GSE Reform Bill Passes House with Strong Sarbanes-Oxley Provisions

A bill overhauling the regulatory oversight of the government sponsored enterprises Fannie Mae, Freddie Mac, and the Federal Home Loan Banks has passed the House. The Federal Housing Finance Reform Act (HR 1427) would also create a new, independent regulator of the GSEs with broad powers analogous to current banking regulators. The Federal Housing Finance Agency would be headed by a Director, appointed by the President and confirmed by the Senate for a 5-year term.

New Financial Services Committee Chair Barney Frank has pledged to pass legislation to reform the government-sponsored enterprises in this session of Congress.

The regulated entities are required to register at least one class of capital stock with the Securities and Exchange Commission.

The legislation establishes corporate governance requirements for the composition, operation, and compensation of the board of directors. The enterprises are required to comply with several provisions of the Sarbanes-Oxley Act regardless of their registration status with the SEC.

For example, the Act requires the chief executive officer and the chief financial officer of an enterprise to review each quarterly report and annual report issued by the enterprise to certify that these financial statements fairly present the financial condition of the enterprise as required by section 302 of Sarbanes-Oxley. It also bans loans from the enterprise to any board member or executive officer of the enterprise.

The Act would also amend Section 105(b) of the Sarbanes-Oxley Act by adding the Federal Housing Finance Agency to the list of those federal agencies with which the PCAOB may share information without loss of confidentiality.