GDP Rose 2.4% in Second Quarter
On Friday, the Commerce Department reported that U.S. gross domestic product rose at an annualized seasonally adjusted rate of 2.4% for the second quarter, indicating that the recovery has been weaker than previously expected. However, the report also indicated that business spending increased by 21.9% in the second quarter, compared with a 20.4% rise in the first three months. The figures highlight the contrast in the economy between company profits and the slower jobs market. The underlying inflation rate increased by 1.1% in the April-to-June period over the previous quarter. The consumer price index rose by only 0.1% in the second quarter, slowing sharply from a 2.1% gain in the first quarter. Gross domestic purchase prices rose 0.1%, after a 2.1% increase in the first quarter. The chain-weighted GDP price index increased by 1.8%, compared to 1.0% in the first three months. In a revised assessment of 2009, the Commerce Department’s report indicated the U.S. economy contracted by 2.6%, compared to the previously estimated 2.4% decline.
New York Attorney General Announces Probe of Insurers
On Thursday, New York Attorney General Andrew Cuomo announced that he had opened a fraud investigation into how life insurers pay out benefits after policyholders die. Cuomo said his office served subpoenas on Prudential Financial, Inc. and MetLife, Inc. as part of the probe, seeking information on the companies’ life insurance policies.
Bullard Warns of Deflation
On Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, warned that the Fed’s policies were putting the economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.” Bullard went on to say that the best way for the Fed to avoid falling into a deflationary trap is to shift away from insisting that interest rates remain low, and instead focusing on “quantitative easing” measures by buying Treasuries, funneling money into the economy and boosting inflation expectations. On Friday he reiterated those remarks, but noted that while deflation is a risk, it is not the most likely economic scenario. Bullard has voiced worries about the “extended-period” language since early March, but he has not voted against policy action. He said Thursday his comments were intended to spark debate.
With attorneys and staff worldwide, Bryan Cave attorneys often make the news. Recent media mentions include Walt Moeling of the Financial Institutions practice group:
Moeling on WABE Radio, in Atlanta Journal-Constitution
Atlanta Partner Walt Moeling was interviewed July 26 by WABE Radio, the Atlanta NPR affiliate, and was quoted July 22 in The Atlanta Journal-Constitution on the anticipated uptick in Georgia’s bank failures. Moeling said he expects to see two to four failures per month through the end of the year. “If the economy remains stable, it’s one answer,” he told the Journal-Constitution. “If it slumps…borrowers are going to give up [paying their loans] quickly, and that will boost the number.” Thirty-nine banks have failed in Georgia since August 2008 – the most for any state. Click here to read the full Journal-Constitution article.
Financial Regulatory Reform Bill Becomes Law
On Wednesday, President Obama signed into law the Dodd-Frank Wall Street Reform Act at a ceremony at the Ronald Reagan Building. Speculation and controversy surrounded which bank CEOs were to be invited. Among those invited were Citigroup CEO Vikram Pandit, Morgan Stanley CEO James Gorman, Bank of America CEO Brian Moynihan, and UBS Americas CEO Robert Wolf. However, those not invited included among others JPMorganChase CEO James Dimon or Goldman Sachs CEO Lloyd Blankfein.
Issa Questions SEC Over Goldman Settlement Timing
Last Friday, House Reform and Government Oversight Committee Ranking Member Darrell Issa (R-CA) sent a letter to SEC Chairman Mary Schapiro requesting an inquiry into the timing of the agency’s $550 million settlement with Goldman Sachs. On Thursday, SEC Inspector General David Kotz responded to Issa and confirmed that the Commission would open a formal inquiry and investigate communication between the SEC and Goldman employees.
