July 31, 2012
NY2 706039
©2011 Morrison & Foerster LLP | All Rights Reserved | mofo.com
IFLR Webcast
Dodd-Frank rulemaking progress
Confidential/Subject to Attorney Client Privilege
2
DFA – Open Issues
• Many of the most important issues have not been addressed,
including, for example:
•
•
•
•
Designation of entities that are systemically important
Volcker Rule
Derivatives provisions
Securitization and mortgage related provisions
This is MoFo.
3
Agenda
• During today’s session, we will provide a status report on a number
of the key areas of rulemaking, including:
 Financial stability reform
 Orderly Liquidity Authority (or our resolution authority)
 The Volcker Rule
 The framework applicable to funds
 The regulation of derivatives
 Securitization
 Ratings
 Capital
This is MoFo.
4
Financial Stability Reform
This is MoFo.
5
SIFIs
• SIFIs under U.S. law
• Bank holding companies and FBOs with $50 billion or more in
consolidated assets
• Approximately 34 U.S. companies
• Approximately 99 FBOs
• Nonbank financial companies designated by the Financial Stability
Oversight Council
• “Material financial distress”
• “Nature, scope, size, scale, concentration, interconnectedness, or mix of
activities”
• Must be “predominantly engaged” in financial activities—an issue for the
Federal Reserve
This is MoFo.
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SIFIs (cont’d)
• FSOC final regulations – three stage process for designation
• Stage 1: Quantitative thresholds
• Stage 2: Public and existing supervisory information
• No institution will be informed of exit at Stage 2
• Stage 3: Information request to company
• Notice of Consideration
• Notice of Proposed Determination
• Decision
• Note that prerequisite for SIFI designation is that company be
“predominantly engaged” in financial activities
• Federal Reserve has not completed rulemaking
This is MoFo.
7
SIFIs (cont’d)
• FSOC expected to designate first nonbank SIFIs by end of 2012
• Number of nonbank SIFIs could vary widely
• Federal Reserve perspective
• FDIC perspective
• Basel SIFI principles
• G-SIBs—framework published Nov. 2011
• D-SIBs—proposed framework published June 2012
This is MoFo.
8
Resolution and Liquidation
• Resolution planning
• U.S. requirements – rapid and orderly liquidation under bankruptcy code
• First plans filed on July 2
• Orderly Liquidation Authority
• Criteria
• FDIC appointed as receiver
• $50 billion line of credit
• OLA institutions not synonymous with SIFIs
• Non-SIFI could, at the time, present material risk
• SIFI could be resolved in bankruptcy
This is MoFo.
9
Resolution and Liquidation (cont’d)
• European provisions
• Disparity on nation-by-nation basis
• Financial Stability Board: Key Attributes (Oct. 2011)
• First plans in UK have been submitted
• International coordination
This is MoFo.
10
Volcker Rule
This is MoFo.
11
Volcker Interplay
The Volcker Rule prohibits (with some exceptions) “proprietary trading.”
• Proprietary trading means:
• Engaging as principal
• For the trading account
• Of the “covered banking entity”
• In the purchase or sale of one or more “covered financial
positions.”
• A “covered financial position” includes a swap.
• A “covered banking entity” includes an insured depository institution and any
affiliates or holding companies.
• A trading account is an account in which positions are held in order to realize
gains from short-term price appreciation.
• Generally, positions held for 60 days or less are deemed to be traded
positions and are subject to Volcker restrictions.
• Positions held for more than 60 days generally are exempt
This is MoFo.
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Volcker Considerations
• Volcker restrictions apply to foreign banks trading outside the U.S. in
several circumstances:
• The bank has a U.S. presence—even wholly unrelated to trading—
but fails to meet certain conditions:
• Even though most of its assets, revenues, and income are derived
from non-U.S. operations, the bank maintains a branch, agency, or
representative office in the U.S. but does not comply with Federal
Reserve regulations regarding these offices.
• The majority of any two of the bank’s total assets, total revenues,
or net income are held or derived from activities in the U.S. rather
than activities outside the U.S.
• The trading has any kind of nexus with the U.S.:
• The bank trades with a U.S. resident
• Any bank personnel directly involved in the trade is physically
located in the U.S.
• Trading utilizes any kind of U.S. execution facility.
This is MoFo.
13
Volcker Considerations (cont’d)
• If a foreign bank is subject to Volcker, a variety of prohibitions and restrictions
come into play.
