July 21, 2011
Authors:
Little to Celebrate:
The One Year Anniversary of Dodd-Frank
Daniel F. C. Crowley
Partner
dan.crowley@klgates.com
+1.202.778.9447
Bruce J. Heiman
Partner
bruce.heiman@klgates.com
+1.202.661.3935
July 21, 2011 will be the first anniversary of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank”), the most comprehensive reform of the U.S.
regulatory framework governing the financial system since the Great Depression. In
the year since enactment, there has been an unprecedented flurry of regulatory and
Congressional activity. Yet, many of the most contentious policy issues remain to be
resolved. This report provides an overview of the progress that has been made and
highlights some of the policy battles ahead.
Akilah Green
Associate
akilah.green@klgates.com
Background
+1.202.661.3752
Rulemaking
Karishma Shah Page
Associate
karishma.page@klgates.com
+1.202.778.9128
Collins R. Clark
Associate
collins.clark@klgates.com
Over the past year, regulatory agencies have been working at a frenetic pace to
implement Dodd-Frank, which contains over 315 rulemaking requirements and 145
study and reporting provisions. The rulemakings and studies, in many cases, are on the
most contentious and complex aspects of Dodd-Frank. Moreover, many of the
rulemaking and study requirements have ambitious deadlines for finalization. More
than one-quarter of the rulemakings are due in the third quarter of 2011 alone.
+1.202.778.9114
Nicole B. Ehrbar
Government Affairs Analyst
nicole.ehrbar@klgates.com
+1.202.661.3794
In light of the monumental amount of work to be done and the limited timeframe in
which to do it, missed deadlines are becoming a more common occurrence.
Approximately 62 percent of the rules required by Dodd-Frank have yet to be proposed
and only 21 rules have been finalized. The Securities and Exchange Commission
(“SEC”) and the Commodity Futures Trading Commission (“CFTC”), both of which
had some of the earliest deadlines, have recently delayed key rulemakings.
The delay has not raised significant concerns among Members of Congress. Both
House and Senate Republicans have been urging the regulatory agencies to slow
rulemakings and take a more deliberative approach. Similarly, on the Democratic side,
both Senate Banking Committee Chairman Tim Johnson (D-SD) and House Financial
Services Committee Ranking Member (and Dodd-Frank Act namesake) Barney Frank
(D-MA) have said that there may be certain rulemakings in which a delay is warranted
in order to ensure that the final rule gets it right.
Financial Services Reform Alert
Congressional Scrutiny
During the past year, both the House and the Senate
have also been engaging in oversight of DoddFrank, but to different ends. The House Republican
Majority has embarked on a rigorous oversight
hearing schedule, often with multiple hearings on
different aspects of Dodd-Frank taking place on the
same day when the House is in session. These
oversight activities have been focused on lessening
the impact of the more controversial provisions of
Dodd-Frank by influencing the implementation
process. Republicans are also attempting to force
changes in certain rulemaking proposals through
other available means, such as by withholding
funding through the appropriations process. The
Senate Democratic Majority’s oversight efforts, in
contrast, have generally been focused on ensuring
that implementation of Dodd-Frank is proceeding
consistent with Congressional intent. However,
Members of Congress on both sides of the aisle have
submitted a large number of letters to regulatory
agencies on various rulemakings. In sum, the level
of Congressional oversight and other efforts to
influence the Dodd-Frank rulemaking process is
significant and ongoing.
The prospect for enactment of corrections legislation
is less clear. To date, Republican House members
have introduced a number of bills aimed at rolling
back portions of Dodd-Frank; the success of these
efforts is likely to be limited, since the Senate
Democratic Majority and the Administration are
unlikely to act favorably on such measures.
However, there are a growing number of discrete
issues on which there is bipartisan, bicameral
support. Therefore, in the coming months,
momentum is likely to build to address these issues
either as stand-alone provisions or as part of a larger
Dodd-Frank Act corrections package.
