[Congressional Record Volume 156, Number 105 (Thursday, July 15, 2010)]
[Senate]
[Pages S5902-S5933]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
NONBANK FINANCIAL COMPANIES
Mr. KERRY. Mr. President, the conference report to accompany H.R.
4173, the Dodd-Frank Wall Street reform bill, creates a mechanism
through which the Financial Stability Oversight Council may determine
that material financial distress at a U.S. nonbank financial company
could pose such a threat to the financial stability of the United
States that the company should be supervised by the Board of Governors
of the Federal Reserve System and should be subject to heightened
prudential standards. It is my understanding that in making such a
determination, the Congress intends that the council should focus on
risk factors
[[Page S5903]]
that contributed to the recent financial crisis, such as the use of
excessive leverage and major off-balance-sheet exposure. The fact that
a company is large or is significantly involved in financial services
does not mean that it poses significant risks to the financial
stability of the United States. There are large companies providing
financial services that are in fact traditionally low-risk businesses,
such as mutual funds and mutual fund advisers. We do not envision
nonbank financial companies that pose little risk to the stability of
the financial system to be supervised by the Federal Reserve. Does the
chairman of the Banking Committee share my understanding of this
provision?
Mr. DODD. The Senator from Massachusetts is correct. Size and
involvement in providing credit or liquidity alone should not be
determining factors. The Banking Committee intends that only a limited
number of high-risk, nonbank financial companies would join large bank
holding companies in being regulated and supervised by the Federal
Reserve.
Capital Requirements
Ms. COLLINS. Mr. President, I understand that it is the intent of
paragraph 7 of section 171(b) of this legislation to require the
Federal banking agencies, subject to the recommendations of the
council, to develop capital requirements applicable to insured
depository institutions, depository institution holding companies, and
nonbank financial companies supervised by the Board of Governors that
are engaged in activities that are subject to heightened standards
under section 120. It is well understood that minimum capital
requirements can help to shield various public and private stakeholders
from risks posed by material distress that could arise at these
entities from engaging in these activities. It is also understood and
recognized that minimum capital requirements may not be an appropriate
tool to apply under all circumstances and that by prescribing section
171 capital requirements as the correct tool with respect to companies
covered by paragraph 7, it should not be inferred that capital
requirements should be required for any other companies not covered by
paragraph 7.
Mrs. SHAHEEN. I also understand that the intent of this section is
not to create any inference that minimum capital requirements are the
appropriate standard or safeguard for the council to recommend to be
applied to any nonbank financial company that is not subject to
supervision by the Federal Reserve under title I of this legislation,
with respect to any activity subject to section 120. Rather, the
council should have full discretion not to recommend the application of
capital requirements to any such nonbank financial company engaged in
any such activity.
Mr. DODD. I concur with Senator Collins and Senator Shaheen. Section
171 of this legislation came from an amendment that Senator Collins
offered on the Senate floor, and I truly appreciate the constructive
contribution she has made to this legislative process. My understanding
also is that the capital requirements under paragraph 7 are intended to
apply only to insured depository institutions, depository institution
holding companies, and nonbank financial companies supervised by the
Board of Governors. I thank my friends from Maine and New Hampshire for
this clarification.
Insurance Company Definition
Mr. NELSON of Nebraska. Mr. President, first, I would like to commend
Chairman Dodd for his hard work on the Wall Street reform bill and for
maintaining an open and transparent process while developing this
legislation. With regard to the orderly liquidation authority under
title II of the bill, an ``insurance company'' is defined in section
201 as any entity that is engaged in the business of insurance, subject
to regulation by a State insurance regulator, and covered by a State
law that is designed to specifically deal with the rehabilitation,
liquidation, or insolvency of an insurance company. Is it the intent of
this definition that a mutual insurance holding company organized and
operating under State insurance laws should be considered an insurance
company for the purpose of this title?
Mr. DODD. Yes, that is correct. It is intended that a mutual
insurance holding company organized and operating under State insurance
laws should be considered an insurance company for the purpose of title
II of this legislation. I thank the Senator from Nebraska for this
clarification.
Independent Representatives
Mrs. LINCOLN. Mr. President, as chairman of the Agriculture,
Nutrition, and Forestry Committee, I became acutely aware that our
pension plans, governmental investors, and charitable endowments were
falling victim to swap dealers marketing swaps and security-based swaps
that they knew or should have known to be inappropriate or unsuitable
for their clients. Jefferson County, AL, is probably the most infamous
example, but there are many others in Pennsylvania and across the
country. That is why I worked with Senator Harkin and our colleagues in
the House to include protections for pension funds, governmental
entities, and charitable endowments in the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
Those protections--set forth in section 731 and section 764 of the
conference report--place certain duties and obligations on swap dealers
and security-based swap dealers when they deal with special entities.
One of those obligations is that a swap dealer or the security-based
swap dealer entering into a swap or security-based swap with a special
entity must have a reasonable basis for believing that the special
entity has an independent representative evaluating the transaction.
Our intention in imposing the independent representative requirement
was to ensure that there was always someone independent of the swap
dealer or the security-based swap dealer reviewing and approving swap
or security-based swap transactions. However, we did not intend to
require that the special entity hire an investment manager independent
of the special entity. Is that your understanding, Senator Harkin?
Mr. HARKIN. Yes, that is correct. We certainly understand that many
special entities have internal managers that may meet the independent
representative requirement. For example, many public electric and gas
systems have employees whose job is to handle the day-to-day hedging
operations of the system, and we intended to allow them to continue to
rely on those in-house managers to evaluate and approve swap and
security-based swap transactions, provided that the manager remained
independent of the swap dealer or the security-based swap dealer and
met the other conditions of the provision. Similarly, the named
fiduciary or in-house asset manager--INHAM--for a pension plan may
continue to approve swap and security-based swap transactions.
Foreign Banks
Mrs. LINCOLN. Mr. President, I wish to engage my colleague, Senator
Dodd, in a brief colloquy related to the section 716, the bank swap
desk provision.
In the rush to complete the conference, there was a significant
oversight made in finalizing section 716 as it relates to the treatment
of uninsured U.S. branches and agencies of foreign banks. Under the
U.S. policy of national treatment, which has been part of U.S. law
since the International Banking Act of 1978, uninsured U.S. branches
and agencies of foreign banks are authorized to engage in the same
activities as insured depository institutions. While these U.S.
branches and agencies of foreign banks do not have deposits insured by
the FDIC, they are registered and regulated by a Federal banking
regulator, they have access to the Federal Reserve discount window, and
other Federal Reserve credit facilities.
It is my understanding that a number of these U.S. branches and
agencies of foreign banks will be swap entities under section 716 and
title VII of Dodd-Frank. Due to the fact that the section 716 safe
harbor only applies to ``insured depository institutions'' it means
that U.S. branches and agencies of foreign banks will be forced to push
out all their swaps activities. This result was not intended. U.S.
branches and agencies of foreign banks should be subject to the same
swap desk push out requirements as insured depository institutions
under section 716. Under section 716, insured depository institutions
must push out all swaps and security-based swaps activities except for
specifically enumerated activities, such as hedging and other similar
risk mitigating activities directly related
[[Page S5904]]
to the insured depository institution's activities, acting as a swaps
entity for swaps or security-based swaps that are permissible for
investment, and acting as a swaps entity for cleared credit default
swaps. U.S. branches and agencies of foreign banks should, and are
willing to, meet the push out requirements of section 716 as if they
were insured depository institutions.
This oversight on our part is unfortunate and clearly unintended.
Does my colleague agree with me about the need to include uninsured
U.S. branches and agencies of foreign banks in the safe harbor of
section 716?
Mr. DODD. Mr. President, I agree completely with Senator Lincoln's
analysis and with the need to address this issue to ensure that
uninsured U.S. branches and agencies of foreign banks are treated the
same as insured depository institutions under the provisions of section
716, including the safe harbor language.
End Users
Mrs. LINCOLN. Mr. President, I will ask unanimous consent to have
printed in the Record a letter that Chairman Dodd and I wrote to
Chairmen Frank and Peterson during House consideration of this
Conference Report regarding the derivatives title. The letter
emphasizes congressional intent regarding commercial end users who
enter into swaps contracts.
As we point out, it is clear in this legislation that the regulators
only have the authority to set capital and margin requirements on swap
dealers and major swap participants for uncleared swaps, not on end
users who qualify for the exemption from mandatory clearing.
As the letter also makes clear, it is our intent that the any margin
required by the regulators will be risk-based, keeping with the
standards we have put into the bill regarding capital. It is in the
interest of the financial system and end user counterparties that swap
dealers and major swap participants are sufficiently capitalized. At
the same time, Congress did not mandate that regulators set a specific
margin level. Instead, we granted a broad authority to the regulators
to set margin. Again, margin and capital standards must be risk-based
and not be punitive.
It is also important to note that few end users will be major swap
participants, as we have excluded ``positions held for hedging or
mitigating commercial risk'' from being considered as a ``substantial
position'' under that definition. I would ask Chairman Dodd whether he
concurs with my view of the bill.
Mr. DODD. I agree with the Chairman's assessment. There is no
authority to set margin on end users, only major swap participants and
swap dealers. It is also the intent of this bill to distinguish between
commercial end users hedging their risk and larger, riskier market
participants. Regulators should distinguish between these types of
companies when implementing new regulatory requirements.
Mrs. LINCOLN. Mr. President, I ask unanimous consent to have printed
in the Record the letter that Chairman Dodd and I wrote to Chairmen
Frank and Peterson to which I referred.
investment adviser
Mrs. LINCOLN. Mr. President, I rise to discuss section 409 of the
Dodd-Frank bill, which excludes family offices from the definition of
investment adviser under the Investment Advisers Act. In section 409,
the SEC is directed to define the term family offices and to provide
exemptions that recognize the range of organizational, management, and
employment structures and arrangement employed by family offices, and I
thought it would be worthwhile to provide guidance on this provision.
For many decades, family offices have managed money for members of
individual families, and they do not pose systemic risk or any other
regulatory issues. The SEC has provided exemptive relief to some family
offices in the past, but many family offices have simply relied on the
``under 15 clients'' exception to the Investment Advisers Act, and when
Congress eliminated this exception, it was not our intent to include
family offices in the bill.
The bill provides specific direction for the SEC in its rulemaking to
recognize that most family offices often have officers, directors, and
employees who may not be family members, and who are employed by the
family office itself or affiliated entities owned, directly or
indirectly, by the family members. Often, such persons co-invest with
family members, which enable those persons to share in the profits of
investments they oversee and better align the interests of those
persons with those of the family members served by the family office.
In addition, family offices may have a small number of co-investors
such as persons who help identify investment opportunities, provide
professional advice, or manage portfolio companies. However, the value
of investments by such other persons should not exceed a de minimis
percentage of the total value of the assets managed by the family
office. Accordingly, section 409 directs the SEC not to exclude a
family office from the definition by reason of its providing investment
advice to these persons.
Mr. DODD. I thank the Senator. Pursuant to negotiations during the
conference committee, it was my desire that the SEC write rules to
exempt certain family offices already in operation from the definition
of investment adviser, regardless of whether they had previously
received an SEC exemptive order. It was my intent that the rule would:
exempt family offices, provided that they operated in a manner
consistent with the previous exemptive policy of the Commission as
reflected in exemptive orders for family offices in effect on the date
of enactment of the Dodd-Frank Act; reflect a recognition of the range
of organizational, management and employment structures and
arrangements employed by family offices; and not exclude any person who
was not registered or required to be registered under the Advisers Act
from the definition of the term ``family office'' solely because such
person provides investment advice to natural persons who, at the time
of their applicable investment, are officers, directors or employees of
the family office who have previously invested with the family office
and are accredited investors, any company owned exclusively by such
officers, directors or employees or their successors-in-interest and
controlled by the family office, or any other natural persons who
identify investment opportunities to the family office and invest in
such transactions on substantially the same terms as the family office
invests, but do not invest in other funds advised by the family office,
and whose assets to which the family office provides investment advice
represent, in the aggregate, not more than 5 percent of the total
assets as to which the family office provides investment advice.
Mrs. LINCOLN. I appreciate the Senator's explanation and ask that the
Senator work with me to make this point in a technical corrections
bill.
Mr. DODD. I agree that this position should be raised in a
corrections bill and I look forward to working with the Senator towards
this goal on this point.
Mrs. LINCOLN. I thank the Senator for his leadership and his
assistance and cooperation in ensuring the passage of this important
bill.
VOLCKER RULE
Mrs. BOXER. Mr. President, I wish to ask my good friend, the Senator
from Connecticut and the chairman of the Banking Committee, to engage
in a brief discussion relating to the final Volcker rule and the role
of venture capital in creating jobs and growing companies.
I strongly support the Dodd-Frank Wall Street Reform and Consumer
Protection Act, including a strong and effective Volcker rule, which is
found in section 619 of the legislation.
I know the chairman recognizes, as we all do, the crucial and unique
role that venture capital plays in spurring innovation, creating jobs
and growing companies. I also know the authors of this bill do not
intend the Volcker rule to cut off sources of capital for America's
technology startups, particularly in this difficult economy. Section
619 explicitly exempts small business investment companies from the
rule, and because these companies often provide venture capital
investment, I believe the intent of the rule is not to harm venture
capital investment.
Is my understanding correct?
Mr. DODD. Mr. President, I thank my friend, the Senator from
California, for her support and for all the work we have done together
on this important issue. Her understanding is correct.
[[Page S5905]]
The purpose of the Volcker rule is to eliminate excessive risk taking
activities by banks and their affiliates while at the same time
preserving safe, sound investment activities that serve the public
interest. It prohibits proprietary trading and limits bank investment
in hedge funds and private equity for that reason. But properly
conducted venture capital investment will not cause the harms at which
the Volcker rule is directed. In the event that properly conducted
venture capital investment is excessively restricted by the provisions
of section 619, I would expect the appropriate Federal regulators to
exempt it using their authority under section 619(J).
Captive Finance
Ms. STABENOW. Mr. President, I would like to discuss the derivatives
title of the Wall Street reform legislation with chairman of the Senate
Agriculture, Nutrition, and Forestry Committee, Senator Lincoln.
I would like to first commend the Senator and her staff's hard work
on this critically important bill, which brings accountability,
transparency, and oversight to the opaque derivatives market.
For too long the over-the-counter derivatives market has been
unregulated, transferring risk between firms and creating a web of
fragility in a system where entities became too interconnected to fail.
It is clear that unregulated derivative markets contributed to the
financial crisis that crippled middle-class families. Small businesses
and our manufacturers couldn't get the credit they needed to keep the
lights on, and many had to close their doors permanently. People who
had saved money and played by the rules lost $1.6 trillion from their
retirement accounts. More than 6 million families lost their homes to
foreclosure. And before the recession was over, more than 7 million
Americans had lost their jobs.
The status quo is clearly not an option.
The conference between the Senate and the House produced a strong
bill that will make sure these markets are accountable and fair and
that the consumers are back in control.
I particularly want to thank the Senator for her efforts to protect
manufacturers that use derivatives to manage risks associated with
their operations. Whether it is hedging the risks related to
fluctuating oil prices or foreign currency revenues, the ability to
provide financial certainty to companies' balance sheets is critical to
their viability and global competitiveness.
I am glad that the conference recognizes the distinction between
entities that are using the derivatives market to engage in speculative
trading and our manufacturers and businesses that are not speculating.
Instead, they use this market responsibly to hedge legitimate business
risk in order to reduce volatility and protect their plans to make
investments and create jobs.
Is it the Senator's understanding that manufacturers and companies
that are using derivatives to hedge legitimate business risk and do not
engage in speculative behavior will not be subjected to the capital or
margin requirements in the bill?
Mrs. LINCOLN. I thank the Senator for her efforts to protect
manufacturers. I share the Senator's concerns, which is why our
language preserves the ability of manufacturers and businesses to use
derivatives to hedge legitimate business risk.
Working closely with the Senator, I believe the legislation reflects
our intent by providing a clear and narrow end-user exemption from
clearing and margin requirements for derivatives held by companies that
are not major swap participants and do not engage in speculation but
use these products solely as a risk-management tool to hedge or
mitigate commercial risks.
Ms. STABENOW. Again, I appreciate the Senator's efforts to work with
me on language that ensures manufacturers are not forced to
unnecessarily divert working capital from core business activities,
such as investing in new equipment and creating more jobs. As you know,
large manufacturers of high-cost products often establish wholly owned
captive finance affiliates to support the sales of its products by
providing financing to customers and dealers.
Captive finance affiliates of manufacturing companies play an
integral role in keeping the parent company's plants running and new
products moving. This role is even more important during downturns and
in times of limited market liquidity. As an example, Ford's captive
finance affiliate, Ford Credit, continued to consistently support over
3,000 of Ford's dealers and Ford Credit's portfolio of more than 3
million retail customers during the recent financial crisis--at a time
when banks had almost completely withdrawn from auto lending.
Many finance arms securitize their loans through wholly owned
affiliate entities, thereby raising the funds they need to keep
lending. Derivatives are integral to the securitization funding process
and consequently facilitating the necessary financing for the purchase
of the manufacturer's products.
If captive finance affiliates of manufacturing companies are forced
to post margin to a clearinghouse it will divert a significant amount
of capital out of the U.S. manufacturing sector and could endanger the
recovery of credit markets on which manufacturers and their captive
finance affiliates depend.
Is it the Senator's understanding that this legislation recognizes
the unique role that captive finance companies play in supporting
manufacturers by exempting transactions entered into by such companies
and their affiliate entities from clearing and margin so long as they
are engaged in financing that facilitates the purchase or lease of
their commercial end user parents products and these swaps contracts
are used for non-speculative hedging?
Mrs. LINCOLN. Yes, this legislation recognizes that captive finance
companies support the jobs and investments of their parent company. It
would ensure that clearing and margin requirements would not be applied
to captive finance or affiliate company transactions that are used for
legitimate, nonspeculative hedging of commercial risk arising from
supporting their parent company's operations. All swap trades, even
those which are not cleared, would still be reported to regulators, a
swap data repository, and subject to the public reporting requirements
under the legislation.
This bill also ensures that these exemptions are tailored and narrow
to ensure that financial institutions do not alter behavior to exploit
these legitimate exemptions.
Based on the Senator's hard work and interest in captive finance
entities of manufacturing companies, I would like to discuss briefly
the two captive finance provisions in the legislation and how they work
together. The first captive finance provision is found in section
2(h)(7) of the CEA, the ``treatment of affiliates'' provision in the
end-user clearing exemption and is entitled ``transition rule for
affiliates.'' This provision is available to captive finance entities
which are predominantly engaged in financing the purchase of products
made by its parent or an affiliate. The provision permits the captive
finance entity to use the clearing exemption for not less than two
years after the date of enactment. The exact transition period for this
provision will be subject to rulemaking. The second captive finance
provision differs in two important ways from the first provision. The
second captive finance provision does not expire after 2 years. The
second provision is a permanent exclusion from the definition of
``financial entity'' for those captive finance entities who use
derivatives to hedge commercial risks 90 percent or more of which arise
from financing that facilitates the purchase or lease of products, 90
percent or more of which are manufactured by the parent company or
another subsidiary of the parent company. It is also limited to the
captive finance entity's use of interest rate swaps and foreign
exchange swaps. The second captive finance provision is also found in
Section 2(h)(7) of the CEA at the end of the definition of ``financial
entity.'' Together, these 2 provisions provide the captive finance
entities of manufacturing companies with significant relief which will
assist in job creation and investment by our manufacturing companies.
Ms. STABENOW. I agree that the integrity of these exemptions is
critical to the reforms enacted in this bill and to the safety of our
financial system. That is why I support the strong anti-abuse
provisions included in the bill.
[[Page S5906]]
Would you please explain the safeguards included in this bill to
prevent abuse?
Mrs. LINCOLN. It is also critical to ensure that we only exempt those
transactions that are used to hedge by manufacturers, commercial
entities and a limited number of financial entities. We were surgical
in our approach to a clearing exemption, making it as narrow as
possible and excluding speculators.
In addition to a narrow end-user exemption, this bill empowers
regulators to take action against manipulation. Also, the Commodity
Futures Trading Commission and the Securities Exchange Commission will
have a broad authority to write and enforce rules to prevent abuse and
to go after anyone that attempts to circumvent regulation.
America's consumers and businesses deserve strong derivatives reform
that will ensure that the country's financial oversight system promotes
and fosters the most honest, open and reliable financial markets in the
world.
Ms. STABENOW. I thank the Chairman for this opportunity to clarify
some of the provisions in this bill. I appreciate the Senator's help to
ensure that this bill recognizes that manufacturers and commercial
entities were victims of this financial crisis, not the cause, and that
it does not unfairly penalize them for using these products as part of
a risk-mitigation strategy.
It is time we shine a light on derivatives trading and bring
transparency and fairness to this market, not just for the families and
businesses that were taken advantage of but also for the long-term
health of our economy and particularly our manufacturers.
Stable Value Funds
Mr. HARKIN. Mr. President, as chairman of the Health, Education,
Labor, and Pensions Committee, the pensions community approached me
about a possible unintended consequence of the derivatives title of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. They were
concerned that the provisions regulating swaps might also apply to
stable value funds.
Stable value funds are a popular, conservative investment choice for
many employee benefit plans because they provide a guaranteed rate of
return. As I understand it, there are about $640 billion invested in
stable value funds, and retirees and those approaching retirement often
favor those funds to minimize their exposure to market fluctuations.
When the derivatives title was put together, I do not think anyone had
stable value funds or stable value wrap contracts--some of which could
be viewed as swaps--specifically in mind, and I do not think it is
clear to any of us what effect this legislation would have on them.
Therefore, I worked with Chairman Lincoln, Senator Leahy, and Senator
Casey to develop a proposal to direct the SEC and CFTC to conduct a
study--in consultation with DOL, Treasury, and State insurance
regulators--to determine whether it is in the public interest to treat
stable value funds and wrap contracts like swaps. This provision is
intended to apply to all stable value fund and wrap contracts held by
employee benefit plans--defined contribution, defined benefit, health,
or welfare--subject to any degree of direction provided directly by
participants, including benefit payment elections, or by persons who
are legally required to act solely in the interest of participants such
as trustees.
If the SEC and CFTC determine that it is in the public interest to
regulate stable value fund and wrap contracts as swaps, then they would
have the power to do so. I think this achieves the policy goals
underlying the derivatives title while still making sure that we don't
cause unintended harm to people's pension plans.
Mrs. LINCOLN. Mr. President, I share Chairman Harkin's concern about
possible unintended consequences the Dodd-Frank Wall Street Reform and
Consumer Protection Act could have on pension and welfare plans which
provide their participant with stable value fund options. These stable
value fund options and their contract wrappers could be viewed as being
a swap or a security-based swap. As Chairman Harkin has stated, there
is a significant amount of retirement savings in stable value funds,
$640 billion, which represents the retirement funds of millions of
hardworking Americans. One of my major goals in this legislation was to
protect Main Street. We should try to avoid doing any harm to pension
plan beneficiaries. When the stable value fund issue was brought to my
attention, I knew it was something we had to address. That is why I
worked with Chairman Harkin and Senators Leahy and Casey to craft a
provision that would give the CFTC and the SEC time to study the issue
of whether the stable value fund options and/or the contract wrappers
for these stable value funds are ``swaps'' or some other type of
financial instrument such as an insurance contract. I think subjecting
this issue to further study will provide a measure of stability to
participants and beneficiaries in employee benefit plans--including
those participants in defined benefit pension plans, 401(k) plans,
annuity plans, supplemental retirement plans, 457 plans, 403(b) plans,
and voluntary employee beneficiary associations--while allowing the
CFTC and SEC to make an informed decision about what the stable value
fund options and their contract wrappers are and whether they should be
regulated as swaps or security-based swaps. It is a commonsense
solution, and I am proud we were able to address this important issue
which could affect the retirement funds of millions of pension
beneficiaries.
volcker rule
Mr. BAYH. I thank the Chairman. With respect to the Volcker Rule, the
conference report states that banking entities are not prohibited from
purchasing and disposing of securities and other instruments in
connection with underwriting or market making activities, provided that
activity does not exceed the reasonably expected near term demands of
clients, customers, or counterparties. I want to clarify this language
would allow banks to maintain an appropriate dealer inventory and
residual risk positions, which are essential parts of the market making
function. Without that flexibility, market makers would not be able to
provide liquidity to markets.
