more than just financial reform; analysis and observations on the dodd-frank wall street reform and...

8/8/2019 More Than Just Financial Reform; Analysis and Observations on the Dodd-Frank Wall Street Reform and Consumer

1/94

August 2010

JONE DAY

WHITE PAPER

MoRE THAn JusT FInAncIAl REFoRM:

AnAlysIs And obsERvATIons on THE

dodd-FRAnk WAll sTREET REFoRM AndconsuMER PRoTEcTIon AcT
http://www.jonesday.com/


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Table of Contents

Page

Introduction ..................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... .............. 6

The Financial Stability Oversight Council ..................... ...................... ....................... ....................... ...................... ....................... ....................... .............. 8Enhanced upervision and Prudenial andards .................... ...................... ....................... ....................... ...................... ....................... ........... 9

Miiaion of Risks o Financial abiliy .................... ...................... ....................... ....................... ...................... ....................... ....................... ..........10Observaions ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ...................... 1 1

Bre P. Barraae Jordan L. chwarz+1.212.326.3446 +1.212.326.7848

[email protected] [email protected]

Changes in the Regulation of Depository Institutions and their Holding Companies .......................................................................12Acquisiions and Oher Expansion Aciviies............................................................................................................................................................14Concenraion Limis on Acquisiions ...........................................................................................................................................................................14governance ....................................................................................................................................................................................................................................15Nonbank Banks and temporary Moraorium on FDIC Approvals ..............................................................................................................15ecuriies Holdin Companies ..........................................................................................................................................................................................15Examinaions and Reporin ...............................................................................................................................................................................................16

Charer Conversions .................................................................................................................................................................................................................16general udy of Bankin Aciviies ...............................................................................................................................................................................16Lendin Limis...............................................................................................................................................................................................................................17Affiliae transacions ................................................................................................................................................................................................................17Inermediae Holdin Companies ...................................................................................................................................................................................17Conflics of Ineres in ecuriizaion transacions ..............................................................................................................................................18Observaions ..................................................................................................................................................................................................................................18

Ralph F. MacDonald III (Chip) Caherine R. Reichel+1.404.581.8622 +1.212.326.7866


The Collins AmendmentNew Capital Rules Under the Act ...............................................................................................................................19Backround ....................................................................................................................................................................................................................................19

the Amendmen ..........................................................................................................................................................................................................................19Effecive Daes .............................................................................................................................................................................................................................19Excepions ..................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... .... 20udies ..................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ............ 20Reulaions ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... 20Conclusions and Effecs .................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ....................2 1

Ralph F. MacDonald III (Chip)+1.404.581.8622

[email protected]

The Volcker Rule: New Section 13 of the Bank Holding Company Act ........................................................................................................23Wha is Covered by ecion 13 .........................................................................................................................................................................................23Permissible Privae Equiy and Hede Funds Aciviies ....................... ....................... ...................... ....................... ....................... ................25

Capial ...............................................................................................................................................................................................................................................26Effecive Dae ...............................................................................................................................................................................................................................27udies ..............................................................................................................................................................................................................................................27Rulemakin ....................................................................................................................................................................................................................................28Observaions .................................................................................................................................................................................................................................29


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Are the Reports of TARPs Death Exaggerated? ..................... ...................... ....................... ....................... ...................... ....................... ................... 30Defici Reducions ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ........ 30Federal Housin Finance Aency Repor and gEs ..................... ....................... ....................... ...................... ....................... ....................... 30Observaions................................................................................................................................................................................................................................30


[email protected]

Orderly Liquidation Authority ......................................................................................................................................................................................................31Auhoriy o e Prudenial andards ..................... ....................... ...................... ....................... ....................... ...................... ....................... .............32Auhoriy o Place a Company ino Receivership and Eniies ubjec o Receivership .................... ....................... ............... 33Orderly Liquidaion Fund ......................................................................................................................................................................................................34Powers of he FDIC as Receiver ......................................................................................................................................................................................35Prioriy cheme in Receivership...................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... 36the Claims Process ...................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... .... 38Avoidance of Fraudulen transfers and Preferenial transfers ....................... ...................... ....................... ....................... ...................... . 38eoff ..................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ................ 39

Conrac Paries .................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ................ 40udies and Repors ..................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ......4 1Conclusion .....................................................................................................................................................................................................................................42

Mark A. Cody Corinne Ball co A. griffin+1.312.269.4392 +1.212.326.7844 +1.212.326.8371

[email protected] [email protected] [email protected]

Hedge Fund, Private Equity, and Other Advisers ........................................................................................................................................................43Eliminaion of he Privae Adviser Exempion .........................................................................................................................................................43Oher Exclusions and Exempions .................................................................................................................................................................................43New Records and Repors for Privae Funds .........................................................................................................................................................44Cusody of Clien Asses ......................................................................................................................................................................................................45Adjusmen of Invesor andards ..................................................................................................................................................................................45

transiion .........................................................................................................................................................................................................................................45

Anhony L. Perricone (tony) Mark V. Minon+1.212.326.7871 +1.214.969.3763


Federal Insurance Office...............................................................................................................................................................................................................46

tracy K. raford+1.216.586.7288

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The Derivatives Legislation: Is the World Now Safer? .............................................................................................................................................47the Bi Picure ............................................................................................................................................................................................................................47Do We Finally Have Clariy as o How waps are Defined and Who is Responsible for Reulain them? ...............48Mandaory Clearin ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ......5 1Are You Covered by he Ac? .............................................................................................................................................................................................53Capial and Marin Requiremens .................................................................................................................................................................................55Posiion Limis ..............................................................................................................................................................................................................................57

Volcker Rule tradin Limiaions .....................................................................................................................................................................................57the Push-Ou Requiremen (he Lincoln Amendmen) ................................................................................................................................58Pracical Implicaions of he Push-Ou Provision and he Volcker Rule ...................... ....................... ...................... ....................... .... 60New andards of Conduc and Real-time Reporin Requiremens ...................... ....................... ....................... ...................... ........ 60Exraerriorial Effec ...................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... .....6 1Addiional Impac on Exisin waps ....................... ...................... ....................... ....................... ...................... ....................... ....................... ............6 1timin ................................................................................................................................................................................................................................................62Final thouhs: the Fuure Impac ................................................................................................................................................................................62

Joel . telpner tracy L. Oley+1.212.326.3663 +1.202.879.5416


Corporate Governance and Executive Compensation ............................................................................................................................................65

ay-On-Pay Voes .................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ............65hareholder Approval of golden Parachues .........................................................................................................................................................65Broker Voin ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ................... 66Proxy Access ....................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ................... 66Hedin Disclosure..................................................................................................................................................................................................................67Board Leadership Disclosure ............................................................................................................................................................................................67Clawback Provision ..................................................................................................................................................................................................................67Compensaion Commiees .................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... ........... 68Exempion from ecion 404(b) for Cerain maller Issuers ..................... ....................... ....................... ...................... ....................... ....... 68Disclosure of Raio of CEO Pay o Median toal Compensaion .................... ...................... ....................... ....................... ...................... 68tabular Disclosure of Pay-for-Performance .................... ....................... ...................... ....................... ....................... ...................... ....................... 68