The President Signs into Law Unemployment Benefits Extension
On Thursday, President Obama signed into law legislation passed by the House on Thursday and the Senate on Wednesday that would restore unemployment benefits to an estimated 2 million Americans without jobs. The $34 billion measure was the subject of a fierce partisan battle in Congress over whether the cost should be offset with spending cuts or tax increases to avoid enlarging the federal deficit. The vote in the House was 272 to 152, with 31 Republicans joining 241 Democrats in supporting the measure. The final vote in the Senate was 59-39. Among other issues, the bill also extends through 2012 a number of business tax credits and changes multi-employer pension funding requirements.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. In connection with the signing, the White House also released the following animated film.
We are continuing to work on providing guidance on compliance with the Dodd-Frank Act for community banks. Links to all of our posts on the Dodd-Frank Act can currently be found here, and we are working to provide a better overview of our content related to the Dodd-Frank Act.
The text of the Dodd-Frank Act can still be difficult to find online (and has been made more difficult by the House Financial Services Committee removing a copy of the Act from their website). However, the Library of Congress has the official version (in both PDF and text) available online (see the links next to #6) and the U.S. Government Printing Office has also now published the adopted law.
Congress returned to session last week following the Fourth of July district work period. On Thursday, July 15, 2010, the Senate approved, by a 60-39 vote, the conference report for H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act. President Obama is expected to sign the bill into law this week.
Summary by Title
I. Financial Stability – establishes a new oversight structure, the Financial Stability Oversight Council. This entity will determine which nonbanks will be subject to regulation, and will make recommendations to the Fed for the implementation of the increased prudential standards to be applied to bank-holding companies with total consolidated assets of $50 billion or more and to designated nonbanks.
II. Orderly Liquidation Authority – authorizes federal authorities to place both “large bank-holding companies” and “significant nonbanks” in receivership under Federal control for liquidation in the event that the institution is deemed to significantly threaten the stability of the broader financial system.
III. Enhancing Financial Institution Safety and Soundness – eliminates the Office of Thrift Supervision (“OTS”). Under the new legislation, the Fed will assume responsibility for regulating savings and loan holding companies (“SLHCs”), the OCC will assume responsibility for federal savings associations, and the FDIC will have responsibility for State savings associations. The transfer of functions is generally expected to occur one year from the date of enactment. The Act also provides for a permanent increase of FDIC deposit insurance per depositor from $100,000 to $250,000, and modifies elements of the deposit insurance assessment program. This includes increasing the minimum reserve ratio for the Deposit Insurance Fund from 1.15 percent to 1.35 percent, but requires the FDIC to offset the effect of the increase on institutions with assets of less than $10 billion.
IV. Regulation of Advisers to Hedge Funds and Others – requires that advisors to “private funds” register with the SEC. “Private funds” are defined as any issuer that would be an “investment company,” including most private equity funds, hedge funds, and venture capital funds.
V. Insurance – creates the Federal Insurance Office, a new federal office charged with studying the insurance industry and reporting to Congress on recommendations concerning federal regulation of insurance. Previously under state supervision, this provision will subject the activities of the insurance industry to federal scrutiny.
VI. Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions – limits the ability of certain bank and bank-related entities to engage in proprietary trading or investing in hedge funds and private equity funds to 3 percent of the entity’s Tier 1 capital. This Title also places new restrictions on acquisitions that would result in a financial company controlling more than 10% of liabilities as defined in the Act, and requires Fed approval for a financial holding company to acquire a company with consolidated assets of more than $10 billion.
VII. Regulation of Over-the-Counter Swaps Markets – prohibits the Fed or the FDIC from providing Federal assistance to insured depository institutions involved in the swaps markets, except for certain swap activities. Additionally, this provision requires clearing and exchange trading for derivatives contracts that are eligible for clearing and accepted by newly established derivatives clearing organizations. The law imposes new capital and margin requirements and various reporting obligations on OTC swap dealers and major OTC swap participants. However, there remains some debate over the correct interpretation of the section governing commercial end users, and whether margining requirements will be required for their hedging swaps. With respect to all of the provisions in this Title, the SEC and CFTC will have joint rulemaking authority.