Nominations
Another issue that has impacted Dodd-Frank Act
implementation is the numerous vacancies at the
regulatory agencies. In many cases, the President
has nominated candidates that are awaiting Senate
confirmation. With respect to the banking
regulators, President Obama has nominated Martin
Gruenberg to chair the Federal Deposit Insurance
Corporation (“FDIC”) after Sheila Bair stepped
down. The President also nominated Thomas Curry
to head the Office of the Comptroller of the
Currency (“OCC”). John Walsh has served as
Acting Comptroller of the Currency since August
2010. Recently, nominee Peter Diamond withdrew
his nomination for the Board of Governors of the
Federal Reserve System (“Federal Reserve”). The
President has nominated Mark Wetjen for the
CFTC.
The vacancy that has been the subject of the most
speculation and controversy has been that of the
Director of the Bureau of Consumer Financial
Protection (“CFPB”). Elizabeth Warren, who
originally formulated the idea of the CFPB, was
seen as the top candidate for the position. In
September 2010, President Obama and Treasury
Secretary Tim Geithner named Dr. Warren as
Assistant to the President and Special Advisor to the
Treasury Department on the CFPB. Dr. Warren has
been controversial among Republicans and the
industry and, as a result, was unlikely to garner
sufficient votes for confirmation. Earlier this week,
the President instead nominated former Ohio
Attorney General Richard Cordray for the position.
However, Congressional Republicans have
continued to insist that no one will be confirmed for
the position until significant structural and funding
changes are made to the CFPB.
Systemic Risk
Dodd-Frank created a new regulatory framework in
an attempt to monitor and manage financial stability
and systemic risk. At the core of the new regulatory
structure is the Financial Stability Oversight
Council (“FSOC”), which has the authority to
designate nonbank financial firms as systemically
significant (“SIFI”), subjecting them to heightened
supervision by the Federal Reserve. Since the
enactment of Dodd-Frank, few issues have garnered
more attention than the process by which the FSOC
will designate nonbank firms as systemically
significant and the question of what more stringent
prudential regulation under the Federal Reserve will
entail. While the Federal Reserve is ultimately
responsible for promulgating the rules for such
macro-prudential regulation, which it expects to
release for public comment this summer, DoddFrank permits the FSOC to make recommendations
regarding the enhanced regulation.
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Financial Services Reform Alert
To date, the FSOC has issued an Advanced Notice
of Proposed Rulemaking and a Proposed Rule
regarding its designation of nonbank firms; FSOC
has stated its intention to finalize the proposal by the
summer of 2011, but that deadline will almost
certainly slip. Both proposals have been heavily
criticized by Republicans and Democrats, as well as
by the private sector, for simply restating the criteria
for SIFI designation already stated in the statute
itself. At a May 12 Senate Banking Committee
oversight hearing, members of the FSOC agreed that
it was necessary to provide further clarification
about the metrics the FSOC would use for SIFI
designation and committed to publishing an
additional, more detailed proposal. The form of the
forthcoming guidance is not yet clear, but the FSOC
is expected to issue “guidelines” for SIFI
designations near the end of July for a 60 day
comment period. After the rulemaking is finalized,
the FSOC will begin the process of identifying
which institutions may be systemically significant,
which will likely entail extensive dialogue between
such institutions and the FSOC through the end of
the year. Initial designations will likely begin in
early 2012.
Chairman Ben Bernanke has indicated that the
Federal Reserve plans to unveil a package of
proposed rules implementing more stringent
prudential standards for SIFIs and bank holding
companies with assets in excess of $50 billion
(“covered companies”) this summer. The deadline
for these regulations to be finalized is January 2012.
Few details of the new regulatory regime are
available. In a June 3 speech, Governor Daniel
Tarullo provided some insights, stating that although
Federal Reserve staff was using three different
approaches to determine how much additional
capital should be required, the “expected impact”
methodology has had the most influence. The
“expected impact” approach focuses on determining
how much additional capital is needed to equalize
the expected impact of a SIFI failure compared to
the failure of a non-SIFI firm. Under this approach,
Governor Tarullo stated that enhanced capital
requirements could be anywhere from 20 percent to
100 percent more than Basel III capital
requirements. Federal Reserve officials have
indicated that the so called “SIFI surcharge” will be
scaled based on the size and risk profile of each
institution.
The Administration and the FSOC have also faced
bipartisan criticism for the lack of full membership
of the FSOC nearly a year after enactment.
