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.
The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act includes significant changes to creation and regulation of asset-backed securities (“ABS”) (see Title IX, Subtitle D, starting on page 186 of this PDF version of Title IX). The three most significant areas in the bill deal with (1) risk-retention requirements, (2) disclosure and reporting requirements, and (3) representations and warranties in ABS offerings.
Risk-Retention Requirements
Under the bill, the Federal banking agencies must publish rules to require securitizers of ABS to retain an economic interest in at least 5% of the credit risk for any asset that the securitizer conveys to the a third party. This requirement is intended to keep a securitizer’s “skin in the game,” so that the securitizer has a disincentive to take unnecessary risks. There may be exceptions or exemptions, prescribed by rule or regulation, to this risk-retention requirement for securitizations (i) of “qualified residential mortgages,” when the securitizer certifies to the SEC as to the effectiveness of the securitizer’s internal controls for ensuring that all of the assets are actually qualified residential mortgages, (ii) that are in the public interest and for the protection of investors, (iii) of assets issued or guaranteed by the United States or an agency of the United States (other than Fannie Mae or Freddie Mac), (iv) of assets issued or guaranteed by any state (or political subdivision), which are also exempt from the registration requirements under the Securities Act, and (v) of other assets, including any loan or other financial asset made, insured, guaranteed, or purchased by an institution that is supervised by the Farm Credit Administration.
The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a new regulatory framework for the supervision of financial holding companies and their non-bank subsidiaries, and provides new standards for interstate bank mergers, interstate bank acquisitions by bank holding companies, de novo branching for national and state banks, and charter selection and conversion (see Title VI).
Increasing Supervision of Holding Companies and Their Subsidiaries
Sections 604 and 605 of the conference report broaden the supervisory powers afforded to the Federal Reserve Board to supervise the activities of holding companies and their non-bank subsidiaries. The conference report permits the Federal Reserve to review other supervisory materials – “reports and supervisory information” – provided to regulators by the holding company or any of its subsidiaries to get a better sense of the risk profile of non-depository subsidiaries of the holding company. In addition, the Federal Reserve is permitted to commence examinations of the holding company and its subsidiaries, with a particular focus on prudential concerns such as the safety and soundness of the institution, the overall stability of the U.S. financial system, as well as a review of the compliance of the holding company and its subsidiaries with relevant provisions of federal law.
The conference report attempts to reduce the burden of additional regulatory examinations on financial institutions and regulators, with the Federal Reserve instructed to rely on reports from prior examinations by other federal or state regulators in order to get a preliminary picture of the condition of the holding company and its subsidiary. The conference report further requires the Federal Reserve to coordinate its activities with the functional regulator of a subsidiary; for example, should the conference report be enacted, the Federal Reserve is required to consult with the OCC for its review of a national bank and to consult with the Securities Exchange Commission for its review of a securities or brokerage subsidiary.
On June 28, 2010, the House and Senate conferees 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 House approved a bill that has almost was almost identical to the conference report, except for a change in the so-called “pay-for” amendment (as discussed here). The Senate is now poised to vote on the legislation. The final version of the bill includes provisions that are intended to significantly improve the regulation of credit rating agencies (see Title IX, Subtitle C, starting on page 135 of this PDF version of Title IX).
Congressional Findings
Unlike many of the other areas in the regulatory reform bill, the improvements to the regulation of credit rating agencies begins with a section describing Congress’s findings regarding credit rating agencies. These findings seem intended to explain and justify the significant changes that Congress is making in the regulation of credit rating agencies. Specifically, Congress indicates that because credit ratings and the reliance placed on credit ratings are systemically important the activities of credit rating agencies, including nationally recognized statistical rating organizations (“NRSROs”), are a matter of public interest, because their activities are central to capital formation, investor confidence, and the efficient performance of the U.S. economy. Further, credit rating agencies play a “gatekeeper” role, similar to securities analysts and auditors, and this role justifies a similar level of public oversight and accountability, as well as the same standards of liability. Finally, the ratings on many structured financial products have turned out to be inaccurate, and these inaccuracies have adversely affected the health of the U.S. and world economies, which necessitates increased accountability on the part of credit ratings agencies. (more…)
The Dodd-Frank regulatory reform bill, which recently passed the House, includes a number of executive compensation reforms. The executive compensation provisions in the bill include reforms to both SEC-reporting company disclosure and financial institution specific disclosure.
The Dodd-Frank reform bill expounds on current TARP say-on-pay requirements and makes them generally applicable to SEC-reporting companies. Under the reform bill, not less than once every three years, SEC registrants must include in annual meeting proxy statements a shareholder resolution on the compensation of executive officers. In addition, not less than once every six years, SEC registrants must have a shareholder vote to determine the frequency of a vote on executive compensation by shareholders, which may occur, as determined by shareholders, every one, two or three years.
Under the bill, SEC registrants must disclose golden parachute agreements in a proxy statement where shareholders are asked to approve an acquisition, merger, consolidation or proposed sale of substantially all of the assets. The aggregate total compensation that may be paid in such transaction, pursuant to a golden parachute agreement, must be included in this disclosure and be submitted for shareholder approval in a separate resolution.
