Dodd's New Financial Regulation Bill

Senate Banking Committee Chairman Christopher Dodd (D-CT) announced his plan for financial regulation today. A few weeks ago, I dissected a draft out of the House Financial Service Committee that sought to accomplish essentially the same task. The two plans differ in some very significant ways. Rather than blog my way though this one, I thought it might be more useful to note some highlights, and then dig a little deeper into several interesting topics in subsequent posts.

So I'll start with just the summary (.pdf) of the draft. The entire proposal (.pdf) is 1,136 pages. That makes the House's 253-page version look short. It's far more ambitious, which probably amounts to the House's version being a little more realistic.

Consumer Financial Protection Agency

Consumer protection advocates will be elated to hear that the Senate's draft seeks to create a much debated independent Consumer Financial Protection Agency. The summary touts that the agency will prevent fraud and abuse while helping consumers to have clearer information on financial products like credit cards and mortgages.

Systemic Risk Regulator

This marks a big difference between the House and Senate versions. In the House version, a systemic risk council was created that had little actual regulatory power. Most regulation was left to the Federal Reserve. Dodd's version creates an entirely new agency to take on systemic risk regulation. The president would appoint an independent chairman to head the agency. Its board, however, would look a lot like the House's council. But the new agency would have the systemic regulatory power, not the Fed.

Big Non-Financial Firm Regulation

Like the House's version, the Senate would call for stricter capital and leverage requirements. The summary says that the intent is to discourage firms from getting too large. That goal seemed a little more implicit in the House version. The Senate also wants broader authority for the regulator to break up financial institutions that pose a significant systemic risk. It also seeks to have the Fed regulate what it calls "important market utilities," like "clearing, payments, and settlements systems."

Resolution Authority

From the summary, it sounds like this part of the new draft is very similar to what the House's plan calls for. The Federal Deposit Insurance Company (FDIC) would resolve non-bank financial institutions here as well. The post-resolution cost imposition appears to be the similar as well -- bore by other financial firms. But I'll double check this when I start digging into the actual bill.

Regulator Consolidation

The Senate version also goes a little further than the House version in consolidating bank regulators. The House abolished the Office of Thrift Supervision. Dodd's bill, however, would end the bank regulation authority of Office of the Comptroller of the Currency, the Office of Thrift, the FDIC and the Fed, and concentrate it in just one new regulator.


The House's draft hardly mentioned derivatives. The Senate's version would create enhanced regulatory power over derivatives for the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission. It also seeks to require central clearing and exchange trading for derivatives, where possible. The SEC and CFTC would have to pre-approve derivatives contracts as well.

Hedge Funds

I don't recall reading about hedge fund regulation in the House's bill at all. Dodd wants hedge funds over $100 million in value to register with the SEC and disclose financial data. This is an interesting goal, given that hedge funds did not play a tangible role in the financial crisis.

Executive Compensation

This section essentially seeks to give a firm's shareholders more say on pay. They would get to vote on executive pay and golden parachutes. Of course, the votes would be non-binding. That means that they'd essentially just create bad press for their firm without actually requiring any change. I find it hard to believe that this would happen very often. There is also a provision that appears to claw back executive compensation if fraud is found.

Rating Agencies

Here's the first part of the summary:

Establishes a new Office of Credit Rating Agencies at the Securities and Exchange Commission to strengthen regulation of credit rating agencies. New rules for internal controls, independence, transparency and penalties for poor performance will address shortcomings and restore investor confidence in these ratings.

Oh, this will be fun to go through. I'm especially amused with the penalties for poor performance.

Investor Protections

The SEC will gain a lot of power and additional funding through this bill. It would also be funded by assessments on firms, not taxpayers.


The Senate looks to have similar goals to the House here. Like the house, it wants originators to have some "skin in the game." But it wants more skin -- 10%, rather than just 5%. Oddly, it also appears to limit this to mortgages, disregarding all those other forms of securitization that do essentially the same thing with other assets.*

Like I said, Dodd's plan is far broader than the House's version. I can already see that it does some things better, but others worse. But now, I'll really dig in.

* Note: This is incorrect -- the full draft does generalize the rules for all asset-backed securities. The summary must have attempted to generalize by incorrectly using the more familiar term "mortgage-backed securities."