Specifically, two of the FSOC’s voting seats
continue to be vacant: that of the CFPB Director
and an independent member, appointed by the
President with the advice and consent of Senate,
having insurance expertise. Members of both
parties have particularly focused on the lack of
adequate insurance expertise on the FSOC, noting
that it is inappropriate for the FSOC to be
promulgating some of its most significant
rulemakings without the benefit of a full council’s
expertise.
Resolution Authority
Title II of Dodd-Frank gave the Federal Deposit
Insurance Corporation (“FDIC”) the ability to act as
receiver for non-bank financial firms designated as
systemically significant by the FSOC. Under this
new Orderly Liquidation Authority, the FDIC must
establish a comprehensive framework to wind down
these systemically significant firms, addressing such
issues as the priority of creditors’ claims and the
procedures governing the ultimate liquidation of the
company.
On July 6, the FDIC finalized its rulemaking
establishing the framework for its Liquidation
Authority and setting forth the priority of creditors’
claims. Specifically, the final rule establishes 11
priority claim categories, with the company’s
shareholders having the lowest priority. The rule
becomes effective August 15, 2011. More recently,
on May 4, the FDIC established the Systemic
Resolution Advisory Committee. The Committee
has no final decision-making authority but will
instead provide advice and recommendations to the
FDIC regarding its resolution authority.
Dodd-Frank also requires covered companies to
periodically provide the FDIC, Federal Reserve, and
FSOC with resolution plans, or “living wills,” in the
event of their failure. On April 22, the FDIC and
Federal Reserve published their joint proposed rule
detailing the requirements of the living wills and
July 21, 2011
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Financial Services Reform Alert
quarterly credit exposure requirements. The FDIC
rule is expected to be finalized in August.
Depository Institutions and Their
Holding Companies
At the first anniversary of Dodd-Frank, the federal
banking agencies have taken steps to accommodate
the abolition of the Office of Thrift Supervision
(“OTS”). However, they have not yet proposed
regulations to implement some of the most
significant reforms, such as increased capital
standards required by the Collins Amendment and
limitations on proprietary trading and hedge fund
and private equity activities imposed by the Volcker
Rule.
Abolition of the OTS
As of July 21, 2011, OTS authority over thrifts and
thrift holding companies transfers to the OCC,
Federal Reserve, and FDIC. These regulators have
expressed a general desire to make the regulation of
such entities as consistent as possible with the
regulations applicable to banks and bank holding
companies. The OCC has taken the most significant
efforts toward transition, reorganizing internally,
hosting a series of regional meetings to get
acquainted with officers and directors of federal
thrifts, and proposing changes to convert banks and
thrifts to a single financial reporting system based on
the “call reports” currently used by banks. The OCC
has also started the process of incorporating relevant
OTS regulations into existing OCC regulations.
Applicable OTS regulations will be reissued as OCC
regulations, with further adjustments made over
time.
Minimum Capital Standards (Collins
Amendment)
The provision known as the Collins Amendment
requires regulators to establish minimum capital
requirements for depository institution holding
companies and systemically important nonbank
financial institutions that are at least as high as those
currently applicable to insured depository
institutions. So far, the federal banking regulators
have proposed implementing rules only with respect
to certain institutions required to comply with Basel
II. More comprehensive implementation is expected
to be proposed late this year as part of the new
Basel III capital standards.
Proprietary Trading and Hedge Fund
Activities (Volcker Rule)
The provision known as the Volcker Rule will
generally prohibit proprietary trading and severely
limit investment in hedge funds and private equity
funds by depository institutions and their affiliates.
As required by Dodd-Frank, the FSOC conducted a
study on the Volcker Rule and issued a report in
January. Although many observers hoped the
FSOC report would clarify how details of the rule
would be implemented, it primarily restated the
statutory provisions and identified, but did not
resolve, the difficult aspects of implementation.
On July 13, the Government Accountability Office
(“GAO”) released a separate report on the Volcker
Rule, also required by Dodd-Frank. The report
criticized the regulators drafting the Volcker Rule
regulations for failing to gather comprehensive
information on proprietary trading and hedge fund
activities currently being conducted. Proposed
regulations are due in October.
Relevant Studies
Two other required studies relating to depository
institutions are worthy of note. First, on July 8, the
FDIC released its study on “brokered” and “core”
deposits. Early comments by FDIC staff showed a
desire to recommend a new deposit classification
system that would group deposits along a
continuum of stability. The study recognizes that
some deposits currently classified as brokered are
stable sources of funding but concludes that current
brokered deposit framework should be retained
because of a lack of sufficient data.
