89–010 

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 


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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 


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1Testimony of Timothy Geithner, Secretary of the Treasury, to the Banking Committee, June 

18, 2009. 2Testimony of Sheila Bair, Chairman of the Federal Deposit Insurance Corporation to the 

Banking Committee, July 23, 2009. 3Testimony of Timothy Geithner, Secretary of the Treasury, to the Banking Committee, June 

18, 2009. 4Testimony of Ben Bernanke, Federal Reserve Board Chairman, to the Banking Committee, 

July 22, 2009. 5Testimonies of Sheila Bair, Chairman of the Federal Deposit Insurance Corporation, to the 

Banking Committee, May 6 and July 23, 2009. 6Testimony of Mary Schapiro, Chairman of the Securities and Exchange Commission, to the 

Banking Committee, July 23, 2009. 7Testimony of Daniel Tarullo, Federal Reserve Board Governor, to the Banking Committee, 

July 23, 2009. 8Testimony of Eugene Ludwig, former Comptroller of the Currency, to the Banking Committee, September 29, 2009. 

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

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

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 


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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 


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9Testimony of Paul Volcker, former Federal Reserve Board Chairman, to the Banking Committee, February 4, 2009. 10Testimonies of Sheila Bair, Chairman of the Federal Deposit Insurance Corporation, to the 

Banking Committee, March 19, May 6, and July 23, 2009. 

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. 

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. 

In his July 23, 2009 testimony, Federal Reserve Board Governor 

Daniel Tarullo also argued for a new resolution authority as a 


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11Testimony of Daniel Tarullo, Federal Reserve Board Governor, to the Banking Committee, 

July 23, 2009. 12Testimony of Eugene Ludwig, former Comptroller of the Currency, to the Banking Committee, September 29, 2009. 13The 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. 

‘‘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

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 conVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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14For data on outstanding volumes of financial commercial paper and discount rates for AA 

financial commercial paper see http://www.federalreserve.gov/releases/cp/. 15For data on outstanding volumes guaranteed see http://www.fdic.gov/regulations/ 

resources/tlgp/reports.html. 

tracted 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

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 


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16These firms will be supervised by the Board of Governors because their failure could threaten overall financial stability. 

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

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 proVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00008 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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17Testimony by Neal Wolin, Deputy Secretary of the Treasury, to the Senate Banking Committee, 2/2/10. 18Testimony 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. 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. 

tected 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

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

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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20Testimony of Ellen Seidman, former Director of the Office of Thrift Supervision, to the 

Banking Committee, March 2, 2009. 21Testimony of Michael Barr, July 14, 2009. 22Testimony 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. 23Testimony of Gene Dodaro, Acting Comptroller General of the United States, February 4, 

2009. 24Testimony of Michael Barr, July 14, 2009. 

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

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

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. 

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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25Testimony of Eugene Ludwig to the Banking Committee, October 16, 2008. 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 refiContinued 

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

—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 


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nances; 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. 27Testimony 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. 28The 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. 29See Banking Committee Hearings on February 7 and March 22, 2007. 30Testimony 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. 

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. 

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: 

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

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 perVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00012 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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31Testimony 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?’’ 32Testimony of Allen Fishbein, September 20, 2006. 33See Banking Committee hearings on March 22, 2008. 

cent did not know the frequency with which the rate could 

change.31

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

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. 

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 


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34Testimony of Martin Eakes, Chief Operating Officer of the Self-Help Credit Union, to the 

Committee, February 7, 2007. 35 Neil Bhutta and Glenn Canner, ‘‘Did CRA Cause the Mortgage Market Meltdown,’’ Federal 

Reserve Bank of Minneapolis, March 9, 2009. 36Testimony 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. 37 ‘‘Subprime Debacle Traps Even Very Credit-Worthy, Wall Street Journal, December 3, 2007. 

Eakes, Chief Operating Officer of the Self-Help Credit Union, ‘‘a 

devil’s choice.’’ 34

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. 

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

—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 


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38 CRL, ‘‘Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages,’’ May 31, 2006. 39Testimony of Travis Plunkett, Legislative Director of the Consumer Federation of America 

to the Banking Committee, July 14, 2009. 40Testimony of Patricia McCoy to the Banking Committee, March 3, 2009. 41 Banking Committee document, ‘‘Mortgage Market Turmoil: A Chronology of Regulatory Neglect’’ prepared by the staff of the Banking Committee, March 22, 2007. 

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 higherrate 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 nonLatino white borrowers.38

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

—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. 

