On June 16, 2010, the conference committee reconciling the House and Senate versions of the federal financial reform bill agreed to include in the final reform legislation the House provision that provides an exemption on compliance with Sarbanes-Oxley Act (SOX) Section 404(b) for companies with less than $75 million in market capitalization.
Under the provisions of SOX 404, publicly reporting companies and their independent auditors are each required to report on the effectiveness of internal control over financial reporting. Section 404(a) requires all public companies to assess the effectiveness of their internal control over financial reporting, while Section 404(b) requires independent auditors to report on management’s assessment. On October 2, 2009, the Securities and Exchange Commission (SEC) granted its latest deferral for compliance with SOX 404(b), providing non-accelerated filers, those companies with a public float below $75 million, with a reprieve from the auditor attestation until annual reports for fiscal years ending on or after June 15, 2010 are filed. At the time of that deferral, the SEC was adamant that it would not be granting any further extensions for compliance with SOX 404(b).
The inclusion of the exemption in the final reform legislation would permanently exempt the auditor attestation requirement and significantly reduce the anticipated compliance burdens of smaller reporting companies. Disclosure of management attestations on internal control over financial reporting would continue to be required for smaller reporting companies.
Last week the conference committee charged with reconciling the House and Senate versions of the federal financial reform bill began its formal deliberations, and this debate continues in open session. The language originally proposed by Sen. Susan Collins (R-Maine) remains in the base text on which reconciliation efforts will focus. The Collins amendment would exclude trust preferred from the consolidated Tier 1 capital of banks and holding companies. This would force an estimated $1.3 trillion in deleveraging and would affect the roughly 600 banks with less than $10 billion in assets that hold these securities as Tier 1 capital. Here we provide an update on this aspect of the reform bill and its likely fate between now and the conference committee’s self-imposed July 4 reconciliation deadline.
Observers consistently note that FDIC has been the driving force behind this amendment and that it will continue to advocate for it. Collins being a Republican, Democrats are not likely to dismiss her proposal out of hand during the reconciliation process—the reconciled bill will still need to garner a 60-vote supermajority to proceed to a final passage vote on the Senate floor. As you may recall, the May 20 passage vote on the Senate bill (59-39 in favor) followed the narrowest of victories in the vote to end debate on it: 60-40. In that vote, Collins joined just two other Republican Senators, including fellow Maine senator Olympia Snowe, and two independents in voting with Democrats for cloture. Those five votes offset negative votes on the matter by two Democrats in an otherwise partisan passage vote.
Their possible influence notwithstanding, since the Senate’s May 20th vote on the bill, both Collins and the FDIC have expressed a willingness to soften the implementation of her proposal:
- Collins, in a June 7 interview: “I’m taking a look at all of these suggestions. I will say that it’s clear to me from talking to the FDIC chairman that trust-preferred is a debt instrument and cannot easily be converted into common equity, and therefore I don’t think it should qualify as Tier 1 capital. Having said that, I recognize that there is a need for a transition period, and that’s what we are taking a look at.”
- FDIC spokesman Andrew Gray on June 8: “With respect to the Collins amendment, the FDIC supports grandfathering or providing a transition period for TruPS. We’ve publicly acknowledged the need for special transition rules.”
Financial Regulatory Reform Bill
On Tuesday, Sen. Blanche Lincoln (D-AR) won her state’s primary runoff over Lt. Gov. Bill Halter (D-AR), overcoming what many considered long odds for her campaign. Lincoln’s loss could have jeopardized the provision she sponsored to the Senate-passed bill that would require banks to spin off their derivatives desks. Those same sources are now predicting that Lincoln’s victory makes it much more likely for the provision to survive the conference committee. Supporters, including Senate Majority Whip Dick Durbin (D-IL) and Sen. Tom Harkin (D-IA), rallied behind Lincoln saying her primary election win Tuesday boosted her bargaining power. House Speaker Nancy Pelosi (D-CA) has also privately indicated support for Lincoln’s language. However, Lincoln’s provisions face opposition from the Administration, the Treasury Department and the Federal Reserve. In a meeting with House Democrats Wednesday, Securities and Exchange Commission Chairman Mary Schapiro expressed concern over Lincoln’s proposal. Shapiro argued that it could give a “false sense of security” to the marketplace.
