WASHINGTON — Congressional action on comprehensive financial regulatory reform was thrown into question last week after Democrats lost a Senate seat, giving retailers and banks some hope that the more burdensome regulatory proposals will be changed or even dropped in a final package.
Congress and the White House have been on the warpath to hold Wall Street accountable for the 2008 financial meltdown and subsequent federal bailout. Retailers have gotten caught in the crossfire.
The Senate is poised to take up a financial regulatory reform bill this year, following passage in the House of a comprehensive reform bill in December.
But the rules of the game for financial reform have likely changed in the Senate.
Democrats lost their 60-vote filibuster-proof majority last week when Massachusetts Republican Scott Brown won a seat in a special election that had been held by a Democratic stalwart, the late Sen. Edward M. Kennedy, for nearly 47 years.
That means Democrats, who are still in the majority, will now likely have to scale back the financial regulatory reform bill in the Senate to garner more support from some Republicans, who have voiced opposition to some provisions, according to industry veterans.
“Whether you are talking about financial regulatory reform or health care, many of these pending issues will have to take a wait-and-see approach because of the fallout of what happened in Massachusetts,” said Steve Pfister, senior vice president for government relations at the National Retail Federation.
Banks are staging a two-front battle against financial reform, following President Obama’s pronouncements and proposal earlier this month to levy a 10-year, $90 billion tax on the largest financial institutions, saying he wanted the money to cover any shortfall in the $700 billion Troubled Asset Relief Program implemented to bail out beleaguered financial firms at the peak of the financial crisis. The fee would be levied on the debts of financial firms with more than $50 billion in consolidated assets and the administration estimated more than 60 percent of the revenues will most likely be paid by the 10 largest financial institutions.
Obama more recently called for tougher regulations on banks that would place restrictions on their size and scope of activity.
Retail groups have several concerns about provisions in the House-passed bill and in the Senate draft bill, introduced by Sen. Christopher Dodd (D., Conn.) last November.
“Unfortunately, the legislation’s new corporate governance restrictions go well beyond financial institutions and affect all publicly traded companies, including those in the retail industry, which had no role in the recent financial crisis,” said John Emling, senior vice president for government affairs for the Retail Industry Leaders Association, in a letter to House lawmakers in December.
The bills would give the Securities and Exchange Commission regulatory authority to issue proxy access rules for shareholder participation in the nomination of directors.
“The proposed rules would enable shareholders controlling a small percentage of a company’s shares to nominate and elect directors to advance particular political or social policies, or the minority shareholder’s own immediate financial interests,” said Emling.
He said it could “ultimately be detrimental to the corporation and its stakeholders, including the millions of average Americans who invest in our companies.”
House Democrats defended their tough new financial regulatory legislation as a means of protecting consumers and reining in abuses on Wall Street that led to the financial meltdown last year.
“There has to be a greater level of accountability and responsibility by the boards of directors and senior management to shareholders,” said Steven Adamske, communications director for the House Financial Services Committee, which shepherded the bill through the House under the leadership of its chairman, Rep. Barney Frank (D., Mass.) “There has to be a way for shareholders that have something invested in company, as it goes up and down, to seek redress.”
“The overall message is: ‘If you want people to invest in your company, don’t fear them,’” he said. Adamske said the intent of the bill was to give more power to shareholders to participate on such corporate issues as executive compensation.
“Shareholders should not be in a position [to influence] where [a corporation] makes individual business decisions such as whether to open a plant in Cleveland or close one in Kansas City. That’s ridiculous,” he said. “But when it comes to the percentage of profits that go to executive compensation, that should be a shareholder issue.”
The bill also includes a mandate for annual shareholder votes on executive compensation.
The bills would also create a new Consumer Financial Protection Agency, to which Republicans, retailers and banks are opposed, that would give the agency authority to regulate “store-valued” cards that retailers offer to their customers for use in the retailers’ own stores, and are often referred to as “closed loop” gift cards.
“In the retail setting, gift cards are merely an advanced payment for a future sale of merchandise or services by the retailer,” said Emling. “They are today’s version of a gift certificate or store credit in an electronic format. What they are not is a financial product in need of regulation by the proposed [consumer protection agency].”
Retailers also are concerned the broad definition of “stored value” will subject to more scrutiny certain loyalty or promotional programs used by retailers.
“One of the things that has intensified our concerns about a consumer financial protection agency as proposed in the House bill is that it would be a self-funded agency, which would not get appropriations from Congress,” said Elizabeth Oesterle, vice president and government relations counsel for the National Retail Federation. “That means they would go out and put surcharges on the people they are regulating, and any company with a gift card program could potentially get an assessment from the federal government.”
Adamske disagreed with retailers’ assertions. “What the bill is trying to do in creating a consumer financial protection agency is to be a watchdog against abuses in financial transactions or in the financial industry against consumers,” he said.
“We’ve been concerned for some time that gift cards have been an unregulated area in the marketplace by which companies issuing gift cards can lead to abuses and unfairness to consumers.”
One practice that would come under the new agency’s scrutiny would be that of companies assessing fees on consumers who redeem expired gift cards, Adamske said.
“In addition, there have been an increasing number of refunds given to consumers in the form of redemption cards and they should not come with fees or expiration dates,” Adamske said. “The vast majority of retailers treat their customers as customers and play by the rules but there are a few bad actors that we need to watch out for and that is what the intent of the bill is.”
The NRF also takes exception to a proposal in the House bill that would eliminate procedural safeguards, such as required Congressional directives, and give “unlimited” rulemaking authority to the Federal Trade Commission. The bill would add new enforcement authority for the FTC to assess civil penalties for unfair or deceptive acts or practices.
“The FTC is the de facto regulator for retailers,” said Oesterle. “A lot of things retailers do fall under its jurisdiction over marketing and advertising and consumer privacy issues. The fact that it would be a supercharged agency [under the provision in the House bill] is a little concerning.”
Adamske said the House bill seeks to give the FTC more unencumbered authority to go after the “bad actors” and would not change the oversight function of Congress.