Winners and Losers Under Dodd Financial Reform Proposal

March 17, 2010

U.S. Senate Banking Committee Chairman Christopher Dodd introduced his latest bill to overhaul the financial system on Monday.

The committee is expected to work on the bill next week and it will likely change dramatically. Below are some of the winners and losers under the proposals Dodd made on Monday.

CREDIT RATING AGENCIES -LOSE

  • Credit rating agencies such as Moody’s Corp., Standard & Poor’s, and Fitch Ratings would be subject to greater liability under Dodd’s latest bill.
  • Securities and Exchange Commission gets authority to deregister rating agencies for providing bad ratings over time
  • Regulators required to remove unnecessary references to ratings in their regulations

LARGE BANKS – WIN AND LOSE

  • Fed continues to supervise banks such as Citigroup with assets over $50 billion
  • Large financial firms such as Bank of America would have to pay into a $50 billion fund that would be used to liquidate, resolve a large troubled firm
  • Banks such as Goldman Sachs could be prohibited from proprietary trading and investing in hedge funds and private equity funds

SMALL BANKS – WIN

  • Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency would regulate banks and thrifts with assets below $50 billion

INSURANCE COMPANIES – WIN AND LOSE

  • Although the U.S. government has had to use billions of dollars in taxpayer funds to prop up insurer AIG, insurers will not be subject to federal oversight unless they are deemed to be systemically important
  • An office within Treasury Department would be created to monitor the insurance industry and coordinate international insurance issues
  • Large financial firms, including insurers, would have to pay into a $50 billion fund that would be used to liquidate, resolve a large troubled firm

CONSUMERS -LOSE

  • New rules to protect consumers from risky financial products could be overturned by banking regulators if banking regulators believe the rule could threaten the financial system.
  • Consumer Financial Protection Bureau will be housed in the Federal Reserve, which has been criticized for failing to rein in the risky lending that contributed to the financial crisis

SHAREHOLDERS/INVESTORS – WIN AND LOSE

  • Would get say on executive compensation through a non binding vote
  • SEC gets authority to give shareholders a cheaper and easier way to nominate corporate board directors
  • Publicly listed companies’ compensation committees would be required to be independent from firms’ boards of directors
  • Brokers who provide financial advice would not be held to same standard as investment advisers, who have fiduciary standards or rules that requires them to act in their clients’ best interest. Instead, the bill requires a study on whether brokers who give investment advice should adhere to fiduciary rules

PRIVATE EQUITY, VENTURE CAPITAL FUNDS -WIN

  • Advisers to hedge funds would be required to register with the SEC
  • Advisers to other private pools of capital such as private equity and venture capital are exempt from registration

U.S. FEDERAL RESERVE – WIN

  • New powers to supervise systemically important financial firms and preserves Fed’s authority to supervise banks with assets over $50 billion
  • Part of a “risk council” that would have authority to monitor risk in the financial system and decide whether a large complex company needs to divest assets
  • Regulates systemically important clearing, payments and settlements systems
  • Houses Consumer Financial Protection Bureau. Would have power along with other regulators to appeal consumer protection bureau’s rules if deemed to hurt safety and soundness of banking system and stability of financial system
  • Dodd originally wanted to confine the Fed to setting monetary policy and acting as the lender of last resort.

(Reporting by Rachelle Younglai; Editing by Andrew Hay)

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