The landmark overhaul of Wall Street agreed to by Senate and House conferees early Friday morning would enact sweeping new rules on banks and other financial institutions.
Congress is expected to vote on the legislation next week, and President Barack Obama hopes to sign it by the July Fourth holiday.
The 2,000-page bill aims to prevent taxpayer-funded bailouts that followed the financial crisis of 2008-2009. It would revamp regulation of mortgages, credit cards, broad financial system risks and the $600 trillion derivatives market.
Here’s a look at the bill’s major provisions:
Lawmakers agreed on wide-ranging new restrictions on the $600 trillion derivatives market in an effort to make the complicated financial products more transparent.
On the bill’s most controversial provision — backed by Sen. Blanche Lincoln (D-Ark.) — House and Senate members agreed to restrict derivatives trading by requiring bank holding companies to spin off riskier types of derivatives into separate affiliates that would not receive federal taxpayer assistance.
But they also allowed several exceptions. Banks may continue trading in markets for interest rates, foreign exchanges, gold and silver and some forms of credit default derivatives. They may also continue trading derivatives for “risk-mitigating” purposes for their own companies.
The measure’s restrictions would apply to new derivatives contracts entered into after a two-year phase-in process.
The change will affect some of the biggest banks on Wall Street. Commercial banks took in $23 billion in revenue on derivatives trading in 2009.
Named after former Federal Reserve Chairman Paul Volcker, the provision seeks to limit proprietary trading at big financial firms and to restrict bank sponsorship of hedge funds and private equity firms. Volcker pushed hard for a provision to limit excessive and speculative risks on Wall Street; Democratic Sens. Carl Levin (Mich.) and Jeff Merkley (Ore.) then pushed to spell out the restrictions more explicitly in the legislation.
The conference committee changed the language to provide more specific limits on proprietary trading, distinguish some forms of hedging from other derivatives trading and to provide explicit conditions for insurers, which are often organized as bank holding companies, to conduct trading normally used for their businesses.
The new form of the rule also allows banks to invest in hedge funds and private equity funds, but would limit these investments to no more than 3 percent of a firm’s Tier I Capital. Volcker had opposed a small allowance for bank sponsorship of funds.
Consumer protection office
The legislation creates a major new consumer protection regulatory bureau that will be housed in the Federal Reserve. It would have power to write and enforce rules over mortgages, credit cards and other types of financial products. The office will have full consumer protection powers over banks and credit unions with at least $10 billion in assets.
Auto dealers lobbied hard and won an exemption from the new consumer protection office. Dealers argued they already fall under a series of state and federal regulations.
At the root of the Wall Street overhaul bill is an effort to prevent future taxpayer-funded bailouts of financial firms. The bill sets up a new system whereby the Federal Deposit Insurance Corporation may unwind large financial firms.
Earlier versions of the legislation required the financial industry to pay into a fund to cover the costs of big firms failing in the future. The House version had included a $150 billion fund. The conference committee removed the fund in favor of language agreed to in the Senate that favors a bankruptcy-like process as the default way of dealing with large failures.
Systemic risk council
The legislation directs a new council of financial regulators to keep an eye on broad risks to the financial system. The 2008 financial crisis exposed firms’ ability to shop around weak links in the nation’s regulatory system, a process known as “regulatory arbitrage.”
Federal Reserve audit
Lawmakers passed tougher new auditing powers over the central bank, which committed trillions of dollars during the worst of the financial crisis. Rep. Ron Paul (R-Texas) and scores of Republican and Democratic lawmakers failed in their effort to require government audits of the Fed’s monetary policies. The Fed and Obama administration argued that such a move would compromise the independence of the central bank and hurt the private market’s confidence in the bank to set interest rates free of political considerations.
Lawmakers bridged House and Senate differences on the issue of whether to extend a fiduciary duty to broker-dealers and insurance agents. A fiduciary duty is a responsibility to act in a client’s best financial interests. Under the agreement, the SEC must conduct a study of proposed new rules and may pursue new rules on the issue. If the commission decided to write new rules, it must take into account the results of the study.
The conference agreed to new requirements for lenders to retain part of the risk in the loans that they issue. The “skin in the game” provision aims to discourage lenders from writing risky loans and then passing the risk on entirely. Some high-quality mortgages would be exempt under the new rules.
The legislation would direct the Federal Reserve to set “reasonable and proportional” fees paid by merchants and retailers to banks and credit unions that issue debit cards.
Banks and retailers lobbied against one another on the provision, and its inclusion is a big win for retailers, which may end up paying lower fees to banks on credit card swipes. Senate Majority Whip Dick Durbin (D-Ill.) was the measure’s main sponsor.
Hedge funds and private equity funds
The conference agreed to new SEC registration and reporting requirements for hedge funds and private equity funds with at least $150 million in assets under management. Venture capital funds will not face the same requirements.
The conference committee exempted a certain type of annuity, equity-indexed annuities, from Securities and Exchange Commission (SEC) regulation. Financial companies that offer the annuities lobbied hard for the exemption from an SEC ruling that treated the products as securities. The companies argued that the annuities are insurance products and should be regulated at the state level.
Consumer advocacy groups, financial planners and the SEC opposed the change.
Big banks and hedge funds will be hit with fees of up to $19 billion to cover the costs of the overhaul. The fee would be collected by the Federal Deposit Insurance Corporation and be placed in an account at the Treasury Department. The money would be held for 25 years and then could be used only to offset the debt.