On Wednesday, Pelosi appointed Democratic conferees to the committee including Barney Frank (D-MA), the chair of the Financial Services Committee; Agriculture Committee Chairman Collin Peterson (D-MN), Energy and Commerce Committee Chairman Henry Waxman (D-CA), Judiciary Committee Chairman John Conyers (D-MI), Oversight and Government Reform Chairman Edolphus Towns (D-NY), and Small Business Committee Chairwoman Nydia Velazquez (D-NY). The non-chairmen level House Democrat appointees include Paul Kanjorski (D-PA), Maxine Waters (D-PA), Carolyn Maloney (D-PA), Luis Gutierrez (D-PA), Mel Watt (D-PA), Gregory Meeks (D-NY), Dennis Moore (D-KS), Mary Jo Kilroy (D-PA), Gary Peters (D-PA), Leonard Boswell (D-PA), Bobby Rush (D-PA), Elijah Cummings (D-PA), Heath Shuler (D-PA). House Minority Leader John Boehner (R-OH) also named GOP members including Spencer Bachus (R-AL), ranking member on the House Financial Services Committee; Joe Barton (R-TX), ranking member of the House Energy and Commerce Committee; Rep. Sam Graves (R-MO), ranking member of the House Small Business Committee; Darrell Issa (R-CA), ranking member of the House Oversight and Government Reform Committee; Frank Lucas (R-OK), ranking member of the House Agriculture Committee; and Rep. Lamar Smith (R-TX), ranking member of the House Judiciary Committee. The non-ranking member level House Republican conferees include Ed Royce (R-CA), Judy Biggert (R-IL), Shelley Moore Capito (R-WV), Jeb Hensarling (R-TX), and Scott Garrett (R-NJ).
On June 10, 2010, the House of Representatives and the Senate released the base text that they will be working from in trying to reconcile their separate versions of financial reform. The House also issued a press release describing the differences between the new base text and the financial reform bill adopted by the House last year.
The base text preserves the thrift charter going forward (a provision originally found in the House but not Senate versions of reform), but retains the interchange fee amendment, the application of national bank lending limits to state banks, and the Collins amendment excluding trust preferred securities and TARP investments from holding company Tier 1 capital.
The House also published a side-by-side comparison of the original House and Senate versions of the reform bill.
Senate Adopts Corporate Finance and Executive Compensation Provisions in Financial Reform Bill
On May 27, the Senate released the text of the financial reform bill that was passed the prior week. The bill, known as the “Restoring American Financial Stability Act of 2010″ or the “Act,” would result in sweeping reforms to the financial industry. However, it also contains a number of significant provisions that would affect corporate governance and executive compensation at public companies, as well as Regulation D private placements, whistleblowers and beneficial ownership reporting. This Corporate Finance and Securities Bulletin outlines some of the more important provisions of the Act.
Click here for a complete copy of the Bulletin.
FTC Extends Deadline for Identity Theft Red Flags Rule to December 31, 2010
The Federal Trade Commission announced that it will further delay enforcement of the “Red Flags” Rule through December 31, 2010, while Congress considers legislation that would affect the scope of entities covered by the Rule. The announcement does not affect other federal agencies’ enforcement of the original November 1, 2008 deadline. As a result, the extension does not apply to banks and other financial institutions that are covered by the Red Flags which were separately issued by the Federal Reserve, FDIC, Treasury Department, or National Credit Union Administration. This Antitrust, Franchise & Consumer Client Bulletin discusses the announcement.
Click here to read the complete Bulletin.
Agencies Issue Interim Rules on Dependent Health Care Coverage of Children to Age 26
On May 10, the Internal Revenue Service, the Department of Labor and the Department of Health and Human Services jointly issued interim final regulations addressing the provision of dependent coverage of children to age 26 under the Patient Protection and Affordable Care Act, as amended.
Click here for a copy of the Employee Benefits & Executive Compensation Client Bulletin regarding the new regulations.
June 4, 2010 Issue 21
Financial Regulatory Reform Bill
The House and Senate were out of session this week due to the Memorial Day District Work Period. Consequently, the debate on financial reform remained mostly quiet, although committee staffers began the process of working with the White House and the Treasury Department to reconcile the differences between the House and Senate bills. On Tuesday, House Financial Services Committee Chairman Barney Frank (D-MA) said he was confident that a bill will be on President Obama’s desk by the Fourth of July. He also said he would like to see as many as seven conference committee meetings – broadcast by C-Span, ideally – with amendments voted on individually in open sessions. The initial work of the committee is expected to start next week and last through the end of the month.
