Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act

Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act

Senate Banking Committee

“Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act”

September 30, 2010

Members Present:

Chris Dodd (D-CT), Jack Reed (D-RI), Michael Bennet (D-CO), Daniel Akaka (D-HI), Evan Bayh (D-IN), Tim Johnson (D-SD), Richard Shelby (R-AL), Bob Corker (R-TN), Michael Johanns (R-NE, Bob Bennett (R-UT)


Honorable Neal S. Wolin, Deputy Secretary, U.S. Department of the Treasury

The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System

Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation

Honorable Mary Schapiro, Chairman, U.S. Securities and Exchange Commission

Honorable Gary Gensler, Chairman, U.S. Commodity Futures Trading Commission

Mr. John Walsh, Acting Comptroller of the Currency, Office of the Comptroller of the Currency

Opening Statements:

Dodd: I don’t think anyone wants Congress writing detailed descriptions of regulations or to tie the hands of the regulators. With this legislation, we’ve fixed some of the gaps and loopholes that led to many of the problems, but we can’t legislate morality or wisdom. All we can do is establish a clear framework, and that’s what we’ve tried to do with this new law.

Shelby: We will be asking you to tell us what rules you will be prescribing. Nearly all of the institutions that failed were regulated by these regulators. Conflicting agency rules created opportunities for regulatory arbitrage. Dodd-Frank could potentially create an even more complex and dysfunctional system. How can we expect the agencies to implement so many new complex rules? As time passes, I believe that we will realize that Dodd-Frank will lead to more harm than good.

Highlights from Witness Testimony:

Wolin:We are moving as quickly and carefully as we can and trying to establish transparency. We will build a level playing field for all financial firms and will keep Congress informed throughout the entire process. We’ve set up teams that are responsible for carrying out our major goals. The Financial Stability Oversight Council (FSOC) will hold its first meeting tomorrow. We are working with other members to maintain independence but also maximize coordination among members.

Bernanke: We’ve created a senior staff position to track our progress with all of our implementation responsibilities. We are disclosing on our website summaries of interactions with all members of the public and other organizations. Work is underway to transfer our consumer protection information to the new Consumer Financial Protection Bureau (CFPB). We are providing advice pertaining to internal structure. We’re also continuing to strengthen our supervision of financial institutions and critical infrastructures. The Federal Reserve will provide detailed information about individual transactions. It will include the names of counterparties, terms of repayment, and other relevant information.

Bair: The FDIC is well on our way to putting Dodd-Frank into action. We’ve created a new Office of Complex Financial Institutions to help us implement our new responsibilities, which will also be working with the FSOC. We are working on our new backup examination. Our Board recently strengthened our existing Memorandum of Understanding with other regulatory agencies. We are working with the Treasury in the transition of the new CFPB.

Schapiro: The SEC has issued rules requiring the registration of municipal securities dealers. We have sought comments regarding our study about the obligation of broker-dealers and investment advisers. In October, we plan to release at least six new packages of proposals. We will complete our creation of five new offices by the end of October. In November, we plan to release nine new packages of proposals. By the end of the year, we will have issued all rules pertaining to derivatives. In January, we will submit the results of our Section 913 study. We are engaged in a comprehensive effort to implement the Act.

Gensler: We are working closely with the SEC and the Federal Reserve especially, but also with all of the regulatory agencies. We’ve had 146 individual meetings between the CFTC and other regulators. We are also actively consulting with international regulators. We’re also soliciting broad public comments. We’ve had many public meetings that we list on our website. We plan to actively publish rules starting tomorrow. We’ve coordinated our schedule for releasing rules with the SEC.

Walsh: The OCC is drafting a number of new rules that cover a broad range of issues. We’ve worked quickly to identify our rulemaking obligations. A group of senior managers is working together to coordinate this effort as the OTS is merged with the OCC. We are still in the early stages of work on these projects, and we’ve encountered some challenges to our implementation which may benefit from legislation that clarifies them.

Questions and Answers:

Dodd:I’m interested in hearing who will represent each agency in the FSOC and what you think the key substantive responsibility of those representatives will be. Wolin: Secretary Geithner will be chairing the meeting. He has been very engaged in these implementation efforts. He will be very much involved in the FSOC. On one hand, the members have their own regulatory authorities, but it will be important to make sure the information sharing is adequate for the Council to be effective. It has four studies that it must take on. It should prioritize which non-bank financial institutions should be determined to be systemically risky. Bernanke: I will be attending the meeting, and I intend to be the regular representative of the Federal Reserve. This Council is very important given all of these overlapping responsibilities and authorities. Bair: I think a top priority should be the designation of non-bank systemically important financial firms. I hope the FSOC will be forward-looking with respect to systemic practices and risks. Schapiro: I will represent the SEC and expect to be at every meeting of the Council. Because we have much to do to implement rules to fulfill the Volcker Rules, I think that study should be a priority. Gensler: I will be at every meeting representing the CFTC. For us, a priority will be designating clearinghouses. Walsh: I expect to be there along with another participant. The key challenge will be figuring out how to identify systemic risk. The overall challenge is getting consistent policy across all of the agencies.

