Draft Legislation Creating Consumer Financial Protection Agency Mandates Coordination with SEC but Excepts SEC-Registered Brokers and Advisers

The Obama Administration has sent draft legislation to Congress that would create a new federal Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive, and abusive practices. The 152-page draft is entitled the Consumer Financial Protection Agency Act of 2009.

The new independent agency would be housed in the Executive Branch, with its members appointed by the President. The agency would have broad jurisdiction to protect consumers of credit, savings, payment, and other consumer financial products and services, and regulate providers of such products and services. The legislation envisions that the agency will coordinate with the SEC and CFTC to promote consistent regulatory treatment of consumer and investment products and services.

In fact, the draft provides that the SEC must consult and coordinate with the agency with respect to any rule, including any advance notice of proposed rulemaking, regarding an investment product or service that is the same type of product as, or that competes directly with, a consumer financial product or service that is subject to the jurisdiction of the CFPA. But the draft also provides that the Act should not be construed as altering, amending, or affecting the authority of the SEC to adopt rules, initiate enforcement proceedings, or take any other action with respect to a person regulated by the SEC. Thus, the new agency will have no authority to exercise any power to enforce the Act with respect to a person regulated by the SEC.

There are similar provisions in the draft with regard to the CFTC and persons regulated by the CFTC.

The draft define a person regulated by the SEC to mean a broker or dealer that is required to be registered under the Exchange Act, an investment adviser that is required to be registered under the Investment Advisers Act, or an investment company that is required to be registered under the Investment Company Act, but only to the extent that the person acts in a registered capacity.

Similarly, the draft defines a person regulated by the CFTC as a futures commission merchant, commodity trading adviser, commodity pool operator, or introducing broker that is subject to the jurisdiction of the CFTC under the Commodity Exchange Act, but only to the extent that the person acts in such capacity.

The draft embodies a new proactive approach to disclosure. The CFPA will be authorized to require that all disclosures and other communications with consumers be reasonable: balanced in their presentation of benefits, and clear and conspicuous in their identification of costs, penalties, and risks.

The legislation envisions that the agency’s rules would serve as a floor, not a ceiling. The states would have the ability to adopt and enforce stricter laws for institutions of all types, regardless of charter.

The Board of the agency would be composed of five members, four of whom would be appointed by the President and the fifth would be the Director of the National Bank Supervisor. The Presidential appointments must be US citizens with strong competencies and experiences related to consumer financial products or services. From among the appointed Board members, the President will designate one member of the Board to serve as the Director.

The agency has a broad mandate to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services. Specifically, the draft would authorize the agency to exercise its authorities to ensure that consumers have, understand, and can use the information they need to make responsible decisions about consumer financial products or services; that consumers are protected from abuse, unfairness, deception, and discrimination; that markets for consumer financial products or services operate fairly and efficiently with ample room for sustainable growth and innovation; and that traditionally underserved consumers and communities have access to financial services.

Covered persons under the draft are persons engaging in a financial activity, in connection with the provision of a consumer financial product or service; or any person who, in connection with the provision of a consumer financial product or service, provides a material service to, or processes a transaction on behalf of, the person engaging in the financial activity.

The legislation defines financial activity to mean, among other things, acting as an investment adviser to any person and not subject to regulation by the SEC or CFTC and acting as financial adviser to any person, including providing financial and related advisory services; providing educational courses, and instructional materials to consumers on individual financial management matters; or providing credit counseling, tax-planning or tax-preparation services to any person. Financial activity is also acting as a custodian of money or any financial instrument.

As a catch all, the draft also deems a financial activity to be other activity that the agency defines, by rule, as a financial activity, except that the agency cannot define engaging in the business of insurance as a financial activity.

The term “financial product or service” means any product or service that, directly or indirectly, results from or is related to engaging in one or more financial activities.