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. 

The Choice for Consumer Financial Protection Bureau Director 

Debate has intensified over who should run the newly created Consumer Financial Protection Bureau. The longtime frontrunner has been Elizabeth Warren, but this week alternative names have emerged, including: former　PCAOB Chair Bill McDonough, Treasury Deputy Secretary Michael Barr, and Justice Department official Eugene Kimmelman. 

Bachus Under Fire 

With the possibility that Republicans will take over the House of Representatives next year, the parlor games over who might chair the most powerful committees have already begun. This week, reports emerged that Financial Services Committee Ranking Member Spencer Bachus (R-AL) may face a challenge for the gavel from a number of colleagues, including Ed Royce (R-CA), Jeb　Hensarling (R-TX), or Scott Garrett (R-NJ).  All three have been active conservatives on the committee, on which some members have expressed frustration over what they perceive as Bachus’s failure to adequately challenge Chairman Barney Frank during the debate over financial reform legislation. 

On Friday, White House executive pay-master Kenneth Feinberg released his long awaited bank compensation report in which he cited 17 banks – including Goldman Sachs, JPMorganChase, Citigroup, and AIG – for awarding a total of $1.6 billion in “ill-advised” compensation during the height of the financial crisis in late 2008. The report is only advisory and has no force of law to recoup any of the money. Feinberg’s review, which covered 419 banks, will probably be his last act as pay czar, prior to shifting focus to the $20 billion BP compensation fund. 

Republicans Seek to Prevent Contingency Fee Tax Deductions 

On Friday, House Ways and Means Committee Ranking Member David Camp (R-MI) and Senate Finance Committee Ranking Member Chuck Grassley (R-IA) sent a letter to Treasury Secretary Timothy Geithner urging Treasury to make clear that the Department and the IRS do not support allowing lawyers to deduct “gross contingency fees,” which could cost the Treasury $1.6 billion annually. The Camp-Grassley letter was in response to a recent statement from Assistant Secretary Michael Mundaca that the Office of Tax Policy was considering issuing guidance to clarify the issue raised by Boccardo v. Commissioner. 

More Information 

If you have any questions regarding any of these issues, please contact:　　 

Matt Jessee, Policy Advisor
Matt.jessee@bryancave.com
202.508.6341 

Kip Wainscott, Associate Attorney
Kip.wainscott@bryancave.com
202.508.6172  

Related Posts

1. Financial Services Update – Issue 4 - February 5, 2010
2. Financial Services Update – Issue 5 - February 15, 2010
3. Financial Services Update – Issue 8 - March 6, 2010

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).

Related Posts

1. Final Conference Text of Regulatory Reform Act - June 28, 2010
2. House Approves Dodd-Frank Act - July 1, 2010
3. Passage of the Dodd-Frank Wall Street Reform Act - July 19, 2010

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.

IX. Investor Protections and Improvements to the Regulation of Securities – imposes risk retention requirements in connection with certain asset-backed securities.  Additionally, by reforming the regulation of credit rating agencies, this Title establishes an Investor Advisory Committee charged with providing the SEC with investor perspectives and recommendations.   The Title also establishes an Office of Investor Advocate that will be charged with assisting investors and recommending regulatory changes to protect investors, and gives the SEC authority to establish a fiduciary duty standard of care for broker-dealers providing personalized investment advice to a retail customer.   This Title requires the SEC to adopt rules mandating that institutional investment managers (Form 13F filers) publicly disclose short sales of securities, and expands the regulation of credit rating agencies, including nationally recognized statistical ratings organizations (“NRSROs”) by the SEC.  Additionally, it amends the Sarbanes-Oxley Act to permanently exempt non-accelerated filers from section 404(b) of the Act.

