The House has approved a comprehensive financial reform bill, albeit with a number of key provisions weakened in recent days.
The Wall Street Reform and Consumer Protection Act of 2009 was approved by a party-line vote of 223-202, with no Republicans voting to support the bill and 27 Democrats voting against it. The final legislation includes the creation of a Consumer Financial Protection Agency, a controversial provision steadfastly opposed by the financial industry. The provision survived despite amendments to drop it from the final bill.
The bill now goes to the Senate, where Senate Banking Committee Chairman Christopher Dodd, D-Conn., has introduced his own version of the legislation.
Treasury Secretary Timothy Geithner hailed the legislations passage. House passage of this bill moves us an important step closer to meeting the presidents objectives for reform, he said in a statement. Comprehensive reform must establish clear rules of the road with strong enforcement for our nations financial institutions and markets; end loopholes that allowed big Wall Street firms to escape supervision; make it clear that no firm is too big to fail; and provide strong consumer and investor protections for American families.
In addition to creating a Consumer Financial Protection Agency whose task is protecting consumers from abusive financial products and services, the legislation would create a Financial Stability Council, a council of regulators that would identify financial firms that are so large, interconnected or risky that their collapse would put the entire financial system at risk. Systemically risky firms would be subject to increased oversight, standards and regulation.
However, unlike an earlier version of the bill, the council would not be able to suspend or modify accounting standards that threaten the stability of the U.S. financial system. Accounting industry organizations had lobbied to have the provision watered down in order to preserve the SEC's oversight of the Financial Accounting Standards Board and the independence of the standard-setting process. The final bill now only allows the council to submit comments to accounting standard setters.
The American Institute of CPAs also won an exemption for CPAs from regulation by the Consumer Financial Protection Agency. Other types of professions also won exemptions, including merchants, retailers, doctors and automobile dealers.
Another provision of interest to the accounting profession was an amendment that exempts small and midsized public companies with a float below $75 million from outside audits of their internal controls under Section 404(b) of the Sarbanes-Oxley Act. The audits had been repeatedly delayed by the SEC in response to cost concerns from small companies, but in October, the SEC said the audits would take effect in nine months' time.
The so-called Garrett-Adler amendment was added to the bill approved by the House Financial Services Committee, and permanently exempted the small companies from the 404(b) audits. A later amendment was introduced that would have struck out that provision, sponsored by Rep. Paul Kanjorski, D-Pa. However, Kanjorski's amendment was defeated during debate on the final bill Friday.
The final bill also contains a number of other provisions of keen interest to the financial industry. It would establish an orderly process for shutting down large, failing financial institutions like AIG or Lehman Brothers before they can harm other financial institutions. It would give a say on pay an advisory vote on pay practices including executive compensation and golden parachutes, enabling regulators to ban inappropriate or imprudently risky compensation practices, and requiring financial firms to disclose incentive-based compensation structures.
In addition, the bill would strengthen the Securities and Exchange Commissions powers to protect investors and regulate the nations securities markets. In response to the SECs failures to detect the Madoff and Stanford Financial frauds, the bill would order a study of the entire securities industry to identify needed reforms and force the SEC and other entities to further improve investor protection.
The bill would also regulate, for the first time, the $600 billion over-the-counter derivatives marketplace. Under the bill, all standardized swap transactions between dealers and major swap participants would have to be cleared and traded on an exchange or electronic platform. The bill would define a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring. The provision was heavily lobbied and watered down by hedge funds and agricultural interests, however.
In addition, the bill would outlaw many predatory mortgage lending practices that marked the subprime lending boom. The bill also requires the registration of hedge funds, requiring most advisors to private pools of capital to register with the SEC. They will also be subject to systemic risk regulation by the financial stability regulator.
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