Mr. DODD. The gentleman is correct in his description of the
language.
Event Contracts
Mrs. FEINSTEIN. I thank Chairman Lincoln and Chairman Dodd for
maintaining section 745 in the conference report accompanying the Dodd-
Frank Wall Street Reform and Consumer Protection Act, which gives
authority to the Commodity Futures Trading Commission to prevent the
trading of futures and swaps contracts that are contrary to the public
interest.
Mrs. LINCOLN. Chairman Dodd and I maintained this provision in the
conference report to assure that the Commission has the power to
prevent the creation of futures and swaps markets that would allow
citizens to profit from devastating events and also prevent gambling
through futures markets. I thank the Senator from California for
encouraging Chairman Dodd and me to include it. I agree that this
provision will strengthen the government's ability to protect the
public interest from gaming contracts and other events contracts.
Mrs. FEINSTEIN. It is very important to restore CFTC's authority to
prevent trading that is contrary to the public interest. As you know,
the Commodity Exchange Act required CFTC to prevent trading in futures
contracts that were ``contrary to the public interest'' from 1974 to
2000. But the Commodity Futures Modernization Act of 2000 stripped the
CFTC of this authority, at the urging of industry. Since 2000,
derivatives traders have bet billions of dollars on derivatives
contracts that served no commercial purpose at all and often threaten
the public interest.
I am glad the Senator is restoring this authority to the CFTC. I hope
it was the Senator's intent, as the author of this provision, to define
``public interest'' broadly so that the CFTC may consider the extent to
which a proposed derivative contract would be used predominantly by
speculators or participants not having a commercial or hedging
interest. Will CFTC have the power to determine that a contract is a
gaming contract if the predominant use of the contract is speculative
as opposed to a hedging or economic use?
Mrs. LINCOLN. That is our intent. The Commission needs the power to,
and should, prevent derivatives contracts that are contrary to the
public
[[Page S5907]]
interest because they exist predominantly to enable gambling through
supposed ``event contracts.'' It would be quite easy to construct an
``event contract'' around sporting events such as the Super Bowl, the
Kentucky Derby, and Masters Golf Tournament. These types of contracts
would not serve any real commercial purpose. Rather, they would be used
solely for gambling.
Mrs. FEINSTEIN. And does the Senator agree that this provision will
also empower the Commission to prevent trading in contracts that may
serve a limited commercial function but threaten the public good by
allowing some to profit from events that threaten our national
security?
Mrs. LINCOLN. I do. National security threats, such as a terrorist
attack, war, or hijacking pose a real commercial risk to many
businesses in America, but a futures contract that allowed people to
hedge that risk would also involve betting on the likelihood of events
that threaten our national security. That would be contrary to the
public interest.
Mrs. FEINSTEIN. I thank the Senator for including this provision. No
one should profit by speculating on the likelihood of a terrorist
attack. Firms facing financial risk posed by threats to our national
security may take out insurance, but they should not buy a derivative.
A futures market is for hedging. It is not an insurance market.
collateralized investments
Mrs. HAGAN. Mr. President, I would like to engage Senator Lincoln,
chairman of the Agriculture, Nutrition and Forestry Committee, in a
colloquy.
Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which Chairman Lincoln was the primary architect of,
creates a new regulatory framework for the over-the-counter derivatives
market. It will require a significant portion of derivatives trades to
be cleared through a centralized clearinghouse and traded on an
exchange, and it will also increase reporting and capital and margin
requirements on significant players in the market. The new regulatory
framework will help improve transparency and disclosure within the
derivatives market for the benefit of all investors.
Under the bill, the Commodity Futures Trading Commission, CFTC, and
the Securities and Exchange Commission, SEC, are instructed to further
define the terms ``major swap participant'' and ``major security-based
swap participant.'' The definitions of major swap participant and major
security-based swap participant included in the bill require the CFTC
and the SEC to determine whether a person dealing in swaps maintains a
``substantial position'' in swaps, as well as whether such outstanding
swaps create ``substantial counterparty exposure'' that could have
``serious adverse effects on the financial stability of the United
States banking system or financial markets.'' The definition also
encompasses ``financial entities'' that are highly leveraged relative
to the amount of capital it holds, are not already subject to capital
requirements set by a Federal banking regulator, and maintain a
substantial position in outstanding swaps.
I understand when the CFTC and SEC are making the determination as to
whether a person dealing in swaps is a major swap participant or major
security-based swap participant, it is the intent of the conference
committee that both the CFTC and the SEC focus on risk factors that
contributed to the recent financial crisis, such as excessive leverage,
under-collateralization of swap positions, and a lack of information
about the aggregate size of positions. Is this correct?
Mrs. LINCOLN. Yes. My good friend from North Carolina is correct. We
made some important changes during the conference with respect to the
``major swap participant'' and ``major security-based swap
participant'' definitions. When determining whether a person has a
``substantial position,'' the CFTC and the SEC should consider the
person's relative position in cleared versus the uncleared swaps and
may take into account the value and quality of the collateral held
against counterparty exposures. The committee wanted to make it clear
that the regulators should distinguish between cleared and uncleared
swap positions when defining what a ``substantial position'' would be.
Similarly where a person has uncleared swaps, the regulators should
consider the value and quality of such collateral when defining
``substantial position.'' Bilateral collateralization and proper
segregation substantially reduces the potential for adverse effects on
the stability of the market. Entities that are not excessively
leveraged and have taken the necessary steps to segregate and fully
collateralize swap positions on a bilateral basis with their
counterparties should be viewed differently.
In addition, it may be appropriate for the CFTC and the SEC to
consider the nature and current regulation of the entity when
designating an entity a major swap participant or a major security-
based swap participant. For instance, entities such as registered
investment companies and employee benefit plans are already subject to
extensive regulation relating to their usage of swaps under other
titles of the U.S. Code. They typically post collateral, are not overly
leveraged, and may not pose the same types of risks as unregulated
major swap participants.
Mrs. HAGAN. I thank the Senator. If I may, I have one additional
question. When considering whether an entity maintains a substantial
position in swaps, should the CFTC and the SEC look at the aggregate
positions of funds managed by asset managers or at the individual fund
level?
Mrs. LINCOLN. As a general rule, the CFTC and the SEC should look at
each entity on an individual basis when determining its status as a
major swap participant.
Swap Dealer Provisions
Ms. COLLINS. Mr. President, I rise today as a supporter of the Wall
Street Transparency and Accountability Act, but also as one who has
concerns over how the derivatives title of the bill will be
implemented. I applaud the chairman of the Senate Banking Committee for
his work on the underlying bill. At the same time, I am concerned that
some of the provisions in the derivatives title will harm U.S.
businesses unnecessarily.
I would like to engage the chairman of the Senate Banking Committee
in a colloquy that addresses an important issue. The Wall Street
Transparency and Accountability Act will regulate ``swap dealers'' for
the first time by subjecting them to new clearing, capital and margin
requirements. ``Swap dealers'' are banks and other financial
institutions that hold themselves out to the derivatives market and are
known as dealers or market makers in swaps. The definition of a swap
dealer in the bill includes an entity that ``regularly enters into
swaps with counterparties as an ordinary course of business for its own
account.'' It is possible the definition could be read broadly and
include end users that execute swaps through an affiliate. I want to
make clear that it is not Congress' intention to capture as swap
dealers end users that primarily enter into swaps to manage their
business risks, including risks among affiliates.
I would ask the distinguished chairman whether he agrees that end
users that execute swaps through an affiliate should not be deemed to
be ``swap dealers'' under the bill just because they hedge their risks
through affiliates.
Mr. DODD. I do agree and thank my colleague for raising another
important point of clarification. I believe the bill is clear that an
end user does not become a swap dealer by virtue of using an affiliate
to hedge its own commercial risk. Senator Collins has been a champion
for end users and it is a pleasure working with her.
Mr. McCAIN. Mr. President, we are poised to pass what some have
termed a ``sweeping overhaul'' of our Nation's financial regulatory
system. Unfortunately, this legislation does little, if anything--to
tackle the tough problems facing the financial sector, nor does it
institute real, meaningful and comprehensive reform. This bill is
simply an abysmal failure and serves as yet another example of
Congress's inability to make the choices necessary to bring our country
back into economic prosperity.
What this bill does represent is a guarantee of future bailouts. In a
recent Wall Street Journal op-ed titled ``The Dodd-Frank Financial
Fiasco,'' John Taylor--a professor of economics at Stanford and a
senior fellow at the Hoover Institution--wrote:
The sheer complexity of the 2,319-page Dodd-Frank financial
reform bill is certainly
[[Page S5908]]
a threat to future economic growth. But if you sift through
the many sections and subsections, you find much more than
complexity to worry about.
The main problem with the bill is that it is based on a
misdiagnosis of the causes of the financial crisis, which is
not surprising since the bill was rolled out before the
congressionally mandated Financial Crisis Inquiry Commission
finished its diagnosis.
The biggest misdiagnosis is the presumption that the
government did not have enough power to avoid the crisis. But
the Federal Reserve had the power to avoid the monetary
excesses that accelerated the housing boom that went bust in
2007. The New York Fed had the power to stop Citigroup's
questionable lending and trading decisions and, with hundreds
of regulators on the premises of such large banks, should
have had the information to do so. The Securities and
Exchange Commission (SEC) could have insisted on reasonable
liquidity rules to prevent investment banks from relying so
much on short-term borrowing through repurchase agreements to
fund long-term investments. And the Treasury working with the
Fed had the power to intervene with troubled financial firms,
and in fact used this power in a highly discretionary way to
create an on-again off-again bailout policy that spooked the
markets and led to the panic in the fall of 2008.
But instead of trying to make implementation of existing
government regulations more effective, the bill vastly
increases the power of government in ways that are unrelated
to the recent crisis and may even encourage future crises.
Mr. Taylor then goes on to highlight the many ``false remedies''
contained in this legislation including the ``orderly liquidation''
authority given to the FDIC--which effectively institutionalizes the
bailout process. Other examples are the new Bureau of Consumer
Financial Protection, the new Office of Financial Research, and a new
regulation for nonfinancial firms that use financial instruments to
reduce risks of interest-rate or exchange-rate volatility.
In addition to the ``false remedies,'' the huge expansion of
government, and the outright power-grab by the Federal Government
contained in this so-called reform measure--recent press reports note
that this bill has also become the vehicle for imposing racial and
gender quotas on the financial industry. Section 342 of this bill
establishes Offices of Minority and Women Inclusion in at least 20
Federal financial services agencies. These offices will be tasked with
implementing ``standards and procedures to ensure, to the maximum
extent possible, the fair inclusion and utilization of minorities,
women, and minority-owned and women-owned businesses in all business
and activities of the agency at all levels, including in procurement,
insurance, and all types of contracts.''
This ``fair inclusion'' policy will apply to ``financial
institutions, investment banking firms, mortgage banking firms, asset
management firms, brokers, dealers, financial services entities,
underwriters, accountants, investment consultants and providers of
legal services.''
The provision goes on to assert that the government will terminate
contracts with institutions they deem have ``failed to make a good
faith effort to include minorities and women in their workforce.''
Diana Furchtgott-Roth, former chief economist at the U.S. Department
of Labor and senior fellow at the Hudson Institute, spotlighted the
controversial section in an article on Real Clear Markets on July 8th.
She wrote:
This is a radical shift in employment legislation. The law
effectively changes the standard by which institutions are
evaluated from anti-discrimination regulations to quotas. In
order to be in compliance with the law these businesses will
have to show that they have a certain percentage of women and
a certain percentage of minorities.
This provision was never considered or debated in the Senate. I do
not think it is unreasonable to expect that such a major change in
government policy--indeed a complete shift from anti-discrimination
regulations to a system of quotas for the financial industry--be fully
aired and debated by both Chambers before it is enacted.
Finally, let me return to Mr. Taylor's piece from the Wall Street
Journal. Mr. Taylor added:
By far the most significant error of omission in the bill
is the failure to reform Fannie Mae and Freddie Mac, the
government sponsored enterprises that encouraged the
origination of risky mortgages in the first place by
purchasing them with the support of many in Congress. Some
excuse this omission by saying that it can be handled later.
But the purpose of ``comprehensive reform'' is to balance
competing political interests and reach compromise; that will
be much harder to do if the Frank-Dodd bill becomes law.
I could not agree more. It is clear to any rational observer that the
housing market has been the catalyst of our current economic turmoil.
And it is impossible to ignore the significant role played by Fannie
Mae and Freddie Mac. The events of the past 2 years have made it clear
that never again can we allow the taxpayer to be responsible for poorly
managed financial entities who gambled away billions of dollars. Fannie
Mae and Freddie Mac are synonymous with mismanagement and waste and
have become the face of ``too big to fail.''
During the debate on this financial ``reform'' bill, we heard much
about how the U.S. Government will never again allow a financial
institution to become ``too big to fail.'' We heard countless calls for
more regulation to ensure that taxpayers are never again placed at such
tremendous risk. Sadly, the conference report before us now completely
ignores the elephant in the room--because no other entity's failure
would be as disastrous to our economy as Fannie Mae's and Freddie
Mac's.
As my colleagues know, during Senate consideration of this bill, I
offered a good, common-sense amendment designed to end the taxpayer-
backed conservatorship of Fannie Mae and Freddie Mac by putting in
place an orderly transition period and eventually requiring them to
operate--without government subsidies--on a level playing field with
their private sector competitors. Unfortunately that amendment was
defeated by a near-party-line vote.
The majority, however, did offer an alternative proposal to my
amendment. Was it a good, well thought out, comprehensive plan to end
the taxpayer-backed free ride of Fannie and Freddie and require them to
operate on a level playing field with their private sector competitors?
Nope. It was a study. The majority included language in this bill to
study the problem of Fannie and Freddie for 6 months. Wow! Instead of
dealing head-on with the two enterprises that brought our entire
economy to its knees--the majority wants to study them for 6 more
months.
According to a recent article published by the Associated Press,
these two entities have already cost taxpayers over $145 billion in
bailouts and--according to CBO--those losses could balloon to $400
billion. And if housing prices fall further, some experts caution, the
cost to the taxpayer could hit as much as $1 trillion. And all the
majority is willing to do is study them for 6 months. It is no wonder
the American people view us with such contempt.
The Federal Government has set a dangerous precedent here. We sent
the wrong message to the financial industry: when you engage in bad,
risky business practices, and you get into trouble, the government will
be there to save your hide. It amounts to nothing more than a taxpayer-
funded subsidy for risky behavior and this bill does nothing to prevent
it from happening all over again.
Again, I regret that I have to vote against this bill. I assure my
colleagues, and the American people, that if this were truly a bill
that instituted real, serious and effective reforms--I would be the
first in line to cast a vote in its favor. But it is not. It serves as
evidence of a dereliction of our duty and a missed opportunity to
provide the American people with the protections necessary to avert yet
another financial disaster. They deserve better from us.
Mr. GRASSLEY. Mr. President, I have long worked for the continued
viability of rural low-volume hospitals so that Medicare beneficiaries
living in rural areas in Iowa and elsewhere in the country will
continue to have needed access to care.
Today, I want to discuss another concern, one regarding low-volume
dialysis clinics in rural areas and the kidney dialysis patients they
serve.
Congress enacted a new end-stage renal dialysis, ESRD, bundled
payment system in the Medicare Improvements for Patients and Providers
Act of 2008 that takes effect next year.
I support the establishment of a fully bundled payment system for
renal dialysis services.
It is intended to improve payments for ESRD services and to ensure
access
[[Page S5909]]
to critical renal dialysis services, including those in rural areas.
It will also improve the quality of care for dialysis patients by
requiring ESRD providers to meet certain standards through a new
quality incentive program that is established for ESRD providers.
It establishes a permanent annual update for ESRD providers.
It also provides for payment adjustments in certain circumstances,
such as payments for low-volume facilities and for dialysis facilities
and providers in rural areas that need additional resources.
Last fall, the Centers for Medicare and Medicaid Services, CMS,
issued a proposed rule to implement the new ESRD bundled payment
system. That rule will be finalized later this year.
I am concerned that overall some of the proposed adjustments that
reduce payments for dialysis treatment may be unduly low.
But today I want to focus on one issue in particular--the adjustment
that CMS has proposed for low-volume facilities.
The legislation that established this new bundled payment system
specifically requires CMS to adopt a payment adjustment of not less
than 10 percent for low-volume facilities to ensure their continued
viability with other facilities.
The Secretary was given the discretion to define low-volume
facilities.
Unfortunately, CMS has proposed a very restrictive definition and set
of criteria to qualify as a low-volume facility so the payment
adjustment would only apply to facilities that furnish fewer than 3,000
treatments a year.
According to CMS, ``the low-volume adjustment should encourage small
ESRD facilities to continue to provide access to care to an ESRD
patient population where providing that care would otherwise be
problematic.''
CMS also notes that low-volume facilities have substantially higher
treatment costs.
Previously, CMS considered an ESRD facility with less than 5,000
treatments a year to be small.
But now CMS is proposing to limit eligible ESRD facilities to those
with less than 3,000 treatments a year and requiring this limit to be
met for 3 years preceding the payment year, along with certain
ownership restrictions.
CMS has not proposed any geographic restriction that would limit the
low-volume payment adjustment to dialysis facilities in rural areas.
Medicare reimbursement is already problematic for small dialysis
organizations because they operate on very low Medicare margins.
According to the March 2010 report of the Medicare Payment Advisory
Commission, MedPAC, large dialysis organizations have Medicare margins
of 4.0 percent compared to other dialysis facilities with Medicare
margins of only 1.6 percent.
MedPAC also found that rural dialysis providers have Medicare margins
that average -0.3 percent compared to urban providers with positive
margins of 3.9 percent, and they expressed concern that the gap in
rural and urban margins has widened.
They project that Medicare margins will fall from an aggregate 3.2
percent margin in 2008 to an aggregate 2.5 percent in 2010.
If corresponding declines are seen in rural areas, negative margins
for rural facilities will increase, and low-volume rural facilities
will be hit even harder.
And this projection does not take into account any of the additional
reductions that CMS has proposed as part of the new bundled payment
system even though these reductions would have a significant adverse
impact on small dialysis facilities.
Should the proposed restrictions on low-volume facilities be
finalized, the continued viability of these small dialysis facilities
will be questionable.
This will be especially true in rural areas, and beneficiary access
to these critical dialysis services will be severely jeopardized.
Small rural dialysis clinics provide beneficiaries with end-stage-
renal disease access to critically-needed dialysis services in
medically underserved areas.
In some rural areas, a single clinic may be the only facility that
furnishes this life-sustaining care.
Should the unduly restrictive treatment limit for low-volume
facilities be finalized as proposed, small rural facilities with
slightly higher treatment volumes will lose these essential low-volume
payments.
Since rural dialysis facilities already face negative Medicare
margins, many are likely to close, further limiting access to crucial
dialysis services that these kidney patients depend upon to survive.
New facilities would not be eligible for low-volume payments until
their fourth year of operation under the proposed rule, making it
unlikely that other facilities would take the place of those that had
closed.
The prospect of Medicare beneficiaries' losing access to these life-
sustaining services is simply unacceptable.
I, therefore, urge CMS to modify the proposed restrictions for low-
volume adjustments by raising the treatment limit to the existing 5,000
treatment definition for small rural dialysis facilities.
One of my constituents, Laura Beyer, RN, BSN, is the manager of
dialysis at Pella Regional Health Center, a critical access hospital in
rural Iowa. She has written an editorial about this problem and the
financial crises that small outpatient dialysis facilities, such as
Pella Regional Health Center, are facing. Her editorial will be
appearing in Nephrology News in July.
I ask unanimous consent to have printed in the Record this editorial.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Will the New ESRD Bundle Cause the Death of Rural Hospital-Based
Dialysis Units?
The new End Stage Renal Disease (ESRD) Bundled payment
system scheduled to begin in January, 2011 is expected to
create a financial loss for dialysis clinics across the
United States. According to the CMS Office of Public Affairs
(2009) ``MIPPA [Medicare Improvements for Patients and
Providers Act] specifically requires that the new system trim
two percent of the estimated payments that would have been
made in 2011 under the previous payment system'' (para.3).
Although this is of concern to all dialysis clinics, it is
particularly alarming to non-profit hospital based dialysis
units which are already operating at a loss.
These small hospital-owned dialysis clinics are simply
trying to provide a service to an underserved rural area.
Patients would have no option but to let ESRD claim their
lives because the resources are not available for them to
drive the extended distances to urban areas where dialysis
services are more available. Pella Regional Health Center
(PRHC), a Critical Access Hospital (CAH) in rural Iowa,
offers outpatient dialysis services. Robert Kroese, CEO of
PRHC stated, ``We choose to keep this dialysis clinic open
despite the financial liability to the hospital for one
reason only, people will have no choice but to die without
it. Our community needs this service.''
Currently hospital-based dialysis units represent 13.6
percent of all dialysis facilities in the United States.
Facilities classified as rural only make up 4.4 percent. The
current CMS payment system defines a small facility as <5000
treatments annually as well as other control variables to
include urban vs. rural and facility ownership. The proposed
bundled payment system will decrease reimbursement further
for these rural hospital-based units by decreasing the low-
volume definition to <3000 treatments per year and
eliminating rural facility payment adjustments (Leavitt,
2008). Considering the lack of buying power these small
facilities face compared to the large dialysis companies, the
hope of continuing this service in these rural areas is
diminishing.
At what point is the financial burden going to be too much
for these small rural hospitals to carry? The result will be
thousands of patients without the healthcare services needed
to sustain their lives. Please consider the effects on the
unseen heroes in rural America trying to provide the best
care possible to all Americans who need it. Help protect the
dialysis patients who live in the underserved areas of
America by contacting your state representatives regarding
the preservation of Hospital-based rural dialysis units.
Mr. FEINGOLD. Mr. President, I will oppose the conference version of
the Dodd-Frank bill. While it includes some positive provisions, it
fails its most important mission, namely to ensure that taxpayers,
consumers, businesses, and workers won't be victims of another
financial crisis like the one which a few years ago triggered the worst
recession our Nation has experienced since the Great Depression.
The measure certainly contains many good things, but those positive
provisions do not outweigh the bill's serious failings. Of the several
significant flaws in the bill, I will focus on two--the failure to
reinstate the well-
[[Page S5910]]
proven protections first established by the Glass-Steagall Act of 1933
that were repealed a decade ago, and the failure to firmly and finally
address the essential problem posed by too-big-to-fail financial
institutions.
Earlier this year I was pleased to cosponsor a bill introduced by the
Senator from Washington, Ms. Cantwell, to restore the safeguards that
were enacted as part of the famous Glass-Steagall Act of 1933. And I
was also pleased to cosponsor her amendment to the Financial Regulatory
Reform bill, which was based on that legislation. It went to the very
core of what the underlying bill we are considering seeks to address.
Unlike some other proposals we considered, that amendment had a track
record we can review, because the economic history of this country can
be divided into three eras--the time before Glass-Steagall, the Glass-
Steagall era, and the most recent post-Glass-Steagall era.
In the first era--the time before the enactment of the Glass-Steagall
Act of 1933--financial panics were frequent and devastating. Even
before the market crash in 1929, the panics of 1857, 1873, 1893, 1901,
and 1907 wrecked our economy, putting thousands of firms out of
business, and leaving family breadwinners across the country without
jobs.
In the wake of the 1929 crash--the last great panic of that first
era--4,000 commercial banks and 1,700 savings and loans failed in this
country, triggering the Great Depression that eliminated jobs for a
quarter of the workforce.
It was that last financial crisis that spurred enactment of the
Glass-Steagall Act of 1933, which marks the beginning of the second of
our financial history's three eras.