Rober A. Profusek (Bob) Bradley C. Brasser (Brad)+1.212.326.3800 +1.312.269.4252


Lizanne thomas Manan hah (Mike)+1.404.581.8411 +1.212.326.3986


Investor Protection and Enforcement Provisions....................... ....................... ....................... ...................... ....................... ....................... ............... 69EC Enforcemen..................... ....................... ...................... ....................... ....................... ...................... ....................... ....................... ...................... ............ 69Whisleblower Incenives and Proecions ....................... ...................... ....................... ....................... ...................... ....................... ....................... 69Aidin and Abein Auhoriy ................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... .........7 1the ECs Expanded Auhoriy for Collaeral Bars ....................... ...................... ....................... ....................... ...................... ....................... .....7 1Disqualifyin Felons and Oher Bad Acors from Reulaion D Offerins ..........................................................................................72Resricin Mandaory Pre-Dispue Arbiraion Provisions.............................................................................................................................73the New EC Enforcemen Deadline ....................... ...................... ....................... ....................... ...................... ....................... ....................... ............ 74Oher Key Enforcemen Provisions ................................................................................................................................................................................75

Michael J. McConnell (Mike) Waler W. Davis (Wal) Paricia J. Villareal+1.404.581.8526 +1.404.581.8517 +1.214.969.2973


Henry Klehm III Rebecca M. thornhill+1.212.326.3706 +1.404.581.8771


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Credit Rating Agencies ..................................................................................................................................................................................................................77Increased EC Reulaion of NRROs .......................................................................................................................................................................77Enhanced Inernal Conrols and Conflics of Ineres .......................................................................................................................................77Increased transparency of Rain Mehodoloy .................................................................................................................................................78Expanded Liabiliy and ae of Mind Requiremens in Privae Acions ..................... ...................... ....................... ....................... .... 80Requiremens for NRROs o Consider third-Pary Informaion and o Refer tips o Auhoriies .................... .................8 1niversal Rain ymbols......................... ....................... ....................... ...................... ....................... ....................... ...................... ....................... .............8 1

Removal of auory References o Credi Rains ....................... ....................... ...................... ....................... ....................... ...................... ..8 1Eliminaion and Exempion from Fair Disclosure Rule ....................... ....................... ...................... ....................... ....................... ....................8 1Fuure udies ..............................................................................................................................................................................................................................82Conflics of Ineres and Iniial Credi Rain Assinmens for rucured Finance Producs ....................... ....................... .82timin of Reulaions .............................................................................................................................................................................................................82

Ronald . gross (Ron) glenn . Arden+1.212.326.8331 +1.212.326.7852


Edward J. OConnell (Ed) Michelle Poulos+1.212.326.3480 +1.212.326.3998


Asset-Backed Securities ...............................................................................................................................................................................................................83

Edward J. OConnell (Ed) Ronald . gross (Ron)+1.212.326.3480 +1.212.326.8331


glenn . Arden David E. Conroy+1.212.326.7852 +1.212.326.3823


Preemption ..............................................................................................................................................................................................................................................85Conflic Preempion Required ..........................................................................................................................................................................................85Case-By-Case Requiremen ..............................................................................................................................................................................................86Judicial Review............................................................................................................................................................................................................................87

Judicial Enforcemen of Preempin Reulaions ..................... ...................... ....................... ....................... ...................... ....................... .........87 Watters Overurned; Cuomo Codified .........................................................................................................................................................................87

ae Enforcemen Auhoriy ..............................................................................................................................................................................................87Conclusion .....................................................................................................................................................................................................................................88

timohy J. Finn (tim)+1.202.879.3789

[email protected]

Consumer Protection .......................................................................................................................................................................................................................89tile X: the Consumer Financial Proecion Bureau ...........................................................................................................................................89tile XIV: the Morae Reform and Ani-Predaory Lendin Ac ..................... ...................... ....................... ....................... ................... 90

Bre P. Barraae Caherine R. Reichel Jordan L. chwarz+1.212.326.3446 +1.212.326.7866 +1.212.326.7848


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InTRoducTIonOn July 21, 2010, Presiden Obama sined ino law he Dodd-

Frank Wall ree Reform and Consumer Proecion Ac (he

Ac). the resul of a year-lon effor o ransform financial

supervision in response o he financial crisis, he sweep-

in leislaion affecs no only banks and oher financialinsiuions bu also has far-reachin consequences for all

corporaions doin business in he nied aes. Alhouh

Conress has aemped o lay he foundaion for lon-erm

financial sabiliy, mos of he acual deails and implemena-

ion of many key provisions of he Ac are reserved for reu-

laors o divine in he comin monhshe Ac explicily calls

for more han 240 rulemakin effors and nearly 70 sudies

by 11 reulaory bodies. the Ac is essenially a 2,300-pae

inroducion o an evenual new financial reulaory environ-

menan incomplee roadmap for he reulaory financial

fuure of he nied aes. Nowihsandin he incomplee

characer of he Ac, he Ac will have a sinifican and

immediae impac on all businesses. the Ac:

Devoes much of is deail o addressin public aner

over he bailou raher han o he acual causes of he

financial crisis.

Deleaes mos deail and auhoriy o reulaory

aencies.

goes well beyond radiional financial insiuions by man-

dain chanes o corporae overnance provisions ha

neaively affec all public companies.

Imposes a sinificanly increased compliance burden on

banks and oher financial insiuions ha is likely o fur-

her indusry consolidaion.

Creaes a public marke for derivaives ha increases he

cos of doin business for mos corporaions.

Is likely o coninue o limi access o capial by causin

banks and oher financial insiuions o lend less o com-

ply wih enhanced reulaory requiremens.

Despie is shorcomins and he deleaion of much of he

deail o rulemakin aencies, financial insiuions and all

oher companies mus bein o plan for he hisoric chanes

o .. bankin, derivaives radin, corporae overnance,

consumer financial proecion, execuive compensaion, and

securiies dealin. I is no secre ha adapin o he emer-

in body of rules will be a challene for all, bu opporuniies

will appear for hose insiuions capable of inernalizin he

Acs mos imporan principles and adjusin o rulemakin

and reulaory implemenaion.

Durin his uncerain rulemakin period, marke parici-

pans will disinuish hemselves from heir compeiors no

hrouh passiviy, bu by anicipain he judmen of poli-

cymakers and he reacion of markes. to his end, he fol-

lowin analysis is desined o help our cliens naviae he

Acs subsanial ambiuiies, undersand is complexiies,

and prepare effecive sraeies for adapin o his new

reulaory environmen.

this Whie Paper analyzes he major opics addressed in he

Ac. the ecions in his Whie Paper are as follows:

The Financial Stability Oversight Council. Describes he

membership and powers of his new council of reulaors,

which is asked wih overseein he enirey of he finan-

cial sysem, focusin on aps in he reulaory framework

and emerin hreas o financial sabiliy.

Enhanced Bank Regulatory Provisions. Oulines he major

hemes of deposiory insiuion and holdin company

reulaion, includin provisions relaed o capial and

liquidiy, reulaory supervision, enhanced supervisory

requiremens for merers and acquisiions, enhanced

reulaion of financial insiuions wih consolidaed asses

of a leas $50 billion, he Collins Amendmen, and he

Volcker Rule.

Orderly Liquidation Authority. Analyzes he resoluion

and liquidaion provisions, hihlihin he differences

beween hose provisions and he Bankrupcy Code, and

examinin he poenial impac ha he new leislaion

would have on various paries in ineres.


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Hedge Fund, Private Equity, and Other Advisers.

Describes how he Ac will affec many invesmen advis-

ers o hede funds, privae equiy funds, and real esae

funds by sinificanly expandin he requiremen for

invesmen advisers o reiser wih he ecuriies and

Exchane Commission (he EC).

