Wednesday, April 20, 2011

Dodd-Frank Act Will Dominate House Financial Services Committee Agenda This Year

The agenda of the House Financial Services Committee for the remainder of 2011 will be dominated by the Dodd-Frank Act, Committee staff director Larry Lavender recently told a recent a Council of Institutional Investors seminar. The Committee will be examining all of the provisions in the legislation, he said, and recognizes the need to keep what is good about the Act. He said many lawmakers are skeptical about the new Consumer Financial Protection Bureau because it has unfettered power. Mr. Lavender also noted that the Committee plans to look at reforming credit rating agencies, but no consensus has been reached on what action to take.

The Committee has announced its intention to mark up a bill extending the deadline for implementation of the Dodd-Frank Act’s provisions regarding derivatives on May 12. This legislation, which is sponsored by Committee Chairman Spencer Bachus, would extend for 18 months the deadline for regulatory implementation of the derivative provisions of Dodd-Frank in order to give the SEC and CFTC more time to effectively meet the objectives of the derivatives title, to prioritize deliberation over speed, to consider the costs and benefits, and to understand the cumulative impact of the rules that will be applied to the derivatives marketplace.

In a nod to international comity, HR 5173 would also authorize the SEC and CFTC to exempt non-US persons from the registration and related regulatory requirements of Dodd-Frank to the extent the Commissions determine that the person is subject to a comparable foreign regulatory scheme in its home country and adequate information sharing arrangements are in effect between the SEC or CFTC and the home country regulator.

Also, on May 12, the Committee will mark up a bill, introduced by Chairman Bachus, that would replace the Director of the Bureau of Consumer Financial Protection with a bi-partisan Commission of five members, modeled on the SEC and FTC. According to Chairman Bachus, the Responsible Consumer Financial Protection Regulations Act, HR 1121, is needed because the Dodd-Frank Act currently puts too much power in the hands of one person. Under Dodd-Frank, the Director of the CFPB is given a broad and virtually unlimited mandate to substitute his or her judgment for that of consumers and the free market. In the Chair’s view, empanelling a five-member commission is an important first step in ending predatory financial practices without inappropriately limiting access to credit that small businesses and individuals want and need. Under the legislation, a five-member Commission would carry out all of the duties that would otherwise fall to the Director of the CFPB. The Chairman said that this proposed structure of the CFPB is the same structure that has worked well for many other federal regulators, including the FTC and the SEC.

On May 3, the Capital Markets Subcommittee is scheduled to mark up a number of pieces of legislation. Prominent among them is the United States Covered Bond Act, HR 940, sponsored by Chairman Scott Garrett (R-NJ). This is bi-partisan legislation designed to create a legislative framework for U.S. covered bonds, which are securities issued by banks and backed by pools of loans that enable credit to flow more readily from the capital markets to individuals and small businesses in a way that enhances stability of the broader financial system.

Currently, the US does not have the extensive statutory and oversight regulation designed to protect the interests of covered bond investors that exists in European countries. The legislation would fill this gap by requiring the Secretary of the Treasury to establish an oversight program that would prescribe minimum overcollateralization requirements, identify eligible asset classes for cover pools, and create a registry to enhance the transparency of covered bond programs. The banking agencies would carry out the Treasury-prescribed oversight program. A critical portion of the bill deals with an issuer’s default on its covered bond obligations, and the procedure for dealing with the covered bond program of an issuer in receivership.

The subcommittee is also slated to mark up The Burdensome Data Collection Relief Act, HR 1062, which would repeal a corporate governance provision of Dodd-Frank requiring publicly traded companies to disclose their median annual total compensation of all employees. Under Section 953 of the Dodd-Frank Act, the SEC must adopt rules requiring new disclosures about the relationship between executive compensation and company performance, and the ratio between the median of the annual total compensation of an issuer's employees and the annual total compensation of the issuer's chief executive officer.

The Financial Services Committee received testimony about the enormous burden and complexity this provision poses to public companies, with very little, if any, corresponding benefit to investors. The draft legislation is sponsored by Representative Nan Hayworth (R-NY). At recent hearings, Rep. Hayworth questioned the usefulness of Section 953 and whether there were any reasonable changes Congress could make to the section to make it less burdensome. Corporation Finance Director Meredith Cross replied that the usefulness of the pay ratio is a call for Congress to make.