Another study that is underway will consider
whether to eliminate exceptions to the Bank
Holding Company Act for companies that own
industrial loan companies, credit card banks, and
certain trust companies. The GAO has met with a
number of affected companies, but has not yet given
an indication of what it might recommend. The
final report is due in January 2012.
July 21, 2011
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Financial Services Reform Alert
Private Funds
Dodd-Frank created a new regulatory framework to
govern, investment advisors to private funds,
including hedge funds and private equity funds.
Dodd-Frank mandated that the SEC issue rules
requiring advisers to hedge funds and private equity
funds with more than $100 million in assets under
management, with certain exceptions, to register
with the SEC.
Final rules on the oversight of investment advisers
were released in June, to be effective on July 21.
The rules also address one of the key issues that has
garnered controversy with respect to the private fund
adviser registration requirements—exemptions from
the private fund title of Dodd-Frank. The significant
exemptions from SEC registration are for advisers
solely to venture capital funds, mid-sized advisers
solely to private funds (i.e., such advisers with less
than $150 million in assets), foreign private advisers,
and family offices. In addition, the rules also
address the required transition of mid-sized advisers
to state registration. The rules would require midsized advisers with between $25 million to $100
million in assets under management to withdraw
from SEC registration and to register with one or
more states under state law. The SEC implemented
a transitional exemption period until March 30, 2012
to provide additional time for newly required private
advisers to register.
In January, the SEC also proposed rules to require
disclosure from certain private fund advisers that
ultimately would be shared with the FSOC, which is
in charge of monitoring systemic risk. The pending
SEC rule proposals to mandate more transparency
from private investment fund advisers would seek
general rather than specific disclosure about
underlying positions.
With respect to legislation, in March, Congressman
Robert Hurt (R-VA) introduced H.R. 1082, the
“Small Business Capital Access and Job
Preservation Act,” which would repeal Dodd-Frank
requirement that private equity fund advisers register
with the SEC. Congressman Hurt said the bill
would put private equity fund advisers on the same
footing as venture capitalists that are exempt from
SEC registration under the law. On June 22, the bill
passed out of the House Financial Services
Committee by voice vote. However, the timing of
House floor action remains unclear.
Over-the-Counter (“OTC”) Derivatives
Title VII of Dodd-Frank created an entirely new
comprehensive regulatory regime for swaps and
security-based swaps, which will dramatically
transform the OTC derivatives markets. Designed
to increase transparency and mitigate systemic risk,
the new regime is structured around four key
concepts: (1) registration and regulation of swap
dealers (“SDs”) and major swap participants
(“MSPs”); (2) central clearing and trade execution
requirements on standardized derivatives products;
(3) extensive recordkeeping and real-time reporting
requirements; and (4) significant new trading duties,
business conduct standards, and risk management
procedures.
Following a fall and winter during which the CFTC
and SEC issued proposed rules at a record pace, the
agencies have currently proposed the bulk of Title
VII’s required rulemakings and are in the process of
reviewing an unprecedented amount of comments.
On May 3, the CFTC re-opened certain rulemaking
comment periods until June 3, allowing the public
an additional opportunity to comment. Both
agencies have announced their intention to finalize
rules throughout the remainder of the summer and
fall. Additionally, since some Title VII provisions
automatically became effective July 16, both the
CFTC and SEC have issued orders providing
market participants with exemptive relief. The
CFTC’s exemptive relief expires on the earlier of
(1) the effective date of the applicable final rule, or
(2) December 31, 2011. The final deadline of
December 31, 2011 has drawn criticism from
market participants, who have criticized the date as
being an arbitrary deadline. In contrast, the SEC’s
exemptive relief does not contain a specific sunset
date, instead allowing the exemption to continue
until the relevant rulemakings are finalized and
implemented.
Both the substance and pace of the agencies’ Title
VII rulemaking have faced bipartisan criticism from
lawmakers and the business community. In
particular, the rulemakings addressing margin and
capital requirements, the end-user exemption, entity
and product definitions, and position limits have
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Financial Services Reform Alert
proven to be highly controversial. Consequently,
Congress has taken a particularly active oversight
role with respect to Title VII rulemakings, with
Members engaging in ongoing dialogue with
agencies and holding multiple oversight hearings.
