Now that the healthcare reform bill has been passed, legislators can begin to focus on another equally important issue: financial reform.

“It’s very important for the financial industry that we get some stability,” Barney Frank, chair of the House Financial Services Committee, told an audience of compliance, risk, and audit executives during Compliance Week’s annual conference in Washington D.C. this week. It’s important to move quickly, he said, adding that the bill is very close to passage.

“It’s rare that two major bills come out of the House and Senate on a similar piece of legislation that are this close,” said Frank, referring to the Senate’s version of a financial reform bill passed in recent weeks.

It’s likely that a final bill will be signed before the Fourth of July recess, he added. “That’s important because stability of the economy is important; it’s important for businesses to know what the rules are.”

While the United States has a method for “putting failing banks to death,” no such method is in place for non-bank financial institutions. Frank noted that this lack of legislation is what led to the AIG and Lehman Brothers’ messes, and what eventually led to the financial reform before companies today.

Proposals in the financial reform bill include a model that Frank called “very close to what the FDIC (Federal Deposit Insurance Corporation) does.” Failed entities would be put out of business; shareholders’ equities would be abolished; and money would be used from the financial industry itself to pay off necessary debts, he said.

After passage of the financial reform bill, “there will be no entity in America that does not have to report financial transactions to a regulator,” said Frank. That regulator will be charged with making sure the entity is always able to pay its debts and, if not, reporting that entity to the Federal Reserve.

“No derivate contract will be allowed unless it is reported to the appropriate entity,” in order to ensure that it’s not so overly indebted that it fails, said Frank. He used the example of AIG being able to sell credit default swaps with no restraints.

New financial institutions will have to be sent to a clearinghouse. Those not dealing with derivatives but only hedging their own risks will have to report them, with the option of going to a clearinghouse.

A strong regulatory regime “very much” depends on a globally, coordinated regulatory regime, said Frank. Regarding the flash crash, in particular, “at the very least, I think there has to be a coordination of the shut downs,” so that when one exchange shuts down, all others do, as well. One consequence of technological advancements is that the economy has become “much more intertwined than it ever was,” he said.

Of course, not all are thrilled about the idea of such sweeping financial reform, including many audit and compliance executives. In response, during his speech, Frank said companies often say, ‘Don’t legislate too vigorously.’ On the other hand, when an incident arises, such as Goldman Sachs, the response is almost always, ‘The law didn’t prohibit us from doing it.’”

Said Frank: “You cannot simultaneously argue to us for flexibility, but then in a tough situation argue that, because you didn’t make it specifically illegal, you can’t be compliant.”

Additional coverage of Frank’s speech will be in an upcoming edition of Compliance Week.

—Jaclyn Jaeger