Floor Statement on the Dodd-Frank Wall Street Reform and Consumer Protection Act
Mr. President, on June 29, 2010, the House-Senate conference committee completed its deliberations on the most significant financial regulatory legislation since the 1930s. And, now, this conference report is before the Senate for final enactment. It will fundamentally change how we protect consumers, families, and small business from the reckless and abusive practices of the financial sector, and it will provide a framework for economic growth without the peril of periodic taxpayer bailouts of the financial sector.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a significant achievement. The legislation before the Senate declares that big banks cannot continue to take enormous risk, reaping billions in profits and rewarding their executives with hefty bonuses while counting on taxpayers to bail them out when they get in trouble. Unregulated mortgage lenders will no longer be able to make loans they know will not be repaid; loans that cripple families and communities. And, banks will no longer operate in an unregulated, opaque, and dangerous market for derivatives that helped lead us to the brink of financial catastrophe last year.
However, the events of the last decade and, particularly, the last several years should caution all of us with respect to the efficacy of any single legislative initiative. This bill must be thoughtfully and vigorously implemented. Indeed, the regulators must be particularly vigilant to ensure that this legislative effort is not undone by powerful interests who will be constrained by its provisions. In the years ahead, regulators must have the resources and the will to enforce these provisions to protect consumers and to protect the economy. The Congress must be prepared to provide rigorous oversight and move quickly to ensure that regulatory supervision will keep pace with a dynamic global marketplace.
More than a decade of excessive risk taking and lax regulation culminated in financial collapse in the autumn of 2008. The ensuing economic chaos has left millions unemployed and underemployed, precipitated a foreclosure crisis that still haunts neighborhoods throughout the country, and shattered the dreams of millions of American families.
With this new legislation, we create for the first time a consumer watchdog--the Consumer Financial Protection Bureau--that will solely focus on protecting consumers from unscrupulous financial activities. The law gives this agency independent rulemaking, examination, and enforcement responsibilities, and clear authority to prohibit unfair, deceptive, and abusive financial activities against middle-class families. And it consolidates the existing responsibilities of many regulators to ensure that there is a less fragmented, more comprehensive, and a fully accountable approach to protecting consumers.
The new Bureau represents a fundamental shift in how we inform Americans about abuses by banks, credit card companies, finance companies, payday lenders, and other financial institutions. It will focus these companies on doing their job of providing responsible and constructive financial products to help families and small businesses succeed, rather than destructive products that cause them to fail by draining their income and savings.
I am also pleased that the Senate voted 98 to 1 to approve the bipartisan amendment I offered with Senator Scott Brown to create an Office of Service Member Affairs within the Consumer Financial Protection Bureau. This office will educate and empower members of the military and their families, help monitor and respond to complaints, and help coordinate consumer protection efforts among Federal and State agencies.
Although I would have preferred for the new Consumer Financial Protection Bureau to have sole authority over consumer protection matters for all banks and nonbank financial companies, the final bill represents a strong regime for consumer protection, including rulewriting authority over all entities. It also provides the Bureau with authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion; all mortgage-related businesses, such as lenders, servicers, and mortgage brokers; payday lenders; student lenders; and all large debt collectors and consumer reporting agencies.
One glaring exception is the carve-out for auto lenders. I opposed the Brownback amendment that created a special loophole for auto dealer-lenders, and I also opposed the compromise that is included in the conference report. The original protections in the bill were not meant to vilify auto dealers. The vast majority of dealers in my State of Rhode Island and across the country are hard-working business owners who operate responsibly. Rather, this debate was about ensuring fair and consistent scrutiny of all lending institutions. We cannot ignore the abuses that service members and others have endured because of predatory auto loans. We have learned from the debate that the abuse of service members by some auto dealers is an epidemic. During the debate I received a memo citing 15 recent examples of auto finance abuses just at Camp Lejeune alone. This problem will require close scrutiny after the bill is implemented.
I am also pleased that the legislation includes provisions from the Durbin amendment that will protect small business from unreasonable credit card company fees by requiring the Federal Reserve to issue rules ensuring that fees charged to merchants by credit card companies for debit card transactions are both reasonable and proportional to the cost of processing those transactions. These provisions will allow small businesses to invest more and pass on greater savings to their customers rather than spend their earnings on unreasonable interchange fees.