Republican members of Congress have been
particularly critical of Title VII rulemaking and have
introduced legislation that would significantly roll
back provisions of concern; many of these measures
have limited prospects, in light of the Senate
Democratic Majority. There are some legislative
proposals, however, that have gained bipartisan
support. For example, one area where some
bipartisan consensus has been achieved is the issue
of the CFTC’s perceived failure to conduct adequate
cost-benefit analysis prior to issuance of a proposed
rule. In response to a CFTC Inspector General
report that concluded that the agency “generally
adopted a ‘one size fits all’ approach” to cost-benefit
analysis, Congressman Mike Conaway (R-TX),
Leonard Boswell (D-IA), Patrick McHenry (R-NC),
Mike Quigley (D-IL), and Randy Neugebauer (RTX) introduced H.R. 1840, which would require the
CFTC to engage in a comprehensive cost-benefit
analysis before promulgating regulations or issuing
orders. The bill is now awaiting consideration by
the House Agriculture Committee.
A second area that enjoys bipartisan, bicameral
support is the end-user exemption from margin and
clearing requirements. Republicans and Democrats,
as well as industry commentators, continue to
express concerns that end user transactions may get
swept up into the new Title VII regulatory regime.
Congressmen Frank Lucas (R-OK) and Spencer
Bachus (R-AL) and U.S. Senators Debbie Stabenow
(D-MI) and Tim Johnson (D-SD)—the Chairmen of
the House and Senate Agriculture, House Financial
Services, and Senate Banking Committees—wrote a
letter to the relevant regulators urging them to
ensure end-user transactions were exempt from
margin requirements. More recently, Congressman
Michael Grim (R-NY) and Senator Mike Johanns
(R-NE) have introduced companion legislation in
the House and Senate, H.R. 1610 and S. 947, that
would codify the end-user exemption from margin
requirements.
Investor Protection
Dodd-Frank contained a host of provisions designed
to reform the SEC and to protect investors. Two
areas that have garnered significant attention are the
whistleblower protections and fiduciary duty
provisions.
Whistleblower Protection
Dodd-Frank required the SEC to establish a new
whistleblower program. Under Dodd-Frank,
persons who provide the SEC with information
leading to a successful enforcement action in which
more than $1 million is recovered are entitled to an
award of 10 to 30 percent of those amounts, with
the precise amount to be determined by the SEC.
The SEC has $453 million in a fund that will be
used to award bounties under the new program.
On May 25, the SEC adopted final rules
establishing a whistleblower program mandated by
the law. Ahead of the SEC’s adoption of the final
rules, one of the key areas of interest was the
relationship between a company’s internal
compliance program and the new SEC
whistleblower program. Although the SEC was
urged by many to do so, it declined to require that
whistleblowers report their concerns to the company
either before making a report to the SEC or
afterwards. However, the SEC rules do offer some
incentives to encourage whistleblowers to report to
the company. For example, the rules would allow
persons to obtain credit for reporting original
information to employers, and in addition, the SEC
will consider how much the whistleblower
contributed to, or interfered with, internal
compliance procedures when deciding awards.
Also, the new rules extend the time from 90 days to
120 days when the whistleblower can wait after
reporting problems internally.
The most controversial aspect of the final rule is the
SEC’s decision not to require whistleblowers to
report internally before communicating with the
SEC. In response, Congressman Michael Grimm
(R-NY) introduced H.R. 2483, the “Whistleblower
Improvement Act of 2001,” on July 11. The
legislation would require employees to report
possible violations to their companies before
approaching the SEC with the information in order
to be eligible for the whistleblower program. In
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Financial Services Reform Alert
addition, the bill would require the SEC to alert a
company about whistleblower information and
investigations before any enforcement is taken.
H.R. 2483 is expected to be opposed by Democratic
members, who support whistleblowers being able to
bring the complaints directly to the SEC without
company reporting. The bill is awaiting action in
the House Financial Services Committee
Broker-Dealer Fiduciary Duty
Another area of focus has been harmonization of
fiduciary duties. Dodd-Frank required a study by
the SEC on harmonizing the standards of care for
brokers, dealers, and investment advisers. In
January, the SEC staff issued its report from the
study, which recommended that the Commissioners
promulgate rules to create a uniform fiduciary
standard for all who provide personalized
investment advice to retail customers, regardless of
whether they are registered investment advisers or
broker-dealers. The SEC staff said that a universal
fiduciary duty would protect investors confused by
the differing advice standards. The SEC said it
would begin action on the issue after July 21, 2011,
though the timeframe could slip into the fall.
