By Valentino F. DiGiorgio III

On April 15, 2010, the Senate Committee on Banking, Housing and Urban Affairs marked up and ordered to be reported Senate bill S.3217, the proposed "The Restoring American Financial Stability Act of 2010" (RAFSA). The RAFSA is a sweeping and comprehensive reform bill drafted in response to the financial crisis that nearly crippled the U.S. economy.

The bill’s drafters state that the primary purpose of the RAFSA is to promote the financial stability of the United States, seeking to achieve that goal through multiple measures designed to improve accountability, resiliency and transparency in the financial system by:

• establishing an early warning system to detect and address emerging threats to financial stability and the economy;
  
  
• enhancing consumer and investor protections;
  
  
• strengthening the supervision of large, complex financial organizations;
  
  
• providing a mechanism to liquidate such companies should they fail, without any losses to the taxpayer; and
  
  
• regulating the massive over-the-counter derivatives market.

• Establishes a new Financial Stability Oversight Council (Council) chaired by the Treasury secretary and comprising key regulators. Council will monitor emerging risks to U.S. financial stability; recommend heightened prudential standards for large, interconnected financial companies; and require nonbank financial companies to be supervised by the Federal Reserve if their failure would pose a risk to U.S. financial stability.
  
  
• Requires the Council to make recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements to ensure that companies do not grow too big in size or complexity.
  
  
• Authorizes the Federal Reserve to require (with the Council’s approval) a large financial company that presents grave threats to U.S. financial stability to restrict or divest activities and holdings.
  
  
• Authorizes the Council to require that nonbank companies be regulated by the Federal Reserve if their failure could pose a risk to U.S. financial stability (e.g. cases such as AIG).
  
  
• Requires banks to report data and information to a new Office of Financial Research within the Treasury Department. This new office will analyze the data and identify risks in the system and report them to Congress.

II. Ending Too-Big-To-Fail Bailouts Through the Orderly Liquidation Authority

• Establishes an orderly liquidation authority to give the U.S. government a viable alternative to bankruptcy or bailout of a large, complex financial company.
  
  
• Allows the FDIC to safely unwind a failing nonbank financial company or bank holding company.
  
  
• Preserves the use of the bankruptcy process to close and unwind failing financial companies, including large, complex ones. The orderly liquidation authority could be used if and only if the failure of the financial company would threaten U.S. financial stability.
  
  
• Requires large financial companies to contribute $50 billion over a period of five to 10 years to a liquidation fund held at the Treasury.
  
  
• Imposes additional assessments on large financial companies if necessary to ensure 100 percent repayment of any funds obtained from the Treasury.

III. Liquidity Programs

• Eliminates the ability of either the Federal Reserve or the FDIC to rescue an individual financial firm that is failing, and simultaneously preserves the ability of both regulators to provide needed liquidity and confidence in financial markets during times of severe distress.
  
  
• Allows the FDIC to guarantee short-term debt during financial crises but limits the guarantees to solvent banks and bank holding companies, restricts the conditions under which such support may be offered, increases accountability of the guarantee program and eliminates the possibility that taxpayers will pay for any losses from the program. No guarantee can be offered unless the Federal Reserve Board and the FDIC jointly agree that a liquidity event exists.
  
  
• Authorizes the Treasury to determine a maximum amount of guarantees, which the president may request Congress to allow.
  
  
• Firms that default on guarantees will be put into receivership, resolution or bankruptcy. Any FDIC aid to an individual firm under the systemic risk exception will be possible only if the firm has been placed in receivership. 

IV. The Volcker Rule

• Prohibits or restricts certain types of financial activity in banks, bank holding companies, other companies that control an insured depository institution, their subsidiaries, or nonbank financial companies supervised by the Board of Governors that are high-risk or that create significant conflicts of interest between these institutions and their customers.
  
  
• Banks, bank holding companies, other companies that control an insured depository institution, their subsidiaries, or nonbank financial companies supervised by the Board of Governors will be prohibited from proprietary trading, sponsoring and investing in hedge funds and private equity funds, and having certain financial relationships with those hedge funds or private equity funds for which they serve as investment manager or investment adviser.