The Glass-Steagall Act of 1933 put a stop to financial panics. It
stabilized our banking system by implementing two key reforms. First,
it established an insurance system for deposits, reassuring bank
customers that their deposits were safe and thus forestalling bank
runs. And second, it erected a firewall between securities underwriting
and commercial banking. Financial firms had to choose which business to
be in; they couldn't do both.
That wall between Main Street commercial banking and Wall Street
investment financing was a crucial part of establishing the deposit
insurance safety net because it prevented banks that accepted FDIC-
insured deposits from making speculative investment bets with that
insured money.
The Glass-Steagall Act was an enormous success. It helped prevent any
major financial crisis in this country for most of the 20th century,
and that financial market stability helped foster the economic growth
we enjoyed for decades.
And that brings us to the last of the three eras--the post-Glass-
Steagall era.
All that wonderful financial market stability that we had enjoyed for
decades began to unravel when, in the 1980s, Wall Street lobbyists
spurred regulators to undermine financial regulations, including the
very firewall between Main Street banking and Wall Street investing
that Glass-Steagall had established, and that had worked so well. That
firewall was completely torn down when Wall Street lobbyists convinced
Congress to pass the Gramm-Leach-Bliley Act of 1999.
We have seen the disastrous results of that ill-considered policy.
It's a major part of the reason the financial regulatory reform bill
was considered by this body.
I voted against the Gramm-Leach-Bliley Act, which eliminated the
Glass-Steagall protections. The financial and economic record of that
bill has been disastrous. If the financial regulatory reform bill
before us did nothing else, it should have fixed the problems created
by that ill-advised act.
Just a few weeks ago, at one of the listening sessions I hold in each
of Wisconsin's 72 counties every year, a community banker from
northwestern Wisconsin urged me to support restoring the Glass-Steagall
protections. He rightly pointed out how the lack of those protections
led directly to the Great Depression. And he argued that the bill we
are currently debating doesn't go far enough in this respect. That
community banker was absolutely right.
The bill before us tries to make up for the lack of a Glass-Steagall
firewall by establishing some new limitations on the activities of
banks, and gives greater power and responsibility to regulators. All of
that is well intentioned, but we all know just how creative financial
firms can be at eluding these kinds of limits and regulatory oversight
when so much profit is at stake. No amount of oversight is an effective
substitute for the legal firewall established by Glass-Steagall.
The era in our financial history in which the Glass-Steagall
protections were in force was notable for the lack of instability and
turmoil that had been a regular feature of our financial markets prior
to Glass-Steagall, and that helped bring our economy to the brink after
Glass-Steagall safeguards were repealed. Congress should have restored
those time-tested protections, and reestablished the stability that
brought our Nation half a century of remarkable economic growth.
We could have achieved that by adopting the Cantwell amendment. But,
as we know, the Cantwell amendment was not even permitted a vote, such
was the opposition to that commonsense reform by those who were guiding
this legislation. So our financial markets will continue to remain
adrift in the brief but ruinous post-Glass-Steagall era.
The other flaw I will highlight is the measure's failure to directly
address what in many ways is the reason we are here today, namely the
problem of too big to fail.
During the Senate's consideration of the measure, several amendments
were offered that sought to confront that problem. Two of them, one
offered by the Senator from North Dakota, Mr. Dorgan, and one offered
by the Senators from Ohio, Mr. Brown, and Delaware, Mr. Kaufman, took
the problem on directly. Only one of those amendments even got a vote,
and that proposal, from Senators Brown and Kaufman, was strongly
opposed, and ultimately defeated, by those who were shepherding the
bill through the Senate.
As I noted, the problem of too big to fail is the reason we are
considering financial regulatory reform legislation. It was the threat
of the failure of the Nation's largest financial institutions that
spurred the Wall Street bailout. I opposed that measure as well, in
part because it was not tied to fundamental reforms of our financial
system that would prevent a future crisis and the need for another
bailout. There can be no doubt that we could have had a much tougher
reform package if the bailout had been tied to such a measure.
Nor should there be any doubt about the role Congress has played in
aggravating the problem of too big to fail. Fifteen years ago, the six
largest U.S. banks had assets equal to 17 percent of our GDP. Today,
after the enactment of the Riegle-Neal Interstate Banking and Branching
bill and the Gramm-Leach-Bliley bill, the six largest U.S. banks have
assets equal to more than 60 percent of our GDP.
Years ago, a former Senator from Wisconsin, William Proxmire, noted
that as banking assets become more concentrated, the banking system
itself becomes less stable, as there is greater potential for system
wide failures. Sadly, Senator Proxmire was absolutely right, as recent
events have proved. Even beyond the issue of systemic stability, the
trend toward further concentration of economic power and economic
decisionmaking, especially in the financial sector, simply is not
healthy for the Nation's economy.
Historically, banks have had a very special role in our free market
system: They are rationers of capital. While in recent decades we have
seen changes in the capital markets that provide the largest
corporations with other options to access needed capital, small
businesses still remain dependent on the traditional banking system for
the capital that is essential to them. So when fewer and fewer banks
are making the critical decisions about where capital is allocated,
there is an increased risk that many worthy enterprises will not
receive the capital needed to grow and flourish.
For years, a strength of the American banking system was the strong
community and local nature of that system. Locally made decisions made
by locally owned financial institutions--institutions whose economic
prospects were tied to the financial
[[Page S5911]]
health of the communities they served--have long played a critical role
in the economic development of our Nation and especially for our
smaller communities and rural areas. But we have moved away from that
system. Directly as a result of policy changes made by Congress and
regulators, banking assets are controlled by fewer and fewer
institutions, and the diminishment of that locally owned and controlled
capital has not benefited either businesses or consumers.
Beyond the problems to our capital markets created by this
development, there is Senator Proxmire's warning about the increased
risk of system wide failure. Taxpayers across the country must now
realize that Senator Proxmire's warning about the concentration of
banking assets proved to be all too prescient when President Bush and
Congress decided to bail out those mammoth financial institutions
rather than allowing them to fail.
Some may argue that instead of imposing clear limits on the size of
these financial behemoths, the bill before us seeks to limit their risk
of failing by tightening the rules that should govern their behavior.
And, they might add, the measure also permits regulators to address
these matters more directly than ever before. But we have seen how Wall
Street interests can maneuver around inconvenient regulations.
Moreover, the track record of the regulators themselves has been
troubling at best, and yet this bill relies on that same system to
protect taxpayers and the economy from another financial market
meltdown.
Today, the 10 largest banks have more than $10 trillion in assets.
That is the equivalent of more than three-quarters of our Nation's GDP.
And no one believes that, if one or more of those financial
institutions were to get into trouble, they would be allowed to simply
fail. The risk to the financial markets and the economy is seen as too
great. They are literally too big to fail. And that is the problem.
As economist Dean Baker has noted, too big to fail implies two
things: First, knowing the government will stand behind the debt-of-
too-big to fail institutions, creditors will view those institutions as
better credit risks and lower the cost of credit to them; and second,
too-big-to-fail firms are able to engage in riskier behavior than other
firms because creditors know the government will stand behind a too-
big-to-fail firm if it gets in trouble, they will keep the money
flowing when they otherwise might have closed it off. Baker is exactly
right when he says that this is a recipe for many more bailouts.
Too big to fail has been a growing problem for more than a decade.
Yet nothing in the Dodd-Frank bill requires that those enormous
financial firms be whittled down to a size that would permit them to
fail without disastrous consequences for financial markets or the
economy. In fact, as Peter Eavis noted in the Wall Street Journal, the
bill actually ``enshrines the bailout architecture, and thus the `too-
big-to-fail' distortions in the economy.'' And those distortions are
not limited to the kind of massive, systemic collapse of the financial
markets, which we just experienced. Too-big-to-fail distortions occur
daily. They happen whenever a smaller community bank is competing with
an enormous too-big-to-fail bank. Dean Baker calculated that the credit
advantage the very biggest banks have over smaller institutions because
of too-big-to-fail distortions is worth possibly $34 billion a year.
Those who doubt such a distortion need only talk to a community banker
for a few minutes to understand just how real it is.
Some suggest we should pass this bill because, despite the failings I
have just described, it contains some positive reforms and that we
should enact those improvements and then work to achieve the critically
needed reforms that remain. That analysis assumes there will be some
second great reform effort which will build on the work begun in this
legislation, and that simply isn't going to happen. This is the bill.
In the wake of the financial crisis and bailout, Congress essentially
gets one shot to correct things and prevent a future crisis and
bailout. There will be no financial regulatory reform, part two. Nobody
seriously thinks the White House is planning a second reform package to
go after too big to fail and to reinstate Glass-Steagall protections.
Nor does anyone believe the Senate Banking Committee or the House
Banking Committee is drafting a followup bill to deal with those
issues. For that matter, I know of no advocacy groups that are
seriously planning a followup reform effort to go after too big to fail
or to reinstate the Glass-Steagall firewalls between commercial banking
and Wall Street investment firms. It is not happening, because this is
the moment and this is bill. To minimize the failings of this bill by
suggesting there will be another one coming down the pike is at best
misleading and at worst dishonest.
Mr. President, in this case, we have to get it right--completely
right, not just make a good start. This bill fails the key test of
preventing another crisis, and I will oppose it.
Mr. BROWNBACK. Mr. President, I rise to speak regarding the auto
dealer exclusion in section 1029 of H.R. 4173, the Restoring American
Financial Stability Act of 2010.
I am pleased that my amendment excluding auto dealers from the
jurisdiction of the Bureau of Consumer Financial Protection, CFPB, was
included in the conference report to H.R. 4173. This proposal attracted
bipartisan support because the auto dealers should not have been
regulated in this bill in the first place. They are retailers. They
should not be regulated as bankers. They did not cause the Wall Street
meltdown. They didn't bring down Lehman Brothers or Bear Stearns.
The purpose of my amendment was to protect third party auto
financing. The CFPB could have abolished that kind of financing, but
keeping these provisions in the bill will preserve a variety of auto
financing choices for consumers, and we know that more choices result
in lower prices. And the provisions of my amendment keep auto loans
convenient and affordable while retaining existing consumer protection
laws and policies.
The end result is a balance between consumer protection and the
availability of affordable and accessible credit for consumers to meet
their transportation needs. Except for subsection (d), Section 1029 is
the result of a lot of debate and discussion in both houses of Congress
dating back to last year. During the House Financial Services
Committee's markup of this legislation, Representative John Campbell of
California offered an amendment to exclude auto dealers from the
jurisdiction of the CFPB. The Campbell amendment passed on a bipartisan
vote of 47-21. A modified form of the Campbell amendment was included
during floor consideration of H.R. 4173, which passed by a vote of 223-
202 on December 11, 2009.
I offered an amendment during Senate consideration of H.R. 4173 to
serve as a companion to the Campbell amendment. Although my amendment
did not receive a direct vote, on May 24, the Senate voted to instruct
its conferees to recede to the House on this matter, subject to the
modifications of the Brownback amendment. This motion passed on a
bipartisan vote of 60-30.
The final conference committee agreement incorporates the Brownback-
Campbell language with some modifications. I want to discuss those
provisions specifically and highlight some significant points.
First, section 1029(a) provides that the CFPB ``may not exercise any
rulemaking, supervisory, enforcement or any other authority, including
any authority to order assessments, over a motor vehicle dealer that is
predominately engaged in the sale and servicing of motor vehicle, the
leasing and servicing of motor vehicles, or both.'' This is a clear,
unambiguous exclusion from the authority of the CFPB for motor vehicle
dealers.
Three exceptions to the exclusion for dealers are enumerated in
section 1029(b). Subsection (b)(1) describes activity related to real
estate transactions with consumers. Subsection (b)(2) describes motor
vehicle transactions in which the dealer underwrites, funds, and
services motor vehicle retail installment sales contracts and lease
agreements without the involvement of an unaffiliated third party
finance or leasing source so-called ``buy-here-pay-here'' transactions.
Subsection (b)(3) describes the consumer financial products and
services offered by motor vehicle dealers and limits the exclusion to
those activities or any related or ancillary product or service. The
combination of
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1029(a) and 1029(b) ensures that motor vehicle dealers providing
financial products or services related to the activities described in
subsection (b)(3) are completely excluded from the CFPB.
Section 1029(c) preserves the authority of the Federal Reserve Board,
the Federal Trade Commission and any other Federal agency having
authority to regulate motor vehicle dealers.
Section 1029(d) provides that the Federal Trade Commission, FTC, will
have the authority to write rules to address unfair or deceptive acts
or practices by motor vehicle dealers pursuant to the procedures set
forth in the Administrative Procedures Act instead of the Magnuson-Moss
Act. Motor vehicles dealers are set to become the only businesses in
America singled out for regulation in this manner. I want to emphasize
that this specific provision was neither in the House or Senate bill
and was not under consideration in either chamber. It was added by
House-Senate conferees. Section 1029(d) was included without any
evidence to justify its inclusion, or any debate for that matter. I do
not support this provision, as I believe it invites the FTC to again
engage in regulatory overreach. I am concerned that the removal of the
well-established ``Magnuson-Moss'' safeguards gives the FTC free rein
to conduct fishing expeditions into any area of automotive finance it
perceives as ``unfair.''
The present leadership of the FTC has promised that if Magnuson-Moss
were repealed, they would use their new power prudently. I hope that
this is the case, because we do not want to repeat the kind of
excessive FTC regulation that occurred in the 1970s. For that reason,
Congress must monitor the FTC very closely to ensure the vast power
Congress will now bestow on this agency is not once again abused.
Section 1029(e) requires the Federal Reserve Board and the Federal
Trade Commission to coordinate with the Office of Service Member
Affairs to ensure that any complaints raised by men and women in the
armed services are addressed effectively by the appropriate enforcement
agency.
Section 1029(f) defines certain terms in the bill. My amendment
expanded the House language to also exclude similarly situated RV and
boat dealers.
The concept of excluding auto dealers from the jurisdiction of the
CFPB gained bipartisan support, but there was some debate about its
effect on members of the U.S. Armed Forces. Because we all share the
utmost concern for our service men and women, I think it is appropriate
to revisit that argument briefly and to reiterate my strong belief that
this exclusion will not hurt members of the military.
On February 26, Under Secretary of Defense Clifford Stanley wrote a
widely distributed letter contending that excluding auto dealers from
the CFPB would have a harmful effect on servicemembers. On May 14, I
sent a letter to Under Secretary Stanley asking him to further clarify
and substantiate the claims he made in his letter to ensure that the
Senate would not take action that would harm military members.
Under Secretary Stanley's May 18 response to my letter offered a
series of anecdotes about finance practices that were already illegal.
In addition, Under Secretary Stanley's letter related the results of a
survey of military members regarding auto financing. That survey, which
was informal and unscientific, unfortunately failed to specify the
sources of the problems some servicemembers encountered. It gave no
indication that auto dealers were responsible for bad loans made to
military members and made, and I think it is unfortunate that auto
dealers were blamed for problems they did not cause on the basis of
this survey.
In fact, I was surprised that Pentagon officials cited this survey
instead of relying on their comprehensive 2006 report on abusive
lending practices. This study, entitled ``Report on Predatory Lending
Practices Directed at Members of the Armed Forces and Their
Dependents'' did not include dealer-assisted financing among its list
of predatory lending practices. In the end, in my view, the best
information available indicates that servicemembers will not be harmed
by exempting dealers from the jurisdiction of the CFPB. I am glad that
argument carried the day.
I am very concerned that the CFPB, which will not be overseen by the
Office of Management and Budget and will not depend on Congress for its
funding, will at some point in the future engage in regulatory
overreach that will hurt our economy. Excluding auto, boat and RV
dealers from the CFPB jurisdiction will ensure that these Main Street
small businesses are protected from such harmful regulation. For
consumers, my amendment guarantees that access to affordable credit is
preserved, and all consumer protections laws are maintained. While I am
very concerned about the implications of H.R. 4173 overall, I am
pleased that at least in this instance we have found a way to limit the
threat of regulations that hurt consumers and strangle our economy.
Mr. LEAHY. Mr. President, I strongly support the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010.
The American people often are cynical, with good reason, about the
success that powerful corporate interests have in trumping the
interests and rights of everyday Americans, on Wall Street, in Congress
and even on our Supreme Court. Backed by multimillions of dollars that
ordinary Americans cannot match, the lobbying pressure that was sharply
focused on trying to shape this bill at every step, including the
conference, was almost without parallel. Yet the bill that emerged from
conference truly reflects the Nation's interests in real Wall Street
reform. This is a great, unheralded victory for the American people and
one that should serve as an example again and again.
The recent financial crisis clearly exposed several flaws in our
current regulatory system. Many large Wall Street investment banks and
insurance companies hid their shaky finances from stockholders and
government regulators. Corporate executives saw their salaries rise to
extreme heights, even as their companies were failing and seeking
government assistance. Through it all, Federal regulatory agencies
failed to provide the necessary oversight to rein in these reckless
actions. If this crisis has taught us anything, it is that the look-
the-other way, hands-off deregulatory policies that were in vogue in
recent times can jeopardize not only private investments but our entire
economy.
The conference report we are voting on today goes directly to the
heart of the Wall Street excesses that brought our economy to the
brink. For far too long Wall Street firms made risky bets in the dark
and reaped enormous profits. Then, when their bets went sour, they
turned to America's taxpayers to bail them out. This bill is about
changing the culture of rampant Wall Street speculation and doing what
needs to be done to get our economy back on track. We need more
transparency and oversight of Wall Street. These improvements will
increase transparency in and oversight of the financial sector. These
historic reforms will set clear standards and real enforcement--
including jail time for executives--to finally curb the fraud,
manipulation, and riotous speculation that punctured confidence in our
markets and derailed our economy.
I commend Chairman Barney Frank and Chairman Chris Dodd for their
excellent leadership of the conference. As a conferee, I know full well
the pressure that powerful Wall Street special interests put on all
Members to water down the bill, and I appreciate the difficulty the two
chairmen have endured corralling the votes needed for final passage.
Despite heavy and expensive lobbying from those who support the status
quo, the conference committee put together a strong and balanced bill
that will clean up Wall Street abuses, build confidence in our economy,
and continue our progress toward economic recovery.
This bill makes several significant improvements to our financial
services regulations. Specifically, it will create a new systemic
regulatory council to watch for broad economic bubbles and red flags;
end taxpayer bailouts of Wall Street institutions by establishing a new
resolution authority to wind down failing megafirms outside of
bankruptcy; create a new Consumer Financial Protection Bureau to
oversee financial products on the market and rein in subprime lending;
set new capital and leverage limits for financial institutions; give
the SEC and CFTC
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new authorities and resources to protect investors; bring the massive
derivatives market under Federal regulation for the first time; require
hedge fund and other private investment advisers to register with the
SEC; establish reasonable and fair swipe fees for debit and credit
cards; and provide new resources for unemployed homeowners who are
having trouble making their mortgage payments.
As chairman of the Senate Judiciary Committee, I am particularly
pleased that the conference report also includes provisions I authored,
working with Senator Grassley, Senator Specter, and Senator Kaufman, to
ensure law enforcement and Federal agencies have the necessary tools to
investigate and prosecute financial crimes and to protect
whistleblowers who help uncover these crimes. I am pleased that the
conference report preserves meaningful antitrust oversight in the
financial industry. I also am heartened that the conference agreement
includes provisions I put forward to introduce true transparency into
the complex operations of large financial institutions and the Federal
agencies that regulate them. It has seemed to me that promoting
transparency should be a vital element of Wall Street reform.
Transparency is a cleansing agent for healthy markets. Open information
helps investors make sound decisions. When information is murky, market
decisions must be based on guesses or rumors that corrode trust and
that encourage fraud and deception.
Another major step forward is the derivatives section of the
conference report, crafted by the Agriculture Committee on which I
serve. I applaud our committee chair, Senator Blanche Lincoln, who
fought tirelessly for these reforms. These changes will finally bring
the $600 trillion derivatives market out of the dark and into the light
of day, ending the days of backroom deals that put our entire economy
at risk. The narrow end-user exemption in the bill will allow
legitimate commercial interests, such as electric cooperatives and
heating oil dealers on Main Street, to continue hedging their business
risks, but it will stop Wall Street traders from artificially driving
up prices of heating oil, gasoline, diesel fuel, and other commodities
through unchecked speculation.
The conference report also includes a provision by Senator Dick
Durbin and Representative Peter Welch that I supported to protect our
small businesses from complicated predatory rules that big credit card
companies could otherwise impose on Vermont grocers and convenience
stores. The Durbin-Welch amendment will ensure that a small business
will be able to advertise a discount for paying cash or for using one
card instead of another. I do not want Vermonters to pay more for a
gallon of milk just because the credit card companies are demanding a
high fee on small transactions and are not allowing the grocer to ask
for cash instead of credit.
Another amendment I offered that is included in the final agreement
is of particular importance to small States such as Vermont. My
amendment will guarantee that Vermont and other small States each
receive at least $5 million of the $1 billion in new Neighborhood
Stabilization Program funds in the bill. Originally created in 2008,
this program is designed to stabilize communities that have suffered
from foreclosures and abandonment. My amendment overrode language
proposed by the House that expressly prohibited a small-State-minimum
from being used to allocate funds.
The extractive industries transparency disclosure provision that I
sponsored is another major step forward for protecting U.S. taxpayers
and shareholders and increasing the transparency of major financial
transactions. This provision is about good governance and transparency
so the American people and investors can know if they are investing in
companies that are operating in dangerous or unstable parts of the
world, thereby putting their investments at risk. This provision also
will enable citizens of these resource-rich countries to know what
their governments and governmental officials are receiving from foreign
companies in exchange for mining rights. This will begin to hold
governments accountable for how those funds are used and help ensure
that the sale of their countries' natural resources are used for the
public good.
I am also pleased that the bill includes a provision I cosponsored
with Senator Bernie Sanders to increase transparency on the bailout
transactions made by the Federal Reserve. Under this bill, we will
finally have an audit of all of the emergency actions taken by the
Federal Reserve since the financial crisis began, to determine whether
there were any conflicts of interest surrounding the Federal Reserve's
emergency activities. It is time we know more about the closed-door
decisions made by the Federal Reserve throughout this financial crisis.
Mr. President, the Senate has before it today a conference report
that will rein in Wall Street abuses, end government bailouts, and give
everyday Americans the consumer protection they deserve and expect. It
will help restore faith in our markets, which are part of the vital
foundation of our economic progress. Taking this broom to Wall Street
abuses will help build confidence in our economy and continue our
progress toward economic recovery.
Mr. REED. 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
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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
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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
[[Page S5916]]
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.
[[Page S5917]]
Mr. AKAKA Mr. President, while I strongly support the Dodd-Frank
conference report, I am concerned and disappointed that the legislation
includes a particular provision that would exempt indexed annuity
products from securities regulation. I ask unanimous consent that the
accompanying letters in opposition to this provision from AARP, the
North American Securities Administrators Association, the Consumer
Federation of America, and the Financial Planning Association be
printed in the Record immediately following my remarks.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 1.)
Mr. AKAKA. Indexed annuities combine aspects of insurance and
securities and are sold primarily as investment products. Consumers
across the country, including some in Hawaii, have been harmed by the
deceptive manner in which these products are being sold. For example, a
seller in Hawaii pushed equity indexed annuities to collect
unreasonably high commissions at the expense of senior citizens. Those
investors were harmed by these financial products. Exempting indexed
annuities from securities regulation would establish a dangerous
precedent that promotes the development of financial products not
subject to regulation and investor protection standards.
Opponents might argue that federal regulation is unnecessary or
distracts from state regulation. However, Federal regulation is
necessary to help protect investors by providing consistency and
uniformity because securities laws can vary across states. Others are
concerned that Federal regulation will limit access to indexed
annuities. I counter that these products should only be sold when they
are subject to the strong disclosure, suitability, and sales practice
standards provided within the context of our Nation's securities laws.
I welcome further debate on and examination of this matter, including
hearings to learn more about the consequences of this provision.
AARP,
Washington, DC, May 19, 2010.
Hon. Christopher Dodd,
U.S. Senate, Committee on Banking, Housing and Urban Affairs,
Dirksen Senate Office Building, Washington, DC.
Dear Senator Dodd: AARP writes to strongly oppose Harkin
Amendment #3920, which would deprive investors in equity-
indexed annuities of needed protections provided by state and
federal securities laws.
