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Financial Reform Still Possible in 112th Congress, Says Wolters Kluwer Law & Business

Reform Agenda May Shift, But Common Ground Emerging on Key Provisions

(RIVERWOODS, ILL., November 10, 2010) – With a Republican House in the 112 th Congress, the legislative agenda for financial regulation will shift somewhat but there is still an opportunity for reform legislation next year, according to Wolters Kluwer Law & Business. Wolters Kluwer Law & Business is a leading provider of information and software solutions in key specialty areas for legal and business professionals, with products under the CCH and Aspen names (wolterskluwerlb.com).

“There is a growing bipartisan consensus for certain areas of reform, including issues related to reform of government-sponsored enterprises such as Fannie Mae and Freddie Mac, as part of the overall reform of the securitized secondary mortgage market, and reform of the Public Company Accounting Oversight Board,” said Wolters Kluwer Law & Business Principal Securities Law Analyst James Hamilton, JD, LLM. Hamilton is one of the lead analysts for Wolters Kluwer Law & Business’ Dodd-Frank Wall Street Reform and Consumer Protection Act: Law, Explanation and Analysis.

Covered Bond Act

In late July, the House Financial Services Committee reported out the U.S. Covered Bond Act, HR 5823. It has bipartisan support, having been cosponsored by Rep. Spencer Bachus (R-AL) and Rep. Paul Kanjorski (D-PA).

Rep. Bachus, who is slated to become the Chair of the House Financial Services Committee, recently outlined the principles for draft legislation to reform the secondary mortgage market, with a covered bond market as an integral part of the effort. Among the provisions included in this legislation are:

  • Sunset over a four-year period the current government-sponsored enterprises (GSE) conservatorship and wind down the federal subsidies granted through their charters;
  • Introduce full transparency and accountability to the secondary market;
  • Reduce leverage by phasing in, over four years, capital requirements that are consistent with global standards for large, complex financial institutions; and
  • Create a regulatory safe-harbor for mortgages that meet underwriting standards that are consistent with the Federal Reserve Board's final Home Owner's Equity Protection Act (HOEPA) rule.

“The safe-harbor provision is designed to encourage the return of private capital to the mortgage finance market by giving investors transparency and confidence that the loans they purchase meet appropriate underwriting standards, including the ability to repay and the integrity of the documentation,” said Hamilton. He added that this provision may involve amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which establishes only a limited safe harbor from legal liability. 

According to Hamilton, a centerpiece of the Bachus reform legislation is the establishment of a regulatory framework for a U.S. covered bond market. A covered bond is a form of debt issued by a financial institution where a specific set of high quality assets, typically loans, are set aside into a pool for the benefit of the bondholders. The issuers of covered bonds are responsible to their bondholders for the risk posed by the underlying loan pool. 

“Covered bonds are a source of private mortgage market financing which have worked well in many European countries, and they are used as a private market solution to the need for market participants to have skin in the game,” said Hamilton.

PCAOB Reform

Another piece of legislation that appears to be bipartisan involves the reform of Public Company Accounting Oversight Board (PCAOB) procedures.

In a letter to House Financial Services Committee Chair Barney Frank (D-MA) and Ranking Member Bachus, PCAOB Acting Chair Dan Goelzer asked for legislation amending Sarbanes-Oxley so that Board disciplinary hearing against individual auditors and accounting firms will be public.

“Currently, from the initiation of the PCAOB disciplinary proceeding through the SEC decision to let the sanctions commence, the entire proceeding takes place behind closed doors,” explained Hamilton. “The closed nature of Board disciplinary proceedings is in sharp contrast to similar SEC proceedings against auditors.”

The draft legislation would make PCAOB disciplinary proceedings public when the Board decides that the evidence gathered in an investigation warrants charging a firm or individual with a violation, while at the same time maintaining existing confidentiality of Board inspections. The draft would also retain the Board’s flexibility to order non-public proceedings in appropriate cases.

“Financial reform will most certainly shift priorities in the 112th Congress, but it will continue,” said Hamilton.

For More Information

Members of the press interested in speaking with Wolters Kluwer Law & Business securities and banking law experts should contact Eric Scott at 847-267-2179, eric.scott@wolterskluwer.com or Brenda Au at 847-267-2046, brenda.au@wolterskluwer.com.

More detail on financial and securities reform is at Financial Reform News Center at http://financialreform.wolterskluwerlb.com, providing the legal community and others with a cohesive and robust selection of new developments and analysis; and Jim Hamilton’s World of Securities Regulation, offering unique analysis on securities law and regulation. 

To order Dodd-Frank Wall Street Reform and Consumer Protection Act: Law, Explanation and Analysis, visit http://onlinestore.cch.com or call 1-800-248- 3248.

About Wolters Kluwer Law & Business

Wolters Kluwer Law & Business is a leading provider of research products and software solutions in key specialty areas for legal and business professionals, as well as casebooks and study aids for law students. Its major product lines include Aspen Publishers, CCH, Kluwer Law International and Loislaw. Its markets include health care organizations, law firms, law schools, corporate counsel and professionals requiring legal and compliance information. Wolters Kluwer Law & Business, a unit of Wolters Kluwer, is based in New York City and Riverwoods, Ill. Wolters Kluwer is a market-leading global information services company.

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