GOP financial reform substitute

8/9/2019 GOP financial reform substitute

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Financial Regulatory improvement and Taxpayer Protection ActSummary of Republican Substitute Bill

April 26, 2010Title I Orderly Liquidation Authority

OverviewTitle I of the Republican alternativewill establish a resolutionmechanism fo r th orderlywinding-dawn and liquidationof financial companies. The resolution mechanism will provide aprocess for winding-down financial companies with minimal impact on the financial systemwhile ensuring that failed finns are liquidated and creditors and shareholders bear all the lossesof the failed firm and the costsof its resolution.Triggering ProcessThere will be a~three4-part process for lriggerin~g the resolution authority. First, thc Board ofGovernors: of the Federal Kescrvefloard~ .~id the Board-ofDirectors of the Federal DepositInsuranceCorporation (FDIC) mustmake a recomm~d~o I ether the FDIC2sh~rnld beappointed receiver for the financial company, which must include, among otherthings, anevaluation Qfthe.effect:default.by the financial company would have on financial stability in theUnlte4 States. If the financial compaily is abroker-dealer, -the Securities andExchange:Commiasion would makcthe recommendation in place-of the .Boarct The recommendation.would require the 2/3 vote of each bo~r& Second, the Treasury Secretary, in consultationwiththe President, must determine, among other things, that resolving the financial company underthis titlewould prevent or mitigate theadverse effects that default by the financial companywoulhave oafinanciai.stability in the United Statea Third,. uponmaking such detemiinationis,the Treasury Secretary would file a petition in the United States District Court fo r the District ofColumbia for an order authorizing the Secretary to appoint the FDIC as receiver for the financialcompany. The court would issue the order within 24 hours, unless the courtfindsthat the.Secretarys determinations were arbitrary and capricious.Mandatory Liquidation . . . .If the Treasury Secretary obtains the necessary court order and appoints the FDIC as receiver, theFDIC would have to choose to resolve the financial company by either (1) liquidatng andwinding down the company, or (2) transferring the assets and, liabilities, of the. financial companyto a bridge banl selling such bridge bank and liquidating any remaining assets. The FDIC ismandated to resolve the financial company within. 1 year of its appointment as receiver~but theTreasury-Secretary could apptove two 6-month eneinions~ .0 e sure accountability.and

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oversight of the resolution pcess, any additional extensions beyond 2 years would requireCongressional approval.Emergency Powers without Creditor or Shareholder BailoutsThe FDIC will have authority to operate and liquidate the financial company in amanner thatprevents the failure of the company from sparking or worsening a financial crisis. Mostimportatly, the FDIC will be authorized, with the consent of the Treasury Secretary to ensureaccountability, to take emergency actions to stabilize the financial company. These actions -include isating guarantees, purchasing a~sets, a4vancingfduds to crditos.:on thcitthiihs.In particular, allowing the EDIC toadvance funds to creditors on their claims Will significantlyhelp-preventthe.resohjon of the fina ii comj any from adversel a~~pgflnanginistabLilty,because creditorswill not have to wait months or even years to be paid ontheit claims, as canoccur presently under the Bankniptcy Code. The illiquidity of creditor claims can cause thefailurc of one financial company to trigger cascading failures of its counterparfiea.,Although the FDIC could advance funds to creditors, once the FDIC complcted the claims-valuation process the FDIC would have to recoup front creditors any amounts that acreditor had received in excess ofwhat it would have received in bankruptcy..:. This gives theFOIC the flexibility to advance funds to creditors to prevent or mitigate a systemic crisis, but.then ensures that the FDIC is no t balling out creditors. Thus, the resolution authoritywillallow for ordrly resolution of financial companies, butwill~ allow the FDIC to jrny creditorsmore than they would receive in banlthiptcy. Because the resolution authority will not bail outcreditors, there is no need for a resolution fund. .The FDlCiwiflbeprohibjted from makkig a*cqu~~y investments y.eompa~without.:~;.:::Congressional approvaL. .In-addifion, the resolution authority cannot be . usedto:res~lve fl~jfipanp iakt~nipa$es4~ ~ . :r .; .J.:.~C.c~:.~i.. ~ H .)~ ~ . .~t . -/ ~ -. : .-e ~Ensur~ng ~*flflia~Iliy ... . .. -.-/ . . ..tf; .~ . .: ~