While Congress has not formally addressed the issue
at this time, Congressman Barney Frank (D-MA)
sent a letter to the SEC stating that the new standard
contemplated by Congress was intended to
recognize the difference between broker-dealers and
investment advisers and warned any universal
fiduciary duty should be carefully implemented to
avoid disrupting the broker-dealer business model.
Securitization
Dodd-Frank required securitizers to have “skin in
the game,” based on the premise that such
requirements would drive underwriting discipline,
preventing another housing crisis. Dodd-Frank
requires securitizers to retain at least 5 percent of the
credit risk for any asset that is transferred, sold, or
conveyed to a third party through the issuance of an
asset-backed security. Dodd-Frank also tasked six
regulatory bodies—FDIC, Federal Reserve, HUD,
FHFA, SEC, and OCC (the “Regulators”)—with
defining a class of mortgages, called “qualified
residential mortgages” (“QRM”), that are so
stringently underwritten that they are safe enough to
be exempted from the Dodd-Frank’s risk retention
requirements.
On April 29, the Regulators released their jointly
proposed risk retention rule. The proposed rules
and, in particular, the proposed QRM exemption
have been received with much debate about their
impact on the nascent housing market recovery and
the impact they will have on first-time, low- and
moderate-income borrowers’ ability to access the
housing market in the future. The House Financial
Services, House Oversight and Government
Reform, and Senate Banking Committees have held
hearings on the issue of risk retention and, at this
point, over 300 Members of the House and Senate
have written to the Regulators to voice concerns
about various aspects of the proposal. In response
to the controversy surrounding the proposed risk
retention rule, the Regulators extended the initial
60-day comment period, which would have closed
on June 10, to August 1. During that period,
Members of Congress and stakeholders are expected
to continue to voice concerns via letters, legislation,
and hearings.
In the proposed rule, the Regulators also included
an exemption from the risk retention requirements
for GSE-sponsored securitizations as long as the
GSEs remain in conservatorship. House Financial
Services Committee Capital Markets Subcommittee
Chairman Scott Garrett (R-NJ) introduced
legislation, H.R. 1223, in March that would
eliminate the proposed GSE exemption from the
risk retention requirements, arguing that such an
exemption was not intended by Congress and would
serve as an impediment to the return of the private
market. In April, the Subcommittee unanimously
approved the bill in a 34-0 roll call vote.
Credit Rating Agencies
Dodd-Frank established an entirely new framework
to govern and regulate nationally recognized
statistical rating organizations (the regulatory term
for certain regulated credit rating agencies).
Reforms include establishing an Office of Credit
Ratings (“OCR”) within the SEC with broad
rulemaking authority, including the authority to
deregister a credit rating agency for providing bad
ratings. The SEC and OCR have proposed rules
pertaining to reporting on internal controls,
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Financial Services Reform Alert
protecting against conflicts of interest, establishing
professional standards for credit analysts, and
various disclosures relating to credit rating and
performance of credit ratings.
One area that has garnered attention is a Dodd-Frank
Act provision making credit rating agencies liable if
their ratings of asset-backed securities contain
material misstatements or omissions. In April,
Congressman Steve Stivers (R-OH) introduced a
bill, H.R. 1539, that would repeal the provision. In
May, the House Financial Services Committee
Capital Markets Subcommittee voted (18-14) to
approve the legislation for full committee
consideration. The full House Financial Services
Committee is expected to mark up the bill in July.
Notably, Dodd-Frank removed several statutory
references to credit ratings and credit rating agencies
and required all Federal agencies to review their
regulations and modify them by striking these
references. Regulatory agencies are currently in the
rulemaking process to implement the regulatory
review.