V. The Bureau of Consumer Financial Protection

• Creates the Bureau of Consumer Financial Protection (CFPB), a new, independent consumer entity that will have independent rule making authority for consumer protections.
  
  
• Seeks to prevent regulatory arbitrage and combines in the CFPB the authority of the seven federal agencies involved in consumer financial protection.
  
  
• Authorizes the CFPB to establish a basic, minimum federal level playing field for all banks (both state and federal) and nondepository financial companies that sell consumer financial products and services.
  
  
• Authorizes bank regulators to appeal regulations that would put safety and soundness of the banking industry or the financial system at risk.
  
  
• Some specific CFPB powers affecting banks and other financial institutions:

  Plain English Disclosures. The CFPB will be focused on ensuring that consumers get clear and effective disclosures in plain English and in a timely fashion.
  
  Unfair and Deceptive Practices. The CFPB is authorized to issue rules regarding “unfair, deceptive, or abusive” acts or practices.
  
  Information Collection on Consumer-Loans. Banks will be subject to extensive new information collections imposed by the CFPB. The CFPB may disclose nonconfidential information that it gets from banks where such disclosure is deemed to be in the best interest of the public.
  
  Arbitration Clauses. The CFPB may issue rules prohibiting mandatory arbitration clauses.
  
  Risk Disclosures. The CFPB is authorized to issue rules requiring banks to make disclosures regarding the costs, benefits and risks, in light of the facts and circumstances of a given transaction, for every covered financial product or service.
  
  TILA and RESPA Disclosures. The CFPB is to publish new mandatory disclosures that combine requirements of the Truth in Lending Act and the Real Estate Settlement Procedures Act.
  
  Existing Customer Transaction Disclosures. The CFPB is to issue rules requiring banks to provide information, including cost, charges, and usage data, to any customer who asks for it regarding any transaction with the bank. The data are to be made available electronically and through standardized formats, including machine-readable files, that that CFPB will design.
  
  Penalty for Violations of CFPB Rules. It will be unlawful for a bank to enforce, or attempt to enforce, any agreement that does not conform to the CFPB’s rules. Thus, any violation of a rule may make the entire transaction unenforceable.
  
  Applicability of State Laws. National banks and federal thrifts will find themselves subject to potentially hundreds of state and local consumer protection rules. The Office of the Comptroller of the Currency (OCC) will not be permitted to preempt a state law unless there is substantial evidence of a conflict and the OCC finds that there is a “substantive standard” in place that regulates the activity in question.
  
  Disclosures Regarding Deposit Accounts. Every bank must maintain records of the number and dollar amount of the deposit accounts of its customers, for all branches, ATMs and other deposit-gathering facilities. Customer addresses are to be geo-coded and identified as residential or commercial customers. Every bank must make annual disclosures for each branch, ATM or other facility regarding the type of deposit account (including whether it is a checking or savings account) and data on the number and dollar amount of all accounts, by census tract of the customer.
  
  Small Business Loans. Every bank, when it receives a loan application from a small business, must ask the applicant whether it is women- or minority-owned. The bank is to maintain this information separately from the application file and the bank’s loan underwriter. Banks are to itemize each loan according to 12 enumerated criteria. All this information is to be publicly available.
  
  Prepayment Penalties Prohibited. The CFPB is to adopt rules implementing new prohibitions on prepayment penalties.
  
  Remittance Transfers. Banks that offer remittances will have to make disclosures, updated daily, for sample transfers of $100 and $200, showing what the recipient would receive in the three currencies into which dollars are most frequently converted by the bank. The disclosures would have to be in all the foreign languages that are principally used by the bank’s customers.
  
  HMDA. Banks must report at least 13 new items under the Home Mortgage Disclosure Act.

VI. Strengthening and Consolidating Prudential Supervision

• Seeks to increase the accountability of the banking regulators by establishing clearer lines of responsibility and to stop financial companies from “shopping” for the most lenient regulators and regulatory framework.
  
  
• Abolishes the Office of Thrift Supervision and consolidates supervision of state banks in a single federal regulator—the FDIC.
  
  
• Focuses the activities of the Federal Reserve System on its core functions and strips the Federal Reserve System of its consumer protection functions and its role in supervising state banks and smaller bank holding companies. Assigns the Federal Reserve the responsibility of supervising bank and thrift holding companies with total consolidated assets of $50 billion or more.
  