-...~;J .t;,4. :~--~-c.. ~-L To~hsqrcacitt4ffity~~ thO FiPD and T~ IuEy 3~t~requirecito comply with extensive reporting requirements The Treasury Sereta~y w~l have theauthority to remove the EDIC as the receiver ofa financial company fur cause l.a addition, theGAO and the Council of Financial Regulators will be required to examine the reasqns for thefailure of the fin~nbial company, ufudmg evluatinjthe performance of the companysregulato. TMet~iso *ilFehd the Olvixig-dc)ot that aIloW~ fdineeglators l be emplOyedby-the companies that teysupenrised. . . ~ . . . -To ensure accountability on the part of the creditors, shareholders, andmanagement of the failedfinancial company, all costs of the resolution, including all of the FDICs costs, will be paid fo r

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by the creditors and shareholders ofthe company. Taxpayerswill not cover any costs of theresolution of the company. Claims for executive compensation will have t he same rank asequity, meaning that all other creditors of a company cmciwling those of emp loyees and t heFDIC) will have to be paid in full before executives would be paid anything on their claims. hiaddition, the FDIC will have the. ability to claw-back compensatiboil received by executivesresponsible for the failure of the company during the.prior two yen Finally, managementofthe resolved finnwill be banned from future employment at the financial institution.

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Title U - Federal Resent System ProvisionsTighten Section 13(3) of the FederalReserve Ac tTitle II restricts the Federal Reserves emergency lending authority under Section 13(3) of theFederal ReserveAct This authority was used during the recent crisis by the Federal Reserve(Fed) to use taKpayer resources to bai l out failing companies, putting taxpayers at risk of lossesarising from private-sector risks that they did notundertake. This authority allows the Fed toengage in unfair bailouts of large financial companies, including companies over which the Feddoes not h~ve any oversightAllow Flexibility for Fed to Act as Lender of Last ResortTitle II significantlymodifies Section 13(3) of the Federal Reserve Act. Tha t Section is replacedwith authority for the Fed to be able to provide liquidity to solvent and viable companies duringshort-term liquidity crises, with a requirement that the Secretary of the Treasury and a m~~jodtyof the Board of Governors of the FederalReserve System approve, andwith provisions of strictaccountability to the public.and to Congress and strict audit criteria The Fed is allowed theflexibility to act as a lender of last resort, but only to to solvent firms, against good collateral,and at penalty rates.Strict Solvency Conditions on Fed LendingPrior to making emergency loans, the Fed is required by Title U to obtain evidence thatparticipants in any emergency lending fiacifity are solvent and viable and are unable to secureadequate credit accommodations from other banking institutions. The Fed will no longer makeemergency loans through one of its Federal.Reserve Banks, like the New York Fed, basedmerely on coliat ral that the Fed finds ~to the satisfaction of the Federal Reserve bank as iscurrently the case un4er Section 13(3) emergency lending powers for the Fed and remains thecase in Chairman Dodds bill (5.3317).Stet CblhtetalRequirements Oil Fed LeAdingTitle II sets forth detailed gii~4elines.regarding the quality of assets that can be accepted by theFed in making emergency loans backed by sounds collateral.Enhanced Fed AccountabilityTitLe II enhances accountability of the Fed to the public and to Congress by e~i1ling fo r extensivereviews of any emergency lending facilities of the Fed. There are stringent requirements that the

