The U.S. Senate approved a sweeping Wall Street reform bill Thursday night, capping months of wrangling over the biggest overhaul of financial regulation since the 1930s.
By a vote of 59-39, the Senate approved S. 3217, the “Restoring America’s Financial Stability Act,” legislation meant to address the issues that caused the recent financial crisis.
The Senate bill must now be merged with a measure approved in December by the U.S. House of Representatives. Only then could a final package go to President Obama to be signed into law, something that analysts said may happen next month.
Changes proposed in both bills threaten to constrain the banking industry and reduce its profits for years to come. However, regulatory reform legislation leaves day-to-day regulation of the insurance market at the state level, a move supported by the insurance industry.
“We believe the House and Senate have both made the correct decision in recognizing the strength of the state regulatory system for insurance,” said Robert Rusbuldt, president and CEO of the Independent Insurance Agents and Brokers of America. “Property/casualty insurers played no role in creating the crisis and pose no systemic risk to the overall economy.”
The existing state-based resolution mechanism remains in place and policyholders will remain covered by the state guaranty fund system.
The Senate reform legislation passed late last night recognizes that the property/casualty insurance industry does not pose systemic risk, according to Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA).
“While we continue to have concerns with certain provisions in the bill, we appreciate the distinction made between insurers and others in the financial sector,” Pusey said. “Given the importance of these reforms, AIA will remain active to ensure that the unique nature of insurance is preserved through any conference activity and into the bill’s implementation.”
Issues of interest to surplus lines insurers and agents were also addressed in both the House and Senate financial reform legislation. Both bills include language from the NonAdmitted and Reinsurance Reform Act — surplus lines regulatory reform provisions that aim to make buyer access to the surplus lines market quicker and more efficient, as well as streamlining the payment of surplus lines taxes on multi-state risks for surplus lines brokers.
“Senate approval of the language is a giant step toward achieving needed reforms of surplus lines regulation,” said Richard Bouhan, executive director of the National Association of Surplus Lines Offices (NAPSLO). “This is an issue NAPSLO, and the industry, has worked on for many years and we are glad to see the language included in the bill.”
In addition, the reform legislation would eliminate duplicative compliance requirements on surplus lines policies that insure risks across state lines. The bill reduces surplus line broker costs by clarifying that only one state, the home state of the insured, regulates a multistate surplus line transaction, according to NAPLSO.
The bill includes a fairly strong set of provisions to improve regulatory oversight of ratings agencies, make them legally liable when they fail to follow appropriate procedures, reduce conflicts of interest, and reduce reliance on credit rating agencies.
Some consumer advocates had hoped the bill would do more in this area.
“We do have concerns,” said Consumer Federation of American Director of Investor Protection Barbara Roper Roper. “Particularly that the legislation fails to give the SEC any regulatory authority over rating agency methodologies and procedures and rushes to reduce reliance on ratings without first determining how they are used and whether adequate alternatives exist.”
Even so, CFA said it believes the bill takes important steps to both improve the reliability of ratings and to reduce the financial system’s vulnerability to ratings failures.
President Obama said the final version of the bill would hold financial firms accountable but not stifle the free market.
“Over the last year, the financial industry has repeatedly tried to end this reform with hordes of lobbyists and millions of dollars in ads, and when they couldn’t kill it they tried to water it down. … Today, I think it’s fair to say these efforts have failed,” Obama said.
“We’ve still go some work to do,” he added. “The House and the Senate will have to iron out the differences between the two bills.”
DOW JONES TUMBLES
On Wall Street Thursday, the Dow Jones industrial average slid 3.6 percent, hurt by fears of Europe’s debt crisis retarding global economic recovery, but also by uncertainty over U.S. financial reform, traders said.
Barney Frank, head of a key House panel, told CNBC it was important to complete reform soon to ease uncertainty.
Frank, the Democratic author of Wall Street reform in the House, on Thursday drew an early negotiating line ahead of impending talks with the Senate on a final package.
In letters to senior Senate Democrats that were obtained by Reuters, Frank said certain House proposals on financial firm regulation and bank trading limits must be preserved.
He said the House proposals were important to his home state of Massachusetts and that “none of them threaten or weaken the broad objectives of comprehensive reform … I will insist that they be maintained in the final bill.”
The letters were addressed to Senate Democratic leader Harry Reid and Banking Committee Chairman Christopher Dodd, the Democratic author of the Senate bill. Both will likely be key players, along with Frank, in the House-Senate talks.
“I look forward to working with my colleagues in the House to produce a strong bill,” Dodd said in a statement.
DODD HOPES FOR JULY 4 VOTE
Dodd said he hoped the Senate would be able to vote to approve a final House-Senate package by July 4.
Republicans worked to delay and water down the bill over months of closed-door negotiation and open debate, arguing it was an overreach of government into the private sector.
The Senate bill “places layer upon layer of unnecessary new regulations on financial institutions that will undoubtedly have a chilling effect on the ability of American families and businesses to access credit,” said Republican Senator Judd Gregg in a statement after the vote.
Last-minute maneuvering on the Senate floor killed two controversial amendments: one to tighten proposed restrictions on risky trading by banks, and another exempting car dealers that do not finance their own lending to auto buyers from oversight by a new federal consumer watchdog.
Republicans withdrew the auto-dealer amendment, offered by Senator Sam Brownback, so that the bank trading amendment, offered by Democrats Jeff Merkley and Carl Levin, would not come to a vote. It is opposed by major financial firms.
The House bill already contains a watchdog exemption for auto dealers, opening the door to a deal in conference.
Expecting such a move, Levin told reporters beforehand that it showed “the power of Wall Street” at work in Congress.
Reporting by Reuters and Insurance Journal were used in this story.