Similar to the TARP say-on-pay requirements, the say-on-pay and golden parachute resolutions applicable to all SEC-reporting companies are not binding on SEC registrants or directors. Institutional investors, however, will be required to disclose annually how they voted on such disclosures. Although the bill does not explicitly exclude certain registrants from these requirements, the bill gives the SEC the authority to exempt certain registrants and encourages the SEC to take into consideration whether these requirements “disproportionately burden small issuers.”
June Jobs Report
On Friday, the U.S. Department of Labor reported that the economy added 83,000 private-sector jobs in June but lost 125,000 jobs overall because of the loss of temporary workers hired by the federal government to help with the census. The unemployment rate, based on a different survey, declined to 9.5 percent in June from the previous 9.7 percent.
Financial Regulatory Reform Bill
On Tuesday, House and Senate conferees met after Senator Scott Brown (R-MA) said he opposed the conference report because of a $19 billion “bank tax” on large financial firms and hedge funds used to cover the bill’s costs. Brown had provided key support to pass the Senate version of the legislation, and his opposition, along with the death of Senator Robert Byrd (D-WV), could have left Senate Democrats short of the 60 votes needed to end debate on the conference report. After reconvening, the conference voted to strip out the bank tax and fund the measure by ending the Troubled Asset Relief Program and increasing premium rates to raise the Federal Deposit Insurance Fund’s (FDIC) minimum reserve ratio from 1.15 percent to 1.35 percent by Sept. 30, 2020. However, banks with consolidated assets less than $10 billion would be exempt from the increased premiums. Based on Congressional Budget Office and FDIC estimates, the extra assessment is projected to raise more than $5 billion and would likely be implemented by extending the current premium rates for an extra five quarters, beginning the last quarter of 2017.
On Wednesday, the House passed the financial regulatory reform conference report on a 237-192 vote. Three Republicans crossed the aisle to support the measure, while nineteen Democrats voted against the bill. The conference report now goes to the Senate, which plans to take up the measure the week of July 12th. However, Senator Brown still remains uncommitted despite the removal of the bank tax. In a statement Wednesday, Brown said “I appreciate the conference committee revisiting the Wall Street reform bill and removing [the tax]. Over the July recess, I will continue to review this important bill.” Among the other three Republican supporters of the bill’s Senate version, Senator Susan Collins (R-ME) and Senator Olympia Snowe (R-ME) have now indicated they will vote to end debate on the conference report. However, Senator Charles Grassley (R-IA), the fourth Republican to support the original Senate bill, remains uncommitted. Late Thursday, Senator Maria Cantwell (D-WA), who voted against the Senate bill, announced she would support the conference report leaving Senator Russ Feingold (D-WI) as the only Democrat opposed to the measure.
On June 28, 2010, the House and Senate conferees 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 House approved a bill that has almost was almost identical to the conference report, except for a change in the so-called “pay-for” amendment (as discussed here). The Senate is now poised to vote on the legislation. As expected, the final version of the bill incorporates provisions to increase investors protections (see Title IX, Subtitle A, starting on page 1 of this PDF version of Title IX) and to increase regulatory enforcement and remedies (see Title IX, Subtitle B, starting on page 52 of this PDF version of Title IX).
Increasing Investor Protection
The regulatory reform bill would establish within the SEC three new “advocates” for investor protection: the Investor Advisory Committee, the Office of the Investor Advocate, and ombudsman.
The Investor Advisory Committee will advise and consult with the SEC regarding a number of issues related to investor protection, including the regulatory priorities of the SEC; issues related to regulating securities products, trading strategies, fee structures, and the effectiveness of existing disclosure requirements; initiatives to protect investors; and initiatives to promote investor confidence and the integrity of the securities marketplace. This Committee’s members will be appointed for four years and will consist of the Investor Advocate (discussed below), a representative of the State securities commission, a representative of the interests of senior citizens, and not fewer than 10 or more than 20 members representing individual equity and debt investors, and institutional investors who are knowledgeable about investment issues and have reputations for integrity. (more…)
On June 30, 2010, the House passed the Dodd-Frank regulatory reform bill in the form agreed upon by the Conference Committee the day before. The bill, as passed, was identical to the version approved previously by the Committee except that the so-called “pay-for” amendment, which would require banks with over $50 billion in assets to cover the $19 billion cost of the financial reform legislation, was replaced by early termination of the Troubled Asset Relief Program and a 20 basis-point increase in required FDIC reserves from 1.15% to 1.35% of insured deposits by 2020.
According to Senate Banking Committee Chairman Chris Dodd, immediate TARP termination would save approximately $11 billion, an estimate of the incremental amount that would not be repaid if all remaining allocated TARP funds were spent during the three months left under its current term. According to the Treasury’s May 2010 monthly report to Congress (issued on June 10, 2010), TARP’s projected deficit impact was estimated at $105.4 billion, with less than $550 billion of the authorized $700 billion having been spent.
The legislation allocates the funding based on increased FDIC reserves among a broader base of banks than would have been subject to the $19 billion assessment. Banks with more than $10 billion in assets would support the FDIC reserve increase through their deposit insurance premiums, while the $19 billion assessment would have only applied to banks with over $50 billion in assets. The Independent Community Bankers of America estimates that based on March 31, 2010 call report data, 68 banks between $10 billion and $50 billion would be subject to the higher premiums, in addition to 36 banks with over $50 billion in assets. On the other hand, approximately 7,600 smaller banks would be exempt from the funding requirement.