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Federal Reserve and Treasury report to the public and to Congress on any emergency lending,including reports of loan recipients and collateral against which loans wete made.Requirement thatEmergency Shod-Tern,, Liquidity Fadlities be Approved by the Fed andSecretay of the TreasuryTitle lTrequiresthat~ inafinancia] crisis inwllichtheFedwouldlibto act.initsieaderoflastresort capacity,. the. Fedmust obtain. an. affirmative vote of not. fewer than Smembers of the.Board ofGovernors of the Federal Reserve System and written consent pf the Secretary of theTreasury. Because lender of last resort actions have the capacity of exposing taxpayers to risksand losses that arise from private-sector risk taking, it is necessary for Treasury to have a vpjcein emergency Fed actions and fo r there to be an avenue available to shift. failing assets from theFeds relatively non-Iransparent balance sheet onto the transpara general budget of the U.S.government.Establish aFedffl-easury Accord on EmergencyLending.Title U mandates an Aecorc between the Federal Reserve Board and the Secretary.of theTreasury to arrive at rules governing emergency Fed tending.. li i 1951, the Fed and Treasurycame to an Accord, agreeing to restore Fed.indepenclence from pegging interest rates to supportpost-War borrowing by the Treasury. Similarly, today~ an Accord is necessaryto preserveindependence.of the ~Fe& a monetary policy.and its. lender of last resort fimction from undueinfluenceof the Treasury and politics. Title II requires the Fed and Treasury to jointly publishregulatiots and guidelines to govern emergency Fed tending.The principles fo r the regulations are as follows:

Fed lending only be made to solvent and viable participants of broadeWtpgram~ Solvencyand vi*ilityshall be certified, . The Fed may not lend to bailout aninthviduE[ company or an individual

companys creditors; . . .. Fed len& g shall not be made to an ~npa~zy in bankruptcy, resolution,receivership, or any Federal or State insolvency proceedings, Fed leading hall not be~ t6bhathiei ctdit t&speci&conapanjes orsectors of the financial market that the Fed and Treasury wish to favor;and Fedlendingth.aIlead~to theFedholdingassetsonitsbaianee sheet foramaximum period of time shall be moved on-budget and counted as newbudget authority, outlays, receipts, or deficits or surpluses for purposes ofthe budget oftheU.S. government

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Greater Fed Transparency and Market Certainty About Fed Actions in a CrisisIn calling for the Fed and Treasury to establish clear rules governing how they will lend an drespond to liquidity crises, theAccord inTitle II will provide clarity necessary for fmancialmarket participants to form expectations aboutwhat the government will do in a crisis. Treasurywill no longer push bailouts onto a non-transparentFed balance sheet, nor will the Fe d pick andchoU~e~whichcothpanies or fihanti iseetors tO prop upovr thelong term. Ifwhat fist appearsto be4iiquidity event requmng emergencyFed and Treanry lending ut~oMes: long-1~erminsolvency problern~,-the long$eun consequent tit of losswill be born transparenfly~ byTriy not ajion-transparent Fed balance shea Markets will know what to expect fromTreasury andthe Fed as they will no longer react in ad hoc fashionto an evolving erisis~End Credit Channeling by the Fed .Title ll r es theY dTreasuryto arrive atpoliciesto delineate where andwhenemergency actionswould constitute credit channeling which is most appropriately executed byfiscal authorities, or not in which case lender of last resort policy actionsmay be appropriate.This is to address concerns growing out of the recent financial crisis that the Fed chosewinnersand losers through the choices it made regarding the allocation of credit For instance, during therecent crisis the Fed directed its support to; money market funds; the coimnercial papermarketprimary dealers; themarket for student loans; credit card loans; small business loans; thecommercial real estate market and to the housing sector and Fannie and Freddie, which manycharacterized as credit allocation. The Fed and Treasury themselves issued a statement onMarch 23,2009 stating The Federal Reserve to avoid credit risk and credit allocation and thegovernment decisions to influence the allocation of credit are the province of fiscal authorities~Stop Treasury fromPushing Fiscal Policy Bailout Actions onto the Feds Balance Sheet

~~%c1t..:~:.ttc;,r . .:f:r. .~ .The Accord in Title II calls for the Fed and Treasury to establish provisions:for transfer from theFederal Reserves balance sheet any asset aqifttadusng eniergency lendlatactions that aremost pnper~regar&d as fi&~t policyacttons Fed~raI Re*rve Ch&ii~mi Berffanke hasth&e~ed that We would favor a legisfrttve provision allow ti~fl~rve to transferto the Tre~ry obligai7ons {b~tw MZjji ird mthi ~o4e otEedbra4$en& action as thelender of ~l4 p~Q~p~tply ~pan~jec~ by the ijeasuryDepartmerit.,: . . .. ~ ~ .

