U.S. lawmakers have forged legislation that will overhaul the country's financial system and usher in new rules for Wall Street.
A joint House of Representatives and Senate committee approved a bank regulation bill that lawmakers expect to pass each chamber separately in the coming days. It will then be ready for President Barack Obama to sign into law, possibly by July 4.
Below are some of the likely winners and losers under the regulation bill.
CREDIT RATING AGENCIES — WIN AND LOSE
• Credit rating agencies — such as Moody's Corp., Standard & Poor's and Fitch Ratings — will be subject to greater liability.
• Rating agencies could be sued if they "recklessly" failed to review key information in developing a rating.
• The Securities and Exchange Commission will be given two years to find a way to mitigate conflicts of interests at the biggest rating agencies, Moody's, S&P and Fitch, which are paid by the issuers whose debt they rate. The two years give the agencies breathing space but if the SEC does not find a solution, the regulator is required to implement a proposal by Senator Al Franken and create a board to match rating agencies with debt issuers.
• Federal regulators will be required to remove references to credit rating in their rules in an effort to reduce reliance on the credit rating agencies.
LARGE FINANCIAL FIRMS — WIN AND LOSE
• Large financial firms such as Bank of America and Goldman Sachs will be prohibited from proprietary trading and only be allowed to make minimum investments in hedge funds and private equity funds.
• Large firms will also face tougher standards in what qualifies for capital they are required to set aside to ensure that they do not threaten the stability of the financial system.
• Banks such as Goldman and JPMorgan Chase will be forced to spin off some of their profitable derivatives business or risk losing access to the Federal Reserve's emergency funds. But banks' biggest volume instruments such as foreign exchange and interest rate swaps will still be allowed to be traded by banks.
• The firms' financial products such as mortgages and credit cards will be subjected to new rules from a newly created bureau designed to protect customers from risky products.
• Most derivatives will be forced on to exchanges or through clearinghouses, in an attempt to limit the effect that large, risky trades can have on the economy, another factor that could curb bank profits. Non-financial players such as manufacturers, however, would be exempt.
SMALL BANKS — WIN
• The Federal Reserve will continue supervising small banks. Small banks wanted to maintain a supervisory structure they were familiar with.
• Banking regulators will be the primary regulator to enforce rules for small banks' financial products. The new consumer financial regulator will provide backup enforcement.
U.S. FEDERAL RESERVE — WIN
• Gains powers to supervise systemically important financial firms.
• Retains authority to supervise banks of all sizes.
• Part of a "risk council" that will have authority to monitor risk in the financial system and decide whether a large complex company needs to divest assets.
• Becomes home for the new Consumer Financial Protection Bureau. Will have power along with other regulators to appeal consumer protection bureau's rules if deemed to undermine stability of financial system or banks' deposits.
• The Fed escaped congressional reviews of its monetary policy but will be subject to reviews of its emergency lending and open market activities.
• Democrats and Republicans originally wanted to strip the Fed of its powers to supervise banks and confine the central bank to setting monetary policy and acting as the lender of last resort.
CONSUMERS — WIN
• New rules to protect consumers from risky financial products could only be overturned by banking regulators if banking regulators believe the rules could threaten the financial system or banks' deposits.
• The new consumer regulator will be housed in the Federal Reserve, which has been criticized for failing to rein in the risky lending that contributed to the financial crisis.
• The consumer regulator will get funding from the Fed and would get the authority to request more funds from Congress.
• The consumer regulator will be able to write its own rules for a slew of products such as mortgages and credit cards and enforce those rules.
INVESTORS/SHAREHOLDERS — WIN AND LOSE
• Broker-dealers who provide financial advice will not immediately be required to have fiduciary duties, which would require them to act in their clients best interests. The SEC must first study the issue for six months and then would have authority to impose those duties on brokers if the regulator determines they are necessary.
• Publicly-traded companies will be required to ask their shareholders whether they want a non binding vote on executive pay annually, once every two years or once every three years. Originally, Democrats wanted to give shareholders an annual say on executive pay.
• The SEC will have the authority to give shareholders and easier and cheaper way to nominate corporate board directors.
• The Municipal Securities Rulemaking Board will be required to impose fiduciary duties on municipal bond advisers.
AUTO DEALERS — WIN
• Auto dealers that do financing will be exempt from oversight by the new consumer bureau, and stay within the jurisdiction of the Federal Trade Commission.
PRIVATE POOLS OF CAPITAL — WIN
• Advisers to hedge funds and private equity funds with more than $150 million in assets will be required to register with the SEC. Venture capital funds will be exempt.
CLEARINGHOUSES — WIN
• Derivatives clearinghouses will be able to borrow in emergencies from the Federal Reserve, as long as the systemic risk council, a majority of Fed governors and the Treasury Secretary decide it is necessary.
LAW FIRMS — WIN
• Regulators like the Commodity Futures Trading Commission and Securities and Exchange Commission will have scores of rules to write in coming months to implement the legislation, meaning lots of billable hours for law firms and consultants advising clients on how to respond to proposed rules.
CFTC/SEC — WIN
• The CFTC and SEC will gain new authority to regulate the $615 trillion over-the-counter derivatives market.
• The SEC will win power to oversee the hedge fund industry.
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