Financial Reform Bill Heads to the U.S. Senate

December 11, 2009 ( House lawmakers on Friday approved a sweeping financial reform measure which would, among other things, require hedge funds to register, beef up federal securities regulation, and impose executive compensation limits.

The Wall Street Reform and Consumer Protection Act (H.R. 4173) passed the chamber on a 223 to 202 vote that came after months of debate and negotiations between Democratic and Republican leaders and pressure from lobbyists.

The measure would:

  • require almost all advisers to private pools of capital – including hedge funds – to register with the U.S Securities and Exchange Commission (SEC), and be subject to systemic risk regulation.
  • strengthen the SEC’s powers to regulate the securities markets and order a systemic study of the failures that led to not detecting the Bernard Madoff Ponzi scheme.

  • enable regulators to ban inappropriate or imprudently risky compensation practices, and require financial firms to disclose incentive-based compensation structures. It also gives shareholders a “say on pay” – an advisory vote on pay practices including executive compensation and golden parachutes.
Describing the bill as “the largest overhaul of securities laws since the New Deal,” a Wall Street Journal report said the measure would give regulators new authority to identify and respond to systemic risks, break up or wind down the riskiest firms, and deal with abusive lending practices.

The bill’s most significant effect would be on the largest financial institutions, which would face intense new scrutiny on their operations and would be held to higher capital and liquidity standards, the news report said. The government would be allowed to break up even healthy large institutions that were considered a threat to the broader economy.

The Journal said Senate lawmakers are moving a parallel piece of legislation and that the chance of a bill reaching the President’s desk have considerably improved in the last several days.

More information on the bill is available here. Committee GOP members’ perspective on the measure is here.