These hybrid products combine elements of insurance and
securities, but they are sold primarily as investments, not
insurance, especially to people who are investing for their
own retirement. Growth in equity-indexed annuity value is
tied to one of several securities indexes (e.g. the S&P 500
or the Dow Jones Industrial Average), and comparing and
choosing suitable products can be difficult for investors.
These products also come with high fees and have long
surrender periods, which may make them unsuitable as
investments for most seniors.
In the fall of 2008, the Securities and Exchange Commission
adopted a rule to regulate equity-indexed annuities as
securities (Rule 151A). The rule was later challenged, and
the Court of Appeals for the District of Columbia Circuit
upheld the legal foundation for the SEC's action.
Because seniors are a target audience for these products,
AARP submitted comments to the SEC supporting the rule,
stating it was important that Rule 151A supplement, not
supplant, state insurance law. In fact, the rule applies
specifically to annuities regulated under state insurance
law. AARP also submitted a joint amicus brief, along with the
North American Securities Administrators Association and
MetLife, supporting Rule 151A.
The Harkin amendment would overturn the SEC rule, which is
designed to provide disclosure, suitability, and sales
practice protections afforded by state and federal securities
laws. The amendment would preempt any further ability of the
SEC to regulate in this area. This not only deprives
investors of needed protections against widespread abusive
sales practices associated with these complex financial
products, it also sets a dangerous precedent. If this
amendment is adopted, the industry will be encouraged to
develop hybrid products in the future specifically designed
to evade a regulatory regime designed to protect consumers.
Regulating indexed annuities as securities is long overdue
and vitally important for our nation's investors saving for a
secure retirement.
The SEC's rule on indexed annuities accomplishes this goal
in a thoughtful and reasonable fashion, and it should be
allowed to take effect. AARP therefore opposes the Harkin
amendment.
Sincerely,
David Sloane,
Senior Vice President,
Government Relations and Advocacy.
____
North American Securities
Administrators Association, Inc.,
Washington, DC, June 14, 2010.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
Washington, DC.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
Washington, DC.
Hon. Christopher Dodd,
Chairman, Committee on Banking, Housing and Urban
Development, Washington, DC.
Hon. Richard Shelby,
Ranking Member, Committee on Banking, Housing and Urban
Development, Washington, DC.
Oppose Attempt To Nullify SEC Rulemaking on Equity Indexed Annuities
Dear Chairmen and Ranking Members: On behalf of state
securities regulators, I am writing to oppose an attempt to
deprive investors in indexed annuities of the strong
protections afforded by our nation's securities laws. A
provision to nullify SEC Rule 151 A was not included in
either the House or the Senate bill. I would argue that it is
not germane to the conference, and the provision should not
be accepted by the conferees. Furthermore, efforts such as
this one that will ultimately deprive investors of important
protections should not be allowed to succeed.
Indexed annuities are securities, and they are heavily
marketed as such. All too often, deceptive sales practices
have been used to promote these complicated investment
products. As a result, investors--and senior citizens in
particular--can fall prey to sales pitches designed to make
these investments seem safe and straightforward when in fact
they may be neither. Accordingly, it is vitally important
that indexed annuities be regulated as securities and
subjected to the strong standards afforded by our nation's
securities laws.
To ensure that investors receive these protections, the
Securities and Exchange Commission (``SEC'') adopted Rule
151A, which would subject indexed annuities to regulation as
securities. The United States Court of Appeals for the
District of Columbia Circuit upheld the legal foundation for
Rule 151 A. Although remanding with respect to certain
procedural requirements, the court upheld the rule on
substantive legal grounds, finding it was reasonable for the
SEC to conclude that indexed annuities should be subject to
federal securities regulation.
Attempts to disparage the SEC's rule as a federal attack on
state regulation are unfounded. Critics who level that charge
ignore the fact that the rule will NOT interfere with the
authority of state insurance commissioners to continue
regulating indexed annuities and the companies that issue
them. In fact, in order to be covered by the rule, a contract
must be subject to regulation as an annuity under state
insurance law.
Nor will the rule impose unreasonable burdens on industry.
It will simply require compliance with essentially the same
regulatory standards that for 75 years have applied to all
companies that issue securities. Moreover, the rule is
strictly prospective, applying only to indexed annuities
issued after the effective date, and it does not take effect
for two years, affording the industry ample time to prepare
for compliance. In short, the rule will provide much needed
protections for investors without unfairly burdening
industry.
Indexed annuities are hybrid products that supposedly offer
investors the combined advantages of guaranteed minimum
returns along with profits from stock market gains. Although
indexed annuities may be legitimate vehicles for some people,
they have many features, including high costs, significant
risks, and long surrender periods, that make these products
unsuitable for many investors. Investors have a difficult
time understanding these hazards because indexed annuities
are hopelessly complex. Compounding the problem are the
generous commissions that agents can earn from the sale of
these products.
The problems associated with the marketing of indexed
annuities are a matter of record in countless news articles,
government warnings, regulatory enforcement actions, and
lawsuits filed by innumerable investors seeking damages for
the unsuitable and fraudulent sale of indexed annuities.
Indeed, these products have become so infamous that they were
featured in a prime time Dateline NBC report entitled
``Tricks of the Trade.''
Without question, the single most effective way to address
abuses in the sale of indexed annuities is to regulate them
as securities. This is legally appropriate because indexed
annuities shift a significant degree of investment risk to
purchasers, and therefore pose the very dangers that the
federal securities laws were intended to address. Licensing
standards under the securities laws will help ensure that
agents have the requisite knowledge and character to sell
these complex investment products. Under the securities laws,
those agents will also be subject to strong supervision
requirements. Mandatory registration of indexed annuities as
securities will vastly increase the amount of information
available to investors concerning the terms, risks, and costs
of these offerings. Perhaps most important, the strong
investor protection standards that have been a part of
securities regulation for decades will deter abuses in the
sale of indexed annuities and provide more effective remedies
for those who are victimized.
[[Page S5918]]
The goal of financial reform is to strengthen investor
confidence in our markets and regulating indexed annuities as
securities under federal law is vitally important to meeting
this objective. The SEC's Rule 151A on indexed annuities is a
step in the right direction and it should be allowed to take
effect. Any attempt to reverse this important regulatory
initiative should not be adopted.
Sincerely,
Denise Voigt Crawford,
Texas Securities Commissioner,
NASAA President.
____
North American Securities
Administrators Association, Inc.,
Washington, DC, June 23, 2010.
Protect Investors: Reject Senate Proposals Included in Title IX
Dear Conferee: State securities regulators are profoundly
disappointed that the Senate conferees approved a Title IX
counteroffer that includes two provisions that seriously
weaken investor protections in a bill purportedly written to
strengthen them. I urge you to reject the Senate fiduciary
duty study/rulemaking language and the amendment to exempt
certain hybrid annuity products from securities regulation.
Fiduciary Duty. Instead of the strongest possible fiduciary
duty for every financial intermediary providing investment
advice, the ``compromise'' study in the Senate offer has been
modified to lessen the chances that investors will ever
realize the benefits of a fiduciary duty, the single most
important investor protection in the reform package. For the
following reasons, NASAA must strongly oppose it.
The study is nothing more than a delay tactic and should be
rejected outright.
It is wasteful of the SEC's resources in that it requires
the agency to review and study issues that have already been
repeatedly studied.
If the study remains in place, it should be significantly
streamlined so as to avoid needless repetition of prior
studies. Further, if there must be a study, it should be
required to be conducted on a fully-cooperative basis by both
governmental regulators, the SEC and the states, in order to
maximize resources and insure its completion within the one-
year time frame.
To make matters worse, the rulemaking language proposed by
the Senate fails to achieve the original goal of both the
Senate Banking Committee and the House Financial Services
Committee to impose the Investment Advisers Act fiduciary
duty on broker-dealers when providing personalized investment
advice to retail customers about securities. Our specific
opposition to the Senate rulemaking language includes the
following:
The two year rulemaking provision would mean that it could
be three years before the SEC even undertakes an attempt to
implement a rule to address the study findings. Further, and
as more fully discussed below, the conditions imposed by this
amendment on any such rulemaking process are so arduous that
it is highly doubtful that a rule of any kind would be
promulgated.
The new rulemaking language would not result in a fiduciary
duty for broker-dealers providing investment advice. The
House language authorizing the SEC to adopt rules imposing
the full Investment Advisers Act fiduciary duty on brokers
when they give personalized advice about securities to retail
investors has been removed. It has been replaced by language
authorizing the SEC to adopt rules requiring brokers to act
in their customers' ``best interests'' which is far short of
the fiduciary duty.
That weakened authority provided to the SEC is subject to
such burdensome conditions and limitations that it is
unlikely ever to be exercised. Before the SEC could even
adopt a rule it would have to complete the study required
above and then, as part of the rulemaking, show that no other
approach could address the findings of the study. These
draconian conditions would make any rule promulgated by the
Commission subject to a legal challenge the agency would be
unlikely to win.
The provisions requiring the SEC to harmonize enforcement
of the standard, so that it is applied equally to brokers and
advisers, have also been deleted.
Equity Indexed Annuities. The Senate conferees also
approved an amendment to preempt securities regulation of
equity-indexed annuities and future hybrid products that have
both securities and insurance features. State securities
regulators have actively pursued enforcement cases involving
sales practice abuses of agents selling equity indexed
annuities. These state enforcement actions are in danger of
being preempted by the Harkin amendment and investors,
especially seniors, would be left without the protection of
vigorous securities enforcement activity.
The problems associated with the marketing of indexed
annuities are a matter of record in countless news articles,
government warnings, regulatory enforcement actions, and
lawsuits filed by innumerable investors seeking damages for
the unsuitable and fraudulent sale of indexed annuities. It
was these problems that led the SEC to adopt Rule 151A after
a fair and open rulemaking process.
The best way to ensure adequate investor protections in the
sale of equity indexed annuities is to allow the SEC to
exercise its appropriate authority over these products. State
securities regulators urge you to reject this amendment as it
has no place in a bill intended to strengthen investor
protections.
In closing, we are extremely dissatisfied that the
provisions in the Investor Protection title continue to be
weakened. We urge you to reverse this trend, reject the
Senate counteroffer and insist on strong protections for our
nation's investors.
Sincerely,
Denise Voigt Crawford,
NASAA President,
Texas Securities Commissioner.
____
NASAA & CFA,
May 14, 2010.
Opposition to Harkin/Johanns/Leahy Amendment No. 3920
Dear Senator: We are writing to oppose the Harkin/Johanns/
Leahy amendment, which deprives investors in indexed
annuities of the strong protections afforded by our nation's
securities laws. Indexed annuities are securities, and they
are heavily marketed as such. All too often, deceptive sales
practices have been used to promote these complicated
investment products. As a result, investors--and senior
citizens in particular--can fall prey to unsuitable sales.
Accordingly, it is vitally important that indexed annuities
be regulated as securities and subjected to the strong
disclosure, suitability, and sales practice standards
afforded by our nation's securities laws.
To ensure that investors receive these protections, the
Securities and Exchange Commission (``SEC'') adopted Rule
151A, which would subject indexed annuities to regulation as
securities. The United States Court of Appeals for the
District of Columbia Circuit upheld the legal foundation for
Rule 151A. Although remanding with respect to certain
procedural requirements, the court upheld the rule on
substantive legal grounds, finding it was reasonable for the
SEC to conclude that indexed annuities should be subject to
federal securities regulation.
Attempts to disparage the SEC's rule as a federal attack on
state regulation are unfounded. Critics who level that charge
ignore the fact that the rule will NOT interfere with the
authority of state insurance commissioners to continue
regulating indexed annuities and the companies that issue
them. In fact, in order to be covered by the rule, a contract
must be subject to regulation as an annuity under state
insurance law.
Nor will the rule impose unreasonable burdens on industry.
It will simply require compliance with essentially the same
regulatory standards that for 75 years have applied to all
companies that issue securities. Moreover, the rule is
strictly prospective, applying only to indexed annuities
issued after the effective date, and it does not take effect
for two years, affording the industry ample time to prepare
for compliance. In short, the rule will provide much needed
protections for investors without unfairly burdening
industry.
Indexed annuities are hybrid products that supposedly offer
investors the combined advantages of guaranteed minimum
returns along with profits from stock market gains. Although
indexed annuities may be legitimate vehicles for some people,
they have many features, including high costs, significant
risks, and long surrender periods, that make these products
unsuitable for many investors. Investors have a difficult
time understanding these hazards because indexed annuities
are hopelessly complex. Compounding the problem are the
generous commissions that agents can earn from the sale of
these products.
The problems associated with the marketing of indexed
annuities are a matter of record in countless news articles,
government warnings, regulatory enforcement actions, and
lawsuits filed by innumerable investors seeking damages for
the unsuitable and fraudulent sale of indexed annuities.
Indeed, these products have become so infamous that they were
featured in a prime time Dateline NBC report entitled
``Tricks of the Trade.''
Without question, the single most effective way to address
abuses in the sale of indexed annuities is to regulate them
as securities. This is legally appropriate because indexed
annuities shift a significant degree of investment risk to
purchasers, and therefore pose the very dangers that the
federal securities laws were intended to address. Licensing
standards under the securities laws will help ensure that
agents have the requisite knowledge and character to sell
these complex investment products. Under the securities laws,
those agents will also be subject to strong supervision
requirements. Mandatory registration of indexed annuities as
securities will vastly increase the amount of information
available to investors concerning the terms, risks, and costs
of these offerings. Perhaps most important, the strong
antifraud provisions and suitability standards that have been
a part of securities regulation for decades will deter abuses
in the sale of indexed annuities and provide more effective
remedies for those who are victimized.
Regulating indexed annuities as securities under federal
law is long overdue and vitally important for our nation's
investors. The SEC's Rule 151A on indexed annuities
accomplishes this goal in a thoughtful and reasonable
fashion, and it should be allowed to take effect. The Harkin/
Johanns/Leahy amendment would reverse this important
regulatory initiative and should not be adopted.
Respectfully submitted,
Denise Voigt Crawford,
President, NASAA.
Barbara Roper,
[[Page S5919]]
Director of Investor Protection, CFA.
____
Consumer Federation of America,
Fund Democracy,
June 12, 2010.
Hon. Christopher Dodd,
Chairman, Committee on Banking, Housing and Urban
Development, U.S. Senate, Washington, DC.
Hon. Barney Frank,
Chairman, Financial Services Committee, House of
Representatives, Washington, DC.
Hon. Richard Shelby,
Ranking Member, Committee on Banking, Housing and Urban
Development, U.S. Senate, Washington, DC.
Hon. Spencer Bachus,
Ranking Member, Financial Services Committee, House of
Representatives, Washington, DC.
Protect Investors and the Legislative Process: Reject Equity-Indexed
Annuities Preemption Amendment
Dear Chairman Dodd, Ranking Member Shelby, Chairman Frank,
and Ranking Member Bachus: We understand that members of the
insurance industry continue to press for inclusion in the
conference report of anti-consumer legislation to exempt
equity-indexed annuities from securities regulation. We are
writing to urge you to resist any such efforts.
Equity-indexed annuities are hybrid products that combine
elements of both insurance and securities, but they are sold
primarily as investments. Indeed, as documented in a seven-
part Dateline NBC hidden camera expose, they are among the
most abusively sold products on the market today. Responding
to a rising level of complaints, the Securities and Exchange
Commission voted in late 2008 to adopt rules regulating
equity-indexed annuities as securities, a move that was
immediately challenged in court by the insurance industry. In
deciding the case, a U.S. Court of Appeals sided with the
agency on the basic issue of whether equity-indexed annuities
should be regulated as securities while remanding the rule
with respect to procedural issues.
Having failed to prevail in court, the insurance industry
has turned to Congress to preempt legitimate securities
regulation of this product. We urge you to resist these
efforts for the following reasons:
Equity-indexed annuities are complex products whose returns
fluctuate with performance of the securities markets. Absent
regulation under securities laws, they can be sold by
salespeople with no more understanding of the markets than
the customer.
Although the National Association of Insurance
Commissioners has developed a model suitability rule for
annuity sales, it has not been adopted in all states.
Regulation under securities laws would provide national
uniformity, would bring to bear the added regulatory
resources of the SEC, state securities regulators, and FINRA,
and would provide additional investor protections in the form
of improved disclosures and limits on excessive compensation.
Exempting equity-indexed annuities from securities
regulation would set a dangerous precedent and encourage the
development of additional hybrid products designed
specifically to evade a more rigorous form of regulation.
This highly controversial measure--which is opposed by
consumer advocates as well as state and federal securities
regulators--was not included in either the House or the
Senate bill and is not germane to the underlying legislation.
To include it in the conference report would be a gross
violation of the integrity of the legislative process. We
urge you to protect investors and the legislative process by
preventing the equity-indexed annuities provision from being
added to the conference report.
Respectfully submitted,
Barbara Roper,
Director of Investor Protection, Consumer Federation of
America.
Mercer Bullard,
Executive Director, Fund Democracy.
____
Financial Planning Association,
Washington, DC, June 15, 2010.
Hon. Barney Frank, Chairman,
Hon. Spencer Bachus,
Ranking Member, Committee on Financial Services, House of
Representatives, Washington, DC.
Hon. Christopher J. Dodd, Chairman,
Hon. Richard C. Shelby,
Ranking Member, Committee on Banking, Housing and Urgan
Affairs, U.S. Senate, Washington, DC.
Dear Chairman Frank, Chairman Dodd, Ranking Member Bachus,
and Ranking Member Shelby: I am writing to oppose efforts to
strip the Securities and Exchange Commission (SEC) of
authority to oversee sales practices in connection with
indexed annuities that are marketed as investment products.
At a time when Congress is seeking ways to improve consumer
protections in the financial services sector, the Financial
Planning Association (FPA) believes it would be completely
inappropriate to preempt the SEC from exercising its existing
authority to protect consumers from well-documented abuses.
Indexed annuities have a minimum guaranteed return, but the
actual return will vary based on the performance of a
securities index, such as the S&P 500. FPA members are very
familiar with indexed annuities, with many financial planners
specializing in retirement planning and more than half of our
membership licensed to sell insurance and annuity products.
They may recommend annuities, including indexed annuities, as
an important component of a client's overall financial plan.
As with other financial products, however, proper oversight
is needed to help protect consumers from the few who would
take advantage of them. FPA urges you to reject any efforts
to strip the SEC of authority to protect purchasers of
indexed annuities in the same way they protect those who
purchase variable annuities.
In 2008, the SEC promulgated rules that would have brought
indexed annuities under the same sales practice standards as
variable annuities and other securities if they are marketed
as investment products. Applying a two part test in
accordance with Supreme Court precedent, the SEC sought to
exercise oversight based on the allocation of investment risk
between the insurance company and the customer, and on how
the annuity is marketed. Notably, the SEC left regulation of
the product itself to state insurance regulators and sought
to merely oversee sales practices when the insurer chooses to
market indexed annuities as an investment product.
FPA supported the SEC rule, as a measured and appropriate
move to address a very real problem (See comment letter at
www.fpanet.org/GovernmentRelations/). Opponents challenged
the rule in court arguing that the SEC lacked authority, but
the rule was vacated on other, technical grounds. Now they
are seeking to preempt the SEC from overseeing the sales
practices of these products, as it has effectively done so
for variable annuities.
But the calculus is simple: if a product is marketed and
sold as an investment product, and if the purchaser is
bearing a certain investment risk, applying standard investor
protections is common sense. Any issues particular to indexed
annuities can be addressed through the normal rulemaking and
comment process.
Consumer confidence and consumer protection are two of the
most important considerations as you deliberate over
important changes to our financial regulatory system. I urge
you to resist any attempts to handcuff the SEC before it has
even had an opportunity to bring its consumer protection
resources to bear in this area.
Thank you for your consideration. If you have any
questions, or if FPA can provide additional information,
please contact me.
Very truly yours,
Daniel J. Barry,
Director of Government Relations.
Mrs. LINCOLN. Mr. President, as I have previously discussed, section
737 of H.R. 4173 will grant broad authority to the Commodity Futures
Trading Commission to once and for all set aggregate position limits
across all markets on non-commercial market participants. During
consideration of this bill we all learned many valuable lessons about
how the commodities markets operate and the impact that highly
leveraged, and heretofore unregulated swaps, have on the price
discovery function in the futures markets. I believe the adoption of
aggregate position limits, along with greater transparency, will help
bring some normalcy back to our markets and reduce some of the
volatility we have witnessed over the last few years.
I also recognize that in setting these limits, regulators must
balance the needs of market participants, while at the same time
ensuring that our markets remain liquid so as to afford end-users and
producers of commodities the ability to hedge their commercial risk.
Along these lines I do believe that there is a legitimate role to be
played by market participants that are willing to enter into futures
positions opposite a commercial end-user or producer. Through this
process the markets gain additional liquidity and accurate price
discovery can be found for end-users and producers of commodities.
However, I still hold some reservations about these financial market
participants and the negative impact of excessive speculation or long
only positions on the commodities markets. While I have concerns about
the role these participants play in the markets, I do believe that
important distinctions in setting position limits on these participants
are warranted. In implementing section 737, I would encourage the CFTC
to give due consideration to trading activity that is unleveraged or
fully collateralized, solely exchange-traded, fully transparent,
clearinghouse guaranteed, and poses no systemic risk to the clearing
system. This type of trading activity is distinguishable from highly
leveraged swaps trading, which not only poses systemic risk absent the
proper safeguards that an exchange traded, cleared system provides, but
also may distort price discovery. Further, I
[[Page S5920]]
would encourage the CFTC to consider whether it is appropriate to
aggregate the positions of entities advised by the same advisor where
such entities have different and systematically determined investment
objectives.
I wish to also point out that section 719 of the conference report
calls for a study of position limits to be undertaken by the CFTC. In
conducting that study, it is my expectation that the CFTC will address
the soundness of prudential investing by pension funds, index funds and
other institutional investors in unleveraged indices of commodities
that may also serve to provide agricultural and other commodity
contracts with the necessary liquidity to assist in price discovery and
hedging for the commercial users of such contracts.
Mr. President, as the Chairman of the Senate Committee on
Agriculture, Nutrition and Forestry, I am proud to say that the bill
coming out of our committee was the base text for the derivatives title
in the Senate passed bill. The Senate passed bill's derivatives title
was the base text used by the conference committee. The conference
committee made changes to the derivatives title, adopting several
provisions from the House passed bill. The additional materials that I
am submitting today are primarily focused on the derivatives title of
the conference report. They are intended to provide clarifying
legislative history regarding certain provisions of the derivatives
title and how they are supposed to work together.
I ask unanimous consent that this material be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
The major components of the derivatives title include: 100
percent reporting of swaps and security-based swaps,
mandatory trading and clearing of standardized swaps and
security-based swaps, and real-time price reporting for all
swap transactions--those subject to mandatory trading and
clearing as well as those subject to the end user clearing
exemption and customized swaps. Swap dealers, security-based
swap dealers, major swap participants and major security-
based swap participants will all be required to register with
either the Commodity Futures Trading Commission, CFTC, or the
Securities and Exchange Commission, SEC, and meet additional
requirements including capital, margin, reporting,
examination, and business conduct requirements. All swaps
that are ``traded'' must be traded on either a designated
contract market or a swap execution facility. All security-
based swaps must be traded on either a national securities
exchange or a security-based swap execution facility. It is a
sea change for the $600 trillion swaps market. Swaps and
security-based swaps which are not subject to mandatory
exchange trading or clearing will be required to submit
transaction data to swap data repositories or security-based
swap data repositories. These new ``data repositories'' will
be required to register with the CFTC and SEC and be subject
to statutory duties and core principals which will assist the
CFTC and SEC in their oversight and market regulation
responsibilities.
