Congress Launches Capital Markets Reforms
By: Daniel F. C. Crowley, Karishma Shah Page
In the days before adjourning for the week-long Memorial Day Recess, Congress passed and President Barack Obama signed into law three significant pieces of financial services legislation, kicking off what is likely to be the beginning of a comprehensive capital markets reform effort. This piecemeal yet swift approach suggests the manner in which Congress may proceed with financial services reforms moving forward.
Congress Passes Bills on Fraud, Credit Cards, and Mortgages
- Fraud Enforcement and Recovery Act. On May 20, 2009, President Obama signed into law S. 386, the Fraud Enforcement and Recovery Act of 2009 (FERA; P.L. 111-21). The legislation, which the Senate approved on May 14 by a voice vote and the House passed on May 18 by a 338-52 vote, provides federal authorities with enhanced funding and expanded powers over a broad range of financial crimes (see K&L Gates Alert Fraud Enforcement and Recovery Act of 2009). In addition, FERA establishes an independent Financial Crisis Inquiry Commission, modeled after the Pecora Commission of the 1930s (see below and K&L Gates Alert A Congressional Investigation of Wall Street Looms).
- Helping Families Save Their Homes Act. On the same day, President Obama signed into law S. 896, the Helping Families Save Their Homes Act of 2009 (P.L. 111-22). The bill, which was passed with broad bipartisan support in both the House and the Senate on May 19, enhances the Hope for Homeowners Program and provides the Federal Housing Administration with the authority to engage in foreclosure mitigation programs (for more information about other mortgage-related provisions in the bill, see K&L Gates Alert New Disclosure Obligation Imposed on Assignees ). In addition, the legislation also increases FDIC and National Credit Union Administration borrowing authority and extends the increased $250,000 deposit insurance limit to 2013.
- Credit Cardholders’ Bill of Rights Act. The same week, Congress passed and the President signed H.R. 627, the Credit Cardholders’ Bill of Rights Act of 2009 (P.L. 111-24). The legislation, which was also passed with significant bipartisan support in both chambers, bans certain credit card company practices including double-cycle billing and late fees on issuer delayed crediting of payments, prohibits certain changes in interest rates, and requires expanded disclosure of credit card terms and agreements.
Financial Crisis Inquiry Commission and Capital Markets Reform
- The Commission. As noted previously, S. 386 establishes an independent Financial Crisis Inquiry Commission. The Commission will be comprised of ten members. Senate Majority Leader Harry Reid (D-NV) and Speaker of the House Nancy Pelosi (D-CA) will each appoint three members. Senate Minority Leader Mitch McConnell (R-KY) and House Minority Leader John Boehner (R-OH) will each appoint two members.
- Mandate. The Commission is charged with: (1) investigating the causes of the financial and economic crisis; and (2) examining the causes of the collapse of each major financial institution that failed or was likely to fail had it not been for government assistance. The Commission must submit a report with its findings to Congress on December 15, 2010.
- Relationship to Anticipated Regulatory Reform. Despite the Commission’s December 2010 deadline, Congressional leaders and the Obama Administration have indicated their intention of moving forward with the capital markets reform efforts. As such, rather than the Commission’s findings informing reform legislation, it is likely that financial services reform legislation will move forward in parallel with the Commission’s investigation.
Next on the Agenda
- Structure of Financial Services Regulation. Treasury Secretary Timothy Geithner, National Economic Council Director Lawrence Summers, and President’s Economic Recovery Advisory Board Chairman Paul Volcker met on May 19, 2009 to discuss restructuring of the financial services regulatory framework. Although the proposal is still under development, Secretary Geithner is considering expanding the role of the Federal Reserve to include systemic risk regulation and creating a single bank regulator through a merger of the current responsibilities of the FDIC, Office of the Comptroller of the Currency, and the Office of Thrift Supervision, and a possible merger of the SEC and the CFTC.
House Financial Services Chairman Barney Frank (D-MA), an opponent of the single bank regulator model, prefers a dual-track model, in which a systemic risk regulator is established, while the existing bank and securities regulators continue prudential regulation. The House Financial Services Committee has scheduled a series of hearings on regulatory restructuring. Chairman Frank is preparing two pieces of legislation, one dealing with systemic risk and the other dealing with the structure of the regulatory agencies. He plans to have the Committee consider at least one of the bills by the end of the month. - Derivatives Regulation. Over-the-Counter (OTC) derivatives may be another area where reform efforts begin to take shape. On May 13, 2009, in a letter sent to House and Senate leadership, Secretary Geithner proposed a comprehensive framework for the regulation of OTC derivatives (see K&L Gates Alert Comprehensive Regulatory Framework for OTC Derivatives Proposed as a Prelude to Reform of the U.S. Financial System). The proposal has been met with support from Chairman Frank and House Agriculture Committee Chairman Collin Peterson (D-MN), who share jurisdiction over OTC derivatives issues, signaling that policymakers may be close to reaching a consensus on the general features of the regulatory structure. In addition, Senate Agriculture, Nutrition, and Forestry Chairman Tom Harkin (D-IA) plans to hold a hearing on June 4, 2009 on OTC derivatives trading.
- Municipal Finance Regulation. Chairman Frank recently circulated legislation related to and held a hearing on municipal finance. The four bills would: (1) standardize credit rating of municipal bonds ( H.R. 2549, Municipal Bond Fairness Act); (2) establish a federal reinsurance program for municipal bond issuers ( H.R. 2589, Municipal Bond Insurance Enhancement Act); (3) create a credit liquidity facility for municipal bond issuers (H.R. ____, Municipal Bond Liquidity Enhancement Act); and (4) regulate financial advisors to municipalities ( H.R. ____, Municipal Financial Advisors Regulation Act). House Financial Services Ranking Minority Member Spencer Bachus (R-AL) has expressed skepticism over the bills.
Committees with jurisdiction over financial services issues have also recently held hearings on insurance regulation, hedge fund registration, credit rating agency reform, and federal government resolution authority.
The K&L Gates public policy group is closely monitoring these developments on behalf of the firm’s policy clients.
