Financial Crisis News Center

CCH Briefing Paper Examines House Legislation

The CCH Editorial Staff of banking and securities law analysts has authored a detailed overview titled, "House Passes Wall Street Reform Act." From the introduction:

On December 11, 2009, the U.S. House of Representatives passed legislation to restructure the financial services regulatory system, the Wall Street Reform and Consumer Protection Act of 2009 (HR 4173), by a vote of 223-202. As discussed below, the sweeping array of reforms includes the Financial Stability Improvement Act, which would create a systemic risk regulator, strengthen regulation of depository institutions and bank holding companies, improve the asset-backed securitization process, and provide for an enhanced dissolution authority. The legislation also would create a Consumer Financial Protection Agency, reform the over-the-counter derivatives market, subject hedge funds to stricter scrutiny, impose new corporate governance mandates, adopt heightened requirements for credit rating agencies and expand regulatory enforcement powers. Among other measures, the legislation features expansive consumer mortgage protections and creates a Federal Insurance Office.

Download the briefing paper

Credit Rating Agency Eligibility Process for TALF Adopted

This story appeared in Bank Digest.

The Federal Reserve Board has adopted a final rule that would establish a process by which the Federal Reserve Bank of New York may determine the eligibility of credit rating agencies for the Term Asset-Backed Securities Loan Facility (TALF). The rule establishes criteria for determining the eligibility of agencies to issue credit ratings on asset-backed securities (ABS), other than those backed by commercial real estate, to be accepted as collateral for the TALF. The criteria include registration as a nationally recognized statistical rating organization with the Securities and Exchange Commission and experience issuing credit ratings specific to the types of assets accepted as collateral in the TALF. The final rule is substantively the same as the proposed rule announced on Oct. 5, 2009. The Fed has also issued TALF Frequently Asked Questions.

House Committee Completes Consideration of Reform Proposals

This story appeared in Bank Digest.

The House Financial Services Committee has announced that it has finished its work on the bills that have been offered to reform the regulation of the financial services system. The nine bills approved by the committee have been packaged into a single bill, The Wall Street Reform and Consumer Protection Act (H.R. 4173), which is scheduled for House floor debate during the week of Dec. 7, 2009. Provisions of the bill include:

• a Consumer Financial Protection Agency;
• a systemic risk oversight council;
• the authority to dissolve large, failing financial institutions;
• restrictions on executive compensation;
• enhanced investor protections;
• regulation of derivatives;
• mortgage and predatory lending reforms;
• credit rating agency regulation;
• hedge fund and private equity regulation; and
• an Office of Insurance.

New White Paper Offers Detailed Look at Dodd Bill

Jim Hamilton, J.D., LL. M., CCH Principal Analyst, and Richard Roth, CCH Writer Analyst, have authored an extensive white paper entitled, “Senate Banking Committee Releases Draft Legislation: Restoring American Financial Stability Act of 2009.” From the Introduction:

The Senate Banking Committee has released draft legislation that, if enacted, would provide a sweeping overhaul of the regulation of U.S. financial services and markets. The Restoring American Financial Stability Act of 2009 would regulate systemic risk, enhance transparency and disclosure, delink executive compensation from excessive risk, expand consumer and investor protection, and prevent regulatory arbitrage. The draft provides for the regulation of hedge funds and over-the-counter derivatives and would establish a new resolution authority to unwind failing financial firms. The legislation also provides for major corporate-governance reforms, such as shareholder advisory votes on compensation and enhanced compensation committees. The draft further envisions a completely reformed securitization process playing an important role in the financial markets. A new independent regulator would be created with authority to make sure that consumer protection regulations are written and enforced.

Download the White Paper

Dodd Draft Legislation Would Create New SEC Office of Credit Ratings as Key Part of Rating Agency Reform

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Credit rating agencies market themselves as providers of independent research and in-depth credit analysis. But in the financial crisis, instead of helping people better understand risk, they failed to warn people about risks hidden throughout layers of complex structures.