There are several important definitional and jurisdictional
provisions in title VII. For instance, the new definitions of
``swap'' and ``security-based swap'' are designed to maintain
the existing Shad Johnson jurisdictional lines between the
CFTC and the SEC which have been in place since 1982. Under
the Shad Johnson accord, the CFTC has jurisdiction over
commodity-based instruments as well as futures and options on
broad-based security indices (and now swaps), while the SEC
has jurisdiction over security-based instruments--both single
name and narrow-based security indices--and now security-
based swaps. The Shad Johnson jurisdictional lines were
reaffirmed in 2000 with the passage of the Commodity Futures
Modernization Act, CFMA, as it related to security futures
products. Maintaining existing jurisdictional lines between
the two agencies was an important goal of the Administration,
as reflected in their draft legislation. This priority was
reflected in the bills passed out of the Senate and House
agricultural committees and through our respective chambers
and now reflected in the conference report.
As noted above, the conference report maintains the Shad
Johnson jurisdictional accord. We made it clear that the CFTC
has jurisdiction under Section 2(a)(1) of the Commodity
Exchange Act, ``CEA'', over both interest rate swaps and
foreign exchange swaps and forwards. The definition of
``swap'' under the CEA specifically lists interest rate swaps
as being a swap. This is CEA Section 1a(47)(A)(iii)(I). This
is appropriate as the CFTC has a long history of overseeing
interest rate futures. The futures exchanges have listed and
traded interest rate contracts for nearly 40 years. The CME
has listed for trading quarterly settled interest rate swap
future contracts. In the last 24 months, some designated
contract markets have listed futures contracts which mirror
interest rate swaps in design, function, maturity date and
all other material aspects. In addition, some of the CFTC
registered clearing houses have listed and started to clear
both these interest rate swap futures contracts as well as
interest rate swap contracts. This is on top of the nearly
$200 trillion in interest rate swap contracts which have
been cleared at LCH.Clearnet in London.
Also, under this legislation, foreign exchange swaps and
forwards come under the CFTC's jurisdiction under Section
2(a)(1) of the CEA. We listed in the definition of ``swap''
certain types of common swaps, including ``foreign exchange
swaps'' so it would be clear that they are regulated under
the CEA. See CEA Section 1a(47)(A)(iii)(VIII). In addition,
the terms ``foreign exchange forward'' and ``foreign exchange
swap'' are defined in the CEA itself. See CEA Section 1a(24)
and (25). One should note that foreign exchange forwards are
treated as swaps under the CEA.
The CEA as amended permits the Secretary of the Treasury to
make a written determination to exempt either or both foreign
exchange swaps and or foreign exchange forwards from the
mandatory trading and clearing requirements of the CEA, which
applies to swaps generally. Under new Section 1b of the CEA,
the Secretary must consider certain factors in determining
whether to exempt either foreign exchange swaps or foreign
exchange forwards from being treated like all other swaps.
These factors include: (1) whether the required trading and
clearing of foreign exchange swaps and foreign exchange
forwards would create systemic risk, lower transparency, or
threaten the financial stability of the United States; (2)
whether foreign exchange swaps and foreign exchange forwards
are already subject to a regulatory scheme that is materially
comparable to that established by this Act for other classes
of swaps; (3) the extent to which bank regulators of
participants in the foreign exchange market provide adequate
supervision, including capital and margin requirements; (4)
the extent of adequate payment and settlement systems; and
(5) the use of a potential exemption of foreign exchange
swaps and foreign exchange forwards to evade otherwise
applicable regulatory requirements. In making a written
determination to exempt such swaps from regulation, the
Secretary must make certain findings. The Secretary's written
determination is not effective until it is filed with the
appropriate Congressional Committees and provides the
following information: (1) an explanation regarding why
foreign exchange swaps and foreign exchange forwards are
qualitatively different from other classes of swaps in a way
that would make the foreign exchange swaps and foreign
exchange forwards ill-suited for regulation as swaps; and (2)
an identification of the objective differences of foreign
exchange swaps and foreign exchange forwards with respect to
standard swaps that warrant an exempted status. These
provisions and this process related to exempting foreign
exchange swaps and foreign exchange forwards from swaps
regulation will be, and should be, difficult for the
Secretary of the Treasury to meet. The foreign exchange swaps
and foreign exchange forward market is approximately $65
trillion and the second largest part of the swaps market. It
is important that the foreign exchange swaps market be
transparent as well as subject to comprehensive and vigorous
market oversight so there are no questions about possible
manipulation of currencies or exchange rates.
I would also note that we have made it clear that even if
foreign exchange swaps and forwards are exempted by the
Secretary of the Treasury from the mandatory trading and
clearing requirements which are applicable to standardized
swaps, that all foreign exchange swaps and forwards
transactions must be reported to a swap data repository under
the CFTC's jurisdiction. In addition, we have made it clear
that to the extent foreign exchange swaps and forwards are
listed for trading on a designated contract market or cleared
through a registered derivatives clearing organization that
such swap contracts are subject to the CFTC's jurisdiction
under the CEA and that the CFTC retains its jurisdiction over
retail foreign exchange transactions.
We have made some progress in this legislation with respect
to clarifying CFTC jurisdiction and preserving SEC
enforcement jurisdiction over instruments which are
``security-based swap agreements.'' Security-based swap
agreements are actually ``swaps'' and subject to both the
CFTC and the SEC's jurisdiction. One will notice that we have
inserted the definition of ``security-based swap agreements''
in both the Commodity Exchange Act and the Securities and
Exchange Act--section 1a(47)(A)(v) of the CEA (7 U.S.C.
1a(47)(A)(v)) and section 3(a)(78) of the SEA of 1934 (15
U.S.C. 78c(a)(78)). The term ``security-based swap
agreement'' is a hold-over term from the CFMA of 2000. In the
CFMA, Congress chose to exclude ``swap agreements'' from
regulation by the CFTC and ``security-based swap agreements''
from regulation by the SEC. While the CFMA exclusions were
broad, the SEC retained limited authority--anti fraud and
anti manipulation enforcement authority--with respect to
security-based swap agreements. The Agriculture Committee and
Congress chose to preserve that existing enforcement
jurisdiction of the SEC related to those swaps which
qualify as security-based swap agreements. The swaps which
will qualify as security-based swap agreements is quite
limited. It would appear that non narrow-based security
index swaps and credit default swaps may be
[[Page S5921]]
the only swaps considered to be security-based swap
agreements. The rationale for providing the SEC with
enforcement authority with respect to security-based swap
agreements in the CFMA was premised on the fact that the
CFTC didn't have as extensive an anti-fraud or anti-
manipulation authority as the SEC. This lack of CFTC
authority was remedied in the title VII so that the CFTC
now has the same authority as the SEC. It is good policy
to have a second set of enforcement eyes in this area. The
SEC can and should be able to back up the CFTC on
enforcement issues without interceding in the main market
and product regulation. In the new legislation, we repeal
the specific exclusions related to swap agreements and
security-based swap agreements in both the CEA and the
Securities Exchange Act of 1934, ``SEA''. One should note
that the definition of ``security-based swap agreement''
in the SEA specifically excludes any ``security-based
swap'', which means that SBSAs are really swaps. This
point is made clear in the definition of ``swap'' under
the CEA. Under Section 1a(47)(A)(v) it states that ``any
security-based swap agreement which meets the definition
of ``swap agreement'' as defined in Section 206A of the
Gramm-Leach-Bliley Act of which a material term is based
on the price, yield, value or volatility of any security,
or any group or index of securities, or any interest
therein.'' Regulators should note that Congress chose to
refer to security-based swap agreements as swaps at
several points in the CEA. Further, the CFTC and the SEC,
after consultation with the Federal Reserve, are to
undertake a joint rulemaking related to security-based
swap agreements. The regulators should follow
Congressional intent in this area and preserve the SEC's
anti-fraud and anti-manipulation enforcement authority for
that limited group of swaps which are considered to be
security-based swap agreements.
We have introduced a new term in this legislation, which is
``mixed swap''. The term is found in both the CEA and the
SEA--CEA Section 1a(47)(D) and SEA Section 3(a)(68)(D). The
term is subject to a joint rulemaking between the CFTC and
the SEC. The term ``mixed swap'' refers to those swaps which
have attributes of both security-based swaps and regular
swaps. A ``mixed swap'' is somewhat similar to a ``hybrid
product'' under the CEA which has attributes of both
securities and futures. CEA Section 2(f). Hybrid products
must be predominantly securities to be excluded from
regulation as contracts of sale of a commodity for future
delivery under the CEA. While there is no ``predominance'' or
``primarily'' test in the definition of ``mixed swap'' the
regulators should ensure that when deciding the
jurisdictional allocation of such mixed swaps in the joint
rulemaking process, that mixed swaps should be allocated to
either the CFTC or the SEC based on clear and unambiguous
criteria like a primarily test. A de minimis amount of
security-based swap attributes should not bring a swap into
the SEC's jurisdiction just as a de minimis amount of swap
attributes should not bring a security-based swap into the
CFTC's jurisdiction. While there will be some difficult
decisions to be made on individual swap contracts, it will be
fairly clear most of the time whether a particular swap is
more security-based swap or swap. We expect the regulators to
be reasonable in their joint rulemaking and interpretations.
The mandatory clearing and trading of certain swaps and
security-based swaps, along with real-time price reporting,
is at the heart of swaps market reform. Under the conference
report, swaps and security-based swaps determined to be
subject to the mandatory clearing requirement by the
regulators would also be required to be traded on a
designated contract market, a national securities exchange,
or new swap execution facilities or security-based swap
execution facilities. To avoid any conflict of interests, the
regulators--the CFTC and the SEC--will make a determination
as to what swaps must be cleared following certain statutory
factors. It is expected that the standardized, plain vanilla,
high volume swaps contracts--which according to the Treasury
Department are about 90 percent of the $600 trillion swaps
market--will be subject to mandatory clearing. Derivatives
clearing organizations and clearing agencies are required to
submit all swaps and security-based swaps for review and
mandatory clearing determination by regulators. It will also
be unlawful for any entity to enter into a swap without
submitting it for clearing if that swap has been determined
to be required to clear. It is our understanding that
approximately 1,200 swaps and security-based swaps contracts
are currently listed by CFTC-registered clearing houses and
SEC-registered clearing agencies for clearing. Under the
conference report, these 1,200 swaps and security-based swaps
already listed for clearing are deemed ``submitted'' to the
regulators for review upon the date of enactment. It is my
expectation that the regulators, who are already familiar
with these 1,200 swap and security-based swap contracts,
will work within the 90 day time frame they are provided
to identify which of the current 1,200 swap and security-
based swap agreements should be subject to mandatory
clearing requirements. The regulators may also identify
and review swaps and security-based swaps which are not
submitted for clearinghouse or clearing agency listing and
determine that they are or should be subject to mandatory
clearing requirement. This provision is considered to be
an important provision by senior members of the Senate
Agriculture Committee, as it removes the ability for the
clearinghouse or clearing agency to block a mandatory
clearing determination.
The conference report also contains an end user clearing
exemption. Under the conference report, end users have the
option, but not the obligation, to clear or not clear their
swaps and security-based swaps that have been determined to
be required to clear, as long as those swaps are being used
to hedge or mitigate commercial risk. This option is solely
the end users' right. If the end user opts to clear a swap,
the end user also has the right to choose the clearing house
where the swap will be cleared. Further, the end user has the
right, but not the obligation, to force clearing of any swap
or security-based swap which is listed for clearing by a
clearing house or clearing agency but which is not subject to
mandatory clearing requirement. Again the end user has the
right to choose the clearing house or clearing agency where
the swap or security-based swap will be cleared. The option
to clear is meant to empower end users and address the
disparity in market power between the end users and the swap
dealers. Under the conference report, certain specified
financial entities are prohibited from using the end user
clearing exemption. While most large financial entities are
not eligible to use the end user clearing exemption for
standardized swaps entered into with third parties, it would
appropriate for regulators to exempt from mandatory clearing
and trading inter affiliate swap transactions which are
between for wholly-owned affiliates of a financial entity. We
would further note that small financial entities, such as
banks, credit unions and farm credit institutions below $10
billion in assets--and possibly larger entities--will be
permitted to utilize the end user clearing exemption with
approval from the regulators. The conference report also
includes an anti-evasion provision which provides the CFTC
and SEC with authority to review and take action against
entities which abuse the end user clearing exemption.
In addition to the mandatory clearing and trading of swaps
discussed above, the conference report retains and expands
the Senate Agriculture Committee's real time swap transaction
and price reporting requirements. The Agriculture Committee
focused on swap market transparency while it was constructing
the derivatives title. As stated earlier, the conference
report requires 100% of all swaps transactions to be
reported. It was universally agreed that regulators should
have access to all swaps data in real time. On the other
hand, there was some outstanding questions regarding the
capacity, utility and benefits from public reporting of swaps
transaction and pricing data. I would like to respond to
those questions. Market participants--including exchanges,
contract markets, brokers, clearing houses and clearing
agencies--were consulted and affirmed that the existing
communications and data infrastructure for the swaps markets
could accommodate real time swap transaction and price
reporting. Speaking to the benefits of such a reporting
requirement, the committee could not ignore the experience of
the U.S. Securities and Futures markets. These markets have
had public disclosure of real time transaction and pricing
data for decades. We concluded that real time swap
transaction and price reporting will narrow swap bid/ask
spreads, make for a more efficient swaps market and benefit
consumers/counterparties overall. For these reasons, the
Senate Agriculture Committee required ``real time'' price
reporting for: (1) All swap transactions which are subject to
mandatory clearing requirement; (2) All swaps under the end
user clearing exemption which are not cleared but reported to
a swap data repository subject; and, (3) all swaps which
aren't subject to the mandatory clearing requirement but
which are cleared at a clearing house or clearing agency--
under permissive, as opposed to mandatory, clearing. The
conference report adopted this Senate approach with one
notable addition authored by Senator Reed. The Reed
amendment, which the conference adopted, extended real time
swap transaction and pricing data reporting to ``non-
standardized'' swaps which are reported to swap data
repositories and security-based swap data repositories.
Regulators are to ensure that the public reporting of swap
transactions and pricing data does not disclose the names or
identities of the parties to the transactions.
I would like to specifically note the treatment of ``block
trades'' or ``large notional'' swap transactions. Block
trades, which are transactions involving a very large number
of shares or dollar amount of a particular security or
commodity and which transactions could move the market
price for the security or contract, are very common in the
securities and futures markets. Block trades, which are
normally arranged privately, off exchange, are subject to
certain minimum size requirements and time delayed
reporting. Under the conference report, the regulators are
given authority to establish what constitutes a ``block
trade'' or ``large notional'' swap transaction for
particular contracts and commodities as well as an
appropriate time delay in reporting such transaction to
the public. The committee expects the regulators to
distinguish between different types of swaps based on the
commodity involved, size of the market, term of the
contract and liquidity in that contract and related
contracts, i.e; for instance the size/dollar amount of
what constitutes a
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block trade in 10-year interest rate swap, 2-year dollar/
euro swap, 5-year CDS, 3-year gold swap, or a 1-year
unleaded gasoline swap are all going to be different.
While we expect the regulators to distinguish between
particular contracts and markets, the guiding principal in
setting appropriate block-trade levels should be that the
vast majority of swap transactions should be exposed to
the public market through exchange trading. With respect
to delays in public reporting of block trades, we expect
the regulators to keep the reporting delays as short as
possible.
I firmly believe that taking the Senate bill language
improved the final conference report by strengthening the
regulators enforcement authority dramatically. The Senate
Agriculture Committee looked at existing enforcement
authority and tried to give the CFTC the authority which it
needs to police both the futures and swaps markets. As I
mentioned above, we provided the CFTC with anti-fraud and
anti-manipulation authority equal to that of the SEC with
respect to non narrow-based security index futures and swaps
so as to equalize the SEC and CFTC enforcement authority in
this area. The CFTC requested, and received, enforcement
authority with respect to insider trading, restitution
authority, and disruptive trading practices. In addition, we
added in anti-manipulation authority from my good friend
Senator Cantwell. Senator Cantwell and I were concerned with
swaps participants knowingly and intentionally avoiding the
mandatory clearing requirement. We were able to reach an
agreement with the other committees of jurisdiction by
providing additional enforcement authority that I believe
will address the root problem. Further, I would be remiss in
not mentioning that we provided specific enforcement
authority under Section 9 for the CFTC to bring actions
against persons who purposely evade the mandatory clearing
requirement. This provision is supposed to work together with
the anti-evasion provision in the clearing section. Another
important provision is one related to fraud and an episode
earlier this year involving Greece and the use of cross
currency swaps. We gave new authority to the CFTC to go after
persons who enter into a swap knowing that its counterparty
intends to use the swap for purposes of defrauding a third
party. This authority, which is meant to expand the CFTC's
existing aiding and abetting authority, should permit the
CFTC to bring actions against swap dealers and others who
assist their counterparties in perpetrating frauds on third
parties. All in all, the CFTC's enforcement authority was
expanded to meet known problems and fill existing holes. It
should give them the tools which are necessary to police this
market.
A significant issue which was fixed during conference was
clarifying that in most situations community banks aren't
swap dealers or major swap participants. The definition of
swap dealer was adjusted in a couple of respects so that a
community bank which is hedging its interest rate risk on its
loan portfolio would not be viewed as a Swap Dealer. In
addition, we made it clear that a bank that originates a loan
with a customer and offers a swap in connection with that
loan shouldn't be viewed as a swap dealer. It was never the
intention of the Senate Agriculture Committee to catch
community banks in either situation. We worked very hard to
make sure that this understanding came through in revised
statutory language which was worked out during conference.
There were some concerns expressed about banks being caught
up as being highly leveraged financial entities under prong
(iii) of the major swap participant definition. This concern
was addressed by adding language clarifying that if the
financial entity had a capital requirement set by a federal
banking regulator that it wouldn't be included in the
definition under that prong. This particular prong of the
major swap participant provision was intended to catch
entities like the hedge fund LTCM and AIG's financial
products subsidiary, not community banks. We also clarified
in Section 716 that banks which are major swap participants
are not subject to the federal assistance bans. These changes
and clarifications should ensure that community banks, when
acting as banks, are not caught by the swap dealer or major
swap participant definitions.
Section 716 and the ban on federal assistance to swap
entities is an incredibly important provision. It was agreed
by the administration, and accepted by the conference, that
under the revised Section 716, insured depository
institutions would be forced to ``push out'' the riskiest
swap activities into a separate affiliate. The swap dealer
activities which would have to be pushed out included: swaps
on equities, energy, agriculture, metal other than silver and
gold, non investment grade debt, uncleared credit default
swaps and other swaps that are not bank permissible
investments. We were assured by the administration that all
of the types of swaps enumerated above are not bank
permissible and will be subject to the push out. Further, it
is our understanding that no regulatory action,
interpretation or guidance will be issued or taken which
might turn such swaps into bank permissible investments or
activities.
It should also be noted that a mini-Volcker rule was
incorporated into Section 716 during the conference. Banks,
their affiliates and their bank holding companies would be
prohibited from engaging in proprietary trading in
derivatives. This provision would prohibit banks and bank
holding companies, or any affiliate, from proprietary trading
in swaps as well as other derivatives. This was an important
expansion and linking of the Lincoln Rule in Section 716 with
the Volcker Rule in Section 619 of Dodd-Frank.
Section 716's effective date is 2 years from the effective
date of the title, with the possibility of a 1 year extension
by the appropriate Federal banking agency. It should be noted
that the appropriate federal banking agencies should be
looking at the affected banks and evaluating the appropriate
length of time which a bank should receive in connection with
its ``push out.'' Under the revised Section 716, banks do not
have a ``right'' to 24 month phase-in for the push out of the
impermissible swap activities. The appropriate federal
banking agencies should be evaluating the particular banks
and their circumstances under the statutory factors to
determine the appropriate time frame for the push out.
The Senate Agriculture Committee bill revised and updated
several of the CEA definitions related to intermediaries such
as floor trader, floor broker, introducing broker, futures
commission merchant, commodity trading advisor, and commodity
pool operator as well as adding a statutory definition of the
term commodity pool. We note that the definition of futures
commission merchant is amended to include persons that are
registered as FCMs. This makes clear that such persons must
comply with the regulatory standards, including the capital
and customer funds protections that apply to FCMs. The Senate
Agriculture Committee wanted to ensure that all the
intermediary and other definitions were current and reflected
the activities and financial instruments which CFTC
registered and regulated entities would be advising on,
trading or holding, especially in light of Congress adding
swaps to the financial instruments over which the CFTC has
jurisdiction. We note that in addition to swaps, we added
other financial instruments such as security futures
products, leverage contracts, retail foreign exchange
contracts and retail commodity transactions which the CFTC
has jurisdiction over and which would require registration
where appropriate.
With respect to commodity trading advisors, CTAs, commodity
pool operators, CPOs, and commodity pools, we wanted to
provide clarity regarding the activities and jurisdiction
over these entities. Under Section 749 we have provided
additional clarity regarding what it means to be ``primarily
engaged'' in the business of being a commodity trading
advisor and being a commodity pool. To the extent an entity
is ``primarily engaged'' in advising on swaps, such as
interest rate swaps, foreign exchange swaps or broad-based
security index swaps, then it would be required to register
as a commodity trading advisor with the CFTC. On the other
hand, to the extent an entity is primarily engaged in
advising on security-based swaps it would be required
register as an investment adviser with the SEC or the states.
We would note that under existing law the CEA and the
Investment Advisers Act have mirror provisions which exempts
from dual registration and regulation SEC registered IAs and
CFTC registered CTAs as long as they only provide very
limited advice related to futures and securities,
respectively. This policy is continued and expanded to the
extent it now covers advice related to swaps and security-
based swaps.
With respect to commodity pools, the SEC has long
recognized that commodity pools are not investment companies
which are subject to registration or regulation under the
Investment Company Act of 1940. Alpha Delta Fund No Action
Letter (pub avail. May 4, 1976); Peavey Commodity Futures
Fund I, II and III No action letter (pub avail. June 2,
1983)); Managed Futures Association No Action Letter (Pub
Avail. July 15, 1996). To be an ``investment company'' under
Section 3(a) of the Investment Company Act an entity has to
be primarily engaged in the business of investing,
reinvesting, or trading securities. In the matter of the
Tonopah Mining Company of Nevada, 26 S.E.C. 426 (July 22,
1947) and SEC v. National Presto Industries, Inc., 486 F.3d
305 (7th Cir. 2007). Commodity pools are primarily engaged in
the business of investing, reinvesting or trading in
commodity interests, not securities. For this reason,
commodity pools are not investment companies and are not
utilizing an exemption under the Investment Company Act. A
recent and well know example of commodity pools which the SEC
has recognized as not being investment companies, and not
being required to register under the Investment Company Act,
comes in the commodity based exchange traded funds (ETF)
world. While recent ETFs based on gold, silver, oil, natural
gas and other commodities have registered their securities
under the 1933 and 1934 Acts and listed them on national
securities exchanges for trading, these funds, which are
commodity pools which are operated by CFTC registered
commodity pool operators, are not registered as investment
companies under the Investment Company Act of 1940. See the
Investment Company Institute 2010 Fact Book, Chapter 3. We
have clarified that commodity interests include not only
contracts of sale of a commodity for future delivery and
options on such contracts but would also include swaps,
security futures products, leverage contracts, retail foreign
exchange contracts, retail commodity transactions, physical
commodities and any funds held in a margin account for
trading such instruments. I am pleased that
[[Page S5923]]
the Conference Report includes these new provisions which
were in the bill passed out of the Senate Agriculture
Committee.
I would also note the importance of Section 769 and Section
770. These sections amend the Investment Company Act of 1940
and the Investment Advisers Act of 1940 so that certain terms
in the CEA are now incorporated into both of the 1940 Acts,
which are administered by the SEC. We believed it was
appropriate to incorporate these important definitions from
the CEA into the two 1940 Acts as it relates to advice on
futures and swaps, such as interest rate swaps and foreign
exchange swaps and forwards, as well as what constitutes
being a commodity pool and being primarily engaged in the
business of investing in commodity interests as distinguished
from being an investment company which is primarily engaged
in the business of investing, reinvesting, holding, trading
securities. I am pleased that the Conference Report includes
these new updated definitions as it should help clarify
jurisdictional and registration requirements.