  
• Consolidates supervision of smaller bank holding companies (those with assets of less than $50 billion) so that the regulator for the bank or thrift will also regulate the holding company. Gives the FDIC and the OCC the responsibility for supervising the holding companies of smaller, less complex organizations.
  
  
• Leaves intact the Federal Reserve’s ability to obtain information needed for the conduct of monetary policy.
  
  
• Subjects banks to new Federal Reserve Board rules governing purchases of assets from, or sales to, insiders.
  
  
• Applies lending limits applicable to national banks, regardless of higher state-lending limits.
  
  
• Subjects bank holding companies to new capital requirements and new rules regarding their role as a source of strength to their bank subsidiaries.

VII. Regulation of Over-The-Counter Derivatives and Systemically Significant Payment, Clearing and Settlement Functions 

• Authorizes the SEC and the Commodities Futures Trading Commission to regulate over-the-counter derivatives.
  
  
• Requires more transactions to clear through central clearing- houses and trade on exchanges. Uncleared swaps will be subject to margin requirements, swap dealers and major swap participants will be subject to capital requirements, and all trades will be reported so that regulators can monitor them.
  
  
• Grants authority to the Federal Reserve to regulate and examine systemically important payment, clearing and settlement functions.

VIII. Investor Protection

• Seeks to improve the regulation and performance of credit rating agencies by enhancing SEC oversight authority and requiring more robust internal supervision of the ratings process.
  
  
• Requires rating agencies to disclose more data about assumptions and methodologies underlying ratings.
  
  
• Holds rating agencies accountable for failures to produce ratings with integrity, both by allowing the SEC to suspend rating agencies that consistently fail to produce accurate ratings and by lowering the pleading standard for private lawsuits alleging that a rating agency knowingly or recklessly failed to conduct a reasonable investigation of the factual elements of the rated security, or failed to obtain reasonable verification of such factual elements from independent sources that it considered to be competent.
  
  
• Requires financial regulators to review and remove unnecessary references to credit ratings in their regulations.
  
  
• Requires securitizers to retain an economic interest in a material portion (at least 5 percent) of the credit risk for any asset that securitizers transfer, sell, or convey to a third party.
  
  
• Requires publicly-traded companies to give shareholders the right to cast advisory votes on whether they approve of their company’s executive compensation. The board committee that sets compensation policy would consist only of directors who are independent. The company would tell shareholders about the relationship between the executive compensation it paid and its financial performance. The company would be required to have a policy to recover money that it erroneously paid to executives based on financials that later had to be restated due to an accounting error.
  
  
• Establishes the Office of Investor Advocate housed within the SEC to help retail investors with problems they have with the SEC or self-regulatory organizations.
  
  
• Requires securities broker-dealers to use auditors that are subject to inspections and discipline by a rigorous regulator, the Public Company Accounting Oversight Board.
  
  
• Requires larger investors to post margin collateral based on the net positions in their securities and futures portfolio.
  
  
• Creates an Investment Advisory Committee to give advice to the SEC from its members, which would include representatives of mutual funds, stock and bond investors, senior citizens, state securities regulators and others.
  
  
• Increases the amount of money available to the Securities Investor Protection Corporation to pay valid claims of customers of defunct broker-dealers.
  
  
• Grants SEC new authority to impose limitations on mandatory arbitration; to bar someone who violated the securities laws while working for one type of registered securities firm, such as a broker-dealer, from working for other types of securities firms, such as investment advisers; and to require that securities firms give new disclosures to investors before they buy investment products.
  
  
• Establishes a new SEC whistleblower program.
  
  
• Requires all public companies to comply with new SEC rules regarding the election of directors and to make certain disclosures if the chairman and CEO offices have not been separated.
  
  
• Authorizes the Federal Reserve Board to require all publicly traded bank holding companies with less than $10 billion in assets to have a new “risk committee.”

IX. Regulation of Private Funds

• Requires advisers to large hedge funds to register with the SEC.
  
  
• Requires private funds—hedge funds with more than $100 million in assets under management—to disclose information regarding their investment positions and strategies.