Federal Insurance Office. Discusses he creaion of he

Federal Insurance Office, which will collec informaion

and monior developmens in he sae reulaion of insur-

ance, bu has no auhoriy o reulae or supervise insur-

ance companies.

Derivatives. Analyzes he Acs bifurcaed jurisdicional

framework, which submis virually all swaps o reula-

ion by eiher he EC or he Commodiy Fuures tradin

Commission. this secion also describes he clearin-

house requiremen for swaps, hihlihin cerain limied

exempions, and explains new reulaions and require-

mens on eniies enain in swap ransacions.

Corporate Governance and Executive Compensation.

Discusses he rend oward shor-ermism resulin

from new rules overnin corporae America, includ-

in say-on-pay voin, shareholder approval of olden

parachues, he prohibiion of broker voin in cerain

insances; he requiremen of clawback provisions for

exchane-raded companies, requiremens for disclos-

in hedin policies and compensaion raios, and pro-

posed chanes o proxy access.

Investor Protection and Enforcement Provisions.

Analyzes enforcemen provisions aimed a improvin

securiies laws and srenhenin invesor proecions,

which include: addin new whisleblower proecions and

incenives; esablishin aidin and abein liabiliy in EC

enforcemen acions; providin he EC wih he auhoriy

o issue indusry-wide collaeral bars; disqualifyin cerain

bad acors from Reulaion D offerins; resricin man-

daory predispue arbiraion provisions; and esablishin

a deadline for he EC o file an enforcemen acion afer

providin an individual wih a Wells Noice.

Credit Rating Agencies. Describes he increased reula-

ion of credi rain aencies, which include: enhancin

he ECs powers o oversee and reulae cerain rain

aencies; requirin he adopion of specified inernal con-

rols; expandin reulaions inended o address conflics

of ineres; expandin disclosure obliaions o increase

compeiion and add ransparency o he rains process;

and exposin credi rain aencies o reaer poenial

liabiliy o EC enforcemen acions, as well as privae

acions under he securiies laws.

Asset-Backed Securities. Analyzes a number of mae-

rial chanes for he srucured finance marke, includin

credi risk reenion requiremens, which obliaes oriina-

ors/securiizers o reain credi exposure o heir securi-

ized asses, and oher provisions focused on increased

disclosure and reporin requiremens.

Preemption. Discusses new sandards and procedural

requiremens affecin federal preempion of sae con-

sumer laws, focusin on he adopion of he leal san-

dard for preempion se forh by he .. upreme Cour

in Barnett Bank v. Nelson.

Consumer Protection. Discusses he esablishmen of he

new Consumer Financial Proecion Bureau and new mor-

ae lendin sandards.


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THE FInAncIAl sTAbIlITy ovERsIgHTcouncIlthe Ac creaes he Financial abiliy Oversih Council

(he Council) o idenify risks o he financial sabiliy of he

nied aes (he ..) ha could arise from he maerial

financial disress, failure, or by onoin aciviies of lare,

inerconneced bank holdin companies1 or nonbank finan-

cial companies,2 or ha could arise ouside he financial ser-

vices markeplace.3 to faciliae his objecive, he Council

will promoe marke discipline by aempin o eliminae

expecaions ha he .. overnmen will shield hem from

losses in he even of failure. the Council is also iven pow-

ers ha will allow i o idenify and respond o emerin

hreas o he sabiliy of he .. financial sysem.

Membership of he Council is divided beween voin

members and nonvoin members. Voin members each

have one voe, and include he followin 10 individuals: he

ecreary (he ecreary) of he nied aes Deparmen

of treasury (he treasury), as Chairperson of he Council;

he Chairperson of he Board of governors of he Federal

Reserve ysem (he Board of governors or Federal

Reserve); he Comproller of he Currency; he Direcor

of he Bureau of Consumer Financial Proecion; he

Chairperson of he ecuriies and Exchane Commission;

he Chai rperson of he Federal Deposi InsuranceCorporaion (he FDIC); he Chairperson of he Commodiy

Fuures tradin Commission; he Direcor of he Federal

Housin Finance Aency; he Chairperson of he Naional

1 Bank holdin companies are defined by reference o secion2 of he Bank Holdin Company Ac of 1956. H.R. 4173, 101(a)(1). this Ac defines a bank holdin company as any companyha has conrol over any bank or over any company ha is orbecomes a bank holdin company. 12 ..C. 1841.

2 A company is a nonbank financial company if 85 percen of isross revenues or consolidaed asses are relaed o aciviiesha are financial in naure. H.R . 4173, 102(a). Noably, finan-cial in naure is defined in accordance wih secion 4(k) of he

Bank Holdin Company Ac (12 ..C. 1843(k)). nder ha ac,he Board of governors (defined below), in consulaion wihhe ecreary (defined below), is auhorized o deermine whaaciviies are financial in naure. 12 ..C. 1843(k). the ac iselfdeclares a wide-rane of aciviies financial in naure, includinlendin, financial and invesmen advisory services, insuranceaency aciviies, issuin, underwriin and dealin in securiies,and oher common bankin aciviies.

3 H.R. 4173, 112. the conceps of maerial financial disress ando he financial sabiliy of he nied aes are no definedin he Ac. imilarly, he Ac does no define lare, inercon-neced bank holdin company, alhouh provisions reard-in enhanced supervision auomaically apply o bank holdincompanies wih a leas $50 billion in consolidaed asses (dis-cussed in more deail below).

Credi nion Adminisraion Board; and an independen

member wih insurance experise who is appoined by he

Presiden of he nied aes (he Presiden) for a six-year

erm, wih he advice and consen of he enae.4

the Councils nonvoin members, who will serve in an advi-

sory capaciy for a wo-year erm, include he followin five

individuals: he Direcor of he Office of Financial Research

(he OFR); he Direcor of he Federal Insurance Office (he

FIO); a sae insurance commissioner, o be desinaed

by a process deermined by he ae insurance commis-

sioners; a sae bankin supervisor, o be desinaed by a

process deermined by he sae bankin supervisors; and

a sae securiies commissioner (or officer performin like

funcions), o be desinaed by a process deermined by he

sae securiies commissioners.5

nless oherwise saed in he Ac, acion by he Council

requires a majoriy voe.6 Acions requirin a wo-hirds voe

include he deerminaion o subjec a nonbank financial

company o enhanced supervision,7 he decision o rescind

such deerminaion,8 resolvin jurisdicional dispues

amons Member Aencies,9 causin cerain companies

o ake measures ha miiae risk o he financial sysem

(discussed below),10 and recommendin ha he ecreary

appoin he FDIC as receiver of a financial company.11

In order o monior he financial services markeplace o

idenify poenial risks o he financial sabiliy of he .., he

Ac permis he Council o collec informaion from Member

Aencies, oher federal and sae financial reulaory aen-

cies, he FIO, bank holdin companies, and nonbank finan-

cial companies.12 Wih respec o bank holdin companies

and nonbank financial companies, he Council, hrouh he

OFR, may require he submission of repors for he purpose

of assessin he exen o which such company, financial

aciviy or financial marke in which such companys parici-

paion poses a hrea o he financial sabiliy of he ..13

4 H.R. 4173, 111(b)(1).5 H.R. 4173, 111(b)(2).6 H.R. 4173, 111(f).7 H.R. 4173, 113(a).8 H.R. 4173, 113(d).9 H.R. 4173, 119. A Member Aency means any aency repre-

sened by a voin member of he Council. H.R. 4173, 102(a)(3).10 H.R. 4173, 121.11 H.R. 4173, 203(a).12 H.R. 4173, 112(a).13 H.R. 4173, 112(d)(3)(A).