Another extremely important issue which originated in the
Senate Agriculture Committee was imposing a fiduciary duty on
swap dealers when dealing with special entities, such as
municipalities, pension funds, endowments, and retirement
plans. The problems in this area, especially with respect to
municipalities and Jefferson County, Alabama in particular
are very well known. I would like to note that Senators
Harkin and Casey have been quite active in this area and
worked closely with me on this issue. While Senators Harkin,
Casey and I did not get everything which we were looking for,
we ended up with a very good product. First, there is a clear
fiduciary duty which swap dealers and major swap participants
must meet when acting as advisors to special entities. This
is a dramatic improvement over the House passed bill and
should help protect both tax payers and plan beneficiaries.
Further, we have expanded the business conduct standards
which swap dealers and major swap participants must follow
even when they are not acting as advisors to special
entities. I'd make a very important point, nothing in this
provision prohibits a swap dealer from entering into
transactions with special entities. Indeed, we believe it
will be quite common that swap dealers will both provide
advice and offer to enter into or enter into a swap with a
special entity. However, unlike the status quo, in this case,
the swap dealer would be subject to both the acting as
advisor and business conduct requirements under subsections
(h)(4) and (h)(5). These provisions will place tighter
requirements on swap entities that we believe will help to
prevent many of the abuses we have seen over the last few
years. Importantly, the CFTC and the SEC have the authority
to add to the statutory business conduct standards which swap
dealers and major swap participants must follow. We expect
the regulators to utilize this authority. Among other areas,
regulators should consider whether to impose business conduct
standards that would require swap dealers to further disclose
fees and compensation, ensure that swap dealers maintain
the confidentiality of hedging and portfolio information
provided by special entities, and prohibit swap dealers
from using information received from a special entity to
engage in trades that would take advantage of the special
entity's positions or strategies. These are very important
issues and should be addressed.
Section 713 clarifies the authority and means for the CFTC
and SEC to facilitate portfolio margining of futures
positions and securities positions together, subject to
account-specific programs. The agencies are required to
consult with each other to ensure that such transactions and
accounts are subject to ``comparable requirements to the
extent practicable for similar products.'' The term
``comparable'' in this provision does not mean ``identical.''
Rather, the term is intended to recognize the legal and
operational differences of the regulatory regimes governing
futures and securities accounts.
Title VII establishes a new process for the CFTC and SEC to
resolve the status of novel derivative products. In the past,
these types of novel and innovative products have gotten
caught up in protracted jurisdictional disputes between the
agencies, resulting in delays in bringing products to market
and placing U.S. firms and exchanges at a competitive
disadvantage to their overseas counterparts.
In their Joint Harmonization Report from October 2009, the
two agencies recommended legislation to provide legal
certainty with respect to novel derivative product listings,
either by a legal determination about the nature of a product
or through the use of the agencies' respective exemptive
authorities. Title VII includes provisions in Sections 717
and 718 to implement these recommendations.
It does so by establishing a process that requires public
accountability by ensuring that jurisdictional disputes are
resolved at the Commission rather than staff level, and
within a firm timeframe. Specifically, either agency can
request that the other one: 1) make a legal determination
whether a particular product is a security under SEC
jurisdiction or a futures contract or commodity option under
CFTC jurisdiction; or 2) grant an exemption with respect to
the product. An agency receiving such a request from the
other agency is to act on it within 120 days. Title VII also
provides for an expedited judicial review process for a legal
determination where the agency making the request disagrees
with the other's determination.
Title VII also includes amendments to existing law to
ensure that if either agency grants an exemption, the product
will be subject to the other's jurisdiction, so there will be
no regulatory gaps. For example, the Commodity Exchange Act
is amended to clarify that CFTC has jurisdiction over options
on securities and security indexes that are exempted by the
SEC. And Section 741 grants the CFTC insider trading
enforcement authority over futures, options on futures, and
swaps, on a group or index of securities.
We strongly urge the agencies to work together under these
new provisions to alleviate the ills that they themselves
have identified. The agencies should make liberal use of
their exemptive authorities to avoid spending taxpayer
resources on legal fights over whether these novel derivative
products are securities or futures, and to permit these
important new products to trade in either or both a CFTC- or
SEC-regulated environment.
Section 721 includes a broad and expansive definition of
the term ``swap'' that is subject to the new regulatory
regime established in Title VII. It also provides the CFTC
with the authority to further define the term ``swap'' (and
various other new terms in Title VII) in order to include
transactions and entities that have been structured to evade
these important new legal requirements. The CFTC must not
allow market participants to ``game the system'' by labeling
or structuring transactions that are swaps as another type of
instrument and then claim the instrument to be outside the
scope of the legislation that Congress has enacted.
Section 723 creates a ``Trade Execution Requirement'' in
new section 2(h)(8) of the Commodity Exchange Act (CEA).
Section 2(h)(8)(A) requires that swaps that are subject to
the mandatory clearing requirement under new CEA Section
2(h)(1) must be executed on either a designated contract
market or a swap execution facility. Section 2(h)(8)(B)
provides an exception to the Trade Execution Requirement if
the swap is subject to the commercial end-user exception to
the clearing requirement in CEA Section 2(h)(7), or if no
contract market or swap execution facility ``makes the swap
available to trade.'' This provision was included in the bill
as reported by the Senate Agriculture Committee and then in
the bill that was passed by the Senate.
In interpreting the phrase ``makes the swap available to
trade,'' it is intended that the CFTC should take a practical
rather than a formal or legalistic approach. Thus, in
determining whether a swap execution facility ``makes the
swap available to trade,'' the CFTC should evaluate not just
whether the swap execution facility permits the swap to be
traded on the facility, or identifies the swap as a candidate
for trading on the facility, but also whether, as a practical
matter, it is in fact possible to trade the swap on the
facility. The CFTC could consider, for example, whether there
is a minimum amount of liquidity such that the swap can
actually be traded on the facility. The mere ``listing'' of
the swap by a swap execution facility, in and of itself,
without a minimum amount of liquidity to make trading
possible, should not be sufficient to trigger the Trade
Execution Requirement.
Both Section 723 and Section 729 establish requirements
pertaining to the reporting of pre-enactment and post-
enactment swaps to swap data repositories or the CFTC. They
do so in new Sections 2(h)(5) and 4r(a) of the Commodity
Exchange Act, respectively, which provide generally that
swaps must be reported pursuant to such rules or regulations
as the CFTC prescribes. These provisions should be
interpreted as complementary to one another and to assure
consistency between them. This is particularly true with
respect to issues such as the effective dates of these
reporting requirements, the applicability of these provisions
to cleared and/or uncleared swaps, and their applicability--
or non-applicability--to swaps whose terms have expired at
the date of enactment.
Section 724 creates a segregation and bankruptcy regime for
cleared swaps that is intended to parallel the regime that
currently exists for futures. Section 724 requires any person
holding customer positions in cleared swaps at a derivatives
clearing organization to be registered as an FCM with the
CFTC. Section 724 does not require, and there is no intention
to require, swap dealers, major swap participants, or end
users to register as FCMs with the CFTC to the extent that
such entities hold collateral or margin which has been put up
by a counterparty of theirs in connection with a swap
transaction. In amending both the Commodity Exchange Act
(CEA) and the Bankruptcy Code to clarify that cleared swaps
are ``commodity contracts,'' Section 724 makes explicit what
had been left implicit under the Commodity Futures
Modernization Act of 2000. Specifically, we have clarified
that: 1) title 11, Chapter 7, Subchapter IV of the United
States Bankruptcy Code applies to cleared swaps to the same
extent that it applies to futures; and 2) the CFTC has the
same authority under Section 20 of the CEA to interpret such
provisions of the Bankruptcy Code with respect to cleared
swaps as it has with respect to futures contracts.
Section 731 prohibits a swap dealer or major swap
participant from permitting any associated person who is
subject to a statutory disqualification under the Commodity
Exchange Act (CEA) to effect or be involved in effecting
swaps on its behalf, if it knew or reasonably should have
known of the statutory disqualification. In order to
implement
[[Page S5924]]
this statutory disqualification provision, the CFTC may
require such associated persons to register with the CFTC
under such terms, and subject to such exceptions, as the CFTC
deems appropriate.
The term ``associated person of a swap dealer or major swap
participant'' is defined in Section 721 as a person who,
among other things, is involved in the ``solicitation'' or
``acceptance'' of swaps. These terms would also include the
negotiation of swaps.
Section 731 includes a new Section 4s(g) of the CEA to
impose requirements regarding the maintenance of daily
trading records on swap dealers and major swap participants.
To reflect advances in technology, CEA Section 4s(g)
expressly requires that these registrants maintain ``recorded
communications, including electronic mail, instant messages,
and recordings of telephone calls.'' Under current law,
Section 4g of the CEA governs the maintenance of daily
trading records by certain existing classes of CFTC
registrants, and is worded more generally and without
expressly mentioning the recorded communications enumerated
in CEA Section 4s(g). The enactment of this provision should
not be interpreted to mean or imply that the specifically-
identified types of recorded communications that must be
maintained by swap dealers and major swap participants under
CEA Section 4s(g) would be beyond the authority of the CFTC
to require of other registrants by rule under Section 4g.
Sections 733 and 735 establish a regime of core principles
to govern the operations of swap execution facilities and
designated contract markets, respectively. Certain of these
swap execution facility and designated contract market core
principles are identically worded. Given that swap execution
facilities will trade swaps exclusively, whereas designated
contract markets will be able to trade swaps or futures
contracts, we expect that the CFTC may interpret identically-
worded core principles differently where they apply to
different types of instruments or for different types of
trading facilities or platforms.
Section 737 amends Section 4a(a)(1) of the Commodity
Exchange Act (CEA) to authorize the CFTC to establish
position limits for ``swaps that perform or affect a
significant price discovery function with respect to
registered entities.'' Subsequent descriptions of the
significant price discovery function concept in Section 737,
though, refer to an impact on ``regulated markets'' or
``regulated entities.'' The term ``registered entity'' is
specifically defined in the CEA, and clearly includes
designated contract markets and swap execution facilities. By
contrast, the terms ``regulated markets'' and ``regulated
entities'' are not defined or used anywhere else in the CEA.
This different terminology is not intended to suggest a
substantive difference, and it is expected that the CFTC may
interpret the terms ``regulated markets'' and ``regulated
entities'' to mean ``registered entities'' as defined in the
statute for purposes of position limits under Section 737.
Section 737 also amends CEA Section 4a(a)(1) to authorize
the CFTC to establish position limits for ``swaps traded on
or subject to the rules of a designated contract market or a
swap execution facility, or swaps not traded on or subject to
the rules of a designated contract market or a swap execution
facility that performs a significant price discovery function
with respect to a registered entity.'' Later, Section 737
sets out additional provisions authorizing CFTC position
limits to reach swaps, but without utilizing this same
wording regarding swaps traded on or off designated contract
markets or swap execution facilities. The absence of this
wording is not intended to preclude the CFTC from applying
any of the position limit provisions in Section 737 in the
same manner with respect to DCM or SEF traded swaps as is
explicitly provided for in CEA Section 4a(a)(1).
Finally, Section 737 amends CEA Section 4a(a)(4) to
authorize the CFTC to establish position limits on swaps that
perform a significant price discovery function with respect
to regulated markets, including price linkage situations
where a swap relies on the daily or final settlement price of
a contract traded on a regulated market based upon the same
underlying commodity. Section 737 also amends CEA Section
4a(a)(5) to provide that the CFTC shall establish position
limits on swaps that are ``economically equivalent'' to
futures or options traded on designated contract markets. It
is intended that this ``economically equivalent'' provision
reaches swaps that link to a settlement price of a contract
on a designated contract market, without the CFTC having to
first make a determination that the swaps perform a
significant price discovery function.
Section 741, among other things, clarifies that the CFTC's
enforcement authority extends to accounts and pooled
investment vehicles that are offered for the purpose of
trading, or that trade, off-exchange contracts in foreign
currency involving retail customers. Thus, the CFTC may
bring an enforcement action for fraud in the offer and
sale of such managed or pooled foreign currency
investments or accounts. These provisions overrule an
adverse decision in the CFTC enforcement case of CFTC v.
White Pine Trust Corporation, 574 F.3d 1219 (9th Cir.
2009), which erected an inappropriate limitation on the
broad mandate that Congress has given the CFTC to protect
this country's retail customers from fraud.
Section 742 includes several important provisions to
enhance the protections afforded to customers in retail
commodity transactions, and I would like to highlight three
of them. First, Section 742 clarifies the prohibition on off-
exchange retail futures contracts that has been at the heart
of the Commodity Exchange Act (CEA) throughout its history.
In recent years, there have been instances of fraudsters
using what are known as ``rolling spot contracts'' with
retail customers in order to evade the CFTC's jurisdiction
over futures contracts. These contracts function just like
futures, but the court of appeals in the Zelener case (CFTC
v. Zelener, 373 F.3d 861 (7th Cir. 2004)), based on the
wording of the contract documents, held them to be spot
contracts outside of CFTC jurisdiction. The CFTC
Reauthorization Act of 2008, which was enacted as part of
that year's Farm Bill, clarified that such transactions in
foreign currency are subject to CFTC anti-fraud authority. It
left open the possibility, however, that such Zelener-type
contracts could still escape CFTC jurisdiction if used for
other commodities such as energy and metals.
Section 742 corrects this by extending the Farm Bill's
``Zelener fraud fix'' to retail off-exchange transactions in
all commodities. Further, a transaction with a retail
customer that meets the leverage and other requirements set
forth in Section 742 is subject not only to the anti-fraud
provisions of CEA Section 4b (which is the case for foreign
currency), but also to the on-exchange trading requirement of
CEA Section 4(a), ``as if'' the transaction was a futures
contract. As a result, such transactions are unlawful, and
may not be intermediated by any person, unless they are
conducted on or subject to the rules of a designated contract
market subject to the full array of regulatory requirements
applicable to on-exchange futures under the CEA. Retail off-
exchange transactions in foreign currency will continue to be
covered by the ``Zelener fraud fix'' enacted in the Farm
Bill; further, cash or spot contracts, forward contracts,
securities, and certain banking products are excluded from
this provision in Section 742, just as they were excluded in
the Farm Bill.
Second, Section 742 addresses the risk of regulatory
arbitrage with respect to retail foreign currency
transactions. Under the CEA, several types of regulated
entities can provide retail foreign currency trading
platforms--among them, broker-dealers, banks, futures
commission merchants, and the category of ``retail foreign
exchange dealers'' that was recognized by Congress in the
Farm Bill in 2008. Section 742 requires that the agencies
regulating these entities have comparable regulations in
place before their regulated entities are allowed to offer
retail foreign currency trading. This will ensure that all
domestic retail foreign currency trading is subject to
similar protections.
Finally, Section 742 also addresses a situation where
domestic retail foreign currency firms were apparently moving
their activities offshore in order to avoid regulations
required by the National Futures Association. It removes
foreign financial institutions as an acceptable counterparty
for off-exchange retail foreign currency transactions under
section 2(c) of the CEA. Foreign financial institutions
seeking to offer them to retail customers within the United
States will now have to offer such contracts through one of
the other legal mechanisms available under the CEA for
accessing U.S. retail customers.
Section 745 provides that in connection with the listing of
a swap for clearing by a derivatives clearing organization,
the CFTC shall determine, both the initial eligibility and
the continuing qualification of the DCO to clear the swap
under criteria determined by the CFTC, including the
financial integrity of the DCO. Thus, the CFTC has the
flexibility to impose terns or conditions that it determines
to be appropriate with regard to swaps that a DCO plans to
accept for clearing. No DCO may clear a swap absent a
determination by the CFTC that the DCO has proper risk
management processes in place and that the DCO's clearing
operation is in accordance with the Commodity Exchange Act
and the CFTC's regulations thereunder.
Section 753 adds a new anti-manipulation provision to the
Commodity Exchange Act (CEA) addressing fraud-based
manipulation, including manipulation by false reporting.
Importantly, this new enforcement authority being provided to
the CFTC supplements, and does not supplant, its existing
anti-manipulation authority for other types of manipulative
conduct. Nor does it negate or undermine any of the case law
that has developed construing the CEA's existing anti-
manipulation provisions.
The good faith mistake provision in Section 753 is an
affirmative defense. The burden of proof is on the person
asserting the good faith mistake defense to show that he or
she did not know or act in reckless disregard of the fact
that the report was false, misleading, or inaccurate.
Section 753 also re-formats CEA Section 6(c), which is
where the new anti-manipulation authority is placed, to make
it easier for courts and the public to use and understand.
Changes made to existing text as part of this re-formatting
were made to streamline or eliminate redundancies, not to
effect substantive changes to these provisions.
Title VIII of the legislation provides enhanced authorities
and procedures for those clearing organizations and
activities of financial institutions that have been
designated as systemically important by a super-majority of
the new Financial Stability Oversight Council. Title VIII
preserves
[[Page S5925]]
the authority of the CFTC and SEC as primary regulators of
clearinghouses and clearing activities within their
jurisdiction. Title VIII further expands the CFTC's and SEC's
authorities in prescribing risk management standards and
other regulations to govern designated clearing entities, and
financial institutions engaged in designated activities.
Similarly, Title VIII preserves and expands the CFTC's and
SEC's examination and enforcement authorities with respect to
designated entities within their respective jurisdictions.
Title VIII sets forth specific standards and procedures
that permit the Council, upon a supermajority vote of the
Council, and upon a determination that additional risk
management standards are necessary to prevent significant
risks to the stability of the financial system, to require
the CFTC or SEC to impose additional risk management
standards regarding designated financial market utilities or
financial institutions engaged in designated activities.
Thus, the authorities granted in Title VIII are intended to
be both additive and complementary to the authorities granted
to the CFTC and SEC in Title VII and to those agencies'
already existing legal authorities. The authority provided in
Title VIII to the CFTC and SEC with respect to designated
clearing entities and financial institutions engaged in
designated activities would not and is not intended to
displace the CFTC's and SEC's regulatory regime that would
apply to these institutions or activities.
Whereas Title VIII is specifically addressed to payment,
settlement, and clearing activities, Title I is addressed to
consolidated entity supervision of complex financial
institutions. Accordingly, to prevent coverage under two
separate regulatory schemes, clearing agencies and
derivatives clearing organizations are generally excepted
from Title I. Also excepted from Title I are national
exchanges, designated contract markets, swap execution
facilities and other enumerated entities.
Title X of the legislation, which establishes a new Bureau
of Consumer Financial Protection, maintains the supervisory,
enforcement, rulemaking and other authorities of the CFTC
over the persons it regulates. The legislation expressly
prohibits the new Bureau from exercising any powers with
respect to any persons regulated by the CFTC, to the extent
that the actions of those persons are subject to the
jurisdiction of the CFTC. It is not intended that Title X
would lead to overlapping supervision of such persons by the
Bureau. In this respect, the legislation is fully consistent
with the Treasury Department's White Paper on Financial
Regulatory Reform, which proposed the creation of an agency
``dedicated to protecting consumers in the financial products
and services markets, except for investment products and
services already regulated by the SEC or CFTC.'' (See
Treasury White Paper at 55-56 (June 17, 2009) (emphasis
added)).
Mr. DURBIN. Mr. President, I rise to speak about my interchange fee
amendment that was incorporated into the Dodd-Frank Wall Street Reform
and Consumer Protection Act. There are some important aspects of the
amendment that I want to clarify for the record.
First, it is important to note that while this amendment will bring
much-needed reform to the credit card and debit card industries, in no
way should enactment of this amendment be construed as preempting other
crucial steps that must be taken to bring competition and fairness to
those industries. For example, a key component of the Senate-passed
version of my amendment was a provision that would prohibit payment
card networks from blocking merchants from offering a discount for
customers who use a competing card network. This provision was
unfortunately left out of the final conference report, but the need for
this provision remains undiminished. It is blatantly anticompetitive
for one company to prohibit its customers from offering a discounted
price for a competitor's product, and I will continue to pursue steps
to end this practice.
Additionally, in no way should my amendment be construed as
preempting or superseding scrutiny of the credit card and debit card
industries under the antitrust laws. Section 6 of the Dodd-Frank act
conference report contains an antitrust savings clause which provides
that nothing in the act shall be construed to modify, impair, or
supersede the operation of any of the antitrust laws. I want to make
clear that nothing in my amendment is intended to modify, impair, or
supersede the operation of any of the antitrust laws, nor should my
amendment be construed as having that effect. Vigorous antitrust
scrutiny over the credit and debit card industries will continue to be
needed after enactment of the Dodd-Frank act, particularly in light of
the highly concentrated nature of those industries.
With respect to the new subsection 920(a) of the Electronic Fund
Transfer Act that would be created by my amendment, there are a few
issues that should be clarified. The core provisions of subsection (a)
are its grant of regulatory authority to the Federal Reserve Board over
debit interchange transaction fees, and its requirement that an
interchange transaction fee amount charged or received with respect to
an electronic debit transaction be reasonable and proportional to the
cost incurred by the issuer with respect to the transaction. Paragraph
(a)(4) makes clear that the cost to be considered by the Board in
conducting its reasonable and proportional analysis is the incremental
cost incurred by the issuer for its role in the authorization,
clearance, or settlement of a particular electronic debit transaction,
as opposed to other costs incurred by an issuer which are not specific
to the authorization, clearance, or settlement of a particular
electronic debit transaction.
Paragraph (5) of subsection (a) provides that the Federal Reserve
Board may allow for an adjustment of an interchange transaction fee
amount received by a particular issuer if the adjustment is reasonably
necessary to make allowance for the fraud prevention costs incurred by
the issuer seeking the adjustment in relation to its electronic debit
transactions, provided that the issuer has demonstrated compliance with
fraud-related standards established by the Board. The standards
established by the Board will ensure that any adjustments to the fee
shall be limited to reasonably necessary costs and shall take into
account fraud-related reimbursements that the issuer receives from
consumers, merchants, or networks. The standards shall also require
issuers that want an adjustment to their interchange fees to take
effective steps to reduce the occurrence of and costs from fraud in
electronic debit transactions, including through the development of
cost-effective fraud prevention technology.
It should be noted that any fraud prevention adjustment to the fee
amount would occur after the base calculation of the reasonable and
proportional interchange fee amount takes place, and fraud prevention
costs would not be considered as part of the incremental issuer costs
upon which the reasonable and proportional fee amount is based.
Further, any fraud prevention cost adjustment would be made on an
issuer-specific basis, as each issuer must individually demonstrate
that it complies with the standards established by the Board, and as
the adjustment would be limited to what is reasonably necessary to make
allowance for fraud prevention costs incurred by that particular
issuer. The fraud prevention adjustment provision in paragraph (a)(5)
is intended to apply to all electronic debit transactions, whether
authorization is based on signature, PIN or other means.
Paragraph (6) of subsection (a) exempts debit card issuers with
assets of less than $10 billion from interchange fee regulation. This
paragraph makes clear that for purposes of this exemption, the term
``issuer'' is limited to the person holding the asset account which is
debited, and thus does not count the assets of any agents of the
issuer. However, the affiliates of an issuer are counted for purposes
of the $10 billion exemption threshold, so if an issuer together with
its affiliates has assets of greater than $10 billion, then the issuer
does not fall within the exemption.
It should be noted that the intent of my amendment is not to diminish
competition in the debit issuance market. I will be watching closely to
ensure that the giant payment card networks Visa and MasterCard do not
collude with one another or with large financial institutions to take
steps to purposefully disadvantage small issuers in response to
enactment of this amendment.
Paragraph (7) of subsection (a) exempts from interchange fee
regulation electronic debit transactions involving debit cards or
prepaid cards that are provided to persons as part of a federal, state
or local government-administered payment program in which the person
uses the card to debit assets provided under the program. The Federal
Reserve Board will issue regulations to implement this provision, but
it is important to note that this exemption is only intended to apply
to
[[Page S5926]]
cards which can be used to transfer or debit assets that are provided
pursuant to the government-administered program. The exemption is not
intended to apply to multi-purpose cards that mingle the assets
provided pursuant to the government-administered program with other
assets, nor is it intended to apply to cards that can be used to debit
assets placed into an account by entities that are not participants in
the government-administered program.