• Proprietary trading in any kind of security is presumptively prohibited.
• Trading in connection with an underwriting is permissible.
• Trading in connection with market making also is permissible, but a large
number of restrictions apply. The specifics of these restrictions are
unclear.
• Trading as a hedging activity is permissible, but the scope of such hedging
is uncertain, particularly whether Volcker permits trading to hedge an entire
portfolio.
• How the U.S. regulators will enforce these restrictions is unclear.
• U.S. regulators may or may not have authority to examine or supervise the
non-U.S. operations of a foreign bank that are unrelated to the business of
a branch, agency.
• U.S. regulators may attempt to restrict operations of a branch, agency, or
representative office.
• U.S. regulators have some authority to limit other business of a foreign
bank in the U.S.
This is MoFo.
14
Funds
This is MoFo.
15
SEC Releases
• June 22, 2011: SEC publishes three releases adopting new rules
under the Advisers Act to implement provisions of Dodd-Frank:
• Release IA-3220: Family Offices
• Release IA-3221: Rules Implementing Amendments to the Advisers Act
• Release IA-3222: Exemptions for Certain Advisers
• October 31, 2011: SEC publishes a release implementing Form PF
• Release IA-3308
• December 21, 2011: SEC publishes a release amending net worth
standards for accredited investors
• Release 33-9287
This is MoFo.
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Implementing Release
The Implementing Release relates to:
• registration requirements for investment advisers; and
• reporting requirements for (1) registered investment advisers, and (2)
exempt reporting advisers
This is MoFo.
17
Mid-sized Advisers
• Advisers Act Section 203A generally prohibits an investment adviser
regulated by the state in which it maintains its principal office and
place of business from registering with the SEC unless it has at least
$25 million AUM
• Dodd-Frank created a new category of covered mid-sized advisers:
• with $25 million – $100 million AUM, and
• subject to registration and examinations as investment advisers with the
state of their principal office and place of business
• Wyoming, New York and Minnesota are states that do not meet both
requirements
This is MoFo.
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Mid-sized Advisers (cont’d)
New Advisers Act Section 203A(a)(2) provides that no covered midsized adviser shall register with the SEC unless the adviser:
• advises a registered investment company;
• advises a “business development company”; or
• is required to register with 15 or more states
This is MoFo.
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Mid-sized Advisers (cont’d)
• By raising the SEC registration threshold to $100 million AUM, DoddFrank generally bars smaller and mid-sized investment advisers from
choosing SEC registration over state registration
• According to the SEC, approximately 3,200 advisers will be required
to withdraw their SEC registrations and register on a state level
This is MoFo.
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Transition to State Registration
• Mid-sized advisers registered with the SEC as of July 21, 2011, must
remain registered with the SEC until January 1, 2012, unless an
exemption applies.
• Deadlines for mid-sized advisers no longer eligible to register with the
SEC:
• Those registered with the SEC on January 1, 2012, must file an
amendment to Form ADV no later than March 30, 2012, to indicate that
they are no longer eligible to remain registered with the SEC
• Advisers required to withdraw must withdraw registration with the SEC by
filing Form ADV-W no later than June 28, 2012
This is MoFo.
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Assets Under Management
• The SEC revised the instructions to Form ADV Part 1A to create a
uniform standard for advisers to calculate their AUM for determining
eligibility for registration or exemptions, and other regulatory purposes
• Advisers Act Section 203A(A)(2) defines AUM as the “securities
portfolios” with respect to which an adviser provides “continuous and
regular supervisory or management services”
• New term, “regulatory assets under management” (RAUM), replaces
“assets under management” in Form ADV Part 1
This is MoFo.
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Assets Under Management (cont’d)
• RAUM:
• to be calculated on a gross basis (without deduction of “any outstanding
indebtedness or other accrued but unpaid liabilities”)
• to be valued at market value of private fund assets, or fair value if market
value is unavailable
• must include:
• the value of any securities portfolios for which the adviser provides continuous
and regular supervisory or management services, regardless of the nature of the
assets held by the private fund (e.g., proprietary assets, assets managed for
which no compensation is received, and assets of foreign clients)
• the amount of any uncalled capital commitments made to a private fund
This is MoFo.
23
Derivatives
This is MoFo.