The Dodd-Frank Act also creates a new Financial Stability Oversight Council, comprised of existing regulators, to identify and respond to emerging risks throughout the financial system. This new council represents another significant improvement to protect families from devastating economic trends by, for the first time, creating one single entity responsible for looking across the financial system to prevent and respond to problems.
This section of the conference report also puts in place a new rigorous system of capital and leverage standards that will discourage banks from getting so large that they put our financial system at risk again. The new Financial Stability Oversight Council will make recommendations to the Federal Reserve to apply strict rules for capital, leverage, liquidity, and risk management
so that firms that grow too big will face stricter rules that will likely deter the bigger is better mentality of too many banks. The council will also make recommendations for nonbank financial companies that have grown so large or complex that their activities pose a threat to the financial stability of the United Sates. No financial institution, bank or otherwise, will be able to take risks to multiply their gains without holding adequate capital. And, more importantly, such institutions will be on notice that the taxpayers will not bail them out.
The conference report includes a new Office of Financial Research, a proposal that I developed to provide an entity capable of researching, modeling, and analyzing risks throughout the financial system. For too long, those charged with keeping the banking system stable have lacked the data and analytical power to keep up with complex financial activities. This office ends that situation and takes a bold step forward to understand the factors that threaten to rip holes in our financial system, provide early warnings, and allow regulators to act on that information. As we create this new office, I will ensure that it retains its independence and broad data collection, budget, and hiring authority, so we are sure to better identify and mitigate economic challenges in the future. The challenge presented by the task of understanding the financial markets and monitoring systemic risk will require a sustained, integrated research effort that brings together some of the top researchers and practitioners in the country from a diverse range of relevant disciplines. The Office of Financial Research must become a world class institution that can go ``toe to toe'' with the top Wall Street banks.
In addition, this law creates a safe way to liquidate large financial companies, so that taxpayers will never again have to prop up a failing firm to avoid sending shockwaves through the financial system. Shareholders and unsecured creditors, not taxpayers, will bear losses, and culpable management will be removed. Financial institutions will pay for their failures, not taxpayers. Indeed, the existing rules on emergency lending authority and debt guarantees will be substantially changed to ensure that such tools cannot be used to bail out individual firms. This will send an important message to Wall Street: operate at your own risk since the taxpayers will no longer be in the business of bailing you out.
The Dodd-Frank Act also establishes important new limits on banks engaging in proprietary trading and in owning and investing in hedge funds and private equity funds. These provisions are known as the Volcker rule or the Merkley-Levin amendment. These new rules will help ensure that banks are not betting with consumer bank deposits on risky activities for the banks' own profit.
Until the last few decades, commercial banking and investment banking were largely conducted by separate institutions. However, in recent years, banks have engaged in a multitude of higher risk activities, such as short-term trading for a bank's own profit, and the sponsoring of hedge funds and private equity funds. The law changes that and prohibits any bank, thrift, holding company, or affiliate from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund. It also prohibits activities that involve material conflicts of interest between banks and their clients, customers, and counterparties.
The conference report also includes two provisions in this area that I authored. One requires the chief executive officer at a banking entity to certify annually that it does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the hedge fund or private fund. The other provision requires banking entities to set aside more capital commensurate with the leverage of the hedge fund or private equity fund.
Although the final provisions included in the bill represent a stronger and more targeted approach to reducing risk in our banking system, I believe the change during the conference to allow for a 3 percent de minimus exclusion from the ban on sponsoring or investing in hedge funds or private equity funds was unwise. The original Merkley-Levin proposal did not include such an exclusion. Congress and the regulators will need to monitor bank activities very closely in the coming years to ensure that this exclusion is not abused.
The bill also makes some changes to consolidate our country's fragmented and inefficient system for supervising banks and holding companies. It eliminates the Office of Thrift Supervision, a particularly lax supervisor, and redistributes responsibilities for bank oversight and supervision to bring greater consistency and more effective oversight to all firms. These changes are an important step forward, although additional consolidation and streamlining of our regulatory agencies could have further improved the effectiveness of the system.