X.  Bureau of Consumer Financial Protection – establishes the Bureau of Consumer Financial Protection, which has authority to prohibit practices that it finds to be unfair, deceptive, or abusive, and to mandate particular disclosures and to prohibit or restrict pre-dispute arbitration practices.  The Bureau also has responsibility for mortgage reform and enforcement as set forth in Title XVI, the “Mortgage Reform and Anti-Predatory Lending Act.”  In addition to creation of the Bureau, this Title also limits interchange fees for debit card transactions (including those involved with certain prepaid card products) to an amount that is deemed to be reasonable under regulations issued by the Fed.

XI. Federal Reserve System Revisions – tightens the conditions under which the Fed may provide emergency assistance to institutions.  This Title also authorizes the FDIC to guarantee debts of banks and bank holding companies.

XII. Improving Access to Mainstream Financial Institutions – establishes a program of incentives (that may include grants, and various contracts or agreements) intended to enable low-and moderate-income individuals to establish accounts in an insured depository institution that are appropriate to meet their needs.  This Title also establishes a program to provide low-cost, small dollar value loans.  These programs would involve loans of $2,500 or less that will be required to be repaid in installments, and that do not have any pre-payment penalty.

XIII. Pay It Back Act – decreases the TARP funds authorized under the Emergency Economic Stabilization Act of 2008 (“EESA”) from $700 billion to $475 billion.  This Title mandates that any funds received from the sale of obligations and securities of Fannie Mae, Freddie Mac, or funds provided to a state under the American Recovery and Reinvestment Act (“ARRA”) that are not accepted by the state’s Governor or by the state legislature will be rescinded and placed in the General Fund of the Treasury.

XIV Mortgage Reform and Anti-Predatory Lending Act – places new regulations on mortgage originators and imposes new disclosure requirements and appraisal reforms.

XV. Miscellaneous Provisions – restricts U.S. funding of IMF loans to heavily indebted countries.  This Title also declares that trade of conflict minerals in the Congo is helping to finance conflict.   It imposes greater safety-related disclosure requirements on companies operating mines, and requires that any resource extraction issuer must include in its annual report all payments made to foreign governments or the Federal Government for the purpose of development of oil, natural gas, or minerals.

Related Posts

1. Improvements to the Asset-Backed Securitization Process Under the Dodd-Frank Wall Street Reform Bill - July 7, 2010
2. Dodd-Frank Wall Street Reform Bill Significantly Modifies the Regulation of Credit Rating Agencies - July 2, 2010
3. House Approves Dodd-Frank Act - July 1, 2010

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.

Step Transaction Doctrine Not Applicable to Multi-Step Bargain Sales to Charity

In Klauer v. Commissioner, the Tax Court refused to apply the step transaction doctrine to disallow a corporation’s charitable contribution deduction for property transferred in a series of bargain sales to a charitable organization to which the corporation has granted options to purchase the property.  The taxpayers were shareholders of Klauer Manufacturing Co., a family-owned subchapter S corporation.  For a review of this decision and other tax news and developments, please see the Tax Advice and Controversy practice group’s June 2010 Bulletin.

Supreme Court Restricts “Honest Services” Fraud to Cases Involving Bribery or Kickbacks

In a recent decision involving a former Enron CEO’s criminal conviction, the U.S. Supreme Court limited, but did not altogether cut off, the government’s ability to prosecute corporate crime under the federal statute that bars theft of “honest services.”  The case had been closely followed because of the widespread use of the statute to prosecute fraudulent corporate schemes.  To read more about the decision, please see the Client Alert published by the White Collar Defense and Investigations Client Service Group on June 30, 2010.

Supreme Court Rules Against Ban on GM Alfalfa

On June 21, 2010, the Supreme Court issued its first-ever decision on genetically modified crops by overturning a court order that prohibited the planting of Monsanto’s pesticide resistant alfalfa seeds until an EPA environmental impact study was complete.  The Court’s decision was 7 to 1 in Monsanto v. Geertson Seed Farms that the lower court had abused its discretion in issuing the injunction.  For more information on this and other matters, please see the Food, Dietary Supplement and Cosmetic Regulatory and Policy Bulletin published by the Food and Drug Administration Practice on June 28, 2010.