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. 


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42Testimony to the Banking Committee, March 3, 2009. 43 Banking Committee hearing, April 7, 2004. 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 

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

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

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 antipredatory 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


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Impact of Federal Preemption of State Anti-Predatory Lending Laws on the Foreclosure Crisis,’’ 

by Lei Ding et al, March 23, 2010. 45Testimony of Martin Eakes to the Banking Committee, April 7, 2004. 46Testimony of Travis Plunkett to the Banking Committee, February 12, 2009. 

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

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

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 


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47Testimony of Levitin, Associate Professor of Law at Georgetown University Law Center to 

the Banking Committee, February 12, 2009. 48Testimony of Michael Calhoun to the U.S. House of Representatives Committee on Financial Services, September 30, 2009. 49Letter from Comptroller of the Currency John Dugan to the Board of Governors of the Federal Reserve System, August 18, 2008. 50 Banking Committee hearing, November 17, 2009. 51Testimony of Jean Ann Fox, Director of Financial Services at Consumer Federation of 

America to the Banking Committee, November 17, 2009. 

credit cards lack regulatory motivation and have conflicting missions. . . . 47

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

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. 

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

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 


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52Testimony 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/bankloverdraftlfeeslMoebs/index.htm. August 

10, 2009. 54FDIC Study of Bank Overdraft Programs, November, 2008. 

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. 

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

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 


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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. 

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. 

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 


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57Leslie Parish and Uriah King, Phantom Demand, Center for Responsible Lending, July 9, 

2009. 58King, Uriah, Parrish, Leslie, and Tanki, Ozlem. ‘‘Financial Quicksand.’’ Center for Responsible Lending. November 30, 2006. 59 Raj Date and Brian Reed, Auto Race to the Bottom; Free Markets and Consumer Protection 

in Auto Finance, November 16, 2009. 

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

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. 

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 dealVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00021 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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60Letter 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). 61Letter from Under Secretary of Defense to Clifford Stanley to Assistant Secretary of the 

Treasury, Michael Barr. February 26, 2010. 62Letter 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. 

erships, among others. As a result, courts ordered most 

major car finance companies to cap rates . . . though the 

orders expire soon.60

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

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

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 


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63Signe-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. 64Letter to Chairman Dodd and Senator Shelby by the LCCR, December 3, 2009. 65 ‘‘Financial Regulatory Reform: A New Foundation’’, Administration’s White Paper, June 

2009. 

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 autofinancing 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

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. 

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

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. 


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66Testimony of Richard J. Hillman, Managing Director Financial Markets and Community Investment, GAO, to the Banking Committee, 9/29/09. 67Testimony of Eugene Ludwig to the Banking Committee, 9/29/09. 68Testimony of Richard Carnell to the Banking Committee, September 29, 2009. 69Testimony of Martin Baily to the Banking Committee, September 29, 2009. 70Testimony of John Dugan to the Banking Committee, August 4, 2009. 

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

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

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

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

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


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71 Id. 72Testimony of Daniel Tarullo to the Banking Committee, August 4, 2009. 73The 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 ratContinued 

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

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

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 


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ing 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). 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. 

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. 

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. 

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. 


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77The 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.’’ 78Speaking 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.’’ 79Statement of Chairman Chris Dodd, hearing of the Banking Committee, 12/3/09. 80Statement of Chairman Chris Dodd, hearing of the Banking Committee, 2/4/09. 81 Ranking Member Richard Shelby, Banking Committee hearing, 6/18/09. 82 Banking Committee hearing, ‘‘Modernizing The U.S. Financial Regulatory System,’’ 2/4/09. 

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. 

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

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 


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83Testimony of Former Federal Reserve Board Chairman Paul Volcker to the Banking Committee, February 9, 2009. 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. 

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

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. 

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. 


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86Testimony of Ben Bernanke, Federal Reserve Board Chairman, to the Senate Banking Committee, 12/3/09. 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. 

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 

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-thecounter 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-thecounter 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. 

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 


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89Obama Administration white paper, Financial Regulatory Reform: A New Foundation, June 

2009. 90 Associated Press, U.S. Warns EU Derivatives Ban Won’t Work, 3/16/10. 91 Acharya, et al., The Ultimate Financial Innovation, 2008. 

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

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 overthe-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. 

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. 


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92Wall Street Journal, 4/13/10. 93 Chairman Bernanke, Senate Banking Committee testimony, 12/3/09. 94 Chairman Gensler, Senate Agriculture Committee testimony, 11/18/09. 95 Chairman Gensler, Senate Banking Committee testimony, 6/22/09. 

