The House passed a regulatory reform bill 223 to 202 on Friday that would significantly reshape the financial framework.
H.R. 4173 is a key priority for President Obama but its passage was no slam dunk as the bill had to undergo substantial changes throughout the process to minimize its impact on an array of niche business interests in order to maintain support.
One of the bill’s most controversial elements was the creation of a consumer financial protection agency – a provision said to be important to Obama but which barely was included following a threat Friday from Rep. Walt Minnick, D-Idaho, and other moderate Democrats.
The Minnick amendment would have scrapped the agency and created a council of regulators that would enforce both safety and soundness and consumer protections.
The amendment failed 223 to 208, but early head counts proved so close that Democratic leaders launched a strong offensive against the measure with House Majority Leader Steny Hoyer spending considerable floor time speaking out against it. Rep. Melissa Bean, D-Ill., a key moderate, also spoke out against the amendment, but only after succeeding in delaying initial consideration of the bill Wednesday afternoon in exchange for a deal to strengthen the Office of the Comptroller of the Currency’s ability to preempt state consumer protection laws.
Under the final bill, the Consumer Financial Protection Agency would write rules for all banks and non-banks, but could only enforce them against non-banks and community banks with more than $10 billion of assets.
During debate Friday, an amendment from House Judiciary Committee Chairman John Conyers that would let bankruptcy judges cram down debt on primary mortgages to prevent foreclosures was also rejected, 241 to 188.
The bill would establish a framework to minimize systemic risk, enabling regulators to require large, interconnected, firms to increase their capital, force them to deleverage, halt risky product offerings, or even break up.
Financial institutions of $50 billion and more in assets and hedge funds of $10 billion and more would pay into a $150 billion fund managed by the Federal Deposit Insurance Corp. to pay for the failure of systemic risk firms.
“ICI supports modernization of the U.S. financial services regulatory framework. America’s mutual fund shareholders, almost 90 million strong, need a financial system that is sound and globally competitive," said Paul Schott Stevens, president and CEO of the Investment Company Institute. “However, a number of provisions included in the House-passed bill must be addressed as the legislative process continues."
Stevens said the bill, in its current form, could subject mutual funds to inappropriate forms of bank-like regulation should regulators decide to deem mutual funds a source of systemic risk. The bill could also require mutual funds and their shareholders to contribute to a dissolution fund for failing financial institutions, he said.
"Mutual funds do not and cannot ‘fail’ in a manner that would require payments to funds or their shareholders out of any such dissolution fund," Stevens said. “We look forward to continuing to work with Congress to resolve these issues.”
The legislation also would require all standardized derivatives transactions to be cleared and traded on exchanges or other platforms. It reforms the credit rating agencies, requires registration of hedge funds, enhances investor protections, ties executive compensation to performance and tightens mortgage underwriting standards.