Treasury-HUD “Conference on the Future of Housing Finance”
Next Tuesday, August 17th, the U.S. Departments of Treasury and Housing & Urban Development (HUD) will co-host the “Conference on the Future of Housing Finance,” an open press, day long event where Treasury Secretary Tim Geithner and HUD Secretary Shaun Donovan will moderate panel discussions which will include the following panelists: Barbara J. Desoer, President of Bank of America Home Loans; Ingrid Gould Ellen, Professor of Urban Planning and Public Policy at New York University; · Bill Gross, Co-founder and Co-chief Investment Officer of PIMCO; Mike Heid, Co-president of Wells Fargo Home Mortgage; S.A. Ibrahim, Chief Executive Officer of Radian Group Inc.; Marc H. Morial, President and Chief Executive Officer of the National Urban League; Alex Pollock, Resident Fellow at the American Enterprise Institute; Lewis Ranieri, Chairman of Ranieri and Company, Inc.; Ellen Seidman, Ellen Seidman, Executive Vice President ShoreBank Corporation; Michael A. Stegman, Director of Policy and Housing at the John D. and Catherine T. MacArthur Foundation; Susan Wachter, Professor at the University of Pennsylvania’s Wharton School; Mark Zandi, Chief Economist of Moody’s Analytics. Sources indicate the topic of eliminating GSEs could emerge as one of the most contentious points of discussion.
July Retail Sales and Consumer Price Index Reports Released
On Friday, the Department of Commerce released its July retail sales report showing an increase of 0.4% during the month. This positive report follows Mary and June sales figures showing consecutive declines. The Department of Labor also issued its July consumer prices report for July on Friday showing the seasonally adjusted Consumer Price Index rose 0.3 percent. The June report also showed prices fell 0.1 percent, and therefore such positive July figures could ease concerns about deflation.
This post looks at potential enforcement and compliance risks for private funds under the new Dodd-Frank Act. We believe it should be of interest to managers of hedge funds, private equity funds and venture capital funds, as well as those who invest in or deal with them. It follows up an earlier post concerning the basic requirement that most private funds register with the SEC; this post focuses on a series of lesser known but significant risks under the Dodd-Frank Act (also available as a printer-friendly Client Alert).
By now, most “private” or “hedge” fund managers know that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires SEC registration of most advisers to private funds, effective July 2011. But SEC registration is not the only aspect of the new law that fund managers need to be aware of. Other provisions of the law will have significant effects on funds.
Key issues include:
- Funds must meet expanded books and records requirements.
- Advisers to venture capital funds, exempt from registration under the law, will have to take pains to avoid being treated as private equity or hedge fund advisers, who do have to register.
- The standard for aiding and abetting liability has been lowered, such that “recklessness” rather than “actual knowledge” is sufficient.
- Smaller advisers, not subject to SEC registration, will become subject to the vagaries of state regulation.
“Private” or “hedge” funds are swept into the law through Title IV, the “Private Fund Investment Advisers Registration Act of 2010.” While Title IV does contain the registration requirements, it also contains other provisions that expand the scope well beyond the regulatory hook of registration. Further, other provisions of Dodd-Frank – notably, Title IX, entitled “Investor Protections and Improvements to the Regulation of Securities” – also have significant implications for private funds.
The following outlines the primary consumer protection requirements of the Mortgage Reform and Anti-Predatory Lending Act (the “Act” or the “Mortgage Act”), which is Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Effective Dates. The Mortgage Act is somewhat ambiguous as to its effective dates. There is a possible argument that those many provisions of the Act for which no regulation is specifically required took effect immediately upon the signing of the Act by the President on July 21, 2010. We believe do not believe that to be a plausible interpretation.
Under the best interpretation of the Act, those provisions for which no regulations are issued would take effect 18 months after the designated transfer date. The designated transfer date is the date on which the various consumer protection functions are transferred from the federal banking agencies to the Consumer Financial Protection Bureau (the “Bureau”). Where regulations are required by the Act, they must be issued in final form within 18 months of the designated transfer date, and the regulation and corresponding Act provision then would take effect within 12 months thereafter.
The Consumer Financial Protection Bureau. The majority of the Mortgage Act’s provisions will be included in the “enumerated consumer laws” that the Bureau will implement and enforce. However, most of the regulations that the Act requires would be written by the Federal Reserve, presumably due to the delay until the designated transfer date.
Public companies should be aware of the following potential landmines – there are others – crafted into the Dodd-Frank Act:
Enhancements to whistleblower incentives and protections (§ 922), which may encourage employees to report borderline (or even non-existent) issues to authorities.
The lowering of the standard for “aiding and abetting” liability from “knowing and substantial” assistance to “knowing or reckless and substantial” assistance (§ 929 O), which may encourage the SEC to pursue marginal actions against companies or individuals who potentially may have assisted a violation. (The Act also mandates a GAO study of the benefits and detriments of enabling private rights of action for aiding and abetting violations. Such a study could be a basis for legislative attempts, within the next few years, to overturn the long-standing prohibition of such actions established by Central Bank of Denver and other cases.)
Empowerment of the SEC to seek and obtain monetary penalties in administrative proceedings against entities and individuals who are not registered with the Commission, e.g. public companies that are not registered as broker-dealers or investment advisors (§ 929 P). There is a perception that administrative proceedings – unlike actions in federal district court –provide the SEC with a “home-court advantage.” Previously, the Commission would have had to file an action in district court were it to seek monetary penalties against a public company.
