Senator Dodd Releases Financial Reform Proposal: The Restoring American Financial Stability Act of 2009

by Mr. Daniel F. C. Crowley Esq., Mr. Bruce J. Heiman Esq., Ms. Karishma Shah Page Esq. and Mr. Justin D. Holman Esq.

Excerpt:

On November 10, 2009, Senate Banking Committee Chairman Christopher Dodd (D-CT) released a discussion draft of the "Restoring American Financial Stability Act of 2009" (the "Dodd Draft"). Chairman Dodd has been developing the Senate version of the regulatory reform package over several months. Until recently, the Chairman was working in conjunction with Ranking Member Richard Shelby (R-AL). However, Chairman Dodd recently decided to proceed only with the Democrats on the Committee.

At the time of this writing (November 19,2009), the House Financial Services Committee is completing its markup of the House regulatory reform package (please see the K&L Gates alert Redoubling Efforts on the Financial Reform Debate: House Approaches Floor Vote, While Senate Gets Underway for additional information on House developments). With the Senate and House taking different approaches in several respects, debate on significant aspects of the regulatory reform package will continue.

Systemic Risk

1. Which Agency Would Regulate?

The Dodd Draft proposes to create the Agency for Financial Stability ("AFS") as an independent agency responsible for identifying, monitoring, and addressing systemic risk. The AFS would be led by an independent chairman and a board of seven financial regulators and an independent board member. The AFS would not have direct supervisory powers over financial companies, but it would have the authority to:

Subject financial companies whose financial distress would threaten financial stability (i.e., "specified financial companies") to heightened prudential standards;
Write rules to increase prudential standards for bank holding companies with more than $10 billion in assets;
Assign otherwise unregulated financial companies that threaten financial stability to be supervised by a federal regulator; and
Identify and write regulations applicable to systemically important market utilities, which include operators of payment, settlement, and clearing systems.

The House systemic risk proposal is contained in the "Financial Stability Improvement Act of 2009" ("FSIA"; H.R. 3996), the mark up of which is now being completed by the House Financial Services Committee. FSIA would split the functions of a systemic risk regulator among the Federal Reserve and a new entity called the Financial Services Oversight Council ("FSOC"), which would be a council of regulators chaired by the Secretary of the Treasury.

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