House Passes Wall Street Reform and Consumer Protection Act

Margaret E. Tahyar is a partner and member of the New York Financial Institutions Group at Davis Polk & Wardwell LLP. This post was prepared by Ms. Tahyar and Christine Graham, an associate at Davis Polk, and relates to a Davis Polk client memorandum summarizing the provisions of the Wall Street Reform and Consumer Protection Act, which is available here.

Financial sector reform legislation continues to progress through Congress. Earlier this month, the House of Representatives passed its version of the legislation, summarized in this Davis Polk memorandum. The Senate is expected to begin discussion of its draft of the legislation when it returns in January 2010.

The House bill, named the Wall Street Reform and Consumer Protection Act, is an omnibus bill covering all major financial sector legislative reforms under consideration by Congress. As the Wall Street Reform and Consumer Protection Act passed by a narrow vote of 223 to 202, with all Republicans and 27 Democrats voting no, it is clear that many elements remain controversial and subject to change in the Senate. The Senate debate is likely to start with Senate Banking Chairman Christopher Dodd’s proposal, published in November 2009, summarized in this Davis Polk memorandum.

As has been widely reported, the House and Senate proposals differ significantly in the institutional arrangements and the role of the Federal Reserve. However, their impact on the day-to-day business models of major financial institutions is strikingly similar.

We summarize the key business model impacts of the House bill below.

Systemic Regulation

The House bill’s centerpiece is its regime to subject systemically important companies and activities to heightened regulation. The bill creates a new interagency council to identify systemically important companies and activities in consultation with Federal Reserve and regulatory agencies.

Upon identification, the House bill requires the Federal Reserve to impose heightened standards on the systemically important company. These prudential standards must include capital and risk-management requirements, as well as limitations on leverage, liquidity and credit concentration. The Federal Reserve must also impose prompt corrective action requirements, mandatory stress tests and living will requirements and may require contingent capital and place limitations on short-term debt.

The House bill leaves regulatory discretion to effect a Glass-Steagall-like separation of banking and finance, bestowing the interagency council with asset sale and break-up powers and the Federal Reserve with power to prohibit proprietary trading under certain circumstances.

The House bill also permits the imposition of stricter standards for activities and practices across financial institutions.

Resolution Authority

The House bill creates a new resolution authority which can be invoked with respect to a bank holding company, a systemically important financial company, an insurance company, or any other financial company, instead of bankruptcy.

In the event the Federal Reserve, the appropriate regulatory agency, and the Treasury Secretary (in consultation with the President) makes certain systemic risk and financial distress determinations, the FDIC will be appointed the receiver of the covered financial company.

The FDIC’s authority as receiver is modeled on bank resolution rules rather than Bankruptcy Code principles. As receiver, the FDIC will be permitted to transfer assets and liabilities to a third party or temporary bridge financial company, and to conduct the administrative claims process for the liquidation of left-behind assets and liabilities.

In the event there is a shortfall in the amount owed to the US or to the Systemic Dissolution Fund, the House bill permits the FDIC to treat up to 10% of certain secured claims, including a repo claim, as an unsecured claim.

Bank Holding Company Regulation and Institutional Reform

The House bill expands bank holding company regulation over savings and loan holding companies and industrial banks and industrial loan companies, with limited grandfather provisions.


The House bill imposes a central clearing requirement on swaps and security-based swaps (“swaps”) that clearinghouses will accept for clearing and that the CFTC/SEC requires to be cleared. It further requires that all swaps that are subject to the clearing requirement be trade on an exchange or a “swap execution facility.”

The House bill brings under regulation two new categories of market participants – swap dealers and major swap participants – with a conditional hedging exemption for end users whose swaps do not pose a systemic risk. Swap dealers and major swap participants are subject to capital and initial and variation margin requirements, with capital requirements likely to be higher for non-cleared swaps. Significantly, the House bill also limits the ability of swap dealers and major swap participants to be shareholders and directors of clearinghouses, boards of trades, exchanges and swap execution facilities.

Consumer Financial Protection Agency

The House bill establishes the Consumer Financial Protection Agency (“CFPA”) to oversee most financial institutions with respect to most consumer financial products, services and activities. The CFPA will assume broad examination and enforcement authority from existing banking and other regulators. There is a broad carve-out from the CFPA’s authority for any person “regulated by” the SEC, the CFTC or a state securities commission, which would include broker-dealers and most investment advisers, and more general carve-outs for insurance companies and auto-dealers, among others.

Banks, thrifts and credit unions with assets under certain thresholds will still be subject to the CFPA’s authority, although existing banking regulators will retain examination and enforcement authority with respect to compliance with the CFPA Act, CFPA-issued regulations and other consumer financial laws and regulations.

A compromise reached on preemption of state consumer protection laws allows federal banking regulators to preempt a class of similar state laws in certain circumstances.

Investor Protection

The House bill strengthens regulation over broker-dealers and investment advisers. It imposes a fiduciary duty on broker-dealers providing investment advice about securities to retail customers. In addition, the House bill imposes a reporting requirement on short selling activities and requires investment advisers use qualified independent custodians for client accounts over a certain threshold.

The House bill also expands the SEC’s aiding and abetting authority and makes several other changes to SEC’s enforcement authority.

Registration of Private Fund Investment Advisers

The House bill eliminates the “private investment adviser” and certain other registration exemptions, requiring nearly all advisers to private funds to register with the SEC.

Fee Assessments

The House bill changes how the FDIC calculates deposit insurance fees by requiring the FDIC to base deposit insurance fees on an insured depository institution’s total assets less equity, rather than on its deposits.

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