The Financial 'Reform' Bill: Some Interesting Provisions

by: Ira Stoll

The House Financial Services Committee has now posted the full text — all 2315 pages of it — of the "Dodd-Frank Wall Street Reform and Consumer Protection Act." Here is the link to the bill in PDF form. The table of contents alone is 15 pages long.

Some thoughts: Binyamin Appelbaum had it about right in the New York Times over the weekend when he wrote that the bill "is notably short on specifics, giving regulators significant power to determine its impact." Gretchen Morgenson, also writing in the New York Times over the weekend, had an interesting take when she wrote, "After President Obama signs it into law, the nation's financial industry will still be dominated by a handful of institutions that are too large, too interconnected and too politically powerful to be allowed to go bankrupt if they make unwise decisions or make huge wrong-way bets."

Some specific provisions worth paying attention to: President Obama, Secretary Geithner, and Senator Schumer all came out initially quite strongly for requiring companies to split their chairman and ceo positions. We wrote about that earlier here. The Dodd-Frank conference report waters that down (in Section 972) to a far more wishy washy and neutral provision requiring the Securities and Exchange Commission to issue "rules that require an issuer to disclose in the annual proxy sent to investors the reasons why the issuer has chosen (1) the same person to serve as chairman of the board of directors and chief executive officer (or in equivalent positions); or (2) different individuals to serve as chairman of the board of directors and chief executive officer (or in equivalent positions of the issuer)."

Another controversy, highlighted by Harvard Law School professor Lucien Bebchuck, was whether Congress would set a 5% ownership threshold for shareholders to nominate director candidates via proxies, or whether Congress would leave it up to the SEC to set a threshold, which the SEC would likely set at 1%. The Dodd-Frank conference report, in section 971, leaves the matter to the discretion of the SEC, instructing it to issue rules "under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors."

Another item worth focusing on in the bill is the Financial Crisis Assessment Fund, Section 1601. Again, the details are vague: the Financial Stability Oversight Council is authorized to "impose risk-based assessments on and the Corporation shall collect such assessments from financial companies in such amount and manner and subject to such terms and conditions that the Council determines are necessary." Hedge funds with assets of more than $10 billion and financial companies with assets of more than $50 billion are subject to the "assessments," which are to be leveled subject to no less than 13 different factors, the 13th of which is "such other risk-related factors as the Council may determine to be appropriate."

Look for hedge funds to exercise all kinds of creative acrobatics to get themselves under this $10 billion threshold, above which they become subject to an open-ended, arbitrary tax. Though they'd better act fast: "Except as otherwise specifically provided in this Act or the amendments made by this Act, this Act and such amendments shall take effect 1 day after the date of enactment of this Act."

There are some decent Federal Reserve transparency requirements in Dodd-Frank. One provision, Section 1109, for example, requires, "the Board of Governors shall publish on its website, not later than December 1, 2010, with respect to all loans and other financial assistance provided during the period beginning on December 1, 2007 and ending on the date of enactment of this Act under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Term Securities Lending Facility, the Term Auction Facility, Maiden Lane, Maiden Lane II, Maiden Lane III, the agency Mortgage-Backed Securities program, foreign currency liquidity swap lines, and any other program
created as a result of section 13(3) of the Federal Reserve Act (as so designated by this title)—
(1) the identity of each business, individual, entity, or foreign central bank to which the Board of Governors has provided such assistance;
(2) the type of financial assistance provided to that business, individual, entity, or foreign central bank;
(3) the value or amount of that financial assistance;
(4) the date on which the financial assistance was provided;
(5) the specific terms of any repayment expected, including the repayment time period, interest charges, collateral, limitations on executive compensation or dividends, and other material terms; and
(6) the specific rationale for each such facility or program."

Other provisions that some may find intriguing: Congress creates an interagency group to conduct a study and issue a report on "the oversight of existing and prospective carbon markets" (Section 750). Venture capital funds (Section 407) and "family offices" (Section 409) get exempt from most of the regulations applied to other financial advisers.