Dodd Finance Reform Plan Finally Hits

Senator Chris Dodd unveiled his financial regulatory reform legislation today, saying the final product reflects months of bipartisan talks between Republicans and Democrats.

The Senate Banking Committee, which the Connecticut Democrat chairs, will begin marking up the legislation next week, Dodd said.

The bill would create a new independent office, housed inside the Federal Reserve, to write and enforce consumer protection rules for financial products. It also would establish a new council of financial regulators that would identify, monitor, and address risks that large firms—including nonbanks such as American International Group—pose to the entire financial system.

In addition, the bill would direct regulators to implement rules that prohibit banks from engaging in proprietary trading or investing in hedge funds and private equity firms. Bank regulation would be streamlined, but the state banking system that governs many community banks would be retained.

Shareholders would be provided a nonbinding vote on executive compensation and the right to nominate directors.

Republicans had urged Dodd to delay the markup so they could continue negotiating a bill, but Dodd said time was running out to get the legislation passed this year. That’s needed, he said, to make sure regulators have the tools they need to deal with future financial crises.

“We will have financial reform adopted this year in the Congress of the United States,” he said.

There is broad consensus on much of the bill, Dodd said. The biggest fights are over consumer protection and shareholder rights.

The House’s bill, which passed in December, created a new independent Consumer Financial Protection Agency. Banks and business groups strongly oppose that, contending it would create an unneeded additional layer of regulation and could impose burdens on nonfinancial companies as well.

Dodd’s bill also calls for a new consumer protection regulator, but it would be housed at the Federal Reserve instead of as a separate agency. The Fed, however, wouldn’t have “one iota of authority” over the consumer protection office’s budget or operations, Dodd said.

The new Consumer Financial Protection Bureau would write consumer protection rules for all entities that offer consumer financial services or products. It also would enforce these regulations at banks and credit unions with assets of more than $10 billion, mortgage-related businesses, and large nonbank financial companies, such as payday lenders.

Other regulators would be consulted when banks are examined in order to prevent an undue regulator burden, according to Dodd. Regulators also could appeal the consumer bureau’s regulations to the systemic risk council if they believe the rules would jeopardize the safety and soundness of the banking system.

Dodd’s approach to consumer protection didn’t satisfy the American Bankers Association because it continues to separate consumer regulations from safety and soundness regulations. The Financial Services Roundtable also contends Dodd gave too much autonomy to the new consumer office.

“Consumer protection should not be separated out from the regulators which govern the products,” said Steve Bartlett, the roundtable’s president and CEO.

Both groups urged Dodd to continue working with Republicans on crafting a bipartisan approach to financial regulatory reform.

“We do not believe that workable regulatory reform can be enacted without a bipartisan approach,” Yingling said.