Given the extensive work that many investment advisers will have to undertake in order to fully comply with the Private Fund Act (a process that can stretch into many months), we urge all Firm clients and contacts to promptly begin to consider what impact the Private Fund Act has on their operations and to plan the steps necessary to comply with its various aspects. To assist our clients and contacts in determining whether you will be affected in this area, below is a brief summary of the changes resulting from the Private Fund Act (also available as a printer-friendly Client Alert).
On July 21, 2010, President Obama signed into law the financial reform package known as the Dodd- Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which contains the Private Fund Investment Advisers Registration Act of 2010 (the “Private Fund Act”). The Private Fund Act changes the regulatory framework that governs investment advisers managing private fund investments, including private equity funds, hedge funds and real estate funds. Specifically, the Private Fund Act (i) requires that many investment advisers, including certain foreign investment advisers, that are currently exempt from registration with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), register with the SEC; (ii) requires that certain investment advisers currently registered with the SEC change to state registration and (iii) significantly expands the reporting and record-keeping requirements for domestic and foreign investment advisers to private funds of all types. The Private Fund Act adopts a new set of limited exemptions from SEC registration based on the asset class managed, the amount of assets under management and/or the operational details of foreign managers. At the same time, the Private Fund Act significantly expands the reporting and record keeping requirements to which these limited exempt entities will be subject going forward.
The Private Fund Act becomes effective one year from the date of the Dodd-Frank Act’s enactment, on July 21, 2011. During this one year window, each affected investment adviser will need to become fully compliant with the requirements of the Private Fund Act, including SEC registration (which currently unregistered investment advisers may choose to pursue immediately). Although the Private Fund Act contemplates substantial SEC rule making and guidance over the next year, it is clear that investment advisers will need to devote substantial resources to conformity with the Private Fund Act (including, for example, designation and training of a Chief Compliance Officer, adoption of extensive compliance procedures as mandated by the Advisers Act, and modification or adoption of SEC mandated internal reporting and record keeping systems).
This post summarizes the federal preemption standard that will apply to national banks and federal thrifts as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new preemption rules are included in Title X of the Dodd-Frank Act, also referred to as the Consumer Financial Protection Act of 2010.
The Preemption Standards Before The Act
Understanding the new preemption standard requires an understanding of the historical preemption standards. Until 2004, federal thrifts operated under one standard and national banks under another.
The OTS (and before them, the FHLBB) took the position that federal thrift regulation “occupied the field” of regulation for federal thrifts. This broad preemption basically meant that only the most incidental of State laws would apply to federal thrifts.
In contrast, the OCC traditionally claimed federal preemption only on a case-by-case basis and only if the State law in question interfered with a national bank in the exercise of its federally-authorized powers. In 1996, the U.S. Supreme Court in the Barnett decision upheld this approach when it held that State laws can regulate national banks where doing so does not “prevent or significantly interfere with” a national bank’s exercise of its powers.
In 2004, the OCC issued new regulations that stated the OCC’s preemption authority more broadly. While the OCC refrained from claiming occupation of the field, the broad preemptive language of the regulation was otherwise very similar to the OTS’ preemption regulation. Given that the OCC announced this new standard while States, counties and cities were aggressively regulating “predatory lending,” it is perhaps not surprising that the OCC was widely criticized by consumer advocacy groups for preempting consumer protection laws.
Included in the Dodd-Frank Act – aimed primarily at the reform of financial institutions – are provisions that will apply to all publicly traded companies, including provisions relating to “say on pay” shareholder votes, proxy access, executive compensation disclosure and compensation committees. Some of these provisions are effective immediately. Most will become effective only upon rule-making by the Securities and Exchange Commission (SEC or the Commission). These provisions are summarized below (and also available as a printer-friendly Client Alert).
“Say on Pay” and Golden Parachutes (Section 951)
The Act requires that shareholders be given the opportunity – at least once every three years – to approve the compensation paid to the CEO, the CFO and the named executive officers as disclosed pursuant to Item 402. In addition, shareholders must be given the opportunity – at least once every six years – to vote on whether this “say-on-pay” vote will occur every one year, two years or three years.
Public companies must include shareholder resolutions on both of these matters in the proxy statement for the first shareholder meeting held after January 21, 2011 – the six-month anniversary of the enactment of the Act. This means that these provisions will be effective for the 2011 proxy season.
The Act provides that the shareholder votes relating to the say-on-pay matters must be set out in separate proposals and will be non-binding. A “rule of construction” set out in the Act provides that the votes will not be construed as overruling a board decision or creating or implying any change or addition to directors’ fiduciary duties.
In addition, in any proxy or consent solicitation in connection with a shareholder vote on an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all of the assets of a company, the Act requires the soliciting public company to provide disclosure of compensation payments triggered by the transaction, referred to as golden parachute payments, which may be made to its named executive officers. Then, in a separate resolution in that proxy statement, the issuer must provide shareholders with the opportunity to approve those golden parachute payments, unless the golden parachute payments were previously approved by the shareholders. Like the say-on-pay provisions, the golden parachute payment disclosure and approval provisions are applicable to shareholder meetings occurring after January 21, 2011.
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.