Senator Dodd Releases Plan for Financial Regulatory Reform

On November 10, 2009, Senate Banking Committee Chairman Christopher Dodd released a discussion draft of proposed legislation to reform financial regulation. This proposed legislation follows the release by the House Financial Services Committee of its discussion draft of legislation intended to accomplish the same goal. The bill introduced by the House Financial Services Committee is currently being marked-up. The two plans differ in some very significant ways, with the Dodd Bill being the most dramatic approach yet, leading us to believe the debate over the approach to financial regulatory reform will intensify.

Among other significant differences discussed in more detail below, the Dodd proposal would combine all federal depository institution regulatory function into one agency, whereas the House Committee Bill would only combine the Office of Thrift Supervision with the Office of the Comptroller of the Currency. While the House Committee Bill would preserve the federal thrift charter, under the Dodd proposal, no charters for federal savings associations could be issued after enactment; however, institutions with federal savings association charters will be able to retain those charters and will be regulated by the newly created Financial Institutions Regulatory Administration (“FIRA”). Unlike the proposed House Committee Bill, which would have made savings and loan holding companies, including mutual holding companies, be regulated by the Federal Reserve Board, under the proposed Dodd Bill, savings and loan holding companies would be regulated by the FIRA under the regulations currently in place for governing savings and loan holding companies. Various features of the Dodd Bill that would directly affect Federal and State savings associations are discussed below.

The Bill introduced by Senator Dodd would create three new government agencies:

• Agency For Financial Stability

This Agency is designed to oversee and regulate systemic risk. The Board of Directors of the Agency would consist of a Chairperson appointed by the President to head the Agency, the Secretary of Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Chairperson of the newly created Financial Institutions Regulatory Administration (“FIRA”), the Director of the newly created Consumer Financial Protection Agency (“CFPA”), the Chairperson of the Securities and Exchange Commission, the Chairperson of the Commodity Futures Trading Commission, and an independent member appointed by the President.

Unlike the proposed House Bill, the Dodd Bill would take all power to regulate systemic risk from the Federal Reserve Board and vest it solely in the Agency For Financial Stability.

• Financial Institutions Regulatory Administration

The FIRA would be an independent agency governed by five board members: the chairmen of the FDIC and Federal Reserve Board and three individuals appointed by the President subject to Senate confirmation. It would assume the responsibility for regulating and examining all national banks, Federal savings associations, and would become the primary federal regulator for FDIC-insured State banks and State savings associations and their holding companies. Both the Office of the Comptroller of the Currency and the Office of Thrift Supervision would be eliminated and the supervisory and regulatory role of the FDIC would be transferred to the FIRA. Similarly, the Federal Reserve Board would lose its supervisory and regulatory powers as well over both member banks and bank holding companies. A State Bank Advisory Board would be established within FIRA that would make recommendations to FIRA concerning, among other things, the streamlining of the regulation and supervision of small state-chartered banks and savings associations that are well capitalized. The FIRA would also establish a Division of Community Bank Supervision that would examine and supervise small national banks, and Federal savings associations and perform the function of primary federal regulator for the State banks and State savings associations.

The transfer of the functions of the Office of Thrift Supervision and the Office of the Comptroller of the Currency to FIRA would occur one year from enactment of the Senate Bill, unless either agency is able to establish that an extra six months is required for an orderly transition. All functions of the FDIC relating to the supervision and regulation of State nonmember banks would be transferred to FIRA under the same timeframe. Similarly, all functions of the Board of Governors relating to the supervision of member banks, bank holding companies and subsidiaries of bank holding companies would be transferred to FIRA as well.

Under the Dodd Bill, all regulations, resolutions, interpretive rules and other regulatory guidance of the Federal Reserve Board, FDIC, Office of Thrift Supervision and Office of the Comptroller of the Currency will remain in effect until modified by the FIRA. Further, all employees of the Office of the Comptroller of the Currency and Office of Thrift Supervision will be transferred to FIRA. The FIRA will work with the FDIC to determine the number and type of employees to be transferred to FIRA to carry out the duties being transferred to FIRA. Employees of the Federal Reserve Board will be transferred to FIRA as necessary as well.

The Dodd Bill would not repeal the Savings and Loan Holding Company Act or the Office of Thrift Supervision’s regulations implementing the Savings and Loan Holding Company Act, including provisions relating to mutual holding companies. Consequently, as drafted, it appears mutual holding companies would continue to be treated as savings and loan holding companies with the same powers as they currently have. In contrast to the Dodd Bill, the House Committee Bill would transfer oversight of all savings and loan holding companies, including mutual holding companies, to the Federal Reserve Board. Further, unlike the Dodd proposal, which would not repeal the Savings and Loan Holding Company Act, the House Committee Bill would repeal the Savings and Loan Holding Company Act, which would result in savings and loan holding companies being regulated as bank holding companies. Although FIRA can implement new regulations and repeal existing ones, the Dodd proposal appears to contemplate more continuity in the regulatory oversight of savings and loan holding companies than the House Committee Bill.

The Dodd Bill would terminate the issuance of new federal thrift charters effective with enactment of the bill. In contrast, the House Committee Bill would preserve the federal thrift charter. The Dodd proposal to terminate the issuance of new federal thrift charters leaves the ability of federal thrifts in the mutual form to convert to stock form in question because the issuance of the new stock charter would technically be a new federal thrift charter.

• Consumer Financial Protection Agency

All of the current banking agencies would lose oversight over consumer products. Instead, the CFPA would regulate credit cards, mortgages and other financial products. States would be permitted to pass tougher consumer protections and federal law would not pre-empt tougher state laws.

As discussed above, the House Bill is currently being marked-up in the House and the Dodd Bill will be marked-up as well. Once the bills pass out of their committees and are approved by their respective bodies, there will be a conference to work out the differences and arrive at a final bill. Consequently, much can change between now and when a final Bill is voted on.