don't 
see--what is the point of the Chairman of the Federal Reserve sitting 
around worrying about details of credit card regulation? That is what 
he is doing right now, and I think that is a mistake and not a good use 
of his time.''
    \85\``The Fed has several missions, and monetary policy is the 
primary one,'' said Alice Rivlin, a Brookings Institution scholar and 
former Fed vice chairman. ``But they also have a mission to stabilize 
the banking system, and we're in the process of expanding our view of 
what the banking system is.'' Washington Post, 7/17/08.
---------------------------------------------------------------------------
    Finally, it should be noted that Title III leaves intact 
the Federal Reserve's ability to obtain information needed for 
the conduct of monetary policy. Section 11 of the Federal 
Reserve Act gives the Board of Governors authority to require 
any depository institution to provide ``such reports of its 
liabilities and assets as the Board may determine to be 
necessary or desirable to enable the Board to discharge its 
responsibility to monitor and control monetary and credit 
aggregates.'' This information may be obtained from any bank, 
savings and loan association, or credit union, and does not 
depend on the chartering agency or regulator of the depository. 
In addition, section 21 of the Federal Reserve Act provides 
that the Board may conduct special examinations of any Federal 
Reserve member bank. Members include all national banks and 
state banks that elect to become members of their district 
Federal Reserve bank. These provisions of the Federal Reserve 
Act remain unchanged. Therefore the Federal Reserve will retain 
extensive powers to gather the data it needs to conduct 
monetary policy, including data from banks that it does not 
supervise.
REGULATION OF OVER-THE-COUNTER DERIVATIVES AND SYSTEMICALLY SIGNIFICANT 
        PAYMENT, CLEARING, AND SETTLEMENT FUNCTIONS
          Making derivatives safer is a very important part of 
        solving too-big-to-fail.\86\--Chairman Ben Bernanke
---------------------------------------------------------------------------
    \86\Testimony of Ben Bernanke, Federal Reserve Board Chairman, to 
the Senate Banking Committee, 12/3/09.

    Many factors led to the unraveling of this country's 
financial sector and the government intervention to correct it, 
but a major contributor to the financial crisis was the 
unregulated over-the-counter (``OTC'') derivatives market. 
Derivatives can trade either over-the-counter where contracts 
are often customized and privately negotiated between 
counterparties, or through regulated central clearinghouses and 
exchanges that establish rules for trading contracts among many 
different counterparties.
    Massive growth in bilateral, unregulated derivatives 
trading: At the time of the crisis in December, 2008, the 
global over-the-counter derivatives market stood at $592 
trillion.\87\ The top five derivatives dealers in the United 
States accounted for 96 percent of outstanding over-the-counter 
contracts made by the leading bank holding companies, according 
to the OCC. As such, this market was dominated by the too-big-
to-fail financial companies that trade derivatives with 
financial and non-financial users. The dangers posed by the OTC 
derivatives market have been known for many years. In 1994, the 
GAO produced a report, titled, ``Financial Derivatives: Actions 
Needed to Protect the Financial System.'' At the time of their 
report, the GAO determined the size of the derivatives market 
to be $12.1 trillion. Included in GAO's findings in 1994 were 
concerns about risks to taxpayers arising from the 
interconnectedness between dealers and end users: ``the rapid 
growth and increasing complexity of derivatives activities 
increase risks to the financial system, participants, and U.S. 
taxpayers;'' and ``relationships between the 15 major U.S. 
dealers that handle most derivatives activities, end users, and 
the exchange-traded markets makes the failure of any one of 
them potentially damaging to the entire financial market.''\88\ 
By the time of the 2008 crisis, the derivatives market had 
grown to be almost fifty times as large from when GAO raised a 
red flag. Much of this growth has been attributed to the 
Commodities Futures Modernization Act of 2000 which explicitly 
exempted OTC derivatives, to a large extent, from regulation by 
the Commodity Futures Trading Commission (``CFTC'') and limited 
the SEC's authority to regulate certain types of OTC 
derivatives. By 2008, 59 percent of derivatives were traded 
over-the-counter, or away from regulated exchanges, compared to 
41 percent in 1998.
---------------------------------------------------------------------------
    \87\Bank for International Settlements, press release, 5/19/09.
    \88\U.S. Government Accountability Office, ``Financial Derivatives: 
Actions Needed to Protect the Financial System,'' GGD-94-133 May 18, 
1994.
---------------------------------------------------------------------------
    According to the Obama Administration, ``the downside of 
this lax regulatory regime . . . became disastrously clear 
during the recent financial crisis . . . many institutions and 
investors had substantial positions in credit default swaps--
particularly tied to asset backed securities . . . excessive 
risk taking by AIG and certain monoline insurance companies 
that provided protection against declines in the value of such 
asset backed securities, as well as poor counterparty credit 
risk management by many banks, saddled our financial system 
with an enormous--and largely unrecognized--level of risk.'' 
``[T]he sheer volume of these contracts overwhelmed some firms 
that had promised to provide payment on the CDS and left 
institutions with losses that they believed they had been 
protected against. Lacking authority to regulate the OTC 
derivatives market, regulators were unable to identify or 
mitigate the enormous systemic threat that had developed.''\89\
---------------------------------------------------------------------------
    \89\Obama Administration white paper, Financial Regulatory Reform: 
A New Foundation, June 2009.
---------------------------------------------------------------------------
    OTC contracts can be more flexible than standardized 
contracts, but they suffer from greater counterparty and 
operational risks and less transparency. Information on prices 
and quantities is opaque. This can lead to inefficient pricing 
and risk assessment for derivatives users and leave regulators 
ill-informed about risks building up throughout the financial 
system. Lack of transparency in the massive OTC market 
intensified systemic fears during the crisis about interrelated 
derivatives exposures from counterparty risk. These 
counterparty risk concerns played an important role in freezing 
up credit markets around the failures of Bear Stearns, AIG, and 
Lehman Brothers.
    Hidden leverage due to under-collateralization: Although 
over-the-counter derivatives can be used to manage risk and 
increase liquidity, they also increase leverage in the 
financial system; traders can take large speculative positions 
on a relatively small capital base because there are no 
regulatory requirements for margin or capital. The ability of 
derivatives to hide leverage was evident in problems faced by 
financial companies such as Bear Stearns and Lehman as well as 
non-financial derivatives participants such as the government 
of Greece--Chairman Gensler recently stated that higher capital 
requirements for derivatives would have prevented Greece from 
using currency swaps to hide debt.\90\ When users negotiate 
margin bilaterally, they ``will act in their own interest to 
manage their risk. These actions may not take into account the 
spillover risk throughout the system.''\91\ For example, the 
markets generally considered AIG Financial Products (``AIGFP'') 
an extremely low risk counterparty because its parent company 
was rated AAA. This high rating allowed AIGFP to hold lower 
capital/margin against its derivatives portfolio. Had market 
participants or regulators demanded more capital, the company 
would have had less incentive to enter into such large 
positions as the projected return on investment would have been 
lower. Even if AIGFP had such large positions, the company 
would have had more funds to apply to the losses. Had 
information been more readily available to regulators and 
counterparties about the scope of AIGFP's credit default swap 
positions, regulators and market participants might have 
detected the systemic implications of AIGFP's book.
---------------------------------------------------------------------------
    \90\Associated Press, U.S. Warns EU Derivatives Ban Won't Work, 3/
16/10.
    \91\Acharya, et al., The Ultimate Financial Innovation, 2008.
---------------------------------------------------------------------------
    The dangers of under-collateralization were recently 
identified by the International Monetary Fund (``IMF'') and the 
Wall Street Journal:

          The main risk posed by this gigantic pool is the 
        hidden leverage. Put simply, a bank may have a large 
        derivatives position but avoid posting cash upfront 
        with its trading partner as others do.
          This ``under-collateralization'' makes the system 
        prone to runs because, when instability arrives, all 
        banks rush to collect what they are owed on 
        derivatives--and try to delay paying out what they 
        themselves owe. Witness the Lehman Brothers collapse. 
        And the numbers aren't small.
          On Tuesday, the International Monetary Fund released 
        a paper estimating that five large U.S. derivatives 
        dealers were potentially under-collateralized by 
        between $500 billion and $275 billion as of September 
        2009. The IMF gets to that range using firms' net 
        derivatives liabilities, a figure showing how much 
        banks owe on derivatives trades adjusted for netting 
        and collateral posting.
          Putting nearly all derivatives through 
        clearinghouses, with tough margin rules, could do away 
        with most of the under-collateralization. The IMF says 
        getting there could be very costly for the banks. But 
        consider it a bill they should have paid years ago.\92\
---------------------------------------------------------------------------
    \92\Wall Street Journal, 4/13/10.

    Counterparty credit exposure in the derivatives market was 
largely seen as a source of systemic risk during the failures 
of both Bear Stearns and Lehman Brothers, and would have 
brought down AIG but for a massive collateral payment made with 
taxpayer money. It created the dangerous interconnections that 
spread and amplified risk across the entire financial system. 
More collateral in the system, through margin requirements, 
will help protect taxpayers and the economy from bailing out 
companies' risky derivatives positions in the future. In 
testimony before the Senate Banking Committee, Federal Reserve 
Chairman Bernanke described margin requirements for derivatives 
users as ``an appropriate cost of protecting against 
counterparty risk.''\93\
---------------------------------------------------------------------------
    \93\Chairman Bernanke, Senate Banking Committee testimony, 12/3/09.
---------------------------------------------------------------------------
    Need to reduce systemic risk build-up and risk transmission 
in the derivatives market: Chairman Gensler of the Commodity 
Futures Trading Commission described the flaws of bilaterally-
negotiated margin as follows: ``Even though individual 
transactions with a financial counterparty may seem 
insignificant, in aggregate, they can affect the health of the 
entire system.''\94\ ``One of the lessons that emerged from 
this recent crisis was that institutions were not just `too big 
to fail,' but rather too interconnected as well. By mandating 
the use of central clearinghouses, institutions would become 
much less interconnected, mitigating risk and increasing 
transparency. Throughout this entire financial crisis, trades 
that were carried out through regulated exchanges and 
clearinghouses continued to be cleared and settled.''\95\
---------------------------------------------------------------------------
    \94\Chairman Gensler, Senate Agriculture Committee testimony, 11/
18/09.
    \95\Chairman Gensler, Senate Banking Committee testimony, 6/22/09.
---------------------------------------------------------------------------
    In July of 2008, during a hearing on derivatives regulation 
before the Senate Banking Committee, Patrick Parkinson, deputy 
director of the Division of Research and Statistics for the 
Board of Governors of the Federal Reserve System, testified to 
the danger present in the OTC derivatives market: ``weaknesses 
in the infrastructure for the credit derivatives markets and 
other OTC derivatives markets have created operational risks 
that could undermine the effectiveness of counterparty risk-
management practices.''\96\ In June of 2009, A. Patricia White, 
the associate director of the Division of Research and 
Statistics for the Board of Governors of the Federal Reserve 
System, testified about unregulated derivatives' ability to 
spread harm through the system and the need to combat such 
risk. Ms. White said, ``OTC derivatives appear to have 
amplified or transmitted shocks. An important objective of 
regulatory initiatives related to OTC derivatives is to ensure 
that improvements to the infrastructure supporting these 
products reduce the likelihood of such transmissions and make 
the financial system as a whole more resilient to future 
shocks. Centralized clearing of standardized OTC products is a 
key component of efforts to mitigate such systemic risk.''\97\ 
While the systemic risk presented by the unregulated OTC 
derivatives market has long been known, it was realized in 2008 
with devastating consequences. Now it must be addressed to 
restore stability and confidence in the financial system.
---------------------------------------------------------------------------
    \96\Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the Senate Committee on Banking, Housing, and Urban 
Affairs, 7/9/08.
    \97\Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the Senate Committee on Banking, Housing, and Urban 
Affairs, 6/22/09.
---------------------------------------------------------------------------

Creating a Safer Derivatives Market to Protect Taxpayers Against Future 
        Bailouts

    As a key element of reducing systemic risk and protecting 
taxpayers in the future, protections must include comprehensive 
regulation and rules for how the OTC derivatives market 
operates. Increasing the use of central clearinghouses, 
exchanges, appropriate margining, capital requirements, and 
reporting will provide safeguards for American taxpayers and 
the financial system as a whole.
    Under Title VII, for the first time, over-the-counter 
derivatives will be regulated by the SEC and the CFTC, more 
transactions will be required to clear through central clearing 
houses and trade on exchanges, un-cleared swaps will be subject 
to margin requirements, swap dealers and major swap 
participants will be subject to capital requirements, and all 
trades will be reported so that regulators can monitor risks in 
this vast, complex market. Under Title VIII, the Federal 
Reserve will be granted the authority to regulate and examine 
systemically important payment, clearing, and settlement 
functions. The overall result would be reduced costs and risks 
to taxpayers, end users, and the system as a whole. The 
language in these titles is based on proposals drafted by the 
Obama Administration and includes all of the key regulatory 
features for derivatives market reform that have been endorsed 
by the G20: more central clearing, exchange trading, capital, 
margin, and transparency.

        G20 Steering Group Letter, 3/31/10: ``Standardized 
        over-the-counter derivatives contracts should be traded 
        on exchanges or electronic platforms, where 
        appropriate, cleared through central clearing 
        counterparties by 2012 at the latest, and reported to 
        trade repositories.''\98\
---------------------------------------------------------------------------
    \98\G20 Steering Group Letter, 3/31/10.

        G20 Leaders' Statement, The Pittsburgh Summit, 9/25/09: 
        ``Improving over-the-counter derivatives markets: All 
        standardized OTC derivative contracts should be traded 
        on exchanges or electronic trading platforms, where 
        appropriate, and cleared through central counterparties 
        by end-2012 at the latest. OTC derivative contracts 
        should be reported to trade repositories. Non-centrally 
        cleared contracts should be subject to higher capital 
        requirements. We ask the FSB and its relevant members 
        to assess regularly implementation and whether it is 
        sufficient to improve transparency in the derivatives 
        markets, mitigate systemic risk, and protect against 
        market abuse.''\99\
---------------------------------------------------------------------------
    \99\G20 Leaders' Statement, The Pittsburgh Summit, 9/25/09, http://
www.pittsburghsummit.gov/mediacenter/129639.htm.

    The combination of these new regulatory tools will provide 
market participants and investors with more confidence during 
times of crisis, taxpayers with protection against the need to 
pay for mistakes made by companies, derivatives users with more 
price transparency and liquidity, and regulators with more 
information about the risks in the system.
    Central clearing, margin, and capital requirements as a 
systemic risk management tool: ``The main tool for regulating 
contagion and systemic risk is liquidity reserves 
(margin).''\100\ In the OTC market, margin requirements are set 
bilaterally and do not take account of the counterparty risk 
that each trade imposes on the rest of the system, thereby 
allowing systemically important exposures to build up without 
sufficient capital to mitigate associated risks. The problem of 
under-collateralization is especially apparent in bank 
transactions with non-financial firms and regulators should 
address this problem through the new margin requirements for 
uncleared derivatives established in the legislation. According 
to the Comptroller of the Currency, ``Banks held collateral 
against 64 percent of total net current credit exposure 
(``NCCE'') at the end of the third quarter. Bank credit 
exposures to banks/securities firms and hedge funds are very 
well secured. Banks hold collateral against 90 percent of their 
exposure to banks and securities firms, and 219 percent of 
their exposure to hedge funds. The high coverage of hedge fund 
exposures occurs because banks take `initial margin' on 
transactions with hedge funds, in addition to fully securing 
any current credit exposure. Coverage of corporate, monoline 
and sovereign exposures is much less.''\101\
---------------------------------------------------------------------------
    \100\Rama Conti, Columbia University, Credit Derivatives: Systemic 
Risk and Policy Options, 2009.
    \101\Comptroller of the Currency, Quarterly Report on Bank Trading 
and Derivatives Activities, 12/18/09.
---------------------------------------------------------------------------
    With appropriate collateral and margin requirements, a 
central clearing organization can substantially reduce 
counterparty risk and provide an organized mechanism for 
clearing transactions. For uncleared swaps, regulators should 
establish margin requirements. In addition, regulators should 
also impose capital requirements on swap dealers and major swap 
participants. While large losses are to be expected in 
derivatives trading, if those positions are fully margined 
there will be no loss to counterparties and the overall 
financial system and none of the uncertainty about potential 
exposures that contributed to the panic in 2008.
    Exchange trading as a price transparency mechanism: ``While 
central clearing would mitigate counterparty risk, central 
clearing alone is not enough. Exchange trading is also 
essential in order to provide price discovery, transparency, 
and meaningful regulatory oversight of trading and 
intermediaries,'' said Former CFTC Chairman Brooksley 
Born.\102\ Exchange trading can provide pre- and post-trade 
transparency for end users, market participants, and 
regulators. When swaps are executed on the basis of robust 
price information, rather than privately quoted, the cost of 
those transactions can be reduced over time. ``The relative 
opaqueness of the OTC market implies that bid/ask spreads are 
in many cases not being set as competitively as they would be 
on exchanges. This entails a loss in market efficiency,'' wrote 
Stanford University Professor Darrel Duffie.\103\ Trading more 
derivatives on regulated exchanges should be encouraged because 
it will result in more price transparency, efficiency in 
execution, and liquidity. In order to allow the OTC market to 
adapt to more exchange-trading, the legislation provides for 
``alternative swap execution facilities'' (``ASEF'') to fulfill 
the exchange-trading mandate. The absence of an exchange 
trading mandate provides ``supra-normal returns paid to the 
dealers in the closed OTC derivatives market [and] are 
effectively a tax on other market participants, especially 
investors who trade on open, public exchanges,'' according to 
International Risk Analytics co-founder Christopher 
Whalen.\104\ Resistance to price transparency in the financial 
markets has been overcome in the past, as noted by Duffie: 
``About 6 years ago, a post-trade reporting system known as 
TRACE was forced by U.S. regulation into the OTC markets for 
corporate and municipal bonds, which operate in a manner that 
is otherwise similar to the OTC derivatives markets. Dealers 
resisted the introduction of TRACE, claiming that more price 
transparency would reduce the incentives of dealers to make 
markets and in the end reduce market liquidity. So far, 
empirical evidence appearing in the academic literature has not 
given much support to these claims.''\105\
---------------------------------------------------------------------------
    \102\Former CFTC Chairman Brooksley Born, Joint Economic Committee 
testimony, 12/1/09.
    \103\Stanford University Professor Darrel Duffie, The Road Ahead 
for the Fed, 2009.
    \104\International Risk Analytics co-founder Christopher Whalen, 
Senate Banking Committee testimony, 6/22/09.
    \105\Stanford University Professor Darrel Duffie, Pew Research, 
2009.
---------------------------------------------------------------------------
    Allow for some customized, bilateral contracts: Some parts 
of the OTC market may not be suitable for clearing and exchange 
trading due to individual business needs of certain users. 
Those users should retain the ability to engage in customized, 
uncleared contracts while bringing in as much of the OTC market 
under the centrally cleared and exchange-traded framework as 
possible. Also, OTC (contracts not cleared centrally) should 
still be subject to reporting, capital, and margin requirements 
so that regulators have the tools to monitor and discourage 
potentially risky activities, except in very narrow 
circumstances. These exceptions should be crafted very narrowly 
with an understanding that every company, regardless of the 
type of business they are engaged in, has a strong commercial 
incentive to evade regulatory requirements. ``Every firm has 
reasons why its contracts are `exceptional' and should trade 
privately; in reality, most derivatives contracts are 
standardized--or standardizable--and could trade on 
exchanges,'' said Joe Dear, Chief Investment Officer of the 
California Public Employees' Retirement System.\106\
---------------------------------------------------------------------------
    \106\Chief Investment Officer of the California Public Employees' 
Retirement System Joe Dear, National Press Club speech, 11/3/09.
---------------------------------------------------------------------------
    Therefore, the legislation permits regulators to exempt 
contracts from the clearing and exchange trading requirement 
based on these narrow criteria: one counterparty is not a swap/
security-based swap dealer or major swap/security-based swap 
participant and does not meet the eligibility requirements of a 
clearinghouse. If no clearinghouse, board of trade, exchange, 
or alternative swap execution facility accepts the contract for 
clearing or trading, then the contract must be exempt from the 
clearing and exchange trading requirements. The regulators may 
also exempt swaps from the margin requirement for uncleared 
swaps under the following narrow criteria: one counterparty is 
not a swap/security-based swap dealer or major swap/security-
based swap participant, using the swap as part of an effective 
hedge under generally accepted accounting principles, and 
predominantly engaged in activities that are not financial in 
nature. Regulators must notify the Financial Stability 
Oversight Council before issuing any permissive exemptions.
    In providing exemptions, regulators should minimize making 
distinctions between the types of firms involved in the market 
or the types of products the firms are engaged in and instead 
evaluate the nature of the firm's derivatives activity: ``[T]wo 
complementary regulatory regimes must be implemented: one 
focused on the dealers that make the markets in derivatives and 
one focused on the markets themselves--including regulated 
exchanges, electronic trading systems and clearing houses . . . 
These two regimes should apply no matter which type of firm, 
method of trading or type of derivative or swap is involved,'' 
testified Chairman Gensler.\107\ To achieve the objectives of 
regulatory reform in the OTC market,``it is critical that 
similar products and activities be subject to similar 
regulations and oversight.''\108\ In determining whether to 
bring non-swap dealers into the regulatory framework, 
regulators should focus on counterparty credit exposure. It was 
counterparty credit risk that played a critical role in 
exacerbating the 2008 crisis. Regulators would measure credit 
exposure by evaluating the value of collateral held against 
such exposure. According to the Office of the Comptroller of 
the Currency, ``the first step to measuring credit exposure in 
derivative contracts involves identifying those contracts where 
a bank would lose value if the counterparty to a contract 
defaulted today . . . A more risk sensitive measure of credit 
exposure would also consider the value of collateral held 
against counterparty exposures.''\109\
---------------------------------------------------------------------------
    \107\Chairman Gensler, Senate Banking Committee testimony, 6/22/09.
    \108\Obama Administration white paper, Financial Regulatory Reform: 
A New Foundation, June 2009.
    \109\Comptroller of the Currency, Quarterly Report on Bank Trading 
and Derivatives Activities, 12/18/09.
---------------------------------------------------------------------------

INVESTOR PROTECTION

    Title IX addresses a number of securities issues, including 
provisions that respond to significant aspects of the financial 
crisis caused by poor securitization practices (Subtitle D); 
erroneous credit ratings (Subtitle C); ineffective SEC 
regulation of Madoff Securities, Lehman Brothers and other 
firms (Subtitle F); and executive compensation practices that 
promoted excessive risk-taking (Subtitle E). In connection with 
the crisis, concerns have also been raised that investors need 
more protection; shareholders need a greater voice in corporate 
governance; the SEC needs more authority; the SEC should be 
self-funded; and the municipal securities markets need improved 
regulation, which are addressed here as well.
    Significant aspects of the financial crisis involved 
securities. Serious and far reaching problems were caused by 
poor and risky securitization practices; erroneous credit 
ratings; ineffective SEC regulation of investment banks such as 
Lehman Brothers and broker dealers such as Madoff; and 
excessive compensation incentives that promoted excessive risk 
taking. During the crisis, it became apparent that investors 
needed better protection, shareholders needed more voice in 
corporate governance, the municipal securities markets needed 
improved regulation, and the SEC needs assistance. Title IX 
addresses these and other investor protection and related 
securities issues.
    Credit ratings that vastly understated the risks of complex 
mortgage-backed securities encouraged the build-up of excessive 
leverage and credit risk throughout the financial system in the 
years before the crisis. With the onset of the crisis, the 
ratings of many mortgage-backed bonds were sharply downgraded, 
fuelling widespread uncertainty about asset values and 
amplifying problems in residential mortgage markets into a 
global financial panic. The rating agencies' errors can be 
attributed to overreliance on mathematical risk models based on 
inadequate data and to conflicts of interest in the process of 
rating complex structured securities, where the rating agencies 
actually advised the issuers on how to obtain AAA ratings, 
without which the securities could not have been sold.
    This legislation will improve the regulation and 
performance of credit rating agencies by enhancing SEC 
oversight authority and requiring more robust internal 
supervision of the ratings process. In addition, rating 
agencies will be required to disclose more data about 
assumptions and methodologies underlying ratings, in order to 
permit investors to better understand credit ratings and their 
limitations. Due diligence investigations into the facts 
underlying ratings will be encouraged. Rating agencies will be 
held accountable for failures to produce ratings with 
integrity, both by allowing the SEC to suspend rating agencies 
that consistently fail to produce accurate ratings and by 
lowering the pleading standard for private lawsuits alleging 
that a rating agency knowingly or recklessly failed to conduct 
a reasonable investigation of the factual elements of the rated 
security, or failed to obtain reasonable verification of such 
factual elements from independent sources that it considered to 
be competent. Finally, the legislation requires financial 
regulators to review and remove unnecessary references to 
credit ratings in their regulations.
    Excesses and abuses in the securitization process played a 
major role in the crisis. Under the ``originate to distribute'' 
model, loans were made expressly to be sold into securitization 
pools, which meant that the lenders did not expect to bear the 
credit risk of borrower default. This led to significant 
deterioration in credit and loan underwriting standards, 
particularly in residential mortgages. Moreover, investors in 
asset-backed securities could not assess the risks of the 
underlying assets, particularly when those assets were 
resecuritized into complex instruments like collateralized debt 
obligations. With the onset of the crisis, there was widespread 
uncertainty regarding the true financial condition of holders 
of asset-backed securities, freezing interbank lending and 
constricting the general flow of credit. Complexity and opacity 
in securitization markets prolonged and deepened the crisis, 
and have made recovery efforts much more difficult.
    This title requires securitizers to retain an economic 
interest in a material portion of the credit risk for any asset 
that securitizers transfer, sell, or convey to a third party. 
This ``skin in the game'' requirement will create incentives 
that encourage sound lending practices, restore investor 
confidence, and permit securitization markets to resume their 
important role as sources of credit for households and 
businesses.
    Congress is empowering shareholders in a public company to 
have a greater voice on executive compensation and to have more 
fairness in compensation affairs. Under the new legislation, 
each publicly traded company would give its shareholders the 
right to cast advisory votes on whether they approve of its 
executive compensation. The board committee that sets 
compensation policy would consist only of directors who are 
independent. The company would tell shareholders about the 
relationship between the executive compensation it paid and its 
financial performance. The company would be required to have a 
policy to recover money that it erroneously paid to executives 
based on financials that later had to be restated due to an 
accounting error.
    Management nominees for directors of public companies could 
generally serve on the board only if they won a majority of the 
votes in an uncontested election. Also, the S.E.C. would have 
the authority to allow shareholders to have more power in 
governing the public companies in which they own stock. If the 
S.E.C. gives shareholders proxy access, a shareholder who has 
owned an amount of stock for a period of time, as specified by 
the S.E.C., could choose a candidate to nominate for election 
to the board of directors on the company's proxy.
    Investors would have new sources of assistance. The new 
Office of Investor Advocate housed within the SEC would help 
retail investors with problems they have with the SEC or self-
regulatory organizations. Securities broker-dealers, such as 
Bernard L. Madoff Investment Securities, would have to use 
auditors that are subject to the inspections and discipline by 
a rigorous regulator, the Public Company Accounting Oversight 
Board, which would better protect investor accounts. Larger 
investors would have to post margin collateral based on the net 
positions in their securities and futures portfolio. An 
Investment Advisory Committee is created in the law to give 
advice to the SEC from its members, which would include 
representatives of mutual fund, stock and bond investors, 
senior citizens, State securities regulators, and others. The 
law increases the amount of money available to the Securities 
Investor Protection Corporation to pay off valid claims of 
customers of defunct broker-dealers.
    The SEC would get more power, assistance and money at its 
disposal to be an effective securities markets regulator. The 
SEC would have new authority to impose limitation on mandatory 
arbitration; to bar someone who violated the securities laws 
while working for one type of registered securities firm, such 
as a broker-dealer, from working for other types of securities 
firms, such as investment advisers; to require that securities 
firms give new disclosures to investors before they buy 
investment products. The SEC would have more help in 
identifying securities law violations through a new, robust 
whistleblower program designed to motivate people who know of 
securities law violations to tell the SEC. It also expands 
existing whistleblower law. In light of recent failures of the 
SEC, the GAO will also provide assistance through studies and 
recommendations to improve the agency's internal supervisory 
controls, management and financial controls. The SEC has asked 
to be unfettered by the Congressional appropriation process and 
the new law would allow the agency to be self-funded.
    A major lesson from the crisis is the importance of 
transparency in financial markets. The $3 trillion municipal 
securities market is subject to less supervision than corporate 
securities markets, and market participants generally have less 
information upon which to base investment decisions. During the 
crisis, a number of municipalities suffered losses from complex 
derivatives products that were marketed by unregulated 
financial intermediaries. This title requires a range of 
municipal financial advisors to register with the SEC and 
comply with regulations issued by the Municipal Securities 
Rulemaking Board (MSRB). The composition of the MSRB will be 
changed so that representatives of the public--including 
investors and municipalities--make up a majority of the board. 
In addition, the title establishes an Office of Municipal 
Securities within the SEC and contains a number of studies on 
ways to improve disclosure, accounting standards, and 
transparency in the municipal bond market.

REGULATION OF PRIVATE FUNDS

    Title IV requires advisers to large hedge funds to register 
with the Securities and Exchange Commission, in order to close 
a significant gap in financial regulation. Because hedge funds 
are currently unregulated, no precise data regarding the size 
and scope of hedge fund activities are available, but the 
common estimate is that the funds had at least $2 trillion in 
capital before the crisis. Their impact on the financial system 
can be magnified by extensive use of leverage--their trades can 
move markets. While hedge funds are generally not thought to 
have caused the current financial crisis, information regarding 
their size, strategies, and positions could be crucial to 
regulatory attempts to deal with a future crisis. The case of 
Long-Term Capital Management, a hedge fund that was rescued 
through Federal Reserve intervention in 1998 because of 
concerns that it was ``too-interconnected-to-fail,'' shows that 
the activities of even a single hedge fund may have systemic 
consequences.
    Hedge fund registration was part of the Treasury's 
Department's regulatory reform proposal, and has been endorsed 
by many witnesses before the Committee, including Mr. James 
Chanos, Chairman of the Coalition of Private Investment 
Companies, who testified that ``private funds (or their 
advisers) should be required to register with the SEC. . . . 
Registration will bring with it the ability of the SEC to 
conduct examinations and bring administrative proceedings 
against registered advisers, funds, and their personnel. The 
SEC also will have the ability to bring civil enforcement 
actions and to levy fines and penalties for violations.''\110\ 
Other supporters of the title include a range of industry 
groups, institutional investors, the Group of Thirty, the G-20, 
and the Investors' Working Group.
---------------------------------------------------------------------------
    \110\Testimony of James Chanos, Chairman, Coalition of Private 
Investment Companies, to the Senate Banking Committee, 7/15/09.
---------------------------------------------------------------------------
    In addition to SEC registration, this title requires 
private funds--hedge funds with more than $100 million in 
assets under management--to disclose information regarding 
their investment positions and strategies. The required 
disclosures include information on fund size, use of leverage, 
counterparty credit risk exposure, trading and investment 
positions, valuation policies, types of assets held, and any 
other information that the SEC, in consultation with the 
Financial Stability Oversight Council, determines is necessary 
and appropriate to protect investors or assess systemic risk. 
The Council will have access to this information to monitor 
potential systemic risk, while the SEC will use it to protect 
investors and market integrity.

                III. BACKGROUND AND NEED FOR LEGISLATION

    The statistics alone reveal the terrible toll the financial 
crisis exacted on the U.S. economy. From the start of the 
crisis through March 2010, more than 8 million jobs were 
lost.\111\ Unemployment in the United States reached 10.1% in 
October 2009, the highest rate of unemployment since 1983, and 
as of March 2010 was holding at 9.7%; prior to the economic 
collapse, in October 2008, the unemployment rate was just 
6.6%.\112\ American household wealth fell by more than $13 
trillion from the peak value of American wealth in 2007 to the 
height of the crisis at the end of 2008. Even after several 
months of recovery, household wealth is still down $11 
trillion, or almost 17%, from its 2007 peak.\113\ Home prices 
have dropped 30.2% from their 2006 peak,\114\ and retirement 
assets dropped by more than 20%. Real Gross Domestic Product in 
the United States in the fourth quarter of 2008, and the first 
and second quarters of 2009 decreased by an annual rate of 
about 5.4%, 6.4%, and 0.7%, respectively, from the previous 
periods, and Real GDP through 2009 had not reached the levels 
seen prior to the economic collapse.\115\ More than 7 million 
homes in America have entered foreclosure since the beginning 
of 2007.\116\
---------------------------------------------------------------------------
    \111\Bureau of Labor Statistics, database of seasonally adjusted 
total nonfarm payroll, www.bls.gov.
    \112\Bureau of Labor Statistics, database of seasonally adjusted 
unemployment rate, 16 years and older, www.bls.gov.
    \113\The Federal Reserve, Flow of Funds report, 3/11/10, 
www.federalreserve.gov.
    \114\S&P/Case-Shiller Home Prices Indices, 20-City Composite, press 
release, 3/30/10, www.standardandpoors.com.
    \115\Bureau of Economic Analysis, Gross Domestic Product: Fourth 
Quarter 2009 press release, 3/26/10, www.bea.gov.
    \116\Reuters News, January 29, 2008; January 15, 2009; January 14, 
2010; March 11, 2010.
---------------------------------------------------------------------------
    Behind the statistics are hardworking men and women whose 
lives have been shattered, small businesses that have been 
shuttered, retirement funds that have evaporated, and families 
who have lost their homes. While some of the most prominent 
American financial institutions have been destroyed or badly 
weakened, it is the millions of American families, who did 
nothing wrong, who have suffered the most. Indeed, the 
financial crisis has torn at the very fiber of our middle 
class.
    This devastation was made possible by a long-standing 
failure of our regulatory structure to keep pace with the 
changing financial system and prevent the sort of dangerous 
risk-taking that led us to this point, propelled by greed, 
excess, and irresponsibility. The United States' financial 
regulatory structure, constructed in a piecemeal fashion over 
many decades, remains hopelessly inadequate to handle the 
complexities of modern finance. In January 2009, the GAO added 
the U.S. financial regulatory system to its list of high-risk 
areas of government operations because of its fragmented and 
outdated structure.\117\
---------------------------------------------------------------------------
    \117\GAO, High Risk Series: An Update, GAO-09-271 (Washington, 
D.C.: Jan. 2009).
---------------------------------------------------------------------------
    Rather than taking measures to strengthen the financial 
services sector, some of our regulators actively embraced 
deregulation, pushed for lower capital standards, ignored calls 
for greater consumer protections and allowed the companies they 
supervised to use complex financial instruments to manage risk 
that neither they nor the companies really understood. 
Moreover, many actors in the financial system--the ``shadow'' 
banking system--have escaped any form of meaningful regulation. 
As former Comptroller of the Currency Eugene Ludwig testified, 
``The paradigm of the last decade has been the conviction that 
un- or under-regulated financial services sectors would produce 
more wealth, net-net. If the system got sick, the thinking 
went, it could be made well through massive injections of 
liquidity. This paradigm has not merely shifted--it has 
imploded.''\118\
---------------------------------------------------------------------------
    \118\Testimony before the Senate Committee on Banking, Housing, and 
Urban Affairs, 10/16/08.
---------------------------------------------------------------------------
    The financial crisis can trace its origins to a downturn in 
the housing market that in turn exposed a raft of unsound 
lending practices. These practices ultimately led to the 
failure of a number of companies heavily involved in making or 
investing in subprime loans. On April 2, 2007, New Century 
Financial Corporation, a leading subprime mortgage lender, 
filed for Chapter 11 bankruptcy. Quickly, the first signs of 
trouble in the housing market came to Wall Street. In June of 
2007, Bear Stearns suspended redemptions from one of its funds 
and in July of 2007, Bear Stearns liquidated two of its hedge 
funds that were heavily invested in mortgage-backed securities. 
On August 6, a large retail mortgage lender, American Home 
Mortgage Investment Corporation, filed for Chapter 11 
bankruptcy. In December of 2007, the Federal Reserve, after 
announcing several cuts to interest rates of both the federal 
funds rate and the primary credit rate over the previous 
months, announced the creation of a Term Auction Facility to 
address pressures in the short-term funding markets. In March 
of 2008, the Federal Reserve announced an additional short-term 
lending facility, the Term Securities Lending Facility to 
promote liquidity in the financial markets.\119\
---------------------------------------------------------------------------
    \119\Federal Reserve Bank of St. Louis, ``The Financial Crisis--A 
Timeline of Events and Policy Actions.''
---------------------------------------------------------------------------
    On March 14, 2008, the first major shock wave spread across 
Wall Street when the Federal Reserve announced the bailout of 
Bear Stearns through an arrangement with JPMorgan Chase. Bear 
Stearns, whose assets were concentrated in mortgage-backed 
securities, faced a major liquidity crisis as it failed to find 
buyers for its now-toxic assets. Just days later, on March 16, 
JPMorgan Chase agreed to buy all of Bear Stearns with 
assistance from the Federal Reserve.\120\
---------------------------------------------------------------------------
    \120\Ibid.
---------------------------------------------------------------------------
    In the months that followed the crisis grew more severe. On 
July 11, 2008, the OTS closed IndyMac BankFSB, a large thrift 
saddled with nonperforming mortgages. IndyMac had relied on an 
``originate-to-distribute'' model of mortgage lending,\121\ 
under which it originated loans or brought them from others, 
and then packaged them together in securities and sold them on 
the secondary market to banks, thrifts, or Wall Street 
investment banks.\122\ By securitizing and selling its loans, 
IndyMac could shift the risk of borrower defaults onto others. 
This business model led to significant deterioration in its 
credit and loan underwriting standards. Accordingly, , when 
housing prices declined and the secondary market collapsed 
IndyMac was left with a large number of nonperforming mortgages 
in its portfolio which was the primary cause of its 
failure.\123\
---------------------------------------------------------------------------
    \121\In an ``originate-to-distribute'' model, for the most part, 
the originator of mortgages sells the mortgages to a person who 
packages the loans into securities and sells the securities to 
investors. By selling the mortgages, the originator thus gets more 
funds to make more loans. However, the ability to sell the mortgages 
without retaining any risk, also frees up the originator to make risky 
loans, even those without regard to the borrower's ability to repay. In 
the years leading up to the crisis, the originator was not penalized 
for failing to ensure that the borrower was actually qualified for the 
loan, and the buyer of the securitized debt had little detailed 
information about the underlying quality of the loans.
    \122\Material Loss Review of IndyMac Bank, FSB (OIG-09-032); Office 
of Inspector General, U.S. Department of Treasury.
    \123\``The primary causes of IndyMac's failure were largely 
associated with its business strategy of originating and securitizing 
Alt-A loans on a large scale. This strategy resulted in rapid growth 
and a high concentration of risky assets.'' Id. ``IndyMac's aggressive 
growth strategy, use of Alt-A and other nontraditional loan products, 
insufficient underwriting, credit concentrations in residential real 
estate in the California and Florida markets, and heavy reliance on 
costly funds borrowed from the Federal Home Loan Bank (FHLB) and from 
brokered deposits, led to its demise when the mortgage market declined 
in 2007. IndyMac often made loans without verification of the 
borrower's income or assets, and to borrowers with poor credit 
histories. Appraisals obtained by IndyMac on underlying collateral were 
often questionable as well. As an Alt-A lender, IndyMac's business 
model was to offer loan products to fit the borrower's needs, using an 
extensive array of risky option-adjustable-rate-mortgages (option 
ARMs), subprime loans, 80/20 loans, and other nontraditional products. 
Ultimately, loans were made to many borrowers who simply could not 
afford to make their payments.'' Id.
---------------------------------------------------------------------------
    Later in July 2008, regulators and lawmakers made several 
moves to stabilize government-sponsored entities Fannie Mae and 
Freddie Mac; the Federal Reserve authorized emergency lending 
by the Federal Reserve Bank of New York (FRBNY) and; the 
Securities and Exchange Commission temporarily prohibited naked 
short-selling in securities; President Bush signed into law the 
Housing and Economic Recovery Act of 2008 which allowed the 
Treasury Department to purchase GSE obligations and created a 
new regulatory regime for the entities--the Federal Housing 
Finance Agency (FHFA). Ultimately, on September 7, FHFA placed 
both Fannie Mae and Freddie Mac into government 
conservatorship.\124\
---------------------------------------------------------------------------
    \124\Federal Reserve Bank of St. Louis, ``The Financial Crisis--A 
Timeline of Events and Policy Actions.''
---------------------------------------------------------------------------
    September 15, 2008 saw two more icons of Wall Street 
collapse and ushered in a period of extraordinary government 
intervention to prevent a complete financial meltdown, the 
depths of which, according to Federal Reserve Board Chairman 
Ben Bernanke, ``could have rivaled or surpassed the Great 
Depression.''\125\ Bank of America announced its plan to 
purchase Merrill Lynch, and Lehman Brothers filed for 
bankruptcy, unable to find a buyer. The following day, the 
Federal Reserve authorized the FRBNY to provide the American 
International Group with up to $85 billion of emergency lending 
(the FRBNY was authorized to lend an additional $37.8 billion 
to AIG on October 6 and later the Treasury Department would 
purchase $40 billion of AIG preferred shares through the TARP 
program). On September 17, the SEC announced a ban on short-
selling of all stocks of financial sector companies. On 
September 21, the Federal Reserve accepted applications from 
investment banking companies Goldman Sachs and Morgan Stanley 
to become bank holding companies, allowing them access to the 
federal safety net. From September 12 to October 10, the Dow 
Jones Industrial Average dropped 26%. Major bank failures 
continued, with the OTS closing Washington Mutual on September 
25, and facilitating its acquisition by JPMorgan Chase. 
Wachovia bank also faced collapse, forcing it to find a buyer; 
ultimately Wells Fargo purchased the bank on October 12.\126\
---------------------------------------------------------------------------
    \125\Speech to the 43rd Annual Alexander Hamilton Awards Dinner, 
Center for the Study of the Presidency and Congress, Washington, D.C., 
4/8/10.
    \126\Federal Reserve Bank of St. Louis, ``The Financial Crisis--A 
Timeline of Events and Policy Actions.''
---------------------------------------------------------------------------
    While Wall Street was reeling, lawmakers worked to craft an 
emergency measure to stabilize the markets and halt the 
momentum of the crisis. On September 20, Treasury Secretary 
Henry Paulson delivered to Capitol Hill his proposal for the 
Emergency Economic Stabilization Act. Nine days later, the 
House of Representatives voted down a modified version of the 
Treasury Department proposal. On that day, the Dow Jones 
Industrial Average fell by more than 750 points.\127\ The 
Senate later acted to pass a further modified measure including 
comprehensive oversight, help for homeowners, and corporate 
governance requirements not included in the Treasury Department 
proposal. The bill was signed into law by President Bush on 
October 3, 2008, establishing the $700 billion Troubled Asset 
Relief Program (TARP).
---------------------------------------------------------------------------
    \127\Dow Jones Indexes, Index Data, www.djaverages.com.
---------------------------------------------------------------------------
    As a result of the crisis, in addition to the losses of 
homes, family savings, and jobs, the government became a 
reluctant, but major shareholder of private banks, automobile 
companies, and other giants of the economy. The TARP program 
was enacted to provide the government with a critical tool 
needed to wrest the economy from a free-fall. But with the 
passage of TARP, the Congress granted the Treasury Department 
extraordinary powers and a staggering sum of taxpayer money to 
address a crisis that was brought on by the failures of the 
very banks that benefited from the program and by the 
government regulators that failed at their jobs. While this 
extent of government intervention was necessary to avert a 
complete collapse of the U.S. economy, our nation should never 
again be put in the position of having to bail out big 
companies.
    The consequences of the crisis could not be more evident, 
from the failures on Wall Street to the devastation on Main 
Street and across the globe. Its myriad causes however, are 
buried in a patchwork of problems touching on almost every 
aspect of the financial services sector. Throughout the course 
of its work over the past 40 months, the Committee probed and 
evaluated the causes of the economic downfall in order to 
develop a legislative response that prevents a recurrence of 
the same problems and that creates a new regulatory framework 
that can respond to the challenges of a 21st century 
marketplace.

Causes of the Financial Crisis

    The crisis was first triggered by the downturn in the 
national housing market, leading to an overall housing slump. 
This slump brought into focus the prevalence of unsound lending 
practices, including predatory lending tactics, most often in 
the subprime market. Many of these practices, and the products 
that ultimately spread the risks associated with these 
practices, existed in what came to be known as the shadow 
banking system, a structure that eluded regulation and 
oversight despite its prevalence in the financial marketplace.
    Though the market for subprime mortgages was less than 1% 
of global financial assets, the faults in the system allowed 
the turmoil in the housing market to spill over into other 
sectors. Faults in the system included a securitization process 
that fueled excessive risk taking by permitting mortgage 
originators to quickly sell the unsuitable loans they made, and 
thereby transfer the risks to someone else; credit rating 
agencies that gave inflated ratings to securities backed by 
risky mortgage loans; and the use of unregulated derivatives 
products based on these faulty loans that only served to spread 
and magnify the risk. The system operated on a wholesale 
misunderstanding of, or complete disregard for the risks 
inherent in the underlying assets and the complex instruments 
they were backing. Explaining the rise in complex financial 
products and their danger to the financial system, Eugene 
Ludwig testified to the Committee, ``Technology, plus 
globalization, plus finance has created something quite new, 
often called `financial technology.' Its emergence is a bit 
like the discovery of fire--productive and transforming when 
used with care, but enormously destructive when 
mishandled.''\128\
---------------------------------------------------------------------------
    \128\Testimony before the Senate Committee on Banking, Housing, and 
Urban Affairs, 10/16/08.
---------------------------------------------------------------------------
    Gaps in the regulatory structure allowed these risks and 
products to flourish outside the view of those responsible for 
overseeing the financial system. Many major market 
participants, such as AIG, were not subject to meaningful 
oversight by federal regulators. Additionally, no financial 
regulator was responsible for assessing the impact the failure 
of a single firm might have on the state of the financial 
system. Indeed, as the crisis grew more severe, the 
interconnected relationships among financial companies 
increased the pressure on those already struggling to survive, 
which only served to accelerate the downfall of some firms. For 
example, as AIG's position worsened, it was required to post 
more collateral to its counterparties and to increase its 
capital holdings as required by regulators.
    Fueling the loss of confidence in the system was the 
failure of regulators and market participants to fully 
understand the extent of the obligations of these teetering 
firms, thus making an orderly shutdown of these companies 
nearly impossible. When Lehman Brothers declared bankruptcy, 
the markets panicked and the crisis escalated. With no other 
means to resolve large, complex and interconnected financial 
firms, the government was left with few options other than to 
provide massive assistance to prop up failing companies in an 
effort to prevent the crisis from spiraling into a great 
depression.
    Despite initial efforts of the government, credit markets 
froze and the U.S problem spread across the globe. The crisis 
on Wall Street soon spilled over onto Main Street, touching the 
lives of most Americans and devastating many.

                     IV. HISTORY OF THE LEGISLATION

    From the beginning of the 110th Congress, the work of the 
Senate Committee on Banking, Housing and Urban Affairs focused 
on the problems in the housing market that started with the 
spread of predatory lending and culminated in the turmoil in 
the credit markets that led to the economic crisis of 2008 and 
2009. This work led to the drafting and committee passage of 
the Restoring American Financial Stability Act in March 2010.
    The Committee's first official examination of the housing 
crisis began with a hearing in February 2007, titled 
``Preserving the American Dream: Predatory Lending Practices 
and Home Foreclosures'' which featured testimony from 
representatives of the mortgage industry, consumer advocates, 
and victims of predatory lending. The next month, the Committee 
followed up with a hearing to explore problems in the mortgage 
market--``Mortgage Market Turmoil: Causes and Consequences.'' 
The hearing featured testimony from federal and state banking 
regulators as well as representatives from industry and 
consumers.
    As the crisis evolved and leading up to Committee passage 
of RAFSA, the Committee held nearly 80 hearings to both examine 
the causes of the housing and economic crisis and assess how 
best to stabilize the nation's financial services industry and 
capital markets, while lessening the impact of the crisis on 
Main Street Americans. In the immediate aftermath of the 
collapse of Bear Stearns, the Committee held 8 hearings on the 
``Turmoil in the U.S. Credit Markets'' and the foreclosure 
crisis. Upon the collapse of Lehman Brothers, the Committee 
held another series of hearings on the economic turmoil, 
including on the Bush Administration's proposed legislation 
that eventually became the ``Emergency Economic Stabilization 
Act of 2008.'' The Committee has held a series of oversight 
hearings on the implementation of that Act since its passage as 
well as on other extraordinary measures the financial 
regulatory agencies have taken, including the Federal Reserve, 
to stabilize the economy.
    Beginning in February 2009, the Committee began its first 
of more than 50 hearings to assess the types of reforms needed 
to protect the economy from another devastating financial 
crisis. The Committee held comprehensive hearings on how to end 
the abuses and loopholes that led the country into the current 
crisis. Hearings explored all specific elements of the 
financial reform legislation, as well as specific regulatory 
failures that contributed to the crisis.
    With an eye toward drafting comprehensive legislation, the 
Committee held hearings on prudential bank supervision, 
systemic risk, ending taxpayer bailouts of companies perceived 
to be ``too big to fail,'' consumer protection, derivatives 
regulation, investor protection, private investment pools, 
insurance regulation and government-sponsored entities. 
Throughout its examinations, the Committee took testimony from 
regulators, policy experts, industry representatives, and 
consumer advocates.
    In looking at the consequences of the crisis, the Committee 
examined how the crisis affected sectors all across the 
financial services industry and the Main Street economy. Areas 
covered, aside from the overall state of the banking, housing 
and securities industries, included the impact on community 
banks and credit unions, manufacturing, international aspects 
of regulation, consumers, and the effect on homeownership.
    To learn from the mistakes of the past, the Committee 
thoroughly examined factors that led to the crisis. These 
hearings began with investigations into the problems associated 
with subprime and predatory lending, and continued with 
hearings including the failure of AIG, investment fraud 
including the Bernard Madoff and Allen Stanford cases, the 
actions of credit ratings agencies, failures of regulators, 
problems of risk management oversight, and the role of 
securitization in the financial crisis.
    In the spring of 2009, the Obama Administration released a 
set of its proposals for financial regulatory reform. On June 
18, 2009, the Committee held a hearing, ``The Administration's 
Proposal to Modernize the Financial Regulatory System,'' to 
examine the President's ideas for reforms, including testimony 
from Treasury Secretary Timothy Geithner. This hearing was 
followed by two hearings on additional proposals from the 
Administration in the start of 2010, titled ``Prohibiting 
Certain High-Risk Investment Activities by Banks and Bank 
Holding Companies'' and ``Implications of the `Volcker Rules' 
for Financial Stability.'' These hearings included testimony 
from Deputy Secretary Neal S. Wolin and Presidential Economic 
Recovery Advisory Board Chairman and former Federal Reserve 
Board Chairman Paul Volcker.
    On November 10, 2009, Banking Committee Chairman 
Christopher Dodd introduced to his colleagues a discussion 
draft of financial reform legislation, based on the Committee's 
extensive hearing record, numerous briefings and meetings, as 
well as the Administration's proposal. Introducing the draft, 
Chairman Dodd said:

          It is the job of this Congress to restore 
        responsibility and accountability in our financial 
        system to give Americans confidence that there is a 
        system in place that works for and protects them. . . . 
        The financial crisis exposed a financial regulatory 
        structure that was the product of historic accident, 
        created piece by piece over decades with little thought 
        given to how it would function as a whole, and unable 
        to prevent threats to our economic security. . . . I 
        will not stand for attempts to protect a broken status 
        quo, particularly when those attempts are made by some 
        of the same special interests who caused this mess in 
        the first place.

    The Committee convened on November 19, 2009, to begin 
consideration of the Restoring American Financial Stability Act 
of 2009. The Committee met only to receive opening statements 
from members. Based on the opening statements, the Chairman 
decided to postpone further consideration of the legislation, 
pending the outcome of various bipartisan working groups the 
Chairman assembled to consider significant aspects of the 
legislation.
    On March 16, 2010, following more than 80 hearings with 
testimony from hundreds of experts and months of negotiations 
with both Republicans and Democrats on the Banking Committee, 
Chairman Dodd unveiled the financial reform proposal that he 
would introduce to the Committee. One week later, on March 22, 
the Committee met and passed the bill by a vote of 13 to 10, as 
amended with a single manager's amendment. No additional 
amendments were offered.

                     V. SECTION-BY-SECTION ANALYSIS

                      Title I--Financial Stability


Section 101. Short title

    The title may be cited as the ``Financial Stability Act of 
2010.''

Section 102. Definitions

    This section defines various terms used in the title, 
including ``bank holding company,'' ``member agency,'' 
``nonbank financial company,'' ``Office of Financial 
Research,'' and ``significant nonbank financial company.'' 
``Nonbank financial companies'' are defined as companies 
substantially engaged in activities that are financial in 
nature (as defined in section 4(k) of the Bank Holding Company 
Act of 1956), excluding bank holding companies and their 
subsidiaries. ``Nonbank financial companies supervised by the 
Board of Governors'' refer to those nonbank financial companies 
that the Financial Stability Oversight Council (``Council'') 
has determined shall be supervised by the Board of Governors of 
the Federal Reserve System (``Board of Governors'') under 
section 113 and subject to prudential standards authorized 
under this title.
    This section requires the Board of Governors to establish 
by rulemaking the criteria for determining whether a company is 
substantially engaged in financial activities to qualify as a 
nonbank financial company. It is intended that commercial 
companies, such as manufacturers, retailers, and others, would 
not be considered to be nonbank financial companies generally, 
and this provision is intended to provide certainty by 
mandating the establishment of the criteria through the public 
notice and comment process required for rulemaking.
    This section provides that the Board of Governors will 
define the term ``significant bank holding company'' and 
``significant nonbank financial company'' through rulemaking. 
It is not intended that securities or futures exchanges 
regulated by the SEC and the CFTC that act as administrators of 
marketplaces be considered a ``significant nonbank financial 
company,'' which term is used in this title with respect to 
counterparty exposure, to the extent the exchanges do not act 
as a counterparty (and thus do not create credit exposures).
    This section also clarifies that with respect to foreign 
nonbank financial companies, references to ``company'' and 
``subsidiary'' include only the United States activities and 
subsidiaries of such foreign companies.

           Subtitle A--Financial Stability Oversight Council


Section 111. Financial Stability Oversight Council established

    This section establishes the Council, consisting of the 
following voting members: (1) the Secretary of the Treasury, 
who will serve as the Chairperson (``Chairperson'') of the 
Council, (2) the Chairman of the Board of Governors (``Board of 
Governors'') of the Federal Reserve System, (3) the Comptroller 
of the Currency, (4) the Director of the Bureau of Consumer 
Financial Protection, (5) Director of the Federal Housing 
Finance Agency, (6) the Chairman of the Securities and Exchange 
Commission, (7) the Chairperson of the Federal Deposit 
Insurance Corporation (``FDIC''), (8) the Chairperson of the 
Commodity Futures Trading Commission, and (9) an independent 
member (appointed by the President, with the advice and consent 
of the Senate) having insurance expertise.
    The Director of the Office of Financial Research (which is 
established under subtitle B) will serve in an advisory 
capacity as a nonvoting member. The Council will meet at the 
call of the Chairperson or majority of the members then 
serving, but not less frequently than quarterly. Any employee 
of the Federal government may be detailed to the Council, and 
any department or agency of the United States may provide the 
Council such support services the Council may determine 
advisable.

Section 112. Council authority

    This section enumerates the purposes of the Council, which 
include: (1) identifying risks to the financial stability of 
the United States that could arise from the material financial 
distress or failure of large, interconnected bank holding 
companies or nonbank financial companies; (2) promoting market 
discipline, by eliminating expectations on the part of 
shareholders, creditors, and counterparties of such companies 
that the government will shield them from losses in the event 
of failure; and (3) responding to emerging threats to the 
stability of the United States financial markets.
    The duties of the Council include: (1) collecting 
information from member agencies and other regulatory agencies, 
and, if necessary to assess risks to the United States 
financial system, directing the Office of Financial Research to 
collect information from bank holding companies and nonbank 
financial companies; (2) providing direction to, and requesting 
data and analyses from, the Office of Financial Research to 
support the work of the Council; (3) monitoring the financial 
services marketplace to identify threats to U.S. financial 
stability; (4) facilitating information sharing among the 
member agencies; (5) recommending to member agencies general 
supervisory priorities and principles reflecting the outcome of 
discussions among the member agencies; (6) identifying gaps in 
regulation that could pose risks to U.S. financial stability; 
(7) requiring supervision by the Board of Governors for nonbank 
financial companies that may pose risks to the financial 
stability of the U.S. in the event of their material financial 
distress or failure; (8) making recommendations to the Board of 
Governors concerning the establishment of heightened prudential 
standards for risk-based capital, leverage, liquidity, 
contingent capital, resolution plans and credit exposure 
reports, concentration limits, enhanced public disclosures, and 
overall risk management for nonbank financial companies and 
large, interconnected bank holding companies supervised by the 
Board of Governors; (9) identifying systemically important 
financial market utilities and payments, clearing, and 
settlement system activities and subjecting them to prudential 
standards established by the Board of Governors; (10) making 
recommendations to primary financial regulatory agencies to 
apply new or heightened standards and safeguards for financial 
activities or practices that could create or increase risks of 
significant liquidity, credit, or other problems spreading 
among bank holding companies, nonbank financial companies, and 
United States financial markets; (11) providing a forum for 
discussion and analysis of emerging market developments and 
financial regulatory issues, and for resolution of 
jurisdictional disputes among member agencies; and (12) 
reporting to and testifying before Congress.
    The section also authorizes the Council to request and 
receive data from the Office of Financial Research and member 
agencies to carry out the provisions of this title. The 
Council, acting through the Office of Financial Research, may 
also require the submission of reports from financial companies 
to help assess whether a financial company, activity, or market 
poses a threat to U.S. financial stability. Before requiring 
such reports, the Council, acting through the Office of 
Financial Research, shall coordinate with the appropriate 
member agency (including the Office of National Insurance 
established in the Treasury Department under Title V of this 
Act) or primary financial regulatory agency and shall rely, 
whenever possible, on information already available from these 
agencies. In the case of a foreign nonbank financial company or 
a foreign-based bank holding company, it is intended that the 
Council, acting through the Office of Financial Research, 
consult to the extent appropriate with the applicable foreign 
regulator for the company.

Section 113. Authority to require supervision and regulation of certain 
        nonbank financial companies

    This section authorizes the Council, by a vote of not fewer 
than \2/3\ of members then serving, including an affirmative 
vote by the Chairperson, to determine that a nonbank financial 
company will be supervised by the Board of Governors and 
subject to heightened prudential standards, if the Council 
determines that material financial distress at such company 
would pose a threat to the financial stability of the United 
States. Each determination will be based on a consideration of 
enumerated factors by the Council, including, among others: the 
degree of leverage (a typical mutual fund could be an example 
of a nonbank financial company with a low degree of leverage); 
amount and nature of financial assets; amount and types of 
liabilities (which could be different types of liabilities 
based on, for example, their maturity, volatility, or 
stability), including degree of reliance on short-term funding; 
extent and type of off-balance-sheet exposures; extent to which 
assets are managed rather than owned and to which ownership of 
assets under management is diffuse; the operation of, or 
ownership interest in, any clearing, settlement, or payment 
business of the company; and any other risk-related factors 
that the Council deems appropriate. Size alone should not be 
dispositive in the Council's determination; in its 
consideration of the enumerated factors, the Council should 
also take into account other indicia of the overall risk posed 
to U.S. financial stability, including the extent of the 
nonbank financial company's interconnections with other 
significant financial companies and the complexity of the 
nonbank financial company. It is not intended that a Council 
determination be based on the exchange functions of securities 
or futures exchanges regulated by the SEC and the CFTC, to the 
extent that as part of these functions the exchanges act as 
administrators of marketplaces and not as counterparties. 
Further, it is not intended that the activities of securities 
and futures exchanges overseen by the SEC and the CFTC that 
consist of, or occur prior to, trade execution be considered a 
``clearing, settlement or payment business,'' provided that 
such activities do not include functioning as a counterparty.
    The Council will provide written notice to each nonbank 
financial company of its proposed determination and the company 
would have the opportunity for a hearing before the Council to 
contest the proposed determination. The Council will consult 
with the primary federal regulatory agency of each nonbank 
financial company or subsidiary of the company before making 
any final determination. The section provides for judicial 
review of the final determination of the Council. In case of a 
foreign nonbank financial company, it is intended that the 
Council consult to the extent appropriate with the applicable 
foreign regulator for the company.

Section 114. Registration of nonbank financial companies supervised by 
        the Board of Governors

    This section directs a nonbank financial company to 
register with the Board of Governors if a final determination 
is made by the Council under section 113 that such company is 
to be supervised by the Board of Governors.

Section 115. Enhanced supervision and prudential standards for nonbank 
        financial companies supervised by the Board of Governors and 
        certain bank holding companies

    This section authorizes the Council to make recommendations 
to the Board of Governors concerning the establishment and 
refinement of prudential standards and reporting and disclosure 
requirements for nonbank financial companies supervised by the 
Board of Governors pursuant to a determination under section 
113 and large, interconnected bank holding companies. Such 
standards and requirements must be more stringent than those 
applicable to other nonbank financial companies and bank 
holding companies that do not present similar risks to the 
financial stability of the United States, and they must 
increase in stringency as appropriate in relation to certain 
characteristics of the company, including its size and 
complexity. The Council may only recommend standards for bank 
holding companies with total consolidated assets of $50 billion 
or more, and the Council may recommend an asset threshold 
greater than $50 billion for the applicability of any 
particular standard. The prudential standards may include risk-
based capital requirements, leverage limits, liquidity 
requirements, a contingent capital requirement, resolution plan 
and credit exposure report requirements, concentration limits, 
enhanced public disclosures, and overall risk management 
requirements.
    The section enumerates the factors that the Council shall 
consider in making its recommendation, which include those 
factors considered in determining whether a nonbank financial 
company should be subject to supervision and prudential 
standards by the Board of Governors under section 113, among 
them the amounts and types of assets and liabilities, degree of 
leverage, and extent of off-balance sheet exposures. In making 
its recommendation, it is intended that the Council take into 
account the nature of the business of different types of 
nonbank financial companies as well as any existing regulatory 
regime applicable to different types of nonbank financial 
companies; the Committee recognizes that not all standards and 
requirements may be applicable universally. With respect to the 
contingent capital requirement, the Council shall conduct a 
study of the feasibility, benefits, costs, and structure of 
such a requirement and report to Congress not later than two 
years after the date of enactment of this Act.

Section 116. Reports

    Under this section, the Council, acting through the Office 
of Financial Research, may require reports from nonbank 
financial companies supervised by the Board of Governors 
pursuant to a section 113 determination and bank holding 
companies with total consolidated assets of $50 billion or more 
and their subsidiaries, but must use existing reports to the 
fullest extent possible.

Section 117. Treatment of certain companies that cease to be bank 
        holding companies

    This section is intended to ensure that a bank holding 
company that could pose a risk to U.S. financial stability if 
it experienced material financial distress would remain 
supervised by the Board of Governors and subject to the 
prudential standards authorized under this title even if it 
sells or closes its bank. The section applies to any entity or 
a successor entity that (1) was a bank holding company having 
total consolidated assets equal to or greater than $50 billion 
as of January 1, 2010, and (2) received financial assistance 
under or participated in the Capital Purchase Program 
established under the Troubled Asset Relief Program. If such 
entity ceases to be a bank holding company at any time after 
January 1, 2010, then the entity will be treated as a nonbank 
financial company supervised by the Board of Governors as if 
the Council had made a determination under section 113. The 
entity may request a hearing and appeal to the Council its 
treatment as a nonbank financial company supervised by the 
Board of Governors.

Section 118. Council funding

    Any expenses of the Council will be treated as expenses of, 
and paid by, the Office of Financial Research. (The Council 
will have only one member for which it incurs salary and 
benefit expenses, the independent member having insurance 
expertise. All other members of the Council, and any employees 
detailed to the Council, will be paid by their respective 
agencies or departments.)

Section 119. Resolution of supervisory jurisdictional disputes among 
        member agencies

    This section authorizes a dispute resolution function for 
the Council. The Council shall resolve disputes among member 
agencies about the respective jurisdiction over a particular 
financial company, activity, or product if the agencies cannot 
resolve the dispute without the Council's intervention. The 
section prescribes the procedures for dispute resolution and 
makes the Council's written decision binding on the member 
agencies that are parties to the dispute.

Section 120. Additional standards applicable to activities or practices 
        for financial stability purposes

    This section authorizes the Council to issue 
recommendations to the primary financial regulatory agencies to 
apply new or heightened prudential standards and safeguards, 
including those enumerated in section 115, for a financial 
activity or practice conducted by bank holding companies or 
nonbank financial companies under the agencies' jurisdiction. 
The Council would make such recommendation if it determines 
that the conduct of the activity or practice could create or 
increase the risk of significant liquidity, credit, or other 
problems spreading among bank holding companies and nonbank 
financial companies or U.S. financial markets. The section 
requires the Council to consult with the primary financial 
regulatory agencies, provide notice and opportunity for comment 
on any proposed recommendations, and consider the effect of any 
recommendation on costs to long-term economic growth. The 
Council may recommend specific actions to apply to the conduct 
of a financial activity or practice, including limits on scope 
or additional capital and risk management requirements.
    The Council may inform the primary financial regulatory 
agency of any Council determination that a bank holding company 
or nonbank financial company, activity, or practice no longer 
requires any heightened standards implemented under this title. 
The primary financial regulatory agency may determine whether 
to keep such standards in effect, and shall promulgate 
regulations to establish a procedure by which entities under 
its jurisdiction may appeal the determination of the primary 
financial regulatory agency.

Section 121. Mitigation of risks to financial stability

    This section is intended to provide additional authority 
for regulators to address grave threats to U.S. financial 
stability if the prudential standards established under this 
title would not otherwise do so. The section authorizes the 
Board of Governors, if it determines that a nonbank financial 
company supervised by the Board of Governors pursuant to a 
determination under section 113 or a bank holding company with 
total consolidated assets of $50 billion or more poses a grave 
threat to the financial stability of the United States, to 
require such company to comply with conditions on the conduct 
of certain activities, terminate certain activities, or, if the 
Board of Governors determines that such action is inadequate to 
mitigate a threat to the financial stability of the United 
States, sell or transfer assets to unaffiliated entities, with 
an affirmative vote of 2/3 of the Council members then serving 
and after notice and opportunity for hearing. The Board of 
Governors and the Council will take into consideration the 
factors set forth in section 113(a) and (b) in any 
determination or decision under this section.

                Subtitle B--Office of Financial Research


Section 151. Definitions

Section 152. Office of Financial Research established

    This section establishes within the Treasury Department the 
Office of Financial Research, (``Office'') headed by a Director 
appointed by the President and confirmed by the Senate. The 
Director shall serve for a term of 6 years. This section 
provides the Director with certain authorities to manage the 
Office and also authorizes a fellowship program to be 
established.

Section 153. Purpose and duties of the Office

    The purpose of the Office is to support the Council in 
fulfilling the purposes and duties of the Council and to 
support member agencies of the Council by (1) collecting data 
on behalf of the Council and providing such data to the Council 
and member agencies; (2) standardizing the types and formats of 
data reported and collected; (3) performing applied research 
and essential long-term research; (4) developing tools for risk 
measurement and monitoring; (5) performing other related 
services; (6) making the results of the activities of the 
Office available to financial regulatory agencies, and (7) 
assisting member agencies in determining the types and formats 
of data where member agencies are authorized by this Act to 
collect data. This section provides the Office with certain 
administrative authorities and rulemaking authority regarding 
data collection and standardization, requires the Director to 
testify annually before Congress, and authorizes the Director 
to provide additional reports to Congress. Testimony provided 
by the Director is not subject to review or approval by any 
other Federal agency or officer.

Section 154. Organizational structure; responsibilities of primary 
        programmatic units

    This section establishes within the Office, to carry out 
the programmatic responsibilities of the Office, the Data 
Center and the Research and Analysis Center. The Data Center 
shall, on behalf of the Council, collect, validate, and 
maintain all data necessary to carry out the duties of the Data 
Center. The data assembled shall be obtained from member 
agencies of the Council, commercial data providers, publicly 
available data sources, and financial entities. The Data Center 
shall prepare and publish a financial company reference 
database, financial instrument reference database, and formats 
and standards for Office data, but shall not publish any 
confidential data. The Research and Analysis Center shall, on 
behalf of the Council, develop and maintain independent 
analytical capabilities and computing resources to (1) develop 
and maintain metrics and reporting systems for risks to the 
financial stability of the United States, (2) monitor, 
investigate, and report on changes in system-wide risk levels 
and patterns to the Council and Congress, (3) conduct, 
coordinate, and sponsor research to support and improve 
regulation of financial entities and markets, (4) evaluate and 
report on stress tests or other stability-related evaluations 
of financial entities overseen by the member agencies, (5) 
maintain expertise in such areas as may be necessary to support 
specific requests for advice and assistance from financial 
regulators, (6) investigate disruptions and failures in the 
financial markets, report findings, and make recommendations to 
the Council based on those findings, (7) conduct studies and 
provide advice on the impact of policies related to systemic 
risk, and (8) promote best practices for financial risk 
management. Not later than 2 years after the date of enactment 
of this Act, and not later than 120 days after the end of each 
fiscal year thereafter, the Office shall submit a report to 
Congress that assesses the state of the United States financial 
system, including an analysis of any threats to the financial 
stability of the United States, the status of the efforts of 
the Office in meeting the mission of the Office, and key 
findings from the research and analysis of the financial system 
by the Office.

Section 155. Funding

    This section provides authority to fund the Office through 
assessments on nonbank financial companies supervised by the 
Board of Governors pursuant to a determination under section 
113 and bank holding companies with total consolidated assets 
of $50 billion or more. The Board of Governors shall provide 
interim funding during the 2-year period following the date of 
enactment of this Act, and subsequent to the 2-year period the 
Secretary of Treasury shall establish by regulation, with the 
approval of the Council, an assessment schedule applicable to 
such companies that takes into account differences among such 
companies based on considerations for establishing the 
prudential standards for such companies under section 115.

Section 156. Transition oversight

    The purpose of this section is to ensure that the Office 
has an orderly and organized startup, attracts and retains a 
qualified workforce, and establishes comprehensive employee 
training and benefits programs. The Office shall submit an 
annual report to the Senate Banking Committee and the House 
Financial Services Committee that includes a training and 
workforce development plan, workplace flexibilities plan, and 
recruitment and retention plan. The reporting requirement shall 
terminate 5 years after the date of enactment of the Act. 
Nothing in this section shall be construed to affect a 
collective bargaining agreement or the rights of employees 
under chapter 71 of title 5, United States Code.

Subtitle C--Additional Board of Governors Authority for Certain Nonbank 
             Financial Companies and Bank Holding Companies


Section 161. Reports by and examination of nonbank financial companies 
        by the Board of Governors

    The Board of Governors may require reports from nonbank 
financial companies supervised by the Board of Governors 
pursuant to a determination under section 113 and any 
subsidiaries of such companies, and may examine them to 
determine the nature of the operations and financial condition 
of the company and its subsidiaries; the financial, 
operational, and other risks within the company that may pose a 
threat to the safety and soundness of the company or the 
stability of the U.S. financial system; the systems for 
monitoring and controlling such risks; and compliance with the 
requirements of this subtitle.
    To the fullest extent possible, the Board of Governors 
shall rely on reports and information that such companies and 
their subsidiaries have provided to other Federal and State 
regulatory agencies, and on reports of examination of 
functionally regulated subsidiaries made by their primary 
regulators (or in case of foreign nonbank financial companies, 
reports provided to home country supervisor to the extent 
appropriate).

Section 162. Enforcement

    Nonbank financial companies supervised by the Board of 
Governors will be subject to the enforcement provisions under 
section 8 of the Federal Deposit Insurance Act.
    If the Board of Governors determines that a depository 
institution or functionally regulated subsidiary does not 
comply with the regulations of the Board of Governors or 
otherwise poses a threat to the financial stability of the 
U.S., the Board of Governors may recommend in writing to the 
primary financial regulatory agency for the subsidiary that the 
agency initiate a supervisory action or an enforcement 
proceeding. If the agency does not initiate an action within 60 
days, the Board of Governors may take the recommended 
supervisory or enforcement action.