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Status of Title VII
 Critical building blocks of the Title VII regulatory regime have
recently been jointly adopted by the CFTC and SEC
 Entity Definitions (adopted in April and published in May 2012) covering definitions
of swap dealer, security-based swap dealer, major swap participant, major
security-based swap participant and eligible contract participant
 Product Definitions (adopted in July 2012, with publication expected soon) covering
definitions of swap and security-based swap
 However, still awaiting final action by the U.S. Treasury regarding the
exemption of FX forwards and FX swaps for certain purposes
 Publication of Product Definitions will trigger a host of compliance dates under the
CFTC’s Title VII regulations, but will not have a similar effect with respect to the
SEC’s Title VII regulations
 Except for joint rulemaking efforts, CFTC is much further along in its Title VII
rulemaking than the SEC
This is MoFo.
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Status of CFTC Title VII Implementation
 CFTC is moving ahead toward commencing implementation of significant
components of its Title VII regime during the fall of 2012
 CFTC has been more active than SEC in adopting final rules under Title VII, including between
April 2012 and as recently as last week acting to finalize rules for:
 End-User Exception
 Phase in Schedule for Mandatory Clearing
 Core Principles for Designated Contract Markets
 Customer Clearing Documentation and Timing Requirements
 Internal Business Conduct Standards for Swap Dealers and MSPs
 CFTC has recently provisionally registered ICE Trade Vault as a swap data repository and
approved DTCC-SWIFT as an interim provider of “Legal Entity Identifiers” (LEIs) to permit
compliance with swap data reporting requirements
 CFTC also last week proposed its first list of swaps (covering certain categories of interest rate
and credit default swaps) to be designated for mandatory clearing
 Subject to a post-publication 30-day comment period, this list could become final some time
in September 2012
This is MoFo.
26
Status of CFTC Title VII Implementation
(cont’d)
 With publication of the Product Definitions expected to occur soon, registration for
swap dealers and major swap participants will likely become mandatory by late
September/early October 2012
 Once this registration requirement occurs, many other Title VII rules adopted by
the CFTC will begin to take effect at that time or shortly thereafter, including:
 Real-time Reporting for Credit and Interest Rate Swaps
 General Recordkeeping and Reporting for Credit and Interest Rate Swaps
 Various Internal Business Conduct Standards for swap dealers and MSPs
 External Business Conduct Standards
 Position Limits for physical commodity-based futures and swaps for spot
months and, for legacy agricultural commodities, non-spot months (CFTC
recently provided temporary no-action relief from certain aggregation
requirements under its position limit rules)
 Also under CFTC’s rules, FCMs will be required in November 2012 to implement
the LSOC method for segregating customer initial margin posted for cleared swaps
This is MoFo.
27
Status of CFTC Title VII Implementation
(cont’d)
 Despite all this recent activity, CFTC has significant rulemaking that
it has not yet completed, including
 Margin requirements for OTC swaps (CFTC recently reopened the comment period
on the rule it had proposed covering OTC swap margining)
 Capital requirements for non-bank swap dealers and MSPs
 Swap execution facility (SEF) requirements, the most significant of which are
 SEF market structure (central limit order book versus request for quote)
 Block trade definitions
 “Available to trade” criteria
 Documentation requirements for OTC swaps as well as portfolio compression and
netting
 Additional phase-in rules covering trading documentation and margining
This is MoFo.
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Status of CFTC Title VII Implementation
(cont’d)
 CFTC is also working to finalize guidance and compliance relief
relating to the cross-border application of Title VII and the CFTC’s
Title VII rules
 Within last month, CFTC issued:
 Proposed Guidance regarding the application of its Title VII rules, and
 Proposed Exemptive Order to permit delayed compliance with certain Title VII
requirements
 Following the applicable comments periods,
 Proposed Guidance could be finalized by some time in September 2012, and
 Proposed Exemptive Order could be finalized by late August to mid September
2012
This is MoFo.
29
Status of CFTC Title VII Implementation
(cont’d)
 Proposed Guidance attempts to address cross-border matters by:
 distinguishing between “Entity-level” requirements and “Transaction-level” requirements of Title
VII
 defining who is a U.S. Person for cross-border purposes
 considering how Title VII should apply to foreign branches, subsidiaries and affiliates of U.S.