Health and Human Services Inspector General Release Report on Foreign Clinical Trials

The Inspector General of the Department of Health and Human Services is slated to release a report detailing the number of drugs for which trials take place outside of the U.S.  The report found that ten drugs received U.S. approval in 2008 without testing being conducted in the U.S. and without any U.S. test patients.  For more information on this and other matters, please see the Pharmaceuticals, Medical Devices and Biologics Regulatory and Policy Bulletin published by Food and Drug Administration practice on June 22, 2010. 

In re Bilski:  No Bright-Line Rule for Determining Whether Processes are Patent-Eligible Subject Matter

The United States Supreme Court has issued the long-awaited Bilski “business methods” decision, addressing whether a “process” must be tied to a particular machine or apparatus, or must transform a particular article into a different state or thing (also known as the “machine-or-transformation” test) to be patentable.  Importantly, the Court did not eliminate business methods from the realm of patentable subject matter, or even severely curtail their availability.  For more information on the Bilski decision, please see the Bulletin published by the Intellectual Property Client Service Group on June 29, 2010.

Pequignot v. Solo Cup Company — The Federal Circuit puts the lid on false patent marking

The patent marking statute creates a cause of action against a company or manufacturer who, for the purpose of deceiving the public, falsely marks unpatented products as patented.  Damages can be awared in the amount of $500 per falsely marked article and any person may sue to collect the damages, with half of the proceeds going to the Federal Government.  For more information, please see the Bulletin published by the Intellectual Property Client Service Group on June 11, 2010. 

Institute of Medicine and National Research Council Report Question FDA’s Ability to Keep Food Safe

The Institute of Medicine and the National Research Council recently issued a report at the request of Congress finding that FDA “should adopt a risk-based approach to food safety and take steps to prevent foodborne illness more effectively.”  For more information on this and related news, please see the Food, Dietary Supplement and Cosmetic Regulatory and Policy Bulletin published by the Food and Drug Administration Practice on June 14, 2010. 

Missouri Court of Appeals Requires Evidence of “Unequivocal Acceptance” by Employee in Order to Enforce Arbitration Agreement

The Missouri Court of Appeals recently issued an opinion that will affect the enforceability of some arbitration agreements between Missouri employers and their employees.  Kunzie v. Jack-in-the-Box, Inc., ED92974 (Mo. App. E.D. Mar. 9, 2010), held that an at-will employee’s continued employment, without more, does not establish acceptance of an arbitration agreement.  Please see the Client Alert published by the Labor &  Employment Client Service Group on June 2, 2010 for a review of the opinion.   

California Proposition 65 — Shoes, Purses, What’s Next?

What is Prop 65?  California Proposition 65, passed by voters in 1986, has given rise to hundreds of lawsuits against retailers and manufacturers of products that contain “hazardous substances,”  including lead, phthalates, cadmium, and acrilymides.  The first products targeted were food-related — ceramicware, decorated glassware, and cookware.  Food products themselves were targeted next, including wine, balsamic vinegar, chocolate, potato chips and, most recently, coffee products.  For more information, please see the Client Alert published by the Retail group on June 29, 2010. 

Consumer Product Safety Commission Begins Issuing Import Detention Notices

On June 14, 2010, the Consumer Product Safety Commission began issuing its own detention notices to importers, with copies to the broker and Customs and Border Protection Agency, on imported products that violate or are suspected of violating consumer safety laws.  For more information on the new detention notice, please see the International Regulatory Bulletin No. 470 published by International Trade Group on June 18, 2010.

Foreign Corrupt Practices Act Enforcement

FCPA enforcement activity is growing.  For more information, please see the International Regulatory Bulletin No. 468 published by the International Trade Group on June 7, 2010. 