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

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

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

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 


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96Testimony before the Subcommittee on Securities, Insurance, and Investment of the Senate 

Committee on Banking, Housing, and Urban Affairs, 7/9/08. 97Testimony before the Subcommittee on Securities, Insurance, and Investment of the Senate 

Committee on Banking, Housing, and Urban Affairs, 6/22/09. 98G20 Steering Group Letter, 3/31/10. 

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. 

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 overthe-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

G20 Leaders’ Statement, The Pittsburgh Summit, 9/25/09: 

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99G20 Leaders’ Statement, The Pittsburgh Summit, 9/25/09, http:// 

www.pittsburghsummit.gov/mediacenter/129639.htm. 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. 

changes or electronic trading platforms, where appropriate, and cleared through central counterparties by end2012 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

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

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 


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102Former CFTC Chairman Brooksley Born, Joint Economic Committee testimony, 12/1/09. 103Stanford 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. 105Stanford University Professor Darrel Duffie, Pew Research, 2009. 106 Chief Investment Officer of the California Public Employees’ Retirement System Joe Dear, 

National Press Club speech, 11/3/09. 

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

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


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107 Chairman Gensler, Senate Banking Committee testimony, 6/22/09. 108Obama 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. 

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

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 


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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 uncerVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00036 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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tainty regarding the true financial condition of holders of assetbacked 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 brokerdealers. 

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 brokerdealer, from working for other types of securities firms, such as inVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00037 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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vestment 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. 

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110Testimony of James Chanos, Chairman, Coalition of Private Investment Companies, to the 

Senate Banking Committee, 7/15/09. 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. 113The Federal Reserve, Flow of Funds report, 3/11/10, www.federalreserve.gov. 114S&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. 

tions 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. 

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

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. 


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117GAO, High Risk Series: An Update, GAO–09–271 (Washington, D.C.: Jan. 2009). 118Testimony before the Senate Committee on Banking, Housing, and Urban Affairs, 10/16/ 

08. 119Federal Reserve Bank of St. Louis, ‘‘The Financial Crisis—A Timeline of Events and Policy 

Actions.’’ 

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

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

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 mortgagebacked 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

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 


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120 Ibid. 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. 122Material 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. 124Federal Reserve Bank of St. Louis, ‘‘The Financial Crisis—A Timeline of Events and Policy 

Actions.’’ 125Speech to the 43rd Annual Alexander Hamilton Awards Dinner, Center for the Study of 

the Presidency and Congress, Washington, D.C., 4/8/10. 

agreed to buy all of Bear Stearns with assistance from the Federal 

Reserve.120

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

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 shortselling 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

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 


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126Federal Reserve Bank of St. Louis, ‘‘The Financial Crisis—A Timeline of Events and Policy 

Actions.’’ 127Dow Jones Indexes, Index Data, www.djaverages.com. 

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 shortselling 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

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). 

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. 


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128Testimony before the Senate Committee on Banking, Housing, and Urban Affairs, 10/16/ 

08. 

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

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. 


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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. 


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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. 


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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. 


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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, interVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00047 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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connected 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 


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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. 


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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.) 


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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 


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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 


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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 


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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. 


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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 


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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. 


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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 


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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 twothirds 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 


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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 


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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 

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ities; (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 


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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 ‘‘comVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00062 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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modity 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 

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tion 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 

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son 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. 


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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. 


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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 

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vision, 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. 


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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, 


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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 lowestrisk 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. 


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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. 

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

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 


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130FACT 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). 133Regulating 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). 135Financial 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. 138Special 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). 

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 

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141Regulating 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). 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). 

alties for violations.’’ 141 Former SEC Chief Accountant Lynn Turner also supported this provision in testimony.142

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 


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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). 146Regulating 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). 

the Managed Funds Association,145 the Coalition of Private Investment Companies,146 and the Private Equity Council.147

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 


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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). 

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. 

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 


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149 North American Securities Administrators Association, letter to Chairman Dodd and Ranking Member Shelby, November 17, 2009. 

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

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 


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150Regulating 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). 151Madoff 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). 152SEC Inspector General H. David Kotz, letter to Senator Dodd, October 29, 2009. 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. 

by requiring investment funds to be audited by independent public 

accounting firms that are overseen by the PCAOB.’’ 150

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

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

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. 


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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 

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ures 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 


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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’’. 