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9

However, prior o requirin submission of hese repors,

he Council is insruced o rely, o he exen possible, on

informaion available from he financial reulaory aency

responsible for reulain such company.14

If he Council is unable o deermine wheher he financial

aciviies of a nonbank f inancial company pose a hrea

o financial sabiliy based on hese repors, discussions

wih manaemen, and publicly available informaion, he

Council may reques he Board of governors, and he

Board of governors is auhorized, o conduc an examina-

ion of he nonbank financial company for he sole purpose

of deerminin wheher such company should be subjec o

enhanced supervision.15

Once he Council decides o place a company under he

enhanced supervision of he Board of governors, acin

hrouh he OFR i may require repors o keep he Council

informed as o: he financial condiion of he company;

sysems for moniorin and conrollin financial, operain

and oher risks; ransacions wih any subsidiary ha is a

deposiory insiuion; and he exen o which he aciviies

and operaions of he company and any subsidiary hereof,

could, under adverse circumsances, have he poenial o

disrup financial markes or affec he overall financial sa-

biliy of he ..16

the Council, he OFR, and he oher Member Aencies

mus mainain he confidenialiy of any daa, informaion,

and repors submied under his Ac. the submission of

any nonpublicly available daa or informaion will no con-

siue a waiver of, or oherwise affec, any privilee arisin

under federal or sae law o which he daa or informaion

is oherwise subjec.17

EnHAncEd suPERvIsIon And PRudEnTIAlsTAndARds

Nonbank Financial Companies. If he Council deermines

ha he maerial financial disress of a nonbank finan-

cial company poses a hrea o he financial sabiliy of he

.., i is auhorized o subjec such company o enhanced

14 H.R. 4173, 112(d)(3)(B).15 H.R. 4173, 112(d)(4). this provision applies only o .. nonbank

financial companies.16 H.R. 4173, 116.17 H.R. 4173, 112(d)(5).

supervision by he Board of governors.18 the procedures

esablished under he Ac require he Council o: (1) pass a

proposed deerminaion, by wo-hirds majoriy; (2) pro-

vide noice o such company of he deerminaion, includ-

in an explanaion of he basis for he deerminaion; and (3)

allow he company an opporuniy for a hearin before he

Council o cones he deerminaion.19 the Council has 60

days afer such hearin o issue a final deerminaion. the

Ac provides a nonexclusive lis of facors ha he Council

will consider prior o makin a final deerminaion includin,

amon ohers: he exen of leverae of he company; off-

balance-shee exposure; relaionships wih oher sinifican

financial companies; he imporance of he company as a

source of credi; and he naure, scope and inerconneced-

ness of he aciviies of he company.20

If he Council makes he final deerminaion, a nonbank

financial company has 30 days from receip of noice o

seek judicial review in he .. Disric Cour for he Disric

of Columbia (he D.C. Disric Cour) or he judicial disric in

which he home office of such nonbank financial company is

locaed.21 Review of he Councils final deerminaion is limied

o wheher such deerminaion was arbirary and capricious.

Large Bank Holding Companies. A bank holdin company

wih reaer han $50 billion22 in consolidaed asses is auo-

maically subjec o enhanced supervision by he Board of

governors.23 Noably, his sipulaion includes any eniy (or

successor eniy) ha was a bank holdin company havin

oal consolidaed asses of a leas $50 billion as of January

1, 2010, and received financial assisance under or parici-

paed in he Capial Purchase Proram esablished under he

troubled Asse Relief Proram24 (tARP). the Ac provides

an opporuniy for such bank holdin company o appeal his

reamen before he Council, bu he decision o ran an

appeal is o be made by he Council and requires a wo-hirds

18 H.R. 4173, 113(a)(1)-(2); H.R. 4173, 113(b)(1)-(2).19 H.R . 4173, 113(e). If a nonbank financial company does no

make a imely reques for a hearin, he Council will noify suchcompany, in wriin, of he final deerminaion of he Councilno laer han 10 days afer he dae by which he company mayreques a hearin. H.R. 4173, 113(e)(4).

20 H.R. 4173, 113(a)(2), (b)(2).21 H.R. 4173, 113(h).22 the Board, pursuan o a recommendaion by he Council, may

esablish a hreshold above $50 billion. H.R. 4173, 165(a)(2)(B).23 H.R. 4173, 165(a)(1), (a)(2).24 H.R. 4173, 117.


10/94

10

voe in favor of ranin an appeal.25 If he Council denies an

appeal, i mus reevaluae ha decision a leas annually.

Anti-Evasion. In order o avoid evasion of enhanced supervi-

sion and prudenial sandards, he Ac includes an umbrella

provision applicable o any company ha poses a hrea o

he financial sabiliy of he . ., based on he facors o be

considered for subjecin a nonbank financial company o

supervision by he Board of governors. to apply he ani-

evasion provision, he Council mus make a deerminaion,

by wo-hirds majoriy includin an af firmaive voe by he

Chairperson of he Council, ha:

the company poses a hrea o he financial sabiliy of

he .., based on consideraion of he above menioned

facors;

the company is oranized or operaes in such a manner

as o evade he applicaion of his ile of he Ac; and

uch financial aciviies of he company will be supervised

by he Board of governors and subjec o prudenial san-

dards in accordance wih he ile of he Ac.26

Companies subjec o he Acs ani-evasion provision are

eniled he same opporuniy for review as described above

for he decision o subjec a nonbank financial company

o enhanced supervision by he Board of governors. pon

makin such a deerminaion, he Council mus submi a

repor o he appropriae commiees of Conress deail-

in he reasons for makin such deerminaion. In order o

faciliae supervision, he Board of governors may require

such company o esablish an inermediae holdin com-

pany for purposes of conducin he companys aciviies

ha are financial in naure or incidenal hereo.27

25 H.R. 4173, 117(c).26 H.R. 4173, 113(c).27 H.R. 4173, 113(c)(3).

MITIgATIon oF RIsks To FInAncIAl sTAbIlITy

Alon wih he aforemenioned powers over bank hold-

in companies wih consolidaed asses of a leas $50 bil-

lion and nonbank financial companies supervised by he

Board of governors, he Board of governors is also iven

he auhoriy o impose on such companies exraordinary

measures o miiae risk. the Board of governors, in con-

sulaion wih he Council, mus firs provide such a com-

pany wrien noice ha i is bein considered for miiaory

acion pursuan o his secion of he Ac, includin an expla-

naion of he basis for, and descripion of, he proposed mii-

aory acion. uch company will be iven an opporuniy for

a hearin before he Board of governors. ubsequen o he

hearin, he Board of governors mus noify he company

wihin 60 days of is final decision, includin he resuls of

he voe by he Council. pon an affirmaive voe by wo-

hirds of he Council, he Board of governors can impose he

followin measures on such company:

Limi he abiliy of he company o mere wih, acquire,

consolidae wih, or oherwise become affiliaed wih

anoher company;

Resric he companys abiliy o offer a financial produc

or producs;

terminae one or more aciviies;