Dietary Guidelines Advisory Committee Report Says New Guidelines Should Focus on Fighting Obesity; USDA and HHS Solicit Comments

One June 15, 2010, USDA and HHS announced that the Report of the Dietary Guidelines Advisory Committee on the Dietary Guidelines for Americans, 2010 is now available.  More than ever before, the guidelines address issues specific to obesity.  For more information on this and other news, please see the Food, Dietary Supplement and Cosmetic Regulatory and Policy Bulletin published by the Food and Drug Administration Practice on June 14, 2010. 

FDA Device Chief Jeffrey Shuren Introduces New Guidelines for Device Trials

FDA Device Chief Shuren has introduced new guidelines for FDA device reviewers to use in conducting evaluations of clinical trial designs.  Under the new guidelines, reviewers will not approve device studies for “pivotal” product assessments if the experiment’s protocols are not likely to produce clear conclusions to guide the approvals.  For more information and other news, please see the Pharmaceuticals, Medical Devices and Biologics Regulatory and Policy Bulletin published by the Food and Drug Administration Practice on June 2, 2010.

Dietary Supplements Get Senate Attention

On May 25, 2010, Senators Tom Harkin (D-IA) and Orrin Hatch (R-UT) introduced the Dietary Supplement Full Implementation and Enforcement Act of 2010, legislation that “will help the Food and Drug Administration protect consumers from unsafe dietary supplements and boost FDA accountability.”  For more information on this and other news, please see the Food, Dietary Supplement and Cosmetic Regulatory and Policy Bulletin published by the Food and Drug Administration Practice on June 7, 2010.

FDA:  Genetic Testing Kits are Medical Devices

The FDA has sent letters to five manufacturers of genetic testing kits stating that the agency is considering the kits to be medical devices.  As such, the agency has said that they need to receive approval from the agency before they can be marketed.  For more information on this and other news, please see the Pharmaceuticals, Medical Devices and Biologics Regulatory and Policy Bulletin published by the Food and Drug Administration Practice on June 15, 2010.

U.S. House and Senate Agree on Iran Sanctions Bill

U.S. House and Senate conferees announced that they had reached agreement on the Iran sanctions legislation passed earlier this year by each chamber.  For more information on the newly agreed  bill, please read the June 23, 2010 International Regulatory Bulletin published by the International Trade Group.

New UN Sanctions Further Target Iran’s Military and Nuclear Activities

On June 9, 2010, the United Nations Security Council passed a fourth round of sanctions against Iran over its nuclear program.  UNSCR 1929, which passed by a vote of 12 to 2 (with one abstention), reaffirms previous resolutions issued against Iran.  For more information on the sanctions, please see the June 16, 2010 International Regulatory Bulletin published by the International Trade Group.

Export Control Developments – BIS Seeks to Harmonize Definitions under Multiple Export Control Regulations in U.S.

In April 2010, Defense Secretary Robert Gates announced that the Obama Administration plans to reform the U.S. export system with four key principals:  Single Export Control List, Single Licensing Agency, Single Enforcement Coordination Agency, and Single IT System.  For more details, please see the Asia Trade Alert published June 18, 2010 by Bryan Cave International Trade LLC.

CHINA – Direct &  Indirect Tax Authorities Focus on Automotive Industry

The State Administration of Taxation (“SAT”) has, in recent years, taken a more industry-focused approach towards transfer price audits.  To achieve this the SAT has provided its audit teams with specialized and industry focused training.  For more information, please read the Asia Trade Alert published June 28, 2010 by Bryan Cave International Trade LLC.

Update on Trade Agreements – Thailand Ratifies ATIGA

The Ministry of Finance issued the Notification dated April 26, 2010 implementing the tariff reduction and exemption privileges under the ASEAN Trade in Goods Agreement (“ATIGA”), prior to the date of entry into force of the ATIGA.   For more information, please read the May-June 2010 Asia Trade Bulletin published by Bryan Cave International Trade LLC.