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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 


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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 nondomiciliary 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)). 


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154FACT 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 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. 

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 


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155Strengthening 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). 

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. 

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. 


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156Strengthening 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 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 Federallychartered 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 Federallychartered 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

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 

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157Pub. L. 106–102, Title I, section 121(b), 113 Stat. 1378 (November 12, 1999). 158 69 Fed Reg. 239 (December 12, 2002). 

dition, 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. 

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 


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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 

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159Strengthening 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). 160Federal Financial Institutions Examination Council (2009), ‘‘FFIEC Issues Statement on 

Regulatory Conversions, press release, July 1, www.ffiec.gov/press/pr070109.htm. 

eral 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. 

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, 


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161Strengthening 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). 

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. 

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 

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ing 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. 


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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 highrisk 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. 


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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-theCounter 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 


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‘‘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 ‘‘securitybased 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 


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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 


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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, antimanipulation, 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. 


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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 CFTCregistered 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. 


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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,’’ ‘‘seVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00097 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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curity-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 ‘‘securitybased 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 GrammLeach-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 deVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00098 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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terrence 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. 


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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 securitybased 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 securitybased 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. 


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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 securitybased 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. 


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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 

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tions 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 

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162FACT 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. 164FACT 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. 

latory 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

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 FedVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00104 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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166Obama Reform Proposal Would Enhance SEC Investor Protection Role, Jim Hamilton’s 

World of Securities Regulation, jimhamiltonblog.blogspot.com, June 17, 2009. 

eral 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

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 


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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.’’ 


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167 AARP, letter to Senators Dodd and Shelby, November 19, 2009. 

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

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 


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168Obama Administration Would Enhance SEC’s Investor Protection Role, Mr. James Hamilton, CCH Financial Crisis Newsletter, June 18, 2009, www.financialcrisisupdate.com. 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. 

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

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. 

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. 


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171Senator Kohl, letter to Senator Dodd, February 22, 2010. 

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.’’ 

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 


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172FACT 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. 173 AARP, letter to Senators Dodd and Shelby, November 19, 2009. 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. 177The 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. 178Fact 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. 

municipal securities dealer to arbitrate any dispute between them. 

This provision was included in the Treasury Department’s legislative proposal.172

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 upfront 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

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

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). 

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 


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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. 181Like 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). 182 ‘‘Assessment of the SEC’s Bounty Program’’, Office of Inspector General, U.S. Securities 

and Exchange Commission, Report No. 474. March 29, 2010. 183Same would apply to cases when SEC forwards criminal cases to DOJ that lead to penalties and sanctions. 

the submission of whistleblower tips.’’ 179 In his letter to Senator 

Dodd, SEC Inspector General David Kotz also recommended a 

similar Whistleblower Program.180

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. 

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. 

‘‘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 


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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. 

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. 


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184FACT 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. 185 North American Securities Administrators Association, Inc., letter to Chairman Dodd and 

Ranking Member Shelby, November 17, 2009. 186Pro-Investor Legislative Agenda for the 111th Congress, North American Securities Administrators Association, January, 2009, www.nasaa.org. 187 Johnson, Jennifer, 2010. ‘‘Private Placements: A regulatory Black Hole’’. Delaware Journal 

of Corporate Law. Vol. 34, p. 195. 

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. 

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

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

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 approVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00113 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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priate 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 


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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 preVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00115 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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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). 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). 

scribe, 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

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

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 


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190Reforming 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). 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). 

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

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 


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193Reforming 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). 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). 195Securitization 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). 

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

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 


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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). 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). 

statistics over the short, medium, and long term, and across asset 

classes and geographies.’’ 196

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

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 difVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00119 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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198Securitization 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). 199Securitization 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). 

ferent 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 


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200Mr. Jeff Mahoney, Council of Institutional Investors, letter to Senator Dodd, p. 3, November 18, 2009. 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). 

rating agencies truly accountable to the investors that depend on 

them.’’ 200

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

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 


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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). 

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

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. 


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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 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

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 


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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). 206 Consumer Federation of America, Letter to Senators Dodd and Shelby, November 24, 2009. 207Letter to Chairman Dodd and Ranking Member Shelby, November 24, 2009. 

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

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 ratVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00124 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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208Letter dated November 17, 2009. 

ings 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

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 imVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00125 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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209 U.S. Financial Regulatory Reform: An Investor’s Perspective, Investor’s Working Group, 

July 2009. 210Securitization 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). 

portant 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. 