Section 163. Acquisitions

    A nonbank financial company supervised by the Board of 
Governors pursuant to a determination under section 113 shall 
be treated as a bank holding company for purposes of section 3 
of the Bank Holding Company Act which governs bank 
acquisitions. A nonbank financial company supervised by the 
Board of Governors or a bank holding company with total 
consolidated assets of $50 billion or more shall not acquire 
direct or indirect ownership or control of any voting shares of 
a company engaged in nonbanking activities having total 
consolidated assets of $10 billion or more without providing 
advanced written notice to the Board of Governors.
    In addition to other criteria under the Bank Holding 
Company Act for reviewing acquisitions, the Board of Governors 
shall consider the extent to which a proposed acquisition would 
result in greater or more concentrated risks to global or U.S. 
financial stability of the global or U.S. economy.

Section 164. Prohibition against management interlocks between certain 
        financial holding companies

    A nonbank financial company supervised by the Board of 
Governors pursuant to a determination under section 113 shall 
be treated as a bank holding company for purposes of the 
Depository Institutions Management Interlocks Act. It is not 
intended that a registered investment company sponsored by a 
nonbank financial company be deemed unaffiliated with its 
sponsor for the purpose of this section.

Section 165. Enhanced supervision and prudential standards for nonbank 
        financial companies supervised by the Board of Governors and 
        certain bank holding companies

    This section directs the Board of Governors to establish 
prudential standards and reporting and disclosure requirements 
for nonbank financial companies supervised by the Board of 
Governors pursuant to a determination under section 113 and 
large, interconnected bank holding companies with total 
consolidated assets of $50 billion or more. The standards and 
requirements shall be more stringent than those applicable to 
other nonbank financial companies and bank holding companies 
that do not present similar risks to the financial stability of 
the United States, and increase in stringency as appropriate in 
relation to certain characteristics of the company, including 
its size and complexity. The Board of Governors may adopt an 
asset threshold greater than $50 billion for the applicability 
of any particular standard. The prudential standards will 
include risk-based capital requirements, leverage limits, 
liquidity requirements, a contingent capital requirement, 
resolution plan and credit exposure report requirements, 
concentration limits, enhanced public disclosures, and overall 
risk management requirements. The section enumerates the 
factors that the Board of Governors shall consider in setting 
the standards, which include those factors considered in 
determining whether a nonbank financial company should be 
subject to supervision and prudential standards by the Board of 
Governors under section 113, among them the amounts and types 
of assets and liabilities, degree of leverage, and extent of 
off-balance sheet exposures. It requires that each nonbank 
financial company supervised by the Board of Governors as well 
as bank holding company with total consolidated assets of $10 
billion or more that is a publicly traded company to establish 
a risk committee to be responsible for oversight of enterprise-
wide risk management practices of the company.
    With respect to the resolution plan requirement authorized 
in this section, if the Board of Governors and the FDIC jointly 
determine that the resolution plan of a company is not credible 
and would not facilitate an orderly resolution under the 
bankruptcy code, such company would have to resubmit resolution 
plans to correct deficiencies. Failure to resubmit a plan 
correcting deficiencies within a certain timeframe would result 
in the imposition of more stringent capital, leverage, or 
liquidity requirements, or restrictions on the growth, 
activities, or operations of the company. If, two years after 
the imposition of these requirements or restrictions, the 
company still has not resubmitted a plan that corrects the 
deficiencies, the Board of Governors and the FDIC, in 
consultation with the Council, may direct the company to divest 
certain assets or operations in order to facilitate an orderly 
resolution under the bankruptcy code in the event of failure.

Section 166. Early remediation requirements

    The Board of Governors, in consultation with the Council 
and the FDIC, shall by regulation establish requirements to 
provide for early remediation of financial distress of a 
nonbank financial company supervised by the Board of Governors 
pursuant to a determination under section 113 or a large, 
interconnected bank holding company with total consolidated 
assets of $50 billion or more. This provision does not 
authorize the provision of any financial assistance from the 
Federal government. Instead, the purpose of this provision is 
to establish a series of specific remedial actions to be taken 
by such company if it is experiencing financial distress, in 
order to minimize the probability that the company will become 
insolvent and the potential harm of such insolvency to the 
financial stability of the United States. It is intended that 
the requirements established under this section take into 
account the structure and operations of, and any existing 
regulatory regime applicable to, different types of nonbank 
financial companies, including whether certain structures 
impose legal or structural limits on the ability of the nonbank 
financial company to hold capital.

Section 167. Affiliation

    Nothing in this subtitle shall be construed to require a 
nonbank financial company supervised by the Board of Governors 
pursuant to a determination under section 113 or a company that 
controls such nonbank financial company to conform it's 
activities to the requirements of section 4 of the Bank Holding 
Company Act. If such company engages in activities that are not 
financial in nature, the Board of Governors may require such 
company to establish and conduct its financial activities in an 
intermediate holding company.

Section 168. Regulations

    Except as otherwise specified in this subtitle, the Board 
of Governors shall issue final regulations to implement this 
subtitle no later than 18 months after the transfer date.

Section 169. Avoiding duplication

    The Board of Governors shall take any action it deems 
appropriate to avoid imposing requirements that are duplicative 
of applicable requirements under other provisions of law.

Section 170. Safe harbor

    The Board of Governors shall promulgate regulations on 
behalf of, and in consultation with, the Council setting forth 
the criteria for exempting certain types or classes of nonbank 
financial companies from supervision by the Board of Governors 
pursuant to a determination under section 113. It is intended 
that such regulations take into account potential duplication 
between the requirements under this title and Title VIII of 
this Act for financial market utilities. The Board of 
Governors, in consultation with the Council, shall review such 
regulations no less frequently than every 5 years, and based 
upon the review, the Board of Governors may update such 
regulations, and such updates will not take effect until 2 
years after publication in final form. The Chairpersons of the 
Board of Governors and the Council shall submit a joint report 
to the Senate Banking Committee and the House Financial 
Services Committee not later than 30 days after issuing the 
regulations or updates, and such report shall include at a 
minimum the rationale for exemption and empirical evidence to 
support the criteria for exemption.

                Title II--Orderly Liquidation Authority


Section 201. Definitions

    This section defines various terms used in this title. 
Financial companies are defined as (1) bank holding companies, 
(2) nonbank financial companies supervised by the Board of 
Governors of the Federal Reserve System (Board of Governors) 
pursuant to a determination under section 113 of this Act, (3) 
other companies predominantly engaged in activities that the 
Board of Governors has determined are financial in nature, or 
incidental to activities that are financial in nature, for 
purposes of section 4(k) of the Bank Holding Company Act of 
1956, and (4) subsidiaries of any of the companies included in 
(1), (2), and (3) other than an insured depository institution 
or insurance company (but it is not intended that an investment 
company required to be registered under the Investment Company 
Act of 1940 would be deemed to be a subsidiary of a company 
included in (1) (2), and (3) by reason of the provision by such 
company of services to the investment company, unless such 
company (including through all of its affiliates) owns 25 
percent or more of the shares of the investment company). An 
``insurance company'' is any entity that is engaged in the 
business of insurance, subject to regulation by a State 
insurance regulator, and covered by a State law that is 
designed to specifically deal with the rehabilitation, 
liquidation, or insolvency of an insurance company. A mutual 
insurance holding company organized and operating under State 
insurance laws may be considered an insurance company for the 
purpose of this title. A ``covered financial company'' is a 
financial company for which a determination has been made to 
use the orderly liquidation authority under section 203.A 
``covered broker or dealer'' is a covered financial company 
that is a broker dealer registered with the Securities and 
Exchange Commission (``SEC'') under section 15(b) of the 
Securities Exchange Act of 1934 and is a member of Securities 
Investor Protection Corporation (``SIPC'').

Section 202. Orderly Liquidation Authority Panel

    This section establishes an Orderly Liquidation Authority 
Panel (``Panel'') composed of 3 judges from the United States 
Bankruptcy Court for the District of Delaware. Subsequent to a 
determination by the Secretary of the Treasury (``Secretary'') 
under section 203, the Secretary, upon notice to the Federal 
Deposit Insurance Corporation (``FDIC'') and the covered 
financial company, shall petition the Panel for an order 
authorizing the Secretary to appoint the FDIC as receiver. The 
Panel, after notice to the covered financial company and a 
hearing in which the covered financial company may oppose the 
petition, shall determine within 24 hours of receipt of the 
petition whether the determination of the Secretary is 
supported by substantial evidence. If the Panel determines that 
the determination of the Secretary (1) is supported by 
substantial evidence, the Panel shall issue an order 
immediately authorizing the Secretary to appoint the 
Corporation as receiver of the covered financial company, and 
(2) is not supported by substantial evidence, the Panel shall 
immediately provide the Secretary with a written statement of 
its reasons and afford the Secretary with an opportunity to 
amend and refile the petition with the Panel. The decision of 
the Panel may be appealed to the United States Court of Appeals 
not later than 30 days after the date on which the decision of 
the Panel is rendered, and the decision of the Court of Appeals 
may be appealed to the Supreme Court not later than 30 days 
after the date of the final decision of the Court of Appeals.
    This section also requires the following studies: a study 
each by the Administrative Office of the United States Courts 
and the Comptroller General of the United States regarding the 
bankruptcy and orderly liquidation process for financial 
companies under the Bankruptcy Code, and a study by the 
Comptroller General of the United States regarding 
international coordination relating to the orderly liquidation 
of financial companies under the Bankruptcy Code.

Section 203. Systemic risk determination

    This section establishes the process for triggering the use 
of the orderly liquidation authority. The process includes 
several steps intended to make the use of this authority very 
rare. There is a strong presumption that the Bankruptcy Code 
will continue to apply to most failing financial companies 
(other than insured depository institutions and insurance 
companies which have their own separate resolution processes), 
including large financial companies.
    To trigger the orderly liquidation authority, the Board of 
Governors and the Board of Directors of the FDIC must each, by 
a two-thirds vote of its members then serving, provide a 
written recommendation to the Secretary that includes: (1) an 
evaluation of whether a financial company is in default or in 
danger of default; (2) a description of the effects that the 
failure of the financial company would have on financial 
stability in the United States; and (3) a recommendation 
regarding the nature and extent of actions that should be taken 
under this title. (The Secretary may request the Board of 
Governors and the FDIC to consider making the recommendation, 
or the Board of Governors and the FDIC may make the 
recommendation on their own initiative.)
    In the case of a covered broker or dealer, or in which the 
largest U.S. subsidiary of a covered financial company is a 
covered broker or dealer, the SEC and the Board of Governors 
must each, by a two-thirds vote of its members then serving, 
provide a written recommendation to the Secretary as described 
above. (The Secretary of the Treasury may request the Board of 
Governors and the SEC to consider making the recommendation, or 
the Board of Governors and the SEC may make the recommendation 
on their own initiative.)
    Upon receiving such recommendations, the Secretary (in 
consultation with the President) may make a written 
determination that: (1) the financial company is in default or 
in danger of default; (2) the failure of the financial company 
and its resolution under otherwise applicable law would have 
serious adverse effects on U.S. financial stability; (3) no 
viable private sector alternative is available to prevent 
default; (4) any effect on the claims or interests of 
creditors, counterparties, and shareholders as a result of 
actions taken under this title has been taken into account; (5) 
any action under section 204 would avoid or mitigate such 
adverse effects; and (6) a Federal regulatory agency has 
ordered the financial company to convert all of its convertible 
debt instruments that are subject to the regulatory order. The 
Secretary would take into consideration the effectiveness of 
the action in mitigating adverse effects on the financial 
system, any cost to the Treasury, and the potential to increase 
excessive risk taking on the part of creditors, counterparties, 
and shareholders in the covered financial company.
    The Secretary shall provide written notice of the 
determination to Congress within 24 hours. The FDIC shall 
submit a report to Congress within 60 days of its appointment 
as receiver on the covered financial company and update the 
information contained in the report at least quarterly. The 
Government Accountability Office will review and report on the 
Secretary's determination.
    The FDIC shall establish policies and procedures acceptable 
to the Secretary governing the use of funds available to the 
FDIC to carry out this title.
    If an insurance company that is a covered financial company 
or subsidiary or affiliate of a covered financial company, its 
liquidation or rehabilitation shall be conducted as provided 
under state law. The FDIC shall have backup authority to file 
appropriate judicial action in state court to place such a 
company into liquidation under state law if the state regulator 
fails to act within 60 days.

Section 204. Orderly liquidation

    This section provides a strong presumption that, in the 
exercise of orderly liquidation authority: (1) creditors and 
shareholders will bear losses, (2) management responsible for 
the company's financial condition are not retained, and (3) the 
FDIC and other agencies (where applicable) take steps to ensure 
that management and other parties responsible for the failed 
company's financial condition bear losses through actions for 
damages, restitution, and compensation clawbacks. The section 
provides that the FDIC act as receiver of the covered financial 
company upon appointment of the Corporation under section 202. 
The FDIC, as receiver, must consult with primary financial 
regulatory agencies of: (1) the covered financial company and 
its covered subsidiaries to ensure an orderly liquidation; and 
(2) any subsidiaries that are not covered subsidiaries to 
coordinate the appropriate treatment of any such solvent 
subsidiaries and the separate resolution of any such insolvent 
subsidiaries under other governmental authority, as 
appropriate. The FDIC shall consult with the SEC and the SIPC 
in the case of a covered financial company that is a broker 
dealer and member of SIPC. The FDIC may consult with or acquire 
the services of outside experts to assist in the orderly 
liquidation process.
    The FDIC may make funds available to the receivership for 
the orderly liquidation of the covered financial company 
subject to the mandatory terms and conditions set forth in 
section 206 and the orderly liquidation plan described in 
section 210(n)(14).

Section 205. Orderly liquidation of covered brokers and dealers

    This section authorizes the application of orderly 
liquidation authority, if necessary, to a SIPC-member broker or 
dealer while generally preserving SIPC's powers and duties 
under the Securities Investor Protection Act of 1970 (``SIPA'') 
with respect to the liquidation of such entity. The section 
provides that the FDIC shall appoint SIPC, without any need for 
court approval, to act as trustee for liquidation under the 
SIPA of a covered broker or dealer. The subsection prescribes 
the powers, duties, and limitation of powers of SIPC as 
trustee. Except as otherwise provide in this title, no court 
may take any action, including an action pursuant to the SIPA 
or the Bankruptcy Code, to restrain or affect the powers or 
functions of the FDIC as receiver of the covered broker or 
dealer.

Section 206. Mandatory terms and conditions for all orderly liquidation 
        actions

    The FDIC shall take action under this title only if it 
determines that such actions are necessary for financial 
stability and not for the purpose of preserving the covered 
financial company. The FDIC must also ensure that shareholders 
would not receive any payment until after all other claims are 
fully paid, that unsecured creditors bear losses in accordance 
with the claims priority provisions in section 210, and that 
management responsible for the company's failure is removed (if 
it has not already been removed at the time of the FDIC's 
appointment as receiver).

Section 207. Directors not liable for acquiescing in appointment of 
        receiver

    This section exempts the board of directors of a covered 
financial company from liability to the company's shareholders 
or creditors for acquiescing or consenting in good faith to 
appointment of a receiver under section 202.

Section 208. Dismissal and exclusion of other actions

    This section provides that the appointment of the FDIC as 
receiver under section 202 for a covered financial company or 
the appointment of SIPC as trustee for a covered broker or 
dealer under section 205 shall result in the dismissal of any 
existing bankruptcy or insolvency case or proceeding and 
prevent the commencement of any such case or proceeding while 
the orderly liquidation is pending.

Section 209. Rulemaking; non-conflicting law

    This section requires the FDIC, in consultation with the 
Council, to prescribe such rules or regulations as considered 
necessary or appropriate to implement this title. To the extent 
possible, the FDIC shall seek to harmonize applicable rules and 
regulations promulgated under this section with the insolvency 
laws that would otherwise apply to a covered financial company.

Section 210. Powers and duties of the corporation

            Subsection (a). Powers and authorities
    This subsection defines the powers and authorities of the 
FDIC as receiver of a covered financial company, including its 
powers and duties: (1) to succeed to the rights, title, powers, 
and privileges of the covered financial company and its 
stockholders, members, officers, and directors; (2) to operate 
the company with all the powers of shareholders, members, 
directors, and officers; (3) to liquidate the company through 
sale of assets or transfer of assets to a bridge financial 
company established under subsection (h); (4) to merge the 
company with another company or transferring assets or 
liabilities; (5) to pay valid obligations that come due, to the 
extent that funds are available; (6) to exercise subpoena 
powers; (7) to utilize private sector services to manage and 
dispose of assets; (8) to terminate rights and claims of 
stockholders and creditors (except for the right to payment of 
claims consistent with the priority of claims provision under 
this section); and (9) to determine and pay claims. The 
subsection also prescribes the FDIC's authorities to avoid 
fraudulent or preferential transfers of interests of the 
covered financial company.
            Subsection (b). Priority of expenses and unsecured claims
    This section defines the priority of expenses and unsecured 
claims against the covered financial company or the FDIC as 
receiver for such company. All claimants of a covered financial 
company that are similarly situated in the expenses and claims 
priority shall be treated in a similar manner except in cases 
where the FDIC determines that doing otherwise would maximize 
the value of the company's assets or maximize the present value 
of the proceeds (or minimize the amount of any loss) from 
disposing of the assets of the company. Creditors who receive 
more than they would otherwise receive if all similarly 
situated creditors were treated in a similar manner would be 
subject to a substantially higher assessment rate under 
subsection (o)(1)(E)(ii). All claimants that are similarly 
situated in the expenses and claims priority shall not receive 
less than the maximum liability amount defined in subsection 
(d). The section also defines the priority of expenses and 
unsecured claims in those cases where the FDIC is appointed 
receiver for a covered broker or dealer.
            Subsection (c). Provisions relating to contracts entered 
                    into before appointment of receiver
    This subsection authorizes the FDIC to repudiate and 
enforce contracts and handle the financial company's qualified 
financial contracts (including derivatives). A counterparty to 
a qualified financial contract would be stayed from 
terminating, liquidating, or netting the contract (solely by 
reason of the appointment of a receiver) until 5:00 PM on the 
fifth business day after the date that the FDIC was appointed 
receiver. (The length of the stay differs from that authorized 
under the Federal Deposit Insurance Act with respect to an 
insured depository institution. Under the Federal Deposit 
Insurance Act, the stay would last until 5:00 PM one business 
day following the date that the FDIC was appointed receiver.)
            Subsection (d). Valuation of claims in default
    This subsection establishes the FDIC's maximum liability 
for claims against the covered financial company (or FDIC as 
receiver) as the amount that the claimant would have received 
if the FDIC had not been appointed receiver with respect to the 
covered financial company and the company was liquidated under 
chapter 7 of the U.S. Bankruptcy Code or any State insolvency 
law. The subsection also authorizes the FDIC, as receiver and 
with the Secretary's approval, to make additional payments to 
claimants only if the FDIC determines this to be necessary to 
minimize losses to the FDIC as receiver from the orderly 
liquidation of the covered financial company. Creditors who 
receive such additional payments would be subject to a 
substantially higher assessment rate under subsection 
(o)(1)(E)(ii).
            Subsection (e). Limitation on court action
    This subsection precludes a court from taking action to 
restrain or affect the powers or functions of the FDIC when it 
is exercising its powers as receiver, except as otherwise 
provided in the title.
            Subsection (f). Liability of directors and officers
    This subsection provides that FDIC may take actions to hold 
directors and officers of a covered financial company 
personally liable for monetary damages with respect to gross 
negligence.
            Subsection (g). Damages
    This subsection provides that recoverable damages in claims 
brought against directors, officers, or employees of a covered 
financial company for improper investment or use of company 
assets include principal losses and appropriate interest.
            Subsection (h). Bridge financial companies
    This subsection authorizes the FDIC, as receiver, to 
establish one or more bridge financial companies. Such bridge 
financial companies may assume liabilities and purchase assets 
of the covered financial company, and perform other temporary 
functions that the FDIC may prescribe.
            Subsection (i). Sharing records
    This subsection requires other Federal regulators to make 
available to the FDIC all records relating to the covered 
financial company.
            Subsection (j). Expedited procedures for certain claims
    This subsection expedites federal courts' consideration of 
cases brought by the FDIC against a covered financial company's 
directors, officers, employees, or agents.
            Subsection (k). Foreign investigations
    This subsection authorizes the FDIC, as receiver, to 
request assistance from, and provide assistance to, any foreign 
financial authority.
            Subsection (l). Prohibition on entering secrecy agreements 
                    and protective orders
    This subsection prohibits the FDIC from entering into any 
agreement that prohibits it from disclosing the terms of any 
settlement of any action brought by the FDIC as receiver of a 
covered financial company.
            Subsection (m). Liquidation of certain covered financial 
                    companies or bridge financial companies
    This subsection provides that the FDIC, as receiver, in 
liquidating any covered financial company or bridge financial 
company that is either (1) a stockbroker that is not a member 
of SIPC, or (2) a commodity broker, will apply the applicable 
liquidation provisions of the bankruptcy code pertaining to 
``stockbrokers'' and ``commodity brokers'' (as such terms are 
defined in subchapters III and IV, respectively, of chapter 7 
of chapter 7 of the U.S. Bankruptcy Code).
            Subsection (n). Orderly Liquidation Fund
    This subsection creates the Orderly Liquidation Fund 
(``Fund') in the Treasury Department that will be available to 
the FDIC to carry out the authorities in this title. The sole 
purpose of the Fund is to allow the FDIC to carry out the 
orderly liquidation of a covered financial company as 
authorized by this title; the Fund may not be used for any 
other purpose. The FDIC shall manage the Fund consistent with 
the policies and procedures acceptable to the Secretary of 
Treasury that are established under section 203(d), and invest 
amounts held in the Fund that are not required to meet the 
FDIC's current needs in obligations of the United States.
    The target size of the Fund shall be $50 billion, adjusted 
on a periodic basis for inflation. The FDIC shall impose 
assessments as provided in subsection (o) to capitalize the 
Fund and reach the target size during an ``initial 
capitalization period'' of not less than 5 years or greater 
than 10 years from the date of enactment. (The FDIC, with the 
approval of the Secretary of the Treasury, may extend the 
initial capitalization period if the Fund incurs a loss from 
the failure of a covered financial company before the initial 
capitalization period expires.) Except as provided in 
subsection (o), FDIC shall suspend assessments when the initial 
capitalization period expires. The intention of this subsection 
and subsection (o) is to require large financial firms, rather 
than taxpayers, to serve as the first source of liquidity in 
winding down the failed financial company.
    The FDIC may issue obligations to the Secretary of the 
Treasury. FDIC may not issue or incur any obligation that would 
result in total obligations outstanding that exceed the sum of 
(1) the amount of cash and cash equivalents held in the Fund, 
and (2) the amount that is equal to 90 percent of the fair 
value of assets from each covered financial company that are 
available to repay the FDIC (the ``maximum obligation 
limitation''). It is intended that the determination of the 
amount available to the FDIC under (2) above be limited to what 
the assets of the covered financial company, calculated on a 
consolidated basis, can support. The FDIC and the Secretary 
shall jointly prescribe rules, in consultation with the 
Council, governing the calculation of the maximum obligation 
limitation.
    The FDIC may issue obligations only after the cash and cash 
equivalents of the Fund have been drawn down to facilitate the 
orderly liquidation of a covered financial company.
    Amounts in the Fund shall be available to the FDIC with 
regard to a covered financial company for which the FDIC has 
been appointed receiver after the FDIC has developed an orderly 
liquidation plan acceptable to the Secretary of the Treasury. 
The FDIC may amend an approved plan at any time, with the 
concurrence of the Secretary.
            Subsection (o). Risk-based assessments
    This subsection requires the FDIC to charge risk-based 
assessments to eligible financial companies during the initial 
capitalization period until the FDIC determines that the Fund 
has reached the target size. Eligible financial companies 
include bank holding companies with total consolidated assets 
equal to or greater than $50 billion and nonbank financial 
companies supervised by the Board of Governors pursuant to a 
determination under section 113 of Title I.
    The FDIC must charge additional risk-based assessments if: 
(1) the Fund falls below the target size after the initial 
capitalization period in order to restore the Fund to the 
target size over a period determined by the FDIC; (2) the FDIC 
is appointed receiver for a covered financial company and the 
Fund incurs a loss during the initial capitalization period; or 
(3) such assessments are necessary to pay in full obligations 
issued to the Secretary of the Treasury within 60 months of 
their issuance (unless the FDIC requests, and the Secretary 
approves, an extension in order to avoid as serious adverse 
effect on the U.S. financial system). If required, any such 
additional risk-based assessments shall be imposed on (1) 
eligible financial companies and financial companies with total 
assets equal to or greater than $50 billion that are not 
eligible financial companies, and (2) any financial company, at 
a substantially higher rate than would otherwise be assessed, 
that benefitted from the orderly liquidation under this title 
by receiving payments or credit pursuant to subsections (b)(4), 
(d)(4), and (h)(5). The subsection outlines the risk factors 
that the FDIC shall consider in imposing risk-based assessments 
to capitalize the Fund as well as any additional assessments 
that may be required.
    The FDIC shall prescribe regulations to carry out this 
subsection in consultation with the Secretary and the Council, 
and such regulations shall take into account the differences in 
risks posed by different financial companies, the differences 
in the liability structure of financial companies, and the 
different bases for other assessments that such financial 
companies may be required to pay, to ensure that assessed 
financial companies are treated equitably and that assessments 
under this subsection reflect such differences. It is intended 
that the risk-based assessments may vary among different types 
or classes of financial companies in accordance with the risks 
posed to the financial stability of the United States. For 
instance, certain types of financial companies such as 
insurance companies and other financial companies that may 
present lower risk to U.S. financial stability (as indicated, 
for example, by higher capital, lower leverage, or similar 
measures of risk as appropriate depending on the nature of the 
business of the financial companies) relative to other types of 
financial companies should be assessed at a lower rate. 
Furthermore, the FDIC should consider the impact of potential 
assessment on the ability of certain tax-exempt entities to 
carry out their legally required charitable and educational 
missions, such as the ability of not-for-profit fraternal 
benefit societies to carry out their state and federally 
required missions to serve their members and communities.
            Subsection (p). Unenforceability of certain agreements
    This subsection prohibits enforceability of any term 
contained in any existing or future standstill, 
confidentiality, or other agreement that affects or restricts 
the ability of a person to acquire, that prohibits a person 
from offering to acquire, or that prohibits a person from using 
previously disclosed information in connection with an offer to 
acquire, all or part of a covered financial company.
            Subsection (q). Other exemptions
    This subsection provides certain exemptions to the FDIC 
from taxes and levies when acting as a receiver for a covered 
financial company.
            Subsection (r). Certain sales of assets prohibited
    This subsection requires the FDIC to prescribe regulations 
prohibiting the sale of assets of a covered financial company 
to certain persons found to have been engaged in fraudulent 
activity or participated in transactions causing substantial 
losses to a covered financial company or who are convicted 
debtors.

Section 211. Miscellaneous provisions

    This section makes a conforming change relating to 
concealment of assets from the FDIC acting as receiver for a 
covered financial company, and makes a conforming change to the 
netting provisions contained in the Federal Deposit Insurance 
Corporation Improvement Act of 1991 by expanding the exceptions 
to include section 210(c) of this Act and section 1367 of HERA 
(12 U.S.C. 4617(d)).

 Title III--Transfer of Powers to the Comptroller of the Currency, the 
                Corporation, and the Board of Governors


Section 301. Short title and purposes

    The short title is ``Enhancing Financial Institution Safety 
and Soundness Act of 2010.'' Among the purposes of the title 
are to provide for the safe and sound operation of the banking 
system; to preserve and protect the dual banking system of 
federal and state chartered depository institutions; and to 
streamline and rationalize the supervision of depository 
institutions and their holding companies.

Section 302. Definitions

    Defines the term ``transferred employee'' to refer to those 
employees who are transferred from the Office of Thrift 
Supervision (``OTS'') to the Office of the Comptroller of the 
Currency (``OCC'') or the Federal Deposit Insurance Corporation 
(``FDIC'').

               Subtitle A--Transfer of Powers and Duties


Section 311. Transfer date

    The ``transfer date'' is the date that is 1 year after the 
date of enactment or another date not later than 18 months if 
so designated by the Secretary of the Treasury. The transfer 
date is the date upon which various functions are transferred 
from the OTS to the Federal Reserve Board (``Board''), the OCC, 
and the FDIC. Additionally, certain functions of the Board are 
transferred to the OCC and FDIC. The transfer of personnel, 
property and funding are also keyed to the transfer date.

Section 312. Powers and duties transferred

    This section transfers all functions of the OTS to the 
Board, the OCC, and the FDIC. It also transfers from the Board 
to the OCC and the FDIC, supervisory authority over the holding 
companies of smaller banks. And, it transfers from the Board to 
the FDIC, the supervision of insured state member banks.
    As a result of these various transfers, the Board will 
regulate the larger, more complex bank and thrift holding 
companies--i.e., those with total consolidated assets of $50 
billion or more. The OCC will retain its authority over all 
national banks regardless of their size and will also supervise 
federal thrifts. The OCC will become a holding company 
regulator for the smaller bank and thrift holding companies 
(under $50 billion) where the majority of depository 
institution assets are in national banks or federal thrifts. 
The FDIC will regulate all insured state banks regardless of 
their size--including those that are members of the Federal 
Reserve System--and all state savings associations. The FDIC 
will also supervise the smaller holding companies (under $50 
billion) where the majority of depository institution assets 
are in insured state banks or state thrifts.
    The Board will retain its authority to issue rules under 
the Bank Holding Company Act and will also have the authority 
to issue rules under the Home Owners Loan Act with respect to 
savings and loan holding companies. When issuing rules under 
these acts that apply to bank and thrift holding companies with 
less than $50 billion in assets, the Board must consult with 
the OCC and the FDIC. The OCC and FDIC will jointly write the 
rules that apply to thrifts.
    This section amends the definition of ``appropriate federal 
banking agency'' in section 3(q) of the Federal Deposit 
Insurance Act which indicates the allocation of regulatory 
responsibility among the federal banking agencies by type of 
company--such as a national bank, a state member bank, a 
federal savings association. The definition is amended to 
reflect the new responsibilities of the Board, FDIC, and OCC. 
In addition to the description above, the Board will maintain 
its supervision of uninsured state member banks and various 
foreign bank-related entities.
    This section also requires the OCC, Board and FDIC to issue 
a joint regulation specifying how the $50 billion will be 
calculated and at what frequency to determine the appropriate 
holding company regulator. In terms of the frequency of the 
assessment, it can be no less than 2 years, unless with respect 
to a particular institution there is a transaction outside the 
ordinary course of business, such as a merger or acquisition. 
In issuing the regulations, the agencies are directed to avoid 
disruptive transfers of regulatory authority.

Section 313. Abolishment

    This section abolishes the OTS.

Section 314. Amendments to the revised statutes

    This section clarifies the mission and authorities of the 
OCC.

Section 315. Federal information policy

    This section clarifies that the OCC is an independent 
agency for purposes of Federal information policy.

Section 316. Savings provisions

    This section preserves the existing rights, duties and 
obligations of the OTS, the Board, and the Federal Reserve 
banks that existed on the day before the transfer date. This 
section also preserves existing law suits by or against the 
OTS, the Board, and the Federal Reserve banks, but states that 
as of the transfer date, law suits against the OTS in 
connection with functions transferred to the OCC, the FDIC, or 
Board, are transferred to these agencies as appropriate. In 
addition, as of the transfer date, law suits against the Board 
or a Federal Reserve bank in connection with functions 
transferred to the OCC or the FDIC are transferred to these 
agencies as appropriate.
    This section also continues all of the existing orders, 
regulations, determinations, agreements, procedures, 
interpretations and advisory materials of the OTS and those of 
the Board that relate to the Board's functions that have been 
transferred.

Section 317. References in Federal law to Federal banking agencies

    This section provides that references in Federal law to the 
OTS with respect to functions that are transferred shall be 
deemed references to the OCC, FDIC, or Board, as appropriate. 
In addition, references in Federal law to the Board and the 
Federal Reserve banks with respect to their functions that are 
transferred shall be deemed references to the OCC or the FDIC, 
as appropriate.

Section 318. Funding

    This section allows the Comptroller to collect an 
assessment, fee, or other charge from any entity the OCC 
supervises as necessary to carry out its responsibilities 
including with respect to holding companies, federal thrifts, 
and nonbank affiliates (that are not functionally regulated) 
that engage in bank permissible activities. The OCC's 
supervision of these nonbank affiliates is provided under a new 
section 6 of the Bank Holding Company Act of 1956 which is 
added in Title VI of this Act. In establishing the amount of an 
assessment, fee, or other charge collected from an entity, the 
OCC may take into account the funds transferred to the OCC 
(under a new arrangement with the FDIC), the nature and scope 
of the activities of the entity, the amount and types of assets 
held by the entity, the financial and managerial condition of 
the entity, and any other factor that the OCC deems 
appropriate.
    This section also authorizes the FDIC to charge for its 
supervision of nonbank affiliates under new section 6 of the 
Bank Holding Company Act.
    This section requires the OCC to submit to the FDIC a 
proposal to promote parity in the examination fees state and 
federal depository institutions having total consolidated 
assets of less than $50,000,000,000 pay for their supervision.
    Currently, the FDIC and the Board do not charge state banks 
for their federal supervision. (These agencies share 
examination responsibilities with the states, and thus lower 
the costs to the states of supervising these entities. While 
the states charge for supervision, the FDIC and Board do not.) 
The FDIC pays for supervision of state banks from the Deposit 
Insurance Fund (DIF). Both state and federal depository 
institutions pay insurance premiums into the DIF. Thus, 
national banks and federal thrifts help defray the costs 
associated with the FDIC's supervision of state nonmember 
banks. This subsidy will only grow when the FDIC assumes the 
supervision of all state banks and state thrifts, as well as 
most of their holding companies, if the FDIC continues to rely 
on the DIF to fund supervision.
    The funding disparity can also exacerbate regulatory 
arbitrage according to testimony the Committee received. The 
OCC must assess its banks for examination fees whereas the FDIC 
and the Board have other means to fund their supervision of 
state banks. [footnote to Ludwig's testimony, September 29, 
2009] Thus promoting parity in examination fees should reduce 
the arbitrage in the system and the subsidy for federal 
supervision of state banks by national banks and federal 
thrifts.
    Under this section, the OCC's proposal will recommend a 
transfer from the FDIC to the OCC of a percentage of the amount 
that the OCC estimates is necessary or appropriate to carry out 
its supervisory responsibilities of federal depository 
institutions having total consolidated assets of less than 
$50,000,000,000. The FDIC is directed to assist the OCC in 
collecting data relative to the supervision of State depository 
institutions to develop the proposal.
    Not later than 60 days after receipt of the proposal, the 
FDIC Board must vote on the proposal and promptly implement a 
plan to periodically transfer to the OCC a percentage of the 
amount that the OCC estimates is necessary or appropriate to 
carry out the its supervisory responsibilities for national 
banks and federal thrifts having total consolidated assets of 
less than $50,000,000,000, as approved by the FDIC Board. Not 
later than 30 days after the FDIC Board's vote, the FDIC must 
submit to the Senate Banking Committee and House Financial 
Services Committee a report describing the OCC's proposal and 
the decision resulting from the FDIC Board's vote. If, by 2 
years after the date of enactment of this Act, the FDIC Board 
has failed to approve a plan, the Financial Stability Oversight 
Council shall approve a plan using the dispute resolution 
procedures under section 119.
    The section also requires the Board to collect assessments, 
fees, and charges from (1) bank holding companies and savings 
and loan holding companies that have total consolidated assets 
equal to or greater than $50 billion, and (2) all nonbank 
financial companies supervised by the Board under section 113 
of this Act, that are equal to the total expenses incurred by 
the Board to carry out its responsibilities with respect to 
such companies. Charging holding companies for the Board's 
supervision will result in savings by the taxpayer.

Section 319. Contracting and leasing authority

    This section clarifies the contracting and leasing 
authorities of the Office of the Comptroller of the Currency.

                  Subtitle B--Transitional Provisions


Section 321. Interim use of funds, personnel, and property

    This section provides for the orderly transfer of functions 
(1) from the OTS to the OCC, FDIC and the Board; and (2) from 
the Board to the OCC and FDIC, with specific reference to 
funds, personnel and property.

Section 322. Transfer of employees

    This section states that all employees of the OTS are 
transferred to OCC or the FDIC. The OTS, OCC and FDIC must 
jointly identify the employees necessary to carry out the 
duties transferred from the OTS to the OCC and the FDIC. The 
Board, OCC and FDIC must jointly identify the employees 
necessary to carry out the duties transferred from the Board 
(including the Federal Reserve banks) to the OCC or the FDIC.
    Under this section, relevant employees are transferred 
within 90 days of the transfer date. The section also describes 
the extent to which employees' status, tenure, pay, retirement 
and health care benefits are protected, and describes employee 
protections from involuntary separation and reassignments 
outside locality pay area. It also provides that not later than 
2 years from the transfer date, the OCC and FDIC must each 
place the transferred employees into the established pay and 
classification systems of the OCC and FDIC. In addition, this 
section provides that the OCC and FDIC may not take any action 
that would unfairly disadvantage a transferred employee 
relative to other OCC and FDIC employees on the basis of their 
prior employment by the OTS.

Section 323. Property transferred

    This section provides that property of the OTS is 
transferred to the OCC and FDIC. The OCC, FDIC and Board, will 
jointly determine which property of the Board should be 
transferred and to which of the agencies.

Section 324. Funds transferred

    This section provides that except to the extent necessary 
to dispose of the affairs of the OTS, all funds available to 
the OTS are transferred to the OCC, FDIC, or Board, in a manner 
commensurate with the functions that are transferred to these 
agencies.

Section 325. Disposition of affairs

    This section describes the authority of the Director of the 
OTS and the Chairman of the Board during the 90 day period 
beginning on the transfer date, to manage employees and 
property that have not yet been transferred, and to take 
actions necessary to wind up matters relating to any function 
transferred to another agency.

Section 326. Continuation of services

    This section states that any agency, department or 
instrumentality of the U.S. that was providing support services 
to the OTS or the Board, in connection with functions 
transferred to another agency, shall continue to provide such 
services until the transfer of functions is complete, and 
consult with the OCC, FDIC, or Board, as appropriate, to 
coordinate and facilitate a prompt and orderly transition.

           Subtitle C--Federal Deposit Insurance Corporation


Section 331. Deposit insurance reform

    This section amends the Federal Deposit Insurance Act to 
repeal the provision that states no institution may be denied 
the lowest-risk category solely because of its size. This 
section also directs the FDIC, unless it makes a written 
determination discussed below, to amend its regulations to 
define the term ``assessment base'' of an insured depository 
institution for purposes of deposit insurance assessments as 
the average total assets of the insured depository institution 
during the assessment period, minus the sum of (1) the average 
tangible equity of the insured depository institution during 
the assessment period and (2) the average long-term unsecured 
debt of the insured depository institution during the 
assessment period.
    If, not later than 1 year after the date of enactment of 
this Act, the FDIC submits to the Senate Banking Committee and 
House Financial Services Committee, in writing, a finding that 
such an amendment to its regulations regarding the definition 
of the term ``assessment base'' would reduce the effectiveness 
of the FDIC's risk-based assessment system or increase the risk 
of loss to the Deposit Insurance Fund, the FDIC may retain the 
definition of the term ``assessment base'', as in effect on the 
day before the date of enactment of this Act, or establish, by 
rule, a definition of the term ``assessment base'' that the 
FDIC deems appropriate.
    There is concern that the new assessment base will create 
an additional burden on insured depository institutions that 
support asset growth through increased reliance on Federal Home 
Loan Bank advances. Based on its current risk-based assessment 
rate regulations, the FDIC imposes an upward adjustment on an 
institution's deposit insurance assessment rate if the 
institution has secured liabilities, including Federal Home 
Loan Bank advances, in excess of a certain threshold. This 
section would now direct the FDIC to include assets funded by 
secured liabilities (including Federal Home Loan Bank advances) 
in an institution's assessment base. Therefore, the Committee 
recommends that the FDIC also review and adjust its risk-based 
assessment rate regulations, if warranted, to ensure that the 
assessment appropriately reflects the risk posed by an insured 
depository institution as a result of the changes to the 
assessment base.

Section 332. Management of the Federal Deposit Insurance Corporation

    This section replaces the position of the OTS on the FDIC 
Board of Directors with the Director of the Consumer Financial 
Protection Bureau.

           Subtitle D--Termination of Federal Thrift Charter


Section 341. Termination of federal savings associations

    This section provides that upon the date of enactment of 
this Act, neither the Director of the OTS nor the OCC may issue 
a charter for a federal savings association.\129\
---------------------------------------------------------------------------
    \129\``Congress created the federal thrift charter in the Home 
Owners' Loan Act of 1933 in response to the extensive failures of 
state-chartered thrifts and the collapse of the broader financial 
system during the Great Depression. The rationale for federal thrifts 
as a specialized class of depository institutions focused on 
residential mortgage lending made sense at the time but the case for 
such specialized institutions has weakened considerably in recent 
years. Moreover, over the past few decades, the powers of thrifts and 
banks have substantially converged.
    As securitization markets for residential mortgages have grown, 
commercial banks have increased their appetite for mortgage lending, 
and the Federal Home Loan Bank System has expanded its membership base. 
Accordingly, the need for a special class of mortgage-focused 
depository institutions has fallen. Moreover, the fragility of thrifts 
has become readily apparent during the financial crisis. In part 
because thrifts are required by law to focus more of their lending on 
residential mortgages, thrifts were more vulnerable to the housing 
downturn that the United States has been experiencing since 2007. The 
availability of the federal thrift charter has created opportunities 
for private sector arbitrage of our financial regulatory system.'' 
``Financial Regulatory Reform: A New Foundation,'' Administration's 
White Paper, introduced June 17, 2009.
---------------------------------------------------------------------------
    While this provision would not allow the establishment of 
any new federal thrifts, it does not affect the state thrift 
charter. Nor does it impose any new limits on existing federal 
thrifts or their owners. It would not require the divestiture 
of any thrift and it protects the status of existing unitary 
thrift holding companies.

Section 342. Branching

    This section states that a savings association that becomes 
a bank may continue to operate its branches.

  Title IV--Private Fund Investment Advisers Registration Act of 2010


Section 401. Short title

    Section 401 provides the title of the Act as the ``Private 
Fund Investment Advisers Registration Act of 2010''.

Section 402. Definitions

    Section 402 defines the terms ``private fund'' and 
``foreign private adviser.'' ``Private funds'' are issuers that 
would be regulated investment companies, but for sections 
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (which 
provide exemptions for issuers with fewer than 100 shareholders 
or where all shareholders are qualified purchasers).
    ``Foreign private advisers'' are those that have no place 
of business in the United States; do not hold themselves out 
generally to the public in the United States as investment 
advisers; and have fewer than 15 U.S. clients with less than 
$25 million in assets under management.

Section 403. Elimination of private adviser exemption; limited 
        exemption for foreign private advisers; limited intrastate 
        exemption

    Section 403 would require advisers to large hedge funds to 
register with the SEC, making them subject to record keeping, 
examination, and disclosure requirements. The rationale for the 
provision is that the unregulated status of large hedge funds 
constitutes a serious regulatory gap. No precise data regarding 
the size and scope of hedge fund activities are available, but 
the common estimate is that the funds had about $2 trillion 
under management before the crisis, and that amount may be 
magnified by leverage. They are significant participants in 
many financial markets; their trades and strategies can affect 
prices. While hedge funds are generally not thought to have 
caused the current financial crisis, information regarding 
their size, strategies, and positions could be crucial to 
regulatory attempts to deal with a future crisis. The case of 
Long-Term Capital Management, a hedge fund that was rescued 
through Federal Reserve intervention in 1998 because of 
concerns that it was ``too-interconnected-to-fail,'' indicates 
that the activities of even a single hedge fund may have 
systemic consequences.
    Section 403 was included in the Treasury's Department's 
regulatory reform proposal for hedge funds.\130\ Former SEC 
Chairman Arthur Levitt wrote in testimony for the Senate 
Banking Committee that he would ``recommend placing hedge funds 
under SEC regulation in the context of their role as money 
managers and investment advisers.''\131\ Advocates such as the 
AFL-CIO\132\, CalPERS,\133\ and the Investment Adviser 
Association\134\ also support placing hedge funds under SEC 
regulation via the Investment Advisers Act of 1940. Expert 
panels such as the Group of Thirty,\135\ the G-20,\136\ the 
Investor's Working Group,\137\ and the Congressional Oversight 
Panel\138\ also support this provision, as do industry groups 
such as the Alternative Investment Management Association,\139\ 
the Private Equity Council,\140\ and the Coalition of Private 
Investment Companies (CPIC). Mr. James Chanos, Chairman of the 
CPIC, testified before the Committee that ``private funds (or 
their advisers) should be required to register with the SEC. . 
. . Registration will bring with it the ability of the SEC to 
conduct examinations and bring administrative proceedings 
against registered advisers, funds, and their personnel. The 
SEC also will have the ability to bring civil enforcement 
actions and to levy fines and penalties for violations.''\141\ 
Former SEC Chief Accountant Lynn Turner also supported this 
provision in testimony.\142\
---------------------------------------------------------------------------
    \130\FACT SHEET: Administration's Regulatory Reform Agenda Moves 
Forward; Legislation for the Registration of Hedge Funds Delivered to 
Capitol Hill, U.S. Department of the Treasury, Press Release, July 15, 
2009, www.financialstability.gov.
    \131\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.9 
(2009) (Testimony of Mr. Arthur Levitt).
    \132\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Damon Silvers).
    \133\Regulating Hedge Funds and Other Private Investment Pools: 
Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session (2009) (Testimony of Mr. Joseph 
Dear).
    \134\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. David Tittsworth).
    \135\Financial Reform: A Framework for Financial Stability, Group 
of Thirty, January 15, 2009.
    \136\Enhancing Sound Regulation and Strengthening Transparency, G20 
Working Group 1, March 25, 2009.
    \137\U.S. Financial Regulatory Reform: An Investor's Perspective, 
Investor's Working Group, July 2009.
    \138\Special Report on Regulatory Reform, Congressional Oversight 
Panel, January 2009.
    \139\Alternative Investment Management Association (January 23, 
2009) ``AIMA Supports US Regulatory Reform Proposals'', Press Release, 
www.aima.org.
    \140\Capital Markets Regulatory Reform: Strengthening Investor 
Protection, Enhancing Oversight of Private Pools of Capital, and 
Creating a National Insurance Office: Testimony before the U.S. House 
Committee on Financial Services, 111th Congress, 1st session (2009) 
(Testimony of Mr. Douglas Lowenstein).
    \141\Regulating Hedge Funds and Other Private Investment Pools: 
Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p.17 (2009) (Testimony of Mr. 
James Chanos).
    \142\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Lynn Turner).
---------------------------------------------------------------------------
    A significant number of hedge funds are already registered 
with the SEC, on a voluntary basis. Hedge Fund Research reports 
that nearly 55 percent of the hedge fund firms located in the 
United States are currently registered with the SEC, and that 
SEC-registered hedge fund firms manage nearly 71 percent of all 
US-based hedge fund capital.
    Section 403 eliminates the exemption in section 203(b)(3) 
of the Investment Advisers Act of 1940 for advisers with fewer 
than 15 clients. Under current law, a hedge fund is counted as 
a single client, allowing hedge fund advisers to escape the 
obligation to register with the SEC. The Section adds an 
exemption for foreign private advisers, as defined in this Act. 
The Section adds a limited intrastate exemption, and an 
exemption for Small Business Investment Companies licensed by 
(or in the process of obtaining a license from) the Small 
Business Administration.

Section 404. Collection of systemic risk data; reports; examinations; 
        disclosures

    Section 404 authorizes the SEC to require advisers to 
private funds to file specific reports, which the SEC shall 
share with the Financial Stability Oversight Council. The 
filings shall describe the amount of assets under management, 
use of leverage, counterparty credit risk exposure, trading and 
investment positions, valuation policies, types of assets held, 
and other information that the SEC, in consultation with the 
Council, determines is necessary and appropriate to protect 
investors or assess systemic risk. Reporting requirements may 
be tailored to the type or size of the private fund. Frequency 
of reporting is at the SEC's discretion.
    Paul Schott Stevens, President of the Investment Company 
Institute, testified before the Committee that ``the Capital 
Markets Regulator should require nonpublic reporting of 
information, such as investment positions and strategies that 
could bear on systemic risk and adversely impact other market 
participants.''\143\ Richard Ketchum, Chairman of FINRA, said 
``The absence of transparency about hedge funds and their 
investment positions is a concern.''\144\ Hedge fund industry 
groups also support this provision, including the Managed Funds 
Association,\145\ the Coalition of Private Investment 
Companies,\146\ and the Private Equity Council.\147\
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    \143\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p.12 (2009) 
(Testimony of Mr. Paul Schott Stevens).
    \144\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.5 
(2009) (Testimony of Mr. Richard Ketchum).
    \145\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, 
(2009) (Testimony of Mr. Richard Baker).
    \146\Regulating Hedge Funds and Other Private Investment Pools: 
Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session (2009) (Testimony of Mr. James 
Chanos).
    \147\Capital Markets Regulatory Reform: Strengthening Investor 
Protection, Enhancing Oversight of Private Pools of Capital, and 
Creating a National Insurance Office: Testimony before the U.S. House 
Committee on Financial Services, 111th Congress, 1st session (2009) 
(Testimony of Mr. Douglas Lowenstein).
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    Section 404 requires the SEC to make available to the 
Financial Stability Oversight Council any private fund records 
it receives that the Council considers necessary to assess the 
systemic risk posed by a private fund. These records must be 
kept confidential: the Council must observe the same standards 
of confidentiality that apply to the SEC. Private fund records, 
including those containing proprietary information, are not 
subject to disclosure pursuant to the Freedom of Information 
Act.
    This section also directs the SEC to report annually to 
Congress on how it has used information collected from private 
funds to monitor markets for the protection of investors and 
market integrity.

Section 405. Disclosure provision eliminated

    Section 405 authorizes the SEC to require investment 
advisers to disclose the identity, investments, or affairs of 
any client, if necessary to assess potential systemic risk.

Section 406. Clarification of rulemaking authority

    Section 406 clarifies the SEC's authority to define 
technical, trade, and other terms used in the title, except 
that the SEC may not define ``client'' to mean investors in a 
fund, rather than the fund itself, for purposes of Section 206 
(1) and (2) of the Advisers Act, which governs fraud. The 
clarification avoids potential conflicts between the fiduciary 
duty an adviser owes to a private fund and to the individual 
investors in the fund (if those investors are defined as 
clients of the adviser). Actions in the best interest of the 
fund may not always be in the best interests of each individual 
investor. The section also directs the SEC and CFTC to jointly 
promulgate rules regarding the form and content of reporting by 
firms that are registered with both agencies.

Section 407. Exemptions of venture capital fund advisers

    The Committee believes that venture capital funds, a subset 
of private investment funds specializing in long-term equity 
investment in small or start-up businesses, do not present the 
same risks as the large private funds whose advisers are 
required to register with the SEC under this title. Their 
activities are not interconnected with the global financial 
system, and they generally rely on equity funding, so that 
losses that may occur do not ripple throughout world markets 
but are borne by fund investors alone. Terry McGuire, Chairman 
of the National Venture Capital Association, wrote in 
congressional testimony that ``venture capital did not 
contribute to the implosion that occurred in the financial 
system in the last year, nor does it pose a future systemic 
risk to our world financial markets or retail investors.''\148\ 
Section 407 directs the SEC to define ``venture capital fund'' 
and provides that no investment adviser shall become subject to 
registration requirements for providing investment advice to a 
venture capital fund.
---------------------------------------------------------------------------
    \148\Capital Markets Regulatory Reform: Strengthening Investor 
Protection, Enhancing Oversight of Private Pools of Capital, and 
Creating a National Insurance Office: Testimony before the U.S. House 
Committee on Financial Services, 111th Congress, 1st session, p.15 
(2009) (Testimony of Mr. Terry McGuire).
---------------------------------------------------------------------------

Section 408. Exemption of and record keeping by private equity fund 
        advisers

    The Committee believes that private equity funds 
characterized by long-term equity investments in operating 
businesses do not present the same risks as the large private 
funds whose advisers are required to register with the SEC 
under this title. Private equity investments are characterized 
by long-term commitments of equity capital--investors generally 
do not have redemption rights that could force the funds into 
disorderly liquidations of their positions. Private equity 
funds use limited or no leverage at the fund level, which means 
that their activities do not pose risks to the wider markets 
through credit or counterparty relationships. Accordingly, 
Section 408 directs the SEC to define ``private equity fund'' 
and provides an exemption from registration for advisers to 
private equity funds.
    Informed observers believe that in some cases the line 
between hedge funds and private equity may not be clear, and 
that the activities of the two types of funds may overlap. We 
expect the SEC to define the term ``private equity fund'' in a 
way to exclude firms that call themselves ``private equity'' 
but engage in activities that either raise significant 
potential systemic risk concerns or are more characteristic of 
traditional hedge funds. The section requires advisers to 
private equity funds to maintain such records, and provide to 
the SEC such annual or other reports, as the SEC determines 
necessary and appropriate in the public interest and for the 
protection of investors.

Section 409. Family offices

    Family offices provide investment advice in the course of 
managing the investments and financial affairs of one or more 
generations of a single family. Since the enactment of the 
Investment Advisers Act of 1940, the SEC has issued orders to 
family offices declaring that those family offices are not 
investment advisers within the intent of the Act (and thus not 
subject to the registration and other requirements of the Act). 
The Committee believes that family offices are not investment 
advisers intended to be subject to registration under the 
Advisers Act. The Advisers Act is not designed to regulate the 
interactions of family members, and registration would 
unnecessarily intrude on the privacy of the family involved. 
Accordingly, Section 409 directs the SEC to define ``family 
office'' and excludes family offices from the definition of 
investment adviser Section 202(a)(11) of the Advisers Act.
    Section 409 directs the SEC to adopt rules of general 
applicability defining ``family offices'' for purposes of the 
exemption. The rules shall provide for an exemption that is 
consistent with the SEC's previous exemptive policy and that 
takes into account the range of organizational and employment 
structures employed by family offices. The Committee recognizes 
that many family offices have become professional in nature and 
may have officers, directors, and employees who are not family 
members, and who may be employed by the family office itself or 
by an affiliated entity. Such persons (and other persons who 
may provide services to the family office) may co-invest with 
family members, enabling them to share in the profits of 
investments they oversee, and better aligning the interests of 
such persons with those of the family members served by the 
family office. The Committee expects that such arrangements 
would not automatically exclude a family office from the 
definition.

Section 410. State and federal responsibilities; asset threshold for 
        federal registration of investment advisers

    Section 410 increases the asset threshold above which 
investment advisers must register with the SEC from $25,000,000 
to $100,000,000. States will have responsibility for regulating 
advisers with less than $100,000,000 in assets under 
management. The Committee expects that the SEC, by 
concentrating its examination and enforcement resources on the 
largest investment advisers, will improve its record in 
uncovering major cases of investment fraud, and that the States 
will provide more effective surveillance of smaller funds. In a 
letter to Chairman Dodd and Ranking Member Shelby, the North 
American Securities Administrators Association stated that 
``State securities regulators are ready to accept the increased 
responsibility for the oversight of investment advisers with up 
to $100 million in assets under management. The state system of 
investment adviser regulation has worked well with the $25 
million threshold since it was mandated in 1996 and states have 
developed an effective regulatory structure and enhanced 
technology to oversee investment advisers. . . . An increase in 
the threshold would allow the SEC to focus on larger investment 
advisers while the smaller advisers would continue to be 
subject to strong state regulation and oversight.''\149\
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    \149\North American Securities Administrators Association, letter 
to Chairman Dodd and Ranking Member Shelby, November 17, 2009.
---------------------------------------------------------------------------
    In a letter to Senate Banking Committee staff in October 
2009, Professor Mercer Bullard stated, ``I support the $100 
million threshold. This merely restores the distribution of 
advisers between the SEC and states that existed at the time 
they were split by [the National Securities Markets Improvement 
Act].''

Section 411. Custody of client assets

    Section 411 requires registered investment advisers to 
comply with SEC rules for the safeguarding of client assets and 
to use independent public accountants to verify assets. The SEC 
has recently adopted new rules imposing heightened standards 
for custody of client assets. Mr. James Chanos, Chairman of the 
Coalition of Private Investment Companies, wrote in testimony 
for the Committee that ``Any new private fund legislation 
should include provisions to reduce the risks of Ponzi schemes 
and theft by requiring money managers to keep client assets at 
a qualified custodian, and by requiring investment funds to be 
audited by independent public accounting firms that are 
overseen by the PCAOB.''\150\
---------------------------------------------------------------------------
    \150\Regulating Hedge Funds and Other Private Investment Pools: 
Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p. 18 (2009) (Testimony of Mr. 
James Chanos).
---------------------------------------------------------------------------
    Professor John Coffee wrote in testimony for the Senate 
Banking Committee that ``the custodian requirement largely 
removes the ability of an investment adviser to pay the 
proceeds invested by new investors to old investors. The 
custodian will take the instructions to buy or sell securities, 
but not to remit the proceeds of sales to the adviser or to 
others (except in return for share redemptions by investors). 
At a stroke, this requirement eliminates the ability of the 
manager to recycle' funds from new to old investors.''\151\ SEC 
Inspector General H. David Kotz also supports this 
provision.\152\
---------------------------------------------------------------------------
    \151\Madoff Investment Securities Fraud: Regulatory and Oversight 
Concerns and the Need for Reform: Testimony before the U.S. Senate 
Committee on Banking, Housing, and Urban Affairs, 111th Congress, 1st 
session, pp. 8,10 (2009) (Testimony of Professor John Coffee).
    \152\SEC Inspector General H. David Kotz, letter to Senator Dodd, 
October 29, 2009.
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Section 412. Adjusting the accredited investor standard for inflation

    Accredited investor status, defined in SEC regulations 
under the Securities Act of 1933, is required to invest in 
hedge funds and other private securities offerings. Accredited 
investors are presumed to be sophisticated, and not in need of 
the investor protections afforded by the registration and 
disclosure requirements that apply to public offerings. For 
individuals, the accredited investor thresholds are dollar 
amounts for annual income ($200,000 or $300,000 for an 
individual and spouse) and net worth ($1 million, which may 
include the value of a person's primary residence). These 
amounts have not been adjusted since 1982; some observers 
believe that because of inflation and real estate price 
appreciation many individuals who now meet the accredited 
investor standard may lack the degree of financial expertise 
that was implied by the thresholds when they were established 
nearly three decades ago. The North American Securities 
Administrators Association wrote in a 2007 comment letter to 
the SEC that ``NASAA has long advocated for adjusting the 
definition of accredited investor' in light of inflation and 
has expressed concern at the length of time the thresholds 
contained in the definition have not been adjusted . . . 
[I]nflation has seriously eroded the efficacy of the existing 
thresholds in the definition of accredited investor' since 
their adoption in 1982. NASAA further supports an inflation 
adjustment every five years.''\153\
---------------------------------------------------------------------------
    \153\North American Securities Administrators Association, comment 
letter in response to SEC proposed rule Revisions of Limited Offering 
Exemptions in Regulation D, Release No. 33 8828; IC-27922; File No. S7-
18-07, October 26, 2007.
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    Section 412 requires the SEC to increase the dollar 
thresholds for accredited investor status, to take into account 
price inflation since the current figures were established. The 
Section also directs the SEC to adjust those figures at least 
every five years to reflect the percentage increase in the cost 
of living. This provision is intended to increase investor 
protection by limiting participation in private securities 
offerings to investors who are capable of evaluating the risks 
of such offerings.

Section 413. GAO study and report on accredited investors

    Section 413 directs the GAO to submit a report on the 
appropriate criteria for accredited investor status and 
eligibility to invest in private funds. The goal of the 
exemptions for accredited investors is to identify a category 
of investors who have sufficient knowledge and expertise to 
fend for themselves in making investment decisions. Currently, 
this category is identified by salary or wealth. However, we 
recognize that these are imperfect standards. For example, a 
person's wealth may include a valuable primary residence but 
little liquid cash, or a wealthy person may be a widow or 
widower with a large inheritance, but little investment 
expertise. Accordingly, we ask the GAO to determine whether 
other measures would be more appropriate.

Section 414. GAO study on self-regulatory organization for private 
        funds

    Section 414 directs the GAO to study the feasibility of 
creating a self-regulatory organization to oversee private 
funds--which can include hedge funds, private equity funds, and 
venture capital funds.

Section 415. Commission study and report on short selling

    Section 415 directs the Office of Risk, Strategy, and 
Financial Innovation of the SEC to conduct a study on the 
current state of short selling, the impact of recent SEC rules, 
the recent incidence of failures to deliver, the practice of 
delivering shares sold short on the fourth day following the 
trade, and consideration of real time reporting of short 
positions.

Section 416. Transition period

    Section 416 provides that the title becomes effective one 
year after the date of enactment of this Act, but advisers to 
private funds may voluntarily register with the SEC during that 
1-year period.

                           Title V--Insurance


                Subtitle A--Office of National Insurance


Section 501. Short title

Section 502. Establishment of Office of National Insurance

    This section establishes the Office of National Insurance 
(``Office'') within the Department of the Treasury. The Office, 
to be headed by a career Senior Executive Service Director 
appointed by the Secretary of the Treasury (``Secretary''), 
will have the authority to: (1) monitor all aspects of the 
insurance industry; (2) recommend to the Financial Stability 
Oversight Council (``Council'') that the Council designate an 
insurer, including its affiliates, as an entity subject to 
regulation by the Board of Governors as a nonbank financial 
company as defined in Title I of the Restoring American 
Financial Stability Act; (3) assist the Secretary in 
administering the Terrorism Risk Insurance Program; (4) 
coordinate Federal efforts and establish Federal policy on 
prudential aspects of international insurance matters; (5) 
determine whether State insurance measures are preempted by 
International Insurance Agreements on Prudential Measures; and 
(6) consult with the States regarding insurance matters of 
national importance and prudential insurance matters of 
international importance. The authority of the Office extends 
to all lines of insurance except health insurance and crop 
insurance.
    In carrying out its functions, the Office may collect data 
and information on the insurance industry and insurers, as well 
as issue reports. It may require an insurer or an affiliate to 
submit data or information reasonably required to carry out 
functions of the Office, although the Office may establish an 
exception to data submission requirements for insurers meeting 
a minimum size threshold. Before collecting any data or 
information directly from an insurer, the Office must first 
coordinate with each relevant State insurance regulator (or 
other relevant Federal or State regulatory agency, in the case 
of an affiliate) to determine whether the information is 
available from such State insurance regulator or other 
regulatory agency. The Office will have power to require by 
subpoena that an insurer produce the data or information 
requested, but only upon a written finding by the Director that 
the data or information is required to carry out its functions 
and that it has coordinated with relevant regulator or agency 
as required. The subpoena authority is intended to be an option 
of last resort that would very rarely be used, since it is 
expected that the relevant regulator or agency and the insurers 
would cooperate with reasonable requests for data or 
information by the Office. Any non-publicly available data and 
information submitted to the Office will be subject to 
confidentiality provisions: privileges are not waived; any 
requirements regarding privacy or confidentiality will continue 
to apply; and information contained in examination reports will 
be considered subject to the applicable exemption under the 
Freedom of Information Act for this type of information.
    The Director will determine whether a State insurance 
measure is preempted because it: (a) results in less favorable 
treatment of a non-United States insurer domiciled in a foreign 
jurisdiction that is subject to an International Insurance 
Agreement on Prudential Measures than a United States insurer 
domiciled, licensed, or otherwise admitted in that State and 
(b) is inconsistent with an International Insurance Agreement 
on Prudential Measures. However, the savings clause provides 
that nothing in this section preempts any State insurance 
measure that governs any insurer's rates, premiums, 
underwriting or sales practices, State coverage requirements 
for insurance, application of State antitrust laws to the 
business of insurance, or any State insurance measure governing 
the capital or solvency of an insurer (except to the extent 
such measure results in less favorable treatment of a non-
United States insurer than a United States insurer). The 
savings clause is intended to shield these important State 
consumer protection measures from preemption.
    An ``International Insurance Agreement on Prudential 
Measures'' is defined as a written bilateral or multilateral 
agreement entered into between the United States and a foreign 
government, authority, or regulatory entity regarding 
prudential measures applicable to the business of insurance or 
reinsurance. Before making a determination of inconsistency, 
the Director will notify and consult with the appropriate 
State, publish a notice in the Federal Register, and give 
interested parties the opportunity to submit comments. Upon 
making the determination, the Director will notify the 
appropriate State and Congress, and establish a reasonable 
period of time before the preemption will become effective. At 
the conclusion of that period, if the basis for the 
determination still exists, the Director will publish a notice 
in the Federal Register that the preemption has become 
effective and notify the appropriate State.
    The Director will consult with State insurance regulators, 
to the extent the Director determines appropriate, in carrying 
out the functions of the Office. The Director may also consult 
on insurance matters with Indian Tribes (as defined in Section 
4(e) of the Indian Self-Determination and Education Assistance 
Act, as amended (25 U.S.C. 450b(e))) regarding insurance 
entities wholly owned by Indian Tribes. Nothing in this section 
will be construed to give the Office or the Treasury Department 
general supervisory or regulatory authority over the business 
of insurance.
    The Director must submit a report to the President and to 
Congress by September 30th of each year on the insurance 
industry and any actions taken by the Office regarding 
preemption of inconsistent State insurance measures.
    The Director must also conduct a study and submit a report 
to Congress within 18 months of the enactment of this section 
on how to modernize and improve the system of insurance 
regulation in the United States. The study and report must be 
guided by the following six considerations: (1) systemic risk 
regulation with respect to insurance; (2) capital standards and 
the relationship between capital allocation and liabilities; 
(3) consumer protection for insurance products and practices; 
(4) degree of national uniformity of state insurance 
regulation; (5) regulation of insurance companies and 
affiliates on a consolidated basis; and (6) international 
coordination of insurance regulation. The study and report must 
also examine additional factors as set forth in this section.
    This section also authorizes the Secretary of the Treasury 
to negotiate and enter into International Insurance Agreements 
on Prudential Measures on behalf of the United States. However, 
nothing in this section will be construed to affect the 
development and coordination of the United States international 
trade policy or the administration of the United States trade 
agreements program. The Secretary will consult with the United 
States Trade Representative on the negotiation of International 
Insurance Agreements on Prudential Measures, including prior to 
initiating and concluding any such agreements.

                Subtitle B--State-Based Insurance Reform


Section 511. Short title

    This subtitle may be cited as the ``Nonadmitted and 
Reinsurance Reform Act of 2009''.

Section 512. Effective date

Part I--Nonadmitted Insurance

Sec. 521. Reporting, payment, and allocation of premium taxes

    Gives the home State of the insured (policyholder) sole 
regulatory authority over the collection and allocation of 
premium tax obligations related to nonadmitted insurance (also 
known as surplus lines insurance). States are authorized to 
enter into a compact or other agreement to establish uniform 
allocation and remittance procedures. Insured's home State may 
require surplus lines brokers and insureds to file tax 
allocation reports detailing portion of premiums attributable 
to properties, risks, or exposures located in each state.

Sec. 522. Regulation of nonadmitted insurance by insured's home state

    Unless otherwise provided, insured's home State has sole 
regulatory authority over nonadmitted insurance, including 
broker licensing.

Sec. 523. Participation in national producer database

    State may not collect fees relating to licensing of 
nonadmitted brokers unless the State participates in the 
national insurance producer database of the National 
Association of Insurance Commissioners (NAIC) within 2 years of 
enactment of this subtitle.

Sec. 524. Uniform standards for surplus lines eligibility

    Streamlines eligibility requirements for nonadmitted 
insurance providers with the eligibility requirements set forth 
in the NAIC's Nonadmitted Insurance Model Act.

Sec. 525. Streamlined application for commercial purchasers

    Allows exempt commercial purchasers, as defined in section 
527, easier access to the non-admitted marketplace by waiving 
certain requirements.

Sec. 526. GAO study of nonadmitted insurance market

    The Comptroller General shall conduct a study of the 
nonadmitted insurance market to determine the effect of the 
enactment of this part on the size and market share of the 
nonadmitted market. The Comptroller General shall consult with 
the NAIC and produce this report within 30 months after the 
effective date.

Sec. 527. Definitions

    Among others, defines Exempt Commercial Purchasers and 
details the qualifications necessary to qualify as such for the 
purposes of section 525.

Part II--Reinsurance

Sec. 531. Regulation of credit for reinsurance and reinsurance 
        agreements

    Prohibits non-domiciliary States from denying credit for 
reinsurance if the State of domicile of a ceding insurer is an 
NAIC-accredited State or has solvency requirements 
substantially similar to those required for NAIC accreditation. 
Prohibits non-domiciliary States from restricting or 
eliminating the rights of reinsurers to resolve disputes 
pursuant to contractual arbitration clauses, prohibits non-
domiciliary States from ignoring or eliminating contractual 
agreements on choice of law determinations, and prohibits non-
domiciliary States from enforcing reinsurance contracts on 
terms different from those set forth in the reinsurance 
contract.

Sec. 532. Solvency regulation

    State of domicile of the reinsurer is solely responsible 
for regulating the financial solvency of the reinsurer. Non-
domiciliary States may not require reinsurer to provide any 
additional financial information other than the information 
required by State of domicile. Non-domiciliary States are 
required to be provided with copies of the financial 
information that is required to be filed with the State of 
domicile.

Sec. 533. Definitions

    Among others, defines a reinsurer and clarifies how an 
insurer could be determined as a reinsurer under the laws of 
the state of domicile.

Part III--Rule of Construction

Sec. 541. Rule of construction

    Clarifies that this subtitle will not modify, impair, or 
supersede the application of antitrust laws, confirms that any 
potential conflict between this subtitle and the antitrust laws 
will be resolved in favor of the operation of the antitrust 
laws.

Sec. 542. Severability

    States that if any section, subsection, or application of 
this subtitle is held to be unconstitutional, the remainder of 
the subtitle shall not be affected.

 Title VI--Bank and Savings Association Holding Company and Depository 
            Institution Regulatory Improvements Act of 2009


Section 601. Short title

    The short title of this section is the ``Bank and Savings 
Association Holding Company and Depository Institution 
Regulatory Improvements Act of 2010.''

Section 602. Definitions

    This section defines the term ``commercial firm'' as any 
entity that derives not less than 15 percent of the 
consolidated annual gross revenues of the entity, including all 
affiliates of the entity, from engaging in activities that are 
not financial in nature or incidental to activities that are 
financial in nature, as provided in section 4(k) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1843(k)).