Related Posts

1. May 2010 Client Alerts - June 9, 2010
2. January 2010 Client Alerts - February 5, 2010
3. December 2009 Client Alerts - January 12, 2010

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

Related Posts

1. Financial Services Update – Issue 25 - June 29, 2010
2. Financial Services Update – Issue 2 - January 22, 2010
3. Financial Services Update – Issue 12 - April 5, 2010

Affiliate Transactions under Sections 23A and 23B of the Federal Reserve Act  

Under federal law, transactions between a holding company, a bank, its subsidiaries, or its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. Section 23A imposes collateral reserve requirements on transactions between a bank and an affiliate of the bank that vary based on the credit exposure undertaken by the bank and limits the volume of affiliate transactions permitted by a bank to a percentage of the bank’s capital stock and surplus. In addition, Section 23B requires that affiliate transactions of this sort be made on the basis of market rates and market terms that would otherwise apply if the transaction was at arms-length with a non-affiliated party.  

Under current law, “covered transactions” under 23A include (i) a “loan or extension of credit” to an affiliate; (ii) “a purchase of or an investment in securities issued” by an affiliate; (iii) asset purchases, including repurchase agreements; (iv) an “acceptance of securities issued by the affiliate as collateral or security for a loan” extended to any person or company; or (v) the issuance of a guarantee or letter of credit for or on behalf of an affiliate. Sections 608 and 609 of the conference report broaden the category of “covered transactions” under 23A to include derivative transactions, the borrowing or lending of securities, including debt obligations, and expanded categories of repurchase agreements (“repos”). In total, the broadened definition of “covered transactions” now includes almost any transaction in which a bank would experience credit exposure relating to a transaction by or with its affiliate.   

In addition, Section 23B currently grants the Federal Reserve the authority to write regulations that exempt subsidiaries of bank holding companies from the affiliate transaction rules of Sections 23A and 23B. Section 608 of the conference report deletes this permissive authority, essentially requiring the Federal Reserve to treat subsidiaries and their bank holding company parents as affiliates subject to the transactional limitations of Sections 23A and 23B. Section 609 of the conference report further broadens the applicability of 23A and 23B to otherwise covered transactions between a bank and its financial subsidiary that are currently exempted under current law.   

Finally, Section 615 of the conference report extends similar valuation restrictions to those in Section 23B on transactions between any insured financial institution and one of its executive officers, directors or principal shareholders. Just as Section 23B requires transactions with affiliates to be on market terms, Section 615 requires that a sale of assets by or from an insider must also be on market terms. In addition, should the transaction constitute more than 10% of the financial institution’s capital stock and surplus, a majority of the uninterested directors of the bank or company must pre-approve the transaction.   

Legal Lending Limit Extended to Other Forms of Credit Instruments  

Currently, under the National Bank Act, national banks are subject to a legal lending limit, in which total loans and credit exposures to a single borrower at one time undertaken by the bank cannot exceed more than 10% of the bank’s total unimpaired capital provided the loan is fully secured. This section (12 U.S.C. § 84) further defines “loans and extensions of credit” to include 

all direct or indirect advances of funds to a person made on the basis of any obligation of that person to repay the funds or repayable from specific property pledged by or on behalf of the person and, to the extent specified by the Comptroller of the Currency, such term shall also include any liability of a national banking association to advance funds to or on behalf of a person pursuant to a contractual commitment…  

As was the case with affiliate transactions, Section 610 of the conference report broadens the definition of loans and extensions of credit to include credit exposure created by repos and derivative transactions, which are defined as “a contract, agreement, swap, warrant, note or option that is based, in whole or in part, on the value of any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices or other assets.” Section 614 of the conference report similarly broadens the current law restrictions on loans to directors, officers and principal shareholders of a bank to also include repos, securities lending transactions and derivative transactions.   

