UPDATE: Financial Winners In Senate Bill Dodged The Bullets

The winners after the U.S. Senate passed financial overhaul legislation are the industries that managed to avoid being losers.

Insurers, hedge funds, derivatives exchanges and money managers avoided most of the worst of the Senate's sweeping proposals, which were approved late Thursday.

For big banks, regional banks and consumer lenders, not so much.

"This is not some bump in the road where we go back to business as usual in six months," said attorney Douglas Landy, head of U.S. banking practice at Allen & Overy. "This is a very fundamental change in the way U.S. banks operate, from raising capital to how they operate and what they invest in."

To become law, the Senate's provisions must be reconciled with the House of Representative's financial overhaul legislation passed in December.

By contrast to the fallout for banks, the Senate bill's various provisions imply small, even incremental, changes for insurance companies, independent hedge funds and mutual funds--in part because most policymakers don't blame them for causing the crisis.

There could be some big changes for hedge funds, for example--that is, those owned by banks. A key element of the Senate bill, known as the Volcker Rule after former Fed chief Paul Volcker, restricts banks from investing in or sponsoring hedge funds. A relatively light consequence for hedge funds broadly is that those with more than $100 million must register with the Securities and Exchange Commission as investment advisers and report their trades and portfolios to the agency.

If the Volcker Rule ends up becoming law, it could be a boon for standalone funds. They would face less competition from bank-owned funds; moreover, the investor bases of those bank-owned funds could get spooked and flock to other funds. The Senate's light touch on hedge funds reflects an about-face from the Wall Street crisis of 1998, when hedge fund Long Term Capital Management, rather than a bank, threatened to sink financial markets worldwide.

The insurance industry avoids any major hits should the Senate's bill become law. The Senate bill establishes a federal Office of National Insurance, which insurers have long favored, and which would advise the president and Congress on insurance issues and play a key role in international agreements.

Even though many mutual fund investors suffered losses when markets careened during the crisis, mutual-fund managers were rarely considered responsible in causing it. Fund management companies didn't appear to be an express target of the Senate bill.

The industry complained, however, that it was at risk from spillover effects of legislation, despite assurances Sen. Scott Brown (R., Mass) received from House Financial Services Committee Chairman Barney Frank (D., Mass.) that big companies like Fidelity Investments wouldn't be exposed to more regulation. Paul Schott Stevens, chief executive of the Investment Company Institute, a trade group, said funds could be subject to "bank-like regulation, in the unlikely event that regulators deem a mutual fund a source of 'systemic risk.'"

One clear winner could be the derivatives exchange operators CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE), which operate clearinghouses where companies could be forced to clear their derivatives trades.

Banks and consumer lenders, by contrast, found far less help from the Senate ranks as lawmakers finalized the bill.

Although Republicans worked to defeat even more restrictive Volcker Rule language, banks could face strong curbs on the "swipe" fees they charge to businesses who accept debit cards. Consumer lenders could also be forced to deal with regulations from an independent Consumer Financial Protection agency, which both the House and Senate bills propose.

Moreover, a strong provision by Arkansas Sen. Blanche Lincoln, a Democrat--which shocked some observers by surviving Senate horse-trading, despite opposition from government officials--would make it nearly impossible for Wall Street banks to keep their lucrative derivatives units. Some observers still expect this provision to eventually be watered down or removed.

The Senate bill could also force some banks to go through changes in their capital. Some trust preferred shares might no longer contribute to key bank capital ratios, which might require tough negotiations between banks and investors in these shares over their eventual fate.

The restrictions on capital, coupled with the bill's various other measures, could mean jarring changes for banks and their investors.

Said Steve McBee of lobbyist firm McBee Strategic Consulting: "Senate passage yesterday of financial regulatory reform means the most sweeping reform of our financial system is one step closer to enactment."

-By Marshall Eckblad and Erik Holm, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com

(Jon Kamp, Aparajita Saha-Bubna, Jacob Bunge and Joseph Checkler contributed to this report.)

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