Section 603. Moratorium and study on treatment of credit card banks, 
        industrial loan companies, trust banks and certain other 
        companies as bank holding companies under the Bank Holding 
        Company Act

    This section imposes a three-year moratorium on the ability 
of the Federal Deposit Insurance Corporation to approve a new 
application for deposit insurance for an industrial loan 
company, credit card bank, or trust bank that is owned or 
controlled by a commercial firm. During this period, the 
appropriate Federal banking agency may not approve a change in 
control of an industrial bank, a credit card bank, or a trust 
bank if the change in control would result in direct or 
indirect control of the industrial bank, credit card bank, or 
trust bank by a commercial firm, unless the bank is in danger 
of default, or unless the change in control results from the 
merger or whole acquisition of a commercial firm that directly 
or indirectly controls the industrial bank, credit card bank, 
or trust bank in a bona fide merger with or acquisition by 
another commercial firm.
    In addition, this section provides that within 18 months of 
enactment of this Act, the Comptroller General must submit a 
report to Congress analyzing whether it is necessary to 
eliminate the exceptions in the Bank Holding Company Act of 
1956 (BHCA) for credit card banks, industrial loan companies, 
trust banks, thrifts, and certain other companies, in order to 
strengthen the safety and soundness of these institutions or 
the stability of the financial system.
    The Treasury Department's legislative proposal for 
financial reform includes a provision that would have 
eliminated the exceptions in the BHCA for credit card banks, 
industrial loan companies, trust banks and certain other 
limited purpose banks.\154\ Under this proposal, firms owning 
such companies, including commercial firms, would have been 
subject to regulation as bank holding companies. As a 
consequence, these firms would have been required to divest of 
certain financial businesses in accordance with BHCA activity 
limitations, and would have been subject to new capital 
requirements. The Committee is seeking additional information 
through the GAO to determine whether this new supervisory 
regime should be applied to firms that own credit card banks, 
industrial loan companies, trust banks, or other limited 
purpose banks.
---------------------------------------------------------------------------
    \154\FACT SHEET: ADMINISTRATION'S REGULATORY REFORM AGENDA MOVES 
FORWARD; Legislation for Strengthening Investor Protection Delivered to 
Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 
2009, www.financialstability.gov.
---------------------------------------------------------------------------

Section 604. Reports and examinations of bank holding companies; 
        regulation of functionally regulated subsidiaries

    This section removes limitations on the ability of the 
appropriate Federal banking agency (AFBA) for a bank or savings 
and loan holding company to obtain reports from, examine, and 
regulate all subsidiaries of the holding company. The Committee 
agrees with testimony provided by Governor Daniel K. Tarullo, 
on behalf of the Board of Governors of the Federal Reserve 
System (Federal Reserve) ``that to be fully effective, 
consolidated supervisors need the information and ability to 
identify and address risk throughout an organization.''\155\ 
For this reason, this section removes the so-called Fed-lite 
provisions of the Gramm-Leach-Bliley Act that placed 
limitations on the ability of the Federal Reserve to examine, 
obtain reports from, or take actions to identify or address 
risks with respect to subsidiaries of a bank holding company 
that are supervised by other agencies. However, this section 
also requires the AFBA for the holding company to coordinate 
with other Federal and state regulators of subsidiaries of the 
holding company, to the fullest extent possible, to avoid 
duplication of examination activities, reporting requirements, 
and requests for information.
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    \155\Strengthening and Streamlining Prudential Bank Supervision--
Part I: Testimony of Daniel K. Tarullo, Member Board of Governors of 
the Federal Reserve System, before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 2nd session, p.13 
(August 4, 2009).
---------------------------------------------------------------------------
    While the Committee supports consolidated regulation, it 
also supports coordinated regulation. Accordingly, section 
604(b) requires the AFBA for a bank holding company to give 
prior notice to, and to consult with, the primary regulator of 
a subsidiary before commencing an examination of that 
subsidiary. The section contains an identical requirement with 
respect to the examination by the AFBA for a savings and loan 
holding company of a subsidiary of a savings and loan holding 
company. Other provisions in section 604 specifically require 
the holding company regulator to rely ``to the fullest extent 
possible'' on reports and supervisory information that are 
available from sources other than the subsidiary itself, 
including information that is ``otherwise available'' from 
other Federal or State regulators of the subsidiary. These 
provisions effectively require that the holding company 
regulator provide notice to and consult with the primary 
regulator, e.g., the appropriate Federal banking agency for a 
depository institution, to identify the information it wants 
and ascertain whether that information already is available 
from the primary regulator. In addition, section 604 
specifically requires the AFBA for the holding company to 
coordinate with other Federal and state regulators of 
subsidiaries of the holding company, ``to the fullest extent 
possible, to avoid duplication of examination activities, 
reporting requirements, and requests for information.''
    This section also requires the AFBA for the holding company 
to consider risks to the stability of the United States banking 
or financial system when reviewing bank holding company 
proposals to engage in mergers, acquisitions, or nonbank 
activities or financial holding company proposals to engage in 
activities that are financial in nature. A financial holding 
company also may not engage in certain activities that are 
financial in nature without the approval of the AFBA for the 
holding company if they involve the acquisition of assets that 
exceed $25 billion.
    In addition, the section amends the Home Owners' Loan Act 
to clarify the authority of the AFBA of a savings and loan 
holding company to examine and require reports from the savings 
and loan holding company and all of its subsidiaries. It also 
directs the AFBA to coordinate its supervisory activities with 
other Federal and state regulators of the holding company 
subsidiaries.

Section 605. Assuring consistent oversight of permissible activities of 
        depository institution subsidiaries of holding companies

    This section requires the ``lead Federal banking agency'' 
for each depository institution holding company to examine the 
bank permissible activities of each non-depository institution 
subsidiary (other than a functionally regulated subsidiary) of 
the depository institution holding company to determine whether 
the activities present safety and soundness risks to any 
depository institution subsidiary of the holding company. For 
purposes of this section, ``lead Federal banking agency'' is 
defined as (1) the Office of the Comptroller of the Currency 
for holding companies with Federally-chartered depository 
institution subsidiaries, or where total consolidated assets in 
its Federally-chartered depository institution subsidiaries 
exceed those in its State-chartered depository institution 
subsidiaries or (2) the Federal Deposit Insurance Corporation 
for holding companies with state-chartered depository 
institution subsidiaries, or where total consolidated assets in 
its state-chartered depository institution subsidiaries exceed 
those in its Federally-chartered depository institution 
subsidiaries. The ``lead Federal banking agency'' can recommend 
that the Federal Reserve take enforcement action against a non-
depository subsidiary where the Board is the holding company 
regulator. If the Federal Reserve does not take enforcement 
action within 60-days of receiving the recommendation, the 
``lead Federal banking agency'' may take enforcement action 
against the non-depository institution.
    This provision addresses the problem of the uneven 
supervisory standards under today's regulatory regime, 
applicable to depository and non-depository subsidiaries 
holding companies, highlighted by John C. Dugan, Comptroller of 
the Currency, in his testimony before the Committee. Changes 
made by this section are consistent with the recommendation of 
Comptroller Dugan that where subsidiaries are engaged in the 
same business as is conducted, or could be conducted, by an 
affiliated bank mortgage or other consumer lending, for example 
the prudential supervisor already has the resources and 
expertise needed to examine the activity. Affiliated companies 
would then be made subject to the same standards and examined 
with the same frequency as the affiliated bank. This approach 
also would ensure that the placement of an activity in a 
holding company structure could not be used to arbitrage 
between different supervisory regimes or approaches.\156\
---------------------------------------------------------------------------
    \156\Strengthening and Streamlining Prudential Bank Supervision--
Part I: Testimony of John C. Dugan, Comptroller of the Currency, before 
the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111th 
Congress, 2nd session, p.17 (August 4, 2009).
---------------------------------------------------------------------------

Section 606. Requirements for financial holding companies to remain 
        well capitalized and well managed

    This section amends the BHCA to require all financial 
holding companies engaging in expanded financial activities to 
remain well capitalized and well managed.

Section 607. Standards for interstate acquisitions and mergers

    This section raises the capital and management standards 
for bank holding companies engaging in interstate bank 
acquisitions by requiring them to be well capitalized and well 
managed. In addition, interstate mergers of banks will only be 
permitted if the resulting bank is well capitalized and well 
managed.

Section 608. Enhancing existing restrictions on bank transactions with 
        affiliates

    This section amends section 23A of the Federal Reserve Act 
by, among other things, defining an investment fund, for which 
a member bank is an investment adviser, as an affiliate of the 
member bank.
    It also adds credit exposure from a securities borrowing or 
lending transaction or derivative transaction to the list of 
inter-affiliate ``covered transactions'' in section 23A. The 
Federal Reserve is provided the discretion to define ``credit 
exposure.'' In addition, the Federal Reserve may issue 
regulations or interpretations with respect to the manner in 
which a netting agreement may be taken into account in 
determining the amount of a covered transaction between a 
member bank or a subsidiary and an affiliate, including the 
extent to which netting agreements between a member bank or a 
subsidiary and an affiliate may be taken into account in 
determining whether a covered transaction is fully secured for 
purposes of subsection (d)(4) of section 23A.
    This provision represents a second attempt by Congress to 
address the credit exposure to banks from affiliate derivative 
transactions. Section 121 of the Gramm-Leach-Bliley Act 
provided that ``not later than 18 months after November 12, 
1999, the Federal Reserve shall adopt final rules under this 
section [23A of the Federal Reserve Act] to address as covered 
transactions credit exposure arising out of derivative 
transactions between member banks and their affiliates.''\157\ 
In 2002, the Federal Reserve announced that it ``expects to 
issue, in the near future, a proposed rule that would invite 
public comment on how to treat as covered transactions under 
section 23A certain derivative transactions that are the 
functional equivalent of a loan by a member bank to an 
affiliate or the functional equivalent of an asset purchase by 
a member bank from an affiliate.''\158\ However, the proposed 
rule was not issued.
---------------------------------------------------------------------------
    \157\Pub. L. 106-102, Title I, section 121(b), 113 Stat. 1378 
(November 12, 1999).
    \158\69 Fed Reg. 239 (December 12, 2002).
---------------------------------------------------------------------------
    The bank regulatory framework must address bank credit 
exposure to affiliates from derivative transactions to limit a 
bank's exposure to loss in the event of the failure of an 
affiliate. Over the last two years, the Committee has heard 
testimony regarding the damage to the U.S. economy caused by 
derivatives. Inter-affiliate derivative transactions are a 
major source of intra-firm complexity among the largest 
depository institutions. Moreover, tight limits on traditional 
credit exposures of banks to affiliates, such as loans, and no 
limits on nontraditional credit exposures of banks to 
affiliates, such as derivatives, have created a perverse 
incentive for banks to engage with their affiliates in these 
more complex, volatile and opaque transaction forms.
    Placing limits on derivative transactions will result in 
greater transparency and disclosure of derivative transactions 
between banks and their affiliates, a reduction in the volume 
of internal risk-shifting transactions, and in the 
simplification of the internal structures of our major 
financial firms.

Section 609. Eliminating exceptions for transactions with financial 
        subsidiaries

    This section amends section 23A of the Federal Reserve Act 
by eliminating the special treatment for transactions with 
financial subsidiaries.

Section 610. Lending limits applicable to credit exposure on derivative 
        transactions, repurchase agreements, reverse repurchase 
        agreements, and securities lending and borrowing transactions

    This section tightens national bank lending limits by 
treating credit exposures on derivatives, repurchase 
agreements, and reverse repurchase agreements as extensions of 
credit for the purposes of national bank lending limits. 
Accordingly, banks must take into account these exposures for 
purposes of the affiliate transaction limitations described in 
section 608, the insider transaction limits described in 
section 614, but also for purposes of lending limits that apply 
to non-affiliated third parties.

Section 611. Application of national bank lending limits to insured 
        state banks

    This section requires all insured depository institutions 
to comply with national bank lending limits. This legislation 
applies national bank lending limits to insured state banks for 
several reasons. First, lending limits restrict the percentage 
of a bank's capital that can be loaned to a single borrower and 
are one of the core safety and soundness laws applicable to 
bank operations. In almost all similar areas involving safety 
and soundness (capital adequacy, affiliate transaction limits, 
limits on loans to executive officers, and limits on loans to 
insiders) there is a uniform Federal standard that applies to 
all insured depository institutions. It is the view of the 
Committee that, as a matter of good public policy, banks should 
be subject to a uniform Federal standard with respect to 
lending limits, and should not compete on the basis of 
differences in safety and soundness regulation. A second reason 
relates to section 610 of the legislation that requires 
exposure from derivatives transactions to be included in 
Federal lending limits. State bank lending limits typically do 
not address derivatives. This section addresses the Committee's 
concern that if uniform restrictions in this area do not apply 
across the banking sector, risky derivative activities could 
migrate to state banks, or national banks may seek state 
charters to escape from regulation in this area. This section 
includes a 2-year transition period to ensure that state banks 
have adequate time to implement these new limits.

Section 612. Restriction on conversions of troubled banks and savings 
        associations

    This section prohibits conversions from a national bank 
charter to a state bank or savings association charter or vice 
versa during any time in which a bank or savings association is 
subject to a cease and desist order, other formal enforcement 
action, or memorandum of understanding. It also prohibits the 
conversion of a federal savings association to a national or 
state bank or state savings association under these 
circumstances.
    As Governor Daniel K. Tarullo noted in his testimony to the 
Committee, on behalf of the Federal Reserve, ``while 
institutions may engage in charter conversions for a variety of 
sound business reasons, conversions that are motivated by a 
hope of escaping current or prospective supervisory actions by 
the institution's existing supervisor undermine the efficacy of 
the prudential supervisory framework.''\159\ The Federal 
Financial Institutions Examination Council (FFIEC) recently 
issued a Statement on Regulatory Conversions declaring that 
supervisors will only consider applications undertaken for 
legitimate reasons and will not entertain regulatory conversion 
applications that undermine the supervisory process.\160\ This 
section codifies this important principle.
---------------------------------------------------------------------------
    \159\Strengthening and Streamlining Prudential Bank Supervision--
Part I: Testimony of Daniel K. Tarullo, Member Board of Governors of 
the Federal Reserve System, before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 2nd session, p. 13 
(August 4, 2009).
    \160\Federal Financial Institutions Examination Council (2009), 
``FFIEC Issues Statement on Regulatory Conversions, press release, July 
1, www.ffiec.gov/press/pr070109.htm.
---------------------------------------------------------------------------

Section 613. De novo branching into states

    This section expands the ability of a national bank or 
state bank to establish a de novo branch in another state. In 
the age of Internet transactions, such branching restrictions 
are anachronistic and ineffectual.

Section 614. Lending limits to insiders

    This section expands the type of transactions subject to 
insider lending limits to include derivatives transactions, 
repurchase agreements, reverse repurchase agreements, and 
securities lending or borrowing transactions. This section is 
consistent with this legislation's expansion of affiliate 
transaction limits in section 608, and lending limits 
applicable to non-affiliated third parties in section 610, and 
to include such exposures.

Section 615. Limitations on purchases of assets from insiders

    This section prohibits insured depository institutions from 
entering into asset purchase or sales transactions with its 
executive officers, directors, or principal shareholders or a 
related interest unless the transaction is on market terms and, 
if the transaction represents more than ten percent of the 
capital and surplus of the institution, has been approved in 
advance by a majority of the disinterested members of the 
board.
    This section replaces and expands a similar provision in 
section 22(d) of the Federal Reserve Act (12 U.S.C. 375) that 
simply restricts purchases and sales transactions between a 
member bank and its directors.

Section 616. Rules regarding capital levels of holding companies

    This section clarifies that the Federal Reserve may adopt 
rules governing the capital levels of bank and savings and loan 
holding companies. According to testimony provided to the 
Committee by John C. Dugan, Comptroller of the Currency, under 
the current regulatory system, ``thrift holding companies, 
unlike bank holding companies, are not subject to consolidated 
regulation for example, no consolidated capital requirements 
apply at the holding company level. This difference between 
bank and thrift holding company regulation created arbitrage 
opportunities for companies that were able to take on greater 
risk under a less rigorous regulatory regime.''\161\ This 
section provides the Federal Reserve with the same authority to 
prescribe capital standards for savings and loan holding 
companies that it currently has for bank holding companies. It 
is the intent of the Committee that in issuing regulations 
relating to capital requirements of bank holding companies and 
savings and loan holding companies under this section, the 
Federal Reserve should take into account the regulatory 
accounting practices and procedures applicable to, and capital 
structure of, holding companies that are insurance companies 
(including mutuals and fraternals), or have subsidiaries that 
are insurance companies.
---------------------------------------------------------------------------
    \161\Strengthening and Streamlining Prudential Bank Supervision--
Part I: Testimony of John C. Dugan, Comptroller of the Currency, before 
the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111th 
Congress, 2nd session, p.7 (August 4, 2009).
---------------------------------------------------------------------------
    This section also directs the AFBA for a bank or savings 
and loan holding company to require the company to serve as a 
source of financial strength for any insured depository 
institution that the company owns or controls. If an insured 
depository institution is not the subsidiary of a bank or 
savings and loan holding company, the AFBA for the insured 
depository institution must require any company that owns or 
controls the insured depository institution to serve as a 
source of financial strength for the institution. The AFBA for 
such an insured depository institution may, from time to time, 
require the company, or a company that directly or indirectly 
controls the depository to submit a report, under oath, for the 
purposes of assessing the ability of the company to comply with 
the source of strength requirement, and for purposes of 
enforcing the company's compliance with the source of strength 
requirement. It is the intent of the Committee that such 
companies will be permitted to provide financial reporting to 
the AFBA utilizing the accounting method they currently employ 
in reporting their financial information. More specifically, 
nothing in this provision is intended to mandate that insurance 
companies otherwise subject to alternative regulatory 
accounting practices and procedures use GAAP reporting.

Section 617. Elimination of elective investment bank holding company 
        framework

    This section eliminates the elective Investment Bank 
Holding Company Framework in the Securities Exchange Act of 
1934. This repeals the current supervised investment bank 
holding company program under which the Securities and Exchange 
Commission may supervise a non-bank securities firm that is 
required by a foreign regulator to be subject to consolidated 
supervision by a U.S. regulator and replaces this program with 
the supervisory regime described in section 618.

Section 618. Securities holding companies

    This section permits a securities holding company, not 
otherwise regulated by an AFBA, that is required by a foreign 
regulator to be subject to comprehensive consolidated 
supervision to register with the Federal Reserve to become a 
``supervised securities holding company.'' To qualify, a 
securities holding company must own or control one or more 
brokers or dealers registered with the Securities and Exchange 
Commission, and cannot be a nonbank financial company 
supervised by the Board, an affiliate of an insured bank or 
savings association, a foreign bank, or subject to 
comprehensive consolidated supervision by a foreign regulator. 
This section describes the manner in which the Board must 
supervise and regulate ``supervised securities holding 
companies,'' including through issuance of regulations that 
prescribe capital adequacy and other risk management standards 
to protect the safety and soundness of the company and to 
address risks posed to financial stability by such companies.

Section 619. Restrictions on capital market activity by banks and bank 
        holding companies

    The intent of this section is to prohibit or restrict 
certain types of financial activity--in banks, bank holding 
companies, other companies that control an insured depository 
institution, their subsidiaries, or nonbank financial companies 
supervised by the Board of Governors--that are high-risk or 
which create significant conflicts of interest between these 
institutions and their customers. The prohibitions and 
restrictions are intended to limit threats to the safety and 
soundness of the institutions, to limit threats to financial 
stability, and eliminate any economic subsidy to high-risk 
activities that is provided by access to lower-cost capital 
because of participation in the regulatory safety net.
    Subject to recommendations and modifications by the 
Financial Stability Oversight Council, an insured depository 
institution, a company that controls an insured depository 
institution or is treated as a bank holding company for 
purposes of the Bank Holding Company Act, and any subsidiary of 
such institution or company, will be prohibited from 
proprietary trading, sponsoring and investing in hedge funds 
and private equity funds, and from having certain financial 
relationships with those hedge funds or private equity funds 
for which they serve as investment manager or investment 
adviser. A nonbank financial institution supervised by the 
Board of Governors that engages in proprietary trading, or 
sponsoring or investing in hedge funds and private equity funds 
will be subject to Board rules imposing capital requirements 
relate to, or quantitative limits on, these activities. These 
prohibitions and restrictions will be subject to certain 
exemptions.
    The Council recommendations and modifications will be 
included in a study to assess the extent to which the 
prohibitions, limitations and requirements of section 619 will 
promote several goals, including: the safety and soundness of 
depositories and their affiliates; protecting taxpayers from 
loss; limiting the inappropriate transfer of economic subsidies 
from institutions that benefit from deposit insurance and 
liquidity facilities of the Federal government to unregulated 
entities; reducing inappropriate conflicts of interest between 
depositories and their affiliates, or financial companies 
supervised by the Board of Governors, and their customers; 
affecting the cost of credit or other financial services, 
limiting undue risk or loss in financial institutions; and 
appropriately accommodating the business of insurance within 
insurance companies subject to State insurance company 
investment laws.
    The Council study is included to assure that the 
prohibitions included in section 619 work effectively. It is 
not the intent of the section to interfere inadvertently with 
longstanding, traditional banking activities that do not 
produce high levels of risk or significant conflicts of 
interest. For that reason the Council is given some latitude to 
make needed modifications to definitions and provisions in 
order to prevent undesired outcomes. However, it is intended 
that the Council will determine how to effectively implement 
the prohibitions and restrictions of the section, and not to 
weaken them.
    The Council will have six months to write the study, and 
the appropriate Federal bank agencies will have nine months in 
which to issue regulations that reflect the recommendations of 
the Council.
    Paul Volcker, chairman of the President's Economic Recovery 
Advisory Board and former chairman of Board of Governors of the 
Federal Reserve, has strongly advocated that beneficiaries of 
the federal financial safety net be prohibited from engaging in 
high-risk activities. In the statement he submitted to the 
Senate Committee on Banking, Housing and Urban Affairs on 
February 2, Mr. Volcker argued that there is no public policy 
rationale for subsidizing high risk activities:

          The basic point is that there has been, and remains, 
        a strong public interest in providing a ``safety 
        net''--in particular, deposit insurance and the 
        provision of liquidity in emergencies--for commercial 
        banks carrying out essential services. There is not, 
        however, a similar rationale for public funds--taxpayer 
        funds--protecting and supporting essentially 
        proprietary and speculative activities. Hedge funds, 
        private equity funds, and trading activities unrelated 
        to customer needs and continuing banking relationships 
        should stand on their own, without the subsidies 
        implied by public support for depository institutions.

    He also went on to note that these high-risk activities 
produce unacceptable conflicts of interest in insured and 
regulated institutions:

          . . . I want to note the strong conflicts of interest 
        inherent in the participation of commercial banking 
        organizations in proprietary or private investment 
        activity. That is especially evident for banks 
        conducting substantial investment management 
        activities, in which they are acting explicitly or 
        implicitly in a fiduciary capacity. When the bank 
        itself is a ``customer'', i.e., it is trading for its 
        own account, it will almost inevitably find itself, 
        consciously or inadvertently, acting at cross purposes 
        to the interests of an unrelated commercial customer of 
        a bank. ``Inside'' hedge funds and equity funds with 
        outside partners may generate generous fees for the 
        bank without the test of market pricing, and those same 
        ``inside'' funds may be favored over outside 
        competition in placing funds for clients. More 
        generally, proprietary trading activity should not be 
        able to profit from knowledge of customer trades.

    At the same hearing Deputy Treasury Secretary Neal Wolin 
emphasized the volatility and riskiness of the activities that 
are prohibited under section 619. In his statement he noted 
that:

          Major firms saw their hedge funds and proprietary 
        trading operations suffer large losses in the financial 
        crisis. Some of these firms ``bailed out'' their 
        troubled hedge funds, depleting the firm's capital at 
        precisely the moment it was needed most. The complexity 
        of owning such entities has also made it more difficult 
        for the market, investors, and regulators to understand 
        risks in major financial firms, and for their managers 
        to mitigate such risks. Exposing the taxpayer to 
        potential risks from these activities is ill-advised.

Section 620. Concentration limits on large financial firms

    Subject to recommendations from the Financial Stability 
Oversight Council, a financial company may not merge or 
consolidate with, acquire all or substantially all of the 
assets of, or otherwise acquire control of, another company, if 
the total consolidated liabilities of the acquiring financial 
company upon consummation of the transaction would exceed 10 
percent of the aggregate consolidated liabilities of all 
financial companies at the end of the calendar year preceding 
the transaction.
    The Council recommendations will be included in a study of 
the extent to which the concentration limit under section 620 
would affect financial stability, moral hazard in the financial 
system, the efficiency and competitiveness of United States 
financial firms and financial markets, and the cost and 
availability of credit and other financial services to 
households and businesses in the United States. The intent is 
to have the Council determine how to effectively implement the 
concentration limit, and not whether to do so.
    The Council will have six months to write the study, and 
the Board of Governors of the Federal Reserve will have nine 
months in which to issue regulations that reflect the 
recommendations and modifications of the Council.

      Title VII--Over-the-Counter Derivatives Markets Act of 2009


Section 701. Short title

Section 701. Findings and purposes

    This section describes the findings and purposes of the 
Over-the-Counter Derivatives Markets Act of 2009. In order to 
mitigate costs and risks to taxpayers and the financial system, 
this Act establishes regulations for the over-the-counter 
derivatives market including requirements for clearing, 
exchange trading, capital, margin, and reporting.

                 Subtitle A--Regulation of Swap Markets


Section 711. Definitions

    This section adds new definitions to the Commodity Exchange 
Act and directs the Commodity Futures Trading Commission 
(``CFTC'') and Securities and Exchange Commission (``SEC'') to 
jointly adopt uniform interpretations. The defined terms 
include ``swap,'' ``swap dealer,'' ``swap repository,'' and 
``major swap participant.''
    This section also establishes guidelines for joint CFTC and 
SEC rulemaking authority under this Act. This section requires 
that rules and regulations prescribed jointly under this Act by 
the CFTC and SEC shall be uniform and shall treat functionally 
or economically equivalent products similarly. This section 
authorizes the CFTC and SEC to prescribe rules defining 
``swap'' and ``security-based swap'' to prevent evasions of 
this Act. This section also requires the CFTC and SEC to 
prescribe joint rules in a timely manner and authorizes the 
Financial Stability Oversight Council to resolve disputes if 
the CFTC and SEC fail to jointly prescribe rules.

Section 712. Jurisdiction

    This section removes limitations on the CFTC's jurisdiction 
with respect to certain derivatives transactions, including 
swap transactions between ``eligible contract participants.''

Section 713. Clearing

            Subsection (a). Clearing requirement
    This subsection requires clearing of all swaps that are 
accepted for clearing by a registered derivatives clearing 
organization unless one of the parties to the swap qualifies 
for an exemption. This subsection requires cleared swaps that 
are accepted for trading to be executed on a designated 
contract market or on a registered alternative swap execution 
facility. The CFTC may exempt a party to a swap from the 
clearing and exchange trading requirement if one of the 
counterparties to the swap is not a swap dealer or major swap 
participant and does not meet the eligibility requirements of 
any derivatives clearing organization that clears the swap. The 
CFTC must consult the Financial Stability Oversight Council 
before issuing an exemption. Requires a party to a swap to 
submit the swap for clearing if a counterparty requests that 
such swap be cleared and the swap is accepted for clearing by a 
registered derivatives clearing organization.
    This subsection requires derivatives clearing organizations 
to seek approval from the CFTC prior to clearing any group or 
category of swaps and directs the CFTC and SEC to jointly adopt 
rules to further identify any group or category of swaps 
acceptable for clearing based on specified criteria; authorizes 
the CFTC and SEC jointly to prescribe rules or issue 
interpretations as necessary to prevent evasions of section 
2(j) of the Commodity Exchange Act; and requires parties who 
enter into non-cleared swaps to report such transactions to a 
swap repository or the CFTC.
            Subsection (b). Derivatives clearing organizations
    This subsection requires derivatives clearing organizations 
that clear swaps to register with the CFTC, and directs the 
CFTC and SEC (in consultation with the appropriate federal 
banking agencies) to jointly adopt uniform rules governing 
entities registered as derivatives clearing organizations for 
swaps under this subsection and entities registered as clearing 
agencies for security-based swaps under the Securities Exchange 
Act of 1934 (``Exchange Act''). This subsection also permits 
dual registration of a derivatives clearing organization with 
the CFTC and SEC or appropriate banking agency, authorizes the 
CFTC to exempt from registration under this subsection a 
derivatives clearing organization that is subject to 
comparable, comprehensive supervision and regulation on a 
consolidated basis by another regulator, and provides 
transition for existing clearing agencies. This subsection 
specifies core regulatory principles for derivatives clearing 
organizations, including standards for minimum financial 
resources, participant and product eligibility, risk 
management, settlement procedures, safety of member or 
participant funds and assets, rules and procedures for 
defaults, rule enforcement, system safeguards, reporting, 
recordkeeping, disclosure, information sharing, antitrust 
considerations, governance arrangements, conflict of interest 
mitigation, board composition, and legal risk. This subsection 
also requires a derivatives clearing organization to provide 
the CFTC with all information necessary for the CFTC to perform 
its responsibilities.
            Subsection (c). Legal certainty for identified banking 
                    products
    This subsection clarifies that the Federal banking 
agencies, rather than the CFTC or SEC, retain regulatory 
authority with respect to identified banking products, unless a 
Federal banking agency, in consultation with the CFTC and SEC, 
determines that a product has been structured as an identified 
banking product for the purpose of evading the provisions of 
the Commodity Exchange Act, Securities Act of 1933, or Exchange 
Act.

Section 714. Public reporting of aggregate swap data

    This section directs the CFTC (or a derivatives clearing 
organization or swap repository designated by the CFTC) to make 
available to the public, in a manner that does not disclose the 
business transactions or market positions of any person, 
aggregate data on swap trading volumes and positions.

Section 715. Swap repositories

    This section describes the duties of a swap repository as 
accepting, maintaining, and making available swap data as 
prescribed by the CFTC; makes registration with the CFTC 
voluntary for swap repositories; and subjects registered swap 
repositories to CFTC inspection and examination. This section 
also directs the CFTC and SEC to jointly adopt uniform rules 
governing entities that register with the CFTC as swap 
repositories and entities that register with the SEC as 
security-based swap repositories, and authorizes the CFTC to 
exempt from registration any swap repository subject to 
comparable, comprehensive supervision or regulation by another 
regulator.

Section 716. Reporting and recordkeeping

    This section requires reporting and recordkeeping by any 
person who enters into a swap that is not cleared through a 
registered derivatives clearing organization or reported to a 
swap repository.

Section 717. Registration and regulation of swap dealers and major swap 
        participants

    This section requires swap dealers and major swap 
participants to register with the CFTC, directs the CFTC and 
SEC to jointly adopt rules to mitigate conflicts, and directs 
the CFTC and SEC to jointly prescribe uniform rules for 
entities that register with the CFTC as swap dealers or major 
swap participants and entities that register with the SEC as 
security-based swap dealers or major security-based swap 
participants. This section also requires a registered swap 
dealer or major swap participant to (1) meet such minimum 
capital and margin requirements as the primary financial 
regulatory agency (for banks) or CFTC and SEC (for nonbanks) 
shall jointly prescribe; (2) meet reporting and recordkeeping 
requirements; (3) conform with business conduct standards; (4) 
conform with documentation and back office standards; and (5) 
comply with requirements relating to position limits, 
disclosure, conflicts of interest, and antitrust 
considerations. The Commission may exempt swap dealers and 
major swap participants from the margin requirement according 
to certain criteria and pursuant to consultation with the 
Financial Stability Oversight Council. If a party requests 
margin for an exempt swap, the exemption shall not apply. 
Regulators may permit the use of non-cash collateral to meet 
margin requirements.

Section 718. Segregation of assets held as collateral in swap 
        transactions

    For cleared swaps, this section requires that swap dealers, 
futures commission merchants, and derivatives clearing 
organizations segregate funds held to margin, guarantee, or 
secure the obligations of a counterparty under a cleared swap 
in a manner that protects their property. In addition, 
counterparties to an un-cleared swap will be able to request 
that any margin posted in the transaction be held by an 
independent third party custodian. Assets must be segregated on 
a non-discriminatory basis and may not be re-hypothecated.

Section 719. Conflicts of interest

    This section also directs the CFTC to require futures 
commission merchants and introducing brokers to implement 
conflict-of-interest systems and procedures relating to 
research activities and trading.

Section 720. Alternative swap execution facilities

    This section defines alternative swap execution facility 
and requires a facility for the trading of swaps to register 
with the CFTC as an alternative swap execution facility 
(``ASEF''), subject to certain criteria relating to deterrence 
of abuses, trading procedures, and financial integrity of 
transactions. This section also establishes core regulatory 
principles for ASEFs relating to enforcement, anti-
manipulation, monitoring, information collection and 
disclosure, position limits, emergency powers, recordkeeping 
and reporting, antitrust considerations, and conflicts of 
interest. This section directs the CFTC and SEC to jointly 
prescribe rules governing the regulation of alternative swap 
execution facilities, and authorizes the CFTC to exempt from 
registration under this section an alternative swap execution 
facility that is subject to comparable, comprehensive 
supervision and regulation by another regulator.

Section 721. Derivatives transaction execution facilities and exempt 
        boards of trade

    This section repeals the existing provisions of the 
Commodity Exchange Act relating to derivatives transaction 
execution facilities and exempt boards of trade.

Section 722. Designated contract markets

    This section requires a board of trade, in order to 
maintain designation as a contract market, to demonstrate that 
it provides a competitive, open, and efficient market for 
trading; has adequate financial, operational, and managerial 
resources; and has established robust system safeguards to help 
ensure resiliency.

Section 723. Margin

    This section authorizes the CFTC to set margin levels for 
registered entities.

Section 724. Position limits

    This section authorizes the CFTC to establish aggregate 
position limits across commodity contracts listed by designated 
contract markets, commodity contracts traded on a foreign board 
of trade that provides participants located in the United 
States with direct access to its electronic trading and order 
matching system, and swap contracts that perform or affect a 
significant price discovery function with respect to regulated 
markets.

Section 725. Enhanced authority over registered entities

    This section enhances the CFTC's authority to establish 
mechanisms for complying with regulatory principles and to 
review and approve new contracts and rules for registered 
entities.

Section 726. Foreign boards of trade

    This section authorizes the CFTC to adopt rules and 
regulations requiring registration by, and prescribing 
registration requirements and procedures for, a foreign board 
of trade that provides members or other participants located in 
the United States direct access to the foreign board of trade's 
electronic trading and order matching system. This section also 
prohibits foreign boards of trade from providing members or 
other participants located in the United States with direct 
access to the electronic trading and order matching systems of 
the foreign board of trade with respect to a contract that 
settles against the price of a contract listed for trading on a 
CFTC-registered entity unless the foreign board of trade meets, 
in the CFTC's determination, certain standards of comparability 
to the requirements applicable to U.S. boards of trade. This 
section also provides legal certainty for certain contracts 
traded on or through a foreign board of trade.

Section 727. Legal certainty for swaps

    This section clarifies that no hybrid instrument sold to 
any investor and no transaction between eligible contract 
participants shall be void based solely on the failure of the 
instrument or transaction to comply with statutory or 
regulatory terms, conditions, or definitions.

Section 728. FDICIA amendments

    Makes conforming amendments to the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (``FDICIA'') to 
reflect that the definition of ``over-the-counter derivative 
instrument'' under FDICIA no longer includes swaps or security-
based swaps.

Section 729. Primary enforcement authority

    This section clarifies that the CFTC shall have primary 
enforcement authority for all provisions of Subtitle A of this 
Act, other than new Section 4s(e) of the Commodity Exchange Act 
(as added by Section 717 of this Act, relating to capital and 
margin requirements for swap dealers and major swap 
participants), for which the primary financial regulatory 
agency shall have exclusive enforcement authority with respect 
to banks and branches or agencies of foreign banks that are 
swap dealers or major swap participants. This section also 
provides the primary financial regulatory agency with backstop 
enforcement authority with respect to the nonprudential 
requirements of the new Section 4s of the Commodity Exchange 
Act (relating to registration and regulation of swap dealers 
and major swap participants) if the CFTC does not initiate an 
enforcement proceeding within 90 days of a written 
recommendation by the primary financial regulatory agency.

Section 730. Enforcement

    This section clarifies the enforcement authority of the 
CFTC with respect to swaps and swap repositories, and of the 
primary financial regulatory agency with respect to swaps, swap 
dealers, major swap participants, swap repositories, 
alternative swap execution facilities, and derivatives clearing 
organizations.

Section 731. Retail commodity transactions

    This section clarifies CFTC jurisdiction with respect to 
certain retail commodity transactions.

Section 732. Large swap trader reporting

    This section requires reporting and recordkeeping with 
respect to large swap positions in the regulated markets.

Section 733. Other authority

    This section clarifies that this title, unless otherwise 
provided by its terms, does not divest any appropriate federal 
banking agency, the CFTC, the SEC, or other federal or state 
agency of any authority derived from any other applicable law.

Section 734. Antitrust

    This section clarifies that nothing in this title shall be 
construed to modify, impair, or supersede antitrust law.

         Subtitle B--Regulation of Security-Based Swap Markets


Section 751. Definitions under the Securities Exchange Act of 1934

    This section adds new definitions to the Securities 
Exchange Act of 1934 and directs the CFTC and SEC to jointly 
adopt uniform interpretations. The defined terms include 
``security-based swap,'' ``security-based swap dealer,'' 
``security-based swap repository,'' ``mixed swap,'' and ``major 
security-based swap participant.''
    This section also establishes guidelines for joint CFTC and 
SEC rulemaking authority under this Act. This section requires 
that rules and regulations prescribed jointly under this Act by 
the CFTC and SEC shall be uniform and shall treat functionally 
or economically equivalent products similarly. This section 
authorizes the CFTC and SEC to prescribe rules defining 
``swap'' and ``security-based swap'' to prevent evasions of 
this Act. This section also requires the CFTC and SEC to 
prescribe joint rules in a timely manner and authorizes the 
Financial Stability Oversight Council to resolve disputes if 
the CFTC and SEC fail to jointly prescribe rules.

Section 752. Repeal of prohibition on regulation of security-based 
        swaps

    This section repeals provisions enacted as part of the 
Gramm-Leach-Bliley Act and the Commodity Futures Modernization 
Act that prohibit the SEC from regulating security-based swaps.

Section 753. Amendments to the Securities Exchange Act of 1934

            Subsection (a). Clearing for security-based swaps
    This subsection requires clearing of all security-based 
swaps that are accepted for clearing by a registered clearing 
agency unless one of the parties to the swap qualifies for an 
exemption. This subsection requires cleared security-based 
swaps that are accepted for trading to be executed on a 
registered national securities exchange or on a registered 
alternative swap execution facility. The SEC may exempt a 
security-based swap from the clearing and exchange trading 
requirement if one of the counterparties to the swap is not a 
security-based swap dealer or major swap participant and does 
not meet the eligibility requirements of any clearing agency 
that clears the swap. The SEC must consult the Financial 
Stability Oversight Council before issuing an exemption. 
Requires a party to a security-based swap to submit the swap 
for clearing if a counterparty requests that the swap be 
cleared and the swap is accepted for clearing by a registered 
clearing agency.
    This subsection requires clearing agencies to seek approval 
from the SEC prior to clearing any group or category of 
security-based swaps and directs the CFTC and SEC to jointly 
adopt rules to further identify any group or category of 
security-based swaps acceptable for clearing based on specified 
criteria; authorizes the CFTC and SEC jointly to prescribe 
rules or issue interpretations as necessary to prevent evasions 
of section 3A of the Exchange Act; requires parties who enter 
into non-cleared swaps to report such transactions to a swap 
repository or the CFTC; and directs the SEC and CFTC to jointly 
adopt uniform rules governing entities registered with the CFTC 
as derivatives clearing organizations for swaps and with the 
SEC as clearing agencies for security-based swaps.
            Subsection (b). Alternative swap execution facilities
    This subsection defines alternative swap execution facility 
and requires facilities for the trading of security-based swaps 
to register with the SEC as ASEFs, subject to certain criteria 
relating to deterrence of abuses, trading procedures, and 
financial integrity of transactions. This subsection also 
establishes core regulatory principles for ASEFs relating to 
enforcement, anti-manipulation, monitoring, information 
collection and disclosure, position limits, emergency powers, 
recordkeeping and reporting, antitrust considerations, and 
conflicts of interest. This subsection directs the SEC and CFTC 
to jointly prescribe rules governing the regulation of 
alternative swap execution facilities, and authorizes the SEC 
to exempt from registration under this subsection an 
alternative swap execution facility that is subject to 
comparable, comprehensive supervision and regulation by another 
regulator.
            Subsection (c). Trading in security-based swap agreements
    This subsection prohibits parties who are not eligible 
contract participants (as defined in the Commodity Exchange 
Act) from effecting security-based swap transactions off of a 
registered national securities exchange.
            Subsection (d). Registration and regulation of swap dealers 
                    and major swap participants
    This subsection requires security-based swap dealers and 
major security-based swap participants to register with the 
SEC, and directs the SEC and CFTC to jointly prescribe uniform 
rules for entities that register with the SEC as security-based 
swap dealers or major security-based swap participants and 
entities that register with the CFTC as swap dealers or major 
swap participants. This subsection also requires security-based 
swap dealers and major security-based swap participants to (1) 
meet such minimum capital and margin requirements as the 
primary financial regulatory agency (for banks) or CFTC and SEC 
(for nonbanks) shall jointly prescribe; (2) meet reporting and 
recordkeeping requirements; (3) conform with business conduct 
standards; (4) conform with documentation and back office 
standards; and (5) comply with requirements relating to 
position limits, disclosure, conflicts of interest, and 
antitrust considerations. The Commission may exempt security-
based swap dealers and major swap participants from the margin 
requirement according to certain criteria and pursuant 
consultation with the Financial Stability Oversight Council. If 
a party requests margin for an exempt swap, the exemption shall 
not apply. Regulators may permit the use of non-cash collateral 
to meet margin requirements.
            Subsection (e). Additions of security-based swaps to 
                    certain enforcement provisions
    This subsection adds security-based swaps to the Exchange 
Act's list of financial instruments that a person may not use 
to manipulate security prices.
            Subsection (f). Rulemaking authority to prevent fraud, 
                    manipulation, and deceptive conduct in security-
                    based swaps
    This subsection prohibits fraudulent, manipulative, and 
deceptive acts involving security-based swaps and security-
based swap agreements, and directs the SEC to prescribe rules 
and regulations to define and prevent such conduct.
            Subsection (g). Position limits and position accountability 
                    for security-based swaps and large trader reporting
    As a means to prevent fraud and manipulation, this 
subsection authorizes the SEC to (1) establish limits on the 
aggregate number or amount of positions that any person or 
persons may hold across security-based swaps that perform or 
affect a significant price discovery function with respect to 
regulated markets; (2) exempt from such limits any person, 
class of persons, transaction, or class of transactions; and 
(3) direct a self-regulatory organization to adopt rules 
relating to position limits for security-based swaps. This 
subsection also requires reporting and recordkeeping with 
respect to large security-based swap positions in regulated 
markets.
            Subsection (h). Public reporting and repositories for 
                    security-based swap agreements
    This subsection requires the SEC or its designee to make 
available to the public, in a manner that does not disclose the 
business transactions and market positions of any person, 
aggregate data on security-based swap trading volumes and 
positions. This subsection also describes the duties of a 
security-based swap repository as accepting and maintaining 
security-based swap data as prescribed by the SEC, makes SEC 
registration for security-based swap repositories voluntary, 
and subjects registered security-based swap repositories to SEC 
inspection and examination. This subsection directs the SEC and 
CFTC to jointly adopt uniform rules governing entities that 
register with the SEC as security-based swap repositories and 
entities that register with the CFTC as swap repositories and 
authorizes the SEC to exempt from registration any security-
based swap repository subject to comparable, comprehensive 
supervision or regulation by another regulator.

Section 754. Segregation of assets held as collateral in security-based 
        swap transactions

    For cleared swaps, this section requires that security-
based swap dealers or clearing agencies segregate funds held to 
margin, guarantee, or secure the obligations of a counterparty 
in a manner that protects their property. In addition, 
counterparties to an un-cleared swap will be able to request 
that any margin posted in the transaction be held by an 
independent third party custodian. Assets must be segregated on 
a non-discriminatory bases and may not be re-hypothecated.

Section 755. Reporting and recordkeeping

    This section requires reporting and recordkeeping by any 
person who enters into a security-based swap that is not 
cleared with a registered clearing agency or reported to a 
security-based swap repository. This section also includes 
security-based swaps within the scope of certain reporting 
requirements under Sections 13 and 16 of the Exchange Act.

Section 756. State gaming and bucket shop laws

    This section clarifies the applicability of certain state 
laws to security-based swaps.

Section 757. Amendments to the Securities Act of 1933; treatment of 
        security-based swaps

    This section amends the Securities Act of 1933 to include 
security-based swaps within the definition of ``security.'' 
This section also amends Section 5 of the Securities Act of 
1933 to prohibit offers to sell or purchase a security-based 
swap without an effective registration statement to any person 
other than an eligible contract participant (as defined in the 
Commodity Exchange Act).

Section 758. Other authority

    This section clarifies that this title, unless otherwise 
provided by its terms, does not divest any appropriate federal 
banking agency, the SEC, the CFTC, or other federal or state 
agency of any authority derived from any other applicable law.

Section 758. Jurisdiction

    This section clarifies that the SEC shall not have 
authority to grant exemptions from the provisions of this Act, 
except as expressly authorized by this Act; provides the SEC 
with express authorization to use any authority granted under 
subsection (a) to exempt any person or transaction from any 
provision of this title that applies to such person or 
transaction solely because a security-based swap is a security 
under section 3(a).

                      Subtitle C--Other Provisions


Section 761. International harmonization

    This section requires regulators to consult and coordinate 
with international authorities on the establishment of 
consistent standards for the regulation of swaps and security-
based swaps.

Section 762. Interagency cooperation

    This section establishes a SEC-CFTC Joint Advisory 
Committee to monitor and develop solutions emerging in the 
swaps and security-based swaps markets, a SEC-CFTC Joint 
Enforcement Task Force to improve market oversight, a SEC-CFTC-
Federal Reserve Trading and Markets Fellowship Program to 
provide cross-training among agency staff about the interaction 
between financial markets activity and the real economy, SEC-
CFTC cross-agency enforcement training and education, and 
detailing of staff between the SEC and CFTC.

Section 763. Study and report on implementation

    This section requires the GAO to conduct on study on the 
implementation of this Act within one year of the date of 
enactment.

Section 764. Recommendations for changes to insolvency laws

    This section requires the SEC, CFTC, and FIRA to make 
recommendations to Congress within 180 days of enactment 
regarding Federal insolvency laws and their impact on various 
swaps and security-based swaps activity.

Section 765. Effective date

    This section specifies that this title shall become 
effective 180 days after the date of enactment.

 Title VIII--Payment, Clearing, and Settlement Supervision Act of 2009


Section 801. Short title

Section 802. Findings and purposes

    This section describes the findings and purposes of the 
Payment, Clearing, and Settlement Supervision Act of 2009. In 
order to mitigate systemic risk in the financial system and 
promote financial stability, this Act provides the Financial 
Stability Oversight Council a role in identifying systemically 
important financial market utilities and the Board of Governors 
of the Federal Reserve System (``Board'') with an enhanced role 
in supervising risk management standards for systemically 
important financial market utilities and for systemically 
important payment, clearing, and settlement activities 
conducted by financial institutions.

Section 803. Definitions

Section 804. Designation of systemic importance

    This section authorizes the Financial Stability Oversight 
Council to designate financial market utilities or payment, 
clearing, or settlement activities as systemically important, 
and establishes procedures and criteria for making and 
rescinding such a designation. Criteria for designation and 
rescission of designation include the aggregate monetary value 
of transactions processed and the effect that a failure of a 
financial market utility or payment, clearing, or settlement 
activity would have on counterparties and the financial system.

Section 805. Standards for systemically important financial market 
        utilities and payment, clearing, or settlement activities

    This section authorizes the Board, in consultation with the 
Financial Stability Oversight Council and the appropriate 
supervisory agencies, to prescribe risk management standards 
governing the operations of designated financial market 
utilities and the conduct of designated payment, clearing, and 
settlement activities by financial institutions. This section 
also establishes the objectives, principles, and scope of such 
standards.

Section 806. Operations of designated financial market utilities

    This section authorizes a Federal Reserve bank to establish 
and maintain an account for a designated financial market 
utility and allows the Board to modify or provide an exemption 
from reserve requirements that would otherwise be applicable to 
the designated financial market utility. This section requires 
a designated financial market utility to provide advance notice 
of and obtain approval of material changes to its rules, 
procedures, or operations.

Section 807. Examination and enforcement actions against designated 
        financial market utilities

    This section requires the supervisory agency to conduct 
safety and soundness examinations of a designated financial 
market utility at least annually and authorizes the supervisory 
agency to take enforcement actions against the utility. This 
section also allows the Board to participate in examinations 
by, and make recommendations to, other supervisors and 
designates the Board as the supervisory agency for designated 
financial market utilities that do not otherwise have a 
supervisory agency. The Board is also authorized to take 
enforcement actions against a designated financial market 
utility if there is an imminent risk of substantial harm to 
financial institutions or the broader financial system.

Section 808. Examination and enforcement actions against financial 
        institutions engaged in designated activities

    This section authorizes the primary financial regulatory 
agency to examine a financial institution engaged in designated 
payment, clearing, or settlement activities and to enforce the 
provisions of this Act and the rules prescribed by the Board 
against such an institution. This section also requires the 
Board to collaborate with the primary financial regulatory 
agency to ensure consistent application of the Board's rules. 
The Board is granted back-up authority to conduct examinations 
and take enforcement actions if it has reasonable cause to 
believe a violation of its rules or of this Act has occurred.

Section 809. Requests for information, reports, or records

    This section authorizes the Financial Stability Oversight 
Council to collect information from financial market utilities 
and financial institutions engaged in payment, clearing, or 
settlement activities in order to assess systemic importance. 
Upon a designation by the Financial Stability Oversight 
Council, the Board may require submission of reports or data by 
systemically important financial market utilities or financial 
institutions engaged in activities designated to be 
systemically important. This section also facilitates sharing 
of relevant information and coordination among financial 
regulators, with protections for confidential information.

Section 810. Rulemaking

    This section authorizes the Board and the Financial 
Stability Oversight Council to prescribe such rules and issue 
such orders as may be necessary to administer and carry out the 
purposes of this title and prevent evasions thereof.

Section 811. Other authority

    This section clarifies that this Act, unless otherwise 
provided by its terms, does not divest any appropriate 
financial regulatory agency, supervisory agency, or other 
Federal or State agency of any authority derived from any other 
applicable law.

Section 812. Effective date

    This section specifies that this Act shall be effective as 
of the date of enactment.

                     Title IX--Investor Protections


                               Subtitle A


Section 911. Investor Advisory Committee established

    Section 911 establishes within the SEC the Investor 
Advisory Committee to assist the SEC by advising and consulting 
on regulatory priorities; issues relating to securities, 
trading, fee structures and the effectiveness of disclosures; 
investor protection; and initiatives to promote investor 
confidence. The Committee shall be composed of the Investor 
Advocate, a representative of state securities commissions 
because of the important work that States have performed in 
protecting investors, a representative of the interests of 
senior citizens who are sometimes targeted for securities 
frauds, and between 12 and 22 members who represent the 
interests of individual investors, institutional investors, and 
pension fund investors.
    The Committee shall elect from among themselves a Chairman, 
Vice Chairman, Secretary, and Assistant Secretary, each of whom 
shall serve a 3 year term. The Committee shall meet at least 
twice per year. The SEC shall provide the Committee with the 
staff necessary to fulfill its mission. The SEC must publicly 
respond to Committee findings and recommendations by assessing 
them and disclosing any action the SEC intends to take. It is 
expected that the responses will be made shortly after the 
Committee acts.
    In June of 2009, the SEC formed an Investor Advisory 
Committee. This legislation gives the Investor Advisory 
Committee a statutory foundation and sets congressional 
prerogatives for the Committee's composition and function.
    The proposal for this Committee was included in the 
Treasury Department legislative proposal for financial 
reform.\162\ AARP supports the statutory establishment of this 
Committee. On November 19, 2009, the AARP wrote in a letter to 
Senators Dodd and Shelby, ``AARP also supports additional 
powers granted to the SEC to strengthen its work on behalf of 
investors, including explicit authority to establish an 
Investor Advisory Committee.''\163\
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    \162\FACT SHEET: ADMINISTRATION'S REGULATORY REFORM AGENDA MOVES 
FORWARD; Legislation for Strengthening Investor Protection Delivered to 
Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 
2009, www.financialstability.gov.
    \163\AARP, letter to Senators Dodd and Shelby, November 19, 2009.
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Section 912. Clarification of authority of the commission to engage in 
        consumer testing

    Section 912 clarifies the SEC's authority to gather 
information from and communicate with investors and engage in 
such temporary programs as the SEC determines are in the public 
interest for the purpose of evaluating any rule or program of 
the SEC.
    In the past, the SEC has carried out consumer testing 
programs, but there have been questions of the legality of this 
practice. This legislative language gives clear authority to 
the SEC for these activities.
    This proposal is included in the Treasury Department's 
legislative language for financial reform\164\. The AARP told 
the Committee that it ``supports the explicit authority granted 
to the SEC to test rules or programs by gathering information 
and communicating with investors and other members of the 
public. This type of testing has the very real potential to 
improve the clarity and usefulness of the disclosures that our 
securities regulatory scheme relies upon.''\165\ Mr. James 
Hamilton, Principal Analyst, CCH Federal Securities Law 
Reporter has said ``The SEC can better evaluate the 
effectiveness of investor disclosures if it can meaningfully 
engage in consumer testing of those disclosures. The SEC should 
be better enabled to engage in field testing, consumer outreach 
and testing of disclosures to individual investors, including 
by providing budgetary support for those activities.''\166\
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    \164\FACT SHEET: ADMINISTRATION'S REGULATORY REFORM AGENDA MOVES 
FORWARD; Legislation for Strengthening Investor Protection Delivered to 
Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 
2009, www.financialstability.gov.
    \165\AARP, letter to Senators Dodd and Shelby, November 19, 2009.
    \166\Obama Reform Proposal Would Enhance SEC Investor Protection 
Role, Jim Hamilton's World of Securities Regulation, 
jimhamiltonblog.blogspot.com, June 17, 2009.
---------------------------------------------------------------------------

Section 913. Study and rulemaking regarding obligations of brokers, 
        dealers, and investment advisers

    Section 913 was authored by Senators Johnson and Crapo. It 
directs the SEC to conduct a study of the effectiveness of 
existing legal or regulatory standards of care for brokers, 
dealers, and investment advisers for providing personalized 
investment advice and recommendations about securities to 
retail customers imposed by the SEC and FINRA, and whether 
there are legal or regulatory gaps or overlap in legal or 
regulatory standards in the protection of retail customers. The 
section also requires the SEC to issue a report within one year 
that considers public input. If this study identifies any gaps 
or overlap in the legal or regulatory standards in the 
protection of retail customers relating to the standards of 
care for brokers, dealers, and investment advisers, the SEC 
shall commence a rulemaking within two years to address such 
regulatory gaps and overlap that can be addressed by rule, 
using its existing authority under the Securities Exchange Act 
of 1934 and the Investment Advisers Act of 1940.

Section 914. Creation of Office of the Investor Advocate

    Section 914 was authored by Senator Akaka. Section 914 
creates the Office of the Investor Advocate within the 
Securities and Exchange Commission (SEC). The Committee 
believes it is necessary to create an office of the Investor 
Advocate within the SEC to strengthen the institution and 
ensure that the interests of retail investors are better 
represented. The Investor Advocate is tasked with assisting 
retail investors to resolve significant problems with the SEC 
or the self-regulatory organizations (SROs). The Investor 
Advocate's mission includes identifying areas where investors 
would benefit from changes in SEC or SRO policies and problems 
that investors have with financial service providers and 
investment products. The Investor Advocate will recommend 
policy changes to the SEC and Congress in the interests of 
investors. The Taxpayer Advocate within the Internal Revenue 
Service has contributed significantly to the improvement of 
policies that have benefitted taxpayers. A similar office in 
the SEC has a tremendous potential to similarly benefit retail 
investors. The Investor Advocate, with its independent 
reporting lines, would help to ensure that the interests of 
retail investors are built into rulemaking proposals from the 
outset and that agency priorities reflect the issues that 
confront average investors. The Investor Advocate will increase 
transparency and accountability at the SEC and be equipped to 
act in response to feedback from investors and potentially 
avoid situations such as the mishandling of tips that could 
have exposed Ponzi schemes much earlier. The Investor Advocate, 
and staff of the Office of the Investor Advocate, shall 
maintain the same level of confidentiality for any document or 
information made available under this section as is required of 
any member, officer, or employee of the SEC. In this regard, 
the Investor Advocate and staff in the Office of the Investor 
Advocate are subject to the same statutory and regulatory 
restrictions on, and applicable penalties for, the unauthorized 
disclosure or use of any nonpublic information that apply to 
any member, officer, or employee of the SEC.

Section 915. Streamlining of filing procedures for self-regulatory 
        organizations

    Section 915 requires the SEC to approve a proposed SRO rule 
or institute a proceeding to consider whether the rule should 
be disapproved within 45 days. The SEC can extend this period 
by 45 days if appropriate. If the SEC does not approve the rule 
within this period then it must provide a hearing within 180 
days of the rule proposal publication. The SEC must approve or 
disapprove the rule during this same period, or it can extend 
this period by 60 days if necessary. If the SEC does not follow 
these time restrictions, the rule is deemed to have been 
approved. The SEC has 7 days after the receipt of the proposal 
to notify the SRO if the proposed rule change does not comply 
with the rules of the SEC relating to the required form of a 
proposed rule change.
    The Committee recognizes that in the modern securities 
markets it is important that the SEC operate efficiently and 
responsively. The Committee has heard concerns about current 
SEC processes for action on rule changes by exchanges and other 
self-regulatory organizations.
    The Committee expects that the changes will encourage the 
SEC to employ a more transparent and rapid process for 
consideration of rule changes.
    Nothing in the Section diminishes the SEC's authority to 
reject an improperly filed rule, disapprove a rule that is not 
consistent with the Exchange Act, or diminishes the applicable 
public notice and comment period.
    Nasdaq OMX, NYSE Euronext, International Securities 
Exchange and Chicago Board Options Exchange have written 
jointly by letter dated November 24, 2009 in strong support of 
this provision because ``it would streamline the Securities and 
Exchange Commission's (SEC) process for making a determination 
on an exchange rule proposal.'' They explained, ``As Self 
Regulatory Organizations (SROs), we are subject to the 
regulatory authority of the SEC, which includes the requirement 
that we submit all proposed rule changes to the SEC for 
approval. Although the SEC has made progress in increasing the 
number of rule proposals that may be submitted for immediate 
effectiveness, the process that rule proposals that are not 
subject to immediate effectiveness must undergo remains a point 
of frustration for SROs. The current process enables the SEC to 
use internal interpretations to avoid what should be reasonable 
timelines to move rule filings toward a determination of 
approval or denial. This process not only delays transparency 
and public input, it provides a significant competitive 
advantage to our less regulated competitors, which do not have 
to seek regulatory approval before changing their rules.''

Section 916. Study regarding financial literacy among investors

    Section 916 was authored by Senator Akaka. This Section 
directs the SEC to study and issue a report on the existing 
level of financial literacy among retail investors. The SEC 
will have to develop an investor financial literacy strategy. 
The strategy is intended to bring about positive behavioral 
change in investors. The study will identify: (1) the existing 
level of financial literacy among retail investors; (2) methods 
to improve the timing, content, and format of disclosures to 
investors with respect to financial intermediaries, investment 
products, and investment services; (3) the most useful and 
understandable relevant information that retail investors need 
to make informed financial decisions; (4) methods to increase 
the transparency of expenses and conflicts of interests in 
transactions involving investment services and products; (5) 
the most effective existing private and public efforts to 
educate investors; and (6) in consultation with the Financial 
Literacy and Education Commission, a strategy to increase the 
financial literacy of investors in order to bring about a 
positive change in investor behavior.
    The AARP also supported the study of financial literacy in 
a letter to Senators Dodd and Shelby.\167\
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    \167\AARP, letter to Senators Dodd and Shelby, November 19, 2009.
---------------------------------------------------------------------------

Section 917. Study regarding mutual fund advertising

    Section 917 directs the GAO to conduct a study and issue a 
report on mutual fund advertising to examine: (1) existing and 
proposed regulatory requirements for open-end investment 
company advertisements; (2) current marketing practices for the 
sale of open-end investment company shares, including the use 
of past performance data, funds that have merged, and incubator 
funds; (3) the impact of such advertising on consumers; and (4) 
recommendations to improve investor protections in mutual fund 
advertising and additional information necessary to ensure that 
investors can make informed financial decisions when purchasing 
shares.

Section 918. Clarification of commission authority to require investor 
        disclosures before purchase of investment products and services

    Section 918 was authored by Senator Akaka. Section 918 
clarifies the SEC's authority to require investor disclosures 
before the purchase of investment company shares. This section 
will give the SEC the authority to require broker-dealers to 
disclose to clients their compensation for sales of open- and 
closed-end mutual funds. The Committee believes that investors 
must be provided with relevant, meaningful, and timely 
disclosures about financial products and services from which 
they can make better informed investment decisions. The 
Committee encourages the SEC to use the consumer testing 
authorized under Section 912 and the study on financial 
literacy under Section 916 to inform its scope of disclosures.
    Mr. James Hamilton, Principal Analyst, CCH Federal 
Securities Law Reporter, said ``legislation should authorize 
the SEC to require that certain disclosures (including a 
summary prospectus) be provided to investors at or before the 
point of sale, if the SEC finds that such disclosures would 
improve investor understanding of the particular financial 
products, and their costs and risks. Currently, most 
prospectuses (including the mutual fund summary prospectus) are 
delivered with the confirmation of sale, after the sale has 
taken place. Without slowing the pace of transactions in modem 
capital markets, the SEC should require that adequate 
information is given to investor to make informed investment 
decisions.''\168\
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    \168\Obama Administration Would Enhance SEC's Investor Protection 
Role, Mr. James Hamilton, CCH Financial Crisis Newsletter, June 18, 
2009, www.financialcrisisupdate.com.
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    Mr. Travis Plunkett, Legislative Director of the Consumer 
Federation of America, also supports this provision. In 
testimony for the House Financial Services Committee, he wrote 
``we also strongly support requiring pre-sale disclosure to 
assist mutual fund investors to make more informed investment 
decisions. While mutual funds are subject to more robust 
disclosure requirements than many competing investment products 
and services, the disclosures typically do not arrive until 
three days after the sale. This makes them essentially useless 
in helping investors to assess the risks and costs of the fund, 
as well as the uses for which it may be most 
appropriate.''\169\ AARP also supports this provision.\170\ The 
Committee encourages that Securities and Exchange Commission to 
use the consumer testing authorized under Section 912 and the 
study on financial literacy under Section 916 to inform its 
scope of disclosures.
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    \169\Community and Consumer Advocates' Perspectives on the Obama 
Administration's Financial Regulatory Reform Proposals: Testimony 
before the U.S. House Committee on Financial Services, 111th Congress, 
1st session, p.24 (2009) (Testimony of Mr. Travis Plunkett).
    \170\AARP, letter to Senators Dodd and Shelby, November 19, 2009.
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Section 919. Study on conflicts of interest

    Section 919 directs the GAO to conduct a study and make 
recommendations regarding potential conflicts of interest 
between securities underwriting and securities analysis 
functions within firms. In this study, the GAO will consider 
potential harm to investors of these conflicts, the nature and 
benefit of the undertakings to which the firms agreed as part 
of the Global Settlement, whether any of these undertakings 
should be codified, and whether to recommend regulatory or 
legislative measures to mitigate harm to investors caused by 
these conflicts of interest. The GAO will consult with the SEC, 
FINRA, investor advocates, retail investors, institutional 
investors, academics, and State securities officials in 
performing this study. This issue has been a subject of public 
concern for many years. On March 15, 2010, the U.S. District 
Court in New York rejected a proposal by the SEC and 12 
securities firms to change the legal settlement put in place 
with the Global Research Analyst Settlements to end abuses on 
Wall Street that would have allowed employees in investment-
banking and research departments at Wall Street firms to 
``communicate with each other . . . outside of the presence'' 
of lawyers or compliance-department officials responsible for 
policing employee conduct--an activity strictly prohibited by 
the settlement. The 2003 Global Settlement resolved a major 
securities scandal, in which 10 of the largest securities firms 
and two individual analysts were charged with issuing 
misleading or fraudulent analyst recommendations and fines of 
$1.4 billion were assessed.
    Title V of the Sarbanes-Oxley Act of 2002 (P.L. 107-204) 
addressed aspects of this issue by amending the Securities 
Exchange Act of 1934 to require the SEC, or upon the 
authorization and direction of the SEC, a registered securities 
association or national securities exchange, to adopt rules 
reasonably designed to address conflicts of interest that can 
arise when securities analysts recommend equity securities in 
research reports and public appearances.

Section 919A. Study on improved access to information on investment 
        advisers and broker-dealers

    Senator Brown (OH) authored Section 919A. This Section 
directs the SEC to study and make recommendations on ways to 
improve the access of investors to registration information 
about registered and previously registered investment advisers, 
associated persons of investment advisers, brokers and dealers 
and their associated persons on the existing Central 
Registration Depository and Investment Adviser Registration 
Depository systems, as well as identify additional information 
that should be made publicly available.

Section 919B. Study on financial planners and the use of financial 
        designations

    Senator Kohl authored Section 919B. This Section directs 
the GAO to conduct a study to evaluate and make recommendations 
on the effectiveness of State and Federal regulations to 
protect consumers from misleading financial advisor 
designations; current State and Federal oversight structure and 
regulations for financial planners; and legal or regulatory 
gaps in the regulation of financial planners and other 
individuals who provide or offer to provide financial planning 
services to consumers.
    Senator Kohl has said that ``Financial planners provide 
advice on a wide range of issues, including home ownership, 
saving for college and selecting appropriate investment 
products. Because this advice will have a lasting impact on the 
financial health of the consumer, it is important that the 
service provider meets certain standards. Currently, different 
states' laws govern financial planners, with no standard code 
of conduct, training requirements or conflict of interest 
disclosure requirements. Additionally, there is little 
accountability for financial planners that take advantage of 
consumers. Both consumers and financial planners will benefit 
from standardizing rules and increased oversight at the federal 
level.''\171\ Marilyn Mohrman-Gillis, Managing Director, Public 
Policy, Certified Financial Planner Board of Standards, Inc. 
said ``we recognize that the study is certainly a first step in 
Congress recognizing the need for reform.''
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    \171\Senator Kohl, letter to Senator Dodd, February 22, 2010.
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                               Subtitle B


Section 921. Authority to issue rules to restrict mandatory predispute 
        arbitration

    Section 921 gives the SEC the authority to conduct a 
rulemaking to prohibit, or impose conditions or limitations on 
the use of, agreements that require customers or clients of any 
broker, dealer, or municipal securities dealer to arbitrate any 
dispute between them. This provision was included in the 
Treasury Department's legislative proposal.\172\
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    \172\FACT SHEET: ADMINISTRATION'S REGULATORY REFORM AGENDA MOVES 
FORWARD; Legislation for Strengthening Investor Protection Delivered to 
Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 
2009, www.financialstability.gov.
---------------------------------------------------------------------------
    There have been concerns over the past several years that 
mandatory pre-dispute arbitration is unfair to the investors. 
In a letter to Chairman Dodd and Ranking Member Shelby, AARP 
expressed support for this provision. In listing some of the 
problems with mandatory pre-dispute arbitration, the letter 
identified ``high up-front costs; limited access to documents 
and other key information; limited knowledge upon which to base 
the choice of arbitrator; the absence of a requirement that 
arbitrators follow the law or issue written decisions; and 
extremely limited grounds for appeal.''\173\
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    \173\AARP, letter to Senators Dodd and Shelby, November 19, 2009.
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    The North American Securities Administrators Association 
also supports this provision, stating in testimony that a 
``major step toward improving the integrity of the arbitration 
system is the removal of the mandatory industry arbitrator. 
This mandatory industry arbitrator, with their industry ties, 
automatically puts the investor at an unfair 
disadvantage.''\174\ The Consumer Federation of America,\175\ 
AARP,\176\ and the Public Investors Arbitration Bar Association 
support this approach.\177\
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    \174\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.18 
(2009) (Testimony of Mr. Fred Joseph).
    \175\Consumer Federation of America (November 10, 2009), ``CFA 
Applauds Introduction of Senator Dodd's Financial Reform Package,'' 
Press release, www.consumerfed.org.
    \176\AARP, letter to Senators Dodd and Shelby, November 19, 2009.
    \177\The following article references the Public Investors 
Arbitration Bar Association's support for this provision: ``Death Knell 
For Mandatory Arbitration,'' Helen Kearney, On Wall Street, August 1, 
2009.
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Section 922. Whistleblower protection

    The Whistleblower Program, established and administered by 
the Securities and Exchange Commission, is intended to provide 
monetary rewards to those who contribute ``original 
information'' that lead to recoveries of monetary sanctions of 
$1,000,000 or more in criminal and civil proceedings. The 
genesis of the program is found in President Obama's June 2009 
financial regulatory reform proposal.\178\ A similar provision 
was included in the House of Representatives financial reform 
bill (H.R. 4173).
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    \178\Fact Sheet: Administration's Regulatory Reform Agenda Moves 
Forward; Legislation for Strengthening Investor Protection Delivered to 
Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 
2009. Available at http://www.financialstability.gov. 
---------------------------------------------------------------------------
    The Whistleblower Program aims to motivate those with 
inside knowledge to come forward and assist the Government to 
identify and prosecute persons who have violated securities 
laws and recover money for victims of financial fraud. In a 
testimony for the Senate Banking Committee, Certified Fraud 
Examiner and Madoff whistleblower Harry Markopolos testified in 
support of creating a strong Whistleblower Program. He cited 
statistics showing the efficiency of Whistleblower Programs: 
``whistleblower tips detected 54.1% of uncovered fraud schemes 
in public companies. External auditors, and the SEC exam teams 
would certainly be considered external auditors, detected a 
mere 4.1% of uncovered fraud schemes. Whistleblower tips were 
13 times more effective than external audits, hence my 
recommendation to the SEC to encourage the submission of 
whistleblower tips.'' \179\ In his letter to Senator Dodd, SEC 
Inspector General David Kotz also recommended a similar 
Whistleblower Program.\180\
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    \179\``Oversight of the SEC's Failure to Identify the Bernard L. 
Madoff Ponzi Scheme and How to Improve SEC Performance: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs'', 111th Congress, 1st session, p.33 (2009) (Testimony of Mr. 
Harry Markopolos).
    \180\Inspector General H. David Kotz, letter to Senator Dodd, 
October 29, 2009.
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    Recognizing that whistleblowers often face the difficult 
choice between telling the truth and the risk of committing 
``career suicide'', the program provides for amply rewarding 
whistleblower(s), with between 10% and 30% of any monetary 
sanctions that are collected based on the ``original 
information'' offered by the whistleblower. The program is 
modeled after a successful IRS Whistleblower Program enacted 
into law in 2006. The reformed IRS program, which, too, has a 
similar minimum-maximum award levels and an appeals 
process,\181\ is credited to have reinvigorated the earlier, 
largely ineffective, IRS Whistleblower Program. The Committee 
feels the critical component of the Whistleblower Program is 
the minimum payout that any individual could look towards in 
determining whether to take the enormous risk of blowing the 
whistle in calling attention to fraud.
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    \181\Like the IRS program, the new SEC Whistleblower Program 
provides for an appeals process, the appropriate court of appeals will 
review the determination made by the Commission in accordance with 
section 706 of title 5 of U.S. Code (i.e., abuse of discretion).
---------------------------------------------------------------------------
    We also note a recent report of the current SEC insider-
trading Whistleblower Program by the Office of Inspector 
General of SEC. Since the inception of the program in 1989, 
there have been a total of only seven payouts to five 
whistleblowers for a meager total of $159,537.\182\ In the 
report, the Inspector General recommends several important 
guidelines that any current or future SEC Whistleblower 
Programs should follow, including: development of specific 
criteria for bounty awards (including a provision to award 
whistleblowers that partly rely upon public information), 
development of tips and complaints tracking systems, 
incorporating best practices from DOJ and IRS's Whistleblower 
Programs, and establishment of a timeframe for the new 
policies.
---------------------------------------------------------------------------
    \182\``Assessment of the SEC's Bounty Program'', Office of 
Inspector General, U.S. Securities and Exchange Commission, Report No. 
474. March 29, 2010.
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    ``Original information'' is defined as information that is 
derived from the independent analysis or knowledge of the 
whistleblower, and is not derived from an allegation in court 
or government reports, and is not exclusively from news media. 
In circumstances when bits and pieces of the whistleblower's 
information were known to the media prior to the emergence of 
the whistleblower, and that for the purposes of the SEC 
enforcement\183\ the critical components of the information was 
supplied by the whistleblower, the intent of the Committee is 
to require the SEC to reward such person(s) in accordance with 
the degree of assistance that was provided. The rewards are to 
be from the Investor Protection Fund, which receives funds from 
sanctions collected based on civil enforcement and from other 
funds within SEC that are otherwise not distributed to 
investors (i.e., unused disgorgement funds). Whenever a 
whistleblower or whistleblowers tip leads the SEC to collect 
sanctions and penalties that are determined to be distributed 
to the victims of the fraud, the intent of the Committee is to 
reward the whistleblower prior or at the same time as paying 
such victims, recognizing that were it not for the 
whistleblower's actions, there would have been no discovery of 
the harm to the investors and no collection of any sanctions 
for their benefit.
---------------------------------------------------------------------------
    \183\Same would apply to cases when SEC forwards criminal cases to 
DOJ that lead to penalties and sanctions.
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    The SEC has discretion in determining the amount and 
whether or not a whistleblower is eligible to be awarded. In 
cases when whistleblowers feel that the SEC had abused its 
discretion in determining the amount of the award, they have 
the right to appeal, within 30 days of the decision to a court 
of appeals. The court is to review the determination in 
accordance with section 706 of title 5 of U.S. Code. The 
Committee feels that this review process will significantly 
contribute to make the program reliable for persons who are 
contemplating whether or not to blow the whistle on fraud. It 
will add to the notion of enforceable payout. The Committee, 
having heard from several parties involved in whistleblower 
related cases, has determined that enforceability and 
relatively predictable level of payout will go a long way to 
motivate potential whistleblowers to come forward and help the 
Government identify and prosecute fraudsters. Whistleblowers 
who are employees of an appropriate regulatory agency, DOJ, 
SROs, PCAOB, accountants in certain circumstances, or a law 
enforcement organization are generally not eligible for an 
award. Also not eligible are whistleblowers who are convicted 
of a criminal violation related to the case at hand.
    The Committee intends for this program to be used actively 
with ample rewards to promote the integrity of the financial 
markets.
    The program also requires the SEC to annually report back 
to Congress, among other things, with details regarding the 
number and types of awards granted. It also provides for 
various protections for whistleblowers, specifically barring 
employers to discharge, demote, suspend, threaten, harass 
directly or indirectly, or in any other manner discriminate. 
The provision also makes it unlawful to knowingly and willfully 
make any false, fictitious or fraudulent statement or 
representation, or use any false writing or document knowing 
the writing or document contains any false, fictitious, or 
fraudulent statement or entry. Following the enactment of the 
Act, the SEC will have 270 days to issue final regulations 
implementing the provisions of the Act.