The amendment would also create subsection 920(b) of the Electronic
Fund Transfer Act, which provides several restrictions on payment card
networks. Paragraphs (1), (2) and (3) of 920(b) are intended only to
serve as restrictions on payment card networks to prohibit them from
engaging in certain anticompetitive practices. These provisions are not
intended to preclude those who accept cards from engaging in any
discounting or other practices, nor should they be construed to
preclude contractual arrangements that deal with matters not covered by
these provisions. Further, nothing in these provisions should be
construed to mean that merchants can only provide a discount that is
exactly specified in the amendment. The provisions also should not be
read to confer any congressional blessing or approval of any other
particular contractual restrictions that payment card networks may
place on those who accept cards as payment. All these provisions say is
that Federal law now blocks payment card networks from engaging in
certain specific enumerated anti-competitive practices, and the
provisions describe precisely the boundaries over which payment card
networks cannot cross with respect to these specific practices.
Paragraph (b)(1) directs the Federal Reserve Board to prescribe
regulations providing that issuers and card networks shall not restrict
the number of networks on which an electronic debit transaction may be
processed to just one network, or to multiple networks that are all
affiliated with each other. It further directs the Board to issue
regulations providing that issuers and card networks shall not restrict
a person who accepts debit cards from directing the routing of
electronic debit transactions for processing over any network that may
process the transactions. This paragraph is intended to enable each and
every electronic debit transaction--no matter whether that transaction
is authorized by a signature, PIN, or otherwise--to be run over at
least two unaffiliated networks, and the Board's regulations should
ensure that networks or issuers do not try to evade the intent of this
amendment by having cards that may run on only two unaffiliated
networks where one of those networks is limited and cannot be used for
many types of transactions.
Paragraph (b)(2) provides that a payment card network shall not
inhibit the ability of any person to provide a discount or in-kind
incentive for payment by the use of a particular form of payment--cash,
checks, debit cards or credit cards--provided that discounts for debit
cards and credit cards do not differentiate on the basis of the issuer
or the card network, and provided that the discount is offered in a way
that complies with applicable Federal and State laws. This paragraph is
in no way intended to preclude the use by merchants of any other types
of discounts. It just makes clear that Federal law prohibits payment
card networks from inhibiting the offering of discounts which are for a
form of payment--for example, a 1-percent discount for payment by debit
card. This paragraph also provides that a network may not penalize a
person for the way that the person offers or discloses a discount to
customers, which will end the current practice whereby payment card
networks have regularly sought to penalize merchants for providing
cash, check or debit discounts that are fully in compliance with
applicable Federal and State laws.
Paragraph (b)(3) provides that a payment card network shall not
inhibit the ability of any person to set a minimum dollar value for
acceptance of credit cards, provided that the minimum does not
differentiate between issuers or card networks, and provided that the
minimum does not exceed $10. This paragraph authorizes the Board to
increase this dollar amount by regulation. The paragraph also provides
that card networks shall not inhibit the ability of a Federal agency or
an institution of higher education to set a maximum dollar value for
acceptance of credit cards, provided that the maximum does not
differentiate between issuers or card networks. As with the discounts,
this provision is not intended to preclude merchants, agencies or
higher education institutions from setting other types of minimums or
maximums by card or amount. It simply makes clear that payment card
networks must at least allow for the minimums and maximums described in
the provision.
Paragraph (b)(4) contains a rule of construction providing that
nothing in this subsection shall be construed to authorize any person
to discriminate between debit cards within a card network or to
discriminate between credit cards within a card network on the basis of
the issuer that issued the card. The intent of this rule of
construction is to make clear that nothing in this subsection should be
cited by any person as justification for the violation of contractual
agreements not to engage in the forms of discrimination cited in this
paragraph. This provision does not, however, prohibit such
discrimination as a matter of federal law, nor does it make any
statement regarding the legality of such discrimination. In addition,
this provision makes no statement as to whether a payment card
network's contractual rule preventing such discrimination would be
legal under the antitrust laws.
Finally, it should be noted that the payment card networks as defined
in the amendment are entities such as Visa, MasterCard, Discover, and
American Express that directly, or through licensed members, processors
or agents, provide the proprietary services, infrastructure and
software that route information to conduct credit and debit card
transaction authorization, clearance and settlement. The amendment does
not intend, for example, to define ATM operators or acquiring banks as
payment card networks unless those entities also operate card networks
as do Visa, MasterCard, Discover and American Express.
Overall, my amendment contains much needed reforms that will help
increase fairness, transparency and competition in the debit card and
credit card industries. More work remains to be done along these lines,
but this amendment represents an important first step, and I thank my
colleagues who have supported this effort.
Mr. KOHL. Mr. President, I rise to speak on the Wall Street Reform
and Consumer Protection Act which the Senate will pass today. After 2
years of work, the reckless practices of Wall Street firms that
resulted in terrible losses for people in Wisconsin and across the
nation will finally be ended.
These events showed us that maintaining the current regulatory system
is not an acceptable option. Wall Street needs accountability and
transparency to avoid future financial meltdowns. Congress has the duty
to ensure that this kind of failure never happens again. The Wall
Street Reform and Consumer Protection Act takes vital steps to end
``too big to fail,'' bring unregulated shadow markets into the light,
and make our financial system work better for everyone.
This bill has been thoroughly deliberated in both the House and the
Senate. The Banking Committee held more than 80 hearings since 2008 on
the financial crisis, addressing its causes, grave impacts and
potential remedies. These hearings explored all of the elements of this
legislation in detail, and also looked at the specific regulatory
failures that contributed to the crisis.
The information gathered at these hearings laid down the foundation
for the current bill. The bill was carefully debated and deliberated
while on the Senate floor for 3 weeks--almost as long as the debate on
health care reform.
After the bill passed in the House and the Senate it was then
negotiated by the Conference Committee. I was pleased with the
Conference Committee's ability to address Members' concerns in both
Chambers. The conference lasted 2 weeks and was televised and open to
the public for viewing. This all brought welcome transparency to the
legislative process.
Throughout the consideration of financial reform, I met with people,
banks and businesses in Wisconsin to better understand their needs so
that our businesses and families can be protected from future
recklessness. I have
[[Page S5927]]
worked hard to make sure that this bill protects Main Street and its
businesses by focusing on Wall Street--the source of this crisis.
I am proud to say that we now have a bill that will change our
regulatory system in a way that will prevent and mitigate future
crises. The bill will ensure that a Federal bailout will never again be
an option for irresponsible businesses. The bill creates a council of
regulators to monitor the economy for systemic threats. It will
institute new regulations on hedge funds and over-the-counter
derivatives and create a Bureau of Consumer Financial Protection that
will oversee mortgage, credit cards and other credit products.
Consumers will now have a single entity to report their concerns
about abusive financial practices, allowing regulators to address these
issues in a timelier manner--before more consumers are harmed. The bill
improves access to credit, increases protections and expands financial
education programs enabling consumers to make smart financial decisions
and reducing widespread predatory practices
In addition to providing consumers with adequate protections against
fraud and predatory practices, I also believe that consumers need
affordable alternatives to predatory lending products like pay day
loans. Senator Daniel Akaka shares this belief which is why we worked
together to draft title XII of this bill.
Title XII will help to improve the lives of the millions of low- and
moderate-income households in America that do not have access to
mainstream financial institutions by providing grants to community
development financial institutions so that they can give small dollar
loans at affordable terms to people who are currently limited to
riskier choices like payday loans. This grant making program will
dramatically help to increase the number of small dollar loan options
to consumers that need quick access to money so that they can pay for
emergency medical costs, car repairs and other items they need to
maintain their lives. This legislation is modeled in part after the
FDIC's Small Dollar Loan Pilot Program.
As chairman of the Judiciary Subcommittee on Antitrust, I am pleased
to see that this bill will preserve the ability of the Federal
antitrust agencies to protect competition and American consumers in the
financial services industries. The legislation includes a broad
antitrust savings clause that makes clear that nothing in the act will
modify, impair or supersede the operation of any of the antitrust laws.
It also includes more specific antitrust savings clauses in key
provisions, further ensuring the continued ability of the antitrust
agencies to fully enforce the relevant laws in these critical sectors
in our economy.In addition to strengthening the oversight of mergers
and acquisitions involving financial services firms, the bill
specifically maintains the ability of the antitrust agencies to perform
a thorough competition review of the transactions between these firms.
This robust merger review authority ensures that the Federal
antitrust agencies can continue to play their key role in protecting
competition and ensuring consumers have choices for financial services
and products at competitive rates and prices. Competition is the
cornerstone of our Nation's economy, and the antitrust laws ensure
strong competitive markets that make our economy strong and protect
consumers. This bill will ensure that the antitrust laws retain their
critical role in the financial services industry.
This bill is another step in a long process of financial overhaul.
The Wall Street Reform and Consumer Protection Act provides regulators
with flexibility to implement a number of new rules. They will have to
make decisions on issues ranging from determining fair charges on debit
card swipe fees to deciding when a risky firm should be taken over. We
need to make sure that our regulators have the tools and resources they
need to get the job done right. As a member of the Banking Committee, I
am going to keep a watchful eye on the regulators to make sure they are
given adequate resources and oversight to do the job that they have
been charged with.
Clearly we would not have this bill without the hard work and effort
of Senator Chris Dodd. It has been an honor to work with him and I hope
he is as proud of this great accomplishment as I am.
Finally I would like to take a moment to recognize the staff that
worked so hard on this bill. I would like to acknowledge the staff of
the Banking Committee for all of their exceptional work: including
Levon Bagramian, Julie Chon, Brian Filipowich, Amy Friend, Catherine
Galicia, Lynsey Graham Rea, Matthew Green, Marc Jarsulic, Mark
Jickling, Deborah Katz, Jonathan Miller, Misha Mintz-Roth, Dean
Shahinian, Ed Silverman, and Charles Yi.
I also express my appreciation for all of the work done by the
Legislative Assistants of the Banking Committee Members including Laura
Swanson, Kara Stein, Jonah Crane, Linda Jeng, Ellen Chube, Michael
Passante, Lee Drutman, Graham Steele, Alison O'Donnell, Hilary Swab,
Harry Stein, Karolina Arias, Nathan Steinwald, Andy Green, Brian Appel,
and Matt Pippin.
Mr. DODD. Mr. President, I would like to clarify the intent behind
one of the provisions in the conference report to accompany the
financial reform bill, H.R. 4173, the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010. Section 204(d) contemplates that the
FDIC, as receiver, may take a lien on assets of a covered financial
company or a covered subsidiary. With respect to assets of a covered
subsidiary that is an insurance company or a direct or indirect
subsidiary of an insurance company, I believe that the FDIC should
exercise such authority cautiously to avoid weakening the insurance
company and thereby undermining policyholder protection. Indeed, any
lien taken on the assets of a covered subsidiary that is an insurance
company or a direct or indirect subsidiary of an insurance company must
avoid weakening or undermining policyholder protection. As a result,
the FDIC should normally not take a lien on the assets of such a
covered subsidiary except where the FDIC sells the covered subsidiary
to a third party, provides financing in connection with the sale, and
takes a lien on the assets of the covered subsidiary to secure the
third party's repayment obligation to the FDIC. I understand that the
FDIC intends to promulgate regulations consistent with this view.
Mr. President, I would also like to clarify the intent behind another
of the provisions in the conference report to accompany the financial
reform bill, H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010. Section 1075 of the bill amends the Electronic
Fund Transfer Act to create a new section 920 regarding interchange
fees. This is a very complicated subject involving many different
stakeholders, including payment networks, issuing banks, acquiring
banks, merchants, and, of course, consumers. Section 1075 therefore is
also complicated, and I would like to make a clarification with regard
to that section.
Since interchange revenues are a major source of paying for the
administrative costs of prepaid cards used in connection with health
care and employee benefits programs such as FSAs, HSAs, HRAs, and
qualified transportation accounts--programs which are widely used by
both public and private sector employers and which are more expensive
to operate given substantiation and other regulatory requirements--we
do not wish to interfere with those arrangements in a way that could
lead to higher fees being imposed by administrators to make up for lost
revenue. That could directly raise health care costs, which would hurt
consumers and which, of course, is not at all what we wish to do.
Hence, we intend that prepaid cards associated with these types of
programs would be exempted within the language of section
920(a)(7)(A)(ii)(II) as well as from the prohibition on use of
exclusive networks under section 920(b)(1)(A).
Mr. President, I want to clarify a provision of the conference report
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R.
4173. Section 1012 sets forth the executive and administrative powers
of the Consumer Financial Protection Bureau, CFPB, and section
1012(c)(1)--Coordination with the Board of Governors--provides that
``Notwithstanding any other provision of law applicable to the
supervision or examination of persons with respect to Federal
[[Page S5928]]
consumer financial laws, the Board of Governors may delegate to the
Bureau the authorities to examine persons subject to the jurisdiction
of the Board of Governors for compliance with the Federal consumer
financial laws.'' This provision is not intended to override section
1026, which will continue to define the Bureau's examination and
enforcement authority over insured depository institutions and insured
credit unions with assets of less than $10 billion. The conferees
expect that the board will not delegate to the Bureau its authority to
examine insured depository institutions with assets of less than $10
billion.
Throughout the development of and debate on the Consumer Financial
Protection Bureau, CFPB, I have insisted that the legislation meet
three requirements--independent rule writing, independent examination
and enforcement authority, and independent funding for the CFPB. The
CFPB, as established by the conference report, meets each of those
requirements. I want to speak for a moment about section 1017, which
establishes the independent funding mechanism for the CFPB.
The conference report requires the Federal Reserve System to
automatically fund the CFPB based on the total operating expenses of
the system, using 2009 as the baseline. This will ensure that the CFPB
has the resources it needs to perform its functions without subjecting
it to annual congressional appropriations. The failure of the Congress
to provide the Office of Federal Housing Enterprises Oversight, OFHEO,
with a steady stream of independent funding outside the appropriations
process led to repeated interference with the operations of that
regulator. Even when there was not explicit interference, the threat of
congressional interference could very well have served to circumscribe
the actions OFHEO was willing to take. We did not want to repeat that
mistake in this legislation.
In addition, because many of the employees of the CFPB will come from
existing financial regulators, the conferees take the view that it is
important that the new entity have the resources to keep these high
quality staff and to attract new equally qualified staff, and to
provide them with the support that they need to operate effectively. To
that end, the conferees adopted the employment cost index for total
compensation of State and Federal employees, ECI, as the index by which
the funding baseline will be adjusted in the future. This index has
generally risen faster than the CPI, which was the index used in the
Senate bill. However, the ECI has typically risen at a more gradual
rate than the average operating costs of the banking regulators, which
was the index proposed by the House conferees.
In the end, the conferees agreed to use the ECI and provide for a
contingent authorization of appropriations of $200 million per year
through fiscal year 2014. In order to trigger this authorization, the
CFPB Director would have to report to the Appropriations Committees
that the CFPB's formula funding is not sufficient.
Section 1085 of the legislation adds the Consumer Financial
Protection Bureau, CFPB, to the list of agencies authorized to enforce
the Equal Credit Opportunity Act, ECOA--15 U.S.C. Sec. 1691c(a)(9). The
legislation also amends section 706(g)--15 U.S.C. Sec. 1691e(g)--to
require the CFPB to refer a matter to the Attorney General whenever the
CFPB has reason to believe that 1 or more creditors has engaged in a
``pattern or practice of discouraging or denying applications for
credit'' in violation of section 701, 15 U.S.C. Sec. 1691(a). The
general grant of civil litigation authority to the CFPB, in section
1054(a), should not be construed to override, in any way, the CFPB's
referral obligations under the ECOA.
The requirement in section 706(g) of the ECOA that the CFPB refer a
matter involving a pattern-or-practice violation of section 701, rather
than first filing its own pattern-or-practice action, furthers the
legislation's purpose of reducing fragmentation in consumer protection
and fair lending enforcement under the ECOA. The Attorney General, who
currently has authority under section 706(g) to file those pattern-or-
practice ECOA actions in court on behalf of the government, receives
such pattern-or-practice referrals from other agencies with ECOA
enforcement responsibilities and will continue to do so under the
legislation. By subjecting the CFPB to the same referral requirement,
the legislation intends to avoid creating fragmentation in this
enforcement system under the ECOA where none currently exists.
Title XIV creates a strong, new set of underwriting requirements for
residential mortgage loans. An important part of this new regime is the
creation of a safe harbor for certain loans made according to the
standards set out in the bill, and which will be detailed further in
forthcoming regulations. Loans that meet this standard, called
``qualified mortgages,'' will have the benefit of a presumption that
they are affordable to the borrowers.
Section 1411 explains the basis on which the regulator must establish
the standards lenders will use to determine the ability of borrowers to
repay their mortgages. Section 1412 provides that lenders that make
loans according to these standards would enjoy the rebuttable
presumption of the safe harbor for qualified mortgages established by
this section. These standards include the need to document a borrower's
income, among others. However, certain refinance loans, such as VA-
guaranteed mortgages refinanced under the VA Interest Rate Reduction
Loan Program or the FHA streamlined refinance program, which are rate-
term refinance loans and are not cash-out refinances, may be made
without fully reunderwriting the borrower, subject to certain
protections laid out in the legislation, while still remaining
qualified mortgages.
It is the conferees' intent that the Federal Reserve Board and the
CFPB use their rulemaking authority under the enumerated consumer
statutes and this legislation to extend this same benefit for
conventional streamlined refinance programs where the party making the
new loan already owns the credit risk. This will enable current
homeowners to take advantage of current low interest rates to refinance
their mortgages.
There are a number of provisions in title XIV for which there is not
a specified effective date other than what is provided in section
1400(c). It is the intention of the conferees that provisions in title
XIV that do not require regulations become effective no later than 18
months after the designated transfer date for the CFPB, as required by
section 1400(c). However, the conferees encourage the Federal Reserve
Board and the CFPB to act as expeditiously as possible to promulgate
regulations so that the provisions of title XIV are put into effect
sooner.
I would like to clarify that the conferees consider any program or
initiative that was announced before June 25 to have been initiated for
the purposes of section 1302 of the conference report. I also want to
make clear that the conferees do not intend for section 1302 to prevent
the Treasury Department from adjusting available resources that remain
after the adoption of the conference report among such existing
programs, based on effectiveness.
Mr. President, I also wish to explain some of the securities-related
changes that emerged from the conference committee in the conference
report.
The report amends section 408 to eliminate the blanket exemption for
private equity funds and replace it with an exemption for private fund
advisers with less than $150 million under management. The amendment
also requires the SEC in its rulemaking to impose registration and
examination procedures for such funds that reflect the level of
systemic risk posed by midsized private funds.
Section 913 has been amended to combine the principle of conducting a
study on the standard of care to investors in the Senate bill with a
grant of additional authority to the SEC to act, such as is contained
in the House-passed bill. The section requires the SEC to conduct a
study prior to taking action or conducting rulemaking in this area. The
study will include a review of the effectiveness of existing legal or
regulatory standards of care and whether there are regulatory gaps,
shortcomings or overlaps in legal or regulatory standards. Even if
there is an overlap or a gap, the Commission should not act unless
eliminating the overlap or filling a gap would improve investor
protection and is in the public interest. The study would require a
review of the effectiveness, frequency,
[[Page S5929]]
and duration of the regulatory examinations of brokers, dealers, and
investment advisers. In this review, the paramount issue is
effectiveness. If regulatory examinations are frequent or lengthy but
fail to identify significant misconduct--for example, examinations of
Bernard L. Madoff Investment Securities, LLC--they waste resources and
create an illusion of effective regulatory oversight that misleads the
public. The SEC, in studying potential impacts that would result from
changes to the regulation or standard of care, should seek to preserve
consumer access to products and services, including access for persons
in rural locations. In assessing the potential costs and benefits, the
SEC should take into account the net costs or the difference between
additional costs and additional benefits. For example, it should
consider not only higher transaction or advisory charges or fees but
also the return on investment if an investor receives better
recommendations that result in higher profits through paying higher
fees. After reporting to Congress, the SEC is required to consider the
findings, conclusions, and recommendations of its study.
New section 914 requires the SEC to study the need for enhanced
examination and enforcement ``resources.'' The study of resources
should not be limited to financial resources but should consider human
resources also. Human resources involves whether there is a need for
enhanced expertise, competence, and motivation to conduct examinations
that satisfactorily identify problems or misconduct in the regulated
entity. For example, if examinations fail to identify misconduct due to
insufficient staff expertise, competence, or motivation, the study
should conclude that there is a need for more effective staff or better
management rather than merely more financial resources devoted to
hiring additional staff of the same caliber.
New section 919D creates the SEC Ombudsman under the Office of the
Investor Advocate. The Ombudsman can act as a liaison between the
Commission and any retail investor in resolving problems that retail
investors may have with the Commission or with self-regulatory
organizations and to review and make recommendations regarding policies
and procedures to encourage persons to present questions to the
Investor Advocate regarding compliance with the securities laws. This
list of duties in subsection (8)(B) is not intended to be an exhaustive
list. For example, if the Investor Advocate assigns the Ombudsman
duties to act as a liaison with persons who have problems in dealing
with the Commission resulting from the regulatory activities of the
Commission, this would not be prohibited by this legislation.
Title IX, subtitle B creates many new powers for the SEC. The SEC is
expected to use these powers responsibly to better protect investors.
Section 922 has been amended to eliminate the right of a
whistleblower to appeal the amount of an award. While the whistleblower
cannot appeal the SEC's monetary award determination, this provision is
intended to limit the SEC's administrative burden and not to encourage
making small awards. The Congress intends that the SEC make awards that
are sufficiently robust to motivate potential whistleblowers to share
their information and to overcome the fear of risk of the loss of their
positions. Unless the whistleblowers come forward, the Federal
Government will not know about the frauds and misconduct.
In section 939B, the Report eliminated an exception so that credit
rating agencies will be subject to regulation FD. Under this change,
issuers would be required to disclose financial information to the
public when they give it to rating agencies.
In section 939F, the report requires the SEC to study the credit
rating process for structured finance products and the conflicts of
interest associated with the issuer-pay and the subscriber-pay models;
the feasibility of establishing a system in which a public or private
utility or a self-regulatory organization assigns nationally recognized
statistical rating organizations to determine the credit ratings of
structured finance products. The report directs the SEC to implement
the system for assigning credit ratings that was in the base text
unless it determines that an alternative system would better serve the
public interest and the protection of investors.
The report limits the exemption from risk retention requirements for
qualified residential mortgages, by specifying that the definition of
``qualified residential mortgage'' may be no broader than the
definition of ``qualified mortgage'' contained in section 1412 of the
report, which amends section 129C of the Truth in Lending Act. The
report contains the following technical errors: the reference to
``section 129C(c)(2)'' in subsection (e)(4)(C) of the new section 15G
of the Securities and Exchange Act, created by section 941 of the
report should read ``section 129C(b)(2).'' In addition, the references
to ``subsection'' in paragraphs (e)(4)(A) and (e)(5) of the newly
created section 15G should read ``section.'' We intend to correct these
in future legislation.
The report amended the say on pay provision in section 951 by adding
a shareholder vote on how frequently the compare should give
shareholders a ``say on pay'' vote. The shareholders will vote to have
it every 1, 2, or 3 years, and the issuer must allow them to have this
choice at least every 6 years. Also in section 951, the report required
issuers to give shareholders an advisory vote on any agreements, or
golden parachutes, that they make with their executive officers
regarding compensation the executives would receive upon completion of
an acquisition, merger, or sale of the company.
The report required Federal financial regulators to jointly write
rules requiring financial institutions such as banks, investment
advisers, and broker-dealers to disclose the structures of their
incentive-based compensation arrangements, to determine whether such
structures provide excessive compensation or could lead to material
losses at the financial institution and prohibiting types of incentive-
based payment arrangements that encourage inappropriate risks.
In section 952, the report exempted controlled companies, limited
partnerships, and certain other entities from requirements for an
independent compensation committee.
Section 962 provides for triennial reports on personnel management.