The Dodd-Frank bill also closes a significant gap in financial regulation by requiring advisers to hedge funds and private equity funds to register with the Securities and Exchange Commission. Based on legislation that I introduced, we will for the first time bring advisers to those funds within the umbrella of financial regulation. This will allow regulators to obtain the basic information they need to prevent fraud and mitigate systemic risk, while at the same time providing investors with more information and greater transparency.
Advisers to hedge funds and private equity funds--called ``private funds'' in the legislation--will have to register with either the SEC or a State, depending on the size of the funds they manage. Fund advisers with assets under management over $150 million must register with the SEC. Advisers to other types of funds will continue to have similar requirements, but the threshold for SEC registration will be $100 million. I also successfully included language in the conference report to ensure that State registration is only available to eligible fund advisers if the State has a registration and examination program.
From the beginning of this process I fought against any carve-outs in this title for private equity, venture capital, and family offices. While I successfully convinced the conferees to drop a carve-out for private equity advisers, the bill still contains problematic exemptions for venture capital firms and family offices. Through hearings and other means, I will continue to work to create a regulatory system in which none of the fraud and systemic risks that may lurk within private pools of capital remain out of view and reach of regulators.
On derivatives, the bill closes another huge set of regulatory gaps by overturning a law that prevented regulators from overseeing the shadowy over-the-counter derivatives market and, as a result, bringing accountability and transparency to the market. As we have learned from AIG and Lehman Brothers, derivatives were at a minimum the accelerant that complicated and expanded the financial crisis.
A major problem with derivatives is that they have not been regulated nor well-understood by even those buying and selling them. The legislation changes that and brings transparency and greater efficiency to the marketplace for swaps--derivatives in which two parties exchange certain benefits based on the value of an underlying reference like an interest rate--by requiring the reporting of the terms of these contracts to regulators and market participants. It will move as many swaps as possible from being opaque, bilateral transactions onto clearinghouses, exchanges, and other trading platforms. This should help make the marketplace fairer and more efficient by providing companies and investors with complete information on the market. Firms will also be required to put forward sufficient capital to engage in these transactions, which should help rein in the excessive speculation we saw in the past.
I successfully offered several amendments during the conference to correct potential opportunities for regulatory arbitrage between the Securities and Exchange Commission and the Commodity Futures Trading Commission. One of my improvements requires the SEC and the CFTC to conduct joint rulemaking in certain key areas rather than create potential gaps by conducting them separately. Other amendments clarify the definitions of mixed swap, security-based swap agreements, and index--which are all important terms that fall at the nexus of the two agencies' oversight--to ensure that the new swaps rules cannot be gamed and manipulated.
In a significant improvement to public transparency of swaps data, I successfully included another amendment that will ensure that regulators can require public reporting of trading and pricing data for uncleared transactions, not just aggregate data on transactions, just as they can for cleared transactions.
Also important are provisions to give the Federal Reserve a role in setting risk management standards for derivatives clearinghouses and other critical payment, clearing, and settlement functions, which has been a priority of mine given their importance to the financial system and their potential vulnerability to both natural and manmade disruptions.
The Dodd-Frank conference report also makes important improvements to the Federal Reserve System to ensure that as a financial regulator, it is accountable to the American public rather than to Wall Street. Among other governance improvements, the bill incorporates my proposal to create a new position of Vice Chairman for Supervision on the Federal Reserve Board of Governors, which should help ensure that supervision does not take a back seat to other priorities. The new Vice Chairman will develop policy recommendations for the board regarding the supervision and regulation of depository institution holding companies and other financial firms supervised by the board. He or she will also oversee the supervision and regulation of such firms.
Although the Senate bill included my proposal to require the head of the Federal Reserve Bank of New York to be Presidentially appointed and Senate confirmed, the provision was stripped out during conference. If the Governors of the Federal Reserve System in Washington are required to be confirmed by the Senate, then the President of the Federal Reserve Bank of New York, who played a pivotal and perhaps more powerful role in obligating taxpayer dollars during the financial crisis, should also be subject to the same public confirmation process. Wall Street should not have the ability to choose who is in such a powerful position. Although the final bill limits class A directors--who represent the stockholding member banks of the Federal Reserve District--from participating in the process, it still allows the other directors, who could be bankers or represent other powerful interests, to vote for the head of the New York Reserve Bank. I believe that more still needs to be done to make this position truly accountable to the taxpayers.
