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June 15, 2010 Tuesday 9:20 PM EST
SECTION: NEWS & COMMENTARY; Economy and Politics
LENGTH: 1056 words
HEADLINE: House-Senate panel lets SEC create ratings board
BYLINE: Ronald D. Orol, MarketWatch mailto:firstname.lastname@example.org.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
WASHINGTON (MarketWatch) — Congressional leaders began to work out their differences on a sweeping bank reform package late Tuesday, as lawmakers agreed to a compromise proposal that would allow — after a two-year study — the government to create a special board to decide which credit-ratings agency would rate structured finance securities.
The measure was one of a number of provisions agreed to as both House and Senate members approved tougher regulation of hedge funds, private-equity firms and the creation of a federal insurance office within the Treasury Department.
The bank-reform legislation, written in response to the 2008 crisis, marks the most significant expansion of the regulations governing U.S. financial firms since the Great Depression.
The conference used the Senate bill as a starting point. Conferees from the House vote among themselves on changes to the Senate bill. The Senate conferees then vote among themselves to accept or reject the House proposals. The conference is dominated by Democrats, who hold large majorities in both chambers.
Both Senate and House lawmakers on the panel agreed to a provision that would make permanent a $250,000 deposit insurance limit that was put in place as a temporary program during the height of the financial crisis. The provision would make the provision retroactive to Jan. 1, 2008, to cover some large depositors who lost money during the financial crisis that shook the economy to the brink in September 2008.
“This is good for business and helps revive the economy. It’s important,” said Democratic Rep. Carolyn Maloney of New York.
However, House members rejected a Senate proposal to extend until 2012 a “Transaction Account Guarantee” program created in October 2008 for non interest-bearing transaction accounts. House lawmakers are seeing to make the program permanent. Both sides plan to debate the provision over the coming weeks.
Both Senate and House lawmakers agreed to a House provision that would require privat-equity fund managers to register with the SEC and open up their books to periodic examinations. The Senate bill originally exempted private-equity funds from registration. Both sides agreed to require hedge-fund managers to register.
Rotating credit rater
The House agreed to the Senate proposal that would empower the Securities and Exchange Commission to create a board to decide which credit-rating agency would rate structured finance securities. The provision gives the SEC two years to study the idea before deciding if it wants to create a credit-rating intermediary.
However, the provision takes a step back from another credit-rating measure, introduced by Minnesota Democrat Sen. Al Franken, which was approved by the Senate in May with broad bipartisan support. That would have required the SEC to immediately set up a government body to decide which credit-rating agency would rate the securities. Currently, the rating agencies compete for that business from the issuers, something critics say helped lead to inflated ratings that didn’t reflect the true risks.
The Franken provision, which the SEC will study, would establish a board made up mostly of institutional investors that would choose a credit-rating agency to rate a particular product. Backers say the provision would break up the cycle of credit-rating agencies providing inflated ratings to get repeat business.
House Financial Services Committee Chairman Barney Frank said he worried that the government would be too heavily involved in the rating of securities if the Franken measure passed. The Massachusetts Democrat also expressed concern about how fees would be set and what would happen if an issuer rejected a low rating with the argument that the fees charged were too high.
Sen. Chris Dodd, Frank’s Senate counterpart, said he isn’t concerned about losing Franken’s vote by proposing this compromise measure.
“You end up with a Franken concept that will be worked on and implemented over the next few years by the SEC with some changes in it,” Dodd said. “We tried legislating it, but it is more appropriate to leave it to the SEC.”
Deposit insurance changes
Lawmakers agreed to a measure that would have big banks pay more into a Federal Deposit Insurance Corp. fund than smaller institutions. The FDIC currently collects fees from banks to make payments to depositors in the case of a bank failure.
The new measure would base the insurance assessment on an institution’s assets instead of U.S. deposits, which would result in large financial institutions paying more because a large part of their asset base is in non-deposit assets such as derivatives and mortgage securities.
The votes Tuesday were the first of what congressional leaders said will be a two-week effort to reconcile the two bills. Frank, the leader of the conference, said he hopes to have a bill approved by the conference committee by June 24 so that President Barack Obama has a completed law he can present at a summit of the Group of 20 leading economies, to be held in Toronto over the following weekend.
Lawmakers on the committee are expected Wednesday to consider a governance and executive-compensation section of the bill, including a provision that would allow institutional investors to nominate one or two director candidates on corporate boards. Frank said both chambers are in agreement on this measure and other governance provisions.
Audit the Fed
Lawmakers are also expected Wednesday to vote on the extent to which the Government Accountability Office can examine the Federal Reserve’s books. The Senate approved a one-time audit of the Fed’s emergency lending programs, while the House wanted periodic audits of a wide variety of Fed programs.
Frank said he expects the final language to require the Fed to make public the names of banks that borrow from the Fed’s discount window, but with a one- or two-year delay.
“Any private company that did a transaction with the Fed’s discount window, you’ll ultimately know that, but not for a while. You don’t want that to affect that company. But people are afraid that there were secret transactions going on. The Fed will not be interacting with any private party without that ultimately becoming public.”
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