Section 923. Conforming amendments for whistleblower protection

Section 923. contains conforming amendments for whistleblower 
        protection.

Section 924. Implementation and transition provisions for whistleblower 
        protection

    Section 924 contains implementation and transition 
provisions for whistleblower provisions. The section directs 
the SEC to issue final regulations implementing the provisions 
of section 21F of the Securities Exchange Act of 1934 within 
270 days within enactment of the Act.

Section 925. Collateral bars

    Section 925 gives the SEC the authority to bar individuals 
from being associated with various registered securities market 
participants after violating the law while associated in only 
one area. This provision is included in the Treasury 
Department's legislative proposal.\184\ The Committee finds 
that this provision is necessary because, under current rules, 
individuals could be barred from one registered entity for 
violations, such as fraud, but then work in another industry 
where they could prey upon other investors.
---------------------------------------------------------------------------
    \184\FACT SHEET: ADMINISTRATION'S REGULATORY REFORM AGENDA MOVES 
FORWARD; Legislation for Strengthening Investor Protection Delivered to 
Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 
2009, www.financialstability.gov. 
---------------------------------------------------------------------------

Section 926. Authority of state regulators over regulation D offerings

    Section 926 restores certain authority of States over 
Regulation D offerings. This provision will give the States the 
authority over certain securities sales that are not subject to 
the '33 Act requirements due to their size and scope, as 
determined by the SEC.
    The North American Securities Administrators Association 
described why this provision is needed: ``These offerings also 
enjoy an exemption from registration under federal securities 
law, so they receive virtually no regulatory scrutiny even 
where the promoters or broker-dealers have a criminal or 
disciplinary history. As a result, Rule 506 offerings have 
become the favorite vehicle under Regulation D, and many of 
them are fraudulent. Although Congress preserved the states' 
authority to take enforcement actions for fraud in the offer 
and sale of all `covered' securities, including Rule 506 
offerings, this power is no substitute for a state's ability to 
scrutinize offerings for signs of potential abuse and to ensure 
that disclosure is adequate before harm is done to 
investors.''\185\ In light of the growing popularity of Rule 
506 offerings and the expansive reading of the exemption given 
by certain courts, NASAA believes the time has come for 
Congress to reinstate state regulatory oversight of all Rule 
506 offerings by repealing Subsection 18(b)4(D) of the 
Securities Act of 1933.''\186\
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    \185\North American Securities Administrators Association, Inc., 
letter to Chairman Dodd and Ranking Member Shelby, November 17, 2009.
    \186\Pro-Investor Legislative Agenda for the 111th Congress, North 
American Securities Administrators Association, January, 2009, 
www.nasaa.org.
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    The Committee also heard from interested parties stating 
that the SEC is adequately capable of reviewing these filings, 
however we note, in the words of Jennifer Johnson, that ``the 
SEC simply does not have the resources, even if it had the 
will, to police smaller private placements. State regulators, 
on the other hand, as ``local cops on the beat,'' are well 
positioned to fill this regulatory gap. While states currently 
have enforcement powers under NSMIA . . . they may not become 
aware of serious problems involving Rule 506 offerings until 
after injured investors contact them. While states may be able 
to prosecute the perpetrators of fraud, they cannot 
prophylactically protect future victims.''\187\
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    \187\Johnson, Jennifer, 2010. ``Private Placements: A regulatory 
Black Hole''. Delaware Journal of Corporate Law. Vol. 34, p. 195.
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    The Committee is concerned to protect investors who, under 
current regulatory scheme and practice, lack regulatory 
protections. There is a particular concern to protect investors 
from recidivist perpetrators of securities fraud. This Section 
does not resolve other current issues involving the SEC's 
administration of Regulation D, several of which are 
highlighted in the SEC Office of Inspector General audit report 
on ``Regulation D Exemption Process,'' March 31, 2009 (e.g., 
the SEC ``should develop a process to assess and better ensure 
issuers' compliance with Regulation D and take appropriate 
action when . . . [it] finds companies have materially misused 
the Regulation D exemptions'').

Section 927. Equal treatment of self-regulatory organization rules

    Section 927 provides equal treatment for the rules of all 
SROs under Section 29(a), which voids any condition, 
stipulation, or provision binding any person to waive 
compliance with any provision of the Exchange Act, any rule or 
regulation thereunder, or any rule of an exchange.

Section 928. Clarification that Section 205 of the Investment Advisers 
        Act of 1940 does not apply to state-registered advisers

    Section 928 clarifies that Sec. 205 of the Advisers Act 
(performance fees and advisory contracts) does not apply to 
state-registered investment advisors. This is a clarification 
from the National Securities Markets Improvement Act that these 
restrictions on investment adviser contracts do not apply to 
state-registered advisers.

Section 929. Unlawful margin lending

    Under previous law, it was unlawful for any member of a 
national securities exchange or any broker or dealer to provide 
margin lending to or for any customer on any non-exempt 
security unless the loan met margin regulations provided for in 
Chapter 2B of Title 15 of the U.S. Code and was properly 
collateralized. Section 929 provides that either of these two 
infractions is unlawful by itself.

Section 929A. Protection for employees of subsidiaries and affiliates 
        of publicly traded companies

    Amends Section 806 of the Sarbanes-Oxley Act of 2002 to 
make clear that subsidiaries and affiliates of issuers may not 
retaliate against whistleblowers, eliminating a defense often 
raised by issuers in actions brought by whistleblowers. Section 
806 of the Sarbanes-Oxley Act creates protections for 
whistleblowers who report securities fraud and other 
violations. The language of the statute may be read as 
providing a remedy only for retaliation by the issuer, and not 
by subsidiaries of an issuer. This clarification would 
eliminate a defense now raised in a substantial number of 
actions brought by whistleblowers under the statute.

Section 929B. Fair Fund amendments

    Amends Section 308 of the Sarbanes-Oxley Act of 2002 to 
permit the SEC use penalties obtained from a defendant for the 
benefit of victims even if the SEC does not obtain disgorgement 
from the defendant (e.g., because defendant did not benefit 
from its securities law violation that nonetheless harmed 
investors). Under the Fair Fund provisions of the Sarbanes-
Oxley Act, the SEC must obtain disgorgement from a defendant 
before the SEC can use penalties obtained from the defendant in 
a Fair Fund for the benefit of victims of the defendant's 
violation of the securities laws, or a rule or regulation 
thereunder. This section would revise the Fair Fund provisions 
to permit the SEC to use penalties obtained from a defendant 
for the benefit of victims even if the SEC does not obtain an 
order requiring the defendant to pay disgorgement. In some 
cases, a defendant may engage in a securities law violation 
that harms investors, but the SEC cannot obtain disgorgement 
from the defendant because, for example, the defendant did not 
benefit from the violation.

Section 929C. Increasing the borrowing limit on treasury loans

    Section 929C updates Securities Investor Protection Act, 
including borrowing of funds, distinction between securities 
and cash insurance, portfolio margin, and liquidation. This 
line of credit has not been increased since SIPA was enacted in 
1970. SEC staff believes an increase is necessary to provide 
the Securities Investor Protection Corporation (SIPC) with 
sufficient resources in the event of the failure of a large 
broker-dealer. This line of credit is used in the event that 
SIPC asks for a loan from the SEC and the SEC determines that 
such a loan is necessary ``for the protection of customers of 
brokers or dealers and the maintenance of confidence in the 
United States securities markets.'' SEC staff also support 
eliminating the distinction in the statute between claims for 
cash and claims for securities. Section 21 of the Glass-
Steagall Act, 12 USC 378, prevents broker-dealers (and any 
entity other than a bank) from accepting deposits. Staff 
believes that the distinction between claims for cash and 
claims for securities has become blurred in recent years and 
that the distinction can be confusing to customers.

                               Subtitle C


Section 931. Findings

    This section contains Congressional findings that credit 
ratings are systemically important; relied upon by individual 
and institutional investors and regulators; and central to 
capital formation, investor confidence and economic efficiency. 
Credit rating agencies play a gatekeeper role in financial 
markets that justifies the same level of oversight and 
accountability that applies to securities analysts, auditors, 
and investment banks. Inaccurate ratings, generated in part by 
conflicts of interest in the process of rating structured 
financial products, contributed to the mismanagement of risk by 
large financial institutions and investors, which set the stage 
for global financial panic.

Section 932. Enhanced regulation, accountability, and transparency of 
        nationally recognized statistical ratings organizations

    This section provides for enhanced regulation of nationally 
recognized statistical ratings organizations (NRSROs), greater 
accountability on the part of NRSROs that fail to produce 
accurate ratings, and more disclosure to permit investors to 
better understand credit ratings and their limitations. The 
section builds upon the principles of the Credit Rating Agency 
Reform Act of 2006, which introduced the NRSRO designation and 
sought to improve ratings performance through a combination of 
regulatory oversight and competition.

Enhanced Regulation

    Paragraph (1) of Section 932 provides that each NRSRO shall 
establish, maintain, enforce, and document an effective 
internal control structure governing the implementation of and 
adherence to policies, procedures, and methodologies for 
determining credit ratings, taking into consideration such 
factors as the SEC may prescribe, by rule. This provision also 
calls for an annual report containing an assessment of the 
effectiveness and a CEO attestation on the internal controls. 
In support of this provision, Ms. Rita Bolger, Senior Vice 
President and Associate General Counsel of Standard & Poor's, 
wrote in testimony for the Senate Banking Committee that ``a 
regulatory regime should provide for effective oversight of 
registered agencies' compliance with their policies and 
procedures through robust, periodic inspections. Such oversight 
must avoid interfering in the analytical process and 
methodologies, and refrain from second-guessing rating 
opinions. External interference in ratings analytics undermines 
investor confidence in the independence of the rating opinion 
and heightens moral hazard risk in influencing a rating 
outcome.''\188\
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    \188\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p. 11 
(2009) (Testimony of Ms. Rita Bolger).
---------------------------------------------------------------------------
    Section 932 also gives the SEC the authority to fine an 
NRSRO for violations of law or regulation. Under previous law, 
the SEC could not fine NRSROs, but could only censure, place 
limitations on the activities, functions, or operations of, 
suspend for a period not exceeding 12 months, or revoke the 
registration of any NRSRO. Under this provision the SEC retains 
these abilities. Lynn Turner, former Chief Accountant of the 
SEC, supports this provision. He wrote in testimony for the 
Senate Banking Committee that ``the SEC should be given the 
authority to fine the agencies or their employees who fail to 
adequately protect investors.''\189\
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    \189\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p. 11 (2009) 
(Testimony of Mr. Lynn Turner).
---------------------------------------------------------------------------
    Section 932 attempts to eliminate the effect of the 
inherent conflict of interest in the issuer-pays model of the 
credit rating industry. Under this model, issuers of debt have 
the incentive to use the rating agency that provides the 
highest rating. A conflict of interest thus arises because 
rating agencies want to provide the highest rating to keep the 
issuer's business and are less willing to publish a lower 
rating. The section addresses this conflict by directing the 
SEC to write rules preventing sales and marketing 
considerations from influencing the production of ratings. 
Violation of these rules will lead to suspension or revocation 
of NRSRO status if the violation affects a rating.
    Section 932 addresses the role of the NRSRO compliance 
officer, a position created by the Credit Rating Agency Reform 
Act of 2006. The section prohibits NRSRO compliance officers 
from participating in production of ratings, the development of 
ratings methodologies, or the setting of compensation for NRSRO 
employees. The section allows the SEC to provide exemptions for 
small NRSROs if the SEC finds that compliance would impose an 
unreasonable burden.
    Section 932 also directs NRSRO compliance officers to 
establish procedures for the receipt, retention, and treatment 
of complaints about the rating agency or its ratings. Finally, 
the section directs the compliance officer to submit to the 
NRSRO an annual report on its compliance with the securities 
laws, and its related policies and procedures. The NRSRO must 
submit this report to the SEC.
    Paragraph 6 of Section 932 establishes the Office of Credit 
Ratings within the SEC. The Office shall administer the rules 
of the SEC with respect to NRSROs to protect investors and the 
public interest, to promote accuracy in credit ratings, and to 
prevent conflicts of interest from unduly influencing credit 
ratings. The Director of the Office will report to the Chairman 
of the SEC. The Office will be adequately staffed to fulfill 
its statutory role and will include persons with knowledge of 
and expertise in corporate, municipal, and structured debt.
    The Committee believes that the unique nature of NRSRO 
oversight warrants an independent office within the SEC. The 
fact that there will be a dedicated Office within the SEC to 
focus on NRSROs should improve the quality and efficiency of 
the regulation. Many advocated for a separate Office within the 
SEC to carry out the regulation of NRSROs because of the 
NRSRO's unique and distinct role from the other entities 
overseen by the SEC. Mr. Deven Sharma, President of Standard & 
Poor's, supports ``creating a dedicated office within the SEC 
to oversee NRSROs.''\190\
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    \190\Reforming Credit Rating Agencies: Testimony before the U.S. 
House Committee on Financial Services, 111th Congress, 1st session, 
p.12 (2009) (Testimony of Mr. Deven Sharma).
---------------------------------------------------------------------------
    The Office of Credit Ratings shall conduct annual 
examinations of each NRSRO. Each examination will include a 
review of the policies, procedures, and rating methodologies of 
the NRSRO and whether the NRSRO follows these; the management 
of conflicts of interest by the NRSRO; the implementation of 
ethics policies; the internal supervisory controls of the 
NRSRO; the governance of the NRSRO; the activities of the NRSRO 
compliance officer; the processing of complaints by the NRSRO; 
and the policies of the NRSRO governing the post-employment 
activities of former staff.
    The SEC will make public, in an easily understandable 
format, an annual report summarizing the essential findings of 
all NRSRO examinations that year. The report shall include the 
responses of NRSROs to material regulatory deficiencies 
identified by the SEC and to recommendations made by the SEC.
    Many interested parties believe that, given the rating 
agencies' important role in the financial markets, it is 
appropriate and desirable for the SEC to examine them as they 
would other securities firms. Mr. Lynn Turner, former Chief 
Accountant of the SEC wrote in congressional testimony that 
``the SEC has insufficient authority over the credit ratings 
agencies despite the roles those firms played in Enron and now 
the sub-prime crisis. This deficiency needs to be remedied by 
giving the SEC the authority to inspect credit ratings, just as 
Congress gave the PCAOB the ability to inspect independent 
audits.''\191\ Ms. Barbara Roper, Director of Investor 
Protection at the Consumer Federation of America, wrote in 
testimony that ``the agency should have authority to examine 
individual ratings engagements to determine not only that 
analysts are following company practices and procedures but 
that those practices and procedures are adequate to develop an 
accurate rating. Congress would need to ensure that any such 
oversight function was adequately funded and staffed.''\192\ 
Standard & Poor's President Deven Sharma wrote in testimony 
that S&P supports ``empowering the SEC to conduct frequent 
reviews of NRSROs to ensure that NRSROs follow their internal 
controls and policies for determining ratings and managing 
conflicts of interest.''\193\
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    \191\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p. 11 (2009) 
(Testimony of Mr. Lynn Turner).
    \192\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.9 
(2009) (Testimony of Ms. Barbara Roper).
    \193\Reforming Credit Rating Agencies: Testimony before the U.S. 
House Committee on Financial Services, 111th Congress, 1st session, 
p.12 (2009) (Testimony of Mr. Deven Sharma).
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Accountability

    Paragraph (2) of Section 932 provides that the SEC may 
temporarily suspend or permanently revoke the registration of 
an NRSRO with respect to a particular class or subclass of 
securities, if the SEC finds, on the record after notice and 
opportunity for hearing, that NRSRO does not have adequate 
financial and managerial resources to consistently produce 
credit ratings with integrity. In determining whether an NRSRO 
lacks such resources, the SEC shall consider an NRSRO's failure 
to consistently produce accurate ratings over a sustained 
period of time.
    Subsection (q) of Paragraph 6 of Section 932 directs the 
SEC to require that each NRSRO publicly disclose information on 
the initial credit ratings published by the NRSRO for each type 
of obligor, security, and money market instrument and any 
subsequent changes to such credit ratings. The purpose of this 
disclosure is to allow users of credit ratings to compare the 
performance and accuracy of ratings issued by different NRSROs. 
Disclosures would be clear and informative for investors with 
varying levels of financial sophistication.
    This provision seeks to address the lack of market 
competition in the credit rating industry by allowing investors 
to compare NRSRO performance. Industry analysts often identify 
the lack of competition as one reason why the industry 
performed poorly in rating securities, such as mortgage-backed 
securities, and thus contributed to the economic crisis of 
2008. To portray the concentrated market for credit ratings, 
Sean Egan, Managing Director of Egan-Jones Ratings Co., noted 
that S&P and Moody's control over 90% of the revenues in the 
ratings industry.\194\ This provision will make rating 
performance public--the goal is to foster market competition by 
forcing ratings firms to compete on the basis of their rating 
accuracy. In support of this proposal, Mr. George Miller, 
Executive Director of the American Securitization Forum, wrote 
in congressional testimony ``we support the publication in a 
format reasonably accessible to investors of a record of all 
ratings actions for securitization instruments for which 
ratings are published. We believe that publication of these 
data will enable investors and other market participants to 
evaluate and compare the performance, stability and quality of 
ratings judgments over time.''\195\ Ms. Rita Bolger, on behalf 
of Standard & Poor's, an NRSRO, supports this performance 
disclosure. She wrote in congressional testimony that a way to 
promote sound rating oversight would be to ``require registered 
rating agencies to publicly issue performance measurement 
statistics over the short, medium, and long term, and across 
asset classes and geographies.''\196\
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    \194\Examining the Role of Credit Rating Agencies in the Capital 
Markets: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 109th Congress, 2nd session, p.1 (2005) 
(Testimony of Mr. Sean Egan).
    \195\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p.25 (2009) (Testimony of Mr. 
George Miller).
    \196\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.9 
(2009) (Testimony of Ms. Rita Bolger).
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    Finally, this subsection makes accommodation for 
subscriber-pay NRSROs, by mandating that the disclosure be 
appropriate to the business model of an NRSRO. For these 
NRSROs, the publication of rating performance would likely be 
unsustainable because they rely on credit rating users to pay 
them for ratings.
    During the markup of this legislation, the Committee 
adopted an amendment proposed by Senator Bennet that would 
require that at least one-half the members of NRSRO boards be 
independent directors. Independent directors are defined as 
those who do not accept consulting, advisory, or other fees 
from the NRSRO; are not associated with the NRSRO or an 
affiliate; and do not participate in any deliberation involving 
a rating in which the independent director has a financial 
interest. The NRSRO board must be responsible for establishing, 
maintaining, and enforcing policies and procedures for 
determining credit ratings; preventing conflicts of interests; 
the internal control systems; and compensation practices. The 
provision authorizes the SEC to grant an exemption from 
independence rules for small NRSROs where compliance would 
present an unreasonable burden, provided that the 
responsibilities of the board are delegated to a committee 
including at least one user of NRSRO ratings.

Disclosure

    Subsection (r) of Paragraph 6 of Section 932 directs the 
SEC to prescribe rules to require each NRSRO to ensure that 
credit ratings are determined using procedures and 
methodologies that are approved by the board of directors or 
senior credit officer. The SEC's rules must require that 
material changes to ratings procedures and methodologies be 
applied consistently and publicly disclosed. Such changes must 
be applied to all credit ratings to which they apply within a 
reasonable time period, to be determined by the SEC.
    The rules will also require each NRSRO to notify users of 
credit ratings when a material change is made to a procedure or 
methodology, and when a significant error is identified in a 
procedure or methodology that may result in credit rating 
actions. Ms. Rita Bolger, Senior Vice President and Associate 
General Counsel of Standard & Poor's, wrote in testimony for 
the Senate Banking Committee that ``with greater transparency 
of credit rating agency methodologies, investors would be in a 
better position to assess the opinions.''\197\
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    \197\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.9 
(2009) (Testimony of Ms. Rita Bolger).
---------------------------------------------------------------------------
    Subsection (s) of Paragraph 6 of Section 932 directs the 
SEC to require NRSROs, by rule, to publish a form with each 
rating that discloses qualitative and quantitative information 
that is intended to enable investors and users of credit 
ratings to better understand the main principles and 
assumptions that underlie the rating. The disclosures shall be 
easy to use, directly comparable across different classes of 
securities, and may be provided in either paper or electronic 
form, as the SEC may, by rule, determine.
    The qualitative content of the form shall include the 
credit ratings produced; the main assumptions and principles 
used in constructing procedures and methodologies (including 
qualitative methodologies and quantitative inputs and 
assumptions about the correlation of defaults across obligors 
used in rating structured products); the potential limitations 
of the credit ratings and the types of risks excluded from the 
credit ratings that the NRSRO does not comment on; information 
on the uncertainty of the credit rating including information 
on the reliability, accuracy, and quality of the data relied on 
in determining the credit rating; a statement on the 
reliability and limitations of the data relied upon and any 
other data accessibility limitations; and whether and to what 
extent third party due diligence services have been used by the 
NRSRO, including a description of the information that such 
third party reviewed in conducting due diligence services and a 
description of the findings or conclusions of such third party.
    The form shall include an overall assessment of the quality 
of information available and considered in producing a rating 
in relation to the quality of information available to the 
NRSRO in rating similar issuances; information relating to 
conflicts of interest of the nationally recognized statistical 
rating organization; and such additional information as the SEC 
may require.
    The quantitative content will include an explanation or 
measure of the potential volatility of the credit rating 
(including any factors that might lead to a change in the 
credit ratings), information on the sensitivity of the rating 
to assumptions made by the NRSRO, and the extent of the change 
that a user can expect under different market conditions. In 
addition, the disclosures will include information on the 
historical performance of the rating and the expected 
probability of default and the expected loss in the event of 
default.
    These substantial disclosures will give investors and other 
market participants far more information about the credit risk 
of a debt issue and the reliability of ratings. Dr. William 
Irving, Portfolio Manager at Fidelity Investments, wrote in 
congressional testimony that the Committee should ``facilitate 
greater transparency of the methodology and assumptions used by 
the rating agencies to determine credit ratings. In particular, 
there should be public disclosure of the main assumptions 
behind rating methodologies and models. Furthermore, when those 
models change or errors are discovered, the market should be 
notified.''\198\ Mr. George Miller, Executive Director of the 
American Securitization Forum, added that he ``strongly 
supports enhanced disclosure of securitization ratings methods 
and processes, including information relating to the use of 
ratings models and key assumptions utilized by those 
models.''\199\ The Council of Institutional Investors wrote in 
a letter to Senator Dodd that it supports these reforms 
designed to ``improve the transparency of rating methodologies 
and assumptions and make rating agencies truly accountable to 
the investors that depend on them.''\200\
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    \198\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p.12 (2009) (Testimony of Dr. 
William Irving).
    \199\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p.25 (2009) (Testimony of Mr. 
George Miller).
    \200\Mr. Jeff Mahoney, Council of Institutional Investors, letter 
to Senator Dodd, p. 3, November 18, 2009.
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    Another disclosure that the NRSROs will have to make 
regards due diligence services. Subsection (s) provides the 
findings and conclusions of any third-party due diligence 
report obtained by the issuer or underwriter of an asset-backed 
security shall be made public, in a format to be determined by 
the SEC. The disclosures shall be in a manner that allows the 
public to determine the adequacy and level of due diligence 
services provided by a third party. Many analysts point to the 
decline of due diligence as a factor that contributed to the 
poor performance of asset-backed securities during the crisis. 
Professor John Coffee described the effect of poor due 
diligence in the credit rating industry in testimony for the 
Senate Banking Committee: ``Unlike other gatekeepers, the 
credit rating agencies do not perform due diligence or make its 
performance a precondition of their ratings. In contrast, 
accountants are, quite literally, bean counters who do conduct 
audits. But the credit rating agencies do not make any 
significant effort to verify the facts on which their models 
rely (as they freely conceded to this Committee in earlier 
testimony here). Rather, they simply accept the representations 
and data provided them by issuers, loan originators and 
underwriters. The problem this presents is obvious and 
fundamental: no model, however well designed, can outperform 
its information inputs--Garbage, In; Garbage Out. . . . 
Ultimately, unless the users of credit ratings believe that 
ratings are based on the real facts and not just a hypothetical 
set of facts, the credibility of ratings, particularly in the 
field of structured finance, will remain tarnished, and private 
housing finance in the U.S. will remain starved and underfunded 
because it will be denied access to the broader capital 
markets.''\201\ Ms. Barbara Roper, Director of Investor 
Protection at the Consumer Federation of America, also believes 
that this provision is important. She wrote in congressional 
testimony that new legislation should address ``lack of due 
diligence regarding information on which ratings are 
based.''\202\
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    \201\Examining Proposals to Enhance the Regulation of Credit Rating 
Agencies: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, pp.1-2 (2009) 
(Testimony of Professor John Coffee).
    \202\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.8 
(2009) (Testimony of Ms. Barbara Roper).
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Section 933. State of mind in private actions

    Section 933 was introduced by Senator Reed. It provides 
that the enforcement and penalty provisions applicable to 
statements made by a credit rating agency shall apply in the 
same manner and to the same extent as to statements made by a 
registered public accounting firm or a securities analyst, and 
such statements shall not be deemed forward looking statements. 
In actions for money damages brought against a credit rating 
agency or a controlling person, it shall be sufficient for 
pleading any required state of mind in relation to such action, 
that the complaint state facts giving rise to a strong 
inference that the credit rating agency knowingly or recklessly 
failed to conduct a reasonable investigation of the factual 
elements of the rated security, or failed to obtain reasonable 
verification of such factual elements from independent sources 
that it considered to be competent.
    Section 933 specifies that, for purposes of passing the 
pleading test of the Private Securities Litigation Reform Act, 
plaintiffs need not plead that the CRA ``knowingly or 
recklessly'' engaged in a deceptive misrepresentation or 
omission in communicating with investors, but instead requires 
only that they plead that the CRA ``knowingly or recklessly 
failed . . . to conduct a reasonable investigation . . . with 
respect to . . . factual elements . . . or to obtain reasonable 
verification of such . . . elements . . .''
    The Section permits plaintiffs to more easily pass the 
motion to dismiss stage of litigation. It does not change the 
ultimate standard used by a fact-finder in determining whether 
the basic elements of 10b-5 have been met.
    Columbia University Law Professor John C. Coffee testified 
before the Committee that this provision ``struck a very 
sensible compromise in my judgment. It created a standard of 
liability for the rating agencies, but one with which they 
easily could comply (if they tried).'' He opined that this 
``language does not truly expose rating agencies to any serious 
risk of liability--at least if they either conduct a reasonable 
investigation themselves or obtain verification from others 
(such as a due diligence firm) that they reasonably believed to 
be competent and independent . . . so that a rating agency 
would be fully protected when it received such a certification 
from an independent due diligence firm that covered the basic 
factual elements in its model.''
    Professor Coffee further testified, ``The case for this 
limited litigation threat is that it is unsafe and unsound to 
let rating agencies remain willfully ignorant. Over the last 
decade, they have essentially been issuing hypothetical ratings 
in structured finance transactions based on hypothetical 
assumed facts provided them by issuers and underwriters. Such 
conduct is inherently reckless; the damage that it caused is 
self-evident, and the proposed language would end this state of 
affairs (without creating anything approaching liability for 
negligence).''\203\
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    \203\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Professor John Coffee).
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Section 934. Referring tips to law enforcement or regulatory 
        authorities

    Section 934 provides that each NRSRO will refer to the 
appropriate law enforcement or regulatory authorities any 
information that the NRSRO receives and finds credible that 
alleges that an issuer of securities rated by the NRSRO has 
committed or is committing a violation of law that has not been 
adjudicated by a Federal or State court. This is in effect a 
mandatory whistle-blowing provision, and exceptions could be 
created to cover circumstances when the compliance officer 
concluded that the information was false or unreliable. This 
provision requires the NRSRO to determine whether it feels the 
information is credible, but does not require the NRSRO to 
undertake extensive fact finding or analysis or to determine 
whether a violation of law has occurred.

Section 935. Consideration of information from sources other than the 
        issuer in rating decisions

    Section 935 provides that NRSROs must consider information 
about an issuer that the NRSRO has, or receives from a source 
other than the issuer, that the NRSRO finds credible and 
potentially significant to a rating decision. The Section does 
not require an NRSRO to initiate a search for such information. 
The information is expected to be evaluated on its own merits 
as to whether it indeed should affect the rating. The Committee 
believes that if the NRSRO possesses credible information that 
is significant to a rating decision about an issuer, it should 
consider it even if it has not undertaken to independently 
verify information it has received from an issuer.
    NRSROs use data received from issuers in formulating a 
rating and may not undertake to verify it. For example, one 
NRSRO states:

          While [the NRSRO] has obtained information from 
        sources it believes to be reliable, [the NRSRO] does 
        not perform an audit and undertakes no duty of due 
        diligence or independent verification of any 
        information it receives.
          This type of disclosure and policy may create the 
        appearance that the NRSRO could receive credible, 
        material information about the creditworthiness of an 
        issuer from an outside source but choose not to 
        consider it in formulating a rating. Such information 
        could come from a highly credible press report, 
        information from a knowledgeable industry insider, 
        views from a former employee or other source.
          Mr. James Gellert, Chairman of Rapid Ratings 
        International, Inc., wrote in congressional testimony 
        that ``we believe that, if a rating agency's business 
        model is to provide qualitative assessments of an 
        entity or pool of assets collateralizing a structured 
        product, it should take into account all data it can 
        reasonably attain and qualify as being reliable.''\204\
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    \204\Examining Proposals to Enhance the Regulation of Credit Rating 
Agencies: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p.18 (2009) 
(Testimony of Mr. James Gellert).
---------------------------------------------------------------------------

Section 936. Qualification standards for credit rating analysts

    Section 936 directs the SEC to issue rules reasonably 
designed to ensure that any person employed by an NRSRO to 
perform credit ratings meets standards of training, experience, 
and competence necessary to produce accurate ratings; and is 
tested for knowledge of the credit rating process.
    Following the devastating impact on investors, the economy, 
and families that erroneous ratings had during the credit 
crisis, the Committee feels there is need to improve the 
analysis underlying credit ratings. This requirement is 
intended to improve the quality of ratings by increasing the 
skills of those who formulate them. This section would require 
credit rating analysts to meet high professional standards for 
their industry, just as investment advisers, registered 
representatives, and auditors do for theirs.
    Mr. Mark Froeba testified before the Committee about 
concerns that ``Every rating agency employs `rating analysts' 
but there are no independent standards governing this 
`profession': there are no minimum educational requirements, 
there is no common code of ethical conduct, and there is no 
continuing education obligation. Even where each agency has its 
own standards for these things, the standards differ widely 
from agency to agency. One agency may assign a senior analyst 
with a PhD in statistics to rate a complex transaction; another 
might assign a junior analyst with a BA in international 
relations to the same transaction. The staffing decision might 
appear to investors as yet another tool to manipulate the 
rating outcome.''\205\
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    \205\Examining Proposals to Enhance the Regulation of Credit Rating 
Agencies: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Mark Froeba).
---------------------------------------------------------------------------

Section 937. Timing of regulations

    Section 937 directs the SEC to issue final regulations 
within 1 year of the date of enactment of the Act.

Section 938. Universal ratings symbols

    Section 938 was introduced by Senator Menendez. It requires 
NRSROs to clearly define any symbols used to denote a credit 
rating, and apply any such symbols in a consistent manner to 
all types of securities and money market instruments to which 
they are applied. The Committee believes that an NRSRO's credit 
rating symbol should have the same meaning about 
creditworthiness when it is applied to any issuer--the same 
symbol should not have different meaning depending on the 
issuer. This Section does not dictate the meaning of any credit 
rating--whether it refers to an issuer's likelihood of default, 
ability to pay on time, or other factors. Also, this Section 
does not prevent an NRSRO from using distinct sets of symbols 
to denote credit ratings for different types of securities.
    Some observers have expressed concerns that some rating 
agencies apply stricter standards to municipal debt than to 
corporate debt. Consumer Federation of America and Americans 
for Financial Reform stated, ``Most municipal bonds are rated 
on a different, more conservative rating scale than corporate 
bonds. This dual system employed by the largest rating agencies 
ends up costing state and local governments and their taxpayers 
over a billion dollars a year, a cost these governments can ill 
afford. Bond issuers, be they corporate bond issuers or 
municipal bond issuers, should be rated on the same standard--
the likelihood of default.''\206\ They recommended that the 
legislation require each NRSRO to: (1) establish, maintain and 
enforce written policies and procedures designed to assess the 
risk that investors in securities and money market instruments 
may not receive payment in accordance with the terms of such 
securities and instruments, (2) define clearly any credit 
rating symbols used by the organization, and (3) apply such 
credit rating symbols in a consistent manner for all types of 
securities and money market instruments.''\207\ The National 
Association of State Treasurers stated that ``Bond ratings have 
a direct impact on the interest rates at which governments can 
issue their bonds to finance the construction of critically-
need infrastructure, and the ratings given to these bonds by 
the major credit ratings agencies play a large role in 
determining the cost that taxpayers assume when their 
governments invest in infrastructure . . . We believe that 
ratings applied to municipal bonds should indicate the same 
risk as the identical rating applied to a corporate bond, while 
also recognizing the need for relative ratings among municipal 
issuers. We further believe that ratings should measure the 
ability of an issuer to meet its obligation to investors as 
promised in the bond documents, such obligation primarily being 
to pay its debt service on time and in full.''\208\
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    \206\Consumer Federation of America, Letter to Senators Dodd and 
Shelby, November 24, 2009.
    \207\Letter to Chairman Dodd and Ranking Member Shelby, November 
24, 2009.
    \208\Letter dated November 17, 2009.
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Section 939. Government Accountability Office study and federal agency 
        review of required uses of nationally recognized statistical 
        rating organization ratings

    Section 939 directs the GAO to study the scope of Federal 
and State laws and regulations with respect to the regulation 
of securities markets, banking, insurance, and other areas that 
require the use of ratings issued by NRSROs. Consulting with a 
range of regulators and market participants, GAO shall evaluate 
the necessity of such rating requirements and the potential 
impact on markets and investors of removing them. Within 2 
years of the date of enactment of this Act, the GAO shall 
report to Congress with recommendations on which ratings 
requirements, if any, could be removed with minimal disruption 
to the markets and whether the financial markets and investors 
would benefit from the rescission of the ratings requirements 
identified by the study.
    Within one year of the completion of GAO's report, the SEC 
and other financial regulators shall review rating requirements 
in their regulations, and shall remove such rating 
requirements, unless they determine that there is no reasonable 
alternative standard of creditworthiness to replace a credit 
rating, and that removing the rating requirement would be 
inconsistent with the purposes of the statute that authorized 
the regulation and not in the public interest.
    Currently, there are numerous instances in government rules 
and regulations that require the use of NRSRO ratings. This 
gives the ratings a tacit government sanction. Many observers 
have recommended to the Senate Banking Committee to enact 
policy to remove these references to ratings. Professor 
Lawrence White advised ``Eliminate regulatory reliance on 
ratings--eliminate the force of law that has been accorded to 
these third-party judgments. The institutional participants in 
the bond markets could then more readily (with appropriate 
oversight by financial regulators) make use of a wider set of 
providers of information, and the bond information market would 
be opened to new ideas and new entry in a way that has not been 
possible for over 70 years.''
    One concern is that the reliance on ratings has become so 
prevalent that the abrupt removal of ratings could cause 
unintended consequences and negative effects in the market. 
Therefore, the Committee provides for a GAO study of the 
reliance on ratings. Supporting the caution behind this 
approach, Mr. George Miller, Executive Director of the American 
Securitization Forum, wrote in congressional testimony ``ASF 
believes that credit ratings are an important part of existing 
regulatory regimes, and that steps aimed at reducing or 
eliminating the use of ratings in regulation should be 
considered carefully, to avoid undue disruption to market 
function and efficiency.'' The Investor's Working Group\209\ 
and Mr. Andrew Davidson\210\ also support the ultimate goal of 
reducing the reliance on ratings. The studies would identify 
those requirements for NRSRO ratings for which there is a 
necessity and those requirements which could be removed with 
minimal disruption to the markets over a sufficiently long time 
period to fully explore possible unintended consequences, 
alternative measures of creditworthiness and other factors 
which can ultimately lead to strengthening the financial 
markets.
---------------------------------------------------------------------------
    \209\U.S. Financial Regulatory Reform: An Investor's Perspective, 
Investor's Working Group, July 2009.
    \210\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session (2009) (Testimony of Mr. Andrew 
Davidson).
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Section 939A. Securities and Exchange Commission study on strengthening 
        credit rating agency independence

    Section 939A directs the SEC to conduct a study of the 
independence of NRSROs, evaluate the management of conflicts of 
interest by NRSROs, and evaluate the potential impact of rules 
prohibiting an NRSRO that provided a rating to an issuer from 
providing other services to the issuer. The Committee intends 
this study to include an identification of the types and scope 
of services provided by NRSROs and which of these services 
raises a potential for raising a conflict that could change a 
rating and to cover other relevant issues identified by GAO.

Section 939B. Government Accountability Office study on alternative 
        business models

    Section 939B directs the GAO to conduct a study on 
alternative means of compensating NRSROs in order to create 
incentives for NRSROs to provide more accurate ratings and any 
statutory changes that would be required to facilitate these 
changes. The GAO will submit this report, with recommendations, 
within one year of passage of the Act. The predominant NRSRO 
business model involves the issuer paying for the rating, while 
a small number of NRSROs rely on subscription fees from users. 
The Committee asks the GAO to analyze which model is likely to 
produce the most accurate ratings.
    The Committee recognizes that conflicts of interest exist 
for NRSROs and is interested in an analysis of how and whether 
they are effectively managed so that they do not unfairly 
influence ratings decisions. The study should include any 
recommendations for legislative, regulatory or voluntary 
industry action. Mr. Stephen Joynt, President and CEO of Fitch, 
testified ``The majority of Fitch's revenues are fees paid by 
issuers for assigning and maintaining ratings. This is 
supplemented by fees paid by a variety of market participants 
for research subscriptions. The primary benefit of this model 
is that it enables Fitch to be in a position to offer 
analytical coverage on every asset class in every capital 
market--and to make our rating opinions freely available to the 
market in real-time, thus enabling the market to freely and 
fully assess the quality of our work. Fitch has long 
acknowledged the potential conflicts of being an issuer-paid 
rating agency. Fitch believes that the potential conflicts of 
interest in the ``issuer pays'' model have been, and continue 
to be, effectively managed through a broad range of policies, 
procedures and organizational structures aimed at reinforcing 
the objectivity, integrity and independence of its credit 
ratings, combined with enhanced and ongoing regulatory 
oversight.''
    Mark Froeba, Principal at PF2 Securities Evaluations, Inc. 
and former Senior Vice President at Moody's, testified that 
``there are those who believe that real rating agency reform 
requires a return to an investor-pay model. But there may be a 
third way, a business model that preserves the issuer-pay 
``delivery system'' (the issuer still gets the bill for the 
rating) but incorporates the incentives of the investor-pay 
model. . . . These and other reforms are necessary not only to 
restore investor confidence in ratings but also to prevent 
future ratings-related financial crises.''\211\
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    \211\Examining Proposals to Enhance the Regulation of Credit Rating 
Agencies: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p.18 (2009) 
(Testimony of Mr. Mark Froeba).
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Section 939C. Government Accountability Office study on the creation of 
        an independent professional analysts organization

    Section 939C directs the GAO to conduct a study on the 
feasibility and merits of creating an independent professional 
organization for NRSRO rating analysts that would establish 
independent standards for governing the rating analyst 
profession, establishing a code of ethical conduct, and 
overseeing the rating analyst profession. The GAO shall submit 
a report to the relevant congressional committees within one 
year of passage of the Act. In the aftermath of the devastating 
financial crisis caused in part by poor credit ratings, the 
Committee is interested in exploring means to increase the 
skills of the professionals who produce credit ratings. This 
Section directs the GAO to explore the potential impact of an 
independent professional analysts organization. Mark Froeba, 
Principal at PF2 Securities Evaluations, Inc. and former Senior 
Vice President at Moody's, testified that he recommended the 
creation of ``an independent professional organization for 
rating analysts. Every rating agency employs `rating analysts' 
but there are no independent standards governing this 
`profession': there are no minimum educational requirements, 
there is no common code of ethical conduct, and there is no 
continuing education obligation. Even where each agency has its 
own standards for these things, the standards differ widely 
from agency to agency. One agency may assign a senior analyst 
with a PhD in statistics to rate a complex transaction; another 
might assign a junior analyst with a BA in international 
relations to the same transaction . . . Creating one 
independent professional organization to which rating analysts 
from all rating agencies must belong will ensure uniform 
standards especially ethical standards--across all the rating 
agencies. It would also provide a forum external to the 
agencies where rating analysts might bring confidential 
complaints about ethical concerns. An independent organization 
could track and report the nature and number of these 
complaints and alert regulators if there are patterns in the 
complaints, problems at particular agencies, and even whether 
there are problems with particular managers at one rating 
agency. Finally, such an organization should have the power to 
discipline analysts for unethical behavior.''\212\
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    \212\Examining Proposals to Enhance the Regulation of Credit Rating 
Agencies: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p.18 (2009) 
(Testimony of Mr. Mark Froeba).
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                               Subtitle D


Section 941. Regulation of credit risk retention

    This section requires securitizers, defined as those who 
issue, organize, or initiate asset-backed securities, to retain 
an economic interest in a material portion of the credit risk 
for any asset that securitizers transfer, sell, or convey to a 
third party. The provision intends to create incentives that 
will prevent a recurrence of the excesses and abuses that 
preceded the crisis, restore investor confidence in asset-
backed finance, and permit securitization markets to resume 
their important role as sources of credit for households and 
businesses.
    The Committee's investigation into the causes of the 
financial crisis identified abuses of the securitization 
process as a major contributing factor. Two problems emerged in 
the crisis. First, under the ``originate to distribute'' model, 
loans were made expressly to be sold into securitization pools, 
which meant that the lenders did not expect to bear the credit 
risk of borrower default. This led to significant deterioration 
in credit and loan underwriting standards, particularly in 
residential mortgages. According to the testimony of Dr. 
William Irving, Portfolio Manager of Fidelity Investments:

          Without a doubt, securitization played a role in this 
        crisis. Most importantly, the ``originate-to-
        distribute'' model of credit provision seemed to spiral 
        out of control. Under this model, intermediaries found 
        a way to lend money profitably without worrying if the 
        loans were paid back. The loan originator, the 
        warehouse facilitator, the security designer, the 
        credit rater, and the marketing and product-placement 
        professionals all received a fee for their part in 
        helping to create and distribute the securities. These 
        fees were generally linked to the size of the 
        transaction and most of them were paid up front. So 
        long as there were willing buyers, this situation 
        created enormous incentive to originate mortgage loans 
        solely for the purpose of realizing that up-front 
        intermediation profit.\213\
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    \213\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, (2009) (Testimony of Dr. William 
Irving).

    Second, it proved impossible for investors in asset-backed 
securities to assess the risks of the underlying assets, 
particularly when those assets were resecuritized into complex 
instruments like collateralized debt obligations (CDOs) and 
CDO-squared. With the onset of the crisis, there was widespread 
uncertainty regarding the true financial condition of holders 
of asset-backed securities, freezing interbank lending and 
constricting the general flow of credit. Complexity and opacity 
in securitization markets created the conditions that allowed 
the financial shock from the subprime mortgage sector to spread 
into a global financial crisis, as Professor Patricia A. McCoy 
---------------------------------------------------------------------------
testified before the Committee:

          General investor panic is [another] reason for 
        contagion. Even in transactions involving no nonprime 
        collateral, concerns about the nonprime crisis had a 
        ripple effect, making it hard for companies and cities 
        across-the-board to secure financing. Banks did not 
        want to lend to other banks out of fear that 
        undisclosed nonprime losses might be lurking on their 
        books. Investors did not want to buy other types of 
        securitized bonds, such as those backed by student 
        loans or car loans, because they lost faith in ratings 
        and could not assess the quality of the underlying 
        collateral.\214\
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    \214\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, (2009) (Testimony of Patricia A. 
McCoy).

    Section 941 directs the Federal banking agencies and the 
SEC to jointly prescribe regulations to require any securitizer 
to retain a material portion of the credit risk of any asset 
that the securitizer, through the issuance of an asset-backed 
security, transfers, sells, or conveys to a third party. When 
securitizers retain a material amount of risk, they have ``skin 
in the game,'' aligning their economic interests with those of 
investors in asset-backed securities. Securitizers who retain 
risk have a strong incentive to monitor the quality of the 
assets they purchase from originators, package into securities, 
and sell.
    The regulations will prohibit securitizers from hedging or 
otherwise transferring the credit risk they are required to 
retain. The prohibition does not extend to hedging risks other 
than credit risk (such as interest rate risk) associated with 
the retained assets or position. Originators (defined as 
persons who through the extension of credit or otherwise create 
financial assets that collateralize an asset-backed security, 
and sell assets to a securitizer) will come under increasing 
market discipline because securitizers who retain risk will be 
unwilling to purchase poor-quality assets. Thus, the bill does 
not require that the regulations impose risk retention 
obligations on originators. Risk retention may be divided 
between securitizers and originators only if the regulators 
consider that assets being securitized do not have 
characteristics of low credit risk, that conditions in 
securitization markets are creating incentives for imprudent 
origination, and that allocating part of the risk retention 
obligation to originators would not prevent consumers and 
businesses from obtaining credit on reasonable terms.
    There is broad support for risk retention by securitizers. 
The provision was included in the Treasury Department's 2009 
legislative proposal.\215\ Mr. George Miller, Executive 
Director of the American Securitization Forum, testified before 
the Committee that ``we support the concept of requiring 
retention of a meaningful economic interest in securitized 
loans as a means of creating a better alignment of incentives 
among transaction participants.''\216\ The Group of Thirty 
recommended risk retention as part of broad financial reform:

    \215\Title IX--Additional Improvements to Financial Markets 
Regulation Subtitle D, U.S. Department of the Treasury, 2009, 
www.financialstability.gov.
    \216\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p.19 (2009) (Testimony of Mr. 
George Miller).
---------------------------------------------------------------------------
          The healthy redevelopment of securitized credit 
        markets requires a restoration of market confidence in 
        the adequacy and sustainability of credit underwriting 
        standards. To help achieve this, regulators should 
        require regulated financial institutions to retain a 
        meaningful portion of the credit risk they are 
        packaging into securitized and other structured credit 
        products.\217\
---------------------------------------------------------------------------
    \217\Financial Reform: A Framework for Financial Stability, Group 
of Thirty, p. 49, January 15, 2009.

The Consumer Federation of America\218\, CalPERS\219\, and the 
Investor's Working Group\220\ also support this provision.
---------------------------------------------------------------------------
    \218\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Ms. Barbara Roper).
    \219\Regulating Hedge Funds and Other Private Investment Pools: 
Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, (2009) (Testimony of Mr. Joseph 
Dear).
    \220\U.S. Financial Regulatory Reform: An Investor's Perspective, 
Investor's Working Group, July 2009.
---------------------------------------------------------------------------
    The Committee believes that implementation of risk 
retention obligations should recognize the differences in 
securitization practices for various asset classes. Witnesses 
before the Committee and a number of market participants have 
indicated that a ``one size fits all'' approach to risk 
retention may adversely affect certain securitization markets. 
For example, Mr. J. Christopher Hoeffel of the Commercial 
Mortgage Securities Association testified that ``[P]olicymakers 
must ensure that any regulatory reforms are tailored to address 
the specific needs of each securitization asset class. Again, 
CMSA does not oppose these [risk retention] measures per se, 
but emphasizes that they should be tailored to reflect key 
differences between the different asset-backed securities 
markets.''\221\ Accordingly, the bill requires that the initial 
joint rulemaking include separate components addressing 
individual asset classes--home mortgages, commercial mortgages, 
commercial loans, auto loans, and any other asset class that 
the regulators deem appropriate. The Committee expects that 
these regulations will recognize differences in the assets 
securitized, in existing risk management practices, and in the 
structure of asset-backed securities, and that regulators will 
make appropriate adjustments to the amount of risk retention 
required.
---------------------------------------------------------------------------
    \221\[Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, (2009) (Testimony of Mr. J. 
Christopher Hoeffel).]
---------------------------------------------------------------------------
    In addition, the risk retention rules may provide a total 
or partial exemption for any securitization, as may be 
appropriate in the public interest and for the protection of 
investors. The Committee expects that asset-backed securities 
backed by the full faith and credit of the United States, or 
where the underlying assets were guaranteed by an agency of the 
United States, would qualify for such an exemption.
    The section provides a baseline risk retention amount of 5 
percent of the credit risk in any securitized asset. The figure 
may be set higher at the regulators' discretion, or it may be 
reduced below 5 percent when the assets securitized meet 
standards of low credit risk to be established by rule for the 
various asset classes. The Committee believes that regulators 
should have flexibility in setting risk retention levels, to 
encourage recovery of securitization markets and to accommodate 
future market developments and innovations, but that in all 
cases the amount of risk retained should be material, in order 
to create meaningful incentives for sound and sustainable 
securitization practices.
    The section also authorizes regulators to make exemptions, 
exceptions, or adjustments to the risk retention rules, 
provided that any such exemptions, exceptions, or adjustments 
help ensure high underwriting standards, encourage appropriate 
risk management practices, improve access to credit on 
reasonable terms, or are otherwise in the public interest.

Section 942. Disclosures and reporting for asset-backed securities

    Section 942 seeks to improve transparency in asset-backed 
securities. It directs the SEC to adopt regulations requiring 
each issuer of an asset-backed security to disclose, for each 
tranche or class of security, information regarding the assets 
backing that security. These disclosures shall be in a format 
that facilitates comparison of such data across securities in 
similar types of asset classes. Issuers of asset-backed 
securities shall disclose asset-level or loan-level data 
necessary for investors to independently perform due diligence. 
This data would include data having unique identifiers relating 
to loan brokers or originators, the nature and extent of the 
compensation of the broker or originator of the assets backing 
the security, and the amount of risk retention by the 
originator or the securitizer of such assets. The Committee 
does not expect that disclosure of data about individual 
borrowers would be required in cases such as securitizations of 
credit card or automobile loans or leases, where asset pools 
typically include many thousands of credit agreements, where 
individual loan data would not be useful to investors, and 
where disclosure might raise privacy concerns.
    Mr. George Miller, Executive Director of the American 
Securitization Forum, wrote in testimony for the Committee that 
``ASF supports increased transparency and standardization in 
the securitization markets, and related improvements to the 
securitization market infrastructure. . . . ASF believes that 
every mortgage loan should be assigned a unique identification 
number at origination, which would facilitate the 
identification and tracking of individual loans as they are 
sold or financed in the secondary market, including via RMBS 
securitization.''\222\ The Investor's Working Group wrote in a 
report that ``the SEC should develop a regulatory regime for 
such asset-backed securities that would require issuers to make 
prospectuses available for potential investors in advance of 
their purchasing decisions. These prospectuses should disclose 
important information about the securities, including the terms 
of the offering, information about the sponsor, the issuer and 
the trust, and details about the collateral supporting the 
securities. Such new rules would give investors critical 
information they need to perform due diligence on offerings 
prior to investing. It would also create better opportunities 
for due diligence by the underwriters of such securities, thus 
adding additional levels of oversight of the quality and 
appropriateness of structured offerings.''\223\ Professor 
Patricia McCoy wrote in testimony ``the SEC should require 
securitizers to provide investors with all of the loan-level 
data they need to assess the risks involved. . . . In addition, 
the SEC should require securitizers and servicers to provide 
loan-level information on a monthly basis on the performance of 
each loan and the incidence of loan modifications and 
recourse.''\224\ CalPERS\225\, Mr. Andrew Davidson\226\, and 
Dr. William Irving\227\ also supported enhanced disclosure in 
testimony before the Committee.
---------------------------------------------------------------------------
    \222\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p.18 (2009) (Testimony of Mr. 
George Miller).
    \223\U.S. Financial Regulatory Reform: An Investor's Perspective, 
Investor's Working Group, p.14, July 2009.
    \224\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p.13 (2009) (Testimony of 
Professor Patricia McCoy).
    \225\Regulating Hedge Funds and Other Private Investment Pools: 
Testimony before the Subcommittee on Securities, Insurance, and 
Investment of the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session (2009) (Testimony of Mr. Joseph 
Dear).
    \226\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session (2009) (Testimony of Mr. Andrew 
Davidson).
    \227\Securitization of Assets: Problems and Solutions: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs, 111th Congress, 1st session, p. (2009) (Testimony of Dr. 
William Irving).
---------------------------------------------------------------------------

Section 943. Representations and warranties in asset-backed offerings

    This section directs the SEC to prescribe regulations on 
the use of representations and warranties in the market for 
asset-backed securities that require each NRSRO to include in 
any report accompanying a credit rating a description of the 
representations, warranties, and enforcement mechanisms 
available to investors and how they differ from the 
representations, warranties, and enforcement mechanisms in 
issuances of similar securities. The SEC will also prescribe 
rules to require any originator to disclose fulfilled 
repurchase requests across all trusts aggregated by the 
originator, so that investors may identify asset originators 
with clear underwriting deficiencies.
    This provision was included in the Treasury Department's 
legislative proposal.\228\ Moody's Investor Services described 
the use of representations and warranties and pointed out 
weaknesses in their current usage:
---------------------------------------------------------------------------
    \228\Title IX--Additional Improvements to Financial Markets 
Regulation Subtitle D, U.S. Department of the Treasury, 2009, 
www.financialstability.gov.

          [T]he seller or originator in structured securities 
        makes representations and warranties regarding the 
        characteristics of the loans they sell into 
        securitizations. In light of recent events, typical 
        representations and warranties should be strengthened. 
        In addition to other matters, the seller could provide 
        representations and warranties to investors as to the 
        quality and accuracy of all information presented to 
        investors, rating agencies and other market 
        participants. The value of representations and 
        warranties is diminished when made by entities that are 
        not financially strong, as such entities may be less 
        able to fulfill their obligation to repurchase loans 
        that breach the representations and warranties.\229\
---------------------------------------------------------------------------
    \229\Moody's Proposes Enhancements to Non-Prime RMBS 
Securitization, Moody's, Special Report, p.2, September 25, 2007.

The Committee believes that enhanced disclosure will allow 
investors to better evaluate representations and warranties and 
create incentives for issuers to insist that originators back 
up their representations and warranties with real financial 
resources.

Section 944. Exempted transactions under the Securities Act of 1933

    Section 944 removes the Securities Act of 1933 exemption of 
transactions involving offers or sales of one or more 
promissory notes directly secured by a first lien on a single 
parcel of real estate upon which is located a dwelling or other 
residential or commercial structure.

Section 945. Due diligence analysis and disclosure in asset-backed 
        securities issues

    Section 945 directs the SEC to issue rules that require any 
issuer of an asset-backed security to perform a due diligence 
analysis of the assets underlying the asset-backed security; 
and to disclose the nature of this analysis. Professor John 
Coffee, in congressional testimony, called for action to ``re-
introduce due diligence into the securities offering 
process.''\230\
---------------------------------------------------------------------------
    \230\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p.53 (2009) 
(Testimony of Professor John Coffee).
---------------------------------------------------------------------------

                               Subtitle E


Section 951. Shareholder vote on executive compensation disclosures

    Section 951 provides that any proxy or consent or 
authorization for an annual or other meeting of the 
shareholders will include a separate resolution subject to 
shareholder advisory vote to approve the compensation of 
executives. The Committee believes that shareholders, as the 
owners of the corporation, have a right to express their 
opinion collectively on the appropriateness of executive pay. 
The vote must be tabulated and reported, but the result is not 
binding on the board or management.
    In crafting this Section, there was consideration of 
alternative time intervals, such as votes every three years, 
and of whether votes after the first year should be triggered 
only by a failure to receive a minimum percentage of votes in 
support of the compensation plan. This provision would not 
preclude an issuer from seeking more specific shareholder 
opinion through separate votes on cash compensation, golden 
parachute policy, severance or other aspects of compensation.
    A ``say on pay'' proposal was included in the Treasury 
Department's legislative proposal. The economic crisis revealed 
instances in which corporate executives received very high 
compensation despite the very poor performance by their firms. 
For example, Mr. Charles O. Prince III, the former chief 
executive of Citigroup, ``collected $110 million while 
presiding over the evaporation of roughly $64 billion in market 
value. He left Citigroup in November with an exit package worth 
$68 million, including $29.5 million in accumulated stock, a 
$1.7 million pension, an office and assistant, and a car and a 
driver. Citigroup's board also awarded him a cash bonus for 
2007 worth about $10 million, largely based on his performance 
in 2006 when the bank's results were better. Citigroup has 
announced write-offs worth roughly $20 billion and its share 
has plummeted over 60 percent from last year's high.''\231\
---------------------------------------------------------------------------
    \231\``Chiefs' Pay Under Fire At Capitol,'' The New York Times, 
March 8, 2008.
---------------------------------------------------------------------------
    Ms. Ann Yerger, representing the Council of Institutional 
Investors, wrote in congressional testimony for the Committee 
that ``the Council believes an annual, advisory shareowner vote 
on executive compensation would efficiently and effectively 
provide boards with useful information about whether investors 
view the company's compensation practices to be in shareowners' 
best interests. Nonbinding shareowner votes on pay would serve 
as a direct referendum on the decisions of the compensation 
committee and would offer a more targeted way to signal 
shareowner discontent than withholding votes from committee 
members. They might also induce compensation committees to be 
more careful about doling out rich rewards, to avoid the 
embarrassment of shareowner rejection at the ballot box. In 
addition, compensation committees looking to actively rein in 
executive compensation could use the results of advisory 
shareowner votes to stand up to excessively demanding officers 
or compensation consultants.''\232\
---------------------------------------------------------------------------
    \232\Protecting Shareholders and Enhancing Public Confidence by 
Improving Corporate Governance: Testimony before the Subcommittee on 
Securities, Insurance, and Investment of the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, 
(2009) (Testimony of Ms. Ann Yerger).
---------------------------------------------------------------------------
    The UK has implemented ``say on pay'' policy. Professor 
John Coates in testimony for the Senate Banking Committee 
stated that the UK's experience has been positive; ``different 
researchers have conducted several investigations of this kind 
. . . These findings suggest that say-on-pay legislation would 
have a positive impact on corporate governance in the U.S. 
While the two legal contexts are not identical, there is no 
evidence in the existing literature to suggest that the 
differences would turn what would be a good idea in the UK into 
a bad one in the U.S.''
    Other observers who support ``say on pay'' include the 
Consumer Federation of America, AFSCME, and the Investor's 
Working Group.

Section 952. Compensation committee independence

    Section 952 directs the SEC to direct the national 
securities exchanges and national securities associations to 
prohibit the listing of any security of an issuer that does not 
comply with independent compensation committee standards. In 
determining whether a director is independent, the national 
securities exchanges should consider the source of compensation 
of a member of the board of directors of an issuer, including 
any consulting, advisory, or other compensatory fee paid by the 
issuer to such member of the board of directors; and whether a 
member of the board of directors of an issuer is affiliated 
with the issuer, a subsidiary of the issuer, or an affiliate of 
a subsidiary of the issuer. Any compensation counsel or adviser 
shall be independent.
    The issuer's proxy or consent materials must disclose 
whether the compensation committee has used the advice of a 
compensation consultant and whether the committee has raised 
any conflict of interest. However, the provision does not 
require the use of compensation consultants. The Section also 
directs the SEC to conduct a study of the use of compensation 
consultants and their impact. The Treasury Department's 
legislative proposal included an independent compensation 
committee.
    The Council of Institutional Investors wrote in a letter to 
Senator Dodd ``Compensation committees and their external 
consultants play a key role in the pay-setting process. 
Conflicts of interest contribute to a ratcheting up effect for 
executive pay, however, and should thus be minimized and 
disclosed. Reforms included in the discussion draft would help 
ensure that compensation committees are free of conflicts and 
receive unbiased advice.''

Section 953. Executive compensation disclosures

    Section 953 directs the SEC to require each issuer to 
disclose in the annual proxy statement of the issuer a clear 
description of any compensation required to be disclosed under 
the SEC executive compensation forms and information that shows 
the relationship between executive compensation and the 
financial performance of the issuers, taking into account the 
change in the value of the shares, dividends and distributions. 
It has become apparent that a significant concern of 
shareholders is the relationship between executive pay and the 
company's financial performance for the benefit of 
shareholders. Shareholders are keenly interested when executive 
compensation is increasing sharply at the same time as 
financial performance is falling.
    The Committee believes that these disclosures will add to 
corporate responsibility as firms will have to more clearly 
disclose and explain executive pay. Ms. Ann Yerger wrote in 
congressional testimony on behalf of the Council of 
Institutional Investors ``of primary concern to the Council is 
full and clear disclosure of executive pay. As U.S. Supreme 
Court Justice Louis Brandeis noted, `sunlight is the best 
disinfectant.' Transparency of executive pay enables 
shareowners to evaluate the performance of the compensation 
committee and board in setting executive pay, to assess pay-
for-performance links and to optimize their role of overseeing 
executive compensation through such means as proxy voting.''
    This disclosure about the relationship between executive 
compensation and the financial performance of the issuer may 
include a clear graphic comparison of the amount of executive 
compensation and the financial performance of the issuer or 
return to investors and may take many forms. For example, a 
graph could have a horizontal axis of a number of years and a 
vertical axis with two scales, one for executive compensation 
and a second for financial performance of the issuer for each 
year.

Section 954. Recovery of erroneously awarded compensation

    Section 954 requires public companies to have a policy to 
recover money that they erroneously paid in incentive 
compensation to executives as a result of material 
noncompliance with accounting rules. This is money that the 
executive would not have received if the accounting was done 
properly and was not entitled to. This provision creates 
Section 10D of the Securities Exchange Act of 1934, which 
requires the SEC to direct the national securities exchanges 
and national securities associations to prohibit the listing of 
issuers who do not develop and implement a policy providing 
that, in the event that the issuer is required to prepare an 
accounting restatement due to the material noncompliance, the 
issuer will recover from any current or former executive 
officer of the issuer any compensation in excess of what would 
have been paid to the executive officer had correct accounting 
procedures been followed. This policy is required to apply to 
executive officers, a very limited number of employees, and is 
not required to apply to other employees. It does not require 
adjudication of misconduct in connection with the problematic 
accounting that required restatement.
    The Committee believes it is unfair to shareholders for 
corporations to allow executives to retain compensation that 
they were awarded erroneously. This proposal will clarify that 
all issuers must have a policy in place to recover compensation 
based on inaccurate accounting so that shareholders do not have 
to embark on costly legal expenses to recoup their losses or so 
that executives must return monies that should belong to the 
shareholders. The Investor's Working Group wrote ``federal 
clawback provisions on unearned executive pay should be 
strengthened.''\233\
---------------------------------------------------------------------------
    \233\U.S. Financial Regulatory Reform: An Investor's Perspective, 
Investor's Working Group, July 2009.
---------------------------------------------------------------------------

Section 955. Disclosure regarding employee and director hedging

    Section 955 directs the SEC to require each issuer to 
disclose in the annual proxy statement whether the employees or 
members of the board of the issuer are permitted to purchase 
financial instruments that are designed to hedge or offset any 
decrease in the market value of equity securities granted to 
employees by the issuer as part of an employee compensation. 
This will allow shareholders to know if executives are allowed 
to purchase financial instruments to effectively avoid 
compensation restrictions that they hold stock long-term, so 
that they will receive their compensation even in the case that 
their firm does not perform. Dr. Carr Bettis has written that 
derivatives instruments ``provide a mechanism that insiders can 
use to trade on inside information prior to adverse corporate 
events without the level of transparency typically associated 
with open market sales.''\234\
---------------------------------------------------------------------------
    \234\See Bettis, Bizjak and Kalpathy, ``Insiders' Use of Hedging 
Instruments: An Empirical Examination,'' March 2009.
---------------------------------------------------------------------------

Section 956. Excessive compensation by holding companies of depository 
        institutions

    Section 956 amends Section 5 of the Bank Holding Company 
Act of 1956 to establish standards prohibiting as an unsafe and 
unsound practice any compensation plan of a bank holding 
company that provides an executive officer, employee, director, 
or principal shareholder with excessive compensation, fees, or 
benefits; or could lead to material financial loss to the bank 
holding company. This applies regulatory authority currently 
applicable to banks to their holding companies.

Section 957. Voting by brokers

    Section 957 amends the Securities Exchange Act of 1934 so 
that brokers who are not beneficial owners of a security cannot 
vote through company proxies unless the beneficial owner has 
instructed the broker to do so. The final vote tallies should 
reflect the wishes of the beneficial owners of the stock and 
not be affected by the wishes of the broker that holds the 
shares.

                               Subtitle F


Section 961. Report and certification of internal supervisory controls

    Section 961 directs the SEC to submit a report on SEC's 
conduct of examinations of registered entities, enforcement 
investigations, and review of corporate financial securities 
filings to the House Financial Services and Senate Banking 
Committees. Each report should contain an assessment of the 
SEC's internal supervisory controls and examination staff 
procedures; a certification of adequate supervisory controls by 
the Directors of the Divisions of Enforcement, Division of 
Corporation Finance, and Office of Compliance Inspection and 
Examinations; and a review by the U.S. Comptroller General 
attesting to the adequacy and effectiveness of the internal 
supervisory control structure and procedures.
    The purpose of this Section is to promote complete and 
consistent performance of SEC staff examinations, 
investigations and reviews, and appropriate supervision of 
these activities, through internal supervisory controls. There 
have been numerous examples where securities misconduct has 
flourished and investors have been harmed due to failure to 
follow reasonable procedures. For example, the Inspector 
General found that the Enforcement Office of the Chief 
Accountant received numerous complaints alleging financial 
fraud committed by a public company over 2\1/2\ years which 
were ``not reviewed, analyzed or investigated'' because ``the 
referral procedures for monitoring the progress of referrals of 
complaints . . . were not followed in the 2005-2007 time 
period. For example, regular meetings to decide the disposition 
of referrals were being held.'' (SEC Office of Inspector 
General Report of Investigation, ``Failure to Timely 
Investigate Allegations of Financial Fraud,'' February 26, 
2010).
    The massive fraud perpetrated by Bernard L. Madoff through 
a Ponzi scheme cost investors a tremendous amount of money and 
went undetected through failures in SEC exams and 
investigations. This illustrates the need for such internal 
supervisory controls. The failure of the SEC (or of FINRA) to 
identify the fraud before Mr. Madoff confessed to his sons and 
to law enforcement seriously damaged investor confidence in the 
effectiveness and competence of regulators. The Inspector 
General of the SEC, Mr. David Kotz, testified before the 
Committee about his study of the SEC's failure to find the 
Madoff fraud. The study found ``that the SEC received more than 
ample information in the form of detailed and substantive 
complaints over the years to warrant a thorough and 
comprehensive examination and/or investigation of Bernard 
Madoff and BMIS for operating a Ponzi scheme, and that despite 
three examinations and two investigations being conducted, a 
thorough and competent investigation or examination was never 
performed. The OIG found that between June 1992 and December 
2008 when Madoff confessed, the SEC received six substantive 
complaints that raised significant red flags concerning 
Madoff's hedge fund operations and should have led to questions 
about whether Madoff was actually engaged in trading. Finally, 
the SEC was also aware of two articles regarding Madoff's 
investment operations that appeared in reputable publications 
in 2001 and questioned Madoff's unusually consistent returns.'' 
[IG Report pages 20-21]
    Inspector General Kotz's comprehensive study found that on 
several occasions during more than a decade, the SEC failed to 
perform what appear to be rudimentary procedures that could or 
would have uncovered the Ponzi scheme. The Inspector General 
reported that the ``complaints all contained specific 
information and could not have been fully and adequately 
resolved without thoroughly examining and investigating Madoff 
for operating a Ponzi scheme.'' [Page 22]. For example, the 
Inspector General retained an expert to assist in the 
investigation and was told that ``the most critical step in 
examining or investigating a potential Ponzi scheme is to 
verify the subject's trading through an independent third 
party.'' The OIG investigation ``found the SEC conducted two 
investigations and three examinations . . . based upon the 
detailed and credible complaints that raised the possibility 
that Madoff was misrepresenting his trading and could have been 
operating a Ponzi scheme. Yet, at no time did the SEC ever 
verify Madoff's trading through an independent third-party.'' 
The OIG found that the examinations were ``too narrowly 
focused.'' The OIG found that ``the examination teams . . . 
caught Madoff in contradictions and inconsistencies. However 
they either disregarded these concerns or simply asked Madoff 
about them. Even when Madoff's answers were seemingly 
implausible, the SEC examiners accepted them at face value.'' 
[page 23]
    ``In the first of the two OCIE examinations, the examiners 
drafted a letter to the National Association of Securities 
Dealers . . . seeking independent trade data, but they never 
sent the letter, claiming that it would have been too time-
consuming to review the data they would have obtained. The 
OIG's expert opined that had the letter to the NASD been sent, 
the data would have provided the information necessary to 
reveal the Ponzi scheme. In the second examination, the OCIE 
Assistant Director sent a document request to a financial 
institution that Madoff claimed he used to clear his trades, 
requesting trading done by or on behalf of particular Madoff 
feeder funds during a specific time period, and received a 
response that there was no transaction activity in Madoff's 
account for that period. However, the Assistant Director did 
not determine that the response required any follow-up . . . 
Both examinations concluded with numerous unresolved questions 
and without any significant attempt to examine the possibility 
that Madoff was misrepresenting his trading and operating a 
Ponzi scheme.'' [page 24]
    The ``Enforcement staff almost immediately caught Madoff in 
lies and misrepresentations, but failed to follow up on 
inconsistencies. . . . When Madoff provided evasive or 
contradictory answers to important questions in testimony, they 
simply accepted as plausible his explanations . . . They 
reached out to the NASD and asked for information on whether 
Madoff had options positions on a certain date, but when they 
received a report that there were in fact no options positions 
on that date, they did not take further steps. An Enforcement 
staff attorney made several attempts to obtain documentation 
from European counterparties (another independent third-party) 
and although a letter was drafted, the Enforcement staff 
decided not to send it. Had any of these efforts been fully 
executed, they would have led to Madoff's Ponzi scheme being 
uncovered.''
    In addition, the incidents of courts overturning SEC 
rulemakings in recent years calls into question whether the 
process by which the SEC is promulgating final rules should be 
reexamined and refined. The SEC's process for reaching 
settlement recommendations may need to be reexamined also, in 
light of the recent decision of the Federal District Court in 
New York that rejected as inadequate a proposed $33 million 
settlement involving charges of securities fraud against Bank 
of America which it said ``does not comport with the most 
elementary notions of justice and morality . . . [and] suggests 
a rather cynical relationship between the parties: the SEC gets 
to claim that it is exposing wrongdoing on the part of the Bank 
of America in a high-profile merger; the Bank's management gets 
to claim that they have been coerced into an onerous settlement 
by overzealous regulators. And all of this is done at the 
expense, not only of the shareholders, but also of the 
truth.''\235\ Internationally renowned Columbia University 
Professor John C. Coffee has expressed concerns about what he 
has seen as ``dysfunction in SEC enforcement practices.''\236\ 
Recently, the SEC Office of Inspector General Report of 
Investigation published a report, ``Investigation of the SEC's 
Response to Concerns Regarding Robert Allen Stanford's Alleged 
Ponzi Scheme'' which found that over eight years an SEC office 
``dutifully conducted examinations of Stanford in 1997, 1998, 
2002 and 2004, concluding in each case that Stanford's CDs were 
likely a Ponzi scheme or a similar fraudulent scheme. . . . 
[while the] Examination group made multiple effort after each 
examination to convince . . . [Enforcement] to open and conduct 
an investigation of Stanford, no meaningful effort was made by 
Enforcement to investigate the potential fraud or to bring an 
actions to attempt to stop it until late 2005.
---------------------------------------------------------------------------
    \235\The case is Securities and Exchange Commission v. Bank of 
America Corp., 09-cv-06829, U.S. District Court, Southern District of 
New York (Manhattan).
    \236\The End of Phony Deterrence? `SEC v. Bank of America', John C. 
Coffee, Jr., New York Law Journal, September 17, 2009.
---------------------------------------------------------------------------

Section 962. Triennial report on personnel management

    Section 962 directs the GAO to submit a triennial report to 
the Committee on Banking, Housing, and Urban Affairs of the 
Senate and the Committee on Financial Services of the House of 
Representatives on personnel management by the SEC. In the wake 
of the financial crisis, it is clear that the SEC, along with 
other federal regulators, did not perform its duties as 
intended. The study would review several areas that have been 
implicated, including supervision, competence, communication, 
turnover, and other areas, with recommendations for 
improvements. Within 90 days the SEC will submit a report to 
these congressional Committees describing what actions it has 
taken in response to the GAO report.
    The SEC has been receiving increased amounts of funds and 
is expected to continue to do so. It is critical that these 
funds be used efficiently and not wasted. These studies will 
promote the effective use of resources.
    Mr. Damon Silvers, Associate General Counsel of the AFL-
CIO, wrote in congressional testimony that ``The Commission 
should look at more intensive recruiting efforts aimed at more 
experienced private sector lawyers who may be looking for 
public service opportunities.''\237\
---------------------------------------------------------------------------
    \237\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, pp. 5-6 (2009) 
(Testimony of Mr. Damon A. Silvers).
---------------------------------------------------------------------------
    The Investor's Working Group wrote in their regulatory 
reform report ``Regulators should acquire deeper knowledge and 
expertise. The speed with which financial products and services 
have proliferated and grown more complex has outpaced 
regulators' ability to monitor the financial waterfront. 
Staffing levels failed to keep pace with the growing work load, 
and many agencies lack staff with the necessary expertise to 
grapple with emerging issues. Political appointees and senior 
civil service staff should have a wide range of financial 
backgrounds. Compensation should be sufficient to attract top-
notch talent. In addition, continuing education and training 
should be dramatically expanded and officially mandated to help 
regulators keep pace with innovation.''\238\
---------------------------------------------------------------------------
    \238\U.S. Financial Regulatory Reform: An Investor's Perspective, 
Investor's Working Group, p. 10, July 2009.
---------------------------------------------------------------------------
    The reports should address key management issues. Renowned 
Columbia University Law School Professor John C. Coffee said an 
important ``issue is how to change the SEC's culture.''\239\ 
Senator Merkley at the Madoff IG hearing asked about SEC 
employees involved, ``Was there a general culture of a lack of 
curiosity, a lack of wanting to inconvenience big players . . . 
What are the managerial issues?''\240\ Information in the SEC 
Inspector General's report on the Madoff investigation raises 
concerns about whether some employees who had been promoted to 
serve as mid-level supervisors had the necessary judgment, 
commitment or temperament to be effective supervisors. This 
suggests questions about the appropriateness of how employees 
are promoted to supervisory positions. One indication of a 
supervisor's ineffectiveness may be high turnover among 
subordinates. Related to this issue, the Committee notes that 
the Division of Enforcement will eliminate the position of 
branch chief. The stated purpose ``is to streamline our 
management structure . . . by redeploying our branch chiefs . . 
. to the heart-and-soul function of the SEC--conducting 
investigations. This flattening of our management structure 
will increase the resources dedicated to our investigative 
efforts, and will operate as a check on the extra process, 
duplication, unnecessary internal review and the inevitable 
drag on decision-making that happens in any overly-managed 
organization.'' The Committee sees this as a positive step, 
which suggests the question of whether there are excessive 
numbers of low- or mid-level managers in other divisions and 
similar steps should be taken to improve the effectiveness and 
better use the resources of those divisions.
---------------------------------------------------------------------------
    \239\The End of Phony Deterrence? `SEC v. Bank of America', John C. 
Coffee, Jr., New York Law Journal, September 17, 2009.
    \240\``Oversight of the SEC's Failure to Identify the Bernard L. 
Madoff Ponzi Scheme and How to Improve SEC Performance: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs'', 111th Congress, 1st session, p. 33 (2009) (Statement of 
Senator Jeff Merkley).
---------------------------------------------------------------------------
    Members of the Committee noted that it was some SEC 
employees' apparent incompetence that allowed the Madoff fraud 
to continue for so long--a case of incompetence and not lack of 
resources or legal authority. For example, Senator Menendez 
said that ``the SEC staff was, from everything I've read of 
your report, grossly untrained, uncoordinated and lazy in their 
investigations.'' He asked ``who's held accountable for these 
grossly incompetent performances?''\241\ This raises a concern 
to review SEC response to employees who fail to perform their 
duties. The IG report also identifies a concern that SEC-
regulated entities have on many occasions brought informally to 
the attention of the Committee in other contexts, that 
different offices within the Commission do not communicate 
effectively or, at times, willingly, with each other to share 
expertise. Former SEC Chairman William Donaldson embarked upon 
a project to ``tear down the silos'' and promote more 
communication. Some regulated entities have informally 
complained to the Committee that the SEC inspectors arrive on 
their premises with a limited knowledge of the business they 
are about to inspect, and ask the employees of the regulated 
entity to teach them how their businesses operate. It would be 
appropriate for formal reviews of the efficiency of 
communication between units of the Commission.
---------------------------------------------------------------------------
    \241\``Oversight of the SEC's Failure to Identify the Bernard L. 
Madoff Ponzi Scheme and How to Improve SEC Performance: Testimony 
before the U.S. Senate Committee on Banking, Housing, and Urban 
Affairs'', 111th Congress, 1st session, p. 33 (2009) (Statement of 
Senator Robert Menendez).
---------------------------------------------------------------------------
    Since the concerns identified here, and related ones, have 
faced the Commission for many years, the Committee feels it is 
important to have periodic studies by and recommendations from 
the GAO with the goal of sustaining improvements at the 
Commission.

