Warren Interviews AGs for Consumer Protection Agency
Reports this week indicate that Elizabeth Warren, who is interim head of the U.S. Consumer Financial Protection Bureau, has interviewed four Democratic state attorneys general to be her permanent successor. The four AGs reportedly in the running are Tom Miller of Iowa, Lisa Madigan of Illinois, Roy Cooper of North Carolina and Martha Coakley of Massachusetts. The bureau is scheduled to officially start work on July 21. Under the Dodd-Frank Wall Street Reform Act, which President Obama signed in July, the bureau must have a Senate-confirmed director to perform certain functions such as the supervision and regulation of non-bank financial firms.
House Republicans Release Top Line Budget Numbers
With President Obama set to release his FY 2012 budget on February 14, House Republican leaders on Thursday announced they would seek $32 billion in spending cuts from the resolution currently funding the government. Republicans framed their proposal as cutting $74 billion from President Obama’s 2011 budget request. However, because Obama’s budget was never approved by the last Congress, the cuts would actually be made against a continuing resolution now funding the government. That resolution is to expire on March 4, and if lawmakers do not agree on another short-term measure or one funding the government for the rest of the year, they risk a government shutdown. The spending ceiling announced by House Budget Committee Chairman Paul Ryan (R-WI) represents a $58 billion cut in non-security discretionary funding. While details of the specific department cuts were not announced on Thursday, the House Appropriations Committee next week will release its bill detailing the specific department budgets based on the spending ceiling. Reports indicate that the Democratic majority in the Senate is opposed to the House Republican budget cuts.
TARP Program Breaks Even with Fifth Third Bank Repayment
On Thursday, the Treasury Department announced that Fifth Third Bank has now fully repaid its $3.4 billion in TARP loans and that total repayments and other income from programs within TARP (approximately $243 billion) have nearly surpassed total disbursements under those programs (approximately $245 billion). The Treasury Department also announced that current estimates indicate that bank programs within TARP will ultimately provide a profit of nearly $20 billion to taxpayers.
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Immelt Appointed Chairman of Council on Jobs and Competitiveness; Volcker Resigns
On Friday, President Obama announced that General Electric CEO Jeff Immelt will serve as Chairman of the newly created “Council on Jobs and Competitiveness.” The Council will advise the President on job creation policies and on the establishment of a long-term growth strategy. Immelt previously served on the board of the President’s Economic Recovery Advisory Board (PERAB). On Thursday, the President also announced the resignation of PERAB Chairman Paul Volcker and dissolution of the PERAB.
SEC Issues New Rules on Asset Backed Securities
On Thursday, the Securities and Exchange Commission (SEC) approved new regulations regarding asset-backed securities. Among a series of new rules which will take effect in 2012, one requires that financial firms that issue asset-backed securities assess and disclose the quality of the underlying assets, including mortgages, credit card debt and student loans. The rule, which the SEC first proposed in October, passed in a 3-2 vote. The agency’s two Republican commissioners, Kathleen Casey and Troy Paredes, opposed the changes. Another new rule requires that banks and other issuers disclose the number of requests they have received to buy back troubled assets. Starting in February 2012, the issuers will have to report how many loans they have repurchased, dating back three years.
Geithner Declines First House Republican TARP Hearing
On Wednesday, House Oversight and Government Reform Committee Chairman Darrell Issa invited Treasury Secretary Timothy Geithner to testify next week before the Committee regarding the Troubled Asset Relief Program (TARP). Geithner declined Issa’s invitation but offered to send in his place Tim Massad, an acting Assistant Treasury Secretary. While Issa could have issued Geithner a subpoena, he instead accepted the offer of Massad’s testimony for next week’s hearing.
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Election Day Implications
Based on this week’s election results, next year’s Senate ratio will be 51 Democrats, 47 Republicans, and 2 Independents who will most likely caucus with Democrats. Nine races have yet to be called in the House of Representatives, but the final Republican net gain will most likely be 64 seats. The House Republican leadership will most likely consist of John Boehner (OH) as Speaker, Eric Cantor (VA) as Majority Leader, Kevin McCarthy (CA) as Majority Whip, and Greg Walden (OR) as Chairman of the House Leadership. The Democratic leadership in the House has not been determined, but current-Speaker Nancy Pelosi (CA) has announced she will run for Minority Leader, current-Leader Steny Hoyer (MD) has announced he will run for Minority Whip, and current-Whip James Clyburn (SC) has also announced he will run for Minority Whip. The most important committee leadership change impacting the financial services industry will be Rep. Spencer Bachus (R-AL) as the next likely chairman of the House Financial Services Committee. Bachus has indicated his top priorities include GSE reform and oversight of the newly empowered CFTC and CFPA. The other important committee leadership changes for the industry will be Rep. Darrell Issa (R-CA) as the next chairman of the House Government Reform Committee, Rep. Dave Camp (R-MI) as the next chairman of the Ways and Means Committee, and Sen. Tim Johnson (D-SD) as the likely new chairman of the Senate Banking Committee.