Executive Compensation and
Corporate Governance
Dodd-Frank directed regulatory agencies to
promulgate several rules pertaining to executive
compensation practices of public companies. In
February, the SEC issued a final rule, effective April
4, providing shareholders of public companies with
an advisory vote on executive compensation (“say
on pay”) and, in certain cases, golden parachute
arrangements. With respect to a related provision,
the SEC is expected to finalize a rule in the near
term requiring institutional investment managers to
disclose their say on pay vote. The SEC has also
issued a proposed rule prohibiting the listing of
issuers that do not have independent compensation
committees.
The Federal Reserve, OCC, FDIC, OTS, National
Credit Union Administration, SEC, and Federal
Housing Finance Agency have also jointly issued a
proposed rule that would require financial
institutions to disclose the structure of incentivebased compensation arrangements and to prohibit
any arrangement deemed to provide “excessive
compensation, fees, or benefits” or that “could lead
to material financial loss.”
A related Dodd-Frank provision that has been the
subject of proposed legislation is a directive to the
SEC requiring quarterly disclosure of the median
annual total compensation of all employees, annual
total compensation of the chief executive officer,
and the ratio between the two. The provision has
been criticized as requiring an onerous amount of
data collection for data that may not provide
significant amounts of insight. Congresswoman
Nan Hayworth (R-NY) has introduced H.R. 1062,
the “Burdensome Data Collection Relief Act,”
which would repeal the provision; the bill has been
reported out of the House Financial Services
Committee and is awaiting House Floor
consideration
Municipal Securities
Dodd-Frank contains several provisions of potential
interest to participants in the municipal bond
market, which include the creation of a new
regulatory framework for government municipal
advisers. Dodd-Frank also expanded the
composition of the Municipal Securities
Rulemaking Board (“MSRB”) to ensure majoritypublic membership and enhanced its authorities.
The MSRB, in conjunction with the SEC, has been
undertaking a series of rulemakings to implement
Dodd-Frank’s municipal securities provisions.
Most significantly, Dodd-Frank prohibits a
municipal adviser from providing advice to or on
behalf of a municipal entity or obligated person with
respect to municipal financial products or, with
respect to the issuance of municipal securities, or to
undertake a solicitation of a municipal entity or
obligated person, unless the municipal adviser is
registered with the SEC. In December, the MSRB
issued a notice providing temporary registration
rules for municipal advisers. Dodd-Frank also
prohibits municipal advisers from providing advice,
or from acting on behalf of an obligated person
engaging in fraudulent, deceptive, or manipulative
acts or practices, and imposes a fiduciary duty on
advisers who advise a municipal entity and prohibits
municipal advisers from engaging in any act,
practice, or course of business that is not consistent
with the municipal adviser’s fiduciary duty. The
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Financial Services Reform Alert
MSRB issued separate proposed rules on fair dealing
and fiduciary duty in February.
Consumer Financial Protection
One of the most controversial aspects of Dodd-Frank
was the establishment of the CFPB, housed in the
Federal Reserve. The CFPB, which is scheduled to
begin operations on July 21, will have expansive
authority for consumer protection with respect to
financial products and services offered by both
banks and nonbanks. The CFPB has rulemaking
authority, which notably includes broad authority to
define certain conduct as unfair, deceptive, or
abusive. The CFPB has examination and
enforcement authority over large depository
institutions and nonbank financial institutions for
compliance with the consumer protection laws; the
prudential regulators will retain this authority for
insured depository institutions and credit unions
with assets of $10 billion or less.
Since the enactment of Dodd-Frank, much of the
work has been focused on getting the CFPB up and
running. Dr. Warren headed up a CFPB
Implementation Team, to acquire staff and space,
manage transition from other agencies, and begin
work on implementation of authorities.
In July, the CFPB issued a release on its large bank
supervision program, which will oversee the 111
depository institutions with total assets over $10
billion. For most regulated entities, examinations
will take place on a periodic basis; in the case of a
large and complex institution, there will be a yearround supervision program.
Another area of CFPB focus has been mortgage
disclosures. The CFPB issued a request for
comments in April and draft model forms in May
and June, which are aimed at simplifying federallyrequired mortgage disclosures to make clearer the
costs and risks of a loan and to encourage consumers
to comparison shop for the best offer.
The CFPB has been the target of strong
Congressional oversight in the House. Additionally,
the CFPB has been the target of legislation and
appropriations measures aimed at limiting its impact.