Impose condiions on he manner in which he company

conducs one or more aciviies; and

ell or oherwise ransfer asses or off-balance-shee

iems o unaffiliaed eniies, if he Board of governors

deermines ha such oher acions are inadequae o mii-

ae a hrea o he financial sabiliy of he .. 28

28 H.R. 4173, 121.


11/94

11

obsERvATIons

the Council possesses sinifican power o inervene in

he .. economy in he even i deermines an insiuion

poses a hrea o he overall economy. this power includes

he abiliy o order an examinaion of any bank or nonbank

financial company, subjec hem o enhanced supervi-

sion, and, under cerain circumsances, order he eniy

o cease doin business or sell isel f. I can also apply o

he financial aciviies of any oher company o he exen

he Council deermines hey pose a hrea o he .. finan-

cial sysem. this siuaion could have a sinifican impac

on he way invesors and oher eniies inerac wih cer-

ain banks or oher companies hey feel mih be a risk

o bein subjec o scruiny by he Council, and i is com-

pounded by he reamen of cerain unsecured crediors

under he liquidaion auhoriy in he even he Council

orders a liquidaion of an insiuion. (this opic is dis-

cussed in more deail under he Orderly Liquidaion

Auhoriy ecion.) Furher, i is difficul o believe ha

he Council would be able o successfully idenify risks o

he financial sysem and effecively eliminae hese risks

before i was oo lae wihou creain some deree of

panic jus by virue of he fac ha i was akin acion.


12/94


13/94

13

amoun of coninen capial converible ino equiy in imes

of financial sress. the Chairman of he Council is also

required o carry ou a sudy of he economic effecs of re-

ulaory limiaions inended o reduce sysemic risk under

ecion 123 of he Ac. Implemenin his would have been

much more feasible, less cosly, and less burdensome o he

reulaors and he indusry wihou he Amendmen reard-

in hybrid insrumens.

Stress Tests. In deerminin capial adequacy, he Federal

Reserve, in conjuncion wih he oher bank reulaory aen-

cies and he FIO, mus conduc annual sress ess under

baseline, adverse, and severely adverse condiions wih

respec o any company wih consolidaed asses of $50 bil-

lion or more. All bank holdin companies or oher financial

companies wih consolidaed asses of $10 billion or more

ha are reulaed by a primary federal financial reulaory

aency also mus conduc annual sress ess and repor

he resuls o he Federal Reserve and is primary federal

reulaory aency. Reulaions are o be developed by he

reulaory aencies. I would no be surprisin o see reu-

laors also requirin sress esin of smaller insiuions.

Leverage Limits. Bank holdin companies wih consolidaed

asses of $50 billion or more, and Federal Reserve super-

vised nonbank financial companies, may mainain a deb

o equiy raio of no more han 15 o 1 upon a deerminaion

by he Council ha he company poses a rave hrea o

he financial sabiliy of he nied aes, and ha such a

requiremen is necessary o miiae he risks o he coun-

rys financial sabiliy.

Short-Term Debt. the Federal Reserve may prescribe re-

ulaions limiin he amoun of shor erm deb, includin

off-balance-shee exposures, ha may be accumulaed by

any bank holdin company wih consolidaed asses of $50

billion or more and any supervised nonbank financial com-

pany. the Federal Reserve may impose reulaions and

issue exempions under his provision.

Off-Balance-Sheet Exposures. ecion 165(k) requires bank

holdin companies wih asses of $50 billion or more and

Federal Reserve supervised nonbank financial companies

o have capial ha akes ino accoun off-balance-shee

aciviies. Off-balance-shee aciviies include direc credi

subsiues, irrevocable leers of credi, risk paricipaions

in bankers accepances, purchase areemens, asse sales

wih recourse aains he seller, ineres rae and credi

swaps, commodiies and forward conracs, securiies con-

racs, and oher aciviies or ransacions ha he federal

bankin aencies may define by rule. However, i is unclear

why his provision is needed when i could be covered by

risk-based capial rules.

Prudential Standards. For bank holdin companies wih

more han $50 billion in asses and cerain nonbank finan-

cial companies, he Federal Reserve mus esablish risk-

based capial requiremens and leverae limis, unless

i deermines, in consulaion wih he Council, ha such

requiremens are inappropriae. Furher, he Federal Reserve

is required o impose liquidiy requiremens, overall risk

requiremens, resoluion plan, and credi exposure require-

mens and concenraion limis.

Well-Capitalized and Well-Managed Requirements

Expanded. In addiion o he curren requiremen for heir

bankin subsidiaries, bankin and hrif holdin compa-

nies are required o be well capialized and well manaed

in order o enae in cerain expanded financial aciviies

under he BHC Ac. Likewise, where a holdin company pro-

poses o acquire a bank across sae lines , he are bank

mus be well capialized and well manaed under he Ac,

raher han jus adequaely capialized and adequaely

manaed, as currenly required. Inersae bank merers

also require he resulin eniy o be well capialized and

well manaed, raher han only adequaely capialized and

adequaely manaed, as currenly required.

Countercyclical Capital. thrif holdin companies will

be subjec o capial requiremens for he firs ime under

ecion 616 of he Ac. the Federal Reserve is required o

esablish counercyclical capial raio requiremens for

bank and hrif holdin companies ha will increase capi-

al needed in imes of economic expansion and decrease

capial in imes of economic conracion, consisen wih

he safey and soundness of he company. Addiionally, he

Ac requires bank and hrif holdin companies, and oher

companies ha conrol banks, o serve as source[s] of

financial srenh for heir bankin subsidiaries. Wihin wo

years of enacmen, he respecive federal bankin aen-

cies reulain hese companies will issue rules o ef fec

his requiremen.


14/94

14

Capital Formation. Alhouh here is much in he Ac ha

requires capial, here is lile ha promoes is forma-

ion EC is direced o chane Reulaion D o require ha

accredied invesors have a minimum ne worh of a leas

$1 million, exclusive of he value of heir primary residence,

ne of any morae deb. One provision ha may be help-

ful is conained in ecion 989(g). this amends ecion 404

of he arbanes-Oxley Ac of 2002 by delein he inernal

conrols esin and aesaion requiremens wih respec o

any audi repor prepared for filers ha are no considered

lare acceleraed or acceleraed filers. this may help facil-

iae capial raisin by smaller companies ha have found

ecion 404 o be unduly expensive and burdensome.

AcquIsITIons And oTHER ExPAnsIon

AcTIvITIEsBank and Nonbank Expansion. Bank holdin companies will

find heir freedom o enae in financial aciviies somewha

resriced. Prior Federal Reserve approval is now required of

holdin company acquisiions of nonbank companies whose

oal consolidaed asses o be acquired exceed $10 billion.

these acquisiions are now subjec o prior Federal Reserve

approval; Har-co-Rodino Ac noices will be required

reardless of Federal Reserve approval.