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 realtime, thus enabling the market to freely and fully assess the qualVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00126 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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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). 

ity 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

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 


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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). 213Securitization 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). 

one rating agency. Finally, such an organization should have the 

power to discipline analysts for unethical behavior.’’ 212

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 productplacement 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

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: 


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214Securitization 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). 

215Title IX—Additional Improvements to Financial Markets Regulation Subtitle D, U.S. Department of the Treasury, 2009, www.financialstability.gov. 216Securitization 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). 

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

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: 


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217Financial Reform: A Framework for Financial Stability, Group of Thirty, p. 49, January 

15, 2009. 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). 219Regulating 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. 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).] 

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

The Consumer Federation of America 218, CalPERS 219, and the Investor’s Working Group220 also support this provision. 

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. 

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 


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222Securitization 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). 

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 loanlevel 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 


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223 U.S. Financial Regulatory Reform: An Investor’s Perspective, Investor’s Working Group, 

p.14, July 2009. 224Securitization 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). 225Regulating 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). 226Securitization 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). 227Securitization 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). 228Title IX—Additional Improvements to Financial Markets Regulation Subtitle D, U.S. Department of the Treasury, 2009, www.financialstability.gov. 229Moody’s Proposes Enhancements to Non-Prime RMBS Securitization, Moody’s, Special Report, p.2, September 25, 2007. 

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. 

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: 

[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


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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). 

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

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 anVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00133 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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231 ‘‘Chiefs’ Pay Under Fire At Capitol,’’ The New York Times, March 8, 2008. 232Protecting 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). 

nounced write-offs worth roughly $20 billion and its share has 

plummeted over 60 percent from last year’s high.’’ 231

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

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. 


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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 


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233 U.S. Financial Regulatory Reform: An Investor’s Perspective, Investor’s Working Group, 

July 2009. 234See Bettis, Bizjak and Kalpathy, ‘‘Insiders’ Use of Hedging Instruments: An Empirical Examination,’’ March 2009. 

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

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

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. 


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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 21⁄2 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] 


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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.’’ 


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235The case is Securities and Exchange Commission v. Bank of America Corp., 09–cv–06829, 

U.S. District Court, Southern District of New York (Manhattan). 236The End of Phony Deterrence? ‘SEC v. Bank of America’, John C. Coffee, Jr., New York 

Law Journal, September 17, 2009. 

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. 

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 


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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). 238 U.S. Financial Regulatory Reform: An Investor’s Perspective, Investor’s Working Group, p. 

10, July 2009. 239The 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). 

private sector lawyers who may be looking for public service opportunities.’’ 237

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

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. 

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 

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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). 

trained, 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. 

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 

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242Securities and Exchange Commission’s Financial Statements for Fiscal Years 2009 and 

2008, GAO, ‘‘Highlights,’’ November 2009. 

trol 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. 

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. 


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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). 

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 


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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. 

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. 


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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). 

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 


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246Letter to Chairman Dodd, March 19, 2010. 

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

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 


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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, 


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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). 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). 249Legislative 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 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: 

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

The U.S. Council of Mayors 249 also testified in support of this policy. 

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 

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ards, 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 nonaffiliated 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 


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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). 

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. 

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; 


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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 


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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 nonU.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 asVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00152 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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254Letter from the Honorable Mark W. Olson, July 7, 2009. 

serted 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

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 inVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00153 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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spect 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. 


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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. 


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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 


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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 indepth 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 


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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 


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255Mr. 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. 

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. 

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 


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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 ofVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00160 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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fering 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. 


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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 


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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. 


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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. 


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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 

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tion 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.’’ 


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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 


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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 


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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. 


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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 


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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 predispute 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. 


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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. 


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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 antimoney 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 

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rowers, 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, 


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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 


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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 NaVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00176 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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tional 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 ceaseand-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. 


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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 


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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 


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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. 


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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 GrammLeach-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. 


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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 trans- actions 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 


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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 alterVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00183 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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native 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. 


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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. Loanloss 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 


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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, ExecuVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00186 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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tive 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 REVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00187 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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ALTORS; 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 


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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, 


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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 


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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, ClarkMortenson 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; 


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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, 

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ers 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 


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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 

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ican 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 

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ica; 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 


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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 beVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00197 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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half 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 


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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. 


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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. 


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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 

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serve 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 


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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. 


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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– 


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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 


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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. 


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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). 


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TABLE 1.—ESTIMATED BUDGETARY IMPACT OF S. 3217, 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 

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 

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 Deficit a ........................................................................................................... 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 APPROPRIATION 

Estimated 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. 


