AFR to Frank and Dodd: Make and Finalize the Strongest Legislation Possible

June 15, 2010

Chairman Christopher Dodd

Chairman Barney Frank

Dear Conferee:

As you proceed with these final stages of writing the financial regulatory reform bill we ask you to work for and support a conference report which includes the strongest elements of the legislation developed in each chamber.  Deregulation was a fundamental cause of the financial crisis that has cost more than 8 million jobs, along with trillions of dollars in lost wealth.  The reckless and irresponsible behavior of the big Wall Street banks has done overwhelming harm, and we urge you to do everything possible to rewrite the rules so that Main Street’s interests come first.

In particular, we urge you to make sure that the legislation is strong in the following crucial ways:

  • Protect Consumers. The new Consumer Financial Protection Bureau must have all the functional independence it needs, including a single director named by the President and approved by the Senate, and adequate protected funding. There should be no special carve outs from its authority for auto dealers or others, or limitation of enforcement to large entities. House provisions providing back up authority should be preserved, and Senate provisions that provide entities like payday lenders an unfair first look at regulations should be jettisoned. The final bill should also strengthen the Federal Trade Commission’s ability to protect the public as it retains authority in gaps not covered by the new bureau. Further, no preemption of state law should be allowed unless there is a substantive federal standard that would protect consumers.
  • End the “Casino Economy.”  The final bill must bring the derivatives market into the light of day and require the maximum possible portion of these trades to be cleared and exchange traded; it should preserve the Senate language, exempting legitimate commercial end users hedging commercial risk, and making it clear that financial firms cannot be exempted.  CFTC Chairman Gary Gensler has estimated that the Senate bill would cover 90% of transactions, and the House bill would cover only 60%. The Senate bill also has vitally important provisions ending taxpayer subsidy of risky derivatives trades by requiring that they be separated from the business of commercial banking, and requiring swaps dealers to act in their customers’ interests when they market deals to cities, states, other public institutions and pension funds.  These provisions should remain in the final bill.  A technical change to make sure clearing and exchange trading requirements are fully enforceable is also crucial.
  • Regulate managers of private equity funds. Comprehensive regulation of private investment funds, such as hedge funds and private equity, is essential to prevent the buildup of systemic risks and to protect investors. The final bill should include the stronger House language requiring managers of hedge funds and private equity funds to register with the SEC and giving the SEC authority to require hedge fund and private equity fund advisers to disclose information to investors and creditors.
  • Reduce Systemic Risk by strengthening the ‘Volcker rule’ with the Merkley-Levin language, and avoid exceptions to the prohibition against banks investing in private equity and hedge funds.  The final bill should retain the Speier Amendment leverage limit, and the Collins Amendment’s capital requirements for bank holding companies as well as banks, along with the important provisions in the Senate bill limiting interconnectedness. The stronger House language defining non-bank, systemically risky financial institutions is essential to closing the “shadow bank” loophole that led to hundreds of billions in bailouts. The legislation must also ensure that banks and speculators – not taxpayers – pay the costs when financial institutions fail.
  • Protect investors by requiring all financial advisors to put their clients’ interest first and rejecting attempts to weaken accounting anti-fraud provisions.   The House language establishing a fiduciary duty for broker dealers should be a part of the conference report. On the other hand, the House bill weakens existing protections against accounting fraud at roughly half of all public companies; the Senate bill does not include such a weakening provision and should prevail.
  • Reform Abusive Mortgage Lending Practices by creating strong, enforceable standards for home lending to protect American families’ largest investments – their homes – and to prevent lending abuses.  The base text does a good job combining the best features of the House and Senate bills; the final bill should also include provisions that are only in the House bill to address the foreclosure crisis, including making TARP funds available to help unemployed homeowners stay in their homes.

  • Rein in the credit rating agencies. The final bill should retain the Senate’s Franken amendment, the only provision in either bill that addresses the conflict of interest that led credit rating agencies to inflate the ratings of junk securities to win market share from the issuers who pick and pay them.  The Franken amendment, passed by an overwhelming bipartisan vote in the Senate, would ensure that at least one of a security’s credit ratings comes from a credit rating agency selected by an independent, investor-led board based on its record of accuracy and reliability.  The stronger liability language in the House bill will also make the rating agencies more accountable to investors,  is consistent with the bill’s goal of reducing overreliance on ratings, and should be part of the final package.
  • Reform Federal Reserve governance and increase transparency. The final bill should include the Senate language that bars member banks from voting for regional Fed directors, and gives the President and the Senate the right to select the powerful New York Fed President. It should incorporate the House language that allows audits of the Fed on an ongoing basis, rather than only on a one-time basis.
  • Retain Corporate Governance improvements. The final legislation should retain the important new tools for holding corporate directors accountable, including the stronger House language on executive compensation.

We appreciate the enormity of the task you face, and the tremendous work that members and staff have done in bringing the legislation this far. We look forward to working with you in these final weeks to pass legislation that holds Wall Street accountable, and helps put our economy back on a safer and fairer track.


Americans for Financial Reform