Persons, as well as how guaranties by U.S. Persons might impact these considerations
 contemplating, in the case of some Entity-level requirements, potential “Substituted
Compliance” based on comparably robust home country regulation
 Though early in the comment period, the Proposed Guidance is already
attracting a significant and deeply concerned reaction from the international
banking and financial regulatory community
 Proposed Exemptive Order supplements the Guidance by allowing delayed
compliance for certain (but not all) Entity-level requirements
 Primarily for non-U.S. swap dealers/MSPs who by complying with the order may delay some
compliance until July 2013
 However, U.S. swap dealers/MSPs who comply can delay their compliance with some Entitylevel requirements until January 1, 2013
This is MoFo.
30
Status of CFTC Title VII Implementation
(cont’d)
 All indications are that that CFTC is intent on having compliance commence
by this fall, which will mean that over the next two months:
 Cross Border Proposed Guidance and Proposed Exemptive Order will need to be finalized
 Initial list of swaps designated for mandatory clearing should be published
 To the extent possible, further important rulemaking by the CFTC should be completed or,
alternatively, guidance should be provided as to how newly registered swap dealers and MSPs
should conduct themselves if such rules are not finalized
 To the extent possible, CFTC and NFA should endeavor to address many questions and
uncertainties that have arisen over the interplay of the NFA’s registration process for swap
dealers and MSPs and the CFTC’s regulatory implementation schedule
 U.S. Treasury should finalize its proposed exemption for FX forwards and FX swaps
 Potential swap dealer and MSP registrants will need to finalize and implement many policies,
procedures and system/infrastructure enhancements
 To position the industry to comply with External Business Conduct Standards, OTC
documentation will need to be supplemented, most likely via the Protocol, Supplement and
Questionnaire process currently under development by ISDA
 Address other requests for guidance or clarification from various industry groups or participants
This is MoFo.
31
Status of SEC Title VII Implementation
 SEC is taking a different approach to Title VII rulemaking
 It appears that no registration requirements will be imposed until all substantive
Title VII rulemaking by SEC is complete
 Two of the CFTC’s Commissioners (Sommers and O’Malia) indicated they had
hoped that the CFTC would proceed in a similar fashion
 SEC’s substantive rulemaking has lagged significantly behind the CFTC’s
 In some cases, the SEC is yet to publish a proposed rule on matters that the
CFTC has long since published proposed rules on or even proceeded to adopt
final rules
 For example, as yet no SEC proposed rule on
 on margin requirements for OTC swaps or capital for non-bank registrants
 cross border application of SEC’s Title VII regulation
 Even where SEC has published proposed rules, the timeline for finalizing these
rules is unclear
This is MoFo.
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Status of SEC Title VII Implementation (cont’d)
 At present, there is no clear indication that the SEC will be moving
aggressively or on an expedited basis to finish its Title VII rulemaking
 In addition to manpower issues, the SEC has many other aspects of the DoddFrank Act that are drawing on its resources
 For swap dealers/MSPs that also are potential security-based swap
dealers or major security-based swap participants, the lack of
synchronization between the CFTC and SEC Title VII programs is
likely to present some difficult and confounding compliance
challenges
This is MoFo.
33
Securitization
This is MoFo.
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Dodd-Frank Securitization Perspective
 In the mind of Congress in mid-2010, securitization was a major
contributing factor, if not cause, of financial crisis and thus one of the
principal reasons for the enactment of D-F
 Relatively few D-F provisions specifically target securitization, but
securitization-related concerns permeate the entirety of D-F
 Also, many securitization issues were already being addressed by
regulators and accounting profession before Congress “caught up”
by enacting D-F
 This section of the presentation will address the status of:
 D-F provisions specifically addressing securitization (“core” D-F securitization
provisions)
 Generally applicable D-F provisions that significantly impact securitization (“noncore” D-F securization provisions)
 Significant non-D-F legal, regulatory and accounting developments affecting
securitization
This is MoFo.
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Dodd-Frank Securitization Status
 Core D-F Securitization Provisions
 Section 941: Risk Retention and Definition of “Qualified
Residential Mortgage” (QRM) – PENDING
 Section 942:
 Exchange Act §15(d) Reporting – Done
 Disclosure – PENDING
 Section 943: Representations, Warranties and Repurchase
Provisions – Done
 Section 945: Issuer Due Diligence – Done
 Section 621: Conflicts of Interest – PENDING
This is MoFo.