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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 


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make awards to individuals providing certain information to the 

SEC. 


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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 REVENUES a

Orderly 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 REVENUES 

Orderly Liquidation Authority b ........................................................................................................... 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 SPENDING 

Orderly 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 


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TABLE 2.—NET CHANGES IN THE BUDGET DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES UNDER THE RESTORING AMERICAN FINANCIAL STABILITY ACT 

OF 2010—Continued 

By fiscal year, in billions of dollars— 

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011–2015 2011–2020 

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 

a Positive numbers indicate increases in deficits; negative numbers indicate decreases in deficits. b The 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. 


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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 


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1The 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. 

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. 

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 addiVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00214 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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tional 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 comVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00215 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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panies 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 


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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 Fed- eral 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 cerVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00217 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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tain 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 budgVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00218 Fmt 6659 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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et 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 enhanceduse 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. 


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• 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 


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TABLE 3.—CHANGES IN SPENDING SUBJECT TO APPROPRIATION UNDER THE RESTORING 

AMERICAN FINANCIAL STABILITY ACT OF 2010—Continued 

By fiscal year in millions of dollars— 

2011 2012 2013 2014 2015 2011–2015 

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. 


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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-asyou-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 Payas-You-Go 

Impact a ..... 1.8 ¥0.1 ¥2.6 ¥2.9 ¥2.9 ¥2.9 ¥3.3 ¥3.7 ¥2.9 ¥1.6 ¥6.6 ¥21.0 

a Positive 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). 


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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 

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insurance. 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 


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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 


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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. 


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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 

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vestors 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 


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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 


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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. 


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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 

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tutions; 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 


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259Press Release, United States Department of the Treasury, October 29, 2009. 260 ‘‘FAQs: Role of the NIF, Value and Cost.’’ Committee to Establish the National Institute 

of Finance. 10 Mar. 2010. <http://www.ce-nif.org/faqs-role-of-the-nif/role-of-the-nif-value-andcost>. 

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

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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261Despite 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. 262 Congressional Budget Office, Cost Estimate: S. 3217 Restoring American Financial Stability Act of 2010, April 21, 2010. 263 Id. 

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

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 


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264Federal 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.’’) 

American people will pay for the losses of the investors of large financial institutions. 

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. 

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 


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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. 


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265Of 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. 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.’’). 267See, 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.’’). 

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

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 


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they should have access to investments on which the SEC is spending its investigative resources. 

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 


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268Senate Committee on Banking, Housing, and Urban Affairs, ‘‘American International 

Group: Examining what went wrong, government intervention, and implications for future regulation,’’ March 5, 2009. 269Sorkin, Andrew Ross, ‘‘Too Big To Fail’’ p. 207, 235, (Viking 2010). 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. 

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. 

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. 

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 


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271Specifically, 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. 272Less-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). 273See, e.g., Keybridge Research, An Analysis of the Business Roundtable’s Survey on Overthe-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). 

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. 

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

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 


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274For 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/BHClChangeInControl/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.’’). 275 CME Group, CME Clearing Financial Safeguards (available at: http://www.cmegroup.com/ 

clearing/files/financialsafeguards.pdf) 

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. 

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

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 ComVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00241 Fmt 6604 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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276See ‘‘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). 

modity 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

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 


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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 manVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00243 Fmt 6604 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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277See ‘‘Financial Reform: A New Foundation,’’ U.S. Department of Treasury (available at: 

http://www.financialstability.gov/docs/regs/FinalReportlweb.pdf), page 44, ‘‘We propose several initiatives . . . reducing the incentives for over-reliance on credit ratings.’’ 

ner 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 


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278See 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?’’). 

provision also is likely to harm competition and the value of 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. 

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 

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pense. 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 


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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. 


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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 


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279Monthly Summary Report, February 2010, Fannie Mae, and Monthly Volume Report, February 2010, Freddie Mac. 280Press Release: ‘‘Treasury Issues Update on Status of Support for Housing Programs,’’ U.S. 

Treasury Department, December 24, 2010. 

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. 

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

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 overVerDate Mar 15 2010 06:38 May 06, 2010 Jkt 089010 PO 00000 Frm 00249 Fmt 6604 Sfmt 6602 E:\HR\OC\SR176.XXX SR176

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sight 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 bipartisan 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 


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crisis from occurring again. This bill not only fails in that regard, 

it in fact makes future crises more likely. 

Æ 


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