Financial Reform Becomes a Reality

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By a 60-39 vote, the U.S. Senate has given financial reform (H.R. 4173) its seal of approval, setting the stage for President Obama to make broad, new financial rules regarding consumer protection, risky trading activities, and tougher regulations the law of the land.

The President is expected to sign the bill in a White House ceremony early next week.

The U.S. House of Representatives had already approved the bill June 28, but the bill stalled in the Senate after the death of strong reform advocate Sen. Robert Byrd (D-W.Va.), and the reluctance by some potential backers like Sen. Scott Brown (R-Mass.) and Sen. Olympia Snowe (R-Me.).

But both Brown and Snowe climbed on board this week, along with Democratic holdout Sen. Ben Nelson of Nebraska, and that was enough to give Sen. Harry Reid (D-Nev.) enough votes to push the financial reform bill over the top late Thursday.

"When this (economic) earthquake hit, there wasn't nearly enough oversight, transparency or accountability to shield us from the fallout," Reid said. "This law will strengthen all three."

The bill, more informally known as the Dodd-Frank bill, after co-sponsors Sen. Christopher Dodd (D-Conn.) and Sen. Barney Frank (D-Mass.), weighs in at a hefty 2,300 pages, complete with 533 new regulations, 60 studies and 94 reports.

The U.S. Chamber of Commerce points out that the Dodd-Frank bill is more than 30 times the size of the last big financial reform bill coming out of Congress – 2002’s Sarbanes-Oxley Act, which required 16 new regulations and six new studies.

“Once the legislation is signed, that still really is just the beginning,” said Wolters Kluwer Law & Business analyst Jim Hamilton. “Many of the provisions require the adoption of new regulations to fill in the detail of the legislative framework and create a mosaic of complete financial regulatory reform.”

While the meat-and-potatoes of the bill itself seemingly has something for everyone, the most significant changes include:

A new consumer protection agency. A new agency, called the Consumer Financial Protection Bureau, will act as an advocate for consumers dealing with financial services companies. The CFPB will be completely autonomous and will be independently funded, according to language in the Dodd-Frank bill. The agency will be housed inside the Federal Reserve and will have the power to write new rules on consumer lending and banking transactions.

Stricter rules on investment advice. The House and Senate bill went back and forth on the fiduciary trust issue, but the final bill does impose a fiduciary responsibility on brokers (financial advisers already operate under such rules) when they provide investment advice to consumers. The Securities and Exchange Commission will have supervisory oversight on the fiduciary issue to ensure that brokers act “in the best interest” of their customers.

Credit rating agency reform. H.R. 4173 also takes aim at credit ratings agencies with new rules that solidify regulatory oversight. The bill seeks to heighten ratings agency accountability and improve agency transparency.

Establishment of a new systemic risk regulator. The legislation would enact an early warning system by appointing a federal regulator to monitor investment firms' trading practices.

The creation of a new financial stability oversight council. A mish-mash of federal agencies, including the Federal Reserve, the Treasury and the SEC, will seek to keep tabs on any investment and financial risks that could compromise the U.S. economy. If the need arises, the council could urge more prudent standards for large financial institutions, and could even disband firms that posed a threat to the economy.

New lending rules. Both lenders and borrowers face new rule changes on consumer loans. Lenders will be restricted on what kinds of loans they can write and can no longer get paid extra for pushing borrowers to higher-cost loans. Borrowers face more stringent due diligence guidelines, including an end to those ubiquitous “no-doc” loans that gave credit to borrowers who didn’t have the financial bonafides to pay back the loan.

New rules on derivatives. The Dodd-Frank legislation would trigger the federal regulation of derivatives and shine a spotlight on what critics call a shady market for risky, largely unregulated investments. Under the new rules, federal regulators would get a closer look at derivative trades via a clearing mechanism supervised by the SEC. The agency would have the power to approve or reject derivatives contracts before they’re finalized.

Politically, there’s no telling how the new reform bill will play out with the U.S. public. According to an Ipsos Public Affairs poll released on Thursday, 38% of survey respondents had never heard of the bill, and 33% had heard of the bill, but didn’t know what was in it.

Those more in the loop aren’t any more enthusiastic. Peter Schiff, a financial adviser who predicted the economic downturn back in 2006, and who is a current GOP candidate for the U.S. Senate in Connecticut, said the bill “completely ignores the root causes of the 2008 financial crises,” which were “artificially low interest rates provided by the Fed and government guaranteed mortgages.”

But with the votes counted, and HR 4173 a reality, there’s little doubt that the U.S. financial landscape has just shifted. And both Wall Street and Main Street will be feeling the aftershocks for years to come.

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