Section 611 of the conference report effectively extends similar legal lending limit restrictions to derivative transactions for state banks. The conference report permits state banks to engage in derivative transactions, but only if the relevant state lending limit statute considers credit exposure from derivative transactions.   

In total, the conference report’s amendments to Sections 23A and 23B of the Federal Reserve Act, as well as its effects on the legal lending limit, can be viewed primarily as a part of the broader regulatory reform of derivative transactions and other previously unregulated financial instruments, rather than as a “game-changer” for bank holding companies and their affiliates. Primarily, the focus of the conference report is to include these previously unregulated financial instruments and their appurtenant credit risk under the existing federal restrictions that have the effect of limiting the credit exposure of financial institutions to a particular borrower or affiliate. With the focus of the amendments largely on including relatively complex financial instruments that are largely the province of Wall Street banks, we believe that the effect of these amendments on community and regional financial institutions should be relatively low.

Related Posts

1. Improvements to the Asset-Backed Securitization Process Under the Dodd-Frank Wall Street Reform Bill - July 7, 2010
2. Dodd-Frank Wall Street Reform Bill Significantly Modifies the Regulation of Credit Rating Agencies - July 2, 2010
3. Investor Protections in the Dodd-Frank Regulatory Reform Bill - July 1, 2010

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.

Related Posts

1. Obama Proposes Comprehensive Regulatory Reform - June 17, 2009
2. New Regulatory Framework for the Supervision of Bank Holding Companies and their Subsidiaries - July 5, 2010
3. Regulatory Reform Creates Powerful Financial Stability Oversight Council - June 29, 2010

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 rule also contains one very large loophole which is that, except to the extent the federal banking regulatory agencies adopt policies to the contrary,  the limits do not apply to the purchase of US Treasury securities, or of obligations issued by Fannie Mae, Ginnie Mae, Freddie Mac, a Federal Home Loan Bank, the Federal Agriculture Mortgage Corporation, Farm Credit Banks or state and local municipal bonds. While investing in such instruments would theoretically not carry the same risk as investing in mortgage backed securities, there is still interest rate risk inherent in such investments and a wrong bet on which way rates will head could still cost an institution a great deal of money.

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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.

In addition, the rules must establish standards for the retention of an economic interest in collateralized debt obligations (“CDO”), securities collateralized by CDOs, and similar securities. The rules may vary among securitizers of different classes of assets, but in no event will a securitizer be permitted to hedge (or otherwise transfer), directly or indirectly, the retained risk.

Disclosure and Reporting Requirements

The SEC will adopt regulations requiring each issuer to disclose, for each tranche or class of securities, information regarding the underlying assets to facilitate, to the extent feasible, comparing data across securities in similar types of asset classes. These regulations must also disclose asset-level or loan-level data, as appropriate, to allow investors to independently perform due diligence on the ABS and the assets underlying the ABS. Further, certain issuers of ABS may have ongoing reporting requirements, equivalent to reporting requirements under the Exchange Act. Finally, an issuer of registered ABS must review the assets underlying the ABS and disclose in the registration statement the nature of the issuer’s review.

Representations and Warranties in ABS Offerings

Any securitizer of an ABS offering must disclose the fulfilled and unfulfilled repurchase requests across all trusts aggregated by the securitizer so that investors may identify asset originators that have clear underwriting deficiencies. In addition, nationally recognized statistical rating organizations must include, in any report accompanying a credit rating decision related to an ABS offering, a description of the representations, warranties, and enforcement mechanisms available to investors and how those representations, warranties, and enforcement mechanisms differ from issuances of similar securities.

Other Significant Changes Related to the Regulation of ABS

These provisions represent major changes in the regulation of the ABS market. It is clear that the House and Senate have attempted to address two of the major issues often raised in the discussion of how the ABS market contributed to the financial crisis: the lack of any risk retained by securitizers and the inability to assess the assets underlying the ABS. What is unclear, is how the regulations to enforce these statutory requirements will work in the market, and how the market will respond to these requirements.

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