Gargantuan financial reform bill: It's not just for banks

The financial reform bill awaiting final votes in the House and Senate encompasses everything from banking to insurance to African minerals used in high-tech gadgets. Is that a good thing?

The financial reform bill that's two steps away from President Obama's signature has a gargantuan scope – reaching into banking and mortgages but also into other arenas unrelated to the 2008 financial crisis.

We're talking everything from the use of African minerals in high-tech gadgets to stock brokers' sales pitches.

To some critics, the result is an overbearing mish-mash of legislation that could do more harm than good. To supporters, it's a promising effort to bring America's financial rulebook into the 21st century.

Either way though, this is one big package.

The recently finalized legislation combines bills already passed in the House and Senate into what some financial-policy analysts say will be a roughly 1,500-page measure. The House and Senate need to give the final bill a vote of approval (with the razor-close Senate vote possibly delayed by the death Monday of Sen. Robert Byrd).

"The real strength of the bill is in the breadth of issues that it addresses," says Douglas Elliott, a bank-industry expert at the Brookings Institution, in a written analysis. "The financial crisis revealed flaws in a wide range of activities and this bill, largely shaped by the original Administration proposals, tackles most of them."

Mr. Elliott doesn't like every element of the bill. Probably no one does. But he argues that, although financial crises may not be wholly preventable, the reforms will make future banking troubles less severe.

A bill summary by Capitol Hill staff members includes 100 points. Here's a shorter take, 10 points, focusing on less-publicized elements as well as some core provisions:

• A first-ever federal office focused on the insurance industry will monitor the insurance industry for systemic risk. The industry will remain regulated largely at the state level.

FDIC deposit insurance for account-holders at banks, thrift institutions, and credit unions will be raised to $250,000 (from $100,000) retroactive to Jan. 1, 2008.

• The State Department would have to submit an "illicit minerals trade strategy" for the Congo region. Manufacturers that use minerals originating in the Democratic Republic of Congo would have to disclose measures taken to exercise due diligence on the source and chain of custody of the materials. The provision, sponsored by Sen. Sam Brownback (R) of Kansas, could affect high-tech firms like Intel and Apple.

• The bill beefs up the powers of the Securities and Exchange Commission, including extra funds for enforcement. The SEC would get new power to impose fiduriary responsibility on investment brokers. That means the brokers would have to offer advice based on the best interest of clients, not broker fees. Consumer advocates say the bill should have mandated this change, not allowed the SEC to consider it.

• New disclosure rules would apply to credit-rating firms, along with new penalties if the firms are irresponsible. In a nod to an amendment backed by Sen. Al Franken (D) of Minnesota, the bill seeks to end "shopping for ratings" by calling for the SEC to propose ways to prevent issuers of asset-backed securities from picking the firm they think will give the highest rating.

• Shareholders would get a "say on pay," with the right to a nonbinding vote on executive pay and golden parachutes. Standards for listing on an exchange would require that compensation committees include only independent directors.

• Reforms would reshape Federal Reserve powers, including a ban on Fed bailouts targeted at specific firms (like AIG) in the future. The presidents of regional Fed banks would be selected entirely by directors representing the public, and not partly by directors representing banks that the Fed regulates.

• The bill creates a new Consumer Financial Protection Bureau to consoldiate duties now charged to various federal agencies. It would have a consumer hot line, for questions on things like mortgages, and a new office of financial literacy.

• A Financial Stability Oversight Council of top economic regulators will monitor systemwide risks. The bill summary says this group will ask the Federal Reserve to adopt "increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity."

• An "orderly liquidation" mechanism would allow the Federal Deposit Insurance Corp. (FDIC) to dismantle large financial companies that are on the brink of failure. Shareholders and unsecured creditors would bear losses, to end taxpayer bailouts. But the bill also allows the FDIC to shelter solvent banks from having to bear losses if there is a threat to overall US financial stability.


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