Section 963. Annual financial controls audit

    Section 963 directs the SEC to submit an annual report to 
Congress that describes the responsibility of the management of 
the SEC for establishing and maintaining an adequate internal 
control structure and procedures for financial reporting; and 
contains an assessment of the effectiveness of the internal 
control structure and procedures for financial reporting of the 
SEC during that fiscal year. This is intended to improve the 
quality of the SEC's internal financial control structure.
    The SEC administers the requirements under Section 404 of 
the Sarbanes-Oxley Act of 2002 that public companies report on 
the effectiveness of their internal control structure and 
procedures for financial reporting. Public companies need 
effective internal controls in order to produce accurate 
financial reports, confidently plan their financial activities, 
and inspire the confidence of investors in the integrity of 
public companies and in the securities markets.
    As the Federal regulator of compliance with these 
requirements, it is appropriate for the SEC itself to be an 
example and have an effective internal financial control 
structure and for that to be attested to. Unfortunately, the 
SEC has been found to have material weaknesses in its own 
internal financial controls.
    The GAO has reviewed the SEC's internal financial controls 
since 2004. In many of these reviews, the GAO has found that 
the SEC has material weaknesses and needs improvement in their 
internal control structure. GAO stated in November of 2009 that 
``in GAO's opinion, SEC did not have effective internal control 
over financial reporting as of September 30, 2009. . . . During 
this year's audit, we identified six significant deficiencies 
that collectively represent a material weakness in SEC's 
internal control over financial reporting. The significant 
deficiencies involve SEC's internal control over (1) 
information security, (2) financial reporting process, (3) fund 
balance with Treasury, (4) registrant deposits, (5) budgetary 
resources, and (6) risk assessment and monitoring processes. 
These internal control weaknesses give rise to significant 
management challenges that have reduced assurance that data 
processed by SEC's information systems are reliable and 
appropriately protected; impaired management's ability to 
prepare its financial statements without extensive compensating 
manual procedures; and resulted in unsupported entries and 
errors in the general ledger.''\242\ Similarly, the GAO has 
found that the SEC did not have effective internal controls 
over financial reporting as of September 30, 2004, 2005, and 
2007. In light of these persistent shortcomings and the 
importance of the SEC, an annual review is appropriate and 
beneficial.
---------------------------------------------------------------------------
    \242\Securities and Exchange Commission's Financial Statements for 
Fiscal Years 2009 and 2008, GAO, ``Highlights,'' November 2009.
---------------------------------------------------------------------------

Section 964. Report on oversight of national securities associations

    Section 964 provides that, once every three years, the GAO 
shall study and submit a report to Congress on the SEC's 
oversight of national securities associations (NSA). The report 
is intended to promote regular and effective oversight by the 
SEC of the NSA and to inform the Congress in its oversight role 
of the Nation's securities markets. Such oversight is important 
to assist and promote the NSA's performance of its mission and 
fair dealing with investors and members and to evaluate any 
public concerns that arise.
    It is the Committee's intent that the SEC should oversee 
specifically several important functions which have been 
discussed in connection with the current market situation. 
These matters include an evaluation of governance, including 
the identification and management of conflicts of interest, 
such as those existing when an executive of a broker-dealer 
sits on an NSA board and the NSA enforces its rules on such 
firms; examinations, including the evaluation of the expertise 
of staff; executive compensation practices; the extent of 
cooperation with and responsiveness in providing assistance to 
State securities administrators; funding; arbitration services, 
which may include enforcement of discovery rules and fairness 
of selection process for arbitrators on the panel, and NSA 
review of member advertising.
    Former SEC Chief Accountant Lynn Turner testified on March 
10, 2009 that:

          FINRA has been a useful participant in the capital 
        markets. It has provided resources that otherwise would 
        not have been available to regulate and police the 
        markets. Yet serious questions have arisen that need to 
        be considered when improving the effectiveness and 
        efficiency of regulation.
          Currently the Board of FINRA includes representatives 
        from those who are being regulated. This is an inherent 
        conflict and raises the question of whose interest the 
        Board of FINRA serves. To address this concern, 
        consideration should be given to establishing an 
        independent board, much like what Congress did when it 
        established the Public Company Accounting Oversight 
        Board.
          In addition, the arbitration system at FINRA has been 
        shown to favor the industry, much to the detriment of 
        investors. While arbitration in some instances can be a 
        benefit, in others it has been shown to be costly, time 
        consuming, and biased to those who are constantly 
        involved with it. Accordingly, FINRA's system of 
        arbitration should be made optional, and investors 
        given the opportunity to pursue their case in a court 
        of law if they so desire to do so.
          Finally careful consideration should be given to 
        whether or not FINRA should be given expanded powers 
        over investment advisors as well as broker dealers. 
        FINRA's drop in fines and penalties in recent years, 
        and lack of transparency in their annual report to the 
        public, raises questions about its effectiveness as an 
        enforcement agency and regulator. And with broker 
        dealers involved in providing investment advice, it is 
        important that all who do so are governed by the same 
        set of regulations, ensuring adequate protection for 
        the investing public.

    The Committee has received letters from groups that have 
raised numerous concerns about the performance of FINRA, 
expressing concern that they ``have failed to prevent virtually 
all of the major securities scandals since the 1980s,'' their 
compensation packages for the organization's senior executives 
are ``outrageous'' for their large size, they failed to warn 
the public about auction rate securities and other reasons. The 
Committee believes it is necessary for the GAO to conduct a 
study and issue a report on the SEC oversight of national 
securities associations at least every three years given their 
important role in the market and the concerns which have arisen 
or persisted for many years.

Section 965. Compliance examiners

    Section 965 directs the SEC Divisions of Trading and 
Markets and of Investment Management each to have a staff of 
examiners to perform compliance inspections and examinations of 
entities under their jurisdictions and report to the Director 
of the Division. This is intended to improve the effectiveness 
of the SEC. This will provide each Division internally with 
experts in inspections and in the regulations of that Division, 
who are closely acquainted with and have access to the staff 
who write and interpret those regulations.
    The Inspector General's report on the Madoff investigation 
and the testimony of Mr. Harry Markopolos, for example, were 
critical of the competence and training of the examiners, 
including their unwillingness to ask for information or 
expertise from someone in another SEC division. Mr. David G. 
Tittsworth, Executive Director of the Investment Adviser 
Association, wrote in testimony for the Senate Banking 
Committee that ``the SEC can and should improve its inspection 
program.''\243\ Informal information presented to the Committee 
from regulated entities has indicated that the Office of 
Compliance Inspection and Examinations sometimes sends staff on 
examinations who have lacked requisite expertise to examine 
complex registered financial or securities firms. As a result, 
the quality of the exams appears to have suffered, the staff 
may have taken undue amounts of time to perform inspections 
because they relied excessively on the employees of the firms 
being examined to teach them about the business, and the 
reputation of the agency has suffered.
---------------------------------------------------------------------------
    \243\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. David Tittsworth).
---------------------------------------------------------------------------

Section 966. Suggestion program for employees of the commission

    Section 966 directs the SEC Inspector General to establish 
a hotline for SEC employees to submit suggestions for 
improvements in the efficiency, effectiveness, productivity and 
use of resources of the SEC, as well as allegations of waste, 
abuse, misconduct or mismanagement within the SEC. The 
Inspector General shall maintain as confidential the identity 
of a person who provides information unless he or she requests 
otherwise in writing and any specific information at the 
person's request. The Inspector General will report to Congress 
annually on the nature, number and potential benefits of the 
suggestions of any suggestions; the nature, number and 
seriousness of any allegations; the Inspector General's 
recommendations and actions taken in response to the 
allegations; and actions the SEC has taken in response to the 
suggestions and allegations.
    The SEC would benefit by having more meritorious 
suggestions from its employees on how to improve efficiency and 
productivity. This is particularly important when the SEC will 
be receiving larger budgets and after a period of increased 
public concerns about the agency's ineffective use of resources 
raised in Madoff, restacking, and in other situations. It is 
not clear that the current system for attracting suggestions to 
improve productivity has been producing a robust crop of 
meritorious suggestions.
    The Committee expects that there will be review and 
appropriate action on meritorious suggestions. The Inspector 
General may recognize an employee who makes a suggestion that 
would or does increase efficiency, effectiveness or 
productivity at the SEC or reduces waste, abuse, misconduct or 
mismanagement. The costs of this Suggestion Program shall be 
funded by the SEC Investor Protection Fund. Nothing in this 
section limits other statutory authorities of the Inspector 
General.
    This Program is placed within the Office of the Inspector 
General, which has a tradition of analyzing agency activity to 
prevent abuse and promote effective operations. The IG already 
has a formal system in place for receiving employee complaints 
which can be adapted to receive suggestions. Further, the 
Office of Inspector General has a reputation for keeping 
employee confidences and is not in the normal chain of command 
in the SEC, so that employees may feel more confident that they 
can offer suggestions confidentially and without the risk of 
retaliation by a supervisor. The Inspector General is 
sufficiently independent from the daily SEC staff interactions 
for employees to trust his impartiality in deciding rewards. 
The Office of IG will have few potential conflicts of interest 
in reviewing suggestions compared to other SEC offices. The 
Committee observes that the SEC already has the authority to 
run a suggestion program and has discretion to make cash 
awards, so it would not need legislative authority to do so.
    The Committee has considered whether a Suggestion Program 
must offer monetary rewards that are sufficiently large to 
motivate employees to make meritorious and valuable 
suggestions, and to overcome fears of offending or annoying a 
supervisor or of retribution. The Committee hopes that the 
Suggestion Program would motivate employees to produce 
meaningful suggestions for the benefit of the SEC.

                               Subtitle G


Section 971. Election of directors by majority vote in uncontested 
        elections

    Section 971 provides that if a majority of a public 
company's shares are voted against or withheld from a nominee 
for director who runs uncontested, or without an opponent, he 
or she should be required to resign, unless the board 
unanimously finds it is in the best interest of the 
shareholders for him or her to serve and publishes its 
reasoning. It does this by requiring the SEC to direct the 
national securities exchanges and national securities 
associations to prohibit the listing of any security of an 
issuer who has on their board members that did not receive a 
majority vote in uncontested board elections, subject to an 
exception if the directors unanimously voted that it is in the 
best interests of the shareholders that the director serve.
    The Committee believes that in the uncommon circumstance 
where a majority of shareholders voting in an uncontested 
election prefer that a nominee not serve on the board, it is 
fair and appropriate for their wishes to be honored. Currently, 
an uncontested nominee who receives even one vote would be 
elected as a director of many companies.
    The Committee has received many views on this matter. 
Former SEC Chief Accountant Lynn Turner testified that Congress 
should ``[r]equire majority voting for directors and those who 
can't get a majority of the votes of investors they are to 
represent should be required to step down.''\244\ Ms. Barbara 
Roper, Director of Investor Protection of the Consumer 
Federation of America also testified in favor of requiring 
``mandatory majority voting for directors.''\245\ The Council 
of Institutional Investors, a nonprofit association of public, 
union and corporate pension funds with combined assets that 
exceed $3 trillion, favors majority voting stating: 
``Currently, the accountability of directors at most US 
companies is severely weakened by the fact that shareowners do 
not have a meaningful vote in director elections. Under most 
state laws, including Delaware, the default standard for 
uncontested elections is a plurality vote, which means that a 
director is elected even if a majority of the shares are 
withheld from the nominee. The Council has long believed that a 
plurality standard for the uncontested election of directors is 
inherently unfair and undemocratic and should be replaced by a 
majority vote standard. In recent years, many companies, 
including more than two-thirds of the S&P 500 have agreed with 
the Council and have voluntarily adopted majority voting 
standards. At most public companies, however, plurality voting 
still remains the rule. For example, nearly three-quarters of 
the companies in the Russell 3000 continue to use a straight 
plurality voting standard for director elections. The benefits 
of moving to a majority voting standard are many: it would 
democratize the corporate electoral process; put real voting 
power in the hands of investors; and make boards more 
representative of shareowners. Simply stated, Section 971, if 
enacted, would eliminate a fundamental flaw in the US 
governance model.''\246\
---------------------------------------------------------------------------
    \244\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Lynn Turner).
    \245\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Ms. Barbara Roper).
    \246\Letter to Chairman Dodd, March 19, 2010.
---------------------------------------------------------------------------
    The Committee has also heard from those who are concerned 
and believe that some directors who fail to receive the vote of 
a majority of shareholders should nonetheless serve on the 
board. Such an individual might be, for example, the board's 
only financial expert or a person with unique expertise.
    The Committee has taken this type of concern into account. 
The legislation would allow a director who received less than a 
majority of votes to serve on the board if the remaining board 
members unanimously vote at a board meeting that it is in the 
best interests of the issuer and its shareholders not to accept 
the resignation. When the issuer publishes this decision, it 
should include a specific discussion of the board's analysis in 
reaching that conclusion. Such publication may be made in a 
filing made with the SEC.

Section 972. Proxy access

    Section 972 was introduced by Senator Schumer. It gives the 
SEC the authority to require issuers to allow shareholders to 
put Board nominees on the company proxy. It does not require 
the SEC to engage in rulemaking. The authority gives the SEC 
wide latitude in setting the terms of such proxy access.
    The Committee intentionally did not specify that 
shareholders must have held a certain number of shares or have 
held shares for a particular period of time to be eligible to 
use the proxy. If the SEC proposes rules, interested persons 
can offer their views on the appropriateness of proposed 
regulatory terms in the public comment process.
    The Committee feels that it is proper for shareholders, as 
the owners of the corporation, to have the right to nominate 
candidates for the Board using the issuer's proxy under limited 
circumstances.
    Former SEC Chairman Richard Breeden testified before the 
Committee in favor of one form of proxy access and recommended 
to ``Allow the five (or ten) largest shareholders of any public 
company who have owned shares for more than one year to 
nominate up to three directors for inclusion on any public 
company's proxy statement. Overly entrenched boards have widely 
failed to protect shareholder interests for the simple reason 
that they sometimes think more about their own tenure than the 
interests of the people they are supposed to be protecting . . 
. This provision would give `proxy access' to shareholder 
candidates without the cost and distraction of hostile proxy 
contests. At the same time, any such nomination would require 
support from a majority of shares held by the largest holders, 
thereby protecting against narrow special interest campaigns. 
This reform would make it easier for the largest shareowners to 
get boards to deal with excessive risks, poor performance, 
excessive compensation and other issues that impair shareholder 
interests.'' Ms. Barbara Roper, Director of Investor Protection 
of Consumer Federation of America, testified before the 
Committee and recommended ``improved proxy access for 
shareholders.'' Mr. Jeff Mahoney, General Counsel of the 
Council of Institutional Investors, wrote in a letter to 
Chairman Dodd that ``the only way that shareowners can present 
alternative director candidates at a U.S. public company is by 
waging a full-blown election contest. For most investors, that 
is onerous and prohibitively expensive. A measured right for 
investors to place their nominees for directors on the 
company's proxy card would overcome these obstacles, 
invigorating board elections and making directors more 
responsive, thoughtful and vigilant.'' Former SEC Chief 
Accountant Lynn Turner testified before the Committee that 
``Congress should move to adopt legislation that would: . . . 
Give investors who own the company, the same equal access to 
the proxy as management currently has.'' A coalition of state 
public officials in charge of public investments, AFSCME, 
CalPERS, and the Investor's Working Group also support proxy 
access.

Section 973. Disclosures regarding Chairman and CEO structures

    Section 973 directs the SEC to issue rules that require an 
issuer to disclose the reasons that it has chosen the same 
person or elected to have different people serve in the offices 
of Chairman of the Board of Directors and Chief Executive 
Officer of the issuer.
    The Committee has received strong views on the merits of 
one or the other model and on whether to prohibit a public 
company from having the same individual serve as Chairman and 
as CEO. For example, Mr. Joseph Dear, Chief Investment Officer 
of the California Public Employees' Retirement System, on 
behalf of the Council of Institutional Investors, wrote in 
testimony for the Senate Banking Committee that ``Boards of 
directors should be encouraged to separate the role of chair 
and CEO, or explain why they have adopted another method to 
assure independent leadership of the board.''
    The Committee feels this is an important matter, and 
recognizes that different public companies may have good 
reasons for having the same person as CEO and Chairman or 
different persons in these two positions. Accordingly, the 
legislation asks public companies to disclose to shareholders 
the reasons why it has chosen its governance method. The 
legislation does not endorse or prohibit either method.

                               Subtitle H


Section 975. Regulation of municipal securities and changes to the 
        board of the MSRB

    Section 975 strengthens oversight of municipal securities 
and broadens current municipal securities market protections to 
cover previously unregulated market participants and previously 
unregulated financial transactions with states, counties, 
cities and other municipal entities. This section establishes 
municipal advisors as a new category of SEC registrant. Such 
municipal advisors provide advice to municipal entities on the 
issuance of municipal securities, the use of municipal 
derivatives, and investment advice relating to bond proceeds.
    Mr. Timothy Ryan, President and CEO of SIFMA, in testimony 
before the Committee, said: ``we feel it is important to level 
the regulatory playing field by increasing the Municipal 
Securities Rulemaking Board's authority to encompass the 
regulation of financial advisors, investment brokers and other 
intermediaries in the municipal market to create a 
comprehensive regulatory framework that prohibits fraudulent 
and manipulative practices; requires fair treatment of 
investors, state and local government issuers of municipal 
bonds and other market participants; ensures rigorous standards 
of professional qualifications; and promotes market 
efficiencies.''\247\ Mr. Ronald A. Stack, Chair of the 
Municipal Securities Rulemaking Board (MSRB), wrote in 
testimony for the Senate Banking Committee:
---------------------------------------------------------------------------
    \247\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, pp. 9-10 
(2009) (Testimony of Mr. Timothy Ryan).

          Investors in the municipal securities market would be 
        best served by subjecting unregulated market 
        professionals to a comprehensive body of rules that (i) 
        prohibit fraudulent and manipulative practices, (ii) 
        require the fair treatment of investors, issuers, and 
        other market participants, (iii) mandate full 
        transparency, (iv) restrict real and perceived 
        conflicts of interests, (v) ensure rigorous standards 
        of professional qualifications, and (vi) promote market 
        efficiencies.\248\
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    \248\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p. 25 
(2009) (Testimony of Mr. Ronald A. Stack).

The U.S. Council of Mayors\249\ also testified in support of 
this policy.
---------------------------------------------------------------------------
    \249\Legislative Proposals to Improve the Efficiency and Oversight 
of Municipal Finance: Testimony before the U.S. House Committee on 
Financial Services, 111th Congress, 1st session (2009) (Testimony of 
The Honorable Thomas C. Leppert).
---------------------------------------------------------------------------
    The SEC recently proposed new rules under the Investment 
Advisers Act of 1940 relating to the provision by registered 
investment advisers of investment advisory services to 
municipal entities in which, among other things, the SEC 
proposed prohibiting investment advisers from making payments 
to unrelated persons for solicitation of municipal entities for 
investment advisory services on behalf of investment advisers. 
Rather than effectively prohibiting such third-party 
solicitation for investment advisory services, this section 
would provide that activities of a municipal advisor, broker, 
dealer or municipal securities dealer to solicit a municipal 
entity to engage an unrelated investment adviser to provide 
investment advisory services to a municipal entity or to engage 
to undertake underwriting, financial advisory or other 
activities for a municipal entity in connection with the 
issuance of municipal securities, would be subject to 
regulation by the MSRB. These activities of municipal advisors 
are currently unregulated in most respects and would become 
subject to regulation by the MSRB to the same extent as would 
such activities undertaken by brokers, dealers and municipal 
securities dealers with respect to their transactions in 
municipal securities. Thus, the MSRB would be authorized to 
establish qualification requirements, continuing education and 
operational standards, and fair practice, disclosure, conflict 
of interest and other rules with respect to municipal advisors 
in the same manner as for brokers, dealers and municipal 
securities dealers.
    Section 975 authorizes the MSRB to make rules regulating 
municipal advisors, including financial advisors, brokers of 
guaranteed investment contracts and other investments, swap and 
other municipal derivatives advisors, and certain third party 
solicitors of municipal entities. The Committee believes that 
giving MSRB rulemaking authority in this area is an efficient 
use of regulatory resources, particularly since the SEC 
currently has very few staff with expertise in municipal 
securities. Not only does the MSRB have greater resources in 
terms of personnel and experience in the municipal market. The 
Board has an existing, comprehensive set of rules on key issues 
such as pay-to-play and fair dealing. Therefore, the Committee 
is of the view that consistency would be important to ensure 
common standards. As a baseline for rulemaking with respect to 
municipal advisors, the MSRB has an extensive understanding of 
the municipal securities market and has put in place a mature 
body of comprehensive regulation that (i) prohibits fraudulent 
and manipulative practices, (ii) requires the fair treatment of 
investors, issuers and other market participants, (iii) 
mandates full transparency, (iv) restricts real and perceived 
conflicts of interests, including prohibiting pay-to-play 
practices, (v) ensures rigorous standards of professional 
qualifications, and (vi) promotes market efficiencies. The 
rules for municipal advisory activities would apply equally to 
broker-dealers acting as financial advisors and to non-
affiliated financial advisors. The Committee also notes that 
the MSRB has made important contributions to the transparency 
of the municipal market with its EMMA online reporting system.
    The SEC has general oversight authority over the MSRB, and 
would enforce the municipal advisor rules issued pursuant to 
this section. The MSRB's rulemaking process, including a public 
comment process and SEC approval of all new rules, provides 
another layer of protection regarding the appropriateness of 
rules written by the MSRB. The section creates an expanded role 
for the MSRB in supporting SEC examinations and enforcement; 
gives the MSRB a share of fines collected by the SEC and FINRA; 
and gives the MSRB authority to be an information repository 
for the systemic risk regulator.
    This section also modifies the composition of the MSRB, in 
light of the expansion of the Board's jurisdiction and to avoid 
conflicts of interest. Under current law, 10 of the 15 board 
members represent the securities dealers and underwriters that 
are regulated by the MSRB. With the expansion of the MSRB's 
jurisdiction to include municipal advisors, it is appropriate 
to provide for majority public representation. The section 
provides that the MSRB shall include 8 individuals who are not 
associated with broker-dealers, municipal advisors, or 
municipal securities dealers, and 7 individuals who are 
associated with broker-dealers, municipal advisors, or 
municipal securities dealers. The 8 public members will include 
at least one investor representative, one representative of 
municipalities, and a member of the public with knowledge or 
experience in the municipal securities field. As reconstituted 
under this Section, the MSRB would not be dominated by members 
having exclusive legal obligations to investors, given the 
requirement for majority public membership as well as required 
representation of regulated municipal advisors. Further, the 
section would establish an explicit MSRB statutory mandate to 
protect municipal entities, as well as investors.
    The Section also provides that the MSRB, in conjunction 
with or on behalf of other Federal financial regulators or 
self-regulatory organizations, may establish information 
systems and assess reasonable fees to support those information 
systems.

Section 976. Government Accountability Office study of increased 
        disclosure to investors

    Section 976 directs the GAO to conduct a study and review 
of the disclosure required to be made by issuers of municipal 
securities and report on the findings. The GAO will describe 
the size of the municipal securities markets and the issuers 
and investors; compare the disclosure regimes applicable to 
issuers of municipal versus corporate bonds; evaluate the costs 
and benefits to issuers of municipal securities of requiring 
additional financial disclosures to investors; and make 
recommendations relating to the repeal of the Tower Amendment, 
which bars the MSRB and the SEC from imposing disclosure 
requirements on municipal issuers.
    The Committee believes that to improve investor protection 
there is merit in considering the revocation of the Tower 
Amendment, but that this move is significant and deserves a 
deliberate study before action is taken. In support of 
repealing the Tower Amendment, former SEC Chief Accountant Lynn 
Turner wrote in testimony for the Senate Banking Committee 
``there is a gap in regulation of the municipal securities 
market as a result of what is known as the Tower Amendment. 
Recent SEC enforcement actions such as with the City of San 
Diego, the problems in the auction rate securities, and the 
lurking problems with pension obligation bonds, all cry out for 
greater regulation and transparency in these markets. As a 
result, these token regulated markets now amount to trillions 
of dollars and significant risks. Accordingly, as former 
Chairman Cox recommended, I believe Section 15B(d)--Issuance of 
Municipal Securities--of the Securities Act of 1934 should be 
deleted.''\250\ The Investment Company Institute,\251\ 
Municipal Market Advisers,\252\ and former SEC Chairman Arthur 
Levitt\253\ support increased disclosure by municipalities.
---------------------------------------------------------------------------
    \250\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session, p. 11 (2009) 
(Testimony of Mr. Lynn Turner).
    \251\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Paul Schott Stevens).
    \252\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Thomas G. Doe).
    \253\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Arthur Levitt).
---------------------------------------------------------------------------

Section 977. Government Accountability Office study on the municipal 
        securities markets

    Section 977 directs the GAO to conduct a study and issue a 
report on the municipal securities markets, to include an 
analysis of the mechanisms for trading, reporting, and settling 
transactions; the needs of the markets and investors and the 
impact of recent innovations; potential uses of derivatives in 
the municipal markets; and recommendations to improve the 
transparency, efficiency, fairness, and liquidity of the 
municipal securities market. The GAO shall submit its report to 
the Committee on Banking, Housing, and Urban Affairs of the 
Senate, the Financial Services Committee of the House of 
Representatives, with a copy to the Special Committee on Aging 
of the Senate, within 180 days of the enactment of this Act.

Section 978. Study of funding for Government Accounting Standards Board

    Section 978 requires the SEC to study the funding of the 
Government Accounting Standards Board (GASB). GASB establishes 
accounting principles that are used by many states and local 
governments. As a result, GASB plays an important role in the 
municipal securities market by providing the foundation for 
financial reporting that investors rely on to make investment 
decisions. GASB is currently funded by voluntary contributions 
from states, local governments, and the financial community, 
and through the sale of its publications, to meet its annual 
budget of less than $8 million.
    The Committee is concerned that such voluntary funding 
arrangements can cause undue uncertainty and potentially lead 
to the compromise of the GASB standard setting process. The 
Banking Committee faced and solved a similar problem in 2002, 
when the Financial Accounting Standards Board, which had been 
relying on voluntary contributions and materials sales, was 
given a secure funding mechanism through Section 109 of the 
Sarbanes-Oxley Act.
    The municipal securities market is an important component 
of the Nation's capital markets, as it finances infrastructure 
and other government needs, while at the same time providing 
generally low-risk investment opportunities to Americans. There 
are over 50,000 issuers of municipal securities, with more than 
$2.8 trillion of United States municipal securities 
outstanding. In 2008, over $450 billion of new municipal 
securities were issued and nearly $5 trillion in municipal 
securities were traded.
    In this regard, the Committee is concerned that the current 
funding mechanism may not ensure that GASB can produce high-
quality, unbiased, and transparent governmental accounting and 
financial reporting standards.
    This section requires the SEC to conduct a study that 
evaluates: the role and importance of GASB in the municipal 
securities markets; the manner in which GASB is funded and how 
such manner of funding affects the financial information 
available to securities investors; the advisability of changes 
to the manner in which GASB is funded; and whether legislative 
changes to the manner in which GASB is funded are necessary for 
the benefit of investors and in the public interest. In 
conducting the study, the SEC shall consult with State and 
local government officers.
    In considering the ``advisability'' of changes to the 
funding, the Committee expects the SEC to evaluate alternative 
methods, including methods that would provide GASB with 
certainty about its income to meet its budget. In addition, the 
SEC may consider whether it would be feasible or efficient for 
a private entity, such as a self-regulatory organization, to 
assess a fee from its members that underwrite municipal 
securities offerings or whether it would be appropriate to 
assess fees on secondary market transactions. The SEC is 
required to submit the study to the Committee on Banking, 
Housing, and Urban Affairs of the Senate and the Committee on 
Financial Services of the House of Representatives within 270 
days of the date of enactment.

Section 979. Commission Office of Municipal Securities

    Section 979 establishes an Office of Municipal Securities 
in the SEC to administer the Commission's rules with respect to 
municipal securities dealers, advisors, investors, and issuers. 
The Director of the Office shall report to the Chairman of the 
Commission. The Office shall coordinate with the MSRB for 
rulemaking and enforcement actions, and shall have sufficient 
staff to carry out the requirements of this section, including 
individuals with knowledge and expertise in municipal finance. 
The Committee is concerned that the SEC has reduced the number 
of staff in its municipal securities office over the past few 
decades, and expects that the creation of the Office will allow 
the SEC to devote increased supervisory attention to the 
municipal market.

                               Subtitle I


Section 981. Authority to share certain information with foreign 
        authorities

    Section 102(a) of the Sarbanes-Oxley Act of 2002 (``the 
Act'') makes it unlawful for any public accounting firm to 
prepare or issue, or participate in the preparation or 
issuance, of any audit reports with respect to any issuer 
without being registered with the Public Company Accounting 
Oversight Board (``PCAOB''). As of January 1, 2010, 2,349 firms 
were registered with the PCAOB, including 936 firms in 88 non-
U.S. jurisdictions. Many of those non-U.S. firms regularly 
provide audit reports for issuers and are therefore inspected 
by the PCAOB on a regular basis. As of March 31, 2010, the 
Board has conducted 226 non-U.S. inspections located in 33 
jurisdictions.
    In conducting inspections abroad, the Board has sought to 
coordinate and cooperate with local authorities. The Board has 
said that its cooperative efforts have been impeded by the 
Board's inability to share with its non-U.S. counterparts 
confidential information related to the Board's oversight 
activities. The list of authorities that may receive such 
information is limited to the SEC, the Attorney General of the 
United States, appropriate federal functional regulators, state 
attorneys general in connection with criminal investigations, 
and appropriate state regulatory agencies (such as state boards 
of accountancy). These provisions, therefore, limit the PCAOB's 
ability to share such information with other regulators, 
including non-U.S. regulators.
    A significant number of non-U.S. audit regulators have 
cited this limitation as a reason for not cooperating with 
PCAOB inspections and discouraging or prohibiting PCAOB-
registered firms in their jurisdictions from cooperating. For 
example, the EU Directive on statutory audits permits 
cooperation only if reciprocal working relationships have been 
established between the member state's audit regulator and the 
PCAOB. The European Commission has asserted that these working 
relationships require that the PCAOB and the EU member state's 
auditor regulator be able to engage in a mutual exchange of 
inspection related information including audit working papers.
    Section 981 will allow the PCAOB to share confidential 
inspection and investigative information with foreign audit 
oversight authorities under specified circumstances. The 
sharing may occur if (1) the PCAOB makes a finding that it is 
necessary to accomplish the purposes of the Act of to protect 
investors in U.S. issuers; (2) the foreign authority has: 
provided the assurances of confidentiality requested by the 
PCAOB, described its information systems and controls; 
described its jurisdiction's laws and regulations that are 
relevant to information access and (3) the PCAOB determines it 
is appropriate to share such information. The information about 
information controls and relevant law is to assist the PCAOB in 
making an independent determination that the foreign authority 
has the capability and authority to keep the information 
confidential in its jurisdiction. The PCAOB may rely on 
additional information in making the determination that the 
information will be kept confidential and used no more 
extensively than the same manner that the U.S. and State 
entities identified in Section 105(b)(5)(B) of the Act may use 
the information, which is an important consideration of 
determining the appropriateness of such sharing.
    Thus, the bill requires the Board to consider whether 
applicable foreign laws and the respective foreign auditor 
oversight authority offer protections comparable to those 
provided under the Act. This would require the PCAOB to 
consider not only the foreign auditor oversight authority's 
willingness to maintain the confidentiality of the information, 
but also its ability to do so, both as a matter of the law in 
its jurisdiction and as a matter of the security of its 
information technology systems. The Committee believes that the 
Board could accept an assurance of confidentiality as adequate 
even in circumstances where the foreign auditor oversight 
authority could disclose the information to relevant law 
enforcement or regulatory authorities in its jurisdiction, so 
long as any such authorities are also committed and able to 
comply with confidentiality limitations comparable to those 
that apply to the U.S. and state entities with which the Board 
shares information under Section 105(b)(5)(B) of the Act.
    The Chairman of the PCAOB has written to the Chairman and 
Ranking Member asking for legislation ``to allow the PCAOB to 
share with a foreign audit oversight authority, upon receiving 
appropriate assurances of confidentiality, the inspection and 
investigative information related to the public accounting 
firms within that authority's jurisdiction . . . [in order to] 
facilitate the Board's and foreign authorities' efforts to 
fulfill their inspection mandates. This recommendation enjoys 
widespread investor and profession support.''\254\
---------------------------------------------------------------------------
    \254\Letter from the Honorable Mark W. Olson, July 7, 2009.
---------------------------------------------------------------------------

Section 982. Oversight of brokers and dealers

    Section 982 provides the Public Company Accounting 
Oversight Board (``PCAOB'') with the authority to write 
professional standards related to audits of SEC-registered 
brokers and dealers, to inspect those audits, and, when 
appropriate, to investigate and bring disciplinary proceedings 
related to those audits. This Section provides the PCAOB with 
authority over audits of registered brokers and dealers that is 
generally comparable to its existing authority over audits of 
issuers. This authority permits it to write standards for, 
inspect, investigate, and bring disciplinary actions arising 
out of, any audit of a registered broker or dealer. It enables 
the PCAOB to use its inspection and disciplinary processes to 
identify auditors that lack expertise or fail to exercise care 
in broker and dealer audits, identify and address deficiencies 
in their practices, and, where appropriate, suspend or bar them 
from conducting such audits.
    Currently, every SEC-registered broker and dealer is 
required by section 17(e)(1)(A) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78q(e)(1)(A)) to file with the SEC a balance 
sheet and income statement certified by a public accounting 
firm that is registered with the PCAOB. However, the PCAOB's 
authority to write professional standards, inspect audits, 
investigate audit deficiencies, and bring disciplinary 
proceedings for audit deficiencies extends to audits of 
``issuers,'' as defined in section 2(a)(7) of the Sarbanes-
Oxley Act of 2002 (15 U.S.C. 7201(7)). Therefore, the PCAOB 
does not have the authority to regulate and inspect audits of 
brokers and dealers unless a broker or dealer is an issuer 
(which is typically not the case) or its financial statements 
are part of the consolidated financial statements of an issuer.
    Under the current situation, where auditors of brokers and 
dealers register with the PCAOB but their audits of brokers and 
dealers are not subject to the PCAOB's standard setting, 
inspection and disciplinary authority, investors may expect 
that PCAOB-registered auditors of brokers and dealers are 
subject to inspections and oversight when, in fact, the PCAOB 
has no authority to govern the conduct or monitor the quality 
of their audit work.
    In a July 7, 2009 letter to Chairman Dodd and Ranking 
Member Shelby, Chairman Mark Olson of the PCAOB recommended 
that Congress consider amending the Sarbanes-Oxley Act to grant 
the PCAOB authority to inspect audits of brokers and dealers 
and to take action where deficiencies occur. The Securities 
Investor Protection Corporation has supported granting the 
PCAOB full oversight of audits of brokers and dealers, and 
feels that the PCAOB's new oversight authority should apply to 
audits of all registered brokers and dealers and not only those 
that perform a clearing function or carry customer accounts.
    The Section requires the PCAOB to allocate, assess and 
collect its support fees among brokers and dealers as well as 
issuers. The Committee expects that the PCAOB will reasonably 
estimate the amounts required to fund the portions of its 
programs devoted to the oversight of audits of brokers and 
dealers, as contrasted to the oversight of audits of issuers, 
in deciding the total amounts to be allocated to, assessed, and 
collected from all brokers and dealers. The Committee notes 
that the implementation of a program for PCAOB inspections of 
auditors of brokers and dealers is not intended to and should 
not affect the PCAOB's program for the inspections of auditors 
of issuers. Cost accounting for each program is not required.
    An example of the type of harm that might be avoided in the 
future by extending PCAOB authority is the investor reliance on 
the fraudulent audit of the broker-dealer Bernard L. Madoff 
Investment Securities LLC by Friehling & Horowitz, a firm that 
was not registered with the PCAOB.
    Columbia University Law Professor John C. Coffee testified 
before the Banking Committee on March 10, 2009: ``From this 
perspective focused on prevention, rather than detection, the 
most obvious lesson is that the SEC's recent strong tilt 
towards deregulation contributed to, and enabled, the Madoff 
fraud in two important respects. First, Bernard L. Madoff 
Investment Securities LLC (``BMIS'') was audited by a fly-by-
night auditing firm with only one active accountant who had 
neither registered with the Public Company Accounting Oversight 
Board (``PCAOB'') nor even participated in New York State's 
peer review program for auditors.''
    Professor Coffee noted that the Sarbanes-Oxley Act 
``required broker-dealers to use a PCAOB-registered auditor. 
Nonetheless, until the Madoff scandal exploded, the SEC 
repeatedly exempted privately held broker-dealers from the 
obligation to use such a PCAOB-registered auditor and permitted 
any accountant to suffice. Others also exploited this 
exemption. For example, in the Bayou Hedge Fund fraud, which 
was the last major Ponzi scheme before Madoff, the promoters 
simply invented a fictitious auditing firm and forged 
certifications in its name. Had auditors been required to have 
been registered with PCAOB, this would not have been feasible 
because careful investors would have been able to detect that 
the fictitious firm was not registered . . . At the end of 
2008, the SEC quietly closed the barn door by failing to renew 
this exemption--but only after $50 billion worth of horses had 
been stolen.''

Section 983. Portfolio margining

    Section 983 amends the Securities Investor Protection Act 
of 1970 (``SIPA''), which protects customers from certain 
losses caused by the insolvency of their broker-dealer. Under 
SIPA, claims of customers take priority over claims of general 
unsecured creditors with respect to customer property held by 
an insolvent broker-dealer. Under current law, the protections 
of SIPA do not extend to futures contracts other than security 
futures. As a result, customers currently are effectively 
precluded from including securities and related futures in a 
single securities account.
    The Section will enable customers to benefit from hedging 
activities by facilitating the inclusion of both securities and 
related futures products in a single ``portfolio margining 
account'' provided for under rules of self-regulatory 
organizations approved by the Securities and Exchange 
Commission (the ``SEC''). A portfolio margining account can be 
margined based upon the net risk of the positions in the 
account.
    Section 983 is consistent with a recommendation of the SEC 
and CFTC in their Joint Report on Harmonization of Regulation 
released on October 16, 2009. The agencies recommended giving 
customers the choice of whether to put related futures in a 
securities account or their related securities derivatives in a 
futures account. Customer choice is facilitated by extending 
SIPC insurance to futures in a securities portfolio margining 
account. The Section is also supported by each of the U.S. 
exchanges that trade options.
    Section 983 amends the definitions of ``customer,'' 
``customer property,'' and ``net equity'' in Section 16 of SIPA 
to provide that the owner of a portfolio margining account 
would be given the priority of a customer under SIPA with 
respect to any futures contracts or options on futures 
contracts permitted under SEC-approved rules to be carried in 
the account. Similarly, the customer's ``net equity'' in the 
account would include such futures and options on futures, and 
they would be treated along with cash and securities in the 
account as securities customer property. The definition of 
``net equity'' is further amended to clarify that a customer's 
claim for either a commodity futures contract or a security 
futures contract will be treated as a claim for cash rather 
than as a claim for a security. The Section also amends the 
definition of ``gross revenues from the securities business'' 
to specifically include revenues earned by a broker or dealer 
in connection with transactions in portfolio margining accounts 
carried as securities accounts.

Section 984. Loan or borrowing of securities

    During the period preceding the crisis, a number of 
financial institutions used securities lending programs as a 
basis for leveraged and risky trading activities. This Section 
directs the SEC to write rules that are designed to increase 
the transparency of information available to brokers, dealers, 
and investors with respect to loaned or borrowed securities 
within two years of the date of enactment of this Act. The 
Section also makes it unlawful for any person to effect, 
accept, or facilitate a transaction involving the loan or 
borrowing of securities in contravention of such rules as the 
SEC may prescribe. The SEC is encouraged to act in a shorter 
period of time if necessary in the public interest.

Section 985. Technical corrections to federal securities laws

Section 986. Conforming amendments relating to the repeal of the Public 
        Utility Holding Company Act of 1935

Section 987. Amendment to definition of material loss and nonmaterial 
        losses to the Deposit Insurance Fund for purposes of Inspector 
        General reviews

    Section 987 amends the definition of material loss and adds 
``nonmaterial losses'' definition to the Deposit Insurance Fund 
for purposes of Inspector General Reviews. The Inspectors 
General (IG) of Federal Banking Regulators are required to 
conduct a Material Loss Review for each depository institutions 
that fails and costs the Deposit Insurance Fund $25 million and 
more. The Senate Banking Committee has heard from the IGs that 
due to the rise in bank failures they are severely strained by 
the amount of Material Loss Reviews they must produce. In their 
communications to the Banking Committee the IGs from Federal 
Reserve, Treasury and FDIC have claimed to have hired more 
personnel to reduce the backlog accumulated during the 
financial crisis; however, the number of bank failures has also 
been more than they've expected, and such, the volume of 
workload has remained strenuously high. Because of this, and 
the understanding that most of the bank failures seemed have 
occurred due to similar reasons (exposure to failing mortgages) 
the Committee is proposing an increase in the dollar amount 
that the Deposit Insurance Fund must lose to trigger a Material 
Loss Review. The change will follow this schedule: it will rise 
from the current $25,000,000 to $100,000,000 for the period of 
September 30, 2009 to December 31, 2010 and cascade down to 
$75,000,000 for the period of January 1, 2011 to December 31, 
2011, and rest on $50,000,000 for January 1, 2012 and after. In 
bank failures that do not meet the materiality threshold (and 
thus are ``nonmaterial losses'' to the Deposit Insurance Fund), 
the IGs could still conduct a Material Loss Review if, based on 
their preliminary assessment, such a report would be helpful.
    For every 6 month period after March 31, 2010, the IGs must 
prepare and submit a written report to the appropriate Federal 
banking agency and to Congress on whether any losses deemed to 
be nonmaterial exhibit unusual circumstances and deserve an in-
depth review of the loss.

Section 988. Amendment to definition of material loss and nonmaterial 
        losses to the National Credit Union Share Insurance Fund for 
        purposes of Inspector General reviews

    Section 988 does for credit unions what Section 987 does 
for other insured depository institutions. The Section defines 
a material loss for the National Credit Union Share Insurance 
Fund for purposes of Inspectors General reviews. If the Fund 
incurs a material loss with respect to an insured credit union, 
the Inspector General of the NCUA Board will submit to the 
Board a written report reviewing the supervision of the credit 
union by the Administration. For the purposes of this 
provision, a material loss is defined as an amount exceeding 
the sum of $25,000,000 or an amount equal to 10 percent of the 
total assets of the credit union on the date on which the Board 
initiated assistance. The GAO, under its discretion, could 
review each of these reports and recommend improvements to the 
supervision of insured credit unions.
    For every 6 months period after March 31, 2010, the Board 
IG must prepare and submit a written report to the appropriate 
Federal banking agency and to Congress on whether any losses 
deemed to be nonmaterial exhibit unusual circumstances and 
deserve an in-depth review of the loss.

Section 989. Government Accountability Office study on proprietary 
        trading

    Section 989A was authored by Senator Merkley. Section 989 
directs the GAO to conduct a study on proprietary trading by 
financial institutions and the implication of this practice on 
systemic risk. This will include an evaluation of whether 
proprietary trading presents a material systemic risk to the 
stability of the United States financial system; whether 
proprietary trading presents material risks to the safety and 
soundness of the covered entities that engage in such 
activities; whether proprietary trading presents material 
conflicts of interest between covered entities that engage in 
proprietary trading and the clients of the institutions who use 
the firm to execute trades or who rely on the firm to manage 
assets; whether adequate disclosure regarding the risks and 
conflicts of proprietary trading is provided to the depositors, 
trading and asset management clients, and investors of covered 
entities that engage in proprietary trading; and whether the 
banking, securities, and commodities regulators of institutions 
that engage in proprietary trading have in place adequate 
systems and controls to monitor and contain any risks and 
conflicts of interest related to proprietary trading. The GAO 
will submit a report to Congress on the results of this study 
within 15 months of passage of the Act.

Section 989A. Senior investor protection

    Section 989A was authored by Senator Kohl. Section 989A 
defines the terms ``misleading designation'', ``financial 
product'', ``misleading or fraudulent marketing'' and 
``senior'' for the purposes of protecting senior citizens from 
investment frauds. The Section directs the Office of Financial 
Literacy within Bureau of Consumer Financial Protection to 
establish a program to provide grants of up to $500,000 per 
fiscal year to individual States to investigate and prosecute 
misleading and fraudulent marketing practices or to develop 
educational materials and training to reduce misleading and 
fraudulent marketing of financial products toward seniors. 
States may use the grants for staff, technology, equipment, 
training and educational materials. To receive these grants, 
states must adopt rules on the appropriate use of designations 
in the offer or sale of securities or investment advice; on 
fiduciary or suitability requirements in the sale of 
securities; on the use of designations in the sale of insurance 
products; and on insurer conduct related to the sale of annuity 
products. This Section authorizes $8 million to be appropriated 
for these purposes for fiscal years 2010 through 2014.
    This section is intended to protect seniors from less than 
scrupulous financial advisors who prey on the elderly by 
touting misleading or fraudulent ``senior designations.'' Often 
these deceptive designations can be obtained online and require 
little or no training to acquire. The new grant program will 
provide needed resources to state fraud enforcement agencies 
fighting fraud. The grant application process will incentivize 
states to crack down against the misleading use of senior 
designations by encouraging them to adopt the North American 
Securities Administrators Association (NASAA)'s and the 
National Association of Insurance Commission's (NAIC) newly 
developed model rules on the use of senior designations for the 
sale of securities and insurance products. The grant also calls 
for improved suitability standards for the sales of annuity 
products, with provisions that are likely to be reflected in 
the new suitability standards that are being developed by the 
NAIC. This section has been endorsed by organizations such as 
the AARP, North American Securities Administrators Association 
(NASAA), National Organization for Competency Assurance (NOCA), 
The American College, Financial Planners Association, Fund 
Democracy, Consumer Federation of America, Alliance for Retired 
Americans, National Association of Personal Financial Advisors 
(NAPFA), Older Women's League (OWL) and Financial Certified 
Planners Board of Standards (CFP Board).

Section 989B. Changes in appointment of certain Inspectors General

    Senator Menendez authored this Section, which provides for 
presidential appointment of the Inspectors General of the 
Federal Reserve Board of Governors, the CFTC, the NCUA, the 
PBGC, the SEC, and the Bureau of Consumer Financial Protection 
with Senate approval. The provision is intended to increase the 
stature of the Inspectors General within their agencies. This 
Section strengthens also the subpoena authority.

                               Subtitle J


Section 991. Securities and Exchange Commission self-funding

    Section 991 provides for the SEC to become a self-funded 
organization. Each year the SEC will submit a budget request to 
Congress and the Treasury. The Treasury will deposit this money 
into an account for use by the SEC. The SEC will set its fees 
and assessments at a level meant to fully repay Treasury. If 
the SEC does not recoup sufficient funds, then the SEC is not 
obligated to fully repay Treasury. Any collections in excess of 
25% of the next year's budget request must be paid to Treasury.
    The Council of Institutional Investors,\255\ former SEC 
Chief Accountant Mr. Lynn Turner,\256\ the Investment Adviser 
Association,\257\ and the Investor's Working Group\258\ support 
this policy.
---------------------------------------------------------------------------
    \255\Mr. Jeff Mahoney, Council of Institutional Investors, letter 
to Senator Dodd, p.3, November 18, 2009.
    \256\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part I: Testimony before the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. Lynn Turner).
    \257\Enhancing Investor Protection and the Regulation of Securities 
Markets--Part II: Testimony before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs, 111th Congress, 1st session (2009) 
(Testimony of Mr. David Tittsworth).
    \258\U.S. Financial Regulatory Reform: An Investor's Perspective, 
Investor's Working Group, July 2009.
---------------------------------------------------------------------------

            Title X--Bureau of Consumer Financial Protection


Section 1001. Short title

    Section 1001 establishes the name of this title to be the 
Consumer Financial Protection Act of 2010.

Section 1002. Definitions

    Section 1002 provides the definitions for key terms in 
Title X.
    Paragraph 1 defines the term ``affiliate.''
    Paragraph 2 explains that ``Bureau'' means the Bureau of 
Consumer Financial Protection.
    Paragraph 3 defines the term ``business of insurance.''
    Paragraph 4 defines the term ``consumer.''
    Paragraph 5 makes clear that financial products or services 
defined in the Act that are offered or provided for use by 
consumers primarily for personal, family, or household purposes 
are considered to be ``consumer financial products or 
services'' for purposes of this Act. The definition of 
``consumer financial product or service'' in this paragraph is 
a subset of the defined term ``financial product or serve'' in 
paragraph 13, and includes all activities that are part of the 
broader definition, which excludes the ``business of 
insurance'' under paragraph 13(B). In addition, other key 
financial activities that are central to consumers are also 
included in this definition. These include, among others 
listed, the servicing of mortgage loans and debt collection 
services where the financial service being provided is the 
result of a contract between the lender and the servicer or 
debt collector. For example, mortgage servicers typically 
provide services to the owners of the mortgages. Nonetheless, 
this service is included in the definition of ``consumer 
financial product or service'' because of its obvious impact on 
consumers. A number of other financial activities of a similar 
nature are included in this definition.
    The Committee intends, however, that a financial 
institution's exercise of bona fide trust or fiduciary powers 
would not be subject to the jurisdiction of the Bureau. In 
addition, financial products and services delivered for 
establishing a trust, or to a trust itself, would not be for 
use by a consumer primarily for personal, family, or household 
purposes.
    Paragraph 6 defines ``covered person'' as any person 
engaged in offering or providing a consumer financial product 
or service and an affiliate of such a person that provides a 
material service in connection with the provision of such 
consumer financial product or service is subject to the 
regulatory authority of and, in some cases, to examinations by, 
the CFPB under this title.
    Paragraph 7 defines the term ``credit.''
    Paragraph 8 defines ``deposit-taking activity.''
    Paragraph 9 defines the term ``designated transfer date.''
    Paragraph 10 defines the term ``Director.''
    Paragraph 11 defines the term ``enumerated consumer laws.''
    Paragraph 12 defines the term ``Federal consumer financial 
law.''
    Paragraph 13 defines the term ``financial product or 
service'' and is modeled on the activities that are permissible 
for a bank or a bank holding company, such as under section 
4(k) of the Bank Holding Company Act and implementing 
regulations. However, it is more narrowly drawn in this Act in 
that the list does not include insurance or securities 
activities. The paragraph describes the activities, products, 
and services that are defined as a ``financial product or 
service'' in the context of this legislation. The legislation 
does not intend to capture as ``covered persons'' companies 
that engage in financial data processing activities, as defined 
in paragraph 13, where the company acts as a mere conduit for 
such data, provides services to a person that enables that 
person to establish and maintain a web site simply as a 
conduit, or merchants that provide for electronic payments for 
the sale of their nonfinancial goods or services.
    Paragraph 14 defines the term ``foreign exchange.''
    Paragraph 15 defines the term ``insured credit union.''
    Paragraph 16 defines the term ``payment instrument.''
    Paragraph 17 defines the term ``person.''
    Paragraph 18 defines the term ``person regulated by the 
Commodity Futures Trading Commission.''
    Paragraph 19 defines the term ``person regulated by the 
Commission.''
    Paragraph 20 defines the term ``person regulated by a State 
insurance regulator.''
    Paragraph 21 defines the term ``person that performs income 
tax preparation activities for consumers.''
    Paragraph 22 defines the term ``prudential regulator.''
    Paragraph 23 defines the term ``related person.''
    Paragraph 24 defines the term ``service provider'' and is 
designed to create authority that is generally comparable to 
the authority that federal banking regulators have under the 
Bank Service Company Act. It is included in this Act in order 
to ensure that material outsourced services by a covered person 
in connection with the offering or provision of a consumer 
financial product or service are subject to the regulation and 
supervision of the CFPB for the activities that could be done 
directly by the covered person. Without such authority, covered 
persons could remove many important functions that bear 
directly on consumers from the CFPB's oversight simply by 
contracting those functions out to service providers, thereby 
escaping the jurisdiction of the CFPB and leading to 
significant regulatory arbitrage. Companies that merely provide 
general support or ministerial services to a broad range of 
businesses, or space for advertising either in print or in an 
electronic medium, are not intended to be defined as service 
providers for the purposes of this Act.
    Paragraph 25 defines the term ``State.''
    Paragraph 26 defines the term ``stored value.''
    Paragraph 27 defines the term ``transmitting or exchanging 
money.'' This paragraph is not intended to capture a mere 
conduit, such as a telecommunications company that provides a 
network over which a money service business sends funds. The 
paragraph is intended to cover the companies that are receiving 
currency directly from a consumer, not as a consequence of 
receiving it from the money service business for further 
transmission to a recipient.

          Subtitle A--Bureau of Consumer Financial Protection.


Section 1011. Establishment of the Bureau

    This section creates the Bureau of Consumer Financial 
Protection (the Bureau) in the Federal Reserve System; it 
establishes the Bureau's authority to regulate the offering and 
provision of consumer financial products and services. This 
section also establishes the positions of the Director and 
Deputy Director of the Bureau. The Director is appointed by the 
President and confirmed by the Senate for a 5-year term and 
subject to removal for cause.

Section 1012. Executive and administrative powers

    Section 1012 authorizes the Bureau to establish general 
policies with respect to all executive and administrative 
functions of the Bureau. It provides that the Director may 
delegate to any authorized employee, representative, or agent 
any power vested in the Bureau. The section makes clear that 
the Bureau is to operate without any interference by the Board 
of Governors of the Federal Reserve including with regards to 
rule writing, issuance of orders, examinations, enforcement 
actions, and appointment or removal of employees of the Bureau. 
These provisions are modeled on similar statutes governing the 
Office of the Comptroller of the Currency and the Office of 
Thrift Supervision, which are located within the Department of 
Treasury.
    This section also establishes that, like other federal 
financial services regulators, any Bureau testimony, 
legislative recommendations, or comments on legislation are not 
subject to review or approval by other agencies. The Bureau 
must make clear that any such communications do not reflect the 
views of the President or Board of Governors.

Section 1013. Administration

    This section authorizes the Director to appoint and employ 
officials and professional staff, and to establish in the 
Bureau functional units for research, community affairs, and 
consumer complaints. The Committee expects these functions to 
ensure that the Bureau has a robust knowledge of the markets 
for consumer financial products and services in order to meet 
its purposes and objectives in as efficient and effective 
manner as possible. The Committee also expects the Bureau to 
work with other federal agencies, such as the Federal Trade 
Commission (FTC), to make use of the FTC's existing consumer 
complaints collection infrastructure where efficient and 
advantageous in facilitating complaint monitoring, response, 
and referrals. Section 1013 also establishes within the Bureau 
an Office of Fair Lending and Equal Opportunity and an Office 
of Financial Literacy. Evidence of discriminatory pricing in 
the provision of auto loans, certain terms of mortgage loans, 
and other products indicate the importance of tracking this 
information. Likewise, a more effective effort to improve 
financial literacy should play a crucial role in improving 
consumer protection.

Section 1014. Consumer Advisory Board

    Section 1014 requires the Director to create a Consumer 
Advisory Board and to consult with it on matters pertaining to 
the Bureau's functions and authorities. This panel is modeled 
on the Consumer Advisory Council of the Federal Reserve Board 
and is intended to bring a broad spectrum of perspectives 
together to advise the Director. This provision requires the 
Director to appoint 6 members to the Consumer Advisory Board 
who have been recommended by the Federal Reserve Bank 
Presidents. The provision requires that members are appointed 
without regard to party affiliation, just like the members of 
the advisory committees to the Federal Reserve, the SEC, the 
FDIC, the FDA, and many other federal advisory committees. This 
is important because, as the GAO found in 2004, when a federal 
advisory committee is viewed as politicized, the value of its 
work can be jeopardized.

Section 1015. Coordination

    This section requires the Bureau to coordinate with the SEC 
and CFTC and Federal agencies and State regulators to promote 
consistent regulatory treatment of consumer financial and 
investment products and services.

Section 1016. Appearances before and reports to Congress

    This section requires the Director to appear before 
Congress at semi-annual hearings and, concurrently, to prepare 
and submit a report to the President and Congress concerning 
the Bureau's budget and regulation, supervision, and 
enforcement activities. This provision is modeled on the semi-
annual monetary report and testimony requirement imposed on the 
Federal Reserve. The Committee expects that this requirement 
will ensure the ongoing accountability of the Bureau to the 
Committee and the Congress.

Section 1017. Funding; penalties and fines

    Section 1017 requires the Federal Reserve Board to transfer 
the amount determined by the Director to to be reasonably 
necessary for the Bureau's annual budget, not to exceed a 
specified percentage of the total operating expenses of the 
Federal Reserve System as reported in the 2009 Annual Report of 
the Board of Governors. The Bureau's funding is capped at 12 
percent for fiscal year 2013 and each year thereafter, except 
that the cap is to be adjusted for inflation, and will be 
subject to annual audits and reports to Congress by the GAO. 
This funding is needed to perform the following key functions: 
examinations and enforcement over larger banks, mortgage market 
companies, and other large covered nondepository companies; 
registration and reporting by nondepository companies that are 
subject to the Bureau's examination authority; analytical 
support, monitoring and research, industry guidance and 
rulemaking; operation of a nationwide consumer complaint 
center; and consumer financial education. The mortgage market 
consists of more than 25,000 lenders, servicers, brokers, and 
loan modification firms that would be subject to Bureau 
supervision and enforcement. The Treasury estimates that there 
are more than 75,000 nonbank, non-mortgage firms offering or 
providing consumer financial products or services, of which the 
agency would supervise a percentage. In order to conduct 
thorough supervision of these firms comparable to bank consumer 
compliance supervision will require an adequate budget.
    The Committee finds that the assurance of adequate funding, 
independent of the Congressional appropriations process, is 
absolutely essential to the independent operations of any 
financial regulator. This was a hard learned lesson from the 
difficulties faced by the Office of Federal Housing Enterprise 
Oversight (OFHEO), which was subject to repeated Congressional 
pressure because it was forced to go through the annual 
appropriations process. It is widely acknowledged that this 
helped limit OFHEO's effectiveness. For that reason, ensuring 
that OFHEO's successor agency--the Federal Housing Finance 
Agency--would not be subject to appropriations was a high 
priority for the Committee and the Congress in the Housing and 
Economic Recovery Act of 2008. The budget established in this 
Act will ensure that the Bureau has the funds to perform its 
mission. By comparison with other financial regulatory bodies, 
the CFPB budget is modest, as the chart below illustrates. 


    This section also establishes within the Federal Reserve 
Board a special fund for receipts which can be invested under 
certain guidelines and which are to be used to pay for Bureau 
expenses. Finally, section 1017 creates a victims' relief fund 
for civil penalties obtained by the Bureau.

Section 1018. Effective date

    This section provides that this subtitle shall become 
effective on the date of enactment of this Act.

                Subtitle B--General Powers of the Bureau


Section 1021. Purpose, objectives, and functions

    This section mandates that the purpose of the Bureau is to 
implement and enforce, where applicable, Federal consumer 
financial laws to ensure that markets for consumer financial 
products and services are fair, transparent and competitive.
    The Bureau is authorized to act to ensure that consumers 
are provided with accurate, timely, and understandable 
information in order to make effective decisions about 
financial transactions; to protect consumers from unfair, 
deceptive, or abusive acts and practices and from 
discrimination; to reduce unwarranted regulatory burdens; to 
ensure that Federal consumer financial law is enforced 
consistently in order to promote fair competition; and to 
ensure that markets for consumer financial products and 
services operate transparently and efficiently to facilitate 
access and innovation.
    This section further establishes the Bureau's functions 
with regard to regulation, supervision and enforcement, 
including: conducting financial education programs; collecting, 
investigating and responding to consumer complaints; collecting 
and publishing information relevant to the functioning of 
markets for consumer financial products and services; 
supervising covered persons for compliance with Federal 
consumer financial law, and taking appropriate enforcement 
action; issuing rules, orders and guidance; and performing 
other necessary support activities to facilitate the Bureau's 
functions.

Section 1022. Rulemaking authorities

    This section authorizes the Bureau to administer, enforce 
and implement the provisions of Federal consumer financial law 
and, more specifically, authorizes the Bureau to prescribe 
rules and issue orders and guidance as may be necessary to 
carry out the purposes, and prevent evasions of, those laws. 
Under this section, the Bureau must, when prescribing rules, 
consider potential benefits and costs to consumers and covered 
persons, and consult with prudential regulators regarding 
consistency with safety and soundness considerations and other 
objectives of such agencies. This consultation would have to 
take place prior to the Bureau proposing a rule as well as 
during the public comment process. If during such consultation 
process a prudential regulator provides the Bureau with a 
written objection to the proposed rule, the Bureau is required 
to include in the adopting release a description of the 
objection and the basis for the Bureau's decision regarding 
such objection. The Bureau is authorized under this section to 
exempt classes of covered persons, service providers, or 
consumer financial products or services, from provisions of 
this title.
    This section requires the Bureau to monitor for risks to 
consumers in the offering or provision of consumer financial 
products or services. In monitoring for risks, the Bureau is 
authorized to consider factors including likely risks and costs 
to consumers associated with buying or using a type of consumer 
financial product or service, the extent to which the law is 
likely to adequately protect consumers, and the extent to which 
the risks of a consumer financial product or service may 
disproportionately affect traditionally underserved consumers. 
The Bureau is further granted authority to gather and compile 
information regarding the organization, business conduct, 
markets, and activities of persons operating in consumer 
financial services markets, and to make such information 
public, as is in the public interest.
    The Committee considers the monitoring and information 
gathering function to be an essential part of the Bureau's 
work. The Bureau must stay closely attuned to the marketplace 
for consumer financial products and services in order to 
effectively fulfill the purposes and objectives of this title.
    Under this section, the Bureau is provided with access to 
the examination and financial condition reports made by a 
prudential regulator or other Federal agency having 
jurisdiction over a covered person. Similarly, a prudential 
regulator, State regulator or other Federal agency having 
jurisdiction over a covered person is provided with access to 
any examination reports made by the Bureau. The Bureau is 
required to take steps to ensure that proprietary, personal or 
confidential information is protected from public disclosure. 
In addition, the Bureau is required to assess the efficacy of 
its rules.

Section 1023. Review of Bureau regulations

    This section provides for a process by which the Financial 
Stability Oversight Council may set aside a final regulation 
promulgated by the Bureau if, in the view of two-thirds of the 
Council, the regulation would put the safety and soundness of 
the banking system or the stability of the financial system at 
risk. Under this section, an agency represented by a member of 
the Council may petition the Council to stay the effectiveness 
of, or set aside, a regulation if the member agency filing the 
petition has attempted to work with the Bureau to resolve 
concerns regarding the effect of the rule on financial 
stability or safety and soundness of the banking system. Such 
petition is required to be filed with the Council not later 
than 10 days after the regulation has been published in the 
Federal Register. A decision by the Council to set aside a 
regulation prescribed by the Bureau shall render such 
regulation unenforceable.
    Any such decision by the Council would be required to be 
done within certain specified time limits. A decision to issue 
a stay of, or set aside, a regulation is required to be 
published in the Federal Register as soon as practicable after 
the decision is made, with an explanation of the reasons for 
the decision. A decision by the Council to set aside a 
regulation prescribed by the Bureau is subject to judicial 
review.
    This provision is designed to ensure that consumer 
protection regulations do not put the safety and soundness of 
the banking system or the stability of the financial system at 
risk. This provision is in addition to the significant 
consultation requirements included in Section 1022.
    The Committee notes that there was no evidence provided 
during its hearings that consumer protection regulation would 
put safety and soundness at risk. To the contrary, there has 
been significant evidence and extensive testimony that the 
opposite was the case. Specifically, it was the failure by the 
prudential regulators to give sufficient consideration to 
consumer protection that helped bring the financial system 
down. In fact, it was the organizations that promote consumer 
protection that were urging that underwriting standards be 
tightened for both consumer protection and safety and soundness 
reasons, and it was the prudential regulators who ignored these 
calls.
    For example, in testimony before the Committee (June 26, 
2007), David Berenbaum from the National Community Reinvestment 
Coalition said, ``For the past 5 years, community groups, 
consumer protection groups, fair lending groups, and all of our 
members in the National Community Reinvestment Coalition have 
been sounding an alarm about poor underwriting--underwriting 
that not only endangered communities, their tax bases, their 
municipal governments, their ability to have sound services and 
celebrate homeownership--but [underwriting that] was going to 
impact on the safety and soundness of our banking institutions 
themselves. Those cries for action fell on deaf ears, and here 
we are today.''
    An article in the American Banker (``Do Safety and 
Soundness and Consumer Protection Really Conflict?,'' by 
Cheyenne Hopkins, March 30, 2010) calls the banking industry 
argument that such a conflict exists ``shaky.'' The article 
quotes Kevin Jacques who worked for 10 years in the Office of 
the Comptroller of the Currency, who said, ``. . . I cannot 
recall a meeting I sat in where we worried about consumer 
protection and looked at safety and soundness and said the two 
are in conflict. . . .'' A former New York Federal Reserve Bank 
official, Brad Sabel, agreed with this assessment, saying ``In 
my experience I do not recall seeing a case where a consumer 
protection regulation was found to pose a threat to safe and 
sound operations of the banks.''
    Nonetheless, the Committee included this provision in order 
to reassure that the Bureau cannot put the safety and soundness 
or the stability of the financial system at risk.

Section 1024. Supervision of nondepository covered persons

    Section 1024 establishes the scope of the Bureau's 
supervisory authority over certain nondepository institutions 
(nondepository covered persons). Oversight of these companies 
has largely been left to the States, and they are not currently 
subject to regular Federal consumer compliance examinations 
comparable to examinations of their depository institution 
competitors. According to one Treasury official, ``The federal 
government spends at least 15 times more on consumer compliance 
and enforcement for banks and credit unions than for nonbanks--
even though there are at least five times as many nonbanks as 
there are banks and credit unions.'' The Federal Trade 
Commission has approximately 70 staff members assigned to 
perform enforcement and monitoring functions for approximately 
100,000 nondepository financial service providers nationwide. 
The FTC's authority to issue rules regarding unfair and 
deceptive practices is constrained by procedural requirements, 
and it does not have authority to conduct compliance exams, as 
bank regulators do. For that reason, it has brought fewer than 
25 lawsuits in the last five years against mortgage 
originators, payday lenders and debt collectors.
    The authority provided to the Bureau in this section will 
establish for the first time consistent Federal oversight of 
nondepository institutions, based on the Bureau's assessment of 
the risks posed to consumers and other criteria set forth in 
this section. Banks and other nondepository companies that 
provide consumer financial products or services should be held 
to the same minimum standards for complying with Federal 
consumer financial laws regardless of their corporate 
structure. Specifically, the Bureau will have the authority to 
supervise all participants in the consumer mortgage arena, 
including mortgage originators, brokers, and servicers and 
consumer mortgage modification and foreclosure relief services. 
These entities contributed to the housing crisis that led to 
the near collapse of the financial system. The Bureau will also 
have the authority to supervise larger nondepository 
institutions that offer or provide other consumer financial 
products and services. Larger nondepositories will be defined 
through a Bureau rulemaking and in consultation with the 
Federal Trade Commission. Nondepository covered persons that 
are subject to the Bureau's supervision authority will be 
required to register with the Bureau. This section does not 
apply to depository institutions.
    Specifically, the Bureau will have the authority to 
supervise all participants in the consumer mortgage arena, 
including mortgage originators, brokers, and servicers and 
consumer mortgage modification and foreclosure relief services. 
These entities contributed to the housing crisis that led to 
the near collapse of the financial system. The Bureau will also 
have the authority to supervise larger nondepository 
institutions that offer or provide other consumer financial 
products and services. Larger nondepositories will be defined 
through a Bureau rule making and in consultation with the 
Federal Trade Commission. Nondepository covered persons that 
are subject to the Bureau's supervision authority will be 
required to register with the Bureau. This section does not 
apply to depository institutions.
    The Bureau will have the authority to require reports from 
and to conduct periodic examinations of nondepository covered 
persons described in section 1026(a) to assess compliance with 
Federal consumer financial laws, to obtain information about 
activities and compliance systems, and to detect and assess 
risks to consumers and markets for consumer financial products 
and services. The Bureau will exercise its authority by 
establishing a risk-based supervision program based on an 
assessment of the risks posed to consumers in certain product 
and geographic markets. In establishing the risk-based 
supervisory program, the Bureau will consider the asset size of 
the nondepository covered person, the volume of consumer 
financial product and service transactions it is engaged in, 
the risks to consumers of those products and services, and the 
extent to which the institution is overseen by State 
regulators.
    Section 1024 provides that the Bureau's enforcement 
authority over larger nondepository covered persons, other than 
mortgage entities described in section 1024(a)(1)(A), is 
exclusive, although other Federal agencies may recommend (in 
writing) enforcement actions to the Bureau. Pursuant to a 
Memorandum of Understanding, the Bureau and the FTC will 
coordinate enforcement action of nondepository mortgage actors, 
including civil actions.

