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Leslie Bonacum

Financial Reform: Wolters Kluwer Law & Business Outlines Key Provisions of House-Senate Conference Report, and What’s Next

(RIVERWOODS, ILL., June 28, 2010) – The House-Senate conference report issued Saturday moves sweeping overhaul of the regulation of U.S. financial services and markets one step closer to enactment. According to Wolters Kluwer Law & Business Principal Federal Securities Law Analyst Jim Hamilton, JD, LLM, the overhaul of the U.S. financial regulatory system is based on the themes of regulating systemic risk, enhancing transparency and disclosure, a shareholder advisory vote on executive compensation, expanding consumer and investor protection and preventing regulatory arbitrage. Wolters Kluwer Law & Business is a leading provider of research information and software solutions in key specialty areas for legal and business professionals, with products under the CCH and Aspen names.

Both houses of Congress now have to vote on the legislation, which is expected to occur this week. The President is expected to have the legislation to sign by the Independence Day holiday.

“Once the legislation is signed, that still really is just the beginning,” said Hamilton. “Many of the provisions require the adoption of new regulations to fill in the detail of the legislative framework and create a mosaic of complete financial regulatory reform.’’

Among the key provisions in the historic reform are:

Creation of Systemic Risk Regulator: The legislation would enact an early warning system by creating a regulator to police systemically important firms.

Establish new Financial Stability Oversight Council: This council, chaired by the Treasury Secretary and comprised of key regulators such as the Fed, SEC and CFTC, would monitor emerging risks to U.S. financial stability, recommend heightened prudential standards for large, interconnected financial companies and require nonbank financial companies to heightened supervision by the Federal Reserve if their failure would pose a risk to U.S. financial stability.

New Office of Financial Research: The legislation establishes an executive agency to collect and standardize data on financial firms and their activities to aid and support the work of the federal financial regulators with the data and analytic tools needed to prevent and contain future financial crises by developing tools for measuring and monitoring systemic risk.

Regulation of Derivatives: The legislation would mandate, for the first time, the federal regulation of derivatives under a dual SEC-CFTC regime that emphasize transparency. The CFTC would regulate swaps and the SEC would regulate security-based swaps. The Act requires central clearing and exchange trading for derivatives that can be cleared and provides a role for both regulators and clearing houses to determine which contracts should be cleared.

Added power for PCAOB: The Madoff fraud revealed that the Public Company Accounting Oversight Board lacked the powers it needed to examine the auditors of broker-dealers. Thus, the legislation brings broker-dealers under the PCAOB oversight regime.

Investment Protections for Consumers and Investors: This includes:

  • Financial literacy: The legislation requires the SEC to conduct a financial literacy study and develop an investor financial literacy strategy intended to bring about positive behavioral change among investors.
  • Creation of the Investor Advocate: The legislation strengthens the ability of the SEC to better represent the interests of retail investors by creating an Investor Advocate tasked with assisting retail investors to resolve significant problems with the SEC or the self-regulatory organizations.
  • Greater disclosure to retail investors: The legislation requires disclosures to retail investors prior to the sale of financial products and services. This provision will ensure that investors have the relevant and useful information they need when making decisions that determine their future financial condition.
  • More protection for underserved investors: The legislation intends to increase access to mainstream financial institutions for the unbanked and the underbanked.

Reform of Securitization: The legislation requires companies that sell products like mortgage-backed securities to retain a portion of the risk to ensure that they will not sell toxic securities to investors, because they have to keep some of it for themselves.

Resolution Authority: The legislation’s new orderly liquidation authority would allow the FDIC to safely unwind a failing nonbank financial firms or bank holding companies, an option that was not available during the financial crisis.

Corporate Governance: The legislation gives shareholders a say on pay and proxy access, ensures the independence of compensation committees, and requires companies to set clawback policies to take back executive compensation based on inaccurate financial statements as important steps in helping shift management’s focus from short-term profits to long-term growth and stability.

Hedging Rules: The SEC is directed to adopt rules requiring a company to disclose whether any employee or director is permitted to purchase financial instruments designed to hedge the market value of equity securities granted to the employee or director as part of their compensation.

Executive Compensation Disclosure: The SEC is required to amend Item 402 of Regulation S-K to mandate disclosure of the median of the annual total compensation of all employees, except the CEO; the annual total compensation of the CEO; and the ratio of the two.

Voting by Brokers: Exchange rules must prohibit members that are not beneficial owners of a security from granting a proxy to vote the security in connection with a shareholder vote for the election of directors or executive compensation.

Hedge Fund and Private Equity Fund Advisers: Hedge funds and private equity funds will have to register with the SEC and be subject to heightened disclosure.

Federal-State Regulation of Advisers: The legislation raises the asset threshold above which investment advisers must register with the SEC from the $25,000,000 set in 1996 by the National Securities Markets Improvement Act to $100,000,000.

Added Credit Rating Agencies Oversight: The SEC will have a new office of credit ratings to regulate and promote accuracy in ratings, staffed with experts in structured, corporate and municipal debt finance. The legislation imposes tough new requirements on credit rating agencies. Rating agency boards are subject to new independence rules and rating analysts must be separated from those who sell the firm’s services.

For More Information

Members of the press interested in speaking with Wolters Kluwer securities and banking law experts should contact Leslie Bonacum at 847-267-7153,

For ongoing analysis of financial reform, visit Jim Hamilton’s blog called Jim Hamilton’s World of Securities Regulation, or visit the Financial Reform News Center at The Center provides the legal community and others with a cohesive and robust selection of breaking news stories, analysis and links to the full text of source documents for regulatory actions and serves as a central entry point for professionals for banking and securities law resources related to financial reform.

About Wolters Kluwer Law and Business

Wolters Kluwer Law & Business is a leading provider of research products and software solutions in key specialty areas for legal and business professionals, as well as casebooks and study aids for law students. Its major product lines include Aspen Publishers, CCH, Kluwer Law International and Loislaw. Its markets include health care organizations, law firms, law schools, corporate counsel and professionals requiring legal and compliance information. Wolters Kluwer Law & Business, a unit of Wolters Kluwer, is based in New York City and Riverwoods, Ill. Wolters Kluwer is a market-leading global information services company.

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