VIII. Payment, Clearing, and Settlement Supervision – establishes a structure for a systemic approach to ensuring the stability of the payment, clearing and settlement systems.
Regulations Issued on Preexisting Condition Exclusions, Annual and Lifetime Limits, Rescissions and Patient Protections under Health Care Reform
On June 22, 2010, the Departments of Labor, Treasury and Health & Human Services issued regulatory guidance under the Patient Protection and Affordable Care Act regarding prohibitions on preexisting condition exclusions, annual and lifetime limits and rescissions, as well as guidance regarding certain patient protections. These rules are generally effective for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans). For more information on the rules, please see the Bulletin published by the Employee Benefits & Executive Compensation Client Service Group on June 30, 2010.
Grandfathered Plan Regulations Provide Vital Compliance Information for Employer-Sponsored Health Plans
On June 14, 2010, the Departments of Labor, Treasury and Health & Human Services issued much-anticipated guidance on how a group health plan maintains or loses its status as a grandfathered plan under the Patient Protection and Affordable Care Act. A grandfathered plan is generally one that was in effect on March 23, 2010. Because grandfathered plans are exempt from many of the Act’s requirements, maintaining a plan’s grandfathered status has important plan design and cost implications. Please read the Employee Benefits & Executive Compensation Group’s Bulletin published June 16, 2010, for more information on the interim final regulations.
Supreme Court Expands Time Period for Filing Title VII Disparate Impact Charges
In Lewis v. City of Chicago, the US Supreme Court ruled that the period in which to file an EEOC charge alleging that an employment practice has a disparate impact commences anew whenever that practice is applied, not when that practice was first adopted. The Lewis decision sharpens the dilemma created by last summer’s Ricci v. DeStefano decision, which held that an employer’s changing an employment practice based on its fear of possible disparate impact claims could be a basis for disparate treatment claims. For more information on the decision, please see the Labor & Employment Group’s client Alert published June 1, 2010.
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Financial Regulatory Reform Bill
Congress was not in session this week due to the Fourth of July district work period. However, the House and Senate return to session next week, and the Senate will likely begin debate on the Dodd-Frank Wall Street Reform and Consumer Protection Act Conference Report. With commitments by Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) to support the bill, Democratic leaders remain two votes shy of the sixty they need to move the bill forward – assuming the Senator chosen to replace the late Senator Robert Byrd (D-WV) also is a “yes” vote. Consequently, Democratic leaders are now focused on getting the three Republicans who supported the original Wall Street reform bill that passed the Senate in May to commit to supporting the Conference Report. Senator Scott Brown (R-MA) officially remains uncommitted even after Democrats took the unusual step of reopening the House-Senate conference committee to remove a $19 billion bank fee he opposed. On Monday, Brown was quoted by a local reporter saying, “I’m going to be making a decision soon, but I’m liking what I see.” Senator Olympia Snowe (R-ME) also indicated last week that she approves of the elimination of the bank fee and is now leaning toward supporting the bill. The third Republican, Senator Charles Grassley (R-IA), remains uncommitted.
EU Parliament Approves Bank Bonus Restrictions
On Wednesday, the European Union Parliament approved a bill that restricts bankers in the twenty-seven nation bloc from receiving more than 30 percent of their bonuses in cash beginning next year. The bill will also make bankers susceptible to losing a portion of their bonus if their bank’s performance erodes over the subsequent three years. Banks will further be required to either reduce salaries of their biggest earners or set aside more capital to compensate for the salaries. The legislation, which passed by a vote of 625-28, codifies a compromise reached last week between European governments and lawmakers. National finance ministers from the respective countries are expected to endorse the proposal next Tuesday, July 13, causing it to take effect January 1. The proposal is similar to the measure approved by the G-20 and is designed to affect banks with large operations in Europe such as Deutsche Bank, Barclays, and Goldman Sachs, including some hedge funds. Under the bill, seventy percent of a banker’s bonus would have to be deferred for up to three years and paid in a new class of security, known as “contingent capital,” that would decline in value if the bank’s financial performance deteriorates.
