Developments Of Note
Senator Dodd Introduces Financial Regulatory Reform Bill Dodd Bill Addresses Derivatives Regulation FDIC Issues Guidance On Deposit Interest Restrictions FDIC Continues Securitization Safe Harbor On A Transitional Basis CFTC Adopts Amendments To Commodity Pool Operator Reporting Requirements FINRA Provides Six Month Opt-In Period For Changes To Registration And Examination Requirements For Registered Representatives And Principals Involved In Investment Banking Activities SEC Issues Release For Dark Pools Proposal Other Items Of Note
Goodwin Procter Issues Client Alert On New Legislation Providing An Elective NOL Carryback Period Of Up To Five Years SEC Staff Announces 2010 National CCOutreach Seminar SEC Postpones Reg. S-AM Compliance Date Until June 1, 2010 DEVELOPMENTS OF NOTE Senator Dodd Introduces Financial Regulatory Reform Bill Senate Banking Committee Chairman Christopher Dodd has introduced a discussion draft of the Restoring American Financial Stability Act of 2009 (the "Dodd Bill"), which comprehensively addresses financial regulatory reform, encompassing the range of issues covered in the Obama Administration's proposed legislation and several bills pending in the House of Representatives. For further discussion of the Administration's proposed legislation, please see the July 28, 2009 Alert and the August 4, 2009 Alert and for the House legislation please see the October 20, 2009 Alert, the October 27, 2009 Alert and the November 3, 2009 Alert. Many provisions of the Dodd Bill are similar to other regulatory reform bills, such as the creation of a Consumer Financial Protection Agency ("CFPA"). However, the Dodd Bill also contains significant differences from other regulatory reform proposals, such as (a) combining all prudential bank supervision into a new agency, the Financial Institutions Regulatory Authority (the "FIRA"), (b) creating an entire new agency to regulate systemic risk, the Agency for Financial Stability (the "AFS"), and (c) reducing the powers of the FRB. Based on recent testimony, the Dodd Bill largely reflects the viewpoint of FDIC Chairman Sheila Bair, while the legislation introduced by House Financial Services Chairman Barney Frank largely reflects the viewpoint of FRB Chairman Ben Bernanke.
Senator Dodd introduced a revised version of the Dodd Bill on November 16, 2009 which will be used for the Senate Banking Committee's markup of the bill. The opening statements for the markup of the Dodd Bill are scheduled for November 19, 2009. Senator Dodd has set a November 23, 2009 deadline for the submission of first-degree amendments, with consideration of those amendments by the Senate Banking Committee set for December 2.
Agency For Financial Stability. The Dodd Bill would create a new federal agency, the AFS, to monitor and regulate systemic risk. The AFS would be comparable to the Financial Services Oversight Council (the "Council") that would be created under the House legislation, but with greater authority. The AFS would be governed by a board of directors consisting of an independent chairperson (appointed by the President with the advice and consent of the Senate), the Treasury Secretary, the FRB Chairman, the FIRA Chairperson, the CFPA Director, the SEC Chairman, the FDIC Chairman, the CFTC Chairman, and an independent member with experience in the insurance industry or regulation who would be appointed by the President with the advice and consent of the Senate.
The AFS would be charged with identifying risks to the stability of the U.S. financial system and economy and monitoring those risks. It would also facilitate information sharing between federal and state financial regulatory agencies and identify gaps in the financial regulation regime. Further, the AFS would identify "specified bank holding companies" and "specified non-bank holding companies," collectively, "specified financial companies," whose failure or financial distress would pose a risk to the U.S. financial system or economy. (The term used to describe systemically important firms differs under each proposal: the Administration's proposed legislation refers to "Tier 1 financial holding companies" while the current draft of the House legislation refers to "identified financial holding companies," which may soon be changed to "financial companies subject to stricter standards.") These functions of the AFS are comparable to those of the Council under the House legislation. Unlike the House legislation, the Dodd Bill provides for a full notice and hearing process before the final determination that a company is a specified financial company (and subject to regulation in accordance with that status). Foreign financial companies with substantial assets or operations in the U.S. could also be designated a specified financial company.