The Dodd-Frank Act also includes a number of strong investor protection provisions that represent a significant step forward in how we oversee our capital markets and ensure that investors have the best information available for their decisionmaking. This title reflects strong proposals I have put forward as the chairman of the Securities, Insurance, and Investment Subcommittee, including robust accountability provisions for credit rating agencies, and provisions to strengthen the tools and authorities of the Securities and Exchange Commission.
The conference report includes strong new rules I helped write to address problems we saw at credit rating agencies leading up to the financial crisis. It creates an Office of Credit Ratings at the SEC to increase oversight of nationally recognized statistical rating organizations, and contains strong new rules regarding disclosure, conflicts of interest, and analyst qualifications. Perhaps most significantly, it includes a strong new pleading standard I crafted that will make it easier for investors to take legal action if a rating agency knowingly or recklessly fails to review key information in developing a rating.
I also worked with the chairman and my colleagues in conference to incorporate more than a dozen improvements to the securities laws that will protect investors by strengthening the SEC's ability to bring enforcement actions, addressing issues revealed by the Madoff fraud, and modernizing the SEC's ability to obtain critical information. In particular, these provisions would enhance the ability of the SEC to hire outside experts, strengthen oversight of fund custodians, modernize the ability of the SEC to obtain information from the firms it oversees, and clarify and enhance SEC penalties and other authorities. I am particularly pleased that the conference report contains extraterritoriality language that clarifies that in actions brought by the SEC or the Department of Justice, specified provisions in the securities laws apply if the conduct within the United States is significant, or the external U.S. conduct has a foreseeable substantial effect within our country, whether or not the securities are traded on a domestic exchange or the transactions occur in the United States. I also support the establishment of a program to reward whistleblowers when the SEC brings significant enforcement actions based upon original information provided by the whistleblower, and I look forward to the SEC rules that will detail the framework for this program.
Although I would have preferred the proposal in the Senate bill by Senator Schumer to provide the SEC with self-funding, I am pleased that the amendment on SEC funding that I offered with Senator Shelby during conference was included in the conference report. These provisions would keep the SEC budget within the annual appropriations process, but change how the funding process would work for the Commission. Our proposal includes budget bypass authority, under which the SEC would provide Congress with its assessment of its budget needs at the same time it provides this information to the Office of Management and Budget. In addition, the President, as part of his annual budget request to the Congress, would be required to include the SEC's budget request in unaltered form. The language will also have the SEC deposit up to $50 million per year of the registration fees into a new reserve fund, which can be used for longer range planning for technology and other agency tools. The SEC will have permanent authority to obligate up to $100 million in any fiscal year out of the reserve fund.
One important investor protection that was also supported by Senators Levin, Coburn, and Kaufman but not included in the final bill was language that would have corrected what we and many others, including legal scholars, regard as the mistaken Supreme Court decision in Gustafson v. Alloyd. Before the Supreme Court's decision in this case, the rule was simple but clear: be careful not to mislead when selling securities in both public and private offerings. After Gustafson, this simple rule was needlessly complicated and limited just to public offerings.
Our amendment, which we will continue to work on a bipartisan basis to add to another legislative vehicle in the future, would have put investors in private offerings on the same level as investors in public offerings, thereby restoring congressional intent and a standard that was in place for 60 years before the Supreme Court decided Gustafson.
One of the lessons learned from the Bush era financial collapse is that too often rules were ignored and information was hidden. That is why I am extremely disappointed that the conference report includes an exemption for companies with less than $75 million in market capitalization from the requirements of Sarbanes-Oxley section 404(b). This change will exempt more than 5,000 public companies from audits, despite the fact that small companies have often been shown to be more prone to both accounting fraud and to accounting errors, including among the highest rates of restatements. Enacting this exemption in the name of reducing paperwork, when extensive evidence indicates that the costs of compliance are reasonable and dropping, is unnecessary and unwise. I think there will be a price in the future as fraud increases and investors suffer.