The Director said that Congress could make the pay ratio disclosure more manageable by changing the median of the annual total compensation of an issuer’s employees to the average annual total compensation. She added that it is the SEC’s job to implement the statute in a workable manner. The SEC has yet to propose rules under Section 953 since Dodd-Frank set no deadline for SEC rulemaking. Director Cross allowed that the statute is fairly prescriptive and leaves no leeway for the SEC in the rulemaking process.

The subcommittee will also mark up the Small Company Capital Formation Act, HR 1070, which encourages small companies to access the capital markets. The legislation increases the offering threshold for companies exempted from SEC registration under SEC Regulation A from $5 million, a threshold set in the early 1990s, to $50 million. The SEC has the authority to raise this threshold but has not done so for almost two decades. The draft legislation is sponsored by Rep. David Schweikert (R-AZ).

Another bill scheduled for mark up on May 3 is The Small Business Capital Access and Job Preservation Act (HR 1082, which would exempt advisers to private equity funds from SEC registration. The Financial Services Committee has received testimony regarding the role private equity firms play in preserving existing jobs and creating new ones by providing capital to struggling and growing companies. The Dodd-Frank Act requires most advisers to private investment funds to register with the SEC, including advisers to private equity funds. The draft legislation is sponsored by Rep. Robert Hurt (R-VA).

Members are concerned with the private equity registration requirement. They do not see private equity firms as a source of systemic risk. Rep. Gary Peters (D-MI) said that private equity firms are not generally liquid and not highly leveraged, and thus do not pose a systemic risk. It makes no sense to treat private equity firms the same as large hedge funds, he posited. Rep. Hurt fears that the over-regulation of private equity firms could lead to less job creation. At recent hearings, he asked if the SEC could postpone the private equity regulations until Congress can take further action.

The subcommittee will also mark up the Asset-Backed Market Stabilization Act, HR 1539, which would provide certainty to the issuers of asset-backed securities by repealing Section 939G of Dodd-Frank, which nullified SEC Rule 436(g), thereby imposing Section 11 liability on rating agencies if their ratings were determined to be inaccurate. In the week preceding the effective date of Section 939G, the major rating agencies issued public statements refusing to allow their ratings to be included in registration statements. SEC Regulation AB, however, requires that a prospectus for an asset-backed offering disclose ratings whenever an issuance or sale is conditioned on the assignment of a rating. Thus, the public asset-backed securitization markets froze on July 22, 2010, forcing the SEC to step in and issue a temporary no-action letter on July 22, 2010. On November 23, 2010, the SEC issued a permanent no-action letter. The Act is sponsored by Rep. Steve Stivers (R-OH).

Finally, the subcommittee will nark up HR 33, which would amend the Securities Act to specify when certain securities issued in connection with church plans are treated as exempted securities. The legislation is sponsored by Rep. Judy Biggert (R-Il).

1 comment:

Taku Nishimae said...

Dear Jim,
I'm Taku Nishimae, a, producer at NHK - Japan's public TV.

I've read your article here and quite impressed by it.
http://jimhamiltonblog.blogspot.com/2011/04/dodd-frank-act-will-dominate-house.html

I'm wondering if you could give me your perspective.
I'm producing a feature documentary on financial reform, especially new rules on credit rating and its impact on institutional investors who are affected by it. 
I'd like to have your opinion, and also conduct a quick survey to pension funds on this question to create a meaningful program.
Questions are like these ;
- Is there a clear influence because of the tighter regulation?
- Do investors just keep using AAA ratings?
- Is there any indication of fear or anxiety in the market that this type of policy may distort the market?

We suspect that there is a dilemma of investors who still have to rely on AAA rating system of 3 major credit agencies.
For example;
Calpers are suing S&P, yet they keep using their credit rating, and benefit from their own AAA status.
Although they are accusing the credit agencies, they really cannot get away from the current rating system.

On financial reform and the dilemma of the institutional investors, would you know of any institutional investor (pension fund, insurance company, regional banks, etc...), who we should talk to ?

Best,

Taku Nishimae
Producer





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Taku Nishimae
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skype ; takunishimae
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