Debt Panel Returns for Final Votes on Recommendations
Eight months ago President Obama created the bipartisan “National Commission on Fiscal Responsibility and Reform” charged with proposing spending cuts to Congress. Under the leadership of Erskine Bowles and former-Senator Alan Simpson (R-WY), the eighteen member panel will be reconvening next week to vote on final recommendations to Congress before the committee’s December 1st expiration date. However, expectations remain low that any plan can get the 14-vote supermajority required to send the spending cuts to Congress for a vote in December.
October Jobs Report Released
On Friday, the Department of Labor released its October jobs report showing the domestic economy added 151,000 jobs after four months of job losses. However, nearly 15 million people remain unemployed and actively looking, and the unemployment rate, which remained steady at 9.6 percent, has been relatively flat since May.
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Bernanke Indicates New Fed Actions
Speaking Friday, Federal Reserve Bank Chairman Ben Bernanke indicated the central bank would take new actions to fight the high rate of unemployment. The Fed’s most likely next move will be to resume large purchases of government debt to lower long-term interest rates but weaken the dollar. Bernanke argued that by making credit even cheaper it will encourage businesses and consumers to borrow and spend which would eventually lower unemployment. Bernanke’s comments suggest that the Federal Open Market Committee, which sets monetary policy, is likely to take new steps at its next meeting taking place November 2nd through 3rd. Bernanke also indicated the Fed intends to keep short-term interest rates at nearly zero for even longer than the markets now expect.
Former Countrywide Executives Agree to Settlement with the SEC
On Friday, in a settlement with the SEC over charges of misleading shareholders, former Countrywide Financial CEO Angelo Mozilo agreed to repay $45 million in ill-gotten profits and $22.5 million in civil penalties, former president David Sambol agree to repay $5 million in ill-gotten profits and $520,000 in civil penalties, and former CFO Eric Sieracki agree to pay $130,000 in civil penalties. Mozilo and the others were scheduled to face trial on the charges next week. The civil complaint also accused Mozilo of acting on his inside knowledge of the company’s precarious state when he sold shares between November 2006 and October 2007 ahead of its collapse, reaping more than $139 million. Under the agreement, the three men did not admit wrongdoing.
Federal Regulators Order Lenders to Correct Foreclosure Errors
In response to recent media reports that lenders may have used fraudulent paperwork or “robosigners” to evict struggling borrowers, on Wednesday, the Federal Housing Finance Agency (FHFA), which was established during the financial crisis to regulate Fannie Mae and Freddie Mac, released a policy statement telling lenders to make sure that documents used as part of the foreclosure process were properly reviewed and signed. On Tuesday, Sen. Robert Menendez (D-NJ) sent letters to three banks, JP MorganChase, Bank of America and Ally Financial, which have halted foreclosures in 23 states, after evidence surfaced that their employees or outside lawyers signed documents without reading them. Sen. Al Franken (D-MN) joined Menendez in requesting that Congress’ investigative arm, the Government Accountability Office, examine whether federal regulators overlooked problems at mortgage companies.
More Information
If you have questions regarding any of these issues, please contact:
Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463
Bernanke Promises More Fed Action on Economy
On Friday, Fed Chairman Ben Bernanke said that the Federal Open Market Committee, the Fed panel that Bernanke leads and which sets interest rates, could make additional purchases of longer-term securities in order to prevent deflation. In regards to the overall state of the economy, Bernanke said “the pre-conditions for a pickup of growth in 2011 appear to remain in place, as banks increase lending, worries over the European sovereign debt-crisis abate and consumers increase their savings.”
SEC Votes to Give Shareholders “Proxy Access”
On Wednesday, the SEC Commissioners voted along party lines 3-2 to give shareholders what is commonly known as “proxy access,” which requires companies to include the names of all board nominees, even those not backed by the company, directly on the standard corporate ballots distributed before shareholder annual meetings. To win the right to nominate, an investor or group of investors must own at least 3% of a company’s stock and have held the shares for a minimum of three years.
Currently, shareholders who want to oust board members must pay for mailing separate ballots, as well as wage a separate campaign to win shareholder support. The new rule will be in place in time for the 2011 annual meeting season next spring.
However, the final rule did address concerns from the business community. Smaller companies will be exempt from complying with the rule for three years. Investors will be prevented from borrowing stock to meet the 3% threshold and will be restricted to nominating directors for no more than a quarter of a company’s board.