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Dodd-Frank Securitization Status (cont’d)
 Non-Core D-F Provisions
 Title II: “Orderly Liquidation Authority” (OLA) Provisions –
PENDING
 Section 619: Volcker Rule – PENDING
 Title VII: Derivatives – PENDING
 Section 939A: References to Credit Rating Agencies (CRAs)
 Market Risk Capital Rule – Done
 ICA Rule 3a-7 – PENDING
 Related Issue: ICA §3(c)(5)(C) – PENDING
 Section 939F: Franken Amendment – PENDING
 Section 939G: References to CRAs in Prospectuses – Done
 Sections 1411 and 1412: Ability to Repay; “Qualified Mortgage”
(QM) Definition – PENDING
This is MoFo.
37
Non- Dodd-Frank Reforms - Status
 Accounting – FAS 167/167 – Done
 FDIC Sale Rule – Done
 Regulation AB II – PENDING
 Bank Capital Rules – Mixed
 Rule 17g-5 – Done
 CRD Article 122a – Done
This is MoFo.
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Core Dodd-Frank Reforms
 Risk Retention – D-F § 941





Joint regulatory proposal
5% of credit risk must be retained
Applies to both public and private ABS transactions
Permissible forms: horizontal, vertical, L-shaped
Cash premium over par value must be placed in a “premium capture cash reserve
account” (PCCRA)
 No hedging or transfer of risk
 Exception for “qualified residential mortgage” (QRM) –hotly debated
 Comment period ended 8/1/11; still no final rule
This is MoFo.
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Core Dodd-Frank Reforms (cont’d)
 D-F § 942 – Disclosure
 To be implemented via SEC’s “Regulation AB II”
 Asset level disclosure
 Compensation of broker and originator
 Amount of risk retention by originator and securitizer
 NPR published in 5/10; re-proposed post-D-F with comment period ended
10/4/11; final rule due by 7/21/11, but not yet issued
 D-F § 943 – Fulfilled and requested repurchases across all
securitization trusts aggregated by originator; CRA rep & warranty
disclosure
 Rule 15Ga-1 (sponsor disclosure of repurchase history)
 Adopted in Jan. 2011; filing of initial Form 15Ga-1 with repurchase history was
due on 2/14/12
 Rule 17g-7 (CRA analysis and disclosure of rep & warranties and
enforcement mechanism)
 Adopted in Jan. 2011; CRA compliance required commencing 9/26/11
This is MoFo.
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Core Dodd-Frank Reforms (cont’d)
 D-F § 945 – Issuer due diligence
 Diligence on assets must be performed and disclosed by or on behalf of issuer
 Rule 193 became effective on 3/28/11 for issuances after 12/31/11
 Compare: Section 932 NPR (proposed Rule 15Ga-2) requiring issuers and underwriters to
disclose third party due diligence reports published on 6/8/11 but no final rule yet
 D-F § 621 – Conflicts of interest
 For one year after the closing of an ABS issuance (including synthetic ABS), no underwriter,
placement agent, initial purchaser or sponsor, or any affiliate, may engage in any transaction
that will result in a material conflict of interest with any investor in the ABS transaction
 Industry concerned that proposed rule prohibits traditional structuring and hedging activities
that should not raise conflict of interest concerns
 Eliminates CDS vehicles
 Eliminates credit linked note vehicles that protected bank’s assets if bank is also the u/w
 Can u/w do simple interest rate swaps?
 Can u/w retain subordinated notes? Senior notes?
 Final rule was due under D-F by 4/15/11
 NPR was issued in 9/11 (after final D-F deadline) with comments due on 2/13/12; no final rule
yet
This is MoFo.
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Other Dodd-Frank Reforms
 D-F Title VII – Derivatives
 See separate section of presentation for details
 Securitization industry concern with mandatory centralized clearing and
availability of “end user” exemption for securitization participants
 Industry-seeking broad “structured finance” exemption
 Final rule on swap participant definitions became effective on 7/23/12, but
“end user” exception rules still not issued
 Industry relying on temporary relief provided by SEC on 6/15/11
This is MoFo.
42
Other Dodd-Frank Reforms (cont’d)
 D-F § 939A – References to Credit Rating Agencies
 Market Risk Capital Rule (Final rule adopted in 6/12)
 SEC’s ANPR on ICA Rule 3a-7
 SEC’s ANPR on ICA §3(c)(5)(C)
 SEC ICA ANPRs published on 9/7/11 with comment deadline of 11/7/11;
no further action to date
 D-F § 939F – Franken Amendment (Assigned Credit Ratings)
 SEC report to Congress required in 7/12; deadline just missed
 Must implement Franken’s assigned ratings system unless an alternative
in place – Rule 17g-5?