May Jobs Report Released
On Friday, the Department of Labor released the May jobs report showing the U.S. economy added 431,000 jobs in May. However, only 41,000 of those jobs were from the private sector, and the remaining 411,000 were a result of temporary government jobs in the U.S. Census Bureau. The unemployment rate fell from 9.9% to 9.7%. Taking into account revisions to prior months, the U.S. economy added an average of nearly 200,000 jobs per month in the January-May period. In May, employment in professional and business services rose by 22,000. Manufacturing continued to trend up, rising by 29,000. Construction, a sector of the economy that remains soft, lost 35,000 jobs in May.
G20 Meeting In South Korea
On Friday, the meeting of the G20 finance ministers and central bank governors began in South Korea’s southeastern port city of Busan. The meeting’s agenda focuses on global cooperation to improve financial and fiscal soundness. At the meeting’s outset, sources indicated the ministers would delay the implementation of tougher international banking regulations known as “Basel III,” which were due to be finalized by November. Disagreements over the regulations include the scale, scope, and timing of the increases in capital and liquidity banks will be required to hold, as well as the leverage they will be allowed. The U.S. and U.K. are pushing for tougher standards, but western and central European countries are opposing the stricter measures. Sources indicated that the U.K. and the U.S. are offering to delay the implementation of the Basel III reforms in a bid to ensure that the principles do not get watered down. Sources also indicated that France and Germany are seeking to reopen arguments thought to be settled last year in a bid to dilute capital requirements for their banks by allowing them to include deferred tax assets and minority interests in tier one capital. The Basel III rules were originally expected to be phased in by the end of 2012, but sources familiar with the discussions said that the new rules are now likely to be put in place between 2014 and 2016.
In addition to significant reforms specific to the financial services industry, the Financial Reform Bill is likely to contain a number of significant provisions that would affect corporate governance and executive compensation at public companies, as well as Regulation D private placements, whistleblowers and beneficial ownership reporting.
We address the reforms contained in the Senate-adopted “Restoring American Financial Stability Act of 2010″ and compare to the House-adopted “Wall Street Reform and Consumer Protection Act of 2009.” As the Senate and House are now proceeding to the reconciliation phase, it is difficult to predict what changes, if any, will be made to the final legislation.
You can also obtain a Printer-Friendly Version of this Client Alert.
Some of the more important provisions of the Act are the following:
Corporate Governance Requirements
Majority Voting for Directors. Within one year of enactment, stock exchanges would adopt rules prohibiting the listing of companies that fail to comply with the following voting standards:
- election of directors by a majority of votes cast, in uncontested elections, and by a plurality of shares represented and entitled to vote, in contested elections
- if a director receives less than a majority of votes cast in an uncontested election, the director would tender his or her resignation, and the board would either:
- accept the resignation, determine when it will take effect and publicly disclose the date, generally within a reasonable period of time, as established by the SEC, or
- upon a unanimous vote, decline to accept the resignation and, within 30 days (or such shorter period as the SEC may establish), publicly disclose its reasons for the decision and why it was in the best interests of the company and its shareholders.
The SEC would be permitted to exempt companies from these requirements, based on their size, market capitalization, number of record holders or other factors. The House Bill does not contain a comparable provision.
Authorization of Proxy Access Rules. The Act would authorize the SEC to adopt rules that would (1) require proxy or consent solicitations to include a director nominee submitted by a shareholder, and (2) require companies to follow certain procedures relating to such a solicitation. Like the House Bill, the Act authorizes, but does not require, the SEC to adopt such rules.
Drawing from diverse legal disciplines, we have formed a client team with a focus on retail banking compliance and contractual matters. Whatever day-to-day legal assistance you need in your retail banking area, we can provide prompt and accurate guidance.
We have many years of experience in all of the federal consumer banking regulation, and every day we work to stay current with the constantly changing regulatory environment. We will help you avoid the regulatory minefields. Our Retail Banking Team can assist your bank in all of the following areas:
- Deposit account agreement reviews;
- Deposit advertisement reviews;
- Overdraft policies and disclosures;
- Remote deposit capture agreements and policies;
- Automated clearing house agreements;
- Credit card, mortgage and other lending advertisement reviews;
- Credit card, mortgage and other lending disclosure and agreement reviews;
- Power of attorney interpretations;
- Trust documents and trustee power reviews;
- Individual Retirement Account transactions;
- Prepaid card programs;
- Check fraud assistance;
- Online business banking and cash management; and, of course,
- any issues arising under the Truth in Savings Act, Truth in Lending Act, Electronic Fund Transfers Act, Real Estate Settlement Procedures Act, or consumer privacy and data security laws and regulations.