U.S. Senate Passes Financial Regulatory Reform Bill

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U.S. Senate Passes Financial Regulatory Reform Bill

The U.S. Senate has passed the Restoring American Financial Stability Act of 2010 (the "Senate Bill"), which would comprehensively reform the regulation of financial products and services by providing, among other things, for the establishment of a Financial Stability Oversight Council (the "Council") to monitor systemic risk, a new resolution process for systemically important financial institutions, a new Consumer Financial Protection Bureau (the "CFPB"), the registration of private fund advisers and the regulation of derivatives. For more on the Senate Bill, please see the March 16, 2010 Alert, the March 23, 2010 Alert and the April 27, 2010 Alert. The Senate Bill must now be reconciled with the Wall Street Reform and Consumer Protection Act of 2009 (the "House Bill"), a similar comprehensive financial reform bill that was passed by the U.S. House of Representatives on December 11, 2009. For more on the House Bill, please see the November 3, 2009 Alert, December 8, 2009 Alert and the December 15, 2009 Alert.

Amendments. During three weeks of contentious debate, the following amendments to the Senate Bill were adopted:

Resolution Authority. An amendment by Senators Christopher Dodd and Richard Shelby that implements a bipartisan agreement on the Senate Bill's resolution title, which establishes a new federal process for shutting down large, interconnected financial companies in an orderly manner. The amendment strikes the provisions of the Senate Bill that would create a $50 billion resolution fund for the FDIC to liquidate certain failing systemically important financial firms and direct the FDIC to use Treasury funds for liquidation. Under the amendment, creditors of such a failing firm would have to pay back any funds received in excess of what they would have received in liquidation. The amendment also requires Congress to approve FDIC debt guarantees and provides that the FRB may only use its emergency lending authority for solvent companies. A separate amendment by Senator Barbara Boxer stipulates that any financial firm that enters into the federal resolution process shall be liquidated and provides that no taxpayer funds shall be used to prevent the liquidation of such financial firm. Senator Boxer's amendment further provides that any funds spent to liquidate such a financial firm shall be recovered from the disposition of assets of such financial firm, or shall be the responsibility of the financial industry, through assessments, in order to prevent taxpayers from bearing any losses from such resolution process. Risk-Based Capital Requirements. An amendment by Senator Susan Collins that mandates minimum leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies (including savings and loan holding companies), and nonbank financial companies subject to FRB supervision. The current leverage and risk-based capital requirements applicable to insured depository institutions shall serve as a floor for any such capital requirements. This amendment would also eliminate the ability of financial institutions to include trust preferred securities in the calculation of Tier 1 capital. Senator Collins indicated that she wants these restrictions to apply only to systemically important firms and to be phased in over time; however, the amendment does not contain any such language, so any such changes would have to be implemented by the conference committee during the reconciliation process. Preemption of State Laws. An amendment by Senator Thomas Carper that allows for the preemption of state laws that apply to national banks if such state law (i) has a discriminatory affect on national banks, (ii) is preempted in accordance with the decision of the U.S. Supreme Court in Barnett Bank of Marion County v. Nelson, 517 U.S. 25 (1996) by a court or by the OCC on a case by case basis, or (iii) is preempted by another provision of federal law. The amendment also allows state attorneys general to enforce new rules enacted by the CFPB against both national and state-chartered banks; however, under the amendment state attorneys general are prohibited from bringing federal class actions against national banks or bringing an enforcement action against a national bank for activities conducted in another state. Federal Reserve Bank Supervision. An amendment by Senator Kay Bailey Hutchison that preserves the FRB's authority to regulate state member banks. The original version of the Senate Bill would have limited the FRB to the supervision of financial firms with assets of greater than $50 billion, transferring the supervision of approximately 800 state members banks to the FDIC. Deposit Insurance Assessments. An amendment by Senators Jon Tester and Kay Bailey Hutchison that changes the formula for deposit insurance assessments by basing such assessments on a depository institution's average asset total during the assessment period less its tangible equity, rather than its insured deposits. Under the amendment the deposit insurance assessment for custodial banks will be based on factors including the percentage of total revenues generated by custodial businesses and the level of assets under custody. Definition of "Non-Bank Financial Company." An amendment by Senator David Vitter that was modified by an amendment by Senator David Pryor that revises the Senate Bill's definition of a "non-bank financial company." Under the amendments, the Council...

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