This is MoFo.
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Other Dodd-Frank Reforms (cont’d)
 D-F § § 1411 and 1412 – “Qualified Mortgage” Definition
 Creditors must determine borrower ability to repay
 Rebuttable presumption of ability to repay with “qualified
mortgage” (QM) – controversial issue parallel to “QRM” under
Section 941
 Industry seeks safe harbor instead of rebuttable presumption
 Rulemaking authority now with CFPB
 FRB issued original NPR in 5/11; responsibility shifted to CFPB in 7/11
 In May 2012, CFPB requested additional comments on limited
questions under NPR, with comment deadline of 7/9/12
 Proposal outstanding; no final rule yet
 CFPB’s deadline under D-F is 1/21/2013
This is MoFo.
44
Accounting – FAS 166/167
 Much harder to obtain “sale” treatment of a securitization and to
recognize “gain on sale”
 Assets must be legally isolated from the transferor and its consolidated
affiliates
 Ignore “bankruptcy remote” subsidiaries
 Transferor must surrender control
 Transferees must have the right to pledge or exchange the assets
 A variable interest holder must consolidate a variable interest entity if
it has a “controlling financial interest”
 FAS 166 and 167 became effective for most purposes in Jan. 2010
This is MoFo.
45
FDIC Sale Rule
12 CFR 360.6
 Applies to FDIC-insured banks
 Promulgated because of adoption of FAS 166/167
 Provides
 A safe harbor for sale treatment of transfers of assets that qualify as a
sale under FAS 166/167 for all but legal isolation requirement, or
 Relief from the 90-day automatic stay for securitizations that fail to qualify
as sales under FAS 166/167
 To qualify:
 5% risk retention; no hedging
 Loan level disclosure and periodic reports
 No synthetic or unfunded securitizations
 If RMBS, no more than 6 tranches
 If RMBS, 5% cash reserve for one year to repurchase loans in breach of
reps
 If RMBS, no external credit support or guarantees (other than GSEs)
 Final rule adopted by FDIC in Sept. 2010
This is MoFo.
46
Reg AB II
 Initially proposed prior to D-F, but would constitute SEC’s
compliance with D-F § 942
 Extensive loan level data disclosure
 Reg AB extended to cover 144A and Reg D offerings
 Same disclosure as S-1 offering
 Departure from “sophisticated purchaser” paradigm for private
placements
 Shelf offerings require:
 a preliminary prospectus be available 5 days prior to pricing
 CEO certification of assets being “sufficient to pay” offered securities
 Quarterly 3rd party opinion that assets not repurchased for breach of
reps in fact were not in breach
 5% risk retention; allocated among originator and sponsor
 Proposed rule issued in 5/10; most recent comment period ended
10/4/11
This is MoFo.
47
Rule 17g-5
 Adopted in 11/09 pursuant to Credit Rating Agency Reform Act of
2006
 Issuer, sponsor or underwriter must post all rating agency material
on a password protected internet website
 Material is available to any CRA that can make required certifications
 Competing CRAs can issue their own ratings
 Advanced as an alternative to “assigned ratings” system under
Franken Amendment
This is MoFo.
48
CRD Article 122a
 European Securitization Rule
 Bank investors must obtain sufficient information from issuer to
ascertain the exposure of their investment
 Failure to do so could result in a deduction from capital of 100% of the
investment
 EU bank sponsors are required to provide investors with access to all
relevant data
 Requires 5% risk retention by any of originator, sponsor or original
lender of the securitization
 Sponsor must be a credit institution to satisfy the risk retention rules
 Member States may require more than 5%
 No hedging of the risk
 Form of retained interest must be in the form of one of four options
 Very narrow exemptions
 Cross-border issuers are concerned with potential conflicts between
Article 122a and the final U.S. risk retention rule under D-F § 941
when adopted
This is MoFo.
49
Credit Ratings
This is MoFo.
50
Credit Ratings After Dodd-Frank
• Repeal of Rule 436(g)
• Removal of exemption from Regulation FD
• Removal of credit ratings from rules
• SEC oversight of credit rating agencies
• Liability reforms
• Required disclosures
• Prohibited activities
• Governance
• Conflicts of interest
This is MoFo.
