Tuesday, June 19, 2018

Bill passed to roll back banking regulations would increase oversight in U.S. territories

By on May 23, 2018

SAN JUAN – On Tuesday evening, the U.S. House passed the Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155), which would roll back many elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulations enacted in response to the 2008 financial crisis that caused the collapse of the U.S. banking sector.

The legislation includes the U.S. Territories Investor Protection Act, authored by Rep. Nydia Velázquez (D-NY), which would close a loophole in the Investment Company Act of 1940 that allowed entities to act as an underwriter for the issuance of bonds, while simultaneously repackaging those bonds into mutual funds sold to investors on the island.

The practice, which is considered a conflict of interest stateside, was used on the island by global financial institutions such as Swiss investment bank UBS. The funds were leveraged and concentrated largely in Puerto Rico bonds, whose value dropped along with the island’s mounting debt crisis.

Velázquez has been pushing for her bill since she introduced it in 2015. In a statement after she voted against the bill passed Tuesday, she said: “It is a somewhat ironic, but positive, silver lining that S.2155, which I cannot support, contains provisions I personally authored to prevent the residents of Puerto Rico from being preyed on by unscrupulous actors.

“This bill will put Puerto Rico’s mutual fund industry in regulatory parity with the Mainland and, at last, bring to an end decades of exploitation of Puerto Rican investors. I am heartened, at least, that by passing my legislation, as part of this larger package, we will no longer hear of the people of Puerto Rico being swindled out of their nest egg due to an antiquated loophole in federal investment law.”

Subsidiaries of the foreign financial institutions on the island would have three years to comply with the new rules but the Securities and Exchange Commission may grant an additional three years.

The passed bill reportedly rolls back certain protections for minorities and exempts depository institutions that originate fewer than a specified number of closed-end mortgages or open-end lines of credit from specified public disclosure requirements.

It also increases the asset threshold for financial institutions to be subject to certain standards, from $50 billion to $250 billion, as well as the asset threshold at which company-run stress tests are required, from $10 billion to $250 billion.

In addition, the bill directs the Government Accountability Office to report on foreclosures, homeownership and mortgage defaults in Puerto Rico before and after Hurricane Maria.

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