The House Financial Services Committee has
reported out of Committee H.R. 1121, legislation
introduced by Chairman Bachus that would replace
the CFPB director with a five-person Commission,
and H.R. 1667, legislation introduced by
Congresswoman Shelley Moore Capito (R-WV) to
postpone the July 21 date for the transfer of
functions to the CFPB if there is no CFPB director.
Additionally, Congressman Randy Neugebauer has
introduced a bill, H.R. 557, which transfers the
CFPB from the Federal Reserve to the Treasury
Department. The prospects of the bills are limited,
as they are unlikely to be considered by the
Democratic-governed Senate.
Interchange Fees
Another highly contentious issue has been debit
interchange fees. As a result of an amendment
offered by Senator Richard Durbin (D-IL), DoddFrank mandated that the Federal Reserve regulate
debit card interchange fees. In December, the
Federal Reserve issued a proposed rule that would
have capped the debit card interchange fee at
approximately 12 cents per transaction. In
response, Senators Jon Tester (D-MT) and Bob
Corker (R-TN) and Congresswomen Capito and
Debbie Wasserman Schultz (D-FL) introduced
legislation, S. 575 and H.R. 1081, that would delay
the Federal Reserve rulemaking. An amendment
based on the Tester-Corker legislation received a
majority of votes, but did not garner the 60 votes
necessary for passage. The Federal Reserve issued
a final rule in June, which increased the base cap to
21 cents per transaction.
Mortgage Reform and Anti-Predatory
Lending
Dodd-Frank established minimum national
standards that are designed to require lenders to
ensure that a borrower is able to repay a home loan
at the time the loan is made based on verified and
documented underwriting information. A lender
may presume that a borrower will be able to repay a
loan if the loan has certain low-risk characteristics
that meet the Act’s definition of a “qualified
residential mortgage.” On May 11, the Federal
Reserve issued a proposed rule to implement these
“ability to repay” requirements. The rule will be
finalized by the CFPB. To date, there have been no
significant Congressional efforts to address this
portion of Dodd-Frank.
July 21, 2011
9
Financial Services Reform Alert
Federal Insurance Office
Dodd-Frank also contained several provisions
designed to reduce the number of foreclosures and to
promote homeownership, including authorizing
funding to: (1) provide emergency mortgage relief
for unemployed borrowers in need of temporary
assistance; (2) rehabilitate neighborhoods impacted
by falling property values due to foreclosed and
abandoned homes through the Neighborhood
Stabilization Program; and (3) provide legal
assistance with homeowner preservation and
foreclosure prevention for low- and moderateincome homeowners and renters.
The provisions have been controversial among
Republicans and, in March, the House passed
legislation aimed at rolling back these provisions.
H.R. 839 would terminate the Home Affordable
Modification Program, the Obama Administration’s
signature foreclosure prevention program. H.R. 836
would end the mortgage aid program for
unemployed homeowners facing foreclosure. H.R.
830 would end a program established to help
homeowners who owe more than their homes are
worth refinance their loans. Additionally, H.R. 861
would end the Neighborhood Stabilization Program,
which provides grants to states and local
governments and nonprofit organizations to
purchase and redevelop abandoned and foreclosed
homes. The Senate, with a Democratic Majority, is
not expected to take up any of this legislation.
Dodd-Frank created a new Federal Insurance Office
(“FIO”) within the Treasury Department to oversee
the insurance industry, opening the door to a new
era of federal involvement in the U.S. insurance
industry, which has historically been dominated by
the states. In March, the Administration announced
the appointment of Michael McRaith to head the
FIO. Dodd-Frank calls for the FIO to issue a report
by January 21, 2012 on how to modernize and
improve the system of insurance regulation in the
United States.
The Way Forward
Dodd-Frank was enacted on July 21, 2010, largely
as proposed by the Obama Administration on June
17, 2009. In this Act, Congress revisited every
major financial services law enacted since the 1864
National Bank Act in just over a year and left many
of the most significant policy questions to the
rulemaking process. One year from enactment,
most of those questions remain unresolved. Despite
Republican desires to repeal much of Dodd-Frank, it
remains the law of the land for the foreseeable
future. Therefore, the many outstanding policy
issues will need to be resolved, either through the
rulemaking process or by enactment of subsequent
legislation in the weeks and months - and perhaps
years - ahead.
July 21, 2011
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