51
Repeal of Rule 436(g)
• Prior to repeal, Rule 436(g) exempted NRSROs from the
requirement to provide a consent if ratings were included in a
Securities Act registration statement or prospectus
• Following the repeal, the SEC Staff provided interpretive guidance
on situations where consents of credit rating agencies would not be
required, such as when:
•
Ratings are included in FWPs that comply with Securities Act Rule 433 and in
term sheets or press releases that comply with Securities Act Rule 134
•
Disclosure-related rating information is included in periodic reports (for example,
disclosure relating to a change in a credit rating, liquidity of the issuer, or the
terms of agreements that refer to credit ratings)
•
Information is included or incorporated by reference in a registration statement
on Form S-3 or F-3 that was declared effective prior to July 22, 2010
• Separate relief was provided for issuers of asset-backed securities
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Removal from Regulation FD
• On September 29, 2010, the SEC adopted final rules amending
Regulation FD to eliminate an exemption for credit rating agencies
• The amendments to Regulation FD were made pursuant to Section
939B, and became effective on October 4, 2010
• As a practical matter, there was little impact on communications
between issuers and credit rating agencies, because most credit
rating agencies are already outside of the scope of Regulation FD
because they are no longer considered advisers
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Removal of Credit Ratings
• Section 939A of the Dodd-Frank Act requires federal agencies to
review how existing regulations rely on credit ratings and remove
such references from their rules and replace them with standards of
creditworthiness as each agency deems appropriate
• On July 27, 2011, the SEC unanimously adopted rules to remove
references to credit ratings in rules and forms promulgated under the
Securities Act and the Exchange Act
• The amendments became effective 30 days after publication in the
Federal Register, except for the rescission of Form F-9, which is to
become effective December 31, 2012
This is MoFo.
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Removal of Credit Ratings (cont’d)
• The investment grade rating transaction criteria in Forms S-3 and F-3
have been replaced with the following four alternative criteria:
• The issuer has issued (as of a date within 60 days prior to the filing of the
registration statement) at least $1 billion in non-convertible securities, other
than common equity, in primary offerings for cash, not exchange,
registered under the Securities Act, over the prior three years; or
• The issuer has outstanding (as of a date within 60 days prior to the filing of
the registration statement) at least $750 million of non-convertible
securities, other than common equity, issued in primary offerings for cash,
not exchange, registered under the Securities Act; or
• The issuer is a wholly-owned subsidiary of a WKSI as defined in Rule 405
under the Securities Act; or
• The issuer is a majority-owned operating partnership of a real estate
investment trust (“REIT”) that qualifies as a WKSI.
This is MoFo.
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Revisions to Rule 138 and Rule 139
• These rules relate to research reports relating to companies that are
“in registration.”
• Text of rules revised to reflect new shelf eligibility tests.
• Impacts compliance policies for broker-dealers that issue research
reports, particularly for companies that don’t have at least $75 million
in market capitalization.
• Need to ensure that subject companies remain eligible, particularly under
Rule 139.
This is MoFo.
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Revisions to Rule 134
• A communication used after the filing of a prospectus is not a
“prospectus” or a “free writing prospectus” if it is limited in scope as
described in the Rule, and includes certain required disclosures.
• In practice, Rule 134 is typically used for press releases and
tombstones that announce offerings.
• Amended Rule 134 removes “credit ratings” as one of the
enumerated items of information that may be included.
• Including a credit rating in these types of documents won’t
necessarily cause a document to become a prospectus. However,
since these documents are generally designed to conform to the safeharbor, issuers are expected to remove the credit ratings from them.
This is MoFo.
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Removal of Credit Ratings
• Other affected Rules and Forms:
• Forms S-4 and F-4
• Schedule 14A
• Form F-9 (rescinded)
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Capital
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Capital
• Three U.S. proposals released in June 2012
• Basel III
• Standardized approach
• Market risk for U.S. Basel II banks
• Broad significance for U.S. banking institutions
• Basel III pushed down to all banks >$500 million
• U.S. Basel II banks required to calculate capital under both
advanced approaches and standardized approach in Basel II
• No differences between applications to large and small banks
• Higher loss absorbency for U.S. Basel II banks?
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Capital (cont’d)
• Important comparisons with Basel III
•
•
•
•
•
Bail-in instruments within Tier 1
Countercyclical capital buffer
Rating agencies
Effective date
U.S. prompt corrective action regime
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