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Historic Reform of US Financial Regulation Nearing Legislative Finish Line

By Jim Hamilton

When the Senate passes the Dodd-Frank Wall Street Reform and Consumer Protection Act later this week and sends this historic overhaul of US financial regulation to President Obama for his signature, it will represent the culmination of an 18-month struggle to enact reform the regulation of US markets in the wake of the greatest financial crisis since the Great Depression.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is based on the themes of regulating systemic risk and OTC derivatives, enhancing transparency and disclosure, moving executive compensation regimes away from a culture of short-term risk taking towards long-term value creation, expanding consumer and investor protection, and preventing regulatory arbitrage. The Act restructures the foundations of the U.S. financial regulatory system, enhances regulation over more products and actors and promotes greater accountability in capital markets.

The road to reform began when President Obama signed the American Recovery and Reinvestment Act of 2009 on February 17, 2009. In provisions authored by Senator Dodd, the recovery legislation mandated important corporate governance safeguards and imposed various executive compensation limits on companies participating in the troubled assets relief program (TARP), including a requirement for a nonbinding shareholder advisory vote on executive compensation and for independent compensation committees, presaging requirements that would be placed on all listed companies by the Dodd-Frank Act.

On February 25, 2009, President Obama outlined seven broad principles involving transparency, systemic risk management, and investor protection to guide Congress in passing this historic legislation to reform the nation?s outdated financial regulatory regime.

On March 30, 2009, Senate Banking Committee Chair Christopher Dodd and House Financial Services Committee Chair Barney Frank sent a letter to President Obama pledged to work together to pass legislation creating a framework for 21st century regulation that will enhance financial stability and protect consumers and investors.

On May 20, 2009, President Obama signed the Fraud Enforcement and Recovery Act (FERA) improving the enforcement of securities and commodities fraud and financial institution fraud involving asset-backed securities and fraud related to federal assistance and relief programs. The legislation expands the scope of securities fraud provisions to include commodities and derivatives fraud.

In June of 2009, the Obama Administration proposed to Congress the most sweeping and fundamental regulatory reform of the US financial and securities markets since President Franklin D. Roosevelt?s New Deal. Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation, Treasury Department (June 17, 2009).

December 11, 2009: The U.S. House of Representatives passes the Wall Street Reform and Consumer Protection Act (HR 4173) to restructure the financial services regulatory system.

May 20, 2010: The U.S. Senate passes Restoring American Financial Stability Act (S. 3217, the Senate version of H.R. 4173) to bring about far-reaching reforms.

June 26, 2010: The House-Senate Conference Report is issued reconciling the House and Senate versions of the financial services regulatory reform bills.

June 30, 2010: The U.S. House of Representatives passes the Dodd-Frank Wall Street Reform and Consumer Protection Act.

After nearly two years of congressional hearings and extremely intense legislative negotiations, we are on the verge of historic and comprehensive reform of US financial regulation. This is landmark legislation that touches many aspects of banking and securities regulation, regulates the OTC derivatives markets for the first time and enhances the powers and resources of the SEC.

Full post as published by Jim Hamilton's World of Securities Regulation on July 14, 2010 (boomark / email).