BHC Ac and Bank Merer Ac (BMA) ransacions will now

be subjec o an addiional sauory facor ha he approv-

in aency mus consider he risks posed o he sabiliy of

he .. bankin or financial sysem by any poenial merer

or acquisiion of a bank or nonbank.

concEnTRATIon lIMITs on AcquIsITIons

the Ac requires he Council o conduc a sudy wihin six

monhs of enacmen reardin he exen o which he con-

cenraion limis under new ecion 14 of he BHC Ac would

affec he followin:

Financial sabiliy;

Moral hazard in he financial sysem;

the efficiency and compeiiveness of .. financial firms

and financial markes; and

the cos and availabiliy of credi and oher financial ser-

vices o households and businesses in he ..

the sudy will make recommendaions as o wheher oher

concenraion limis would more effecively implemen

ecion 14, and wheher a limiaion on he concenraion

of liabiliies in he conex of any merer, consolidaion, or

acquisiion would be appropriae.

the Federal Reserve is o adop reulaions wihin nine

monhs of compleion of he Councils sudy, and in accor-

dance wih he Councils recommendaions. Financial com-

panies, banks, includin deposiory insiuion holdin

companies (such as forein banks reulaed as holdin

companies), and supervised nonbank financial companies

(collecively, for purposes of hese concenraion limis,

financial companies) would be prohibied from merin

wih or acquirin any oher financial company if he oal

resulin liabiliies of he bank exceed 10 percen of he

areae consolidaed liabiliies of all financial insiuions

in he .. as of he end of he precedin calendar year.

For purposes of he BHC Ac, ecion 14, liabiliies are cal-

culaed differenly for .. financial companies and forein

based financial companies. For .. financial companies,

liabiliies are he oal of risk-weihed asses of he finan-

cial company under he risk-based capial rules, less he

oal reulaory capial of he company under such risk-

based rules. For forein insiuions, liabiliies are he oal

risk-weihed asses of he .. operaions of he financial

company as deermined under he risk-based capial rules,

less he oal reulaory capial of he . . operaions of he

financial company as deermined under such risk-based

rules. upervised nonbank financial companies and insur-

ance companies will have heir applicable liabiliies deer-

mined by he pendin Federal Reserve reulaion.

Inersae merers under he BMA are also resriced where

he applican, upon consummaion of he ransacion,

would conrol or already conrols more han 10 percen of

he oal amoun of deposis of insured deposiory insiu-

ions in he ..

these concenraion limis are empered by excepions in

he case of acquisiions of defaulin banks, FDIC-assised

ransacions, and acquirin companies ha experience only

a de minimis increase in heir individual liabiliies as a resul

of he ransacion.


15/94

15

govERnAncE

the Ac provides for overnance of public companies,

includin shareholder access. pecific overnance provi-

sions are made applicable o bank holdin companies,

paricularly he lares bank holdin companies by ecion

165(h). the Federal Reserve is required o issue reulaions

requirin each bank holdin company ha is publicly raded

and has oal consolidaed asses of no less han $10 billion

o esablish a risk commiee. upervised nonbank financial

companies are also required o esablish a risk commiee

no laer han one year afer he receip of a final deermi-

naion and will be supervised as such under ecion 113 of

he Ac. the Federal Reserve also may require each publicly

raded bank holdin company ha has consolidaed asses

of less han $10 billion o esablish a risk commiee.

the risk commiees are required o:

Be responsible for he oversih of enerprise-wide risk

manaemen;

Include he number of independen direcors deermined

by he Federal Reserve as appropriae, based upon he

companys naure of operaions, size of asses and oher

appropriae crieria; and

Include a leas one risk manaemen exper havin expe-

rience and idenifyin, assessin, and manain risk

exposures of lare, complex firms.

the Federal Reserve will issue rules, which will ake effec

no laer han 15 monhs afer he ransfer dae of Ot

auhoriies o he oher federal bank reulaory aencies.

the risk manaemen exper is similar o he arbanes-

Oxley Ac financial exper. I will be ineresin o see who

qualifies under he Federal Reserves rules.

nonbAnk bAnks And TEMPoRARy

MoRAToRIuM on FdIc APPRovAlsthe Ac prohibis he FDIC from approvin, hrouh July 21 ,

2013, deposi insurance for a credi card bank, an indus-

rial bank, or a rus bank, as hese erms are defined in he

BHC Ac (collecively, nonbank banks). imilarly, he federal

bankin aencies are prohibied from approvin a chane

of conrol of a nonbank bank, excep where he nonbank

bank is in daner of defaul, as a resul of a combinaion of

a paren company or in connecion wih he acquisiion of

voin shares of a publicly raded paren company where

he acquirin roup owns less han 25 percen of any class

of voin securiies.

I is surprisin ha afer he indusrial bank moraorium ha

lased several years and he relucance of he FDIC o ran

insurance o nonbank banks, ha a furher moraorium is

needed. this will resric new enrans ino he markes for

he services provided by hese insiuions, limi he avail-

abiliy of credi o consumers ha may be available hrouh

indusrial banks and credi card banks, and will hinder he

abiliy of various paricipans in he credi card indusry from

sellin heir credi card banks or porfolios. ince he com-

mencemen of he credi crisis, various insiuions have

announced a oal of sellin heir credi card porfolios ,

especially hose of privae label credi cards.

the Comproller general is also requirin a sudy of elimi-

nain he nonbank bank exempions from he BHC Acs

coverae of banks. this sudy mus also sae he conse-

quences and desirabiliy of applyin BHC Ac reulaions o

hrifs. this repor is due no laer han 18 monhs afer he

enacmen of he Ac.

Credi card banks ha are no deemed banks for BHC

Ac purposes will be allowed o expand heir permis-

sible aciviies o issue credi cards o businesses eliible

for BA loans, whereas now hey can only exend credi o

consumers.

sEcuRITIEs HoldIng coMPAnIEs

Bank holdin companies will no loner be able o reiser

o be supervised by he EC under rules promulaed by

he EC applicable o invesmen bank holdin companies.

Insead, he Ac replaces he elecive invesmen bank hold-in company framework currenly available under EC rules

wih a securiies holdin company sysem ha allows an

invesmen bank holdin company wihou a bank or a sav-

ins associaion affiliae o reiser o be supervised by he

Federal Reserve. this chane accommodaes securiies

holdin companies ha are required by forein reulaors

o be subjec o comprehensive consolidaed supervision.

nder his reime:


16/94

16

ecuriies holdin companies are subjec o capial and

risk-manaemen requiremens se forh by he Federal

Reserve on an individual basis;

the Federal Reserve may examine he securiies holdin

company and any nonbank affiliae and impose record

keepin requiremens; and

ecuriies holdin companies are subjec o applicable

secions of he BHC Ac and cerain provisions of he

FDIA.

ExAMInATIons And REPoRTIng

the reporin requiremens of ecion 5 of he BHC Ac are

expanded o include compliance by bank holdin compa-

nies and heir nonbank subsidiaries wih all oher applicable

provisions of federal law. the Federal Reserves examina-

ion auhoriy is expanded o include no only he safey

and soundness of a bank holdin company or any deposi-

ory insiuion subsidiary, bu also he sabiliy of he coun-

rys financial sysem, as well as moniorin compliance wih

applicable laws oher han consumer laws covered by he

Bureau of Consumer Financial Proecion.

the Federal Reserve is furher required o provide reason-

able noice o and consul wih he appropriae federal

bankin aencies, he EC, and he Commodiy Fuures

tradin Commission (he CFtC), or sae reulaory aen-cies wih respec o holdin company subsidiaries ha are

deposiory insiuions or are funcionally reulaed subsid-

iaries before i commences an examinaion. uch examina-

ions mus be conduced in he same manner, subjec o he

same sandards and wih he same frequency as would be

required if such aciviies were conduced in a lead insured

deposiory insiuion subsidiary of he holdin company.

the bank reulaory aencies powers over holdin compa-

nies are expanded dramaically. In he even ha he FederalReserve does no conduc hese nonbank subsidiary exami-

naions as required, he primary federal bankin aency for

he lead insured deposiory insiuion may recommend ha

he Federal Reserve perform he examinaion. However, if

he Federal Reserve does no bein is examinaion, or does

no provide an appropriae explanaion or plan respondin

o he concerns raised, wihin 60 days afer receivin such

noice, he lead insured deposiory insiuions reulaor

may examine he aciviies of he nonbank subsidiary as if i

were a deposiory insiuion. A fee may be chared by he

appropriae federal bankin aency for any examinaion.