Shelby: Can you state that the Federal Reserve will never again rescue a firm like AIG? Bernanke: Yes I can. The Dodd-Frank Act eliminated this authority. I agree with this and supported it. Shelby: What is the SEC doing to implement a solution to the problem of credit rating agencies? Schapiro: It’s complicated. It’s not clear whether securitizations will continue to go forward without an agreement with the agencies. We’re working through these issues and establishing an office for credit rating agencies. We will be putting them on an annual examination. There are a number of rulemakings that will occur regarding due diligence. Shelby: Each of the regulators charged with rulemaking has committed to public steps to transparency in the process. Will Treasury also commit to this? Wolin: We will be publishing a transparency policy. Shelby: Will each of you post your rulemaking agenda for the public? Gensler: Yes, we already did. Wolin: Insofar as we have rulemakings, we will be transparent. Bernanke: We’re going to be as clear as we can. Many of our rulemaking authorities are consultative, so we want to make sure we’re coordinating.

Reed: You have the opportunity with the Office of Financial Research (OFR) to create a culture that is analytical. Where are you in the process of appointing heads of this office? Wolin: We’re trying to begin setting up the structures that the statute requires. We need to talk to other regulators to see what data is already being collected. The President is reviewing possibilities of who will be the first head of the OFR, but we are focused on making sure that this person has real experience in data collection and data analysis and its application in these important contexts. We want to make sure that it has the independence that it was set up for, so that its work provides an unbiased look at these issues. Reed: I know you’re going to propose a rule about clearing platforms. Can you talk about the collaboration between the CFTC and SEC in this rule? Gensler: We’re sharing drafts, term sheets, etc. in an attempt to coordinate. As of now, I think the text is nearly identical. Schapiro: I think the cooperation really has been unlike anything I’ve ever seen in my years in government. We are committed to asking questions about each other’s approaches in our proposals.

Corker:There has been some confusion about whether or not the CFPB has rulemaking authority during the transition period. Wolin: I think the Secretary has authorities in transferring people and establishing the CFPB. I think the rulemaking authority is circumscribed, but I think he does have the power to do things regarding the transition. Corker: So there are some abilities in setting it up, but no ability to establish rules regarding consumer protection. Wolin: I think you’re right. The authority to actually issue a rule is a tough one until there is a confirmed director. Corker: The interagency working group was going to set up the risk retention standards, and I was wondering if you’ve had any input from the other agencies. Bair: The concern was that securitizations would no longer meet the true sale standard accounting rule, so we provided some temporary safe harbor relief, but going forward, we thought that with the problems in the securitization market that we should impose some conditions on the safe harbor going forward. We addressed key issues in the conditions. The safe harbor was expiring at the end of this month, so we went ahead. We had to do something. I think it’s important for people to understand that if we didn’t do something, it would’ve disrupted the securitization market. I think what we did was prudent. We are eager to work with the other agencies. It’s a 270 day timeline that is provided in Dodd-Frank, and we hope to see it sooner than that. Corker: Why did the OCC object to the rule? Walsh: Since it was in a notice of proposed rulemaking, we thought there should be a single policy for securitization across all markets, and we didn’t see any problem in just extending the safe harbor for the 270 days and then having a set of rules in each venue conform to one another. Corker: I think these are the kinds of things that are going to need oversight in the future. Bair: The 5% risk retention is the law in Dodd-Frank. We think we were quite consistent with the language in Dodd-Frank. We hope this happens in 270 days, but sometimes these deadlines are missed.

Bennet: You’ll be writing a rule that determines what kinds of entities are major swap participants. What will that process look like? A lot of people feel that there is a lack of clarity. Gensler: We’re going to put out proposed joint rules. Our hope is to do that in the middle of November. This category of major swap participants should be very small. They have to have a systemic effect on the system. The vast majority of end users will not be in this category. Schapiro: I agree with that. This is not intended to be an enormous category of market participants. We put out an advanced notice of proposed rulemaking in order to receive comments. This is an area where I expect to get an enormous amount of comments.

Johanns: There was discussion about retroactivity of this bill with respect to derivatives. Do you see any part of this applying retroactively applying to derivatives contracts that went into effect before the signing of the bill? Gensler: I think where this has come up the most is whether or not contracts that existed before the Act still stand, and they do. Johanns: What are the areas of conflict that have arisen in the FSOC and that you anticipate will arise in implementation? Wolin: The independence is very important, as well as the coordination. The group needs to understand that the shared goal of the group is bigger than the goals of the individual agencies. I don’t think there’s been any controversies or fault lines. It’s been a pretty cooperative effort. Bernanke: There is a lot of shared oversight and responsibilities, and multiple viewpoints are good, but I think inevitably there will be some disagreements, but I don’t see any deep or principled controversies at this point.

Akaka: Title XII will increase access to bank and credit union accounts. What is being planned to increase access to mainstream financial institutions? Wolin:We are very focused on implementing this title. We are increasing staff in this area. We’ve been surveying the landscape for some pilot projects. Akaka: What must be done to ensure that the economic empowerment aspects of the bill are implemented in meaningful ways? Bair: There are a number of tools that have been provided to us in the bill. The new CFPB will be a substantial help in this area. I think there will be an increase in small dollar loans. Akaka: The SEC will study financial literacy as well as obligations of brokers, dealers, and investment advisers. Can you talk about this? Schapiro: We have revitalized our efforts in investor advocacy and education. The financial literacy study is in the project planning stage right now. We’re looking at what the most successful private and public sector efforts have been in these areas. We’re in the process of standing up the Office of the Investor Advocate.

Bayh: Since the study about the Volcker Rule may not be completed until after implementation of rules for the Volcker Rule, what weight will that study have? Bernanke: It will be a considerable time until any of these rules are actually implemented, and even after they are, there’s a two year conformance period that could even be extended, so I don’t think that there will be any situation where rules are put into place and then rescinded. Bayh: I just want to make sure that whatever we do is informed by your analysis.