Both the Senate and the House have passed different financial reform bills (HR 4173 and S 3217). Now, the bills are being sent to a bipartisan conference committee for reconciliation. At this point, ATR has identified twelve major differences remaining between the two bills:

  • Corporate Governance

    • House: Shareholders get non-binding vote on executive pay; corporate directors set compensation policy; requires all institutions with $1bn or more in assets to disclose the structure of all incentive-based compensation to regulators (HR 4173 §2002-2004)
    • Senate: Shareholders get non-binding vote on executive pay; includes “Clawback” provision in which executives would give back compensation based on inaccurate financial statements; gives the SEC the authority to offer shareholders proxy access to nominate directors (S 3217 §951-957, S 3217 §971-973)

The new SEC powers allow regulators to play favorites in selectively permitting shareholders to appoint directors via a proxy vote and could politicize the corporate selection process.

  • Proprietary Trading

    • House: Does not ban proprietary trading (Volcker Rule was proposed after House passed its bill)
    • Senate: Includes a version of the so-called Volcker Rule, which would prevent banks from making investments with their own money for their own profit, but regulators will first study such trading before restricting it (S AMDT. 3931)

According to the Wall Street Journal, “Mr. Frank’s vocal support for the Volcker Rule increases the chances it will likely be incorporated into the final legislative package, which could be signed into law by July 4.” While this will decrease the risk present in the system, it likewise decreases the profitability of financial services companies for their shareholders.

  • Too Big to Fail

    • House: Creates a $150 billion fund of levies on largest financial firms to cover costs of firms' failures; creates 11-member Financial Stability Council, made up of existing regulators that will oversee the financial system; includes a provision that would empower the government to force any bank to stop certain practices, or even divest certain operations, if regulators fear there is a risk posed to the broader economy. (HR 4173 §1001-1110)
    • Senate: Costs for failed firms would be pooled to largest firms after a failure; large, failing firms can be liquidated in a process similar to that used by FDIC to seize a failing bank; creates 9-member Financial Stability Council made up of existing regulators to oversee the financial system and recommend to the Fed new rules to govern complex firms to ensure their stability (S 3217 §111-121, S 3217 §202-211, S.AMDT.3737)

The House provision allowing this committee of bureaucrats to stop any business practices that it deems unfit represents an unnecessary intrusion into the market. If investors are willing to tolerate a risk, then government should allow them to assume that risk.

  • Derivatives

    • House: Most derivatives must be traded and cleared through exchanges and monitored by the SEC and CFTC with wide exemptions for end-users. (HR 4173 §3110, HR 4173 §3201-3210)
    • Senate: Mandates exchange trading and clearing for most derivatives, with a limited end-user exemption; forces federally-insured banks to spin-off their swaps desks at a cost of billions in lost revenue and cease trading derivatives (S 3217 §712-733, S AMDT. 3739.)

As Mike Cavanagh, chief financial officer of JPMorgan Chase, explains, “The net result is going to be a shift in the competitive balance in favor of international banks and unregulated entities, which would be very detrimental to the U.S. banking system and economy.” Likewise, the bill decreases the profitability of U.S. firms relative to foreign competition, and it would not have averted the mortgage collapse. Plus, Blanche Lincoln’s (D–Ark.) amendment to require spinoffs would slash profits radically and push capital offshore while preventing domestic firms from hedging risk, and it likely will not make it to the final bill. Mr. Frank said, “I don't see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply to derivatives as well as everything else.”

  • Federal Reserve

    • House: Allows GAO audits of the Fed; Fed is prevented from injecting money into financial institutions; Fed loses consumer protection oversight (HR 4173 §1008)
    • Senate: Allows one-time GAO audit of the Fed; Fed retains oversight over smaller, regional banks; Fed can break apart large companies that pose a threat to the financial system (S 3217 §1151-1158)

Given that the metric for whether a firm “poses a threat to the financial system” is inherently vague, this expansion of power from the Senate bill could easily be used to pursue a political agenda.

  • Consumer Protection

    • House: Creates a new Consumer Financial Protection Agency (CFPA) consolidated from seven other agencies, with an independent director and budget; gives the CFPA full rule-writing authority; excludes auto dealers, accountants, and real estate agents, among others, from oversight (HR 4173 §4101-4410)
    • Senate: Creates a Bureau of Consumer Financial Protection consolidated from seven other agencies, placed inside the Federal Reserve, with an independent director and budget whose rules could be vetoed by a two-thirds vote of a council of bank regulators; excludes small businesses that do not engage in financial activities from oversight (S 3217 §1011-1029)

Regarding having the new bureau of oversight in the Fed, Frank asserts that “the Fed feels it’s like, you know, having your ex-wife’s brother living in the house after you got a divorce.” Besides, as the Senate bill put the agency in the Fed to win over Sen. Bob Corker (R-Tenn.), and as he’s already voted no, Frank predicted, “You’ll have an independent CFPA.” But, as POLITICO reports,  “Republicans charge that a sprawling new agency could reach into mom-and-pop businesses that give credit to customers and will certainly play up small-business opposition to the agency.” In short, the new agency would cost more taxpayer dollars, impede small business owners with compliance and regulation requirements, and do little more than is done by today’s agencies.