One item to be studied involves Commission actions regarding employees
who have failed to perform their duties, an issue that members raised
during the Banking Committee's hearing entitled ``Oversight of the
SEC's Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to
Improve SEC Performance,'' as well as circumstances under which the
Commission has issued to employees a notice of termination. The GAO is
directed to study how the Commission deals with employees who fail to
perform their duties as well as its fairness when they issue a notice
of termination. In the latter situation, they should consider specific
cases and circumstances, while preserving employee privacy. The SEC is
expected to cooperate in making data available to the GAO to perform
its studies.
In section 967, the report directs the SEC to hire an independent
consultant with expertise in organizational restructuring and the
capital markets to examine the SEC's internal operations, structure,
funding, relationship with self-regulatory organizations and other
entities and make recommendations. During the conference, some
conferees expressed concern about objectivity of a study undertaken by
the SEC itself. We are confident that the SEC will allow the
``independent consultant'' to work without censorship or inappropriate
influence and the final product will be objective and accurate.
The report also added section 968 which directs the GAO to study the
``revolving door'' at the SEC. The GAO will review the number of
employees who leave the SEC to work for financial institutions and
conflicts related to this situation.
The report removed the Senate provision on majority voting in
subtitle G which required a nominee for director who does not receive
the majority of shareholder votes in uncontested elections to resign
unless the remaining directors unanimously voted that it was in the
best interest of the company and shareholders not to accept the
resignation.
The report added the authority for the SEC to exempt an issuer or
class of issuers from proxy access rules written under section 971
after taking into account the burden on small issuers.
In section 975, the report added a requirement that the MSRB rules
require
[[Page S5930]]
municipal advisors to observe a fiduciary duty to the municipal
entities they advise.
In section 975, the report changed the requirement that a majority of
the board ``are not associated with any broker, dealer, municipal
securities dealer, or municipal advisor'' to a requirement that the
majority be ``independent of any municipal securities broker, municipal
securities dealer, or municipal advisor.''
In section 978, the report authorized the SEC to set up a system to
fund the Government Accounting Standards Board, the body which
establishes standards of State and local government accounting and
financial reporting.
The report added section 989F, a GAO Study of Person to Person
Lending, to recommend how this activity should be regulated.
The report added section 989G to exempt issuers with less than $75
million market capitalization from section 404(b) of the Sarbanes-Oxley
Act of 2002 which regulates companies' internal financial controls.
This section also adds an SEC study to determine how the Commission
could reduce the burden of complying with section 404(b) of the
Sarbanes-Oxle Act of 2002 for companies whose market capitalization is
between $75 million and $250 million for the relevant reporting period
while maintaining investor protections for such companies.
Section 989I adds a follow-up GAO study on the impact of the
Sarbanes-Oxley section 404(b) exemption in section 989G of this bill
involving the frequency of accounting restatements, cost of capital,
investor confidence in the integrity of financial statements and other
matters, so we can understand its effect.
The report added section 989J, which provides that fixed-index
annuities be regulated as insurance products, not as securities. This
provision clarifies a disagreement on the legal status of these
products.
In section 991, the report changed the method of funding for the SEC
so that it remains under the congressional appropriations process while
giving the SEC much more control over the amount of its funding. The
report also doubled the SEC authorization between 2010 and 2015, going
from $1.1 billion to $2.25 billion, which will provide tremendous
increase in SEC financial resources. These resources can be used to
improve technology and attract needed securities and managerial
expertise. However, the inspector general of the SEC and others have
reported on situations where SEC financial or human resources have not
been used effectively or with appropriate prior cost-benefit analysis.
While the SEC is receiving more resources, we expect that it will use
resources efficiently.
Mr. President, Senator Dorgan wishes to be heard, which pretty much
will end the debate. I will take a minute or so to conclude, and then
the votes will occur around 2 o'clock.
I ask unanimous consent that even though time may be expired, at
least 10 minutes be reserved for the minority to be heard.
The PRESIDING OFFICER. Without objection, it is so ordered.
The Senator from North Dakota.
Mr. DORGAN. Mr. President, I will vote for the conference report on
financial reform. Before I describe why I think it is essential to vote
in favor, let me compliment Senator Dodd. We have had some differences
on some issues, but that is not unusual. What is unusual is when a
piece of legislation this complicated, this consequential, and this
large gets to this point so we will have a final vote and it will go to
the President for signature. It is going to make a difference. It is
not all I would want. I would have written some of it differently. But
there are provisions in this legislation that will prevent that which
happened that nearly caused this country to have a complete economic
collapse. That was the purpose of writing the legislation.
This bill on financial reform establishes a new independent bureau,
housed at the Federal Reserve Board but not reporting to it, dedicated
to protecting consumers from abusive financial products and practices.
It puts in place systems to ensure taxpayer funds will not be used for
Wall Street bailouts in the future. It creates an advanced warning
system, looking out for troubled institutions to make sure we
understand who they are and where they are, those whose failure would
threaten financial markets and the economy. It imposes some curbs on
proprietary trading and hedge fund ownership by banks. There are a
number of things that are salutatory and important.
The vote this afternoon is a starting point, not an ending point. I
make the point by showing the headlines that exist in the newspapers
these days about the fact that there will be substantial amounts of
work done to try to curb activities even in the executive branch with
respect to rules and regulations which are now essential.
The PRESIDING OFFICER. The time under the control of the majority has
expired.
Mr. DORGAN. I ask the Senator from Connecticut, my understanding is
Republicans have 10 minutes. I began the process because the Republican
Senator was not here to claim that. I will be happy to cease at this
point, if he wishes to take his 10 minutes, and then complete my
statement, or I could complete my statement with more time.
Mr. DODD. How much more time would my colleague require?
Mr. DORGAN. Probably 7 more minutes or so.
Mr. DODD. I think it follows more naturally that way.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. DORGAN. I appreciate the courtesy of the Senator from Nebraska.
We all understand why this legislation is trying to prevent this from
ever happening again. I have shown this on the floor many times. This
was from a credit company called Zoom advertising mortgages. We ran up
to a near collapse of the economy with companies advertising this:
Credit approval is just seconds away. Get on the fast track at Zoom
Credit. At the speed of light, Zoom Credit will preapprove you for a
car loan, a home loan, a credit card, even if your credit is in the
tank.
Then it says: Zoom Credit is like money in the bank. We specialize in
credit repair and debt consolidation. Bankruptcy, slow credit, no
credit? Who cares?
We wonder how this country got in trouble. Today on the Internet this
exists. Nothing has changed. Speedy, bad credit loans. If you want to
get a loan, you have bad credit, go to the Internet to this site. I am
not advertising for them because clearly it is probably a bunch of
shylocks running this operation. Bad credit, no credit, bankruptcy, no
problem, no downpayment, no delays. Come to us, if you want money.
Unbelievable.
This is on the Internet today. It describes why we have to pass this
legislation and what we are trying to do to protect the American
consumer and why regulations that come from this are so important. Easy
loan for you. Instant approval. Regardless of your credit score or
history, approval is guaranteed.
This sort of nonsense is not good business. It is not a sensible way
to do things. It is what nearly bankrupted this country.
Wall Street Journal, July 14, let me read the first sentence: Shirley
Davis, 66 years old, retired phone company administrator, lives in
Brooklyn, NY, is more than $33,000 dollars in debt, earns $2,400 a
month, filed for bankruptcy last month. Shortly before that, she ripped
open an envelope from Capitol One Financial Corporation which pitched
her a credit card, even though it sued her 4 years ago to recover
$4,400 she owed on a different credit card from the same bank.
She is quoting now from the letter from Capital One:
At some point we lost you as a customer, and we would like
to get you back.
Mrs. Davis said she was stunned. ``Even I wouldn't give me a credit
card at this point.''
It is still going on. It is why passing this conference report is so
essential.
Would I have written it differently? Yes. I would have restored part
of Glass-Steagall. Ten years ago that was taken apart. Those
protections were put in place after the last Great Depression, and they
protected this country for 70 years or so. It should have been put back
together.
I would ban the trading of naked credit default swaps. That is
betting, not investing. I would have done that.
I would have imposed more aggressive curbs on proprietary trading by
[[Page S5931]]
banks. If the taxpayer has to underwrite you as a commercial bank, you
ought not have a casino atmosphere in your lobby.
Having said that, what was done in this legislation is a very
substantial beginning. It is not an ending, No. 1. No. 2, the
regulatory agencies now have to do a lot of work to make this bill
work, to make this bill effective, to stop what happened from ever
happening again.
Finally, I believe there will be an additional need to legislate in
the future to address some of the things I mentioned.
I believe the work done to get to this point in a Chamber in which it
is very difficult for us to accomplish anything is a success. I commend
my colleague, Senator Dodd from Connecticut, and others who worked on
this legislation in a thoughtful way to try to decide how we can stop
this sort of thing. We all understood it. We heard these things on the
radio and television. Massive loans, they would securitize them. They
would trade the securities back up in derivatives and credit default
swaps. Everybody was making money on all sides, but they were building
a house of cards that came down and nearly collapsed this entire
country's economy.
A lot of people, as I speak today, are still paying the price. They
got up this morning without a job, millions and millions of them. They
can't find work. They are the victims of this cesspool of greed we have
watched for far too long. This legislation has great merit in advancing
solutions to these issues. That is why I will vote yes. Is it perfect?
No. Is it an end point? No. It is a starting point in a process that is
very important.
I hope in the months ahead those who are charged with creating the
regulatory environment to fix this, to implement this legislation, will
get it right because they have the opportunity the way this is written
to get this right if they are smart and effective and want to protect
this country's economy.
Thanks to those who put this together. I intend to cast my vote as
yes.
I yield the floor.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Briefly, I thank my colleague from North Dakota. He has
been an outspoken advocate on behalf of working families in the time we
have served together. The concerns he has expressed consistently in
this process are ones I appreciate very much. We did have a couple of
disagreements over how to proceed, but that is the normal process of
doing business. It was done with civility during the debate and
consideration of the legislation. But I am deeply grateful to him for
his contributions and those of his staff. He made some good
suggestions, and I thank my friend.
The PRESIDING OFFICER. The Senator from Nebraska.
Mr. JOHANNS. Mr. President, I ask unanimous consent to speak for 10
minutes as in morning business.
The PRESIDING OFFICER. Without objection, it is so ordered.
(The remarks of Mr. JOHANNS pertaining to the introduction of S. 3593
are located in today's Record under ``Statements on Introduced Bills
and Joint Resolutions.'')
The PRESIDING OFFICER. The Senator from Michigan is recognized.
Mr. LEVIN. Mr. President, if there is no one on the minority side
waiting to speak, I ask unanimous consent that I be allowed to speak
for 4 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. LEVIN. Mr. President, for too long, too many firms on Wall Street
have had free rein to profit at the expense of their own clients, to
engage in the riskiest sorts of speculation, to prosper from their
risky bets when they pan out, and to have the taxpayers cover the
losses when they do not pan out. For too long, there has been no cop on
the beat on Wall Street.
That must end, and we can end it today by passing the Dodd-Frank
bill. The legislation before us will rebuild the firewall between the
worst high-risk excesses of Wall Street and the jobs and homes and
futures of ordinary Americans.
The Permanent Subcommittee on Investigations, which I chair, spent 18
months and held four hearings investigating the causes of the financial
crisis. The bill Senator Dodd and so many others have crafted will do
much to rein in the problems we identified in our four hearings and
during our investigation, and I greatly appreciate the recognition of
the role of our work on the subcommittee in Senator Dodd's remarks last
night.
This bill will prevent mortgage lenders such as Washington Mutual,
the subject of our first hearing, from making ``liar loans'' to
borrowers who cannot repay, from paying their salespeople more for
selling loans with higher interest rates, and from unloading all the
risk from their reckless loans on to the rest of the financial system.
This bill will dissolve the Office of Thrift Supervision, which
looked the other way despite abundant evidence of Washington Mutual's
abuses, as our second hearing showed.
This bill will bring new oversight and accountability to credit
rating agencies, which, as our third hearing showed, issued inaccurate
ratings that misled investors. Those ratings were paid for by the very
same companies that produced the products being rated, which is a clear
conflict of interest.
The bill before us will rein in the abusive practices of investment
banks such as Goldman Sachs, the subject of our fourth hearing. It will
sharply limit their risky proprietary trading. It will stop the
egregious conflicts of interest that result when these firms package
and sell investment products, often containing junk they want to
dispose of, and then make a bundle betting against those very same
products.
Those who claim this bill fails to rein in Wall Street cannot explain
the massive amounts of effort and money Wall Street has spent to defeat
this bill. If Wall Street likes this bill, it sure has a funny way of
showing it.
The evidence from our investigation and from so many other sources is
clear: We must put an officer back on the beat on Wall Street so the
jobs, homes, and futures of Americans are not again destroyed by
excessive greed. I commend Senator Dodd and his staff and all those who
have brought us to this historic moment. More than anything else, it is
the power of Senator Dodd's arguments and the deep respect for him
among the Members of this body that have brought us to the finish line.
I yield the floor.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, let me again say to my great friend, we have
served here a long time together, Senator Carl Levin of Michigan and I.
He does a remarkable job as chairman of the Armed Services Committee
and the Governmental Oversight Committee, which he also handles as
well.
I am not sure my colleague was here, but I pointed out yesterday that
the hearings the Senator held just prior--I am sure people think we
orchestrate all these things; we look more organized than we usually
are around here, but the fact is, the Senator from Michigan went off
and had planned the hearings for months. The amount of work he and his
staff did for months in preparation for those hearings threw a
tremendous amount of light and great clarity on the subject so that the
average citizen in this country could actually see--not just read
something but see--a moment occurring during those 2 days when the
exposure of what had occurred was so vivid and so clear. Then, frankly,
it was a matter of days after that when we were on the floor
considering the legislation.
As I said, I would love to tell people that was a highly organized
set of events. It was purely coincidental the way it occurred. Again,
those hearings that occurred publicly involved weeks and months of
preparation before they were actually conducted.
So I say to my friend from Michigan, I thank him immensely for his
work, for his contribution to this bill as well, not for just the set
of hearings but then working to include the provisions that are a part
of this legislation. The Senator has made a very valuable contribution
and has highlighted a very important point.
It was fascinating to me, by the way, as to the number of former
chief executive officers from major financial firms in the country who
strongly endorsed what the Senator was doing. This was not merely a
suggestion coming from consumer groups or labor organizations
[[Page S5932]]
or others that one might associate with the Senator's idea. But people
who literally had spent their careers in the financial services sector
were strongly recommending the contributions the Senator made to the
bill.
I do not think that was said often enough, that this was a
significant contribution endorsed by those who understood, had worked,
had earned livelihoods in this industry, who had watched an industry
change dramatically over the years which subjected this country to the
exposure that we are suffering from today.
So I thank my friend from Michigan.
The PRESIDING OFFICER. The Senator from Michigan.
Mr. LEVIN. Mr. President, I thank my dear friend from Connecticut. He
has made such an extraordinary contribution, not just to this bill but
to this Senate over the years. I cannot say enough about him, his
extraordinary integrity and passion that he brings to these subjects.
Senator Merkley, on the proprietary trading language, of course, as
the Senator from Connecticut has already recognized, is in the lead
there and has been an absolutely great partner and leader on that.
But I want to especially thank the Senator from Connecticut for his
passion and for his--and I was very serious about the respect with
which the Senator is held in this body. Without it, without that
feeling about the Senator, as well as the cause the Senator espouses
with others, obviously, we would not be where we are today.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, I thank my friend.
We are about to wrap up this long journey, now going back a long
ways.
Let me mention a couple things. First of all, yesterday I included
the names of the Senate Banking Committee staff who have made such a
difference in the bill. I am not going to go back over all their names.
They are arrayed in the Chamber. A couple of them are sitting next to
me on the floor. Others are in the back. They are led by Eddie
Silverman, who worked with me 20 years ago, as I arrived in the Senate.
He spent decades with me and then left Senate service and went off and
did other things in his life. At my request, he came back for the last
year or so to be a part of this effort. So I thank a great personal
friend, Eddie Silverman, for the job he did.
I thank Amy Friend, who was also deeply involved in this legislation.
If I start down the list, I am going to miss somebody. That is always a
danger. But I thank all of the Members for the tremendous work they
have contributed to this legislation.
I thank Harry Reid, the majority leader. Again, I know I have talked
about him on a couple of occasions. But if we do not have someone to
help bring this all together, it does not happen.
I see my colleague from the State of Washington. I do not know if she
cares to be heard. I was sort of filling in time for the next few
minutes.
Let me thank the Senator. She has been an advocate with great passion
on these issues. She brought a great deal of knowledge. She is someone
who has spent a career herself in the area of financial services and
understands this issue beyond just the intellectual and theoretical
standpoint but has lived it. She saw the successes of it and the
failures of it. So she brings a great wealth of information and ability
to the issue.
I yield to my colleague.
The PRESIDING OFFICER. The Senator from Washington.
Ms. CANTWELL. Mr. President, I thank the chairman for yielding time.
I thank the Senator for his diligence, particularly in the area of
the derivatives market and the fact that this legislation will be the
first time--the first time--the over-the-counter derivatives market in
this country will be regulated.
The fact that Congress made a mistake and said hands off to
derivatives in 2000, and then an $80 trillion market exploded into what
is today a $600 trillion dark market--the chairman has now made sure
that for the first time ever, over-the-counter derivatives will be
regulated. That means for the first time over-the-counter derivatives
will have to be exchange-traded, which means there will be
transparency. It is the first time over-the-counter derivatives will
have to be cleared, which means a third party will have to validate
whether there is real money behind these transactions.
It is the first time the CFTC will be able to enforce aggregate
position limits across all exchanges, which means you cannot hide this
dark market derivative money on some exchange that is not properly
regulated or try to make the market across all exchanges. It is the
first time things like the London Loophole will be closed so we cannot
have markets and exchanges that are not regulated. So the American
people will know something as dangerous as credit default swaps--which
brought down our economy--that now for the first time we will have
regulation of these over-the-counter derivatives.
I thank the chairman for his efforts in that area.
A $600 trillion market, which is greater than 10 times the size of
world GDP, is a danger to our economy if it is not regulated. Thank God
we are going to be regulating it for the first time. I would encourage
all my colleagues on the other side of the aisle, who at one point in
time said these are too complicated to understand--understand, they
brought down our economy and understand we are going to, for the first
time, regulate over-the-counter derivatives.
I thank the chairman for his leadership.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, I thank the Senator from Washington. Again,
I thank her for her contribution.
Mr. President, we have arrived at that moment. Let me make a
parliamentary inquiry. There are two votes, as I understand it. One is
on the waiver of the budget point of order, and the second vote that
will occur will be on adoption of the conference report. Is that
correct?
The PRESIDING OFFICER. The Senator is correct.
Mr. DODD. Mr. President, have the yeas and nays been ordered on the
waiver of the budget point of order?
The PRESIDING OFFICER. They have.
Mr. DODD. Have the yeas and nays been ordered on adoption of the
conference report?
The PRESIDING OFFICER. They have not.
Mr. DODD. Mr. President, I ask for the yeas and nays on the adoption
of the conference report.
The PRESIDING OFFICER? Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mr. DODD. Mr. President, in conclusion, I express my thanks to all. I
want to thank the floor staff as well, both on the minority and
majority side. We have spent a lot of time together over the last year,
and I am deeply grateful to them for the orderly way in which they
conduct their business and how fair and disciplined they are about
making sure the floor of the Senate runs so well. So I thank them
immensely for their work.
I urge my colleagues to waive the point of order and to support this
historic landmark piece of legislation that we hope will set our
country on a course of financial stability and success in the
generations to come.
I yield the floor.
The PRESIDING OFFICER. The question is on agreeing to the motion.
The yeas and nays have been ordered.
The clerk will call the roll.
The bill clerk called the roll.
The yeas and nays resulted--yeas 60, nays 39, as follows:
[Rollcall Vote No. 207 Leg.]
YEAS--60
Akaka
Baucus
Bayh
Begich
Bennet
Bingaman
Boxer
Brown (MA)
Brown (OH)
Burris
Cantwell
Cardin
Carper
Casey
Collins
Conrad
Dodd
Dorgan
Durbin
Feinstein
Franken
Gillibrand
Hagan
Harkin
Inouye
Johnson
Kaufman
Kerry
Klobuchar
Kohl
Landrieu
Lautenberg
Leahy
Levin
Lieberman
Lincoln
McCaskill
Menendez
Merkley
Mikulski
Murray
Nelson (NE)
Nelson (FL)
Pryor
Reed
Reid
Rockefeller
Sanders
Schumer
Shaheen
Snowe
Specter
Stabenow
Tester
Udall (CO)
Udall (NM)
Warner
Webb
Whitehouse
Wyden
NAYS--39
Alexander
Barrasso
Bennett
Bond
Brownback
Bunning
[[Page S5933]]
Burr
Chambliss
Coburn
Cochran
Corker
Cornyn
Crapo
DeMint
Ensign
Enzi
Feingold
Graham
Grassley
Gregg
Hatch
Hutchison
Inhofe
Isakson
Johanns
Kyl
LeMieux
Lugar
McCain
McConnell
Murkowski
Risch
Roberts
Sessions
Shelby
Thune
Vitter
Voinovich
Wicker
The PRESIDING OFFICER. On this vote, the yeas are 60, the nays are
39. Three-fifths of the Senators duly chosen and sworn having voted in
the affirmative, the motion is agreed to.
Mr. REID. Mr. President, I have been conferring off and on throughout
the day with the Republican leader. There will be no more votes today
following final passage. That will be the last vote today.
We are going to swear in the new Senator from West Virginia at 2:15
p.m. on Tuesday. Immediately after that, as soon as that is over, at
2:30, we will vote on extending unemployment benefits.
The Republican leader and I are working on a way to move forward on
small business. I think we have a pretty good path figured out on that.
After that, it is my intention to move to the supplemental
appropriations bill. It appears that we are going to have to have a
cloture vote. I think we can work out the time on that and not spend
too much time.
I have conferred with the Republican leader at the beginning of the
work period, on Monday. We have a list of things we need to accomplish
before we leave here. As everybody knows, we are going to be here
either 4 or 5 weeks. The leaders--Democrat and Republican--are betting
on 4 rather than 5 weeks. But we need cooperation to get that done.
The PRESIDING OFFICER. The question is on agreeing to the conference
report.
The yeas and nays having been ordered, the clerk will call the roll.
The legislative clerk called the roll.
The PRESIDING OFFICER. Are there any other Senators in the Chamber
desiring to vote?
The result was announced--yeas 60, nays 39, as follows:
[Rollcall Vote No. 208 Leg.]
YEAS--60
Akaka
Baucus
Bayh
Begich
Bennet
Bingaman
Boxer
Brown (MA)
Brown (OH)
Burris
Cantwell
Cardin
Carper
Casey
Collins
Conrad
Dodd
Dorgan
Durbin
Feinstein
Franken
Gillibrand
Hagan
Harkin
Inouye
Johnson
Kaufman
Kerry
Klobuchar
Kohl
Landrieu
Lautenberg
Leahy
Levin
Lieberman
Lincoln
McCaskill
Menendez
Merkley
Mikulski
Murray
Nelson (NE)
Nelson (FL)
Pryor
Reed
Reid
Rockefeller
Sanders
Schumer
Shaheen
Snowe
Specter
Stabenow
Tester
Udall (CO)
Udall (NM)
Warner
Webb
Whitehouse
Wyden
NAYS--39
Alexander
Barrasso
Bennett
Bond
Brownback
Bunning
Burr
Chambliss
Coburn
Cochran
Corker
Cornyn
Crapo
DeMint
Ensign
Enzi
Feingold
Graham
Grassley
Gregg
Hatch
Hutchison
Inhofe
Isakson
Johanns
Kyl
LeMieux
Lugar
McCain
McConnell
Murkowski
Risch
Roberts
Sessions
Shelby
Thune
Vitter
Voinovich
Wicker
The conference report was agreed to.
Mr. DODD. Mr. President, I move to reconsider the vote by which the
conference report was agreed to and to lay that motion on the table.
The motion to lay on the table was agreed to.
The PRESIDING OFFICER. The Senator from Pennsylvania is recognized
for 30 minutes.
____________________