After a long and divisive lobbying fight, retailers defeated the banking industry Wednesday as the Senate narrowly defeated legislation to delay new caps on debit-card swipe fees.
The legislation was offered by Sens. Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) and failed on a 54-45 vote, falling just six votes shy of the 60 needed for passage and clearing the way for a provision in last year’s Dodd-Frank Wall Street reform law to take effect July 21.
The provision, often referred to as the “Durbin Interchange Amendment” required the Federal Reserve to establish fair and reasonable interchange fees for many debt and prepaid card transactions. Last Fall, the Federal Reserve proposed new rules which (among other things) would limit to 12 cents per transaction the fee that large banks (with more than $10 billion in assets) can charge merchants every time a consumer uses a debit card or a prepaid gift card. These proposed rules garnered significant critcism and final rules, which are now overdue from the Federal Reserve, are expected shortly.
Senators Tester and Corker initially proposed delaying the Durbin amendment from taking effect for 24 months. The final version of the Tester-Corker plan was to cut the delay in half to 12 months and called for a six-month study of the costs associated with debit transactions and their impact on consumers and small, community banks.
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.
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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.
The Senate-approved version of the Restoring American Financial Stability Act of 2010 raises many issues for community banks. Provisions added to it by the amendment of Senator Susan Collins (R-Maine), however, are drawing special attention. The full text of the amendment can be found as Section 171 of the Senate-approved legislation. The Senate unanimously consented to Senator Collins’ amendment by voice vote on May 13, 2010.
The amendment requires the various federal banking regulators to establish minimum leverage and risk-based consolidated capital requirements for all banks, all bank holding companies, and those non-bank financial firms subject to regulation by the Federal Reserve, regardless of size, that are no less than the capital requirements currently in effect for banks. While unstated in the legislation, this amendment has two primary effects on community banks. First, it eliminates the current regulatory exemption from consolidated capital requirements available to bank holding companies having less than $500 million in assets. Second, it would exclude trust preferred securities and bank holding company TARP CPP Preferred Stock from the consolidated Tier 1 treatment of bank holding companies.
The elimination of the small bank holding company exemption puts additional pressure on community bank holding companies to raise capital through the sale of common stock, as such holding companies will no longer merely need to assure that cash is down-streamed into the bank as Tier 1 capital. However, for purposes of complying with regulator-mandated higher capital requirements at the bank level (whether by memorandum of understanding, IMCR, formal agreement or consent order), the treatment of the capital at the holding company level will continue to be of less importance than the treatment at the bank level.
Under the current regulations, subject to certain limitations, both trust preferred securities and TARP CPP cumulative preferred stock are treated as Tier 1 capital for bank holding companies. However, neither are treated as Tier 1 capital if issued by a depository institution directly. (The TARP CPP securities issued directly to banks without holding companies were originally issued in the form of non-cumulative preferred stock to preserve the Tier 1 treatment for such institutions.) Current estimates are that there is approximately $129 billion in Tier 1 capital that would be eliminated by the disqualification of trust preferred securities as Tier 1 capital, which could force a corresponding $1.3 trillion deleveraging of bank balance sheets, and would cause an average decline of over 200 basis points in the capital ratios of publicly owned bank holding companies. (As background, the FDIC has always objected to the Federal Reserve’s determination, starting in 1996, that trust preferred securities should be included as Tier 1 capital.)
On May 26, 2010, the Senate released the official copy of the Senate-passed “Restoring American Financial Stability Act of 2010.” Before becoming law, the senate-approved bill will need to be reconciled with the previously House-passed “Wall Street Reform and Consumer Protection Act of 2009.” We understand the White House is pushing for reconciliation of the two bills before the Fourth of July congressional recess.
The reconciliation process can lead to dramatic changes in the final legislation, including changes and additions that are not currently reflected in the house or senate versions. For example, in 1980, the increase in FDIC insurance to $100,000 was introduced for the first time in the reconciliation process.
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896). Among other things, the Act:
- extended the $250,000 deposit insurance limit through December 31, 2013;
- extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
- increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
- increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
- removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments. The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.
This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee. The Transaction Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.
On January 9, 2009, Barney Frank introduced H.R. 384, the TARP Reform and Accountability Act, to amend the TARP provisions of the Emergency Economic Stabilization Act of 2008.
As introduced, the Reform Act would: require quarterly reporting on the use of TARP funds, limit the ability to use TARP funds to acquire healthy institutions, require additional compensation limitations, and require Treasury to make TARP Capital available to smaller depository institutions, including Subchapter S corporations and mutuals.
It is important to remember that this is the initial legislation as proposed by Congressman Frank, and it may never become the law, or undergo significant revisions before it becomes the law. At this point, the proposed legislation raises as many questions as it does propose changes. (For a refresher on the process of how a bill becomes law, I recommend this Schoolhouse Rock video.)
A brief summary of the provisions of TARP Reform and Accountability Act follows. Note: Some of the provisions contained in the Reform Act would apply to all institutions that have received assistance under TARP, while others are structured to only apply to those receiving assistance following the effectiveness of the Reform Act. We have attempted to distinguish between these provisions below. We believe it is also important to distinguish between modifications that are requirements versus merely where the Reform Act provides for additional authority for Treasury to act. Finally, Section 105, as noted below, may effectively permit the TARP Capital program to be largely unchanged for all institutions. (more…)