Flawed methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency contributed to a system in which AAA ratings were awarded to complex, unsafe asset-backed securities and other derivatives, adding to the housing bubble and magnifying the financial shock caused when the bubble burst. When investors no longer trusted these ratings during the credit crunch, they pulled back from lending money to municipalities and other borrowers.

Senate Banking Committee Issues Draft Legislation Reforming US Financial Regulation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Senate Banking Committee has released draft legislation that would provide a sweeping overhaul of the regulation of US financial services and markets. The draft would provide for joint SEC-CFTC regulation of derivatives, make the SEC self-funding, strengthen the Commission’s powers, better protect investors, and efficiently and effectively regulate the securities markets The Restoring American Financial Stability Act of 2009 would also reform the credit rating agency process by, among other things, establishes a new Office of Credit Rating Agencies at the SEC to enhance rating agency regulation and mandating new rules for internal controls, independence, transparency and penalties for poor performance in order to restore investor confidence in these ratings.

Key House Committee Passes Credit Agency Reform Legislation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

The House Financial Services Committee has passed bi-partisan legislation reforming the governance and operations of credit rating agencies. The Accountability and Transparency in Rating Agencies Act, HR 3890, enhances the accountability of credit rating agencies by clarifying the ability of individuals to sue such agencies. The Exchange Act is amended to provide that, in an action for money damages against a rating agency, it is enough for pleading any required state of mind that the complaint state with particularity facts giving rise to a strong inference that the rating agency knowingly or recklessly violated the securities laws. In addition, statements made by rating agencies will not be deemed forward looking statements for purposes of the Exchange Act’s safe harbor.

Bipartisan Credit Rating Agencies Bill Approved

This story appeared in Bank Digest.

The House Financial Services Committee approved the Accountability and Transparency in Rating Agencies Act (H.R. 3890) by a vote of 49-14. The bill is intended “to curb the inappropriate and irresponsible actions of credit rating agencies which greatly contributed to our current economic problems,” according to principal sponsor Rep. Paul E. Kanjorski (D-Pa.), Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

CFPA and Rating Agencies Discussion Drafts Released

This story appeared in Bank Digest.

House Financial Services Committee Chairman Barney Frank, D-Mass., has circulated a discussion draft of legislation to create the Consumer Financial Protection Agency. Chairman Frank also announced yesterday that the Committee will hold a hearing on Wednesday, September 30, to discuss the Consumer Financial Protection Agency and the draft legislation. In addition, Paul E. Kanjorski, D-Pa., Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, circulated a discussion draft of legislation to create the Enhanced Accountability and Transparency in Credit Rating Agencies Act. Kanjorski also announced that the Subcommittee will hold a hearing on Wednesday, September 30, to discuss the Enhanced Accountability and Transparency in Credit Rating Agencies Act and the draft legislation.

CFPA Draft at http://www.house.gov/apps/list/press/financialsvcs_dem/discussion_draft_of_cfpa_bill_092509.pdf

Rating Agencies Draft at
http://www.house.gov/apps/list/press/financialsvcs_dem/nrsro_005b_092509.pdf

SEC Adopts New Credit Rating Agency Rules, Proposes Additional Rules

This story appeared in SEC Today

The SEC yesterday unanimously approved six initiatives aimed at strengthening the regulatory framework for nationally recognized statistical rating organizations. The SEC adopted rules to require NRSROs to provide more information about their rating histories and to allow competing credit rating agencies to offer unsolicited ratings for structured finance products by giving them access to the same data. The SEC also adopted amendments to certain rules and forms to remove a number of references to credit ratings.

In opening remarks, SEC Chair Mary Schapiro noted that investors often consider credit ratings in deciding whether to purchase or sell a security. These ratings did not serve them well over the last few years, she said. The SEC's rule adoptions and proposals are intended to improve the reliability and integrity of the ratings process. Schapiro reported that there are currently 10 NRSROs registered with the Commission. Commissioner Kathleen Casey noted that more are "waiting in the wings."