I am also disappointed that conferees included a provision that overturns a recent court case regarding equity indexed annuities. Equity indexed annuities are financial products that combine aspects of insurance and securities, but are sold primarily as investments. This language will preclude State and Federal securities regulators from applying strong disclosure, suitability, and sales practice standards to these often risky and harmful products. I believe this is bad policy.
Clearly with the State securities regulators on one side of this issue, and the insurance regulators on the other--this is not a matter which should have been resolved in a conference committee. The regulation of equity indexed annuities deserves more consideration through hearings and the development of a legislative record that informs the Congress of what changes should happen in this area.
I am pleased that the conference report makes it clear that after conducting a study, the SEC has the authority to impose a fiduciary duty on brokers who give investment advice, and that the advice must be in the best interest of their customers. It also includes language that gives shareholders a say on CEO pay with the right to a nonbinding vote on salaries and golden parachutes. This gives shareholders the ability to hold executives accountable, and to disapprove of misguided incentive schemes. I am also happy that after much dispute, the bill makes it clear that the SEC has the authority to grant shareholders proxy access to nominate directors. These requirements can help shift management's focus from short-term profits to long-term stability and productivity.
I am pleased that the conference report includes several provisions to discourage predatory lending and provide much needed foreclosure relief. To reduce risk, this legislation requires those companies that sell products like mortgage backed securities to hold onto at least 5 percent of what they're selling so that these companies have the incentive to sell only those products they would own themselves. In other words, we make sure that there is some ``skin in the game''.
The conference report also further levels the playing field by enacting some commonsense proposals to protect borrowers. Lenders will now have to ensure that a borrower has the ability to repay a mortgage, and they can no longer steer borrowers into a more expensive mortgage product when the borrower qualifies for a more affordable one. The bill outlaws pre-payment penalties that trapped so many borrowers into unaffordable loans, and those lenders who continue their predatory ways will be held accountable by consumers for as high as 3 years of interest payments and damages plus attorney's fees.
Additionally, the Consumer Financial Protection Bureau will have the authority to investigate and enforce rules against all mortgage lenders, servicers, mortgage brokers, and foreclosure scam operators so that hardworking Americans have a strong financial cop on the beat that has the interests of consumers in mind.
Finally, I am particularly pleased that the conference report includes several provisions, some of which come from legislation I first introduced last Congress and revised this Congress, to provide much needed foreclosure relief to those who have borne the brunt of this crisis. First, it provides $1 billion for loans to help qualified unemployed homeowners with reasonable prospects for reemployment to help cover mortgage payments. Second, I worked with my colleagues to ensure that the additional funding for HUD's Neighborhood Stabilization Program would reach all States, including Rhode Island. Third, I not only supported the inclusion of legal assistance for foreclosure-related issues, but I also fought to ensure that Rhode Island, which has one of the highest rates of foreclosure and unemployment, would be in a better position to receive priority consideration for this assistance. Lastly, I worked to include a national foreclosure database to give regulators an important tool to monitor and anticipate issues stemming from foreclosures and defaults in our housing markets and better pinpoint assistance to struggling homeowners.
Before I conclude I would like to take a moment to thank Kara Stein of my staff, who also serves as the staff director of the Securities, Insurance, and Investment Subcommittee, which I chair, and Randy Fasnacht, a detailee to the subcommittee from the GAO. They did a remarkable job and worked tirelessly. I also want to recognize the contributions of James Ahn of my staff as well as the foundation that Didem Nisanci, formerly of my staff, helped lay for this process. I also want to acknowledge the contributions of many others, including Chairman Dodd and his staff.
I urge my colleagues to support this critical legislation. But the Senate's work does not end with the bill's passage. It will have to monitor and oversee the law's implementation very closely. The Dodd-Frank Wall Street Reform and Consumer Protection Act will make significant improvements to consumer protection that will benefit families and communities in my own State of Rhode Island and across the country. It will help create more transparent, fair, and efficient capital markets in our country, which will help create jobs and support American businesses. And it will provide a more secure and stable economic footing for the decades ahead.