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Recoupment of Any Losses on Fed lading from Jndushy~Title TI gives the Fed senior claims on the estates of any company that receives Fed assistanceand subsequentLy files for bankruptcy or is put into resolutiom Any Fed losses not covered bythose senior claims are recouped by the Fe d from assessments levied by the resolution authority.Increase Accountability of 11w President of the Federal Reserve Bank of New YorkTitle U calls for the Presidentof the Federal Reserve Bank ofNew York to be appointedby thePresident, by an d with advice and consent of the Senate. No longerwill the New York FedPresident be appointed by the New York Fed?s.board ofdirectors an d large Wall Street interests..Enhanced Role ofDirector of Supervision and Regulation at the FedGiven the failings of regulation an d oversight by the Federal Reserve in the recent crisis and thesilo separation within the Federal Reserve System betweenmonetary policyinakers~.and.regulatorsjftle U establishes a Director of the Division of Supervision and Regulation at .theFed,who is appointed by thePresident~byamj with advice and consentof the Senate. Th eDirector is required to testify annually and reportto Congress and the public concerning Fedsupervision and regulationof Ihe financial systems large financial institutions, systernic.siability,and the evolution of any systemic risks.

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Title if i - Council forConsumer Financial ProtectionOverviewThle Ill creates anindependent Council for Consumer Financial Protection (Councifl that willhave the authority to promulgate rules for all of the enumerated consumer protection statutes.The Council will;be composed of three indcpendent consumer:protection eXperts, theChairperson of the FDIC, the Comptroller of the Curtency, and the Chairman of the Board ofGovernors fo r thejederal Reserve. The. composftio~a of the Council will.ensure that all rules,regulations arid orders promulgated by the Couticil appropriately consider the, safety andsoundness considerations of financial intitutions while ensuring that adequate consumersafeguards are in place.AuthorityThe Councilwill have primary supervision and enforcement authority over our nations largestfinancial institutions, large non-bank mortgage originators, and other financial services providerswho have .violated the consumer protection statutes. In addition, the Council.will have backupenforcement authority over regional banks and credit unions. Supervision and enforcement for~small community banks and thrifts will remain with their prhnaty prudential regulator. Thisscheme for supervision and enforcement will establish clear lines of accountability to ensure thatconsumers are protected, while also safeguarding small banks and credit unions frpm overlyburdensome regulatioaState Law PreemptionThis title ensures the continuation ofmore than a century ofprecedent on preemption withrespect to national banks. Presently, state laws that conflict with the National BankAct are preenipted because Congress has long sought to create a national financial market and ensureefficient regulation ofnational banks.

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ThIeJY Financial Stabilifr and Regulatory StructureSubtitle A - The Council ofFinancial Regulators

The Council ofFinancial Regulators (tER or COthICII)will be established to improve thefinancial stability of the U.S. financial system. The CFR ~11 formally bring togtther all federalfinancial regulators to improve regulation, maintain and monitor financial stability, andcoordinate the response of the federal government to any futUre finwicial crises.MembershipThe CFR will be led by the Treasury Secretary, who will serve as Chairperson. The heads of theFed, Office of the Complroller of the Currency (0CC), FDJC, FHFA, SEC, CommodityFutures Trading Commission (CFTC), and the Council for Consumer Financial Protection willserve as members of the CFt The CFRwill function by majority vote, but in instances wherethe Chairman of the Fed or the Treasury Secretary dissent, asuperinajority will b required. The

Council will bS staffed by the Treasury, and Cdtncil member agencies can detail staffand otherresources to support the work of the Council. The Chairman of the Fed will have an enhancedrole on the Council, in particular as it relates to conducting financial market stability researchand developing stress tests for various peOts of the U.S. fihancial systentMission and DutiesThe CFRwill have a four part mission, (1) to improve prudential, consumer protection, andinvestor protection regtltion (2) to oversee United States financial system stability; (3)tomitigate risks to United States financial system stability; and (4 ) to coordinate theresponse of theUnited States Federal Government to financial crises.The CW wifi- be-required to carmy out the following duties:

The (YR will undertake sfress test&of various aspects g*the financial system todetermine material weaknesses and deficiencies. Any firms that fail six~sstests will be.

