Factbox: Major financial regulation reform proposals

(Reuters) - Negotiators for the Senate and House of Representatives are hammering out a compromise between two competing bills representing the biggest overhaul of financial regulation since the 1930s.

A House-Senate conference committee must find a middle ground between bills passed by the two chambers. The committee’s final report could differ from earlier versions.

Once approved by both chambers, the compromise legislation will go to President Barack Obama to sign it into law. That could happen by July 4, analysts say.

The Senate bill is being used by the conference committee as its base text. Here are its key elements, how they compare to the House bill, and winners and losers on each issue:


* Objective: End the idea that some financial firms are “too big to fail.” Avoid a repeat of 2008, when the Bush administration launched costly taxpayer bailouts of firms such as AIG but did not bail out Lehman Brothers. Lehman’s subsequent bankruptcy froze capital markets.

Congress wants a middle ground between bailouts and bankruptcy. Firms would have to keep “funeral plans” on file that describe how they could be shut down quickly.

The Senate bill would set up an “orderly liquidation” process that could be used in some emergencies, instead of bankruptcy. The process would let authorities seize large firms in distress and put them in Federal Deposit Insurance Corp receivership, with liquidation required as the next step.

Shareholders and creditors -- not taxpayers -- would bear the losses. Management would be removed. The FDIC’s costs would be covered in the short term by a Treasury Department credit line, then recouped by sales of the liquidated firms’ assets and, in case of shortfalls, fees slapped on other large firms.

The House bill would set up a similar FDIC process, except that it would be backed by a $150 billion permanent fund paid into by financial firms whose assets exceed $50 billion. The House’s prepaid fund idea looks likely to die in committee.

* Winners and losers: If the new strategy works, the economy will be better protected from financial crises by giving the government better tools to deal with distressed firms. Big financial firms will end up paying new fees.


* Objective: Consolidate and improve the government’s fragmented financial consumer protection programs with an eye to cracking down on abusive home mortgages and credit cards.

Both bills would consolidate programs now spread across a half dozen agencies into one watchdog with teeth and a director nominated by the president and confirmed by the Senate.

The Senate bill makes the new entity part of the Federal Reserve and requires it to answer, in some instances, to a new Financial Stability Oversight Council led by Treasury. House Democrats have agreed to go along with this plan.

The House bill exempts many businesses from watchdog oversight, such as car dealers that do not finance their own lending to customers. The Senate one has fewer exemptions.

On another front, the Senate modestly boosts the power of state regulators to enforce consumer protection laws.

* Winners and losers: Consumers may be better protected, with credit card and mortgage firms facing tougher rules.

Many senators favor a car dealer carve-out. The Obama administration generally opposes exemptions. Car dealers would win big if they can get an exemption in the bill.

The Senate’s approach to state law will likely stand as a compromise between banks and consumer advocates.


* Objective: Ban risky trading unrelated to customers’ needs at banks that enjoy government backing; get banks out of the private equity and hedge fund markets; limit big banks’ growth with a new cap on total nondeposit liabilities.

Obama proposed the rule with his economic adviser Paul Volcker, the former Federal Reserve chairman.

The Senate bill endorses the rule, but calls first for a two-year study and leans on regulators to write the details afterward, leaving the door open to weakening the rule later.

Democratic senators Jeff Merkley and Carl Levin have proposed giving regulators stricter implementation orders and toughening the Senate plan in other ways.

The rule is not in the House bill, although the bill would let regulators bar proprietary trading in some cases.

Some version of the Merkley-Levin version of the rule is widely expected to be included in the final bill.

* Winners and losers: Big banks’ profits would be hurt if the rule is enacted. Banks are working to diminish the damage by carving exemptions into the rule. Volcker opposes these efforts and says his rule would help prevent the next crisis.


* Objective: Regulate the $615-trillion over-the-counter derivatives market, including credit default swaps like those that dragged down AIG. The market is not presently policed.

Both bills propose pushing as much OTC derivatives traffic as possible through more accountable and transparent channels such as exchanges and central clearinghouses.

The Senate bill also would require banks to spin off their swap-trading units, under a provision offered by Senator Blanche Lincoln. Banks oppose this, but support for the provision has grown as Lincoln has refined it.

The House bill exempts a wider range of end-users from central clearing and excludes Lincoln’s swap-trading “push-out” plan. It also limits swap-dealer ownership in clearinghouses.

* Winners and losers: The government would gain a clearer view of risks posed in the market. Wall Street firms that dominate the market -- including Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and Morgan Stanley -- could see their profits cut.


* Objective: Create a new government entity to monitor the financial big picture, spot and head off the next crisis.

Both bills set up a council of regulators chaired by the Treasury. The council could identify firms that threaten financial stability and subject them to stricter policing. The council and the Fed could break up extra-risky firms.

* Winners and losers: Big banks and financial firms would be forced into a tighter regulatory straitjacket. The government would know more about firms that pose a risk and, in theory, be able to stop trouble before it starts.