Section 1025. Supervision of very large banks, savings associations, 
        and credit unions

    Section 1025 grants the Bureau primary examination and 
enforcement authority over all insured depository institutions 
and credit unions with more than $10 billion in assets. This 
authority extends to the affiliates and service providers of 
these large depositories. The current consumer protection 
system divides jurisdiction and authority for consumer 
protection between many federal regulators, whose mission is 
not focused on consumer protection. The result has been that 
banks could choose the least restrictive consumer compliance 
supervisor. The fragmented regulatory structure also resulted 
in finger pointing among regulators and inaction when problems 
with consumer products and services arose. The authority 
granted to the Bureau under this section creates one federal 
regulator with consolidated consumer protection authority over 
the largest depository institutions, leaving regulatory 
arbitrage and inter-agency finger pointing in the past.
    Specifically, the Bureau will have the authority to require 
reports from and to conduct periodic examinations of the 
largest depository institutions to assess compliance with 
Federal consumer financial laws, to obtain information about 
activities and compliance systems, and to detect and assess 
risks to consumers and markets for consumer financial products 
and services. In order to minimize regulatory burden, the 
Bureau is required to coordinate examination and enforcement 
activities with the appropriate prudential regulator, including 
coordinating the scheduling of examinations, conducting 
simultaneous examinations unless the financial institution 
requests otherwise, sharing draft reports, requiring reasonable 
opportunity (30 days) to comment, and requiring that concerns 
raised by the prudential regulator be considered prior to 
issuing a final report. The Bureau must also pursue 
arrangements and agreements with State bank supervisors to 
coordinate examinations where appropriate.
    Section 1025 also provides that any conflicts between 
regulators may be resolved by a governing panel. If the 
proposed supervisory determinations of the Bureau and the 
prudential regulator conflict, the examined financial 
institution may request that the agencies coordinate and 
present a joint statement of coordinated supervisory action. 
The agencies have 30 days to comply. If the agencies do not 
issue a joint statement, the financial institution may appeal 
to a governing panel 30 days after the joint statement is due. 
The governing panel would consist of a representative of the 
Board of Governors, the FDIC, the NCUA or OCC on a rotating 
basis (as long as that agency is not involved in the dispute) 
and a representative of the Bureau and the prudential 
regulator. The panel would have 30 days to provide a final 
determination to the financial institution.

Section 1026. Other banks, savings associations, and credit unions

    Section 1026 provides that an insured depository 
institution or credit union with $10 billion in assets or less 
will continue to be examined for consumer compliance by its 
prudential regulator. The Bureau is authorized to ride along on 
a sample of examinations conducted by the prudential 
regulators, which will assist the Bureau in understanding the 
operations of smaller banks and credit unions. The Bureau would 
not have authority to take enforcement action. Section 1026 
provides the Bureau access to reports by banks and credit 
unions under the $10 billion threshold to help it better 
understand the markets for consumer financial products and 
services, and to ensure that it is a fair and consistent 
market-wide rule writer.

Section 1027. Limitations on authorities of the Bureau; preservation of 
        authorities

    Section 1027 lays out the limits on the Bureau's authority 
with regard to certain entities and product types. These 
limitations make clear that the Bureau does not have authority 
over commercial transactions or the sale of nonfinancial goods 
or services.
    Subsection (a) makes clear that the Bureau may not exercise 
any authority with respect to a merchant, retailer, seller or 
broker of nonfinancial good or service. However, the Bureau 
would have authority if such a person is significantly engaged 
in offering or providing any consumer financial product or 
service or is otherwise subject to an enumerated consumer law 
or other law that is transferred to the Bureau's authority. 
This subsection also allows a merchant to extend credit to a 
consumer for the purchase of a nonfinancial good or service 
without coming under the authority of the Bureau under this 
title. This has been described as allowing local merchants to 
``extend a tab'' to a customer. Merchants may also collect 
these debts (or hire someone to do so), or sell such debts, if 
delinquent, without being subject to the Bureau's authority 
over those activities. This limitation would not extend to 
merchants who, for example, extend credit which exceeds the 
market value of the good or service offered or provided or who 
regularly extend credit that is subject to a finance charge and 
payable by written agreement in more than 4 installments.
    Under this subsection, the Bureau would have no authority 
to issue rules or take enforcement action against merchants, 
retailers, or sellers of nonfinancial goods or services that 
are not engaged significantly in offering or providing consumer 
financial products or services. This makes clear that the 
Committee intends to exclude persons and businesses such as 
dentists, doctors, and small Main Street retailers that simply 
allow their customers to pay bills over time from the new 
authority of the Bureau. Such persons typically are not engaged 
significantly in offering or providing consumer financial 
products or services.
    Finally, for the purposes of this section (a), the term 
``finance charge'' is expected to be interpreted consistent 
with the current rules that implement the Truth in Lending Act, 
including appropriate exclusions from that term for charges for 
unanticipated late payment, delinquency, or default.
    Subsection (b) clarifies that real estate brokerage 
activities are not covered by the Bureau except to the extent 
that a real estate broker is engaged in the offering of a 
consumer financial product or service or is otherwise subject 
to an enumerated consumer law or transferred authority.
    Subsection (c) clarifies that retailers of manufactured 
housing and modular homes are not covered by the Bureau, except 
to the extent that a retailer is engaged in offering or 
providing a consumer financial product or service or is 
otherwise covered by a Federal consumer financial law.
    Subsection (d) clarifies that accountants and tax preparers 
are not covered by the Bureau for certain activities.
    Subsection (e) clarifies that attorneys are not covered by 
the Bureau to the extent they are engaged in the practice of 
law under the law of the State in which they are licensed. 
However, this exception to the Bureau's coverage does not 
extend to an attorney who is engaged in the offering of a 
consumer financial product or service or is otherwise subject 
to an enumerated consumer law or transferred authority.
    Subsection (f) clarifies that persons regulated by a State 
insurance regulator are not covered by the Bureau except to the 
extent that such persons are engaged in the offering of a 
consumer financial product or service or are otherwise covered 
by a Federal consumer financial law.
    Subsection (g) clarifies the authority of the Bureau with 
regards to employee benefit plans and certain other 
arrangements under the Internal Revenue Code of 1986, such as 
IRAs, certain education savings accounts, and others. The 
subsection preserves the authority of other existing agencies 
that regulate these programs. The subsection also prohibits the 
Bureau from exercising any authority with respect to these 
plans except in very limited circumstances. Any rulemaking 
could be done only after a joint request by the Secretary of 
Labor and the Secretary of the Treasury.
    Subsection (h) clarifies that persons regulated by a State 
securities commission are not covered by the Bureau except to 
the extent that such persons are engaged in the offering of a 
consumer financial product or service or are otherwise subject 
to an enumerated consumer law or transferred authority.
    Subsection (i) clarifies that persons regulated by the SEC 
are not covered by the Bureau. However, the SEC is required to 
consult and coordinate with the Bureau with respect to any rule 
for the same type of product as, or competes directly with, a 
consumer financial product or service that is subject to the 
Bureau's jurisdiction. This is to ensure equivalent regulatory 
treatment and prevent regulatory arbitrage.
    Subsection (j) clarifies that persons regulated by the CFTC 
are not covered by the Bureau. As in subsection (i), 
coordination and consultation are required for rule making 
regarding products of the same type or that compete with each 
other and fall under the Bureau's jurisdiction.
    Subsection (k) clarifies that the Bureau has no authority 
with respect to a person regulated by the Farm Credit 
Administration.
    Subsection (l) clarifies that activities relating to 
charitable contributions are not covered by the Bureau. 
However, activities not involving charitable contributions that 
are the offering or provision of any consumer financial product 
or service are covered.
    Subsection (m) clarifies that the Bureau may not define 
engaging in the business of insurance as a financial product or 
service.
    Subsection (n) clarifies that a number of persons that are 
described above may be a service provider and subject to 
certain requests for information.
    Subsection (o) clarifies that nothing in this title shall 
be construed as conferring authority on the Bureau to establish 
a usury limit on an extension of credit or made by a covered 
person to a consumer unless explicitly authorized by law.
    Subsection (p) preserves the authorities of the Attorney 
General of the United States.
    Subsection (q) preserves the authorities of the Secretary 
of the Treasury with regards to a person who performs income 
tax preparation activities for consumers.
    Subsection (r) preserves the authority of the FDIC and NCUA 
with regards to deposit and share insurance.

Section 1028. Authority to restrict mandatory pre-dispute arbitration

    The Committee is concerned that consumers have little 
leverage to bargain over arbitration procedures when they sign 
a contract for a consumer financial product or service. The 
Bureau is therefore required by this section to conduct a study 
and provide a report to Congress on the use of mandatory pre-
dispute arbitration agreements as they pertain to the offering 
or provision of consumer financial products or services. This 
section grants the Bureau authority to prohibit or impose 
conditions and limitations on certain arbitration agreements 
between a covered person and a consumer consistent with the 
results of the study if it is in the public interest. 
Additionally, the Bureau is prohibited from restricting 
consumers from entering into voluntary arbitration agreements 
after a dispute has arisen.
    The bill empowers the Bureau to take a range of steps, 
which could include a prohibition, or could instead be to 
impose conditions or limitations. In addition, the Bureau may 
choose to focus on pre-dispute mandatory arbitration provisions 
in contracts for certain types of consumer financial products 
or services, such as mortgage loans. The Bureau has to justify 
any rule by finding it is in the public interest and for the 
protection of consumers.

Section 1029. Effective date

    This section provides that this subtitle become effective 
on the designated transfer date.

                Subtitle C--Specific Bureau Authorities


Section 1031. Prohibiting unfair, deceptive, or abusive acts or 
        practices

    This section authorizes the Bureau to prevent a covered 
person from engaging in or committing an unfair, deceptive or 
abusive act or practice in connection with a transaction with a 
consumer for a consumer financial product or service, or the 
offering thereof. The Bureau is authorized to prescribe rules 
to identify such acts or practices. In prescribing rules, the 
Bureau is required to consult with the Federal banking 
agencies, or other Federal agencies, as appropriate, concerning 
the consistency of the proposed rule with prudential, market, 
or systemic objectives administered by such agencies.
    Current law prohibits unfair or deceptive acts or 
practices. The addition of ``abusive'' will ensure that the 
Bureau is empowered to cover practices where providers 
unreasonably take advantage of consumers. The Bureau could 
define acts or practices as abusive only if it has a factual 
basis to show that the act or practice either: (1) materially 
interferes with the ability of a consumer to understand a term 
or condition of a consumer financial product or service; or (2) 
takes unreasonable advantage of consumers' lack of 
understanding of material risks, costs, or conditions of the 
product, inability to protect their interests in selecting or 
using the product, or reasonable reliance on a covered person 
to act in the consumers' interest.

Section 1032. Disclosures

    This section helps ensure that consumers receive effective 
disclosures relevant to the purchase of consumer financial 
products or services. Under this section, the Bureau is granted 
rulemaking authority to ensure that information relevant to the 
purchase of such products or services is disclosed to the 
consumer in plain language in a manner that permits consumers 
to understand the costs, benefits, and risks associated with 
the product or service. In prescribing rules, the Bureau is 
required to consider available evidence about consumer 
awareness, understanding of, and responses to disclosures or 
communications about the risks, costs, and benefits of consumer 
financial products or services. The Bureau is granted the 
authority to provide a model form of such disclosure standards, 
and a safe harbor is provided for covered persons that use 
model forms included with a rule issued under this section.
    Under this section, a procedure is established to allow the 
Bureau to permit a covered person to conduct a trial disclosure 
program for the purpose of improving on any model disclosure 
forms issued to consumers to implement an enumerated consumer 
law. The Bureau is required to propose for public comment rules 
and model forms that combine Truth in Lending Act (TILA) and 
Real Estate Settlement Procedures Act (RESPA) disclosures.

Section 1033. Consumer rights to access information

    This section ensures that consumers are provided with 
access to their own financial information. This section 
requires the Bureau to prescribe rules requiring a covered 
person to make available to consumers information concerning 
their purchase and possession of a consumer financial product 
or service, including costs, charges, and usage data. The 
information is required to be made available upon a consumer's 
request in an electronic form usable by the consumer.
    Under this section, a covered person may not be required to 
make available any confidential or proprietary information, any 
information collected by the covered person for antifraud or 
anti-money laundering purposes, or any information that the 
covered person cannot retrieve in the ordinary course of 
business. This section does not impose a duty on covered 
persons to maintain or keep any information about a consumer.

Section 1034. Response to consumer complaints and inquiries

    Section 1034 requires the Bureau to establish procedures, 
in consultation with the appropriate Federal regulatory 
agencies, for providing a timely response to consumer 
complaints or inquiries which include steps taken by the 
regulator in response to the complaint or inquiry, any 
responses received by the regulator from the institution, and 
any follow-up plans or actions by the regulator in response to 
the consumer complaint or inquiry.
    In addition, this section requires very large banks and 
credit unions (as defined in section 1025) subject to 
supervision and primary enforcement by the Bureau to provide a 
timely response to the Bureau, the prudential regulators, and 
any other related agency concerning a consumer complaint or 
inquiry. This includes steps taken by the institution in 
response to the complaint or inquiry, responses received by the 
institution from the consumer, and any follow-up plans or 
actions by the institution in response to the consumer 
complaint or inquiry.
    Section 1034 also requires these very large depository 
institutions to comply in a timely manner with a consumer 
request for information in the control or possession of the 
institution concerning the account of the consumer, not 
including any confidential commercial information, such as 
algorithms used to derive credit scores, information collected 
for the purpose of preventing fraud or other unlawful or 
potentially unlawful conduct, information required to be kept 
confidential by any other provision of law, or any nonpublic or 
confidential information, including confidential supervisory 
information.
    Finally, this section requires the Bureau to enter into a 
Memorandum of Understanding with the appropriate Federal 
regulatory agencies to establish procedures by which very large 
depository institutions and relevant agencies shall comply with 
this section.

Section 1035. Private Education Loan Ombudsman

    Section 1035 requires the Secretary of the Treasury, in 
consultation with the Director, to designate a Private 
Education Loan Ombudsman within the Bureau to provide timely 
assistance to borrowers of private education loans, and to 
disseminate information about the availability and functions of 
the Ombudsman to borrowers, potential borrowers, and related 
institutions, agencies, and participants.
    This section requires the Ombudsman to receive, review, and 
attempt to informally resolve complaints from borrowers of 
private student loans. It also ensures coordination with the 
student loan ombudsman established under the Higher Education 
Act of 1965 by requiring a Memorandum of Understanding no later 
than 90 days after the designated transfer date. The Private 
Education Loan Ombudsman will also compile and analyze data on 
borrower complaints regarding private education loans, and make 
recommendations to the Director, the Secretary of Treasury, the 
Secretary of Education, and relevant Congressional Committees.
    Finally, the Ombudsman is required to prepare an annual 
report describing and evaluating its activities during the 
preceding year, and to submit the report on a consistent annual 
date to the Secretary of the Treasury, the Secretary of 
Education, and relevant Congressional Committees.

Section 1036. Prohibited acts

    This section prohibits by law certain activities such as 
the selling or advertising of consumer financial products or 
services which are not in conformity with the sections of this 
title, the failure or refusal to provide information to the 
Bureau as required by law, and knowingly or recklessly 
providing substantial assistance to another person in violation 
of section 1031.

Section 1037. Effective date

    This section provides that this subtitle become effective 
on the designated transfer date.

                 Subtitle D--Preservation of State Law


Section 1041. Relation to State law

    Section 1041 confirms that the Consumer Financial 
Protection Act (CFP Act) will not preempt State law if the 
State law provides greater protection for consumers. Federal 
consumer financial laws have historically established only 
minimum standards and have not precluded the States from 
enacting more protective standards. This title maintains that 
status quo.
    A strong and independent Bureau with a clear mission to 
keep consumer protections up-to-date with the changing 
marketplace will reduce the incentive for State action and 
increase uniformity. The Gramm-Leach-Bliley Act of 1999 set 
federal financial privacy standards and gave the States the 
authority to go further. Only three States have used that 
power, and banks' operations have not been impaired. If States 
can continue to provide new consumer protections as problems 
arise, and the Bureau has the authority to follow the market 
and keep Federal protection up-to-date, then the Bureau will be 
in a position to set a strong, consistent standard that will 
satisfy the States.
    Additionally, State initiatives can be an important signal 
to Congress and Federal regulators of the need for Federal 
action. States are much closer to abuses and are able to move 
more quickly when necessary to address them. If States were not 
allowed to take the initiative to enact laws providing greater 
protection for consumers, the Federal Government would lose an 
important source of information and reason to adjust standards 
over time.
    For that reason, section 1041 also requires the Bureau to 
propose a rule making when a majority of the States has enacted 
a resolution requesting a new or modified consumer protection 
regulation by the Bureau. As part of the rule making, the 
Bureau is required to consult with federal banking agencies to 
determine whether the proposed regulation presents an 
unacceptable safety and soundness risk. The Bureau must also 
make public in the Federal Register its determination to act or 
not to act on the States' request.

Section 1042. Preservation of enforcement powers of States

    Section 1042 grants authority to State attorneys general to 
enforce this Act against Federal and State chartered entities. 
State regulators are also authorized to take appropriate action 
against State chartered entities. The section also clarifies 
that the CFP Act does not limit any provision of any enumerated 
consumer law that relates to State authority to enforce Federal 
law. State attorneys general and regulators are directed to 
consult or notify the Bureau and the prudential regulators, 
when practicable, before initiating an enforcement action 
pursuant to this section. This section also confirms that the 
CFP Act has no impact on the authority of State securities or 
State insurance regulators regarding their enforcement actions 
or rulemaking activities.

Section 1043. Preservation of existing contracts

    Section 1043 makes clear that the CFP Act shall not be 
construed to affect the applicability of any rule, order, 
guidance or interpretation by the OCC or OTS regarding the 
preemption of State law by a Federal banking law to any 
contract entered into by banks, thrifts, or affiliates and 
subsidiaries thereof, prior to the date of enactment of the CFP 
Act. This section is intended to provide stability to existing 
contracts.

Section 1044. State law preemption standards for national banks and 
        subsidiaries clarified

    Section 1044 amends the National Bank Act to clarify the 
preemption standard relating to State consumer financial laws 
as applied to national banks. This section does not alter the 
preemption standards for State laws of general applicability to 
business conduct. State consumer financial laws are defined as 
laws that directly and specifically regulate the manner, 
content, or terms and conditions of financial transactions or 
accounts with respect to consumers. The standard for preempting 
State consumer financial law would return to what it had been 
for decades, those recognized by the Supreme Court in Barnett 
Bank v. Nelson, 517 U.S. 25 (1996 Barnett), undoing broader 
standards adopted by rules, orders, and interpretations issued 
by the OCC in 2004.
    Specifically, this section sets out the three circumstances 
under which a State consumer financial law can be preempted: 
(1) when the State law would have a discriminatory effect on 
national banks or federal thrifts in comparison with the effect 
of the law on a bank or thrift chartered in that State; (2) if 
the State law, as described in the standard established by the 
Supreme Court in Barnett, ``prevents or significantly 
interferes with a national bank's exercise of its power;'' or 
(3) the State law is preempted by another Federal law. A 
preemption determination pursuant to Barnett can be made by 
either a court or by the OCC on a case-by-case basis. The term 
``case-by-case basis'' is defined to permit the OCC to make a 
single determination concerning multiple States' consumer 
financial laws, so long as the law contains substantively 
equivalent terms.
    Prior to making a determination under the Barnett standard, 
the OCC must follow certain procedures when making a preemption 
determination. Prior to making such a determination the OCC 
must first consult with, and consider the views of, the Bureau. 
The determination by the OCC must also be based on substantial 
evidence supporting the finding that the provision meets the 
Barnett standard. After consulting with the Bureau, the OCC 
must make a written finding that a federal law provides a 
relevant substantive standard that would protect consumers if 
the State law was to be preempted. The federal standard does 
not have to be as strong as the State law that is being 
preempted.
    Section 1044 clarifies that nothing affects the deference 
that a court may afford to the OCC under the Chevron doctrine 
when interpreting Federal laws administered by that agency, 
except for preemption determinations. For a preemption 
determination, a reviewing court must assess the validity of 
the agency's preemption claim based on certain factors, as the 
court finds to be persuasive and relevant.
    Section 1044 does not alter or affect existing laws 
regarding the charging of interest by national banks
    Finally, the OCC is required to periodically publish a list 
of its preemption determinations.

Section 1045. Clarification of law applicable to nondepository 
        institutions subsidiaries

    Section 1045 clarifies that State law applies to State-
chartered nondepository institution subsidiaries, affiliates, 
and agents of national banks, other than entities that are 
themselves chartered as national banks. Such entities are 
generally chartered by the States and therefore should be 
subject to State law.

Section 1046. State law preemption standards for federal savings 
        associations and subsidiaries clarified

    Section 1046 amends the Home Owners' Loan Act to clarify 
that State law preemption standards for Federal savings 
associations and their subsidiaries shall be made in accordance 
with the standard applicable to national banks.

Section 1047. Visitorial standards for national banks and savings 
        associations

    Section 1047 clarifies that a State attorney general may 
bring a judicial action against a national bank or Federal 
savings association to enforce Federal law, as permitted by 
such law, or nonpreempted State law, which is consistent with 
the provisions of the National Bank Act and Home Owners' Loan 
Act relating to visitorial powers. The United States Supreme 
Court affirmed this when it overturned a Federal preemption of 
States to enforce valid State laws against national banks in 
Cuomo v. Clearing House Association, 557 U.S. (2009) (Cuomo). 
The Court held that the National Bank Act generally preempts 
``vistorial'' supervisory powers by States over national banks, 
but that law enforcement powers are separate and not preempted 
by the National Bank Act. A State attorney general is required 
to consult with the OCC before bringing an action against a 
national bank or Federal savings association.

Section 1048. Effective date

    Section 1048 provides that this subtitle becomes effective 
on the designated transfer date.

                     Subtitle E--Enforcement Powers


Section 1051. Definitions

    Section 1051 defines certain key terms for the purposes of 
this subtitle.

Section 1052. Investigations and administrative discovery

    Section 1052 provides the authority to the Bureau to issue 
subpoenas for documents and testimony. It also authorizes 
demands of materials and provides for confidential treatment of 
demanded material. Section 1052 provides for petitions to 
modify or set aside a demand, and for custodial control and 
district court jurisdiction.

Section 1053. Hearings and adjudication proceedings

    Section 1053 provides the authority to the Bureau to 
conduct hearings and adjudication proceedings with special 
rules for cease-and-desist proceedings, temporary cease-and-
desist proceedings, and for enforcement of orders in the United 
States District Court.

Section 1054. Litigation authority

    Section 1054 provides the authority to the Bureau to 
commence civil action against a person who violates a provision 
of this title or any enumerated consumer law, rule or order.

Section 1055. Relief available

    Section 1055 provides for relief for consumers through 
administrative proceedings and court actions for violations of 
this title, including civil money penalties.

Section 1056. Referrals for criminal proceedings

    Section 1056 authorizes the Bureau to transmit evidence of 
conduct that may constitute a violation of Federal criminal law 
to the Attorney General of the United States.

Section 1057. Employee protection

    Section 1057 provides protection against firings of or 
discrimination against employees who provide information or 
testimony to the Bureau regarding violations of this title.

Section 1058. Effective date

    Section 1058 provides that this subtitle becomes effective 
on the designated transfer date.

   Subtitle F--Transfer of Functions and Personnel and Transitional 
                               Provisions


Section 1061. Transfer of consumer financial protection functions

    Section 1061 transfers functions relating to consumer 
financial protection from the Federal banking agencies (Federal 
Reserve, OCC, OTS and FDIC) and NCUA, the Department of Housing 
and Urban Development and the Federal Trade Commission to the 
Bureau.

Section 1062. Designated transfer date

    Section 1062 identifies the date of transfer of functions 
to the Bureau as between 6 and 18 months after the date of 
enactment of the CFP Act and subject to a six month extension. 
It also requires that the transfer of functions be completed 
not later than 2 years after the date of enactment of the CFP 
Act.

Section 1063. Savings provision

    Section 1063 clarifies that existing rights, duties, 
obligations, orders, and rules of the Federal banking agencies, 
the NCUA, the Department of Housing and Urban Development and 
the Federal Trade Commission are not affected by the transfer.

Section 1064. Transfer of certain personnel

    Section 1064 provides for the transfer of personnel from 
various agencies to the Bureau and establishes employment and 
pay protection for two years. It also provides for continuation 
of benefits.

Section 1065. Incidental transfers

    Section 1065 authorizes the Director of the Office of 
Management and Budget, in consultation with the Secretary of 
the Treasury, to make additional incidental transfers of assets 
and liabilities of the various agencies. The authority in this 
section terminates after 5 years.

Section 1066. Interim authority of the Secretary

    Section 1066 provides the Secretary of the Treasury 
authority to perform the functions of the Bureau under the CFP 
Act until the Director of the Bureau is confirmed by the 
Senate.

Section 1067. Transition oversight

    Section 1067 ensures an orderly and organized creation of 
the Bureau. It also requires the Bureau to submit an annual 
report to Congress, which shall include plans for the 
recruitment of a qualified workforce and a training and 
development program.

                  Subtitle G--Regulatory Improvements


Section 1071. Collection of deposit account data

    Section 1071 authorizes the collection of deposit account 
data in order to promote awareness and understanding of the 
access of individuals and communities to financial services, 
and to identify business development needs and opportunities. 
In developing the rules prescribed under Section 1071, the 
Bureau should coordinate with the Federal banking regulators 
and the National Credit Union Administration regarding the type 
and form of the deposit account data, as well as the method of 
collection, making every effort to avoid duplicative data 
collection requirements and minimize additional regulatory 
burden. Where substantially similar data is collected by the 
appropriate Federal banking regulator or the National Credit 
Union Administration, the Bureau should use this data. This 
section becomes effective on the designated transfer date.

Section 1072. Small business data collection

    Section 1072 authorizes the Bureau to collect data on small 
businesses to facilitate enforcement of fair lending laws and 
to enable communities, governmental entities and creditors to 
identify business and community development needs and 
opportunities for women-owned and minority-owned small 
businesses. This section becomes effective on the designated 
transfer date.

Section 1073. GAO study on the effectiveness and impact of various 
        appraisal methods

    Section 1073 requires the GAO to conduct a study on various 
appraisal methods and the extent to which the usage of such 
methods impacts costs to consumers, conflicts of interest and 
home price speculation.

Section 1074. Prohibition on certain prepayment penalties

    Section 1074 prohibits prepayment penalties on all 
residential mortgage loans that are not a qualified mortgage 
and restricts them on qualified mortgages. Qualified mortgages 
are defined to include residential mortgages that meet certain 
criteria, in particular with respect to the application of 
prepayment penalties.

Section 1075. Assistance for economically vulnerable individuals and 
        families

    Section 1075 amends the Financial Education and Counseling 
Grant Program established in the Housing and Economic Recovery 
Act of 2008 by expanding the target audience beyond ``potential 
homebuyers'' to ``economically vulnerable individuals and 
families'' and deletes the 5 organization limit.

Section 1076. Remittance transfers

    Section 1076 amends the Electronic Fund Transfer Act to 
establish minimum protections for remittances sent by consumers 
in the United States to other countries (remittance transfers). 
Immigrants send substantial portions of their earnings to 
family members abroad. These senders of remittance transfers 
are not currently provided with adequate protections under 
federal or state law. They face significant problems with their 
remittance transfers, including being overcharged or not having 
the funds reach intended recipients. This section will require 
disclosures about the costs of sending remittance transfers to 
be displayed in storefronts and to be provided to senders prior 
to and after a transaction. An error resolution process for 
remittance transfers is also established.
    Specifically, this section will allow consumers to compare 
costs by requiring remittance providers to post, on a daily 
basis, a model transfer for the amounts of $100 and $200 in 
their storefronts showing the amount of currency, including 
fees, which would be received by the recipient of a remittance. 
It also will require consumers sending remittances to be 
provided with simple disclosures describing the amount of 
currency for the designated recipient and a promised date of 
delivery. In addition, it establishes an error resolution 
process for remittances that are not properly transmitted.

                   Subtitle H--Conforming Amendments


Section 1081. Amendments to the Inspector General Act

    Section 1081 makes conforming amendments to the Inspector 
General Act to provide the Bureau with oversight by the 
Inspector General of the Board of Governors. This section 
becomes effective on the date of enactment of this Act.

Section 1082. Amendments to the Privacy Act of 1974

    Section 1082 makes conforming amendments to the Privacy 
Act. This section becomes effective on the date of enactment of 
this Act.

Section 1083. Amendments to the Alternative Mortgage Transaction Parity 
        Act of 1982

    Section 1083 makes conforming amendments to the Alternative 
Mortgage Transaction Parity Act. The Alternative Mortgage 
Parity Act was passed in 1982 to preempt State laws and 
constitutions that prohibited adjustable rate mortgage (ARM) 
loans for Federally-chartered and State chartered entities. It 
also preempted State laws with respect to all ``alternative'' 
mortgages, including negative amortization loans and interest 
only loans. States were unable to regulate terms for mortgages 
which have proved to have had significant difficulty. The 
amendment continues to preempt State laws that would prohibit 
adjustable rate mortgages, but removes this preemption of other 
types of ``alternative'' mortgages or features, permitting 
States to legislate in this area.

Section 1084. Amendments to the Electronic Fund Transfer Act

    Section 1084 makes conforming amendments to the Electronic 
Fund Transfer Act.

Section 1085. Amendments to the Equal Credit Opportunity Act

    Section 1085 makes conforming amendments to the Equal 
Credit Opportunity Act.

Section 1086. Amendments to the Expedited Funds Availability Act

    Section 1086 makes conforming amendments to the Expedited 
Funds Availability Act. It also increases the next-day funds 
availability amount under the Expedited Funds Availability Act 
from $100 to $200, and allows future adjustments for inflation.

Section 1087. Amendments to the Fair Credit Billing Act

    Section 1087 makes conforming amendments to the Fair Credit 
Billing Act.

Section 1088. Amendments to the Fair Credit Reporting Act and the Fair 
        and Accurate Credit Transactions Act

    Section 1088 makes conforming amendments to the Fair Credit 
Reporting Act and the Fair and Accurate Credit Transaction Act.

Section 1089. Amendments to the Fair Debt Collection Practices Act

    Section 1089 makes conforming amendments to the Fair Debt 
Collection Practices Act.

Section 1090. Amendments to the Federal Deposit Insurance Act

    Section 1090 makes conforming amendments to the Federal 
Deposit Insurance Act.

Section 1091. Amendments to the Gramm-Leach-Bliley Act

    Section 1091 makes conforming amendments to the Gramm-
Leach-Bliley Act.

Section 1092. Amendments to the Home Mortgage Disclosure Act

    Section 1092 makes conforming and other amendments to the 
Home Mortgage Disclosure Act. The amendments require new data 
fields to be reported to the Bureau, including borrower age, 
total points and fees information, loan pricing, prepayment 
penalty information, house value for loan to value ratios, 
period of introductory interest rate, interest-only or negative 
amortization information, terms of the loan, channel of 
origination, unique originator ID from the Secure and Fair 
Enforcement for Mortgage Licensing Act, universal loan 
identifier, parcel number to permit geocoding, and credit 
score.

Section 1093. Amendments to the Home Owners Protection Act of 1998

    Section 1093 makes conforming amendments to the Home Owners 
Protection Act.

Section 1094. Amendments to the Home Ownership and Equity Protection 
        Act of 1994

    Section 1094 makes conforming amendments to the Home 
Ownership and Equity Protection Act.

Section 1095. Amendments to the Omnibus Appropriations Act, 2009

    Section 1095 makes conforming amendments to the Omnibus 
Appropriations Act, 2009.

Section 1096. Amendments to the Real Estate Settlement Procedures Act

    Section 1096 makes conforming amendments to the Real Estate 
Settlement Procedures Act.

Section 1097. Amendments to the Right to Financial Privacy Act of 1978

    Section 1097 makes conforming amendments to the Right to 
Financial Privacy Act.

Section 1098. Amendments to the Secure and Fair Enforcement for 
        Mortgage Licensing Act of 2008

    Section 1098 makes conforming amendments to the Secure and 
Fair Enforcement for Mortgage Licensing Act of 2008.

Section 1099. Amendments to the Truth in Lending Act

    Section 1099 makes conforming amendments to the Truth in 
Lending Act.

Section 1100. Amendments to the Truth in Savings Act

    Section 1100 makes conforming amendments to the Truth in 
Savings Act.

Section 1101. Amendments to the Telemarketing and Consumer Fraud and 
        Abuse Prevention Act

    Section 1101 makes conforming amendments to the 
Telemarketing and Consumer Fraud and Abuse Prevention Act.

Section 1102. Amendments to the Paperwork Reduction Act

    Section 1102 makes conforming amendments to the Paperwork 
Reduction Act.

Section 1103. Adjustment for inflation in the Truth in Lending Act

    Section 1103 amends the Truth in Lending Act to cover 
transactions of up to $50,000 and allows future adjustments for 
inflation.

Section 1104. Effective date

    Section 1104 provides that Sections 1083 through 1102 
become effective on the designated transfer date.

              Title XI--Federal Reserve System Provisions


Section 1151. Federal Reserve Act amendment on emergency lending 
        authority

    This section amends Section 13(3) of the Federal Reserve 
Act which governs emergency lending. Emergency lending to an 
individual entity is no longer permitted. The Board of 
Governors now is authorized to lend to a participant in any 
program or facility with broad-based eligibility. Policies and 
procedures governing emergency lending must be established by 
regulation, in consultation with the Secretary of the Treasury. 
The Treasury Secretary must approve the establishment of any 
lending program. Lending programs must be designed to provide 
liquidity and not to aid a failing financial company. 
Collateral or other security for loans must be sufficient to 
protect taxpayers from losses.
    The Board of Governors must report to the Senate Committee 
on Banking, Housing and Urban Affairs and the House Committee 
on Financial Services on any 13(3) lending program within 7 
days after it is initiated, and periodically thereafter. The 
identities of recipients of emergency lending will be disclosed 
within 1 year of receipt of assistance, unless the Federal 
Reserve reports to Congress that disclosure would reduce the 
effectiveness of the program or facility or have other serious 
adverse effects, in which case the identities of recipients 
will be disclosed no later than 1 year after the program 
terminates. The GAO will report to Congress evaluating whether 
a determination not to disclose recipient identities within a 
year is reasonable.

Section 1152. Reviews of special Federal Reserve credit facilities

    This section amends Section 714 of Title 31, United States 
Code, to establish Comptroller General audits of emergency 
lending by the Board of Governors of the Federal Reserve under 
Section 13(3) of the Federal Reserve Act.

Section 1153. Public access to information

    This section amends Section 2B of the Federal Reserve Act. 
The Comptroller General audits of 13(3) lending established 
under Section 1152 of this Act, the annual financial statements 
prepared by an independent auditor for the Board of Governors, 
and reports to the Senate Committee on Banking, Housing and 
Urban Affairs on 13(3) lending established under Section 1151 
of this Act will be displayed on a webpage that will be 
accessed by an ``Audit'' link on the Board of Governors 
website. The required information will be made available within 
6 months of the date of release.

Sections 1154-1155. Emergency financial stabilization debt guarantees

    The FDIC will be able to guarantee the debt of solvent 
insured depositories and their holding companies under very 
strict conditions. The Board of Governors of the Federal 
Reserve and the Financial Stability Oversight Council must 
determine that there is a ``liquidity event'' that failure to 
take action would have serious adverse effects on financial 
stability or economic conditions, and that guarantees are 
needed to avoid or mitigate the adverse effects. The 
determination must be in writing and is subject to GAO audit. 
The FDIC may then set up a facility to guarantee debt, 
following policies and procedures determined by regulation, but 
the terms and conditions of the guarantees must be approved by 
the Secretary of the Treasury.
    The Secretary will determine a maximum amount of 
guarantees, and the President may request Congress to allow 
that amount. If the President does not submit the request, the 
guarantees will not be made. Congress has 5 days to disapprove 
the request. Fees for the guarantees are set to cover all 
expected costs. If there are losses, they are recouped from 
those firms that received guarantees.

Section 1156. Additional related amendments

    The FDIC may not exercise its systemic risk authority to 
establish any widely available debt guarantee program for which 
Section 1155 would provide authority.
    If any firm defaults on a debt guarantee provided under 
section 1155, the FDIC shall appoint itself receiver of the 
company if it is an insured depository. If the defaulting firm 
is not an insured depository, the FDIC shall pursue one of two 
alternatives. Under the first alternative the FDIC will require 
consideration that the company be put into the resolution 
mechanism pursuant to Section 203, and require that the company 
file for bankruptcy if the FDIC is not appointed receiver 
within 30 days. Under the second alternative the FDIC will file 
a petition for involuntary bankruptcy on behalf of the 
defaulting company.

Section 1157. Changes to Federal Reserve governance

    The Federal Reserve Act is amended to state that a member 
of the Board of Governors of the Federal Reserve shall serve as 
Vice Chairman for Supervision. The Vice Chairman, who will be 
designated by the President, by and with the advice and consent 
of the Senate, will develop policy recommendations regarding 
supervision and regulation for the Board, and will appear 
before Congress semi-annually to report on the efforts, 
objectives and plans of the Board with respect to the conduct 
of supervision and regulation.
    The Federal Reserve Act is amended to give the Board of 
Governors of the Federal Reserve a formal responsibility to 
identify, measure, monitor, and mitigate risks to U.S. 
financial stability.
    The Federal Reserve Act is amended to state explicitly that 
the Board of Governors of the Federal Reserve may not delegate 
to a Federal reserve bank its functions for establishing 
supervisory and regulatory policy for bank holding companies 
and other financial firms supervised by the Board.
    To eliminate potential conflicts of interest at Federal 
reserve banks, the Federal Reserve Act is amended to state that 
no company, or subsidiary or affiliate of a company that is 
supervised by the Board of Governors can vote for Federal 
reserve bank directors; and the officers, directors and 
employees of such companies and their affiliates cannot serve 
as directors.
    The Federal Reserve Act is amended to state that the 
Federal Reserve Bank of New York president, who is currently 
appointed by the district board of directors, will be appointed 
by the President, by and with the advice and consent of the 
Senate.

    Title XII--Improving Access to Mainstream Financial Institutions


Section 1201. Short title

    This section establishes the name of the title to be the 
``Improving Access to Mainstream Financial Institutions Act.''

Section 1202. Purpose

    This section establishes the purpose of this title to 
encourage initiatives for financial products and services that 
are appropriate and accessible for millions of Americans who 
are not fully incorporated into the financial mainstream. The 
Committee is concerned about lack of access to mainstream 
financial institutions for significant numbers of unbanked or 
underbanked individuals. About one in four families are 
unbanked or underbanked. Many are low- and moderate-income 
families that cannot afford to have their earnings diminished 
by reliance on high-cost and often predatory financial products 
and services. Underbanked consumers rely on non-traditional 
forms of credit including payday lenders, title lenders, or 
refund anticipation loans for financial needs. The unbanked are 
unable to save securely for education expenses, a down payment 
on a first home, or other future financial needs.

Section 1203. Definitions

Section 1204. Expanded access to mainstream financial institutions

    Section 1204 authorizes programs intended to assist low- 
and moderate-income individuals establish bank or credit union 
accounts. This section authorizes the Treasury Secretary to 
establish a multiyear program of grants, cooperative 
agreements, financial agency agreements, and similar contracts 
or undertakings to promote initiatives designed to expand 
access to mainstream financial institutions by low and moderate 
income individuals. Entities eligible under this program 
include: 501(c)(3) organizations; federally insured depository 
institutions; community development financial institutions; 
State, local, or tribal government entities; and partnerships 
or other joint ventures comprised of one or more of these such 
entities. An eligible entity may, in participating in a program 
established by the Secretary under this section, offer or 
provide to low and moderate income individuals products or 
services including small-dollar value loans and financial 
education and counseling.

Section 1205. Low-cost alternatives to payday loans

    Section 1205 will encourage the development of small, 
affordable loans as an alternative to more costly, predatory, 
payday loans. This section authorizes the Secretary to 
establish multiyear demonstration programs by means of grants, 
cooperative agreements, financial agency agreements, and 
similar contracts or undertakings with eligible entities to 
provide low-cost small loans to consumers that will provide 
alternatives to payday loans. Loans under this section are 
required to be made on terms and conditions and pursuant to 
lending practices that are reasonable for consumers. The 
authorization of a grant program under this section is intended 
to encourage the further development of affordable small loans 
that will assist working families by providing access to 
reasonable credit and providing financial education 
opportunities. Entities awarded a grant under this section are 
required to promote financial literacy and education 
opportunities, such as relevant counseling services, 
educational courses, or wealth building programs, to each 
consumer provided with a loan pursuant to this section.

Section 1206. Grants to establish loan-loss reserve funds

    Section 1206 will enable Community Development Financial 
Institutions to establish and maintain small dollar loan 
programs by establishing a grant program within the CDFI Fund 
to encourage affordable small dollar lending through loan-loss 
reserve funds and provision of technical assistance. This 
section directs the CDFI Fund to make grants to CDFIs to 
establish loan-loss reserve funds to help CDFIs defray the 
costs of operating small dollar loan programs in order to help 
provide consumers access to mainstream financial institutions 
and provide payday loan alternatives. Loan-loss reserve funds 
enable financial institutions to maintain the necessary capital 
to offer small dollar loans in a prudentially sound manner. A 
CDFI receiving grants under this program must provide matching 
funds equal to 50% of the amount of any grant received under 
this section. Grants received by a CDFI under this section may 
not be used to provide direct loans to consumers, and may be 
used to help recapture a portion or all of a defaulted loan 
made under the small dollar loan program.
    This section further requires the Fund to provide technical 
assistance grants to CDFIs to support and maintain small dollar 
loan programs. Technical assistance grants help financial 
institutions defray the initial fixed costs of establishing a 
small dollar loan program and effectively implement grant 
activities.
    This section sets requirements for the terms and conditions 
of loans made by participating institutions to ensure 
affordability and help underserved consumers improve their 
financial condition. Small dollar loan programs are defined as 
loan programs where a CDFI offers loans to consumers that do 
not exceed $2500; are required to be paid in installments; have 
no prepayment penalty; report to at least one national consumer 
reporting agency; and meet any other affordability requirement 
established by the Administrator of the Fund.

Section 1207. Procedural provisions

    This section requires an eligible entity desiring to 
participate in a program or obtain a grant under this title to 
submit an application to the Secretary.

Section 1208. Authorization of appropriations

    This section authorizes to be appropriated to the 
Secretary, such sums necessary to administer and fund the 
programs and projects authorized by this title. It further 
authorizes to be appropriated to the Fund for each fiscal year 
beginning in FY 2010, an amount equal to the amount of the 
administrative costs of the Fund for the operation of the grant 
program established under this title.

Section 1209. Regulations

    This section authorizes the Secretary to promulgate 
regulations to implement and administer the grant programs and 
undertakings authorized by this title, including limiting the 
eligibility of entities as deemed appropriate for certain 
activities authorized in Section 1204.

Section 1210. Evaluation and reports to Congress

    This section requires the Secretary to submit a report to 
the Senate Committee on Banking, Housing and Urban Affairs and 
the House Financial Services Committee containing a description 
of the activities funded, amounts distributed, and measurable 
results, as appropriate and available.

                           VI. HEARING RECORD

    Since the beginning of the 110th Congress, the Committee on 
Banking, Housing, and Urban Affairs has held 79 hearings on 
topics surrounding the housing and economic crisis and 
financial regulatory reform.

    Preserving the American Dream: Predatory Lending Practices 
and Home Foreclosures
    Wednesday, February 7, 2007
    Witnesses: The Reverend Jesse Jackson, President and 
Founder, RainbowPUSH Coalition; Mr. Harry H. Dinham, President, 
National Association of Mortgage Brokers; Mr. Hilary Shelton, 
Executive Director, National Association for the Advancement of 
Colored People; Mr. Martin Eakes, Chief Executive Officer, 
Self-Help Credit Union and the Center for Responsible Lending; 
Ms. Jean Constantine-Davis, Senior Attorney, AARP; Mr. Douglas 
G. Duncan, Senior Vice President of Research and Business 
Development, and Chief Economist, Mortgage Bankers Association; 
Ms. Delores King, Consumer, Ms. Amy Womble, Consumer.

    Mortgage Market Turmoil: Causes and Consequences
    Thursday, March 22, 2007
    Witnesses:
    Panel 1: Mr. Emory W. Rushton, Senior Deputy Comptroller 
and Chief National Bank Examiner, Office of the Comptroller of 
the Currency; Mr. Joseph A. Smith, North Carolina Commissioner 
of Banks and Chairman, Conference of State Bank Supervisors; 
Mr. Roger T. Cole, Director, Division of Banking Supervision 
and Regulation, Board of Governors of the Federal Reserve 
System; Mr. Scott M. Polakoff, Senior Deputy Director and Chief 
Operating Officer, Office of Thrift Supervision; Ms. Sandra 
Thompson, Director of the Division of Supervision and Consumer 
Protection, Federal Deposit Insurance Corporation.
    Panel 2: Mr. Brendan McDonagh, Chief Executive Officer, 
HSBC Finance Corporation; Mr. Sandy Samuels, Executive Managing 
Director, Countrywide Financial Corporation; Mr. Laurent 
Bossard, Chief Executive Officer, WMC Mortgage; Mr. L. Andrew 
Pollock, President, First Franklin Financial Corporation; Ms. 
Janis Bowdler, Senior Policy Analyst, National Council of La 
Raza; Mr. Irv Ackelsberg, Consumer Attorney; Ms. Jennie 
Haliburton, Consumer; Mr. Al Ynigues, Borrower.

    Subprime Mortgage Market Turmoil: Examining the Role of 
Securitization
    Tuesday, April 17, 2007
    Witnesses: Mr. Gyan Sinha, Senior Managing Director and 
Head of ABS and CDO Research, Bear Stearns & Co. Inc.; Mr. 
David Sherr, Managing Director and Head of Securitized 
Products, Lehman Brothers; Ms. Susan Barnes, Managing Director 
of Ratings Services, Standard and Poor's; Mr. Warren Kornfeld, 
Managing Director, Residential Mortgage-Backed Securities 
Rating Group, Moody's Investors Service; Mr. Kurt Eggert, 
Professor of Law, Chapman University School of Law; Mr. 
Christopher L. Peterson, Assistant Professor of Law, Levin 
College of Law, University of Florida.

    Ending Mortgage Abuse: Safeguarding Homebuyers
    Tuesday, June 26, 2007
    Witnesses: Mr. David Berenbaum, Executive Vice President, 
National Community Reinvestment Coalition; Professor Anthony 
Yezer, Department of Economics, George Washington University; 
Ms. Denise Leonard, Chairman and CEO, Constitution Financial 
Group, Inc. on behalf of the National Association of Mortgage 
Brokers; Mr. John Robbins, Chairman, Mortgage Bankers 
Association; Mr. Wade Henderson, President and CEO, Leadership 
Conference on Civil Rights; Mr. Alan Hummel, Senior Vice 
President and Chief Appraiser, Forsythe Appraisals, LLC on 
behalf of the Appraisal Institute; Mr. Pat V. Combs, President, 
National Association of REALTORS; Mr. Michael D. Calhoun, 
President, Center For Responsible Lending.

    The State of the Securities Markets
    Tuesday, July 31, 2007
    Witnesses: Honorable Christopher Cox, Chairman, Securities 
and Exchange Commission.

    The Role and Impact of Credit Rating Agencies on the 
Subprime Credit Markets
    Wednesday, September 26, 2007
    Witnesses
    Panel 1: Honorable Christopher Cox, Chairman, Securities 
and Exchange Commission.
    Panel 2: Mr. John Coffee, Adolf A. Berle Professor of Law, 
Columbia Law School; Dr. Lawrence J. White, Leonard E. 
Imperatore Professor of Economics, New York University; Mr. 
Micheal Kanef, Group Managing Director, Assett Finance Group, 
Moody's Financial Services; Ms. Vickie A. Tillman, Executive 
Vice President for Credit Market Services, Standard & Poor's.

    Strengthening our Economy: Foreclosure Prevention and 
Neighborhood Preservation
    Thursday, January 31, 2008
    Witnesses
    Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Robert Steel, Under Secretary of 
Treasury for Domestic Finance, Department of the Treasury.
    Panel 2: Doris Koo, President and CEO, Enterprise Community 
Partners, Inc; Michael Barr, Senior Fellow, Center for American 
Progress, and Professor of Law, University of Michigan Law 
School; Mr. Wade Henderson, President and CEO, Leadership 
Conference on Civil Rights; Mr. Alex Pollock, Resident Fellow, 
American Enterprise Institute.

    The State of the United States Economy and Financial 
Markets
    Thursday, February 14, 2008
    Witnesses: Honorable Henry M. Paulson, Secretary of the 
Treasury; Honorable Christopher Cox, Chairman, Securities and 
Exchange Commission; Honorable Ben S. Bernanke, Chairman, Board 
of Governors of the Federal Reserve System.

    The State of the Banking Industry
    Tuesday, March 4, 2008
    Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Honorable John C. Dugan, Comptroller of 
the Currency, United States Treasury; Honorable John M. Reich, 
Director, Office of Thrift Supervision; Honorable JoAnn 
Johnson, Chairman, National Credit Union Administration; 
Honorable Donald Kohn, Vice Chairman, Board of Governors, 
Federal Reserve System; Mr. Thomas B. Gronstal, Superintendent 
of Banking, State of Iowa.

    Turmoil in U.S. Credit Markets: Examining the Recent 
Actions of Federal Financial Regulators
    Thursday, April 3, 2008
    Witnesses
    Panel 1: The Honorable Ben S. Bernanke, Chairman, Board of 
Governors of the Federal Reserve System; Honorable Christopher 
Cox, Chairman, Securities and Exchange Commission; Robert 
Steel, Under Secretary of Treasury for Domestic Finance, 
Department of the Treasury; Mr. Timothy F. Geithner, President, 
Federal Reserve Bank of New York.
    Panel 2: Mr. James Dimon, Chairman and Chief Executive 
Officer, JP Morgan Chase; Mr. Alan D. Schwartz, President and 
Chief Executive Officer, The Bear Stearns Companies, Inc.

    Restoring the American Dream: Solutions to Predatory 
Lending and the Foreclosure Crisis
    Monday, April 7, 2008
    Witnesses: The Honorable Michael Nutter, Mayor of 
Philadelphia, Pennsylvania; Ms. Yajaira Rivera, Philadelphia, 
Pennsylvania; Ms. Christina Anderson-Jones, Philadelphia, 
Pennsylvania; Ph.D. Ira Goldstein, Director, Policy and 
Information Services, The Reinvestment Fund; Mr. Brian A. 
Hudson, Sr., Executive Director, Pennsylvania House Finance 
Agency.

    Turmoil in U.S. Credit Markets: Examining Proposals to 
Mitigate Foreclosures and Restore Liquidity to the Mortgage 
Markets
    Thursday, April 10, 2008
    Witnesses: Dr. Lawrence H. Summers, Charles W. Eliot 
University Professor, Harvard University; Dr. Dean Baker, Co-
Director, Center for Economic and Policy Research; Ms. Ellen 
Harnick, Senior Policy Counsel, Center for Responsible Lending; 
Mr. Scott Stern, Chief Executive Officer, Lenders One, 
Incorporated; Dr. Douglas Elmendorf, Senior Fellow, The 
Brookings Institution.

    Turmoil in U.S. Credit Markets Impact on the Cost and 
Availability of Student Loans
    Tuesday, April 15, 2008
    Witnesses: John (Jack) F. Remondi, Vice Chairman and Chief 
Financial Officer, Sallie Mae, Inc.; Mr. Tom Deutsch, Deputy 
Executive Director, American Securitization Forum; Ms. Patricia 
McGuire, President, Trinity Washington University; Ms. Sarah 
Flanagan, Vice President for Policy Development, National 
Association of Independent Colleges and Universities; Mark 
Kantrowitz, Publisher, FinAid.org.

    Turmoil in U.S. Credit Markets: Examining Proposals to 
Mitigate Foreclosures and Restore Liquidity to the Mortgage 
Markets
    Wednesday, April 16, 2008
    Witnesses: Honorable Brian D. Montgomery, Federal Housing 
Commissioner and Assistant Secretary, Department of Housing and 
Urban Development; Mr. Art Murton, Director, Division of 
Insurance and Research, Federal Deposit Insurance Corporation; 
Mr. Scott M. Polakoff, Senior Deputy Director and Chief 
Operating Officer, Office of Thrift Supervision.

    Turmoil in U.S. Credit Markets: The Role of the Credit 
Rating Agencies
    Tuesday, April 22, 2008
    Witnesses
    Panel 1: Honorable Christopher Cox, Chairman, Securities 
and Exchange Commission.
    Panel 2: Professor John C. Coffee, Jr., Adolf A. Berle 
Professor of Law, Columbia University Law School; Dr. Arturo 
Cifuentes, Managing Director, R.W. Pressprich & Co.; Mr. 
Stephen W. Joynt, President and Chief Executive Officer, Fitch 
Ratings; Ms. Claire Robinson, Senior Managing Director, Moody's 
Investors Service; Ms. Vickie A. Tillman, Executive Vice 
President for Credit Market Services, Standard & Poor's.

    Turmoil in U.S. Credit Markets: Examining the U.S. 
Regulatory Framework for Assessing Sovereign Investments
    Thursday, April 24, 2008
    Witnesses
    Panel 1: Mr. Scott Alvarez, General Counsel, Board of 
Governors of the Federal Reserve System; Mr. Ethiopis Tafara, 
Director, Office of International Affairs, Securities and 
Exchange Commission.
    Panel 2: Mr. David Marchick, Managing Director, The Carlyle 
Group; Mr. Paul Rose, Assistant Professor of Law, Moritz 
College of Law, Ohio State University; Ms. Jeanne S. Archibald, 
Partner, Hogan and Hartson LLP; Mr. Dennis Johnson, Director of 
Corporate Governance, California Public Employees' Retirement 
System.

    Turmoil in the U.S. Credit Markets: Examining the 
Regulation of Investment Banks by the U.S. Securities and 
Exchange Commission
    Wednesday, May 7, 2008
    Witnesses
    Panel 1: Mr. Erik Sirri, Director, Division of Market 
Regulation, Securities and Exchange Commission.

    Panel 2: Honorable Arthur Levitt, Former Chairman, U.S. 
Securities and Exchange Commission; Mr. David Ruder, Former 
Chairman, U.S. Securities and Exchange Commission.

    The State of the Banking Industry: Part II
    Thursday, June 5, 2008
    Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Honorable John C. Dugan, Comptroller of 
the Currency, United States Treasury; Honorable John M. Reich, 
Director, Office of Thrift Supervision; Honorable JoAnn 
Johnson, Chairman, National Credit Union Administration; 
Honorable Donald Kohn, Vice Chairman, Board of Governors, 
Federal Reserve System; Mr. Timothy J. Karsky, Commissioner/
Chairman, North Dakota Department of Financial Institutions/ 
Conference of State Bank Supervisors.

    Risk Management and its Implications for Systemic Risk
    Thursday, June 19, 2008
    Witnesses: Honorable Donald Kohn, Vice Chairman, Board of 
Governors, Federal Reserve System; Dr. Erik Sirri, Director, 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission; Mr. Scott M. Polakoff, Deputy Director, Office of 
Thrift Supervision; Mr. Richard Bookstaber, Financial Author; 
Professor Richard Herring, Jacob Safra Professor of 
International Banking and Co-Director of the Wharton Financial 
Institutions Center, Wharton School, University of 
Pennsylvania; Mr. Kevin Blakely, President and Chief Executive 
Officer, Risk Management Association.

    Reducing Risks and Improving Oversight in the OTC Credit 
Derivatives Market
    Wednesday, July 9, 2008
    Witnesses: Mr. Patrick Parkinson, Deputy Director, Division 
of Research and Statistics, Board of Governors of the Federal 
Reserve System; Mr. James Overdahl, Senior Economist, U.S. 
Securities and Exchange Commission; Ms. Kathryn E. Dick, Deputy 
Comptroller for Credit and Market Risk, Office of the 
Comptroller of the Currency; Dr. Darrell Duffie, Dean Witter 
Distinguished Professor of Finance, Stanford University, 
Graduate School of Business; Mr. Craig Donohue, Chief Executive 
Officer, Chicago Mercantile Exchange Group; Mr. Edward J. 
Rosen, Cleary Gottlieb Steen & Hamilton LLP, Outside Counsel to 
The Clearing Corporation; Mr. Robert G. Pickel, Executive 
Director and Chief Executive Officer, International Swaps and 
Derivatives Association, Inc.

    Recent Developments in U.S. Financial Markets and 
Regulatory Responses to Them
    Tuesday, July 15, 2008
    Witnesses: Honorable Henry M. Paulson, Secretary of the 
Treasury; The Honorable Ben S. Bernanke, Chairman, Board of 
Governors of the Federal Reserve System; Honorable Christopher 
Cox, Chairman, Securities and Exchange Commission.

    State of the Insurance Industry: Examining the Current 
Regulatory and Oversight Structure
    Tuesday, July 29, 2008
    Witnesses
    Panel 1: Honorable Steven M. Goldman, Commissioner, New 
Jersey Department of Banking and Insurance, on behalf of the 
National Association of Insurance Commissioners; Mr. Travis B. 
Plunkett, Legislative Director, Consumer Federation of America; 
Mr. Alessandro Iuppa, Senior Vice President, Zurich North 
America, on behalf of the American Insurance Association; Mr. 
John L. Pearson, Chairman, President, and Chief Executive 
Officer, The Baltimore Life Insurance Company, on behalf of the 
American Council of Life Insurers.
    Panel 2: Mr. George A. Steadman, President and Chief 
Operating Officer, Rutherfoord Inc., on behalf of the Council 
of Insurance Agents & Brokers; Mr. Thomas Minkler, President, 
Clark-Mortenson Agency, Inc., on behalf of the Independent 
Insurance Agents & Brokers of America; Mr. Franklin Nutter, 
President, Reinsurance Association of America; Mr. Richard 
Bouhan, Executive Director, National Association of 
Professional Surplus Lines Offices.

    Transparency in Accounting: Proposed Changes to Accounting 
for Off-Balance Sheet Entities
    Thursday, September 18, 2008
    Witnesses
    Panel 1: Mr. Lawrence Smith, Board Member, Financial 
Accounting Standards Board (FASB); Mr. John White, Director, 
Office of Corporate Finance, Securities and Exchange 
Commission; Mr. James Kroeker, Deputy Chief Accountant for 
Accounting, U.S. Securities and Exchange Commission.
    Panel 2: Professor Joseph Mason, Hermann Moyse Jr. Endowed 
Chair of Banking, E.J. Ourso College of Business, Louisiana 
State University; Mr. Donald Young, Managing Director, Young 
and Company LLC, and former FASB Board Member; Ms. Elizabeth 
Mooney, Analyst, Capital Strategy Research, The Capital Group; 
Mr. George Miller, Executive Director, American Securitization 
Forum.

    Turmoil in US Credit Markets Recent Actions Regarding 
Government Sponsored Entities, Investment Banks and Other 
Financial Institutions
    Tuesday, September 23, 2008
    Witnesses: Honorable Henry M. Paulson, Secretary of the 
Treasury; The Honorable Ben S. Bernanke, Chairman, Board of 
Governors of the Federal Reserve System; Honorable Christopher 
Cox, Chairman, Securities and Exchange Commission; Honorable 
James B. Lockhart, III, Director, Federal Housing Finance 
Agency.

    Turmoil in the U.S. Credit Markets: The Genesis of the 
Current Economic Crisis
    Thursday, October 16, 2008
    Witnesses: Honorable Arthur Levitt, Jr., Senior Advisor, 
The Carlyle Group; Honorable Eugene A. Ludwig, Chief Executive 
Officer, Promontory Financial Group; Honorable Jim Rokakis, 
Treasurer, Cuyahoga County, Ohio; Honorable Marc H. Morial, 
President and CEO, National Urban League; Mr. Eric Stein, 
Senior Vice President, Center for Responsible Lending.
    Turmoil in the U.S. Credit Markets: Examining Recent 
Regulatory Responses
    Thursday, October 23, 2008
    Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Honorable Neel Kashkari, Interim 
Assistant Secretary for Financial Stability and Assistant 
Secretary for International Affairs, U.S. Department of the 
Treasury; Honorable James B. Lockhart, III, Director, Federal 
Housing Finance Agency; Honorable Elizabeth A. Duke, Governor, 
Board of Governors of the Federal Reserve System; Honorable 
Brian D. Montgomery, Federal Housing Commissioner and Assistant 
Secretary, Department of Housing and Urban Development.

    Oversight of the Emergency Economic Stabilization Act: 
Examining Financial Institution Use of Funding Under the 
Capital Purchase Program
    Thursday, November 13, 2008
    Witnesses: Ms. Anne Finucane, Global Corporate Affairs 
Executive, Bank of America; Mr. Barry L. Zubrow, Executive Vice 
President, Chief Risk Officer, JPMorgan Chase; Mr. Jon 
Campbell, Executive Vice President, Chief Executive Officer of 
the Minnesota Region, Wells Fargo Bank; Mr. Gregory Palm, 
Executive Vice President and General Counsel, The Goldman Sachs 
Group, Inc.; Mr. Martin Eakes, Chief Executive Officer, Self-
Help Credit Union and the Center for Responsible Lending; Nancy 
M. Zirkin, Director of Public Policy, Leadership Conference on 
Civil Rights; Dr. Susan M. Wachter, Worley Professor of 
Financial Management, Wharton School of Business, University of 
Pennsylvania.

    Examining the State of the Domestic Automobile Industry
    Tuesday, November 18, 2008
    Witnesses
    Panel 1: Honorable Debbie Stabenow (D-MI), United States 
Senator.
    Panel 2: Mr. Ron Gettelfinger, President, International 
Union, United Automobile, Aerospace and Agricultural Implement 
Workers of America; Mr. Alan Mulally, President and Chief 
Executive Officer, Ford Motor Company; Mr. Robert Nardelli, 
Chairman and Chief Executive Officer, Chrysler LLC; Mr. G. 
Richard Wagoner, Jr., Chairman and Chief Executive Officer, 
General Motors; Dr. Peter Morici, Professor, Robert H. Smith 
School of Business, University of Maryland.

    The State of the Domestic Automobile Industry: Part II
    Thursday, December 4, 2008
    Witnesses
    Panel 1: Mr. Gene L. Dodaro, Acting Comptroller General, 
United States Government Accountability Office.
    Panel 2: Mr. Ron Gettelfinger, President, International 
Union, United Automobile, Aerospace and Agricultural Implement 
Workers of America; Mr. Alan Mulally, President and Chief 
Executive Officer, Ford Motor Company; Mr. Robert Nardelli, 
Chairman and Chief Executive Officer, Chrysler LLC; Mr. G. 
Richard Wagoner, Jr., Chairman and Chief Executive Officer, 
General Motors; Mr. Keith Wandell, President, Johnson Controls, 
Inc.; Mr. James Fleming, President, Connecticut Automotive 
Retailers Association; Dr. Mark Zandi, Chief Economist and 
Cofounder, Moody's Economy.com.

    Madoff Investment Securities Fraud: Regulatory and 
Oversight Concerns and the Need for Reform
    Tuesday, January 27, 2009
    Witnesses: Professor John C. Coffee, Jr., Adolf A. Berle 
Professor of Law, Columbia University Law School; Dr. Henry A. 
Backe, Jr., Orthopedic Surgeon, Fairfield, Connecticut; Ms. 
Lori Richards, Director, Office of Compliance Inspections and 
Examinations, U.S. Securities and Exchange Commission; Ms. 
Linda Thomsen, Director, Division of Enforcement, U.S. 
Securities and Exchange Commission; Mr. Stephen Luparello, 
Interim Chief Executive Officer, Financial Industry Regulatory 
Authority; Mr. Stephen Harbeck, Interim Chief Executive 
Officer, Financial Industry Regulatory Authority.

    Modernizing the U.S. Financial Regulatory System
    Wednesday, February 4, 2009
    Witnesses
    Panel 1: Honorable Paul A. Volcker, Chair of the 
President's Economic Recovery Advisory Board, Former Chairman, 
Board of Governors of the Federal Reserve System.
    Panel 2: Mr. Gene L. Dodaro, Acting Comptroller General, 
United States Government Accountability Office.

    Pulling Back the TARP: Oversight of the Financial Rescue 
Program
    Thursday, February 5, 2009
    Witnesses: Mr. Gene L. Dodaro, Acting Comptroller General, 
United States Government Accountability Office; Honorable Neil 
M. Barofsky, Special Inspector General, Troubled Asset Relief 
Program; Professor Elizabeth Warren, Chair, Congressional 
Oversight Panel for the Troubled Asset Relief Program.

    Oversight of the Financial Rescue Program: A New Plan for 
the TARP
    Tuesday, February 10, 2009
    Witnesses: Honorable Timothy Geithner, Secretary, United 
States Department of the Treasury.

    Modernizing Consumer Protection in the Financial Regulatory 
System: Strengthening Credit Card Protections
    Thursday, February 12, 2009
    Witnesses: Mr. Travis B. Plunkett, Legislative Director, 
Consumer Federation of America; Mr. James C. Sturdevant, Esq., 
The Sturdevant Law Firm; Mr. Kenneth J. Clayton, Senior Vice 
President and General Counsel, Card Policy Council, American 
Bankers Association; Lawrence M. Ausubel, Professor of 
Economics, University of Maryland; Mr. Todd Zywicki, Professor, 
George Mason University School of Law; Mr. Adam J. Levitin, 
Associate Professor of Law, Georgetown University Law Center.

    Homeowner Affordability and Stability Plan
    Thursday, February 26, 2009
    Witnesses: Honorable Shaun Donovan, Secretary, U.S. 
Department of Housing and Urban Development.

    Consumer Protections in Financial Services: Past Problems, 
Future Solutions
    Tuesday, March 3, 2009
    Witnesses: Mr. Steve Bartlett, President and CEO, Financial 
Services Roundtable; Honorable Ellen Seidman, Senior Fellow of 
New America Foundation, Executive Vice President of ShoreBank 
Corporation; Professor Patricia McCoy, George J. & Helen M. 
England Professor of Law, University of Connecticut School of 
Law.

    American International Group: Examining What Went Wrong, 
Government Intervention, and Implications for Future Regulation
    Thursday, March 5, 2009
    Witnesses: Honorable Donald Kohn, Vice Chairman, Board of 
Governors, Federal Reserve System; Mr. Scott M. Polakoff, 
Senior Deputy Director and Chief Operating Officer, Office of 
Thrift Supervision; Mr. Eric Dinallo, Superintendent, New York 
State Insurance Department.

    Enhancing Investor Protection and the Regulation of 
Securities Markets
    Tuesday, March 10, 2009
    Witnesses: Mr. John Coffee, Adolf A. Berle Professor of 
Law, Columbia Law School; Mr. Lynn E. Turner, Former Chief 
Accountant, U.S. Securities and Exchange Commission; Mr. 
Timothy Ryan, President and CEO, Securities Industry and 
Financial Markets Association; Mr. Paul Schott Stevens, 
President and CEO, Investment Company Institute: Professor 
Mercer Bullard, Associate Professor and President, University 
of Mississippi School of Law and Fund Democracy; Mr. Robert G. 
Pickel, Executive Director and Chief Executive Officer, 
International Swaps and Derivatives Association, Inc.; Mr. 
Damon Silvers, Associate General Counsel, AFL-CIO; Thomas G. 
Doe, CEO, Municipal Market Advisors.

    Perspectives on Modernizing Insurance Regulation
    Tuesday, March 17, 2009
    Witnesses: Mr. Michael McRaith, Director of Insurance, 
Illinois Department of Financial and Professional Regulation, 
on behalf of the National Association of Insurance 
Commissioners; Honorable Frank Keating, President and Chief 
Executive Officer, The American Council of Life Insurers; Mr. 
William R. Berkley, Chairman and Chief Executive Officer, W. R. 
Berkley Corporation, on behalf of the American Insurance 
Association; Mr. Spencer Houldin, President, Ericson Insurance 
Services, on behalf of the Independent Insurance Agents and 
Brokers of America; Mr. John Hill, President and Chief 
Operating Officer, Magna Carta Companies, on behalf of the 
National Association of Mutual Insurance Companies; Mr. Frank 
Nutter, President, The Reinsurance Association of America; Mr. 
Robert Hunter, Director of Insurance, The Consumer Federation 
of America.

    Lessons Learned in Risk Management Oversight at Federal 
Financial Regulators
    Wednesday, March 18, 2009
    Witnesses: Mr. Scott M. Polakoff, Acting Director, Office 
of Thrift Supervision; Ms. Orice Williams, Director, Financial 
Markets and Community Investment, Government Accountability 
Office; Mr. Roger Cole, Director, Division of Banking 
Supervision and Regulation, Federal Reserve Board; Mr. Timothy 
Long, Senior Deputy Comptroller, Bank Supervision Policy and 
Chief National Bank Examiner, Office of the Comptroller of the 
Currency; Dr. Erik Sirri, Director, Division of Trading and 
Markets, U.S. Securities and Exchange Commission.

    Modernizing Bank Supervision and Regulation
    Thursday, March 19, 2009
    Witnesses: Honorable John C. Dugan, Comptroller of the 
Currency, Office of the Comptroller of the Currency; Honorable 
Daniel K. Tarullo, Member, Board of Governors of the Federal 
Reserve System; Honorable Sheila Bair, Chairman, Federal 
Deposit Insurance Corporation; Honorable Michael E. Fryzel, 
Chairman, National Credit Union Administration; Mr. Scott M. 
Polakoff, Acting Director, Office of Thrift Supervision; Mr. 
Joseph A. Smith, North Carolina Commissioner of Banks and 
Chairman, Conference of State Bank Supervisors; Mr. George 
Reynolds, Chairman, National Association of State Credit Union 
Supervisors and Senior Deputy Commissioner, Georgia Department 
of Banking and Finance.

    Current Issues in Deposit Insurance
    Thursday, March 19, 2009
    Witnesses
    Panel 1: Mr. Art Murton, Director, Division of Insurance 
and Research, Federal Deposit Insurance Corporation; Mr. David 
M. Marquis, Executive Director, National Credit Union 
Administration.
    Panel 2: Mr. William Grant, Chairman & CEO, First United 
Bank and Trust, Oakland, Maryland, on behalf of the American 
Bankers Association; Mr. Terry West, President and CEO, VyStar 
Credit Union in Jacksonville, Florida, on behalf of the Credit 
Union National Association; Mr. Steve Verdier, Senior Vice 
President, Independent Community Bankers of America; Mr. David 
J. Wright, CEO, Services Credit Union, Yankton, South Dakota, 
on behalf of the National Association of Federal Credit Unions.

    Modernizing Bank Supervision and Regulation, Part II
    Tuesday, March 24, 2009
    Witnesses: Mr. William Attridge, President, Chief Executive 
Officer and Chief Operating Officer, Connecticut River 
Community Bank, on behalf of the Independent Community Bankers 
of America; Mr. Daniel A. Mica, President and Chief Executive 
Officer, Credit Union National Association; Mr. Aubrey 
Patterson, Chairman and Chief Executive Officer, BancorpSouth, 
Inc., on behalf of the American Bankers Association; Mr. 
Christopher Whalen, Managing Director, Institutional Risk 
Analytics; Ms. Gail Hillebrand, Senior Attorney, Consumers 
Union of U.S., Inc.