- directed to undertake remedial action immediately. Data collected from stress testswillbe used to make system wide enhancements. Stress test failures must be addressed bythe CFR and its member agencies. The CFR will monitor the ever-changing financial marketplace and work to k&pregulators from falling behind such changes.

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The CFR will review and approve or reject all new capital, liquidity and leverageregulations. Through this responsibility the CFR will rationalize capital, liquidity, andleverage requirements so regulatory arbitrage opportunities are eliminated. The CFR will gather and aggregate information relating to the financial markets and willuse it to update and imprqve financial regulation. The CFR will consult with various nonmernber financial reguletory bodies at the Ee4eral,State and LutefnatioWal levels t make ~etthir it h full lihiof si~htn risks in the U.&financial system. The CFR will serve as a forum for jurisdiclion dispute among Council member agencies. The CFR will mb iranAabtioniil ~tMty of lE~ hedge fundno ~guard icgsi~~t-risk&ta.

U.S. financial system stability. The,CFR will bctter prepare the government for financial crisis response, enhancingcooperation among Coucil members regarding crisismanagement and emergencypreparedness exercises. The CFR will identify payment, clearing or settlement activities whose failure wouldpose a risk to U.S. financial system stability and make recommendations to Congress GDhow to minimize such risks. At least annually, the Council will submit; and the Treasury Secretarywill be required totestify on, a financial stability report to the House and Senate banking committee& Eachreport under this section shall include a descriptionof all significant, financialmarket and..r.~fly impact lJmtpd St~tesfip~ipiq sy~tei~. stabiijty 4.:.other sigtuifieint CFR activities. The CFR is required study the use of contingent c~pital and llvi~ wills an4.providethose studies to the FederalRe~ flo tiflufthe 1% th&I th diQefiip new fUles.

Subtitle B - Jmprov4flth to Reg~l3tion o~Banlc ad Saviflg~ t4 LoanRpldrng~ ~ f.%::ompames aid Diptni~ry TatitutionsThis subtitle n~akes several improvements to the regulaiionctbank~and s~vings adoan holdingcompanies by the FederalReserve. This subtitle requires the Federal Reserve to implement anew contingent capital regin~e fox bth I~i, apd thrift holfr c~mp~p.i~s. It.ajso ei~su~es thatthere is clear accountability by explicitly stating that the Federal Reserve is the consoljdatedfunctional regulator of all bank and thrift holding companies. It requires the 0CC as well asother functional regulators to notify the Federal Reserve if the functional regulators see problemswithin other holding company subsidiaries, and it allows the functional regulators backupto