* Objective: Rationalize the jigsaw puzzle of bank and market supervision to stop troubles from festering in the cracks between a half-dozen different federal agencies.

Both bills do little to address this problem. Fixing it was once seen as vital. But bureaucratic turf fights and pressure from banking lobbyists killed an ambitious Senate reform plan.

Both bills would close the Office of Thrift Supervision.

* Winners and losers: Bankers and existing regulators won this fight by preserving the status quo, except for OTS.


* Objective: Ensure that financial firms have thicker capital cushions to ride out troubled times than they had during the severe 2007-2009 credit crisis.

Both bills call for raising capital requirements on firms as they get bigger. But neither spells out much detail.

The Senate bill was amended by Republican Senator Susan Collins with a measure that would make bank holding companies adhere to the same capital standards as bank subsidiaries.

In addition, bank holding companies could no longer count trust-preferred securities and other hybrids as Tier One capital, a key measure of a bank’s strength.

Lawmakers have only half-resolved the Collins provision. They have agreed to give banks more time to comply with it, but have put off deciding which firms could be grandfathered.

* Winners and losers: Most U.S. firms have already boosted their capital since the crisis and should be able to meet higher standards, but the Collins amendment could be hard on Capital One and M&T Bank, analysts say.


* Objective: Give shareholders more clout in electing directors and thereby more say on executive pay.

The Senate and the House are at odds over a “proxy access” proposal that would give shareholders greater access to the corporate proxy statement to nominate directors. Managers now tightly control the director-election process.

The House favors the proposal, but the Senate has proposed limiting enhanced proxy access to investors owning at least 5 percent of a company for more than two years -- a bar so high that investor advocates say it guts the House proposal.

Sources said the White House has intervened on this issue in favor of the Senate’s proposal.

* Winners and losers: Corporate managers seeking to preserve their hold on the proxy look likely to win, handing investors another defeat in a long-running battle.


* Objective: Expose hedge funds and other alternative investment vehicles to more government oversight.

Lawmakers have agreed to private equity and hedge funds with assets of $150 billion or more to register with the Securities and Exchange Commission. Venture capital funds would be exempted from full registration, under the agreement.

* Winners and losers: Regulators would gain a window into a murky market. An estimated 55 percent of hedge funds are already registered. Those that are not would have to do so.


* Objective: Make the securitization market for mortgages and other debt more transparent and accountable.

Lawmakers have agreed to force securitizers to keep a baseline 5 percent of credit risk on securitized assets. More disclosure is required for securitized debt instruments.

* Winners and losers: Investors in securitized products would be better protected. Securitizers -- from lenders to Wall Street bundlers -- face stricter oversight and higher costs.


* Objective: Increase the accuracy of credit ratings used by investors to judge debt-offering risks and boost oversight of for-profit firms that issue these ratings.

Lawmakers have agreed to require a two-year study by regulators of rating agency issues. If they do not devise a better plan in that time, regulators would then be required to implement a plan by Democratic Senator Al Franken that would create a panel to match rating agencies on a semi-random basis with debt issuers for new structured securities.

* Winners and losers: Major rating agencies -- Moody’s Corp, Standard & Poor’s and Fitch Ratings -- won more time from the agreement on the Franken plan, but they will face stricter oversight and more competition. If it works, the rule could make credit ratings more credible.


* Objective: Reduce fees that card issuers charge consumers and merchants.

Lawmakers have agreed to limit fees charged on debit-card transactions. Merchants could encourage customers to use one kind of card over another, or to pay by cash or other means.

* Winners and losers: The fee limits are a victory for merchants and a defeat for big card firms such as JPMorgan Chase. Card networks MasterCard Inc and Visa Inc won more moderate limits in the Senate-House agreement.


* Objective: Shed more light on the Federal Reserve.

Lawmakers have agreed to expose the Fed’s emergency lending during the crisis to congressional scrutiny, but not its decisions on interest rates.

* Winners and losers: Longtime critics who have criticized the Fed’s secrecy can claim victory, while Fed officials managed to avoid intrusive oversight of monetary policy.


* Objective: Hold brokers to the same standard of client care observed by investment advisers, ending a long-standing disparity that investor advocates say is unfair.

The House bill would make this change, forcing brokers who give financial advice to respect a “fiduciary duty” to act in their clients’ best interest as advisers do. Brokers now must only ensure a financial product is suitable for a client.

The Senate bill calls for another study of the issue.

* Winners and losers: Big brokerage houses would have to change their approach under the House bill, while the Senate bill would preserve the status quo for now.


Both bills would set up a new federal office to monitor, but not regulate, the insurance industry, which is now policed at the state level.

Winners and losers: The industry is divided on the issue of federal oversight. The reforms appease opponents of more centralized regulation by keeping real power out of Washington’s hands, while giving big insurers that want a single regulator a possible foothold to use in the future.

Reporting by Kevin Drawbaugh; Editing by James Dalgleish