  • Debit Card

    • House: No changes to present law
    • Senate: Aims to rein in fees placed on debit cards by issuing rules on the fees that merchants pay; grants oversight on essentially all banking transactions with no stated use of the information. (S AMDT. 3989)

The Hill reported that “[Sen.] Durbin [passed] legislation that requires the Federal Reserve to issue rules on swipe fees for debit cards to ensure fees are ‘responsible and proportional’ to processing costs. The legislation does not ban swipe card fees. Durbin had won strong backing from merchant and retail groups. Durbin said the restrictions would not apply to banks and credit unions with $10 billion or less in assets.” ATR believes that it is not the role or responsibility of the government to intervene in what should be a private contractual relationship between retailers and merchant card transactors. Additional privacy concerns surrounding the collecting of all banking transactions remain problematic.

  • Pre-empting State Law

    • House: Does not preempt state law, but instead allows states to put in place protections that are stronger than those at the federal level; forces regulators to examine and preempt state law on a case-by-case basis. (HR 4173 §4404)
    • Senate: Increases the federal government’s ability to prevent states from adopting and enforcing their own, tougher standards on federally-regulated banks. (S 3217 §1041-1047, S AMDT. 4071)

According to Think Progress, “during the buildup of the housing bubble, several states attempted to police predatory subprime lending. However, they were repeatedly preempted by federal bank regulators. In one instance, state regulators in Illinois tried to go after a subprime lending subsidiary of Wells Fargo, but “the company quickly reshuffled its legal paperwork and moved the offending sub-company under its nationally chartered bank,’ exempting it from Illinois law.” And, “The history of the economic crisis shows that this would be a big mistake. And in case [this group of Senators] needs more evidence, it can look at these two studies from the University of North Carolina’s Center for Community Capital.” Moreover, notice that the Senator from Delaware, the banking state, proposed this amendment; it does nothing but harm consumers.

  • Capital Reserves

    • House: No change
    • Senate: Forces banks with more than $250 billion in assets to meet higher, unspecified, capital requirements (S.AMDT.3879)

As Think Progress reports, “while not directly laying out new capital requirements, Collins’ amendment sets a minimum, ensuring that there is some statutory requirement that regulators can’t be talked into dismissing.” But, “officials from the Treasury Department, Federal Reserve and Wall Street are working to kill it. This could also potentially complicate international negotiations on banking rules. The amendment, [backed by FDIC Chairman] Sheila Bair, would force banks with more than $250 billion in assets to meet higher capital requirements.” It is not the role of the federal government to mandate that banks keep a specified percentage of their investment portfolio liquid – that’s what consumers and markets are for.

  • Resolution Fund Tax

    • House: Raises a $150 billion resolution fund from the biggest financial firms, which would be tapped in order to unwind a failed institution. (HR 4173 §1604)
    • Senate: Funds the resolution authority for unwinding systemically risky financial institutions with an after-the-fact levy on the biggest financial firms; orders the Treasury Department to front any money necessary for the unwinding (S 3217 §204-206)

This additional tax on the banking sector that would be passed on to consumers and shareholders from this proposal does nothing but punish the banking sector indiscriminately in that stable banks would pay for the unwinding of their riskier, failing, competitors. In short, it punishes the banks that invested safely.

  • Auto Dealers

    • House: Exempts auto dealers with financing operations from falling under the purview of the new consumer protection agency. (HR 4173 §4205)
    • Senate: Sen. Sam Brownback (R-Kan.) attempted to insert a similar exemption in the Senate bill, arguing that auto dealers did not cause the financial crisis. But the amendment never came up for a vote.

This slight difference stems from district entitlements and will likely be cut in the final version of the bill. ATR believes that no industry should be regulated by this new agency.

  • Securities Risk

    • House: Requires hedge funds with more than $150 million under management to register with the SEC; excludes private equity (HR 4173 §5003-5007)
    • Senate: Requires hedge funds with more than $100 million in assets to register with the SEC; requires firms that package loans into securities to hold 5% or more of the credit risk (S 3217 §403-409)

Given that experienced, professional investors in insurance companies and pension funds invest in hedge funds that are not registered, and given that compliance costs take a large bite out of returns, this intrusion is unwarranted and politically motivated.