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authority if the Federal Res rye fails t act. It requires the Federal Reserve to consider the riskto financial stability in addition to safety and soundness when approving a merger or acquisitionof financial institutions. This title also strengthens the Federal Reserves ability to policetransactions with affiliates in several important ways. It increases capital standards by requiringbank and thrift holding companies to remain well capitalized at the holding company leveLThis subtitle also requires holding companies to act as a source of strength for the. depositaryinstitution subsidiary. It does away with the disastrous Consolidated SupervisddEntitiesprogram created by the Securities and Exchange Commission (SEC~ and creates a new holdingcompany regime for securities holding companies. This subtitle also restricts depositoryinstitutions from engaging in proprietary trading activities and restricts other entities fromengaging in such activities if the holding company. is not well tapitalized or the Federal Reservedeftrnrines that, those activities pose safety and soundness or financial stability concerns. Thissubtitle imposes concentration limits on largC financial institutions.Subtitle C Registration of Large Pooled Investment VehiclesThe Republican alternative will require large pooled investment vehicles, such as hedge funds, toregister with and make reports to the Council of Financial Regulators. Since hedge fundregistration is ultimately driven by concerns about threats to financial system stabilii~ theRepublican alternative will charge the Council, whose edre mission includesmaintaining andmonitoring flnancialstabijity, to monitor the largest hdge funds. The Council~s responsibilities.wilN~e limited strictly td financial stability issues, such as looking at leverage (including off-balance sheet leverage) to ensure that the Council is completelyfocused on monitoring hedgefunds with the purpose of detecting emerging problems throughout.the entire fihancial system,rather than being distracted by individual concerns of a small number ofwealthy investors whoare knowingly investing in unregistered private offerings that do not have the same level ofregulatory scrutiny.Subtitle D Transfer of Powers to the Comptroller of the Currency, the Corporation, andthe Bo~~of GovernorsTitle W also will terminate the Office of Thrift Supervision by trazisferring its regulatoryresponsibilities to the Federal Reserve, the 0CC, and the FDIC. The Federal Reserve willregulate savings and loan holding companies, the 0CC will regulate Federal savings institutions,and the FDIC will regulate state thrifts: ,

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TitleV - Over-the-Counter DerivativesMarketOverviewRepublicans share a desire to correct what current law lacks relative to regulating swaps. Somemay not realize that current law specificallyprevents the CFTC and the SEC from regulatingswaps. ~The Republican alternative would provide significant new.regujatory authorities for theCFFCand.theSEC. ~ .Regulatoly TransparencyALL swap.transacfious will be made known to the appropriate regulators, giving them the muchneed&toois topolie These hattet.4 for fraud an d rbanipuit An~iniportant lesson from thefinancial crisis was that prudential andmarket regulators do n t have detailed andcomprehensive information about transactions or positions in the over-the-counter swapsmarkets. The lack of transparency about counterparty exposures and the lack of adequ$eregulatory tools made it difficult fo r regulators to respond to the crisis effectively and in a timelymmer. MG and Lehman Brothers are two prime examples of this problem.Clearing Requirement.The Federal Reserve Board ofGovernors, the CFTC and the SEC will establish criteria fordetermining the characteristics of swap transactions that should result in a clearing requirement.The CFTC or the SEC (depending on the type of swap) will then use the criteria aW the datamade available through the new transparency requirements to identify which swaps are subjecttoth~ new ~az.4ateS fr~thgrp~ixemen The identiflat I prcccss will be subject to notice-andcommentrulemaking. .Public Transparency

. . . ... ..Therewill be public disseniination of prices and volumes of completed swap.~rcnsacta~sist investors ad other market participan~ ft~ g esthig SWaflosititths to marketmaking mform~44ecasions before executmg future transactions, an 4 assssing the quality ofassume thaI exchange trading is the only way to provid transparency to market participantsTrads that are not executed on an exchange still can be cleaze4~, and~ we can achieve the. goals ~fincreasing transparency ofpositions and price without mandating exchadge trading andpotentially tggering serious unintended consequences. An exchange tradingmandate on swapdealers will encourage them to continue to hold risks on their books ratherthan entering intohedge iransactions to offset those risks; to hedge their risks overseas, beyond the reach of our

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regulators; and to increase the prices that they charge Main Street. businesses to compensate fortheir increased difficulty in laying off the risk.Regulation of Swap ParticipantsEntities holding the bulk majority of all swap transactions twill be required to register with theappropriate regulator, complywith business conduct standards, an d clear any trades identified bythe regulators as being subject to the clearing mandate. This category of swap dealers, largehedge funds, Federal Home Loan Banks, FreddieMac, Fannie Mae and MG-type entities will&known as swap participants. In this way, we are seeking to ensure that entities that ar e mostlikely to contribute to a failure of the U.S. ifnaucial system are closely monitored, conductingtheir dealings in aresponsible manner, and transferring significant risk offof their books and intoa well-regulated clearinghouse.Treatment ofEnd UsersEnd user entities who are not contributing to potential system failure but rather utilize swaps toreduce or offset risk inherent to their businesswill not be required to clear their transactions,thereby avoiding the additional costs of clearing. Bilaterally executed derivatives contractsprovide key benefits to certain end users and should be permitted, sd~ject to appropriate riskmanagement and prudential standards. End users will be required to report a hedging transactionas a bona-fide hedging swap transaction, which is based on the CFTCs existing definition ofwhat constitutes a bona-flde hedge.To quali3r as an end user, no more than 5% of an entitys swap positions may fall outside thedefinition ofa bona-fide hedging swap transaction. Commercial end users who execute swapsin connection with their commercial transactions as an accommodation for their customers will