Recommendaions for enforcemen acion may be made as

a resul of such examinaion by anoher federal bank reula-

ory aency o he Federal Reserve. If he Federal Reserve

does no ake enforcemen acion accepable o he federal

bank reulaor ha made he recommendaion, he bank

reulaory aency may ake he recommended enforcemen

acion aains he non-deposiory insiuions subsidiary as

if i were an insured deposiory insiuion.

cHARTER convERsIons

troubled banks and federal savins associaions will

encouner more difficuly in converin heir saus as sae,

naional, or federal associaions, as applicable. Banks oper-

ain under a cease and desis order or memorandum of

undersandin wih any federal or sae reulaory auhor-

iy concernin any sinifican supervisory maer will no

be allowed o conver heir charer o chane heir reula-

or, wihou approvals from boh he federal bank reulaory

aency ha would overn he resulin eniy and he reu-

laory aency issuin he cease and desis order or memo-

randum of undersandin.

gEnERAl sTudy oF bAnkIng AcTIvITIEs

Wihin 18 monhs of enacmen, he appropriae federal

bankin aencies shall joinly review aciviies ha bankin

eniies may enae in and repor o Conress. the repor

will cover he risks posed by various aciviies in which a

bankin eniy may enae and he relaed risk miiaion

aciviies underaken by bankin eniies. the federal bank

aencies will draw conclusions abou he appropriaeness

of he aciviies and he neaive effecs such aciviies

mih have on he safey and soundness of he .. financial

sysem, and any addiional resricions on hese aciviies

ha may be necessary.


17/94

17

lEndIng lIMITs

the Ac allows insured sae-charered banks o enae in

derivaive ransacions, only if he applicable sae law akes

ino consideraion credi exposure o derivaive ransac-

ions as par of sae lendin. the Ac expressly menions

derivaives, sales of asses under areemens o repur-

chase, and securiies lendin in he lis of credi exensions

o which esablished naional bank lendin limis apply. the

Ac also limis loans o insiders by addin credi exposure

o an insider arisin from a derivaive ransacion, securiies

lendin or borrowin ransacion, and repurchase or reverse

repurchase areemen o he definiion of credi exen-

sions prohibied by he Federal Reserve Ac.

AFFIlIATE TRAnsAcTIons

the Ac furher limis banks ransacions wih heir affili-

aes. the definiion of affiliae under ecion 23A of he

Federal Reserve Ac is expanded o include invesmen

advisers, wihou any reference o such persons bein re-

isered under he .. Invesmen Advisers Ac of 1940 (he

Invesmen Advisers Ac). For he sales of asses wih

areemens o repurchase, he lendin of securiies and

derivaive ransacions are added o he lis of ransacions

ha mus be fully secured by appropriae collaeral a all

imes. the Federal Reserve is auhorized o deermine howa nein areemen may be aken ino accoun when deer-

minin he amoun of a covered ransacion wih an affiliae,

and herefore wheher a ransacion is fully secured.

the Federal Reserves auhoriy o ran exempions under

ecion 23A and 23B of he Federal Reserve Ac and simi-

lar provisions of ecion 11 of he Home Owners Loan Ac

(HOLA), is limied, paricularly wih respec o ransacions

wih financial subsidiaries, which are expressly prohibied.

Durin he credi crisis, he Federal Reserve issued waivers ofhese provisions o many bankin oranizaions wih respec

o heir capial markes operaions. transacions wih hede

funds and privae equiy funds are especially limied, as dis-

cussed more fully in he secion on he Volcker Rule.

transacions wih insiders, includin asse purchases and

sales, are also resriced unless hese are on marke erms,

and, if he ransacion represens more han 10 percen of

he capial sock and surplus of a bank, are approved by a

majoriy of disineresed direcors.

InTERMEdIATE HoldIng coMPAnIEs

If a randfahered uniary hrif holdin company conducs

aciviies oher han financial aciviies, he Federal Reserve

may require such company o esablish and conduc all or a

porion of is financial aciviies in or hrouh an inermedi-

ae holdin company, which shall be a hrif holdin com-

pany. uch requiremen may be implemened by he Federal

Reserve no laer han 90 days afer he ransfer dae of he

Ot auhoriies o he Federal Reserve and he oher appro-

priae bank reulaory aencies. A randfahered uniary

hrif holdin company also may be required o esablish

an inermediae holdin company, if he Federal Reserve

deermines ha such inermediae holdin company is nec-

essary o appropriaely supervise is financial aciviies or o

ensure ha Federal Reserve supervision does no exend

o he non-financial aciviies of ha eniys paren com-

pany. Inernal financial aciviies, such as reasury, inves-

men, and employee benefi funcions, are no required o

be placed in an inermediae holdin company. Imporanly,

a randfahered uniary hrif holdin company ha conrolsan inermediae holdin company mus serve as a source

of srenh o is subsidiary inermediae holdin company,

and mus also be examined by, and repor o, he Federal

Reserve, includin informaion needed by he Federal

Reserve o assess he abiliy of he ulimae paren company

o serve as his source of srenh. the Federal Reserve

reains full enforcemen powers wih respec o he ulimae

paren company as if i were a hrif holdin company and

violaions may be reaed as violaions of he FDI Ac. the

Federal Reserve will also esablish reulaions reardin hecrieria for requirin an inermediae holdin company and

providin resricions or limiaions on ransacions beween

an inermediae holdin company or a paren of such com-

pany and is affiliaes.


18/94

18

conFlIcTs oF InTEREsT In sEcuRITIzATIonTRAnsAcTIons

the ecuriies Ac of 1933 (he ecuriies Ac) is amended

o preven underwriers, placemen aens, iniial purchas-

ers, and sponsors of asse-backed securiies from enain

any ransacion ha would resul in a conflic of ineres forone year afer he closin of he asse-backed securiy sale.

this prohibiion will no apply o:

Risk-miiain hedin aciviies desined o reduce risk

o he underwrier, placemen aen, iniial purchaser, or

sponsor of he purchased asse-backed securiies in rela-

ion o hose securiies;

Purchases or sales of asse-backed securiies made con-

sisen wih he underwriers placemen aens, iniial

purchasers, or sponsors commimen o provide liquidiy

for he asse-backed securiy; or

Purchases or sales of asse-backed securiies made

consisen wih he underwrier, placemen aen, iniial

purchaser, or sponsors bona fide marke-makin wih

respec o he asse-backed securiy.

obsERvATIons

the chanes in reulaions of deposiory insiuions and

heir holdin companies are a surprisinly small par of

he Ac. Noneheless, hese will require subsanial sud-

ies and rulemakin aciviies and considerable saff ime

a each of he bank reulaory aencies. ome of he

hornier issues will include coninen capial and coun-

ercyclical capial, which will be diff icul o implemen in a

pracical manner. Examinaions and reporin will also be

more difficul and will involve increased reulaory overlap

and poenial conflic.

the lendin limis se forh in he Ac require sae banks o

ake ino accoun off-balance-shee and derivaive ransac-

ions ha may require addiional sae leislaion and will

affec wild card provisions in sae laws reardin lendin

limis. Affiliae ransacion resricions are increased under

various provisions of he Ac, includin he Volcker Rule, and

will require considerable rulemakin and inerpreaion.