    Enhancing Investor Protection and the Regulation of 
Securities Markets--Part II
    Thursday, March 26, 2009
    Witnesses
    Panel 1: Honorable Mary Schapiro, Chairman, U.S. Securities 
and Exchange Commission; Honorable Fred Joseph, President, 
North American Securities Administrators Association.
    Panel 2: Honorable Richard C. Breeden, Former Chairman, 
U.S. Securities and Exchange Commission; Honorable Arthur 
Levitt, Former Chairmen, U.S. Securities and Exchange 
Commission; Honorable Paul S. Atkins, Former Commissioner, U.S. 
Securities and Exchange Commission.
    Panel 3: Mr. Richard Ketchum, Chairman and CEO, FINRA; Mr. 
Ronald A. Stack, Chair, Municipal Securities Rulemaking Board; 
Honorable Richard Baker, President and CEO, Managed Funds 
Association; Mr. James Chanos, Chairman, Coalition of Private 
Investment Companies; Ms. Barbara Roper, Director of Investor 
Protection, Consumer Federation of America; Mr. David G. 
Tittsworth, Executive Director and Executive Vice President, 
Investment Adviser Association; Ms. Rita Bolger, Senior Vice 
President and Associate General Counsel, Standard & Poor's, 
Global Regulatory Affairs; President Daniel Curry, President, 
DBRS, Inc.

    Lessons from the New Deal
    Tuesday, March 31, 2009
    Witnesses
    Panel 1: Honorable Christina Romer, Chair, Council of 
Economic Advisors.
    Panel 2: Dr. James K. Galbraith, Lloyd M. Bentsen Chair, 
Lyndon B. Johnson School of Public Affairs, University of Texas 
at Austin; Dr. J. Bradford DeLong, Professor of Economics, 
University of California Berkeley; Dr. Allan M. Winkler, 
Professor of History, Miami (Ohio) University; Dr. Lee E. 
Ohanian, Professor, University of California, Los Angeles.

    Regulating and Resolving Institutions Considered `Too Big 
to Fail'
    Wednesday, May 6, 2009
    Witnesses
    Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Mr. Gary Stern, President, Federal 
Reserve Bank of Minneapolis.
    Panel 2: Honorable Peter Wallison, Arthur F. Burns Fellow 
in Financial Policy Studies, American Enterprise Institute; 
Honorable Martin N. Baily, Senior Fellow, Economic Studies, The 
Brookings Institution; Mr. Raghuram G. Rajan, Eric J. Gleacher 
Distinguished Service Professor of Finance, University of 
Chicago Booth School of Business.

    Strengthening the S.E.C.'s Vital Enforcement 
Responsibilities
    Thursday, May 7, 2009
    Witnesses: Mr. Richard Hillman, Managing Director, 
Financial Markets and Community Investment, U.S. Government 
Accountability Office; Robert Khuzami, Esq., Director, Division 
of Enforcement, U.S. Securities and Exchange Commission; 
Professor Mercer Bullard, Associate Professor of Law, 
University of Mississippi School of Law; Mr. Bruce Hiler, 
Partner and Head of Securities Enforcement Group, Cadwalader, 
Wickersham and Taft LLP.

    Manufacturing and the Credit Crisis
    Wednesday, May 13, 2009
    Witnesses
    Panel 1: Mr. Leo Gerard, President, United Steelworkers; 
Mr. David Marchick, Managing Director, The Carlyle Group.
    Panel 2: Mr. Eugene Haffely, CEO, Assembly and Test 
Worldwide, Inc.; Lieutenant General Larry Farrell, (USAF, 
Retired) President, National Defense Industrial Association; 
Mr. William Gaskin, President, Precision Metalforming 
Association.

    Oversight of the Troubled Assets Relief Program
    Wednesday, May 20, 2009
    Witnesses: Honorable Timothy Geithner, Secretary, United 
States Department of the Treasury.

    The State of the Domestic Automobile Industry: Impact of 
Federal Assistance
    Wednesday, June 10, 2009
    Witnesses: Mr. Ron Bloom, Senior Advisor on the Auto 
Industry, U.S. Department of the Treasury; The Honorable Edward 
Montgomery, White House Director of Recovery for Auto 
Communities and Workers, The White House.

    The Administration's Proposal to Modernize the Financial 
Regulatory System
    Thursday, June 18, 2009
    Witnesses: Honorable Timothy Geithner, Secretary, United 
States Department of the Treasury.

    Over-the-Counter Derivatives: Modernizing Oversight to 
Increase Transparency and Reduce Risks
    Monday, June 22, 2009
    Witnesses
    Panel 1: Honorable Mary Schapiro, Chairman, U.S. Securities 
and Exchange Commission; Honorable Gary Gensler, Chairman, U.S. 
Commodity Futures Trading Commission; Ms. A. Patricia White, 
Associate Director of the Division of Research and Statistics, 
Board of Governors of the Federal Reserve System.
    Panel 2: Dr. Henry Hu, Allan Shivers Chair in the Law of 
Banking and Finance, University of Texas School of Law; Mr. 
Kenneth C. Griffin, Founder, President, and Chief Executive 
Officer, Citadel Investment Group, L.L.C.; Mr. Robert G. 
Pickel, Executive Director and Chief Executive Officer, 
International Swaps and Derivatives Association, Inc.; Mr. 
Christopher Whalen, Managing Director, Institutional Risk 
Analytics.

    The Effects of the Economic Crisis on Community Banks and 
Credit Unions in Rural Communities
    Wednesday, July 8, 2009
    Witnesses: Mr. Jack Hopkins, President and Chief Executive 
Officer, CorTrust Bank National Association, Sioux Falls, SD on 
behalf of the Independent Community Bankers of America; Mr. 
Frank Michael, President and CEO, Allied Credit Union, 
Stockton, CA on behalf of the Credit Union National 
Association; Mr. Arthur Johnson, Chairman and CEO, United Bank 
of Michigan, Grand Rapids, MI on behalf of the American Bankers 
Association; Mr. Ed Templeton, President and CEO, SRP Federal 
Credit Union, North Augusta, SC; Mr. Peter Skillern, Executive 
Director, Community Reinvestment Association of North Carolina.

    Creating a Consumer Financial Protection Agency: A 
Cornerstone of America's New Economic Foundation
    Tuesday, July 14, 2009
    Witnesses
    Panel 1: Honorable Michael S. Barr, Assistant Secretary for 
Financial Institutions, U.S. Department of the Treasury.
    Panel 2: Honorable Richard Blumenthal, Attorney General, 
State of Connecticut; Mr. Edward Yingling, President and CEO, 
American Bankers Association; Mr. Travis B. Plunkett, 
Legislative Director, Consumer Federation of America; Honorable 
Peter Wallison, Arthur F. Burns Fellow in Financial Policy 
Studies, American Enterprise Institute; Mr. Sendhil 
Mullainathan, Professor of Economics, Harvard University.

    Regulating Hedge Funds and Other Private Investment Pools
    Wednesday, July 15, 2009
    Witnesses
    Panel 1: Mr. Andrew J. Donohue, Director of the Division of 
Investment Management, U.S. Securities and Exchange Commission.
    Panel 2: Mr. Dinakar Singh, Founder and Chief Executive 
Officer, TPG Axon Capital; Mr. James Chanos, Chairman, 
Coalition of Private Investment Companies; Mr. Trevor R. Loy, 
General Partner, Flywheel Ventures; Mr. Mark B. Tresnowski, 
Managing Director and General Counsel, Madison Dearborn 
Partners, LLC; Mr. Richard Bookstaber, Financial Author; Mr. 
Joseph Dear, Chief Investment Officer, California Public 
Employees' Retirement System.

    Preserving Homeownership: Progress Needed to Prevent 
Foreclosures
    Thursday, July 16, 2009
    Witnesses
    Panel 1: Honorable Herbert M. Allison, Jr., Assistant 
Secretary for Financial Stability, U.S. Department of the 
Treasury; Honorable William Apgar, Senior Advisor to the 
Secretary for Mortgage Finance, U.S. Department of Housing and 
Urban Development.
    Panel 2: Ms. Joan Carty, President and CEO, The Housing 
Development Fund in Bridgeport, CT; Ms. Mary Coffin, Head of 
Mortgage Servicing, Wells Fargo; Ms. Diane E. Thompson, Of 
Counsel, National Consumer Law Center; Mr. Allen Jones, Default 
Management Executive, Bank of America Home Loans; Mr. Curtis 
Glovier, Managing Director, Fortress Investment Group; Mr. Paul 
S. Willen, Senior Economist and Policy Advisor, Federal Reserve 
Bank of Boston; Mr. Thomas Perretta, Consumer, State of 
Connecticut.

    Establishing a Framework for Systemic Risk Regulation
    Thursday, July 23, 2009
    Witnesses
    Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Honorable Mary Schapiro, Chairman, U.S. 
Securities and Exchange Commission; Honorable Daniel K. 
Tarullo, Member, Board of Governors of the Federal Reserve 
System.
    Panel 2: Ms. Alice Rivlin, Senior Fellow, Economic Studies, 
Brookings Institution; Dr. Allan H. Meltzer, Professor of 
Political Economy, Tepper School of Business, Carnegie Mellon 
University; Mr. Vincent Reinhart, Resident Scholar, American 
Enterprise Institute; Mr. Paul Schott Stevens, President and 
CEO, Investment Company Institute.

    Regulatory Modernization: Perspectives on Insurance
    Tuesday, July 28, 2009
    Witnesses: Mr. Travis B. Plunkett, Legislative Director, 
Consumer Federation of America; Mr. Baird Webel, Specialist in 
Financial Economics, Congressional Research Service; Professor 
Hal Scott, Nomura Professor of International Financial Systems, 
Harvard Law School; Professor Martin Grace, James S. Kemper 
Professor of Risk Management, Department of Risk Management and 
Insurance, Georgia State University.

    Protecting Shareholders and Enhancing Public Confidence by 
Improving Corporate Governance
    Wednesday, July 29, 2009
    Witnesses: Ms. Meredith B. Cross, Director of the Division 
of Corporate Finance, U.S. Securities and Exchange Commission; 
Professor John C. Coates IV, John F. Cogan, Jr. Professor of 
Law and Economics, Harvard Law School; Ms. Ann Yerger, 
Executive Director, Council of Institutional Investors; Mr. 
John J. Castellani, President, The Business Roundtable; 
Professor J.W. Verret, Assistant Professor of Law, George Mason 
University School of Law; Mr. Richard C. Ferlauto, Director of 
Corporate Governance and Pension Investment, American 
Federation of State, County and Municipal Employees.

    Strengthening and Streamlining Prudential Bank Supervision
    Tuesday, August 4, 2009
    Witnesses
    Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Honorable John C. Dugan, Comptroller of 
the Currency, Office of the Comptroller of the Currency; 
Honorable Daniel K. Tarullo, Member, Board of Governors of the 
Federal Reserve System; Mr. John Bowman, Acting Director, 
Office of Thrift Supervision.
    Panel 2: Honorable Eugene A. Ludwig, Chief Executive 
Officer, Promontory Financial Group; Honorable Richard S. 
Carnell, Associate Professor, Fordham University School of Law; 
Honorable Martin N. Baily, Senior Fellow, Economic Studies, The 
Brookings Institution.

    Examining Proposals to Enhance the Regulation of Credit 
Rating Agencies
    Wednesday, August 5, 2009
    Witnesses
    Panel 1: Mr. Michael S. Barr, Assistant Secretary-Designate 
for Financial Institutions, U.S. Department of the Treasury.
    Panel 2: Professor John C. Coffee, Jr., Adolf A. Berle 
Professor of Law, Columbia University Law School; Dr. Lawrence 
J. White, Leonard E. Imperatore Professor of Economics, New 
York University; Mr. Stephen W. Joynt, President and Chief 
Executive Officer, Fitch Ratings; Mr. James Gellert, President 
and CEO, Rapid Ratings; Mr. Mark Froeba, Principal, PF2 
Securities Evaluations, Inc.

    Alleged Stanford Financial Group Fraud: Regulatory and 
Oversight Concerns and the Need for Reform
    Monday, August 17, 2009
    Witnesses
    Panel 1: Mr. Craig Nelson, Investor, Stanford Securities, 
Alabama; Mr. Troy Lillie, Investor, Stanford Securities, 
Louisiana; Ms. Leyla Wydler, Former Vice President and 
Financial Advisor, Stanford Financial Group; Professor Onnig 
Dombalagian, George Denegre Professor of Law, Tulane University 
Law School.
    Panel 2: Ms. Rose Romero, Regional Director, U.S. 
Securities and Exchange Commission; Mr. Daniel M. Sibears, 
Executive Vice President, Member Regulation Programs, Financial 
Industry Regulatory Authority (FINRA).

    Oversight of the SEC's Failure to Identify the Bernard L. 
Madoff Ponzi Scheme and How to Improve SEC Performance
    Thursday, September 10, 2009
    Witnesses
    Panel 1: H. David Kotz, Esq., Inspector General, U.S. 
Securities and Exchange Commission.
    Panel 2: Mr. Harry Markopolos, Chartered Financial Analyst 
and Certified Fraud Examiner; Robert Khuzami, Esq., Director, 
Division of Enforcement, U.S. Securities and Exchange 
Commission; John Walsh, Esq., Acting Director, Office of 
Compliance Inspections and Examinations, U.S. Securities and 
Exchange Commission.

    Helping Homeowners Avoid Foreclosure
    Monday, September 21, 2009
    Witnesses
    Panel 1: Honorable Shaun Donovan, Secretary, U.S. 
Department of Housing and Urban Development.
    Panel 2: Honorable Anne Milgram, Attorney General of New 
Jersey; Ms. Marge Della Vecchia, Executive Director, New Jersey 
Housing and Mortgage Finance Agency; Ms. Phyllis Salowe-Kaye, 
Executive Director, New Jersey Citizen Action Board; Mr. Mario 
Vargas, Executive Director, New Jersey Puerto Rican Action 
Board; Mr. Edward Heaton, Homeowner from Springfield, New 
Jersey; Mr. Bryan Bolton, Senior Vice President, Loss 
Mitigation, CitiMortgage.

    Emergency Economic Stabilization Act: One Year Later
    Thursday, September 24, 2009
    Witnesses
    Panel 1: Honorable Herbert M. Allison, Jr., Assistant 
Secretary for Financial Stability (TARP), U.S. Department of 
the Treasury.
    Panel 2: Honorable Neil M. Barofsky, Special Inspector 
General, Troubled Asset Relief Program; Mr. Gene L. Dodaro, 
Acting Comptroller General, United States Government 
Accountability Office; Professor Elizabeth Warren, Chair, 
Congressional Oversight Panel for the Troubled Asset Relief 
Program.

    Strengthening and Streamlining Prudential Bank Supervision
    Tuesday, September 29, 2009
    Witnesses: Honorable Eugene A. Ludwig, Chief Executive 
Officer, Promontory Financial Group; Honorable Martin N. Baily, 
Senior Fellow, Economic Studies, The Brookings Institution; 
Honorable Richard S. Carnell, Associate Professor, Fordham 
University School of Law; Mr. Richard Hillman, Managing 
Director, Financial Markets and Community Investment, U.S. 
Government Accountability Office.

    International Cooperation to Modernize Financial Regulation
    Wednesday, September 30, 2009
    Witnesses: Ms. Kathleen L. Casey, Commissioner, U.S. 
Securities and Exchange Commission; Mr. Mark Sobel, Acting 
Assistant Secretary for International Affairs, U.S. Department 
of the Treasury; Honorable Daniel K. Tarullo, Member, Board of 
Governors of the Federal Reserve System.

    Securitization of Assets: Problems and Solutions
    Wednesday, October 7, 2009
    Witnesses: Professor Patricia McCoy, George J. & Helen M. 
England Professor of Law, University of Connecticut School of 
Law; Mr. George P. Miller, Executive Director, American 
Securitization Forum; Mr. Andrew Davidson, President, Andrew 
Davidson & Co.; Mr. J. Christopher Hoeffel, Executive Committee 
Member, Commercial Mortgage Securities Association; Dr. William 
Irving, Portfolio Manager, Fidelity Investments.

    Future of the Mortgage Market and the Housing Enterprises
    Thursday, October 8, 2009
    Witnesses
    Panel 1: Mr. Edward J. DeMarco, Acting Director, Federal 
Housing Finance Agency.
    Panel 2: Mr. William Shear, Director, Financial Markets and 
Community Investment, U.S. Government Accountability Office; 
Mr. Andrew Jakabovics, Associate Director for Housing and 
Economics, Center for American Progress Action Fund; Dr. Susan 
M. Wachter, Worley Professor of Financial Management, Wharton 
School of Business, University of Pennsylvania; Honorable Peter 
Wallison, Arthur F. Burns Fellow in Financial Policy Studies, 
American Enterprise Institute.

    Restoring Credit to Manufacturers
    Friday, October 9, 2009
    Witnesses: Mr. David Andrea, Vice President, Industry 
Analysis and Economics, Motor and Equipment Manufacturers 
Association; Mr. Robert C. Kiener, Director of Member Outreach, 
Precision Machined Products Association; Mr. Stephen P. Wilson, 
Chairman and CEO, LCNB National Bank.

    Examining the State of the Banking Industry
    Wednesday, October 14, 2009
    Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit 
Insurance Corporation; Honorable John C. Dugan, Comptroller of 
the Currency, Office of the Comptroller of the Currency; 
Honorable Daniel K. Tarullo, Member, Board of Governors of the 
Federal Reserve System; Honorable Deborah Matz, Chairman, 
National Credit Union Administration; Mr. Timothy T. Ward, 
Deputy Director, Examinations, Supervision, and Consumer 
Protection, Office of Thrift Supervision; Mr. Joseph A. Smith, 
North Carolina Commissioner of Banks and Chairman, Conference 
of State Bank Supervisors; Mr. Thomas J. Candon, Deputy 
Commissioner, Vermont Department of Banking, Insurance, 
Securities and Health Care Administration, National Association 
of State Credit Union Supervisors.

    The State of the Nation's Housing Market
    Tuesday, October 20, 2009
    Witnesses
    Panel 1: Honorable Johnny Isakson (R-GA).
    Panel 2: Honorable Shaun Donovan, Secretary, U.S. 
Department of Housing and Urban Development.
    Panel 3: Ms. Diane Randall, Executive Director, Partnership 
for Strong Communities; Mr. Ronald Phipps, First Vice 
President, National Association of Realtors; Mr. Emile J. 
Brinkmann, Chief Economist and Senior Vice President for 
Research and Economics, Mortgage Bankers Association; Mr. David 
Crowe, Chief Economist, National Association of Home Builders.

    Dark Pools, Flash Orders, High Frequency Trading, and Other 
Market Structure Issues
    Wednesday, October 28, 2009
    Witnesses
    Panel 1: Honorable Edward Kaufman, United States Senator.
    Panel 2: James A. Brigagliano, Esq., Co-Acting Director of 
the Division of Trading and Markets, U.S. Securities and 
Exchange Commission; Mr. Frank Hatheway, Senior Vice President 
and Chief Economist, NASDAQ OMX; William O'Brien, Esq., Chief 
Executive Officer, Direct Edge; Mr. Christopher Nagy, Managing 
Director of Order Routing Sales & Strategy, Ameritrade; Mr. 
Daniel Mathisson, Managing Director and Head of Advanced 
Execution Services, Credit Suisse; Mr. Robert C. Gasser, 
President and Chief Executive Officer, Investment Technology 
Group; Mr. Peter Driscoll, Chairman, Security Traders 
Association; Mr. Adam C. Sussman, Director of Research, TABB 
Group.

    Protecting Consumers from Abusive Overdraft Fees: The 
Fairness and Accountability in Receiving Overdraft Coverage Act
    Tuesday, November 17, 2009
    Witnesses: Mr. Mario Livieri, Consumer, State of 
Connecticut; Mr. Michael D. Calhoun, President, Center For 
Responsible Lending; Mr. Frank Pollack, President and CEO, 
Pentagon Federal Credit Union; Mr. John Carey, Chief 
Administrative Officer, Citibank NA; Ms. Jean Ann Fox, Director 
of Financial Services, Consumer Federation of America.

    Hearing on the nomination of The Honorable Ben S. Bernanke
    Thursday, December 3, 2009
    Witnesses: The Honorable Ben S. Bernanke, Chairman, Board 
of Governors of the Federal Reserve System.

    Prohibiting Certain High-Risk Investment Activities by 
Banks and Bank Holding Companies
    Tuesday, February 2, 2010
    Witnesses: Honorable Paul Volcker, Chairman, President's 
Economic Recovery Advisory Board; Honorable Neal S. Wolin, 
Deputy Secretary, U.S. Department of the Treasury.

    Implications of the `Volcker Rules' for Financial Stability
    Thursday, February 4, 2010
    Witnesses: Mr. Gerald Corrigan, Managing Director, Goldman 
Sachs; Professor Simon Johnson, Ronald A. Kurtz Professor of 
Entrepreneurship, Sloan School of Management, Massachusetts 
Institute of Technology; Mr. John Reed, Retired Chairman, 
Citigroup; Professor Hal Scott, Nomura Professor of 
International Financial Systems, Harvard Law School; Mr. Barry 
L. Zubrow, Executive Vice President, Chief Risk Officer, 
JPMorgan Chase.

    Equipping Financial Regulators with the Tools Necessary to 
Monitor Systemic Risk
    Friday, February 12, 2010
    Witnesses
    Panel 1: Honorable Daniel K. Tarullo, Member, Board of 
Governors of the Federal Reserve System.
    Panel 2: Honorable Allan I. Mendelowitz, Founding Member, 
Committee to Establish the National Institute of Finance; 
Professor John C. Liechty, Associate Professor of Marketing and 
Statistics, Smeal College of Business, Pennsylvania State 
University; Professor Robert Engle, Stern School of Business, 
New York University; Mr. Stephen C. Horne, Vice President, 
Master Data Management and Integration Services, Dow Jones 
Business & Relationship Intelligence.

    Restoring Credit to Main Street: Proposals to Fix Small 
Business Borrowing and Lending Problems
    Tuesday, March 2, 2010
    Witnesses
    Panel 1: Honorable Carl Levin (D-MI), United States 
Senator; Honorable Debbie Stabenow (D-MI), United States 
Senator.
    Panel 2: Mr. Arthur Johnson, Chairman and CEO, United Bank 
of Michigan, Grand Rapids, MI on behalf of the American Bankers 
Association; Mr. Eric Gillett, Vice Chairman and CEO, Sutton 
Bank, Attica, OH on behalf of the Independent Community Bankers 
Association; Mr. Raj Date, Executive Director, Cambridge Winter 
Center for Financial Institutions Policy.

                      VII. COMMITTEE CONSIDERATION

    The Committee on Banking, Housing, and Urban Affairs met in 
open session on March 22, 2010, and by a vote of 13-10 ordered 
the bill reported, as amended.

            VIII. CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

    Section 11(b) of the Standing Rules of the Senate, and 
Section 403 of the Congressional Budget Impoundment and Control 
Act, require that each committee report on a bill contain a 
statement estimating the cost and regulatory impact of the 
proposed legislation. The Congressional Budget Office has 
provided the following cost estimate.

S. 3217--Restoring American Financial Stability Act of 2010

    Summary: S. 3217 would grant new federal regulatory powers 
and reassign existing regulatory authority among federal 
agencies with the aim of reducing the likelihood and severity 
of financial crises.
    The legislation would establish a program to facilitate the 
resolution of large financial institutions that become 
insolvent or are in danger of becoming insolvent when their 
failure is determined to threaten the stability of the nation's 
financial system (such institutions are known as systemically 
important firms). The program would be funded by fees assessed 
on certain large financial companies; an Orderly Liquidation 
Fund (OLF) of $50 billion would be accumulated, and in the 
event of a costly resolution, the fund would be replenished 
over time with future assessments.
    A second new program would expand the authority of the 
Federal Deposit Insurance Corporation (FDIC) to provide 
government guarantees on a broad array of financial obligations 
of banks and bank holding companies if federal officials 
determine that market conditions are impeding the normal 
provision of financing to creditworthy borrowers (known as a 
liquidity crisis). Under the bill, participants in the program 
would be charged fees designed to recover the costs of the 
government guarantees.
    Other provisions of S. 3217 would change how financial 
institutions and securities markets are regulated, create a new 
Bureau of Consumer Financial Protection (BCFP), broaden the 
authority of the Commodity Futures Trading Commission (CFTC) 
and the Securities and Exchange Commission (SEC), establish a 
grant program to encourage the use of traditional banking 
services, expand the supervision of firms that settle payments 
between financial institutions, and make many other changes to 
current laws.
    Under the legislation, as under current law, there is some 
probability that, at some point in the future, large financial 
firms will become insolvent and liquidity crises will arise, 
and that those financial problems will present significant 
risks to the nation's broader economy. The cost of addressing 
those problems under current law is unknown and would depend on 
how the Administration and the Congress chose to proceed when 
faced with financial crises in the future; they could, for 
example, change laws, create new programs, appropriate 
additional funds, and assess new fees. Depending on the 
effectiveness of the new regulatory initiatives and new 
authorities to resolve and support a broad variety of financial 
institutions contained in S. 3217, enacting this legislation 
could change the timing, severity, and federal cost of averting 
and resolving future financial crises. However, CBO has not 
determined whether the estimated costs under the bill would be 
smaller or larger than the costs of alternative approaches to 
addressing future financial crises and the risks they pose to 
the economy as a whole.

Estimated Federal Budgetary Impacts

    CBO estimates that enacting S. 3217 would increase revenues 
by $32.4 billion over the 2011-2015 period and by $75.4 billion 
over the 2011-2020 period and increase direct spending by $25.8 
billion and $54.4 billion, respectively, over the same periods. 
In total, CBO estimates those changes would decrease budget 
deficits by $6.6 billion over the 2011-2015 period and by $21.0 
billion over the 2011-2020 period. In addition, CBO estimates 
that implementing the bill would increase spending subject to 
appropriation by $4.6 billion over the 2011-2015 period and 
$13.2 billion over the 2011-2020 period. Because enacting the 
legislation would affect direct spending and revenues, pay-as-
you-go procedures apply.
    Under S. 3217, the estimated reduction in budget deficits 
over the 2011-2020 period stems largely from industry 
assessments required to capitalize the OLF established by the 
bill to resolve systemically important firms. Those collections 
exceed the expected cost of liquidations during the 
capitalization period. After that time, a growing share of the 
budgetary resources for future liquidation activities would be 
derived from interest credited on balances in the OLF (with 
additional assessments collected only as needed to cover 
losses). Such intragovernmental interest payments are not 
budgetary receipts and do not affect the federal deficit. Thus, 
CBO estimates that the expenses of the OLF would ultimately 
exceed income from new assessments paid by financial firms, 
resulting in an increase in the deficit in those later years. 
Pursuant to section 311 of the Concurrent Resolution on the 
Budget for Fiscal Year 2009 (S. Con Res. 70), CBO estimates 
that the bill would increase projected deficits by more than $5 
billion in at least one of the four consecutive 10-year periods 
starting in 2021.

Mandates

    The bill would impose intergovernmental and private-sector 
mandates, as defined in the Unfunded Mandates Reform Act 
(UMRA), on banks and other private and public entities that 
participate in financial markets. The bill also would impose 
intergovernmental mandates by prohibiting states from taxing 
and regulating certain insurance products issued by companies 
based in other states and by preempting certain state laws. 
Because the costs of complying with some of the mandates would 
depend on future regulations that would be established under 
the bill, and because CBO has limited information about the 
extent to which public entities enter into swaps with 
unregulated entities, CBO cannot determine whether the 
aggregate costs of the intergovernmental mandates would exceed 
the annual threshold established in UMRA ($70 million in 2010, 
adjusted annually for inflation). However, CBO estimates that 
the cost of the mandates on private-sector entities would well 
exceed the annual threshold established in UMRA for such 
mandates ($141 million in 2010, adjusted annually for 
inflation) because the amount of fees collected would be more 
than that amount.

Page Reference Guide:
    Sections
    Major Provisions
    Estimated Costs to the Federal Government
    Basis of Estimate: Changes in Direct Spending and Revenues; 
Changes in Spending Subject to Appropriation
    Pay-As-You-Go Considerations
    Intergovernmental and Private-Sector Impact

Abbreviations used in the cost estimate:
    BCFP--Bureau of Consumer Financial Protection
    CFTC--Commodity Futures Trading Commission
    DIF--Deposit Insurance Fund
    FDIC--Federal Deposit Insurance Corporation
    FSOC--Financial Stability Oversight Council
    GAO--Government Accountability Office
    OCC--Office of the Comptroller of the Currency
    OFR--Office of Financial Research
    OLF--Orderly Liquidation Fund
    OTS--Office of Thrift Supervision
    PCAOB--Public Company Accounting Oversight Board
    SEC--Securities and Exchange Commission
    SIPC--Securities Investor Protection Corporation

Major provisions:
    Title I would establish the Financial Stability Oversight 
Council and the Office of Financial Research (OFR), both of 
which would be funded by assessments on certain financial and 
nonfinancial entities starting two years after the bill's 
enactment. For the first two years after enactment, the Federal 
Reserve would fund those activities.
    Title II would establish a new program for resolving 
certain financial firms that are insolvent or in danger of 
becoming insolvent. The bill would create a fund, the OLF, from 
which the costs of liquidation would be paid. The FDIC would be 
directed to assess fees on private firms to build a $50 billion 
balance in the OLF within 10 years of the bill's enactment.
    Title III would abolish the Office of Thrift Supervision 
(OTS) and change the regulatory oversight of banks, thrifts, 
and related holding companies by transferring authorities and 
employees among the remaining regulatory agencies.
    Titles IV, VII, and IX would change and broaden the 
authority of the SEC to oversee activities and entities 
associated with the national securities exchanges.
    Title V would establish an Office of National Insurance and 
set national standards for how states may regulate and collect 
taxes for a type of insurance that covers unique or atypical 
risks--known as ``surplus lines'' or ``nonadmitted insurance.'' 
The bill also would establish national standards for how states 
regulate reinsurance--often referred to as insurance for 
insurance companies.
    Titles VI would modify the regulation of bank, thrift, and 
securities holding companies.
    Title VII would change and broaden the authority of the 
CFTC to regulate certain derivatives transactions on over-the-
counter markets.
    Title VIII would broaden the supervision of certain firms 
that settle payments between financial institutions.
    Title X would establish the BCFP as an independent agency 
within the Federal Reserve to enforce federal laws that affect 
how banks and nonfinancial institutions make financial products 
available to consumers for their personal use. The BCFP would 
be funded by transfers from the Federal Reserve.
    Title XI would establish a program to guarantee obligations 
of certain financial entities when federal officials determine 
that the economy faces a liquidity crisis. This title also 
would make changes to certain lending activities of the Federal 
Reserve.
    Title XII would establish several grant programs to 
encourage certain individuals to increase their use of the 
federally insured banking system and community-based financial 
institutions.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 3217 is shown in the following table. 
The cost of this legislation fall within budget functions 370 
(commerce and housing credit), 450 (community and regional 
development), and 800 (general government).

                         TABLE 1.--ESTIMATED BUDGETARY IMPACT OF S. 3217, THE RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2010
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                                                                                  By fiscal year, in billions of dollars--
                                                   -----------------------------------------------------------------------------------------------------
                                                     2011    2012    2013    2014    2015    2016    2017    2018    2019    2020   2011-2015  2011-2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               CHANGES IN DIRECT SPENDINGEstimated Budget Authority........................     4.0     6.3     5.6     5.1     5.4     5.6     5.5     5.3     5.8     6.5       26.4       55.2
Estimated Outlays.................................     3.6     6.3     5.4     5.1     5.4     5.6     5.5     5.3     5.8     6.5       25.8       54.4                                                                   CHANGES IN REVENUES

Estimated Revenues................................     1.8     6.4     7.9     8.0     8.3     8.5     8.8     8.9     8.7     8.1       32.4       75.4

                                     NET CHANGES IN THE BUDGET DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES

Estimated Impact on Deficita......................     1.8    -0.1    -2.6    -2.9    -2.9    -2.9    -3.3    -3.7    -2.9    -1.6       -6.6      -21.0                                                      CHANGES IN SPENDING SUBJECT TO APPROPRIATIONEstimated Authorization Level.....................     0.7     0.7     0.9     1.0     1.2     1.3     1.5     1.7     1.9     2.2        4.4       13.1
Estimated Outlays.................................     0.8     0.7     0.9     1.0     1.2     1.3     1.5     1.7     1.9     2.2        4.6      13.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
a Positive numbers indicate increases in deficits; negative numbers indicate decreases in deficits.

    Basis of estimate: For this estimate, CBO assumes that S. 
3217 will be enacted before the end of fiscal year 2010, that 
the necessary amounts will be appropriated in each year, and 
that spending will follow historical patterns for activities of 
the FDIC, the Federal Reserve, and other agencies.
    CBO estimates that the net decrease in the deficit as a 
result of the changes in revenues and direct spending would 
total $21.0 billion over the 2011-2020 period. Most of that 
amount, about $17.6 billion, would be generated by the 
assessments to build up the OLF and the spending of a portion 
of those funds.
    About $4.9 billion of the net deficit decrease related to 
changes in direct spending and revenues would result from 
providing the SEC permanent authority to collect and spend 
certain fees and reclassifying discretionary spending and 
offsetting collections for the SEC as direct spending and 
revenues. Revenues from the fees would exceed the SEC's 
outlays. (Under current law, the SEC's authority to collect and 
spend fees is provided in annual appropriation acts; fee 
collections are recorded as offsetting collections, that is, a 
credit against the agency's spending). Fees collected by the 
SEC have historically exceeded the agency's spending; those 
excess collections currently offset discretionary spending in 
other areas of the budget. Consequently, changing the budgetary 
treatment of the SEC's spending and receipts would increase 
discretionary spending by removing that offset. CBO estimates 
that such spending would increase by about $11.8 billion over 
the 2011-2020 period. The $4.9 billion in net savings from the 
change in direct spending and revenues would be less than the 
increase in discretionary outlays because the SEC fees under S. 
3217 would be lower than those projected under current law.

Changes in Direct Spending and Revenues

    CBO estimates that enacting the legislation would increase 
revenues by $75.4 billion over the 2011-2020 period (see Table 
2). About $43.9 billion of those revenues would be generated by 
assessments imposed by the FDIC, with the remainder arising 
from other activities under the bill. Specifically:
     Several provisions of the bill, most importantly 
those establishing the BCFP and reassigning supervisory 
responsibilities over financial institutions among the various 
regulators, would increase the net earnings of the Federal 
Reserve, which are recorded in the budget as revenues.
     Reclassification of fees collected by the SEC also 
would increase revenues, as would additional fees collected by 
the Public Company Accounting Oversight Board (PCAOB) and the 
Securities Investor Protection Corporation (SIPC).
    CBO estimates that enacting the legislation would increase 
direct spending by $54.4 billion over the 2011-2020 period (see 
Table 2). About $19.4 billion of that amount would result from 
allowing the SEC to spend certain fees without annual 
appropriation action. Additional costs would be incurred by 
establishing the BCFP, the Financial Stability Oversight 
Council, and the OFR; broadening the regulatory duties of the 
PCAOB; increasing the amount the SIPC may borrow from the 
Treasury; authorizing the FDIC to provide loan guarantees to 
financial institutions; and creating a program to make awards 
to individuals providing certain information to the SEC.

  TABLE 2.--NET CHANGES IN THE BUDGET DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES UNDER THE RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  By fiscal year, in billions of dollars--
                                                   -----------------------------------------------------------------------------------------------------
                                                     2011    2012    2013    2014    2015    2016    2017    2018    2019    2020   2011-2015  2011-2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     NET CHANGES IN THE BUDGET DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUESaOrderly Liquidation Authority.....................     2.4     0.2    -2.1    -2.8    -2.7    -2.6    -2.9    -3.3    -2.5    -1.2       -5.0      -17.6
Securities and Exchange Commission Regulation.....    -0.7    -0.5    -0.4    -0.4    -0.5    -0.5    -0.5    -0.5    -0.5    -0.5       -2.5       -4.9
Consumer Financial Protection.....................       *     0.1     0.1     0.4     0.4     0.4     0.4     0.4     0.4     0.5        1.0        3.2
Emergency Financial Stability.....................       *     0.1     0.1     0.1     0.1     0.1     0.1     0.1     0.1     0.1        0.4        0.8
Changes Among Financial Regulators................       *    -0.2    -0.4    -0.5    -0.5    -0.5    -0.5    -0.6    -0.6    -0.6       -1.5       -4.3
Other Financial Oversight and Protection..........       *     0.1     0.1     0.2     0.2     0.2     0.1     0.1     0.1     0.1        0.7        1.3
Financial Stability Oversight.....................       *       *       *     0.1     0.1       *       *       *       *       *        0.3        0.4
Other Provisions Affecting the Federal Reserve....       *       *       *       *       *       *       *       *       *       *          *        0.1
    Total Net Change in the Budget Deficit........     1.8    -0.1    -2.6    -2.9    -2.9    -2.9    -3.3    -3.7    -2.9    -1.6       -6.6      -21.0                                                                   CHANGES IN REVENUESOrderly Liquidation Authorityb....................       0     4.2     5.2     5.1     5.2     5.2     5.2     5.1     4.8     4.0       19.7       43.9
Securities and Exchange Commission Regulation.....     1.8     1.9     2.1     2.2     2.3     2.5     2.7     2.9     2.9     3.0       10.3       24.4
Consumer Financial Protection.....................       0       0     0.1     0.1     0.1     0.2     0.2     0.2     0.2     0.2        0.4        1.2
Changes Among Financial Regulators................       0     0.2     0.5     0.5     0.5     0.5     0.6     0.6     0.6     0.6        1.7        4.6
Other Financial Oversight and Protection..........       0       *       *       *       *     0.1     0.1     0.2     0.2     0.2        0.1        0.8
Financial Stability Oversight.....................       0       0     0.1     0.1     0.1     0.1     0.1     0.1     0.1     0.1        0.2        0.5
Other Provisions Affecting the Federal Reserve....       *       *       *       *       *       *       *       *       *       *          *       -0.1
    Total Revenues................................     1.8     6.4     7.9     8.0     8.3     8.5     8.8     8.9     8.7     8.1       32.4       75.4                                                               CHANGES IN DIRECT SPENDINGOrderly Liquidation Authority:
    Estimated Budget Authority....................     2.4     4.4     3.1     2.3     2.4     2.5     2.2     1.8     2.3     2.9       14.6       26.3
    Estimated Outlays.............................     2.4     4.4     3.1     2.3     2.4     2.5     2.2     1.8     2.3     2.9       14.6       26.3
Securities and Exchange Commission Regulation:
    Estimated Budget Authority....................     1.5     1.5     1.7     1.8     1.9     2.1     2.3     2.4     2.5     2.5        8.3       20.1
    Estimated Outlays.............................     1.1     1.5     1.6     1.7     1.9     2.0     2.2     2.4     2.5     2.5        7.8       19.4
Consumer Financial Protection:
    Estimated Budget Authority....................     0.1     0.1     0.3     0.6     0.6     0.6     0.6     0.6     0.6     0.6        1.5        4.6
    Estimated Outlays.............................       *     0.1     0.2     0.5     0.6     0.6     0.6     0.6     0.6     0.6        1.4        4.5
Emergency Financial Stability:
    Estimated Budget Authority....................       *     0.1     0.1     0.1     0.1     0.1     0.1     0.1     0.1     0.1        0.4        0.8
    Estimated Outlays.............................       *     0.1     0.1     0.1     0.1     0.1     0.1     0.1     0.1     0.1        0.4        0.8
Changes Among Financial Regulators:
    Estimated Budget Authority....................       *     0.1     0.1       *       *       *       *       *       *       *        0.2        0.3
    Estimated Outlays.............................       *     0.1     0.1       *       *       *       *       *       *       *        0.2        0.3
Other Financial Oversight and Protection:
    Estimated Budget Authority....................       *     0.1     0.1     0.3     0.3     0.3     0.3     0.3     0.3     0.3        0.8        2.2
    Estimated Outlays.............................       *     0.1     0.1     0.3     0.3     0.3     0.3     0.3     0.3     0.3        0.8        2.2
Financial Stability Oversight:
    Estimated Budget Authority....................       *     0.1     0.3     0.1     0.1     0.1     0.1     0.1     0.1     0.1        0.5        0.9
    Estimated Outlays.............................       *       *     0.1     0.2     0.2     0.1     0.1     0.1     0.1     0.1        0.5        0.9
    Total Changes in Direct Spending:
        Estimated Budget Authority................     4.0     6.3     5.6     5.1     5.4     5.6     5.5     5.3     5.8     6.5       26.4       55.2
        Estimated Outlays.........................     3.6     6.3     5.4     5.1     5.4     5.6     5.5     5.3     5.8     6.5       25.8      54.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
aPositive numbers indicate increases in deficits; negative numbers indicate decreases in deficits.
bThe legislation could affect federal tax receipts under the Internal Revenue Code. However, there are a number of uncertainties regarding potential
  effects of the use of a bridge financial company by the Federal Deposit Insurance Corporation on the tax attributes of a failed financial institution.
  It is not possible to determine whether the use of a bridge financial company would provide a tax result that is more or less favorable than
  bankruptcy, which is the current-law alternative. Therefore, the staff of the Joint Committee on Taxation is not currently able to estimate the
  changes in tax revenue that would result from this provision of the bill.
Note--* = between -$50 million and $50 million. Components may not sum to totals because of rounding.

Orderly Liquidation Authority

    Title II would create new government mechanisms for 
liquidating systemically important financial firms that are in 
default or in danger of default. CBO estimates that 
implementing those provisions would, on balance, reduce the 
deficit by $17.6 billion over the 2011-2020 period.
    Under conditions outlined in the bill, the FDIC would be 
authorized to enter into various arrangements necessary to 
liquidate such firms, including organizing bridge banks that 
would be exempt from federal and state taxation. Funding for 
those transactions would come from an Orderly Liquidation Fund 
(OLF) established by the legislation and built up from 
compulsory assessments paid by private firms (which would be 
classified as revenues) and interest earned on fund balances 
(which would be invested in Treasury securities). If fund 
balances were insufficient to finance transactions that the 
FDIC deemed appropriate, necessary amounts would be borrowed 
from the Treasury up to a specified amount. Amounts borrowed 
would be based on a formula tied to the value of the assets of 
the liquidated firms and would be repaid through future 
assessments.
    The bill would direct the FDIC to assess upfront fees 
sufficient to establish the OLF at the level of $50 billion 
within 10 years after enactment but would allow the agency to 
extend that deadline if any losses to the fund are incurred 
during that period. The size of the fund would be adjusted 
periodically for inflation.
    CBO's estimate of the cost of the resolution authorities 
provided under the bill represents the difference between the 
expected values of spending by the OLF to resolve insolvent 
firms and assessments collected by the OLF. Those expected 
values represent a weighted average of various scenarios 
regarding the potential frequency and magnitude of systemic 
financial problems. Although the estimate reflects CBO's best 
judgment on the basis of historical experience, the cost of the 
program would depend on future economic and financial events 
that are inherently unpredictable. Moreover, the timing of the 
cash flows associated with resolving insolvent firms is also 
difficult to predict. It might take several years, for example, 
to replenish the funds spent to liquidate a complex financial 
institution. As a result, some of the proceeds from asset sales 
or cost-recovery fees related to financial problems emerging in 
any 10-year period might be collected beyond that period. All 
told, actual spending and assessments in each year would 
probably vary significantly from the estimated amounts--either 
higher or lower than the expected-value estimate provided for 
each year.
    Although the probability that the federal government would 
have to liquidate a financial institution in any year is small, 
the potential costs of such a liquidation could be large. 
Measured on an expected-value basis, CBO estimates that net 
direct spending for potential liquidation activities, which 
includes recoveries from the sale of assets acquired from 
liquidated institutions but excludes revenues from assessments, 
would be $26.3 billion through 2020. As a result, the expected 
timeframe for fully capitalizing the fund is longer than 10 
years. CBO's estimate of assessments reflects the effects of 
the interest earnings of the OLF (an estimated $7 billion), 
which would reduce the amount that firms would have to pay to 
capitalize the fund, and assumes that the FDIC would adjust the 
size of the fund every year to account for inflation. CBO 
estimates that revenues from assessments paid to capitalize the 
fund and cover any losses would total about $44 billion through 
2020, net of effects on payroll and income taxes.\1\ Under 
CBO's estimate, the OLF would have a balance of about $45 
billion at the end of 2020, including the value of assets 
acquired in the course of liquidating financial institutions.
---------------------------------------------------------------------------
    \1\The total amount collected from assessments is estimated to be 
about $58 billion through 2020. But such assessments would become an 
additional business expense for companies required to pay them. Those 
additional expenses would result in decreases in taxable income 
somewhere in the economy, which would produce a loss of government 
revenue from income and payroll taxes that would partially offset the 
revenue collected from the assessment itself.
---------------------------------------------------------------------------

Securities and Exchange Commission Regulation

    Titles IV, VII, and IX would change and expand the 
regulatory activities of the SEC. The bill also would grant 
that agency permanent authority to collect and spend certain 
fees; under current law, this authority is provided in annual 
appropriation acts. Based on information from the agency, CBO 
estimates that enacting those provisions would increase direct 
spending by $19.4 billion over the 2011-2020 period. Of that 
amount, CBO estimates that $16.9 billion would support the 
agency's current activities. The balance, $2.5 billion, would 
be incurred to carry out the new and expanded authorities under 
the bill. CBO estimates that enacting the provisions also would 
increase revenues by $24.4 billion over the 2011-2020 period. 
Taken together, CBO estimates that the provisions would 
decrease deficits by $4.9 billion over the 2011-2020 period.
    Most of that decrease in the deficit--about $4.3 billion--
would be from fees collected that would be unavailable to the 
agency for spending. The reduction in budget deficits from 
changes in direct spending and revenues would probably be 
accompanied by increases in discretionary spending, as 
discussed later in this estimate.
    Reclassification of Fees. Under the bill, the SEC's 
authority to collect fees would be permanent rather than being 
provided through annual appropriation action as is the case 
under current law. The bill would authorize the SEC to assess 
fees for securities trading activities sufficient to cover the 
agency's annual operating expenses, plus an additional amount 
to maintain a reserve that would be limited to 25 percent of 
the following year's budget. The bill also would authorize the 
SEC to collect fees to register securities in amounts 
sufficient to meet targets set in the legislation. Those 
collections would be recorded in the budget as revenues; 
amounts collected by the SEC that exceed annual spending limits 
plus the reserve amount would not be available for the agency 
to spend. CBO assumes that the agency would set fees at levels 
sufficient to meet its budgetary, statutory, and reserve 
requirements each year.
    Additional Regulatory Authority. The bill also would 
broaden the SEC's authority to regulate activities and entities 
associated with the securities markets. Among other things, the 
bill would require advisers to private funds and organizations 
that trade in or facilitate certain derivatives transactions to 
register with the SEC, and it would broaden the SEC's oversight 
of credit rating agencies and advisers for municipal issues. 
CBO estimates that those additional activities would cost about 
$2.5 billion over the 10-year period. CBO estimates that more 
than 800 staff positions would be added over several years to 
meet the agency's additional regulatory authority (a 22-percent 
increase over current staffing levels). This estimate assumes 
that the SEC generally would follow its regular examination 
cycle and established examination procedures for regulating 
advisers to private funds.

Consumer Financial Protection

    Title X would establish the Bureau of Consumer Financial 
Protection as an autonomous entity within the Federal Reserve. 
The bureau would enforce federal laws related to consumer 
financial protection by establishing rules and issuing orders 
and guidance. CBO estimates that creating the BCFP would 
increase budget deficits by $3.2 billion over the 2011-2020 
period.
    The bureau would be authorized to:
           Examine and regulate insured depository 
        institutions and credit unions with more than $10 
        billion in assets;
           Request reports from insured depository 
        institutions and credit unions with $10 billion in 
        assets or less, and participate in the examinations 
        performed by the regulators of those institutions; and
           Supervise large nondepository institutions, 
        mortgage lenders, brokers, and financial service 
        providers.
    The bureau would coordinate examinations with other federal 
or state regulators of the institutions. Similar functions and 
the personnel who now perform those duties at federal agencies 
and the Federal Reserve would be transferred to the new bureau.
    The bill would require the Board of Governors of the 
Federal Reserve to fund the BCFP through transfers from the 
earnings of the Federal Reserve. The amounts transferred would 
be limited to a percentage, starting at 10 percent in 2011 and 
increasing to 12 percent in 2013 and thereafter, of the 2009 
total operating expenses of the Federal Reserve, adjusted 
annually for inflation. In CBO's judgment, the costs of the 
BCFP should be reported as expenditures in the federal budget 
(rather than a reduction in revenues) because the BCFP would be 
independent of the Federal Reserve and its activities would be 
separate and distinct from the Federal Reserve's 
responsibilities for monetary policy and financial regulation. 
Therefore, CBO estimates that the provisions of title X would 
increase direct spending by $4.5 billion over the 2011-2020 
period. That estimate is based on the Federal Reserve's 
reported 2008 operating expenses, the most recent information 
available.
    Based on information from the Federal Reserve, CBO 
estimates that about 515 staff positions would be transferred 
from the Federal Reserve to the BCFP to carry out the new 
regulatory authorities. CBO estimates that this transfer of 
staff would reduce the Federal Reserve's operating expenses by 
$1.2 billion over the 2011-2020 period, increasing remittances 
from the Federal Reserve to the Treasury (which are recorded in 
the federal budget as revenues) by that amount.

Emergency Financial Stability

    In 2008, the FDIC established a temporary program to 
guarantee certain obligations of insured depository 
institutions, holding companies that include insured depository 
institutions, and some affiliates of those firms. (The program 
remains open to some new participants, and significant 
potential liabilities remain from existing participants.) 
Participants pay an upfront fee set to offset expected losses, 
and any shortfall will be recovered through an assessment on 
all FDIC-insured institutions. Conversely, in the event that 
any excess fees are collected, those amounts will revert to the 
Deposit Insurance Fund (DIF) and may be spent or used to reduce 
future deposit insurance premiums. The program provides two 
types of guarantees: one program, which expires in December 
2012, is for newly issued, senior unsecured debt, and the 
other, which expires in December 2010, is for amounts in 
certain non-interest-bearing accounts.
    Title XI would provide a new statutory framework for 
similar, but potentially much broader, assistance. Under the 
bill, the FDIC would be authorized to establish a guarantee 
program if the Federal Reserve, the Secretary of the Treasury, 
and the FDIC determine that a liquidity crisis warrants use of 
such authority. Although the types of firms eligible to 
participate would be similar to those eligible under the 
existing FDIC program, the bill would not limit the types or 
duration of financial obligations that could be guaranteed. 
Firms still would be required to pay an upfront fee for the 
guarantees, but any shortfall would be recovered solely from 
program participants rather than all FDIC-insured institutions. 
In addition, any excess fees would be deposited in the U.S. 
Treasury and would not be available to be spent.
    CBO's estimate of the cost of those provisions reflects the 
expected value of the costs of such guarantees relative to the 
expected value of the costs that would be incurred under 
current law. CBO expects that, in the absence of this 
legislation, the FDIC would respond to any future liquidity 
crises by implementing guarantee programs similar to those it 
adopted in 2008. The costs of this program, like those that 
would result from implementing the liquidation authorities in 
title II, would depend on circumstances that are difficult to 
predict. In addition, cash flows over the 10-year period would 
depend, as for title II, on the lag between potential spending 
for losses and the collection of fees to offset those costs. 
Therefore, while this estimate reflects CBO's best judgment 
regarding expected costs, the actual costs would probably vary 
significantly from the amount estimated for any given year.
    Based on historical experience, we expect that the 
probability of systemic liquidity problems in any year is 
small. In the event of liquidity crises, however, the 
legislation would authorize the FDIC to take a broader range of 
actions that could generate losses that would take some time to 
recover. In particular, CBO expects that limiting the recourse 
for cost-recovery fees to program participants would cause the 
FDIC to recoup losses over a long period of time to avoid 
placing large burdens on a small set of firms. Altogether, CBO 
estimates that enacting those provisions would increase net 
direct spending by $0.8 billion over the 2011-2020 period 
relative to current law.

Changes Among Financial Regulators

    Title III would change the regulatory regime for 
supervising banks, thrifts, and related holding companies. It 
would abolish the Office of Thrift Supervision (OTS) and reduce 
the number of firms regulated by the Federal Reserve. 
Supervision of firms with consolidated assets of less than $50 
billion that currently are regulated by the OTS and the Federal 
Reserve would be transferred to the Office of the Comptroller 
of the Currency (OCC) or the FDIC, depending on each firm's 
charter. The Federal Reserve would continue regulating bank 
holding companies with assets totaling above $50 billion and 
also would supervise thrift holding companies exceeding that 
threshold. Other provisions would direct agencies to complete 
the transition within 18 months after enactment; authorize 
spending of unobligated balances held by the OTS for transition 
and other costs; and allow the OCC to enter into agreements 
without regard to existing laws governing the disposition of 
real or personal property. Finally, the bill would require all 
of those agencies, including the Federal Reserve, to charge 
fees to cover supervisory expenses.
    CBO estimates that implementing those provisions would 
reduce the deficit by an estimated $4.3 billion over the next 
10 years. CBO expects that changes in costs that would result 
from transferring personnel among the banking agencies would 
have no net budgetary impact because they would be offset by 
corresponding changes in the amounts collected from regulated 
institutions. The net budgetary impact of this title would 
result from:
           Collecting fees from firms currently 
        regulated by the Federal Reserve, which CBO estimates 
        would average about $500 million a year or a total of 
        $4.6 billion over the 2011-2020 period;
           Spending of the unobligated balances held by 
        the OTS over the 2011-2020 period, which CBO estimates 
        would total about $150 million, net of certain existing 
        liabilities; and
           Financing the acquisition of buildings and 
        other property for OCC operations, which CBO estimates 
        would result in a net increase in direct spending of 
        $150 million over the next 10 years.
    This title would change direct spending and revenues 
because of the way banking agencies are funded. Under current 
law, costs incurred by the OCC, OTS, and FDIC are recorded in 
the budget as direct spending and are offset by receipts from 
annual fees or insurance premiums. The budgetary effects of the 
Federal Reserve's activities are recorded as changes in 
revenues (governmental receipts). After accounting for changes 
in agency workloads and the implementation of new supervisory 
fees, CBO estimates that most of the budgetary impact of those 
changes would be recorded in the budget as an increase in 
revenues.

Other Financial Oversight and Protections

    The bill would change the authorities of the PCAOB and 
SIPC, which provide oversight and various protections in the 
financial markets. The bill also would establish a program to 
give awards to individuals who provide information to the SEC 
about violations of securities laws. CBO estimates that taken 
together, those provisions would increase budget deficits by 
$1.3 billion over the 2011-2020 period.
    In particular, the bill would establish a whistleblower 
program at the SEC that would award a portion of penalties 
collected in certain proceedings brought for violation of 
securities laws to individuals providing information leading to 
the imposition of the penalties. Based on information from the 
SEC, CBO estimates that this program would cost about $100 
million per year once the regulations are in place. We estimate 
that enacting the award program would increase direct spending 
by $0.9 billion over the 2011-2020 period.
    The bill would expand the authority of the PCAOB to oversee 
the auditors of brokers and dealers that are registered with 
the SEC; those provisions also would increase fees collected by 
the PCAOB to support examination activities. Based on 
information from the PCAOB, CBO estimates that the additional 
oversight and examination requirements would increase the 
agency's costs by about $25 million per year and that the 
agency would increase fees charged to brokers and dealers to 
cover those additional costs. CBO estimates that enacting the 
PCAOB provisions would increase direct spending by $0.2 billion 
over the 2011-2020 period and increase revenues, net of income 
and payroll tax offsets, by a similar amount over the same 
period. The net effect on the deficit as a result of the PCAOB 
provisions would be less than $0.1 billion.
    The bill would raise the amount that SIPC would be 
authorized to borrow from the Treasury. Under current law, SIPC 
makes payments from fee collections and reserves to investors 
that are harmed when a brokerage firm fails and customers' 
assets are missing. In the event collections and reserves are 
insufficient to cover the losses, SIPC is authorized to borrow 
up to $1 billion from the Treasury; the bill would raise that 
borrowing limit to $2.5 billion. SIPC would repay any amounts 
borrowed by raising fees paid by brokers and dealers that are 
registered with the SEC; such fees are recorded in the budget 
as revenues.
    Based on information from SIPC, CBO estimates that the 
agency would probably exercise some of the additional borrowing 
authority provided in this title during the next 10 years. We 
estimate that borrowing additional funds would increase direct 
spending by about $1.0 billion over the 2011-2020 period. 
Further, we estimate that SIPC would recover that cost by 
raising fees, thus increasing revenues over the same period by 
$0.7 billion; CBO estimates that the net effect of this 
provision would be to raise budget deficits by $0.3 billion 
over the 2011-2020 period.

Financial Stability Oversight

    Title I would establish a new council and office in the 
Department of the Treasury to oversee the financial markets. 
The Financial Stability Oversight Council, led by the Secretary 
of the Treasury, would be responsible for identifying risks to 
the financial stability of the United States, facilitating 
information sharing and setting oversight priorities among 
regulators, and potentially directing the Federal Reserve to 
supervise additional financial institutions that it does not 
currently regulate. The council would rely upon the OFR, also 
established in the bill, to collect information on financial 
markets and to provide independent research.
    Based on amounts spent by other councils and agencies that 
provide similar levels of analysis and support, CBO estimates 
that that those new functions would cost about $75 million 
annually. We expect that the office would steadily expand its 
staff and budget over a three- to four-year period before it 
reached that level of effort. We estimate that those functions 
would cost $0.3 billion over the 2011-2015 period and $0.7 
billion over the 2011-2020 period.
    Title I also would allow the OFR to enter into enhanced-use 
lease arrangements with nonfederal partners to acquire new 
facilities. Based on the experience of other agencies with 
similar authorities, CBO expects that such leases would involve 
significant federal commitments. We estimate that the OFR would 
use its enhanced-use leasing authorities to build one general-
purpose office building at a net cost of $0.2 billion over the 
2011-2015 and 2011-2020 periods. CBO expects that the remaining 
construction costs would be covered by fee collections after 
2020.
    To fund the OFR and the council, the legislation would 
establish a Financial Research Fund within the Treasury. For 
the first two years after enactment, the costs of the council 
and the OFR would be paid by the Federal Reserve. In CBO's 
judgment, those costs should be recorded as expenditures in the 
federal budget because, like the BCFP, the council and the OFR 
would be independent of the Federal Reserve and their 
activities would be distinct from the Federal Reserve's 
responsibilities for monetary policy and financial regulation. 
Starting in 2013, the Secretary of the Treasury would collect 
an assessment from certain bank holding companies and nonbank 
financial companies supervised by the Federal Reserve that 
would be sufficient to cover the operating expenses of the OFR 
and the council.
    CBO estimates that collecting the assessment, net of income 
and payroll tax offsets, would increase revenues by $0.2 
billion over the 2011-2015 period and $0.5 billion over the 
2011-2020 period. On balance, we estimate that enacting title I 
would increase budget deficits by $0.3 billion over the 2011-
2015 period and $0.4 billion over the 2011-2020 period.

Other Provisions Affecting the Federal Reserve

    CBO estimates that the requirements in a number of titles 
would result in incremental costs to the Federal Reserve, 
thereby reducing remittances to the Treasury (which are 
recorded in the budget as revenues). Based on information from 
the Federal Reserve, CBO estimates that those provisions would 
reduce revenues by about $0.1 billion over the 2011-2020 
period. CBO expects the costs under title I to occur only in 
the first few years; in all other cases, the costs are expected 
to be ongoing. The key provisions of this sort are:
     The Chairman of the Board of Governors would be a 
member of the Financial Stability Oversight Council, and 
Federal Reserve staff could be assigned to support the work of 
the council.
     Under title VI, the Federal Reserve would incur 
costs to supervise any qualifying securities holding companies 
that elect to be supervised by the Federal Reserve. 
Additionally, the Federal Reserve would develop, in conjunction 
with other federal banking agencies, the regulations to 
implement restrictions regarding investments by banking 
organizations in private equity funds and hedge funds and the 
proprietary trading activities of banking organizations.
     Title VII would expand the rule-making 
requirements for the Federal Reserve related to capital and 
margin requirements for swap dealers and major swap 
participants that are banks.
     Title VIII would likely increase the workload of 
the Federal Reserve to supervise systemically important 
entities that are involved in settling payments between 
financial institutions.

Changes in Spending Subject to Appropriation

    CBO estimates that implementing the legislation would 
increase spending subject to appropriation by about $4.6 
billion over the 2011-2015 period (see Table 3). Most of this 
additional spending would result from the proposed 
reclassification of fees and spending by the SEC, leading to a 
reduction in discretionary spending by the SEC and a greater 
reduction in discretionary offsetting collections from SEC 
fees.

Reclassification of SEC Fees and Spending

    Enacting the bill would change the budgetary classification 
of fees collected by the SEC from offsetting collections 
(amounts netted against discretionary appropriations) to 
revenues. In addition, because the legislation would authorize 
the SEC to spend all the fees it collects without further 
appropriation, the need to appropriate funds for the SEC's 
operations would be eliminated. Historically, fees collected by 
the SEC have exceeded the agency's authorized spending limits.
    CBO estimates that the proposed reclassification of fees 
and spending would reduce discretionary spending by $5.7 
billion over the 2011-2015 period and reduce offsetting 
collections by $9.6 billion over the same period. Taken 
together, those reductions would increase net spending subject 
to appropriation by about $4.0 billion over the 2011-2015 
period and by $11.8 billion over the 2011-2020 period because 
the reduction in amounts that offset spending would exceed the 
reduction in authorized spending levels. (As described on page 
10, the new permanent authority to levy fees and spend the 
proceeds would decrease deficits by an estimated $2.5 billion 
over the 2011-2015 period and by $4.9 billion over the 2011-
2020 period.)

 TABLE 3.--CHANGES IN SPENDING SUBJECT TO APPROPRIATION UNDER THE RESTORING AMERICAN FINANCIAL STABILITY ACT OF
                                                      2010
----------------------------------------------------------------------------------------------------------------
                                                             By fiscal year in millions of dollars--
                                               -----------------------------------------------------------------
                                                   2011       2012       2013       2014       2015    2011-2015
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION
 
Reclassification of SEC Fees and Spending:
    Spending:
        Estimated Authorization Level.........     -1,117     -1,139     -1,167     -1,198     -1,233     -5,854
        Estimated Outlays.....................       -949     -1,136     -1,163     -1,193     -1,228     -5,669
    Offsetting Collections:
        Estimated Authorization Level.........      1,733      1,733      1,885      2,052      2,235      9,638
        Estimated Outlays.....................      1,733      1,733      1,885      2,052      2,235      9,638
        Total Reclassification of SEC Fees and
         Spending:
            Estimated Authorization Level.....        616        594        718        854      1,002      3,784
            Estimated Outlays.................        784        597        722        859      1,007      3,969
Regulation of Over-the-Counter Derivatives:
    Estimated Authorization Level.............         18         55         75         76         77        301
    Estimated Outlays.........................         16         51         73         76         77        293
Access to Mainstream Financial Institutions:
    Estimated Authorization Level.............         57         57         58         59         60        291
    Estimated Outlays.........................         15         57         58         59         59        248
Federal Insurance Office:
    Estimated Authorization Level.............          2          2          2          2          2         10
    Estimated Outlays.........................          1          2          2          2          2          9
Grants to Prevent Misleading Marketing:
    Authorization Level.......................          8          8          8          8          8         40
    Estimated Outlays.........................          1          3          7          7          8         26
Reports:
    Estimated Authorization Level.............          8          3          1          1          1         14
    Estimated Outlays.........................          7          4          1          1          1         14
    Total Changes:
        Estimated Authorization Level.........        709        719        862      1,000      1,150      4,440
        Estimated Outlays.....................        824        714        862      1,004      1,154     4,558
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to totals because of rounding

Regulation of Over-the-Counter Derivatives

    Title VII would require certain derivatives transactions to 
take place on registered exchanges and would place new 
registration and reporting requirements on entities that trade 
in or facilitate such transactions. This title would broaden 
the authority of the CFTC to regulate entities and activities 
related to those transactions.
    Based on information from the CFTC, CBO estimates that 
implementing those broader authorities would cost $293 million 
over the 2011-2015 period, assuming appropriation of the 
necessary amounts. CBO estimates that the agency would add 235 
employees by fiscal year 2013 to write regulations and to 
undertake the additional oversight and enforcement activities 
required under the bill. That would amount to a roughly 40 
percent increase over 2010 staffing levels.

Access to Mainstream Financial Institutions

    Title XII would authorize the appropriation of such sums as 
may be necessary to establish several programs aimed at 
increasing access to and usage of traditional banking services 
in lieu of alternative financial services such as nonbank money 
orders and check cashing, rent-to-own agreements, and payday 
lending. Based on pilot programs operated by the private sector 
and information collected by the FDIC, CBO estimates that this 
effort would cost $248 million over the 2011-2015 period, 
assuming appropriation of the necessary amounts.

Federal Insurance Office

    Title V would establish the Federal Insurance Office within 
the Department of the Treasury to monitor the insurance 
industry and to coordinate federal policy on insurance issues. 
The bill also would authorize the Secretary of the Treasury to 
enter into international agreements to harmonize regulations on 
the insurance industry. Based on information from the Treasury, 
CBO estimates that implementing those provisions would cost $9 
million over the 2011-2015 period, subject to the appropriation 
of the necessary amounts.

Grants To Prevent Misleading Marketing

    Title IX would authorize the appropriation of $8 million in 
each of fiscal years 2011 through 2015 for grants to states to 
protect elderly citizens from misleading marketing of financial 
products. CBO estimates that implementing this provision would 
cost $26 million over the 2011-2015 period.

Reports

    The bill would require the Government Accountability Office 
(GAO) to prepare more than 20 reports on a wide range of 
topics, including financial literacy, oversight of financial 
planners, and disclosures by issuers of municipal securities. 
The bill also would require GAO to audit the BCFP annually. 
Based on information from the agency, CBO estimates that each 
report would cost, on average, $500,000 and would be completed 
within the time allotted in the bill. CBO estimates that 
implementing the reporting provisions in the bill would cost 
$14 million over the 2011-2015 period, assuming appropriation 
of the necessary amounts.
    Pay-as-you-go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in outlays and revenues that are 
subject to those pay-as-you-go procedures are shown in the 
following table.

 CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR S. 3217, THE RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2010, AS ORDERED REPORTED BY THE SENATE COMMITTEE
                                                ON BANKING, HOUSING, AND URBAN AFFAIRS ON MARCH 22, 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   By fiscal year, in billions of dollars--
                                                    ----------------------------------------------------------------------------------------------------
                                                      2011   2012    2013    2014    2015    2016    2017    2018    2019    2020   2011-2015  2011-2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       NET INCREASE OR DECREASE (-) IN THE DEFICIT
 
Statutory Pay-as-You-Go Impacta....................    1.8    -0.1    -2.6    -2.9    -2.9    -2.9    -3.3    -3.7    -2.9    -1.6      -6.6     -21.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
aPositive numbers indicate increases in deficits; negative numbers indicate decreases in deficits.

    Intergovernmental and private-sector impact: The bill would 
impose intergovernmental and private-sector mandates, as 
defined in UMRA, on banks and other private and public entities 
that participate in financial markets. The bill also would 
impose intergovernmental mandates by prohibiting states from 
taxing and regulating certain insurance products issued by 
companies based in other states and by preempting certain state 
laws. Because the costs of complying with some of the mandates 
would depend on future regulations that would be established 
under the bill, and because CBO has limited information about 
the extent to which public entities enter into swaps with 
unregulated entities, CBO cannot determine whether the 
aggregate costs of the intergovernmental mandates would exceed 
the annual threshold established in UMRA ($70 million in 2010, 
adjusted annually for inflation). However, CBO estimates that 
the total amount of fees alone that would be collected from 
private entities would well exceed the annual threshold 
established in UMRA for private-sector mandates ($141 million 
in 2010, adjusted annually for inflation).

Mandates That Apply to Both Intergovernmental and Private-Sector 
        Entities

    Some mandates in the bill would affect both public and 
private entities, including pension funds and public finance 
authorities. The cost of complying with the mandates is 
uncertain and would depend on the nature of future regulations 
and the range of entities subject to them.
    Consumer Financial Protection. The bill would authorize the 
BCFP to regulate banks and credit unions with assets over $10 
million, all mortgage-related businesses (housing finance 
agencies, lenders, servicers, mortgage brokers, and foreclosure 
operators), and all large nonbank financial companies (such as 
payday lenders, debt collectors, and consumer reporting 
agencies). The BCFP would enforce federal laws related to 
consumer protection by establishing rules and issuing orders 
and guidance. Bank and nonbank entities that offer financial 
services or products would be required to make disclosures to 
customers and submit information to the BCFP. The bill also 
would require certain financial institutions to maintain 
records regarding deposit accounts of customers and would 
prohibit prepayment penalties for residential mortgage loans.
    Regulation of Over-the-Counter Derivatives Markets. The 
bill would impose several requirements on public and private 
entities such as pension funds, swap dealers, and other 
participants in derivatives markets. For example, the bill 
would place new requirements on derivatives; require reporting 
by entities that gather trading information about swaps, 
organizations that clear derivatives, facilities that execute 
swaps, pension funds, and swap dealers; and establish capital 
requirements for pension funds, swap dealers and major swap 
participants.
    Regulation of Financial Securities. The bill would require 
entities (including public finance authorities) that sell 
products such as mortgage-backed securities to hold at least 5 
percent of the credit risk of each asset that they securitize. 
Under the bill, the BCFP could exempt classes of assets from 
the retention requirement. The bill also would require issuers 
of securities to disclose information to the SEC about the 
underlying assets and to analyze the quality of those assets.

Mandates That Apply Only to Intergovernmental Entities

    Prohibition on Investments by Small Public Entities. The 
bill would impose a mandate on public entities that invest more 
than $25 million but less than $50 million by prohibiting them 
from entering into swaps with entities that are not federally 
regulated.
    The costs of complying with this mandate would be equal to 
the difference between the cost of entering into a swap with an 
unregulated entity and the cost of entering into one with a 
regulated entity, but because CBO has limited information about 
the extent to which public entities enter into such 
arrangements, we have no basis for estimating the cost of 
complying with this mandate.
    Prohibition on Taxation of Surplus Lines. The bill would 
establish national standards for how states may regulate, 
collect, and allocate taxes for a type of insurance that covers 
unique or atypical risks--known as surplus lines or nonadmitted 
insurance. The bill also would establish national standards for 
how states regulate reinsurance. As defined in UMRA, the direct 
costs of a mandate include any amounts that state and local 
governments would be prohibited from raising in revenues as a 
result of the mandate. The direct costs of this mandate would 
be the amount of taxes on premiums for surplus lines issued by 
out-of-state brokers that states would be precluded from 
collecting.
    While there is some uncertainty surrounding the amount of 
tax that states currently collect, the portion of the surplus 
lines market that would be affected, and the flexibility 
available to states after enactment of the bill, CBO estimates 
that forgone revenues would total less than $50 million, 
annually, beginning one year after enactment. For the purpose 
of estimating the direct cost of the mandate, CBO considered 
the taxes that the industry estimates it is paying and the 
revenues that states, as a whole, would no longer be able to 
collect as a result of the bill.
    Prohibition on Fees for Licensing Brokers. The bill would 
prohibit states from collecting licensing fees from brokers of 
surplus lines unless states participate in a national database 
of insurance brokers. CBO estimates that the costs of 
participating in the database would be small.
    Regulation of Reinsurance. The bill would prohibit states 
other than the state where a reinsurer is incorporated and 
licensed from regulating the financial solvency of that 
reinsurer, if that state is accredited by the National 
Association of Insurance Commissioners. The bill also would 
limit the way states regulate insurers that purchase 
reinsurance. Those mandates would impose no direct costs on 
states.
    Preemption of State Laws. The bill would preempt state laws 
that affect the offer, sale, or distribution of swaps as well 
as consumer protection and insurance laws. The preemptions 
would be mandates as defined in UMRA, but they would impose no 
duty on states that would result in additional spending.