be allowed some additional non-conforming transactions, so they will be subject to a slightlyhigher 7 percent deminimis cap.MarginAs appropriate to their defined responsibilities, the prudential regulators, the CFTC, or the SECwill have the ability to applymargin requirements to uncleared transactions entered into byswap participants,bu t not those transactions that involve end users. Prudentially regulatedswap participantswill also be subject to capital requirements, as determined by their prudentialregulators. To protect the financial integrity of the clearinghoues and to protect the financialstability of the United States from a clearinghouse failure, the regulators also will ensure thatclearinghouses impose appropriate margin requirements. To protect couriteiparty collateral,

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iniflal rnaigin for both cleared and uncleared swap transactions will be subject to newsegregation requirements.

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Title VII Government Snonsored EnterurisesSubtitle A - Special Inspector General for the Conservatorship of Regulated EntitiesTh e Republican alternativewill establish a Special InspectorGeneralwithin the Department ofthe Treasurywith responsibility fat investigating and reporting to Congress on decisions maderegarcfingtheconserUatorships ofFannieMae and Freddi Mac. Th President will be requiredto nominate an individual forthis post within30:days of the date of enactent who~iIjen rnnst beconllrmedby the Sene.The Special Inspector General will provide quarterly reports to Congress, the first tobe 60 daysafter confirmation. Those reportswill focus on areas including: purchased mortgage assets;modified mortgages; risk analysis used fFffiodifrafibfis;hfIj3ilflfWnttitiinwaffo~dah1e~housing goals tough conservatorship; assessment of the proper treatment of the OSEs as itrelates to the Federal budget impact of accepte& Federal funds; an d structural changes rnadebyFFJFA, acting as conservator.Subtitle B - Limited Further Bailouts of Fannie Mae andFreddie MacThe Republican alternative will reestablish the Federal funding limits and mandatory portfolioreductios that were in place prior to the Administrations changes announced December 24,2009. Under the current agrernen~ Treasury can provide unlimited funds to Fannie Mae andFreddie Mac, and the GSEs portfolio reduction requirements were reduced. This subtitle willreiinpose the $200 billion per institution cap that previously had been in place and requireFannieMae and Freddie Mac to reduce their portfolio holdings by 10 percent of the prior yearsholdings. . .~.,The subtitle aisowill. eitablishan approval process for any further.agreements .thatput taxpayermotley atrisL In orderto ensure timely response3 aaagreement could be enteredwIG on am .interhixbasis if the 1)irector.of RH A ac gasqonservatac.dees anecessary~~~.Hpwever~:within 120 days, the agreementmust be approved by Congress. or it wilibe terminated.~ .~ : . . . ,~: ~T : .~-3~:Subtitle C - Report on Reform . . :The Presidentwill be required to submit a plan to reform the CISES to Congress no later than sixmonths after the enactment of the Act

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Title VilE - Securities ReformSubtitle A - Commission Reorganization