Specified financial companies would be required to register with the FIRA and would be subject to similar heightened prudential standards to those provided in the House legislation, including leverage limits, liquidity requirements, concentration requirements and risk management requirements. Such heightened standards would be prescribed by the AFS, a significant difference from the House legislation which calls for the Council to identify systemically significant firms but vests rulemaking authority with the FRB. Unlike the other regulatory reform proposals, the Dodd Bill requires specified financial companies to maintain a minimum amount of contingent capital. Another unique provision of the Dodd Bill subjects all bank holding companies with total assets of $10 billion or greater to heightened prudential standards including risk-based capital requirements, leverage limits, and liquidity requirements. The Dodd Bill also requires publicly-traded specified financial companies and publicly-traded bank holding companies with total assets of $10 billion or greater to establish a risk committee responsible for the oversight of the enterprise-wide risk management practices of the company. Like the House legislation, the Dodd Bill requires specified financial companies to create a resolution plan and provides for the divesture of assets or termination of activities that would pose a threat to the U.S. financial system or the company itself. The Dodd Bill also provides that specified financial companies that conduct nonfinancial activities create intermediate holding companies to conduct all activities that are financial in nature.
Enhanced Resolution Authority. Similar to the House legislation, the Dodd Bill creates resolution authority for systemically important financial institutions. Under the Dodd Bill, the FDIC would be appointed as receiver of a failing financial company upon the recommendation of the FIRA board and the FDIC (or the SEC in cases involving broker-dealers) and a subsequent determination by the Treasury Secretary. The Dodd Bill provides for an ex-post risk-based assessment on financial companies with total assets of $10 billion or greater to recoup any losses relating to the resolution of a failed financial company that could not be satisfied from the sale of such company's assets. This provision is comparable to the funding mechanism in the current draft legislation in the House; however, the House is expected to amend its bill to provide for regular risk-based assessments to fund the systemic resolution fund.
Financial Institutions Regulatory Authority. A core distinction between the Dodd Bill and the other regulatory reform proposals is the creation of the FIRA, which would combine the OCC, the OTS, the supervisory functions of the FRB with respect to bank holding companies and state member banks, and the supervisory functions of the FDIC with respect to state nonmember banks. The FIRA would also be the supervisor of any branch, agency, representative office, or commercial lending company of a foreign bank. Accordingly, the FRB would be left with monetary policy and the role of lender of last resort and the FDIC with the deposit insurance fund and resolution authority. Senator Dodd has stated that the goal in removing the FRB and the FDIC's supervisory powers is to focus each institution on its core competencies, such as monetary policy or deposit insurance. The Administration has heavily criticized removing the FRB's supervisory functions, stating that such powers give the FRB timely and complete information necessary for it to serve as the lender of last resort in the event of a crisis. The FIRA board would consist of the FRB Chairman, the FDIC Chairman and three persons appointed by the President with the advice and consent of the Senate.
The Dodd Bill would establish a State Bank Advisory Board to make recommendations concerning the FIRA's supervision of state-chartered institutions and to advise the FIRA on streamlining the regulation and supervision of such institutions. Community banks would be examined and supervised by a separate Division of Community Banks, which would also make recommendations to the FIRA Board regarding standards appropriate to the supervision of community banks. The Dodd Bill also provides that no member of the FIRA Board or FIRA employee may promote the conversion of a state-chartered bank to a national bank, subject to rules issued by the FIRA board in consultation with the State Bank Advisory Board.
The Dodd Bill would not immediately eliminate the thrift charter, but would prohibit any new charters for federal savings associations. The FIRA would continue to have authority to examine and regulate federal savings associations as long as any exist; however, the Dodd Bill appears to be designed to encourage the demise of the thrift charter.
Bank Holding Company Regulatory Reforms. The Dodd Bill would impose a moratorium on the approval of new applications for deposit insurance from industrial loan companies, trust banks and credit card banks. Limits would also be placed on the...