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.
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.
April 23, 2010 Issue 15
Financial Regulatory Reform Bill
On Wednesday, the Senate Agriculture Committee voted 13 to 8 to approve its financial regulatory bill, which was sponsored by the panel’s chairwoman Senator Blanche Lincoln (D-AR). The bill is expected to be part of the wider regulatory overhaul put forward by the Banking Committee, though Democrats are still figuring out how to combine the proposals. One Agriculture Committee Republican, Senator Charles Grassley (R-IA) joined all twelve Democrats in voting for the bill, however in a statement later, Grassley said that his vote did not mean he would support the larger financial reform bill when it comes to the Senate floor. The bill that passed out of the Agriculture Committee was marginally different than a draft previously unveiled by Chairwoman Lincoln. One important amendment added to the bill by Mrs. Lincoln just before Wednesday’s vote would allow the Secretary of the Treasury to exempt derivatives tied to foreign currency rates from the new rules requiring swaps contracts to be traded on an exchange and routed through a clearing agency. The bill would require most derivative contracts to be traded on a public exchange and to be processed, or cleared, through a third party to guarantee payment if one of the parties to a trade went out of business. The Agriculture Committee bill would also require Wall Street firms to spin off their derivatives trading into a separate subsidiary. That provision is opposed by the major banks as well as President Obama and therefore could emerge as an issue of compromise before the bill reaches the floor.
Last week, Senate Republican leaders expressed strong opposition to the financial regulation bill, but by Wednesday, with Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) making progress on negotiations over changes to the larger legislative package, Minority Leader Mitch McConnell (R-KY) claimed victory over forcing Democrats to make changes to the bill including dropping from the bill a provision to create a $50 billion fund, paid for by big banks, which would be used to unwind failing financial institutions, and expressed a willingness to work with Democrats to advance the bill. In order to pass the bill on the floor, Senate Democrats need the backing of at least one Republican to overcome a possible filibuster, and on Thursday Senate Majority Leader Harry Reid (D-NV) announced his plans to push for a first procedural vote on Monday that will test Republican opposition.
Monday’s test vote raises the pressure on Dodd and Shelby to reach a deal, perhaps even one that would address only major elements of the legislation. Points of disagreement include the role of the federal government in winding down failing financial firms; the independence of a new consumer financial protection agency; and the extent of regulations to be placed on derivatives.
Geithner Trip to India and China
Treasury Secretary Timothy Geithner met with top Hong Kong, Beijing, and Indian finance officials during his week long trip through Asia which focused on trade and monetary matters. Meanwhile, the New York Times reported Friday that the Chinese government was preparing to announce that it will allow its currency to rise with increased volatility. China’s currency, known as the renminbi or yuan, has been pegged at a nearly fixed rate to the dollar for many years. While an official announcement on China’s currency policy may be delayed, the Times reported that China’s central bank appears to have prevailed within the Chinese governmental leadership for a stronger but more flexible currency. Geithner has refrained from publicly commenting about the currency issue in advance of his meetings in Beijing.
Senate Financial Regulatory Reform Bill
Senate Banking Committee Ranking Member Richard Shelby (R-AL) offered to Chairman Chris Dodd a new draft compromise on the consumer protection title of the financial reform bill this week, reflecting a possible shift in the Republican position on the issue. According to sources close to Shelby, the new draft is much closer to the language Dodd and other Democrats have sought, which gives much stronger consumer protection authority to the new agency. However, the new Shelby language is said to also give a new council of regulators the power to veto rules from the agency. Shelby’s proposed compromise may reflect Republicans’ increasing willingness to appear amenable to financial reform.
On January 12, 2009, the FDIC issued a Financial Institution Letter, FIL-1-2009, addressing the use of funding from Federal Financial Stability and Guaranty programs. FIL-1-2009 was brought to the attention of one of our financial institution clients that is a pubic reporting company and a TARP recipient, during the course of its annual examination. Based on the guidance in the FIL, we advised the client to document and summarize the data that it had been monitoring on its use of TARP proceeds and also to include a fairly brief discussion summarizing that information in its Annual Report on Form 10-K. This advice is intended to address the suggestion in the FIL that state nonmember banks “summarize such information in published annual reports and financial statements. Including such information in public reports will provide important information for shareholder and public evaluation of participation in these programs.”
If you are a smaller reporting company that has not finalized your 10-K, you should consider adding this disclosure, or perhaps including it elsewhere in public releases or reports. Also, to the extent you have an examination scheduled in the coming weeks and months, be prepared for an inquiry concerning this FIL.