The SECs threefold mission is to protect investors maintain fair, orderly, and efficient niaalcets;and facilitate capital fonnation, However, fir SECs current organizational structure does not~reflect these missions.. Th e BernieMadoffscandal highlighted, among other things,.how the lackofcoordjna~av,j~ and between units cIte SEC canS have devastating co~Isequences.The Republican alternative will improve the SECs.organizatjon by creating divisions that arededicated toeaoh part of the SECs mission, Th e new Division ofRetail. investor Protection andRetail Financial Services will be dedicated to protecting and educating individual investors,without.regar4 to whether. they trust their hard-earned savings to brokers~ investment advisers, ormutual funds.. The new Division.of Trading will focus on issues relat d to large sophisticatedmarket participants, such as investment banks and exchanges. The new Division of Corpc rate~Disclosure will be dedicated to issuesreWecj to flnancial.statement disclosures, aswell asaccounting and auditing matters.The Republican a1ternati~ie will include two additional divisins. ADivision ofEnforcementwill be charged with enforcing all SEC rules, as well as providing international enforcementassistance. ~iuaIly, a Division ofEconomic.AUalysiswill beheaded by a PhD-level ChiefEcouoxffist~, who will be charged with conducting economic analyses, including cost-benefitanalyses, relhted to Comffiissionnc~j~ The Division ofEconomic Analysis will include asubdivision with responsibility for thncuons~rela~.~ isandfinrnicial innovation,.[Subtitle B - Reserved]Subtitle 0-Municipal Securities . .The Republican alternative requires SEC registration and oversight ofmunicipal advisers and~~increases investor representation on the Municipal Securities Rulemaking Board (~MSRB~; itrequires a review of the disclosure required to be made by municipal issuers and a study ofGovernment Accounting Standards Board (GASB~ funding.The Republican alternative does not contain a provision that would require the SEC to sharefines collected for municipal securities violations with the MSRB. The Republican alternativewill require a study of the secondary.municipal securities market diredted by the SEC ChiefEconomist. Because SEC econonjista have the most experience stwlying the introduction ofpost-trade transparency in the secondary municipal securities market they are the best-positionedto conduct this new study. . . -

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SubtitleD - Sarbaues-Oxley Act Exemption for Smaller IssuersSection 404 of the Sarbazies-Oxlcy Ac t has imposed a disproportionately larger costburden onsmaller public companies with no cortesponding benefit The Republican alternative providesrelief to these iitportantjob creators by acE pting public companies with less :th~n $1 50miliioniapublic float from coinp~ying;with SectIon 404 of Sathhes-Oxley. A reeent.SEC studyrepoitd costs~ 404Qi) broken down b ~naller companies (btreen$50 and $150millionin public float), medium companies (between $150 and $700 million inpublic ffat), ,an& ger companies (greater than $loGinillion in piblic ffoat);c panis. Thestudy showed that smaller~: and medium-sized companies consistently incurred highercompliance costs than larger companies, even after more than four years ofcomplianceexperienc& Unfortunately, the ~EO ~sthcijt dbei ot~ro~y~dc a more &~lifr&&~n Ofcompliance csts betwenthe$l 50 and $700 nllion. . As a result the Republican alternativewill immediately exempt companies with less than $150 million inpubhc float and will directthe SEC to conduct a study to determine whether the appropriate threshold should be bi~her.Subtitle E - Shareholder Registration ThresholdThe Republican alternative contains a provision that updates the thresholds that triggermandatory SEC registiation by public companies. The asset thresholdwill be increa~cd for allcompanies to reflect changes in economy-wide price levels overtime. The shareholder of recordthresholdwill be increased for banks andbank holding companies to reflect the fact thatshareholders of neighborhood banks are likely to l ive in the community and hold the shares~directly rather than in streetname, prompting rnnall banks to hit the threshold more quickly thansimilarly-sized companies in other industries. .> . ....The alternative directs the SEC to conduct a study to determinewl$her.tb~ cr~ethe.asset~threshold; index the asset threshold to a measure of inflatjon increase the shareholder threshold;change the.shar4iolder threshold to~be based eathenuinber ofbeneficial o~ers~or creafle~wthresholds based on othenaitera

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Title X - InsuranceOverviewTitle X establishes the Office ofNational Insurance at the Treasury Departmcnt to monitor the

insurance indusiiy, coordin te international insurance regulation and study and report oninsurance regulatory reform topics. In addition, Title X streamlines the regulation of surpluslines and reinsurance.

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GOP financial reform substitute

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Transcript of GOP financial reform substitute