Mandates That Apply Only to Private Entities

    Orderly Liquidation Fund. Under the bill, the largest 
financial companies would be required to pay assessments 
totaling up to $50 billion into the OLF over the 10 years after 
the bill's enactment. Those companies also would have to submit 
plans to regulators for how they could be liquidated in the 
event of a failure. Because of the target size of the fund, CBO 
estimates that the cost of complying with the mandates would 
greatly exceed the annual threshold for private-sector mandates 
in each of the first five years the mandate is in effect.
    Security and Exchange Commission Fees. The bill would 
increase the amount of fees collected by the SEC, and such an 
increase would impose a mandate on participants in securities 
markets. The cost of the mandate would be the incremental 
increase in such fees compared to current law. CBO estimates 
that increase would total at least $650 million over the first 
five years that the mandate is in effect.
    Financial Stability Oversight. The Financial Stability 
Oversight Council would have the authority to require the 
Federal Reserve to supervise nonbank companies that may pose 
risks to the financial stability of the United States. The 
council also would have the authority to require a large bank 
holding company that poses a risk to the financial stability of 
the United States to meet certain conditions and to terminate 
certain activities. In addition, the Federal Reserve would be 
required to establish standards for nonbank financial companies 
and large bank holding companies regarding capital and 
liquidity requirements, leverage and concentration limits, 
credit exposure, and remediation. The cost of complying with 
these mandates is uncertain and would depend on the details of 
future regulations.
    Beginning two years after the bill's enactment, certain 
bank holding companies and nonbank financial companies 
supervised by the Federal Reserve would be required to pay an 
assessment to the Secretary of the Treasury to cover the 
operating expenses of the Council and the Office of Financial 
Research. Based on information from the Treasury Department, 
CBO estimates that the cost of complying with the mandate would 
total about $70 million per year.
    Regulation of Certain Financial Companies. The regulation 
of some financial companies (including some banks, thrifts, and 
related holding companies) would be transferred to different 
federal agencies, including the OCC and the FDIC. Companies 
that are currently regulated by the Federal Reserve would be 
required to pay new fees and meet the requirements of their new 
regulator. CBO estimates that the amount of additional fees 
paid by those companies would amount to about $500 million per 
year.
    Federal regulators would be required to implement rules for 
banks, their affiliates and bank holding companies, and other 
financial companies to prohibit proprietary trading, 
sponsoring, and investing in hedge funds and private equity 
funds, and limiting relationships with hedge funds and private 
equity funds. Because the requirements on such companies would 
depend on future rules and regulations, CBO cannot estimate the 
cost of complying with the mandates.
    Companies supervised by the Federal Reserve also would be 
prohibited from voting for directors of the Federal Reserve 
Banks. CBO expects there would be no cost to comply with that 
mandate.
    Regulation of Financial Market Utilities. The legislation 
would require persons who manage or carry out payment, 
clearing, and settlement activities among financial 
institutions to meet uniform standards that would be 
established by the Federal Reserve regarding the management of 
risks and clearing and settlement activities. The cost of 
complying with the standards would depend on those future 
regulations.
    Office of National Insurance. The bill would require 
insurance companies to provide data and information to the 
Office of National Insurance, which would also have subpoena 
authority. The cost of the mandates would be small.
    Regulation of Securities Markets. The bill would broaden 
the SEC's authority to regulate entities and activities 
associated with securities markets.
    Regulation of Advisers to Hedge Funds. The bill would 
require hedge fund advisers that manage over $100 million in 
assets to register with the SEC. According to industry experts, 
the expenses for those advisers to prepare for the registration 
process would probably average less than $30,000 per firm. 
Based on information from the SEC regarding the number of firms 
that could be affected by the requirement, CBO estimates that 
the cost of the mandate would fall below the annual threshold 
established in UMRA.
    Mandatory Arbitration. The bill would authorize the SEC to 
prohibit mandatory predispute arbitration agreements between 
brokers, dealers, municipal financial advisers and their 
clients. Based upon information from industry sources, CBO 
expects that if the SEC were to impose such a mandate, the 
incremental cost to those entities of using the court system 
instead of arbitration could be significant.
    Deficiencies in Regulation. The bill would require the SEC 
to establish regulations to address any deficiencies it finds 
in the regulation of brokers, dealers, and investment advisers. 
The cost of the mandates, if any, would depend on future rules 
and regulations.
    Other Financial Oversight and Protections. The cost of each 
of the following mandates on securities markets would be small, 
relative to the annual threshold. The bill would:
           Change the makeup of the Municipal 
        Securities Regulatory Board and require municipal 
        securities advisers to register with the SEC;
           Require auditors of broker-dealers to 
        register with PCAOB and allow it to charge higher 
        regulatory fees;
           Require members of a compensation committee 
        for companies that issue securities to be independent; 
        require companies to provide for an annual nonbinding 
        vote on executive pay and disclose to shareholder the 
        relationship between executive pay and performance; and 
        require companies to have a compliance officer;
           Place additional requirements on the 
        election of directors to the board of a company; and
           Require credit rating agencies to provide 
        public disclosures about methods used to determine 
        credit ratings and the performance of those ratings; to 
        meet education requirements for analysts; and to 
        institute policies to address conflicts of interest.
    Previous CBO estimates: CBO has transmitted several cost 
estimates for bills ordered reported by the House Committee on 
Financial Services containing provisions that are similar to 
provisions in the Restoring American Financial Stability Act of 
2010. CBO also published estimates of the direct spending and 
revenue effects of the Wall Street Reform and Consumer 
Protection Act of 2009, which consolidated and amended the 
individual bills and contained additional provisions.
    On December 9, 2009, CBO transmitted an estimate for the 
Wall Street Reform and Consumer Protection Act of 2009 as 
ordered reported by the House Committee on Rules on December 8, 
2009. Earlier, on December 4, 2009, CBO published an estimate 
for the Wall Street Reform and Consumer Protection as 
introduced on December 2, 2009.
    On July 30, 2009, CBO transmitted an estimate for H.R. 
3269, the Corporate and Financial Institution Compensation 
Fairness Act of 2009, as ordered reported by the House 
Committee on Financial Services on July 28, 2009. H.R. 3269 
contains provisions that are similar to subtitle E of title IX 
of the Restoring American Financial Stability Act.
    On November 3, 2009, CBO transmitted an estimate for H.R. 
3795, the Over-the-Counter Derivatives Markets Act of 2009, as 
ordered reported by the House Committee on Financial Services 
on October 15, 2009. On November 6, 2009, CBO transmitted an 
estimate for H.R. 3795, the Derivatives Markets Transparency 
and Accountability Act of 2009, as reported by the House 
Committee on Agriculture on October 21, 1998. Both House bills 
contain provisions that are similar to title VII of the Senate 
bill.
    On November 13, 2009, CBO transmitted an estimate for H.R. 
3818, the Private Fund Investment Advisers Registration Act of 
2009, as ordered reported by the House Committee on Financial 
Services on October 27, 2009. H.R. 3818 contains provisions 
that are similar to title IV of the Senate bill.
    On December 3, 2009, CBO transmitted an estimate for H.R. 
3126, the Consumer Financial Protection Agency Act of 2009, as 
ordered reported by the House Committee on Financial Services 
on October 22, 2009. H.R. 3126 contains provisions that are 
similar to title X of the Senate bill.
    On December 3, 2009, CBO transmitted an estimate for H.R. 
3890, the Accountability and Transparency in Rating Agencies 
Act, as ordered reported by the House Committee on Financial 
Services on October 22, 2009. H.R. 3890 contains provisions 
that are similar to subtitle C of title IX of the Senate bill.
    On March 11, 2010, CBO transmitted an estimate for H.R. 
2609, the Federal Insurance Act of 2009, as ordered reported by 
the House Committee on Financial Services on December 2, 2009. 
H.R. 2609 is nearly identical to subtitle A of title V of the 
Senate bill.
    Estimate prepared by: Federal Costs: Kathleen Gramp, Susan 
Willie, Matthew Pickford, Daniel Hoople, and Wendy Kiska; 
Federal Revenues: Barbara Edwards; Impact on State, Local, and 
Tribal Governments: Elizabeth Cove Delisle; Impact on the 
Private Sector: Paige Piper/Bach, Brian Prest, and Sam Wice.
    Estimate approved by: Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                    IX. REGULATORY IMPACT STATEMENT

    In accordance with paragraph 11(b), rule XXVI, of the 
Standing Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact of the bill.

NUMBER OF PERSONS COVERED

    The reported bill would promote the financial stability of 
the United States through multiple measures designed to work 
together to improve accountability, resiliency, and 
transparency in the financial system by: establishing an early 
warning system to detect and address emerging threats to 
financial stability and the economy, enhancing consumer and 
investor protections, strengthening the supervision of large 
complex financial companies and providing a mechanism to 
liquidate such companies should they fail without any losses to 
the taxpayer, and regulating the massive over-the-counter 
derivatives market.
    Among those who would benefit from the provisions in the 
reported bill include the participants in the U.S. financial 
system, such as consumers of financial products who would be 
empowered to make more informed choices through better 
disclosures, and investors in the capital markets who would be 
better protected through greater transparency and improved 
corporate governance. Taxpayers would be protected as well, by 
ending the possibility that individual companies could be 
bailed out as they were in 2008 during the financial crisis 
when regulators did not have the ability to liquidate large, 
interconnected financial companies in an orderly way. A large, 
complex financial company that fails will either go through 
bankruptcy, or in the rare, exceptional case where the 
bankruptcy of such financial company would threaten financial 
stability, the company will be liquidated in an orderly fashion 
by the FDIC with funding from the financial services industry, 
not from the taxpayers.
    Under the reported bill, those who provide financial 
services would benefit as well since the bill seeks to ensure 
that financial companies operate in a safer, sounder manner 
through tougher oversight and accountability without 
jeopardizing the financial system through risky, irresponsible 
practices. Companies such as AIG, Lehman Brothers, and Bear 
Stearns would likely not have collapsed and put the entire 
financial system in jeopardy had they been under appropriately 
stringent supervision that limited the dangerous financial 
activities in which they engaged.
    Regulated financial companies will continue to be 
regulated, with the larger, more complex and interconnected 
financial companies facing increasingly stringent supervision. 
(Smaller banks, on the other hand, should not be subject to 
additional regulation.) While the overall thrust of the 
reported bill is to close gaps in regulations and provide 
robust supervision to rein in abusive practices by the weakly 
regulated or unregulated financial companies that led to the 
financial crisis, some financial companies may see their 
regulations rationalized and streamlined through the 
consolidation of holding company and prudential supervision 
that aims to reduce unnecessary duplication. Certain financial 
companies that previously have not been subject to robust 
regulation (or any regulation in some cases), including some 
Wall Street firms and those financial companies operating 
within the unregulated ``shadow'' banking system, will be 
subject to supervision for the first time or become subject to 
tougher oversight so that their risky activities do not trigger 
another financial crisis.

ECONOMIC IMPACT

    By promoting financial stability through a broad range of 
improvements, it is anticipated that the reported bill would 
have a positive economic impact overall by building a solid 
foundation upon which the financial system and the economy of 
the United States could continue to grow in a sustainable 
fashion, with reduced likelihood of, and mitigated impact from, 
any potential financial crises.
    The costs of the last financial crisis to American workers, 
homeowners, and economy have been enormous: 8 million jobs were 
lost, more than 7 million homes entered foreclosure, and $13 
trillion in American household wealth vanished. The reported 
bill seeks to improve the financial architecture of the U.S. to 
minimize or eliminate the likelihood of the recurrence of a 
financial crisis of such proportions. While no legislation 
could eliminate altogether economic cycles and periods of 
financial instability, the strengthened infrastructure for the 
financial system contemplated by the reported bill is intended 
to make the system more resilient and resistant to the adverse 
effects of financial instability.
    A number of provisions in the reported bill would impact 
the U.S. economy positively. For instance, the comprehensive 
regulation and rules for how the OTC derivatives market 
operates would protect taxpayers and inject greater 
transparency into U.S. markets, attracting foreign investment 
and increasing U.S. competitiveness. Increasing the use of 
central clearinghouses and exchanges as well as setting 
appropriate margining, capital, and reporting requirements will 
provide safeguards for American taxpayers and the financial 
system as a whole. The overall result would be reduced costs 
and risks to taxpayers, end users, and the financial system as 
a whole.
    The provision to prohibit banks and bank holding companies 
from proprietary trading and sponsoring and investing in hedge 
funds and private equity funds also would serve to protect 
taxpayers and reduce risks in the financial system. When losses 
from high-risk activities are significant, they can threaten 
the safety and soundness of individual banks and contribute to 
overall financial instability. Moreover, when the losses accrue 
to insured depositories or their holding companies, they can 
cause taxpayer losses. In addition, when banks engage in these 
activities for their own accounts, there is an increased 
likelihood that they will find that their interests conflict 
with those of their customers. This prohibition therefore will 
reduce potential taxpayer losses at financial companies 
protected by the federal safety net, and reduce threats to 
financial stability, by lowering the financial companies' 
exposure to risk. The provision also would prevent financial 
companies protected by the federal safety net, which have a 
lower cost of funds, from directing those funds to high-risk 
uses.
    The creation of the Consumer Financial Protection Bureau 
(CFPB) would provide a level playing field for banks and 
nonbank financial companies that sell financial products and 
services to consumers, subjecting them to uniform rules and 
consistent enforcement for the benefit of consumers. It will do 
so without creating an undue burden on banks and credit unions. 
The CFPB would enable consumers to get clear and effective 
disclosures in plain English and in a timely fashion so that 
they can shop for the best consumer financial products and 
services. The CFPB would stop regulatory arbitrage--it will 
write rules and enforce those rules consistently, without 
regard to whether a mortgage, a credit card, an auto loan, or 
any other consumer financial product or service is made by a 
bank, a credit union, a mortgage broker, an auto dealer, or any 
other nonbank financial company, so that a consumer can shop 
and compare products based on quality, price, and convenience 
without having to worry about getting trapped by fine print 
into an abusive deal. The CFPB would have been able to head off 
the subprime mortgage crisis that directly led to the financial 
crisis, because the CFPB would have been able to see and take 
action against the proliferation of poorly underwritten 
mortgages with abusive terms. The CFPB therefore serves to 
provide another safeguard for the U.S. economy, taxpayers, and 
consumers.
    Several provisions in the bill work together to strengthen 
the supervisory infrastructure of the U.S. financial system, 
reduce the likelihood that an individual financial company 
would become systemically dangerous, and protect taxpayers from 
losses if a financial company fails. The Financial Stability 
Oversight Council and the Office of Financial Research would 
monitor the financial system for emerging risks. The Federal 
Reserve would provide supervision to unregulated financial 
companies that the Council determines could threaten financial 
stability, and impose heightened prudential standards--``speed 
bumps''--such as capital, liquidity, and leverage requirements. 
If a financial company fails but its bankruptcy would threaten 
the financial system, instead of bailing out such company with 
taxpayer dollars, the FDIC would be able to step in and 
liquidate the company with funds from the largest, riskiest 
financial companies and then recover any losses from a broader 
set of large, risky financial companies, if there are any 
losses after selling off the assets of the failed company in an 
orderly fashion to avoid a ``fire sale.'' Taxpayers thus would 
not be at risk from the failure of a financial company, and no 
financial company would be too big to fail.

PRIVACY

    The reported bill is not expected to have an adverse impact 
on the personal privacy of individuals.

PAPERWORK

    The reported bill seeks to minimize any increase in 
paperwork requirements. A number of provisions require 
regulators, before they can require reports or obtain 
information from financial companies, to first consult with and 
obtain such reports or information from other regulators or 
other sources to avoid unnecessary duplication and 
administrative burden.

                X. CHANGES IN EXISTING LAW (CORDON RULE)

    On March 22, 2010 the Committee unanimously approved a 
motion by Senator Dodd to waive the Cordon rule. Thus, in the 
opinion of the Committee, it is necessary to dispense with the 
requirement of section 12 of rule XXVI of the Standing Rules of 
the Senate in order to expedite the business of the Senate.

                           XI. MINORITY VIEWS

                              ----------                              


MINORITY VIEWS OF SENATOR SHELBY, SENATOR BENNETT, SENATOR BUNNING, AND 
                             SENATOR VITTER

                             April 30, 2010

Background
    Chairman Christopher J. Dodd submitted the ``Restoring 
Financial Stability Act of 2010'' (the ``bill'' or the 
``reported bill'') to the Senate Committee on Banking, Housing 
and Urban Affairs (``Committee'') on March 15, 2010. Although 
this bill has been improved since a discussion draft was first 
introduced in November of 2009, we cannot support it in its 
current form. On March 22, the bill was voted out of Committee 
without the support of any Republican members. The Committee 
did not hold a legislative hearing on the bill. A review of the 
hearing list set forth in the majority report reveals that the 
Committee did not hold substantive hearings on most of the 
provisions in this bill. Although the Committee prepared this 
legislation to address the causes of the financial crisis of 
2008, the Committee has not conducted a single investigation 
into any aspect of the crisis. Furthermore, although the 
Committee authorized the creation of the Financial Crisis 
Inquiry Commission (S. 386) to study the causes of the crisis, 
the Commission will not report back to Congress with its 
findings and recommendations until later this year. None of the 
Commission's work informed the Committee's consideration of the 
reported bill. As a process matter, we believe that the 
Committee has yet to conduct the factual inquiries and develop 
the legislative record for a bill of this importance. We also 
note that the reported version of the bill differed in several 
substantive instances from the bill that the Committee 
approved. The discussion below is based on the bill that was 
actually approved by the Committee.
    We offer these dissenting views on the reported bill 
because of our strong belief that the bill contains serious 
flaws and will undermine the long-term health of the U.S. 
economy. The reported bill's shortcomings include its: 
institutionalization of government bailouts; creation of vast 
and unaccountable new bureaucracies with unprecedented power 
and scope; faulty financial regulatory structure; imposition of 
costly and unnecessary regulation on American businesses; 
abrogation of the bankruptcy code in favor of a resolution 
process based not on law and precedent, but rather on the whims 
of un-elected regulators; authorization of data collection and 
monitoring of American consumers that undermines traditional 
civil liberties; creation of barriers-to-entry in financial 
services that will further concentrate market-share in the 
largest financial institutions; over-reliance on the judgment 
of regulators; proliferation of costly and needless litigation; 
mandating of significant new costs on small businesses; 
establishment of new barriers to capital formation by small 
businesses; slanting of corporate government rules in favor of 
special-interest investors; and failure to address the massive 
problems at Fannie Mae and Freddie Mac.
    A detailed explanation of the reasons for Republican 
opposition to the reported bill is set forth in this document.
Title I: Financial Stability
    Title I of the reported bill establishes a council of 
federal financial regulators, the Financial Stability Oversight 
Council (``FSOC'' or ``Council''), for systemic risk regulation 
(Section 111). The overall mission and structure of the FSOC is 
sound. The FSOC would formally bring together for the first 
time all federal financial regulators to improve financial 
regulation, maintain and monitor financial stability, promote 
market discipline, and coordinate the response of the federal 
government to future financial crises. The FSOC will enable 
coordination and communication across the U.S. financial 
regulatory system.
    The particular authorities granted to the FSOC, however, 
are troubling because they entrench ``too big to fail'' 
financial institutions as a permanent part of the U.S. 
financial system, thereby perpetuating the unfair advantages 
these large institutions enjoy over their smaller competitors 
and increasing the risk of U.S. financial system instability. 
The FSOC is empowered to designate bank holding companies with 
over $50 billion in consolidated assets for heightened 
regulation by the Federal Reserve (``Fed'') (Sections 115 and 
165). The FSOC also can designate nonbank financial companies 
for regulation by the Fed.
    The definition of a ``nonbank financial company'' is broad. 
The term includes all companies, other than bank holding 
companies, organized in the U.S. or a U.S. state that are 
substantially engaged in activities that are financial in 
nature. All such companies whose material financial distress in 
the judgment of at least two thirds of the FSOC would ``pose a 
threat to the financial stability of the United States'' would 
be subject to the FSOC designation and Fed regulation (Section 
113). The FSOC systemic designation and follow-on Fed 
regulation could apply to broker-dealers, hedge funds, pension 
funds, insurance companies, and savings and loan holding 
companies (Sections 113 and 165).
    This special designation for nonbank financial companies 
and large bank holding companies will result in these financial 
institutions receiving unfair marketplace advantages. Market 
participants will interpret this special regulation as an 
implicit government guaranty that prevents these firms from 
failing. These expectations will be reinforced by the expanded 
authorities that the reported bill grants to regulators to 
support designated financial institutions, including the 
ability, as provided in Titles II and XI, to subsidize 
creditors, lend against questionable collateral, and issue debt 
guarantees. The implicit stamp of approval that designated 
financial institutions will receive from this regulatory 
restructure will allow them to obtain a lower cost of funds and 
other unfair advantages. These advantages will lead to higher 
shareholder profits and lower counterparty risk. Such firms 
will grow larger and subsume smaller firms who do not have 
these advantages. As these large firms grow, the ability of the 
government to resolve them without taxpayer support diminishes. 
If a financial institution grows too large and constitutes too 
much of some aspect of financial intermediation, the U.S. 
economy may not be able to withstand its liquidation. For 
example, the Federal government has had difficulty addressing 
Fannie Mae and Freddie Mac because they comprised a majority 
stake of the U.S. housing finance market. The reported bill may 
replicate this phenomenon for the rest of the U.S. financial 
marketplace.
    In addition, the reported bill establishes a $50 billion 
fund intended to be used in the resolution of a select group of 
large financial institutions. The select group that contributes 
to the fund will be perceived by markets as having special 
protection and will receive unfair funding advantages. Indeed, 
Treasury Secretary Timothy Geithner warned that `` . . . 
standing fund would create expectations that the government 
would step in to protect shareholders and creditors from 
losses. In essence, a standing fund would be viewed as a form 
of insurance for those stakeholders.''\259\
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    \259\Press Release, United States Department of the Treasury, 
October 29, 2009.
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    Title I of the reported bill also establishes the Office of 
Financial Research (``OFR'') (Section 151). The office is 
fundamentally flawed, as it poses a grave danger to the civil 
liberties of the American people. It has an independent and 
unaccountable head with the authority to collect any and all 
information from any and all financial companies (Section 153). 
The office even has subpoena power (Section 153). No branch of 
government has oversight of this office (Section 152). Given 
the private and personal nature of information being collected 
and monitored by this office, judicial oversight should be 
mandated.
    Advocates for the Office of Financial Research claim $500 
million will be used to purchase servers adequate to store and 
analyze data on all financial transactions in the United 
States. An additional $500 million will be required to staff 
and operate the office. The unrealistic expectation is that 
this office will identify future asset bubbles and work with 
financial regulators to mitigate them before the pre-identified 
risks manifest as financial instability events. But that is not 
the entirety of the mission.
    The advocates of the office openly claim that the office 
will result in cost savings for Wall Street financial 
institutions. The claim is that standardizing data reporting 
will dramatically reduce back office costs (costs associated 
with verifying details of trades with counter parties) and 
costs associated with maintaining reference databases (legal 
entity and financial instrument databases). The reported bill 
requires the office to share data with Wall Street financial 
institutions. Morgan Stanley estimates that implementation of a 
program like the OFR will result in a 20% to 30% savings in its 
operational costs.\260\
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    \260\``FAQs: Role of the NIF, Value and Cost.'' Committee to 
Establish the National Institute of Finance. 10 Mar. 2010. .
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Title II: Orderly Liquidation Authority

    Title II of the reported bill would institutionalize 
bailouts by granting the Executive Branch and federal 
regulatory agencies permanent authority to rescue firms and 
their creditors and shareholders. Rather than curtailing the 
ability of the federal government to bail out companies, this 
legislation would set the stage for repeated and potentially 
larger government bailouts in the future. The limited tools 
that regulators used during the recent crisis, often at the 
very edge of, if not beyond, their statutory authorities, would 
be augmented with new and broader authorities that explicitly 
empower regulators to bail out firms and their creditors and 
shareholders.\261\
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    \261\Despite clear legislative language to the contrary, the FDIC 
has interpreted the systemic risk exception under the Federal Deposit 
Insurance Act (12 U.S.C. 1823(c)(4)(G)) as authorizing the FDIC to 
provide broad financial assistance to financial institutions, including 
billions of dollars in debt guarantees. Similarly, although Section 
13(3) of the Federal Reserve Act prohibits the Board of Governors from 
making equity investments in partnerships and corporations, the Board 
of Governors has interpreted its lending authority as authorizing it to 
lend to special purpose vehicles that invest in assets of failed firms, 
even though such lending has the economic characteristics of equity.
---------------------------------------------------------------------------
    The centerpiece of these new bailout authorities is the 
reported bill's new resolution authority. It would authorize 
the Secretary of the Treasury to place any financial company 
into an administrative resolution process with the Federal 
Deposit Insurance Corporation (``FDIC'') serving as the 
receiver (Section 203). As the receiver, the FDIC, with the 
consent of the Secretary of the Treasury, is explicitly 
authorized to pay creditors and shareholders of the company 
more than they would be entitled to receive in bankruptcy 
(Section 210(d)(4)). Paying creditors and shareholders more 
than they are entitled to is the very definition of a bailout. 
The reported bill states that the FDIC should conduct 
resolutions with ``a strong presumption'' that creditors and 
shareholders bear losses (Section 204). It does not mandate 
that they take all of the losses.
    The reported bill claims that it is ``protecting taxpayers 
from bailouts,'' but it notably does not claim to end bailouts. 
Instead, it grants the FDIC the authority to impose assessments 
on financial companies to pay for bailouts of creditors and 
shareholders. Thus, the reported bill provides a permanent 
source of funding for bailouts while claiming that it protects 
taxpayers. According to the Congressional Budget Office 
(``CBO''), however, the assessments would be tax 
deductible.\262\ As a result, taxpayers are directly on the 
hook to cover the costs of a resolution. To the extent the 
assessments actually are paid by financial companies, the 
American public still picks up the tab. First, CBO has 
indicated that the assessments will result in reduced 
compensation for employees at assessed companies.\263\ Second, 
the assessments will be passed down (like all business taxes) 
to the consumers in the form of higher prices. It does not 
matter whether the funds to pay creditors and shareholders 
additional amounts come directly from taxpayers in the form of 
taxes or indirectly from the public in the form of assessments 
on financial companies. The end result is the same: the 
American people will pay for the losses of the investors of 
large financial institutions.
---------------------------------------------------------------------------
    \262\Congressional Budget Office, Cost Estimate: S. 3217 Restoring 
American Financial Stability Act of 2010, April 21, 2010.
    \263\Id.
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    By establishing a mechanism to bail out creditors and 
shareholders, the reported bill will worsen the too big to fail 
problem that plagues our financial markets. If creditors and 
shareholders know that the FDIC will bail them out using this 
resolution authority, they will impose far less market 
discipline on these firms (such as imposing conditions on the 
firm before they invest, removing management, or selling their 
interests in the firm). After all, if the government will be 
there to ensure that creditors and shareholders do not take 
losses if the company fails, any funds that investors spend to 
monitor their investments would needlessly reduce their 
ultimate profits. And, because investors will abstain from 
disciplining these too big to fail firms, the firms will 
attract ever larger amounts of capital, allowing them to grow 
bigger and giving them a competitive advantage over their 
smaller competitors who investors believe are not too big to 
fail. Moreover, investors will have incentives to take greater 
risks, as they will reap all of the gains while losses will be 
transferred to other firms by the resolution authority. In 
total, this is the same recipe that produced the colossal 
failures of Fannie Mae and Freddie Mac, necessitating a 
government rescue that has cost taxpayers more than $127 
billion to date.\264\ Accordingly, far from ending bailouts, 
the reported bill's resolution authority actually will make our 
financial system less safe, more susceptible to crises, and 
more dependent on bailouts.
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    \264\Federal National Mortgage Association. (2009) 12/31/2009 SEC 
Form 10-K Annual Report. (``When Treasury provides the additional funds 
that have been requested, we will have received an aggregate of $75.2 
billion from Treasury. The aggregate liquidation preference on the 
senior preferred stock will be $76.2 billion, which will require an 
annualized dividend of approximately $7.6 billion.'') Federal Home Loan 
Mortgage Corp. (2010). 2/24/2010 SEC Form 10-Q Quarterly Report. (``To 
date, we have received an aggregate of $50.7 billion in funding under 
the Purchase Agreement.'')
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    The reported bill's resolution authority also suffers from 
numerous technical problems. The bill does not provide any 
mechanism for ensuring that the resolution authority is not 
used to bail out creditors and shareholders of non-financial 
firms. Presently, the reported bill would allow a non-financial 
firm to be resolved under its resolution authority if (1) it is 
a subsidiary of a financial company, or (2) the Secretary of 
the Treasury determines that the company was ``primarily'' 
engaged in activities that are financial in nature. The 
Secretary's determination on whether a company is ``primarily'' 
engaged in financial activities is not reviewable, leaving the 
door open for misuse of the resolution authority. No evidence 
has been presented to the Committee that supports the use of 
the resolution authority to resolve non-financial companies.
    Further, the reported bill does not provide any check on 
the FDIC as receiver for a covered financial company. There are 
no provisions that would permit the removal of the FDIC as 
receiver if the FDIC performs poorly in executing its duties 
under this title.
    In addition, the reported bill does not guard against the 
use of the resolution authority to bail out politically 
influential creditors and shareholders. The FDIC, with the 
consent of the Treasury Secretary, can treat similarly situated 
creditors and shareholders differently, including paying some 
creditors and shareholders 100 percent (or more) of their 
claims while paying others only the amount they would have 
received in bankruptcy. This would allow the FDIC and the 
Treasury Secretary to bail out politically favored creditors 
and shareholders such as foreign governments or politically 
influential investors.
    Finally, the reported bill contains no provisions to ensure 
that the directors, senior executives, and regulators of any 
financial company placed into resolution are held accountable. 
For example, there are no provisions that address the priority 
of the claims of directors and senior executives. In addition, 
the bill lacks any provisions requiring an evaluation of the 
performance of the primary regulators of a covered financial 
company to hold the regulatory staff accountable for any 
failings in their supervision of a covered financial company.

Title III: Transfer of Powers to the Comptroller of the Currency, the 
        Corporation, and the Board of Governors

    Title III of the reported bill creates a cumbersome 
financial regulatory structure that reinforces expectations 
that large financial institutions are too big to fail and that 
contains significant gaps in regulatory oversight. By stripping 
the Fed of all banking regulatory authority except for bank 
holding companies with assets of more than $50 billion, the 
reported bill signals to market participants that large 
financial institutions have a special regulator, the Fed, which 
will not allow any of those institutions to fail. These 
expectations are reinforced by the fact that the Fed has the 
authority, and has demonstrated recently the willingness, to 
provide funding through the discount window and Section 13(3) 
of the Federal Reserve Act to prevent its regulated entities 
from failing.
    The reported bill also contains a significant regulatory 
gap because it does not automatically apply heightened 
regulatory standards to large savings and loan holding 
companies in Section 165 as it does for large bank holding 
companies. The majority claims heightened regulatory standards 
are needed for our largest financial institutions. Yet their 
reported bill exempts savings and loan holding companies from 
Section 165. In fact, it is possible to read Section 165 as a 
prohibition on applying heightened standards developed for 
large bank holding companies to savings and loan holding 
companies. This is of particular concern given the fact that 
several savings and loans holding companies are among the 
largest financial institutions in the country and contributed 
to financial instability, including American International 
Group (``AIG'') and G.E. Capital. For these and all other 
savings and loan holding companies, the majority relies on the 
wisdom and judgment of future regulators to determine through a 
Financial Stability Oversight Council vote whether to apply 
heightened regulatory standards. A superior approach would be 
to apply heightened regulatory standards to all holding 
companies with an insured depository institution. In addition, 
the construct in the reported bill is unworkable for savings 
and loan holding companies that also undertake significant 
commercial activities. The Fed is not an appropriate regulator 
for commercial activities. The reported bill fails to clarify 
or address the regulation of savings and loan holding 
companies.

Title IV: Regulation of Advisers to Hedge Funds and Others

    Title IV of the reported bill has identified hedge funds as 
potential systemic risks. To address these risks, the bill 
imposes a requirement that hedge fund advisers with more than 
$100 million under management register with the Securities and 
Exchange Commission (``SEC'' or ``Commission''). Hedge funds 
have not been identified as a cause of the financial crisis and 
investors in failed funds were not bailed out.
    Regulators should have better information about hedge 
funds, but hedge fund advisor registration is not the 
appropriate approach, and the SEC is not the proper regulator 
to carry out systemic risk oversight. The SEC's 
responsibilities are protecting investors, facilitating capital 
formation, and maintaining fair, orderly, and efficient 
markets. The SEC is not a systemic risk regulator, and when it 
tried to be with the Consolidated Supervised Entity program, it 
failed.\265\
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    \265\Of the firms regulated by the SEC under its Consolidated 
Supervised Entities (``CSE'') program, one collapsed and its creditors 
were bailed out by the Fed (Bear Stearns), one failed and was sold in 
bankruptcy (Lehman Brothers), one was rescued in a merger (Merrill 
Lynch), and two converted to bank holding companies to obtain a rescue 
from the Fed's discount window (Goldman Sachs and Morgan Stanley). The 
CSE program never was authorized by Congress. It was created by the SEC 
in 2005 to provide consolidated regulation to those select firms to 
allow them to avoid consolidated supervision under European Union 
regulation. The record of the SEC's CSEs programs must certainly stand 
as among the greatest regulatory failures in financial history, 
especially if one considers that the financial crisis started in 
September 2007 with the failure of two investment funds sponsored by 
Bear Stearns. Its record should serve as a reminder of the systemic 
problems and financial crises that flawed regulatory structures and 
agencies can produce. While well conceived regulation can enhance 
markets, poorly conceived regulation, especially when the regulation 
involves a captured regulator, can have devastating effects on the 
overall economy, financial stability, and the financial well-being of 
millions of Americans.
---------------------------------------------------------------------------
    It is likely that investors will treat SEC registration as 
an SEC seal of approval. Fraudulent hedge fund advisors likely 
will use registration as a marketing tool.\266\ Investor 
protection is an important job for the SEC, but its resources 
are not endless, and the SEC notoriously is unable to inspect 
its current stable of advisors on a regular basis.\267\ Hedge 
funds are open only to wealthy investors on the theory that 
those investors can hire people to advise them about 
investments and that, ultimately, they can afford to lose 
money. Investors who do not meet the wealth threshold or who 
choose to invest in more closely regulated vehicles can invest 
in public investment companies. Limited SEC resources should 
not be diverted from regulated public investment companies, 
such as mutual funds, in order to monitor hedge fund advisors, 
as the reported bill proposes to do. If the SEC is spending its 
resources in this manner, it will not be long before investors 
that do not meet the accredited investor threshold start 
demanding to be allowed to invest in hedge funds. It will be 
hard to counter the argument that they should have access to 
investments on which the SEC is spending its investigative 
resources.
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    \266\Bernard Madoff used the fact that the SEC had inspected his 
firm as a way to reassure skeptical investors. See SEC Office of 
Investigations, Investigation of Failure of the SEC to Uncover Bernard 
Madoff's Ponzi Scheme--Public Version, Aug. 31, 2009, at 427 (available 
at: 
http://www.sec.gov/news/studies/2009/oig-509.pdf) (``In addition, 
private entities who conducted due diligence stated that Madoff 
represented to them that the SEC had examined his operations when they 
raised issues with him about his strategy and returns.'').
    \267\See, e.g., Testimony by Mary Schapiro, Chairman of the 
Securities and Exchange Commission, before the Subcommittee on 
Financial Services and General Government of the House Committee on 
Appropriations (Mar. 17, 2010) (available at: http://www.sec.gov/news/
testimony/2010/ts031710mls.htm) (``It is important to note, however, 
that even with an increase in the number of exams these additional 
resources will enable us to conduct, we anticipate examining only nine 
percent of SEC registered investment advisers and 17 percent of 
investment company complexes in FY2011.'').
---------------------------------------------------------------------------
    The reported bill also exempts venture capital and private 
equity advisors, but delegates to the SEC the difficult task of 
defining what those terms mean. The SEC, as part of its failed 
attempt several years ago to require hedge fund advisors to 
register, distinguished hedge funds from other types of funds 
by looking to the length of the investor lock-up period. In 
order to avoid registration, some hedge funds simply extended 
their lock-up periods beyond the two year cut-off. Investors' 
ability to exit a fund with which they were dissatisfied was 
thus curtailed. The reported bill may perpetuate this problem.
    The reported bill is not the right way to achieve the 
objective of giving the appropriate regulator the information 
necessary to assess the potential systemic risks posed by large 
hedge funds, and it threatens to divert the SEC from its core 
mission.

Title V: Insurance

    Title V would establish an Office of National Insurance 
(``ONI''). This office would remedy the lack of insurance 
expertise in the Executive Branch revealed during the insurance 
crises triggered by the September 11, 2001 terrorist attacks 
and by the failure of AIG in 2008. As was revealed during the 
Committee's March 5, 2009 hearing on the Fed's rescue of AIG, 
the problems at AIG were not limited to the company's 
derivatives operations in its Financial Products division. As 
discussed further in Title VI, there were also serious problems 
with several of AIG's insurance companies due to the collapse 
of their massive securities lending operation. In light of the 
serious ramifications that the failure of an insurance company 
can have on our financial system, as demonstrated by the 
collapse of AIG, we believe that among the issues that the 
reported bill presently mandates the director of ONI to study, 
there should be a study of the adequacy of state guaranty funds 
to handle the failure of large, interconnected, and 
international insurance companies.

Title VI: Improvements to Regulation of Bank and Savings Association 
        Holding Companies and Depository Institutions

    Title VI of the reported bill contains improvements to the 
regulation of bank and savings and loan holding companies and 
depository institutions. What notably is lacking in Title VI is 
any provision to enhance regulatory oversight of large 
insurance companies. During the financial crisis, several 
prominent insurance companies received a Federal bailout 
through the TARP program. In addition, the collapse of AIG 
revealed serious shortcomings in the regulation of large, 
interconnected, and international insurance companies. The 
failure of AIG was due, in large part, to the massive 
securities lending operation that several state-regulated AIG 
insurance companies ran collectively. Documents submitted at 
the Committee's sole hearing on AIG indicated that several of 
these insurance companies would have been insolvent had not the 
Fed re-capitalized them as part of its bailout. The record 
revealed that the problems at AIG were well-known by its 
regulators at the Office of Thrift Supervision and by state 
insurance commissioners, but they failed to take sufficient 
action to prevent the collapse of the company.\268\ In 
addition, it has recently been revealed that Treasury Secretary 
Geithner was informed personally by AIG of the company's 
problems weeks before AIG received a bailout from the Fed.\269\ 
The Secretary also failed to take preventive action. While 
insurance regulation is a complex matter and our state system 
largely has functioned well for nearly two hundred years, the 
size and international reach of many insurance companies has 
raised legitimate questions, including whether reforms are 
needed to reflect changes in the marketplace. The failure of 
the reported bill to include provisions to ensure the proper 
oversight of large, interconnected, and international insurance 
companies like AIG is a glaring omission.
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    \268\Senate Committee on Banking, Housing, and Urban Affairs, 
``American International Group: Examining what went wrong, government 
intervention, and implications for future regulation,'' March 5, 2009.
    \269\Sorkin, Andrew Ross, ``Too Big To Fail'' p. 207, 235, (Viking 
2010).
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    It is also worth noting that the reported bill remains 
silent with respect to the implementation of prompt corrective 
action during the economic downturn. Enacted as part of the 
Federal Deposit Insurance Corporation Improvement Act of 1991, 
prompt corrective action was designed to protect the Deposit 
Insurance Fund by requiring regulators to resolve failing banks 
before they incur substantial losses. An examination of the 
material loss reviews for the FDIC's resolution of banks over 
the past 3 years reveals that the resolution of banks regularly 
results in losses of 20 to 30 percent of assets.\270\ Under 
prompt corrective action, regulators are required to close any 
bank whose capital falls below 2 percent of tangible net 
equity. The Committee has yet to hold a single hearing on the 
effectiveness of regulators in implementing prompt corrective 
action despite the substantial risks to the taxpayers involved.
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    \270\Under Section 38(k) of the Federal Deposit Insurance Act, the 
inspector general for the appropriate Federal banking agency must make 
a written report reviewing the agencies supervision and implementation 
of prompt corrective action whenever the Deposit Insurance Fund incurs 
a material loss with respect to an insured depository institution. The 
term ``material loss'' is defined as a loss that exceeds the greater of 
$25 million or 2 percent of an institution's total assets at the time 
the FDIC was appointed receiver.
---------------------------------------------------------------------------
    The Committee also has failed to develop a record to 
demonstrate a link between proprietary trading and financial 
instability during the housing and credit market crisis. Yet, 
the reported bill contains a broad prohibition on proprietary 
trading. Insured depository institutions benefit from a 
government provided deposit insurance subsidy so robust 
activity restrictions, including proprietary trading 
limitations, may be warranted. But, the policy rationale for 
extending a proprietary trading ban beyond insured depositories 
is less compelling as non-insured depository institutions 
should not benefit from the government subsidies provided by 
the FDIC.

Title VII: Improvements to Regulation of Over-the-Counter Derivatives 
        Markets

    In addressing the regulation of the U.S. over-the-counter 
(``OTC'') derivatives market, the reported bill is flawed in 
its objectives and the mechanics for achieving those 
objectives. Rather than focusing on the key goals of regulatory 
access and authority and greater use of central clearing, the 
bill attempts to restructure dramatically the OTC derivatives 
market. It does so without adequate regard for potentially 
severe unintended consequences, which include increasing 
systemic risk and outsourcing jobs to markets overseas, harming 
the U.S. economy.
    The reported bill, despite its purported commitment to 
regulatory transparency, does not even reach significant 
segments of the OTC derivatives market. For example, a large 
percentage of the OTC market consists of foreign exchange 
derivatives which are explicitly carved out of the bill. 
Similarly, the definition of a ``swap,'' which determines the 
bill's coverage, omits a category of swaps that, before now, 
has been included in the definition.\271\ Rather than casting a 
wide net and then making appropriate exclusions, the bill 
leaves significant portions of the OTC swaps market in the 
dark.
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    \271\Specifically, the Gramm-Leach-Bliley Act treated as a ``swap 
agreement'' any agreement, contract, or transaction that ``provides for 
the purchase or sale, on a fixed or contingent basis, of any commodity, 
currency, instrument, interest, right, service, good, article, or 
property of any kind.'' These are not ``swaps'' in the reported bill.
---------------------------------------------------------------------------
    The bill will have deleterious effects in the derivatives 
markets and in the marketplace as a whole. The highly 
international swaps market, which already is well established 
in Europe and Asia, may simply move offshore and beyond U.S. 
regulators' reach to a jurisdiction with a more rational 
regulatory regime.\272\ Corporations that currently use 
derivatives to manage their risk and may not be able to access 
foreign markets may choose simply not to manage their risk at 
all. Unhedged corporate risks will result in higher prices and 
greater price volatility for consumers, and less innovation and 
capital investment. Companies that cannot withstand a large 
unhedged risk may fail, resulting in large job losses. 
Alternatively, corporations may continue to use derivatives 
subject to the bill's strict requirements for collateral. 
Setting aside collateral in the required amounts will cause 
companies, already having a difficult time raising capital, to 
forgo other valuable uses of their capital. The effect on the 
real economy and the job market would be substantial. One 
estimate suggests that mandatory clearing and margining would 
force companies to set aside $900 billion in capital that would 
otherwise be used to build factories, hire workers, and fund 
research and development.\273\
---------------------------------------------------------------------------
    \272\Less-established overseas markets, such as Malaysia, have also 
expressed interest in attracting OTC derivatives trades. See, e.g., 
Financial Times, ``Malaysia bourse plans derivatives boost'' (April 27, 
2010) (available at: http://www.ft.com/cms/s/0/5fdb7ab8-5222-11df-8b09-
00144feab49a.html).
    \273\See, e.g., Keybridge Research, An Analysis of the Business 
Roundtable's Survey on Over-the-Counter Derivatives (Apr. 14, 2010) 
(available at: http://www.businessroundtable.org/sites/default/files/
BRT%20OTC%20Derivatives%20Survey%20284%2014%2010%29.pdf) (finding that 
``a 3% margin requirement on OTC derivatives could be expected to 
reduce capital spending by $5 to $6 billion per year, leading to a loss 
of 100,000 to 120,000 jobs, including both direct and indirect 
effects''); Letter from the Natural Gas Supply Association and the 
National Corn Growers Association to Senate Majority Leader Reid, 
Senator Lincoln, and Senator Chambliss (April 15, 2010) (available at: 
http://www.ngsa.org/newsletter/pdfs/2010%20Press%20Releases/16-
Corn%20Growers%20Join%20Drumbeat%20Against%20Mandatory%20Clearing.pdf).
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    The reported bill, by imposing bank-style capital 
requirements that are as strict or stricter for non-bank 
entities, likely will drive some of these entities out of the 
market and concentrate the market further among the dealers who 
already have established a powerful foothold in the market. 
Capital requirements are not necessary for non-banks that do 
not have access to federal deposit insurance or another form of 
federally subsidized insurance in the event of default.
    The reported bill is rooted in a presumption that central 
clearing is always risk-reducing. While central clearing can 
reduce risk and should be encouraged, its abilities to do so 
should not be overstated. First, some clearinghouses may be 
stronger than others. A clearinghouse that is poorly run and 
poorly regulated may not be a strong counterparty. Second, even 
a well-regulated clearinghouse is not a riskless 
counterparty.\274\ Third, there is no basis for the bill's 
categorical claim that there is ``a greater risk to the swap 
dealer or major swap participant and to the financial system 
arising from the use of swaps that are not centrally cleared'' 
that warrants ``substantially higher capital requirements'' for 
swaps that are not centrally cleared. Fourth, specialized 
dealers in bilateral markets can monitor and manage the risks 
of complex, illiquid derivatives contracts and complex, opaque 
counterparties more effectively than all-purpose clearinghouses 
that are designed to clear standardized liquid contracts among 
clearing members.
---------------------------------------------------------------------------
    \274\For example, last year, the Federal Reserve Board of Governors 
assigned a 20 percent risk weighting to ICE Trust, which is the same 
risk weighting that the individual members of the clearinghouse 
typically get. See letter from the Federal Reserve Board of Governors 
to Cleary, Gottlieb, Steen and Hamilton LLP (June 5, 2009) (available 
at: http://www.federalreserve.gov/boarddocs/legalint/
BHC_ChangeInControl/2009/20090605.pdf) (``Exposures to ICE Trust in the 
form of Margin and [Guaranty Fund] Contributions are not materially 
riskier than exposures to the participants themselves, and the 
exposures to ICE Trust, therefore, need not be subject to higher risk 
weights.'').
---------------------------------------------------------------------------
    Moreover, most participants in the OTC market, such as 
hedge funds and commercial end users, do not clear directly 
through a clearinghouse. As a result, even when they clear a 
derivative, they do not directly face the clearinghouse. 
Instead, they clear through a firm that is a member of the 
clearinghouse. Such indirect access to clearinghouses exposes a 
market participant to credit risk associated with that clearing 
member and its other customers. In the event of the failure of 
the clearing member or one of its customers, other customer 
assets may be at risk. Certain protections can be put in place 
to minimize the likelihood of loss for non-defaulting 
customers, but some level of risk remains. As the CME Group 
notes, ``While the policies applicable to the segregation of 
customer monies for products traded in regulated markets are 
specifically designed to protect customers from the 
consequences of a clearing member's failure, they do not always 
provide complete protection should the default be caused by 
another customer at the firm.''\275\
---------------------------------------------------------------------------
    \275\CME Group, CME Clearing Financial Safeguards (available at: 
http://www.cmegroup.com/clearing/files/financialsafeguards.pdf)
---------------------------------------------------------------------------
    The reported bill improperly delegates significant policy 
decisions to regulators and raises the possibility of arbitrary 
implementation. For example, market participants' statuses as 
``major swap participants'' would turn on the judgment of 
regulators, who would have an incentive to make their 
regulatory reach extend as far as possible. Moreover, because a 
``major swap participant'' is defined, in part, by whether a 
person would cause his or her counterparties ``significant 
credit losses,'' a person's status will depend, in part, on how 
well its counterparties manage risk. This approach will 
undermine, rather than enhance, market discipline.
    The bill, in trying to address systemic risk concerns, 
gives rise to a new set of concerns. As soon as one 
clearinghouse starts clearing a swap, there will be a 
presumptive mandate to clear the swap. In other words, 
clearinghouses' profit-driven, competitive decisions on when to 
start clearing which products would drive the clearing mandate. 
Moreover, the bill would require the SEC and the Commodity 
Futures Trading Commission (``CFTC'') to identify swaps that 
clearinghouses had not asked for permission to clear that, in 
the judgment of the SEC and CFTC, should be accepted for 
clearing. By allowing the regulators to force clearinghouses to 
accept swaps for clearing, the bill could force clearinghouses 
to accept for clearing swaps the risks of which they do not 
understand. Pressuring clearinghouses into clearing in this 
manner could sow the seeds for a clearinghouse failure sometime 
in the future.
    The reported bill makes it very difficult for anyone to get 
an exemption from clearing and exchange trading requirements. 
It allows the SEC and CFTC, with prior approval by the FSOC, to 
exempt a swap if one of the parties is not a swap dealer or 
major swap participant and does not meet the eligibility 
requirements of a clearing organization. Faced with the 
prospect of a long, burdensome exemptive process, the bill will 
dissuade corporations from using swaps to offset their risks. 
Even if a corporation succeeds in getting an exemption from the 
clearing requirement, it will be subject to margin requirements 
unless it can obtain an exemption. Exemptions only will be 
available for swaps that fit within the narrow and technically 
complex Generally Accepted Accounting Principles hedging 
category.
    The reported bill requires that cleared swaps also be 
traded on an exchange or exchange-like facility. This 
requirement will effect a significant change in market 
structure. End users will face higher, not lower, costs as 
their dealers will find it more difficult to lay off the risk 
that they take on. Indeed, the exchange trading requirement may 
cause dealers to retain more risk on their books. Other markets 
have been allowed to develop in a manner that serves the 
interests of investors. Proponents of an exchange trading 
requirement cite improved price transparency. Exchange trading 
is not necessary for transparency, however. Through a system 
like the TRACE system employed in the corporate bond market, 
valuable post-trade transparency can be communicated to 
investors for use in assessing execution quality, marking their 
books, and assessing pricing in future transactions. SEC 
Chairman Mary Schapiro and independent academics have embraced 
a TRACE-like solution for the OTC derivatives market.\276\
---------------------------------------------------------------------------
    \276\See ``Stronger regulation would help bring financial swaps out 
of the shadows,'' Washington Post OpEd by Mary Schapiro (April 2, 2010) 
(available at: http://www.washingtonpost.com/wp-dyn/content/article/
2010/04/01/AR2010040102801.html), and the statement of the Shadow 
Financial Regulatory Committee on Derivatives, Clearing and Exchange-
Trading (April 26, 2010) (available at: http://www.aei.org/docLib/
Statement%20No.%20293-%20Derivatives-
%20Clearing%20and%20Exchange%20Trading.pdf).
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Title VIII: Payment, Clearing, and Settlement Supervision

    Title VIII of the reported bill would give the Council 
broad power to identify financial market utilities and payment, 
clearing or settlement activities that it deems to be now, or 
likely to become, systemically important. Those entities and 
activities would then be subject to risk regulation by the 
Fed's Board of Governors. This title is another example of the 
bill's inclination to leave difficult decisions to regulators. 
Forcing regulators to determine when someone or something ought 
to be regulated is an inappropriate delegation of Congressional 
power. Moreover, a regulator charged with the task of 
identifying regulatory targets has every incentive to cast its 
net wide to obtain additional jurisdiction and avoid 
accusations of regulatory timidity in the event of a future 
problem.
    The egregiousness of this title's delegation of 
Congressional decision-making derives largely from the broad 
manner in which key terms are defined. ``Payment, clearing and 
settlement activities,'' for example, include any ``activity 
carried out by 1 or more financial institutions to facilitate 
the completion of financial transactions.'' Such an activity is 
``systemically important'' if ``the failure of or disruption to 
[that activity] could create, or increase, the risk of 
significant liquidity or credit problems spreading among 
financial institutions or markets and thereby threaten the 
stability of the financial system.'' With definitions like 
these guiding the Council, it could decide to assign any aspect 
of the financial market to the Fed.
    Once an entity or activity is identified, the Fed is given 
broad authority to set risk management standards that can 
address any areas that the Fed deems necessary to promote risk 
management and safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system. In other 
words, this title gives the Fed unfettered discretion to 
regulate entities and activities that the Council determines 
``are, or are likely to become, systemically important.'' 
Private enterprises that are deemed to be of systemic 
importance will have to get preapproval from the Fed before 
making any material changes in their operations.
    Lack of regulatory accountability contributed to the recent 
financial crisis. This title exacerbates the problem by 
allowing the Council to bring the Fed into significant sectors 
of the financial system as a back-up regulator. If a problem 
arises, both the Fed and the relevant supervisory agency will 
have someone else to blame. A more sensible approach would be 
for Congress to identify the existing financial market 
utilities and payment, clearing and settlement activities that 
merit greater oversight and provide the appropriate regulator 
with the appropriate authority. The Council could be given the 
authority to identify additional systemically important 
utilities and activities and make regulatory recommendations to 
Congress.

Title IX: Investor Protections and Improvements to the Regulation of 
        Securities

    Title IX of the reported bill is a ``Christmas tree'' of 
amendments to the securities laws, many of which are not 
related to the recent crisis and will not help to prevent 
another crisis. In addition, many were not the subject of 
Committee hearings. Some of these issues are important and 
warrant consideration by Congress and the SEC in the future. 
Considering them now as part of this bill is a distraction from 
the issues that are central to the bill and deserve Congress's 
undivided attention. Some of the issues that appear in Title IX 
have been on special interest wish lists for many years. The 
reported bill offers a convenient vehicle to pass them into law 
without the scrutiny they deserve.
    Subtitle A establishes a permanent investment advisory 
committee at the SEC to advise the Commission on setting and 
implementing its regulatory priorities and promoting investor 
confidence. The intention may be good, but the statute 
implements it in a manner that ensures that special interests 
that may not serve investors' interests have a seat at the SEC 
rulemaking table. It also establishes an Office of Investor 
Advocate to serve the same function as the SEC's existing 
Office of Investor Education and Advocacy.
    Subtitle B relates to enforcement issues. It includes a 
provision to protect and reward SEC whistleblowers. The value 
of whistleblowers was illustrated vividly by the role of Harry 
Markopolos in identifying the Madoff fraud, even though his 
warnings to the SEC went unheeded. Nevertheless, as established 
in the bill, the whistleblower provision does not afford the 
SEC with appropriate discretion and would force the SEC to 
devote considerable resources to defending its decisions with 
respect to whistleblower awards. For example, the bill would 
require the SEC to pay whistleblowers not less than ten percent 
of the monetary sanctions collected and would allow 
dissatisfied whistleblowers to appeal to the United States 
Court of Appeals.
    Subtitle B also rolls back the National Securities Market 
Improvement Act by giving state regulators a role in regulating 
Regulation D offerings and by instituting a lengthy pre-
approval process for such offerings which are available only to 
accredited investors. Legitimate entrepreneurs will be unable 
to fund their projects or will be forced to struggle through a 
slow and unpredictable bureaucratic process before they can 
raise money. At a time when the economy is weak and jobs are 
scarce, financial reform legislation should attempt to 
encourage capital formation and innovation, not discourage it 
by erecting new obstacles for our entrepreneurs.
    Subtitle C attempts to address credit rating agencies. The 
bill's approach only would aggravate the over-reliance problem, 
however, undermining one of the key recommendations of the 
Treasury white paper on financial reform.\277\ The bill also 
undermines the objectives of the 2006 Credit Rating Agency 
Reform Act, which focused on increasing competition, improving 
disclosure, and addressing conflicts of interest. The reported 
bill cites the systemic importance of, and investor reliance 
on, credit ratings as a justification for giving the SEC a new 
role, monitoring the accuracy of credit ratings. Excessive 
investor reliance on credit ratings was at the root of the 
recent crisis. Encouraging greater reliance on credit ratings 
by promising that the SEC will identify and punish inaccurate 
rating agencies is exactly the opposite of what a financial 
reform bill ought to achieve. Reducing investors' perceptions 
that the SEC is looking over the shoulders of the credit rating 
agencies to ensure that they are doing a good job would help to 
encourage investors to do their own due diligence. Some of the 
bill's attempts to address conflicts of interest, such as 
imposing strict independence requirements for boards of 
directors and qualification standards for credit rating 
analysts, will discourage competition by setting up barriers to 
entry for credit rating agencies considering registering as 
nationally recognized statistical rating organizations. The 
bill also includes a new liability standard for all credit 
rating agencies, which will make credit rating agencies an easy 
target for lawsuits. This provision also is likely to harm 
competition and the value of credit ratings.
---------------------------------------------------------------------------
    \277\See ``Financial Reform: A New Foundation,'' U.S. Department of 
Treasury (available at: http://www.financialstability.gov/docs/regs/
FinalReport_web.pdf), page 44, ``We propose several initiatives . . . 
reducing the incentives for over-reliance on credit ratings.''
---------------------------------------------------------------------------
    The reported bill also threatens a healthy return of the 
securitization markets. The centerpiece of Subtitle D is a five 
percent risk retention requirement for securitizations. The 
requirement is a one-size-fits-all solution in a very diverse 
securitization marketplace. In combination with accounting and 
bank capital rule changes, a risk retention requirement could 
force the entire securitization to be retained on bank balance 
sheets for accounting and capital purposes. Securitizations 
would then become economically unworkable. The bill would 
permit less than five percent risk retention in cases in which 
the originator complies with underwriting standards set by the 
SEC, along with the bank regulators. A more sensible approach 
would direct bank regulators to set underwriting standards that 
include a down payment requirement for all residential 
mortgages.\278\ The SEC, a disclosure regulator, should focus 
its efforts on improving disclosure about the underlying assets 
in a securitization pool to enable investors to conduct due 
diligence, rather than instilling in investors a sense of 
complacency by an arbitrary risk retention requirement.
---------------------------------------------------------------------------
    \278\See John C. Dugan, Comptroller of the Currency, Speech before 
the American Securitization Forum (Feb. 2, 2010) (available at: http://
www.occ.treas.gov/ftp/release/2010-13a.pdf ) (``But while lax 
underwriting is plainly a fundamental problem that needs to be 
addressed, mandatory risk retention for securitizers is an imprecise 
and indirect way to do that, and is by no means guaranteed to work. How 
much retained risk is enough? And what type of retained risk would work 
best--first loss, vertical slice, or some other kind of structure?'').
---------------------------------------------------------------------------
    Subtitle E addresses executive compensation in a number of 
unproductive ways. First, it requires public companies to have 
annual votes on executive compensation. This one-size-fits-all 
solution imposed at the federal level tramples over state 
corporate law, forces shareholders to pay for something that 
they may not want, and exacerbates short-term thinking. The 
subtitle also imposes a requirement on public companies to 
disclose the ratio of the median employee compensation to the 
chief executive officer's compensation. Although provisions 
like this appeal to popular notions that chief executive 
officer salaries are too high, they do not provide material 
information to investors who are trying to make a reasoned 
assessment of how executive compensation levels are set. 
Existing SEC disclosures already do this. More generally, the 
subtitle's prescriptive approach hinders corporations from 
devising policies that work for the unique circumstances of 
their corporations.
    Subtitle G likewise forces all public corporations to adopt 
uniform approaches to corporate governance regardless of 
whether those approaches would serve the needs of shareholders 
and without regard for the central role of states in 
establishing corporate governance standards. Subtitle G imposes 
a majority voting requirement for directors of public 
corporations, without any evidence that majority voting 
benefits shareholders. In fact, AIG, Washington Mutual, Lehman 
Brothers, Citigroup, Merrill Lynch, Bank of America, and 
Wachovia all required majority voting before the financial 
crisis. Special interest groups hope that the majority voting 
requirement will work in conjunction with the bill's proxy 
access requirement to give them special access to corporate 
boardrooms. Proxy access is designed to permit shareholders to 
put their nominees for the board on the company ballot at the 
company's expense. Mandating proxy access raises investor 
protection concerns because all shareholders are forced to fund 
campaigns by one shareholder to gain representation on the 
board and because directors are supposed to represent the 
interests of the shareholders as a whole, not particular 
special interests. Despite these concerns, some shareholders 
already are able to choose to implement proxy access. Changes 
in state law have made it possible for shareholders to tailor 
proxy access provisions that work for their particular 
corporations. A federal proxy access mandate is not needed and 
would deprive shareholders of the very voice it purports to 
give them.
    Subtitle H of the reported bill deals with municipal 
securities, an area that warrants attention. Nevertheless, the 
subtitle includes some troubling features. Fines collected for 
enforcement violations would be shared between the SEC and the 
Municipal Securities Rulemaking Board. Allowing these entities 
to profit from their enforcement actions provides them with a 
profit motive for bringing cases, which would harm the 
credibility of the agency.
    Subtitle I of the bill would, among other things, expand 
the mission of the Public Company Accounting Oversight Board 
(``PCAOB'') to include overseeing auditors of broker-dealers. 
Because the PCAOB is still working on fulfilling its initial 
mission, a large influx of new registrants will pose additional 
resource challenges. To minimize this burden, the legislation 
should not extend to auditors of Introducing Brokers, who do 
not handle customer funds.
    Subtitle J of the bill would remove the SEC from the 
appropriations process and permit it to fund itself through the 
fees and assessments that it collects. It could set its budget 
at any level that it determined proper and exceed that budget 
at its discretion. In the event the SEC spends more than its 
budget, it is permitted, but not required, to notify Congress 
of the amount of additional money and anticipated uses of that 
money. In the wake of some of the largest regulatory failures 
in the SEC's history and the embarrassing scandal involving 
senior SEC officials repeatedly downloading pornography on 
government computers during the height of the financial crisis, 
it is surprising that Congress would decide to make the SEC 
less accountable. Additional resources are warranted for the 
SEC's important responsibilities, but they should be 
accompanied by a responsibility to account to Congress for how 
those resources are spent.

Title X: Bureau of Consumer Financial Protection

    Title X creates a massive new entity whose power and 
autonomy have no current equivalent anywhere else in the 
Federal government. The Bureau of Consumer Financial Protection 
(``Bureau'') will have no meaningful coordination with the 
safety and soundness regulators to ensure that banks will not 
fail or be critically weakened as a result of a consumer rule. 
Indeed, the Bureau would have the authority to trump the safety 
and soundness regulators, thereby creating instability in our 
nation's financial system. The manner in which the legislation 
separates safety and soundness and consumer protection 
regulation is similar to the regulatory structure of Fannie Mae 
and Freddie Mac. In that instance, the Department of Housing 
and Urban Development (HUD) set consumer standards while the 
Office of Federal Housing Enterprise Oversight regulated for 
safety and soundness. Ultimately, the consumer standards set by 
HUD undermined the solvency of Fannie and Freddie. Fannie and 
Freddie are currently the largest recipients of bailout funds.
    Under the reported bill, the Bureau would regulate every 
aspect of financial transactions. The Bureau would have 
enormous reach into Main Street companies like orthodontists, 
home repair and renovation contractors, and anyone else who 
extends credit in more than four installments. It would set 
lending standards; determine what type of documents lenders 
could use; and require banks to make a certain percentage of 
their loans to specific, politically favored borrowers (i.e., 
housing authorities or ``green'' businesses). The Bureau could 
force all lenders to use the same lending forms and terms and 
conditions.
    The reported bill provides the Bureau with an enormous 
taxpayer-provided funding source without executive or 
congressional oversight of its budget. The legislation states 
that the budget for the new Bureau shall be 12 percent of the 
overall operating budget of the Federal Reserve System for 
fiscal year 2009. This would allow the Bureau to command 
approximately $650 million of Fed resources. Currently, the 
Office of the Comptroller of the Currency (``OCC'') has an 
overall operating budget of $750 million, and the OCC handles 
both consumer protection supervision and prudential 
supervision.
    The reported bill also undermines more than a century of 
precedent on preemption with respect to national banks. 
Presently, state laws that conflict with the National Bank Act 
are pre-empted because Congress has long sought to create a 
national financial market and ensure the efficient regulation 
of national banks. The reported bill, however, effectively 
eliminates preemption and allows states to set their own 
regulations under certain circumstances. Furthermore, the bill 
requires the OCC and the courts to determine on a case-by-case 
basis which state laws are pre-empted, which will create 
significant legal uncertainty and generate unnecessary 
litigation. In addition, the bill would allow State Attorneys 
General to bring class action suits against national banks, 
usurping the responsibility of federal regulators and creating 
even more needless litigation.
    Finally, the Bureau poses a threat to Americans' civil 
liberties. Under Section 1022, the new Bureau would collect any 
information it chooses from businesses and consumers, including 
personal characteristics and financial information. Americans 
could be required to provide the new consumer agency with 
written answers, under oath, to any question posed by the 
Bureau regarding their personal financial information. The 
Bureau would have the authority to monitor transactions such as 
personal deposit account activity, credit card usage, and how 
much an individual spends on groceries. This is a massive new 
grant of authority for an entity whose budget is derived from 
taxpayer funds.

Title XI: Federal Reserve System Provisions

    During the recent financial crisis, the FDIC put American 
taxpayers at risk by guaranteeing trillions of dollars of 
private debt. Title XI of this bill seeks to institutionalize 
such guarantees, under the rubric of ``emergency financial 
stabilization'' authority, providing permanent authority to put 
taxpayer resources at risk to insure private debt whenever the 
Fed and FDIC deem it appropriate. No regulator should be 
allowed to expose taxpayers to trillions of dollars of risk 
without express approval from Congress.
    During the crisis, the Fed contributed to creating moral 
hazard by vastly expanding use of its discount window to fund a 
variety of financial market participants, including some over 
which it had no oversight. The Fed also created new lending 
facilities to direct liquidity and credit to markets that were 
deemed most stressed and systemically important. The Fed 
ballooned its balance sheet from a pre-crisis level of around 
$800 billion to over $2.2 trillion. Those resources are not 
free. Those resources are liabilities of the Fed, created 
through the Fed's money creation powers, and are therefore also 
liabilities of taxpayers. This bill seeks to institutionalize 
Fed support to whichever market segment it and the Treasury 
deem to be in need of liquidity. The Fed may make loans and 
take collateral that the Fed finds is to its ``satisfaction.''
    The Fed does need to perform its lender of last resort 
function but should only do so to briefly assist firms who are 
solvent and in need of liquidity that cannot readily be 
obtained in the open market. The lender of last resort function 
of a central bank does not involve long-term loans to insolvent 
firms based on questionable collateral. Yet, this bill seeks to 
enshrine the Fed's ability to lend to ``any program or facility 
with broad-based eligibility,'' taking as collateral whatever 
satisfies the Fed. The broad-based and vague language governing 
the Fed's emergency lending authorities is an invitation for 
future governments to avoid hard decisions and shift them to 
the Fed. With trillions of dollars of taxpayer resources likely 
to be on the line, the language in the bill governing the Fed's 
emergency lending power is far too loose.
    Furthermore, the reported bill expands and codifies the 
FDIC's broad ability to guarantee the debt of depositories and 
of depository holding companies in a loosely defined 
``liquidity event.'' The amounts of the guarantees are 
unlimited. The President may, or may not, submit a report to 
Congress on the FDIC's plan to issue guarantees. Most 
troubling, however, is that there is no requirement that a 
company that receives guarantees and defaults on its 
obligations be taken into an FDIC receivership, bankruptcy, or 
resolution. Thus, the FDIC and Treasury could prop up whatever 
companies they choose. Moreover, there is ample room to grant 
debt guarantees in routine stressful, yet not crisis, 
circumstances given the broad definitions.
    We believe that the Treasury Secretary and the Fed should 
be required to enter into an ``Accord'' to establish clear 
rules on the use of 13(3) of the Federal Reserve Act and the 
Fed's balance for fiscal purposes.

Title XII: Improving Access to Mainstream Financial Institutions

    Title XII was inserted quietly into the Dodd bill at the 
last minute as part of the manager's amendment during the 
Committee mark-up. It was not considered by the Committee. 
Title XII creates a grant program that would give certain 
financial institutions, and others, taxpayer dollars to 
``recapture a portion or all of a defaulted loan'' (Section 
1206). The purpose of the grant program is to encourage certain 
financial institutions, and others, to get low- and moderate-
income individuals to establish accounts at their institutions. 
We do not support using taxpayer dollars to pay financial 
institutions to attract new customers, and then cover the 
losses if the new customers default on the loans. This is an 
iteration of ``heads Wall Street wins, tails the taxpayer 
loses.'' This is replicating on a smaller scale the precise 
practices that led to the bailouts of Fannie Mae and Freddie 
Mac.

Government sponsored entities

    Fannie Mae and Freddie Mac played major roles in the 
financial crisis. Combined, these two institutions represent 
nearly $5.5 trillion in business, and they have been in 
conservatorship since September 6, 2008.\279\ Despite this, the 
reported bill does nothing to address the future of the 
Government Sponsored Enterprises.
---------------------------------------------------------------------------
    \279\Monthly Summary Report, February 2010, Fannie Mae, and Monthly 
Volume Report, February 2010, Freddie Mac.
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    In doing so, the reported bill leaves uncertainty in the 
secondary mortgage market. As Fannie Mae and Freddie Mac have 
such a large influence on the market, private sector investment 
will not achieve optimal levels until investors are certain as 
to the future of these institutions. By remaining silent on 
their futures, the reported bill prevents the private sector 
from fully committing to the secondary mortgage market. Without 
a properly functioning secondary mortgage market, additional 
pressure falls upon the GSEs, the Federal Housing 
Administration, the Veterans Administration and Ginnie Mae. 
This additional pressure grows these entities, concentrating 
risk with the taxpayer rather than in the private sector, and 
increases the difficulty of reforming Fannie Mae and Freddie 
Mac.
    Despite this, the reported bill takes no interim steps to 
protect taxpayers. On December 24, 2009, the Treasury 
Department and the Federal Housing Finance Administration 
(``FHFA'') announced that the Preferred Stock Purchase program 
would be amended to ``allow the cap on Treasury's funding 
commitment under these agreements to increase as necessary to 
accommodate any cumulative reduction in net worth over the next 
three years.'' It further allowed Fannie Mae and Freddie Mac 
higher portfolio holdings than previously mandated.\280\
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    \280\Press Release: ``Treasury Issues Update on Status of Support 
for Housing Programs,'' U.S. Treasury Department, December 24, 2010.
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    The reported bill also does nothing to increase the 
accountability of Fannie Mae and Freddie Mac, nor those 
operating them. The President has yet to nominate anyone to 
officially run the FHFA, who acts as conservator, and the 
Office of Special Inspector General of FHFA remains vacant. 
Thus, there is no one politically accountable to the public for 
the operation of these multi-trillion dollar entities. By 
remaining silent on any interim taxpayer protections or 
oversight provisions, the reported bill allows for the 
continued unlimited bailout of Fannie Mae and Freddie Mac.
    If nothing is to be done to address the future of the GSEs 
in the reported bill, it would be useful to establish new 
investigative oversight that would provide regular updates to 
the Congress and to the American people. Limits governing the 
taxpayer funding available to Fannie and Freddie and the 
portfolio holdings of these institutions should be 
reestablished. A process to ensure that future agreements of 
this nature are approved by Congress also should be 
established. Finally, a deadline should be given to the 
President for the submission of a plan outlining his ideas for 
the ultimate reform of Fannie Mae and Freddie Mac to ensure 
that the timeline does not continue to slip.

Variation between the bill as reported and the specific changes to the 
        bill approved by Committee action

    The reported bill contains numerous substantive changes 
that were not approved by the Committee. Among these are:
          1. Reducing the number of hours from 48 to 24 that 
        the Secretary has to provide a report to Congress 
        following the appointment of the FDIC as receiver for a 
        financial company (Section 203(c));
          2. Removing the provision that made the consent of a 
        company's directors or shareholders to the appointment 
        of a receiver constitute a company being ``in default 
        or in danger of default'' (Section 203(c));
          3. Prohibiting the FDIC from taking equity interest 
        in a covered financial company (Section 206);
          4. Removing language that made liquidation of a 
        covered financial company optional and replacing it 
        with language that makes liquidation mandatory (Section 
        210);
          5. Removing language that gave the FDIC the 
        discretion to put an institution into bankruptcy or 
        resolution if it defaulted on a debt guarantee provided 
        under Title VI and replacing it with language that 
        makes such action mandatory (Section 1156); and
          6. Changing language to allow the Fed to lend to 
        ``participants'' rather than ``programs'' under Section 
        13(3) of the Federal Reserve Act (Section 1151).
    These are non-technical changes that should have been made 
only through direct Committee action.

Conclusion

    We are disappointed in the Committee's decision to report 
the bill in its current form for Senate consideration. Even the 
bill's proponents recognize that the reported bill is rife with 
substantive and technical problems. We believe that the 
reported bill's deficiencies are so significant that it will be 
impossible to correct them on the Senate floor. We would 
readily support a properly designed bi-
partisan financial reform bill. Unfortunately, the reported 
bill is not such a bill. In fact, with respect to the bill's 
treatment of the problems of too big to fail and bailouts, the 
bill's language promises a future clouded with moral hazards in 
financial markets, with unfair and undemocratic funding 
advantages for a select few large financial institutions, and 
with institutionalized bailout authorities. In the aftermath of 
the economic crisis of 2008, we believe that it is the 
responsibility of Congress to take action to prevent such a 
crisis from occurring again. This bill not only fails in that 
regard, it in fact makes future crises more likely.

                                  
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