In June, the Federal Reserve outlined a series of its own bank compensation principles, and at a Congressional hearing last month, Federal Reserve Chairman Ben Bernanke promised to move on further compensation restrictions. Additionally, the Obama Administration’s Special Master for TARP Executive Compensation, Ken Feinberg, is preparing to release a report in the near future on the highest earners at 180 U.S. financial companies.
Matt Jessee, Policy Advisor
Matt.jessee@bryancave.com
202.508.6341
Kip Wainscott, Associate Attorney
Kip.wainscott@bryancave.com
202.508.6172
On June 28, 2010, conferees from the U.S. House and the U.S. Senate approved the financial regulatory reform conference report (known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act”), and on June 30, 2010, the U.S. House approved a bill that is almost identical to the conference report, except for a change in the so-called “pay-for” amendment (as discussed here). The U.S. Senate will continue its consideration of the legislation following its July District Work Period. Included among its many provisions are amendments to current law governing affiliate transactions between a financial institution and a related party and changes to the legal lending limit for national and state banks. In general, the amendments found in Title VI (see Title VI, starting on page 1 of this PDF version of Title VI) only broaden the existing restrictions on affiliate and insider transactions to include financial products such as derivatives, repurchase agreements (“repos”) and securities purchase or sale transactions that involve a credit exposure, rather than re-writing the general standards governing affiliate and insider transactions.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Enhancing Financial Institution Safety and Soundness Act of 2010 (the “Act”) shifts regulatory authority from the OTS to the other federal banking regulatory authorities.
The Federal Reserve will become the federal regulator for savings and loan holding companies and their subsidiaries (other than depository institutions) and will have rulemaking authority under Section 11 of the Home Owners’ Loan Act, which generally covers the same types of transactions as currently governed by Regulations O and W as applied to savings associations. The OCC will be charged with regulating federal savings associations and FDIC will pick up regulatory authority over state savings associations. These transfers of power are to occur within one year of the enactment of the Act, subject to a potential 18-month extension if necessary to effectively complete the transition. The OTS will be abolished 90 days after the transfers have been finalized. The OCC and FDIC will work jointly with the OTS to transfer former OTS employees to OCC and FDIC to perform, to the extent practicable, the same functions that the employees performed at the OTS.
All existing OTS orders, resolutions, agreements, regulations and interpretations will continue to be in full force and effect and will be enforced by the Federal Reserve, OCC or FDIC, as applicable, until modified or superseded by the respective regulatory agency. Prior to the official dates of the transfers of power, each of the Federal Reserve, OCC and FDIC will publish a list specifying the former OTS regulations that will be enforced by the respective agency going forward.
While the OTS is being abolished, the federal thrift charter is not affected by the Act. Prior versions of the Act contemplated the elimination of the thrift charter and automatic conversion of federal thrifts into national banks. However, the Act as currently agreed to preserves the federal thrift charter. The authority to grant new thrift charters will be given to the OCC, as noted above, but the Act does not mandate whether new thrift charters should be issued, apparently leaving that to the discretion of the OCC.
One of the ideas incorporated into the Regulatory Reform Act has been the so-called Volcker Rule, named after former Federal Reserve Chairman, Paul Volcker. Volcker’s proposal was that banks should not be engaged in speculative trading for their own accounts. For example, holdings in mortgage backed securities caused huge losses for the nation’s largest banks.
The rule has now made it into the conference committee’s version of the bill although in a somewhat watered down version of what Volcker had originally proposed. The bill in its current version would prohibit a bank from investing more than 3% of its tier 1 capital in a private equity hedge fund and would also prohibit a bank from owning more than 3% of the equity in such a fund.
As a practical matter, these limits probably work to the advantage of large banks. The limit still allows large financial institutions to invest billions of dollars of their own money in speculative trades. It may also have the unintended consequence of causing some institutions to move money that they currently have invested with hedge funds and managing the investments themselves.