Durin a ime when he saffs of he various bank reula-

ory aencies are sreched due o he sressed naure of

he sysem, considerable addiional resources will have o

be added and devoed o sudies and wriin reulaions.

We hope ha hese added responsibiliies will no diver he

reulaory saff from heir already more han full-ime jobs

dealin wih pressin issues in he bankin sysem ha have

and will coninue o exis reardless of he Ac.


19/94

19

THE collIns AMEndMEnTnEWcAPITAl RulEs undER THE AcTthe Collins Amendmen (he Amendmen) is ecion 171

of he Ac. I applies bank capial sandards o oher finan-

cial services companies, includin bank and hrif holdin

companies. the Amendmen was promoed by he FDIC

and hihlihed by he FDIC press release on he passae

of he Ac. Alhouh raionalized from is oriinal form, he

Amendmen reduces he ypes of capial ha coun for

reulaory purposes. the Amendmen and he oher capi-

al provisions in he Ac are amon he more sinifican and

poenially cosly and disrupive provisions of he Ac.

bAckgRound

the Federal Deposi Insurance Corporaion Improvemens

Ac of 1991 (FDICIA) added ecion 38 o he FDI Ac o

esablish a promp correcive acion (PCA) se of rules

applicable o FDIC-insured banks. the PCA auhorized he

applicable federal bank reulaors o esablish five capi-

al caeories ranin from well capialized o criically

undercapialized. As insured deposiary insiuions capial

fell hrouh hese caeories, hey became subjec o ever

reaer resricions in heir aciviies. Banks ha became

criically undercapialized and were unable o raise capi-

al were required o be placed in FDIC receivership. Bank

reulaors were auhorized o issue PCA direcives requirin

undercapialized banks o raise capial or sell wihin 30 days.

PCA direcives are usually deah senencesmos recipi-

ens are placed in receivership and many imes he recipi-

ens board of direcors consens o a receivership a he

ime a PCA direcive is received. the PCA reime refleced

he sense of he Conress in FDICIA ha i was less cosly o

he FDIC deposi insurance fund o close srulin banks

sooner.

the PCA reime applies only o FDIC-insured deposiory

insiuions and no o heir holdin companies. the Board

of governors of he Federal Reserve ysem has applied

capial rules o bank holdin companies similar o he PCA

capial sandards. Bank holdin companies were able o

use a broader rane of capial insrumens han banks.

avins and loan holdin companies did no have sepa-

rae capial sandards, nor did companies ha conrolled

indusrial banks, credi card banks, and oher eniies ha

were FDIC-insured bu were no banks under he BHC

Ac, as amended. Ofen he Of fice of he Comproller of he

Currency (OCC) or FDIC required he parens of such non-

bank banks o ener ino capial mainenance or capial and

liquidiy mainenance areemens (CALMAs), which had

similar, and ofen more srinen, effecs as bank holdin

company and bank capial reulaions.

THE AMEndMEnT

the Amendmen applies he enerally applicable PCA lever-

ae and risk-based capial sandards (he enerally appli-

cable sandards) on a consolidaed basis o:

Insured deposiory insiuions;

Deposiory insiuion holdin companies (holdin com-

panies); and

Nonbank financial companies supervised (supervised

financial companies) by he Federal Reserve as a resul

of he Ac.

these sandards will be esablished by he appropriae fed-

eral bankin aency, which enerally is is primary federal

reulaor. the enerally applicable sandards will be floors

for he sandards se by he reulaors, and canno be lesshan he curren PCA sandards for insured deposiory

insiuions.

EFFEcTIvE dATEs

the Amendmen applies o any deb or equiy issued by

holdin companies and supervised financial companies on

or afer May 19, 2010. For insrumens issued prior o May 19,

2010, he followin apply o he deducions required by his

secion [171]:

A phase-in, incremenally over . . . 3 years beinnin

January 1, 2013, enerally;

No capial deducions are required for holdin compa-

nies wih less han $15 billion of consolidaed asses and

muual holdin companies, each esed as of May 19, 2010;


20/94

20

As o any holdin company no supervised by he Federal

Reserve as of May 19, 2010, he effecive dae is five years

afer enacmen of he Ac, excep as o ubsecions 171(b)

(4)(A) and (B);

For BHC subsidiaries of forein bankin oranizaions

ha have relied on Federal Reserve R01-1, he effecive

dae is five years afer enacmen of he Ac, excep for

ubsecion 171(b)(4)(A).

ExcEPTIons

the Amendmen does no apply o:

Capial insrumens issued o he treasury or any oher

overnmen aency prior o Ocober 4, 2010 pursuan o

tARP;

Any Federal Home Loan Bank;

Any small BHC subjec o he Federal Reserves mall

Bank Holdin Company Policy aemen (he small BHC

policy) applicable o BHCs wih $500 million or less of

consolidaed coss; or

Forein oranizaions ha own or conrol a .. holdin

company.

sTudIEs

ecion 174 of he Ac direcs he Comproller general,

in consulaion wih federal bank reulaors o sudy and

repor, wihin 18 monhs of he enacmen of he Ac, on (i)

hybrid capial insrumens includin rus-preferred securi-

ies (hybrid securiies) for bankin insiuions and bank

holdin companies (he Hybrid Capial udy) and (ii) he

capial requiremens of .. holdin companies (inermedi-

ae holdin companies) ha are conrolled by forein banks

(he Inermediae HC udy).

the Hybrid Capial udy mus consider many of he hins

already mandaed by ecion 171, includin:

the curren use of hybrid securiies as tier 1 capial;

Differences in capial componens for banks and holdin

companies, and heir respecive benefis and risks;

the economic effec of prohibiin hybrid insrumens as

tier 1 capial;

Reviewin he consequences of disqualifyin rus-pre-

ferred securiies and wheher i could lead o he failures

or undercapializaion of bankin oranizaions;

Inernaional compeiive effecs of prohibiin hybrid

securiies as tier 1 capial;

the availabiliy of capial for insiuions wih less han $10

billion of oal asses; and

Any oher effecs or financial sysem safey and sound-

ness and poenial economic effecs.

the Inermediae HC udy will consider:

Curren Federal Reserve policy reardin inermediae

companies;

Naional reamen and compeiive opporuniies for for-

ein banks in he ..;

Forein banks home counry capial sandards compared

o .. capial sandards;

Poenial forein reulaory effecs on .. bankin ora-

nizaions operain abroad;

Effecs on he cos and availabiliy of credi in he ..;

and

Oher economic effecs and effecs on safey and

soundness.

Anoher sudy is called for by ecion 174 of he Ac. this

ecion direcs he Comproller general, afer consula-

ion wih he federal bank reulaors, o sudy smaller (in

his case, financial companies wih consolidaed asses of

$5 billion or less) deposiory insiuions access o he capi-

al markes. the repor will be made o he House Financial

ervices Commiee and he enae Bankin Commiees,

and will include recommendaions for leislaive or reula-

ory acion ha would enhance smaller insiuions access

o capial consisen wih safey and soundness.

REgulATIons

the Federal Reserve will need o revise is holdin com-

pany capial reulaions in he Appendices o Reulaion Y

(Re. Y), and implemen sandards for hrif holdin com-

panies when he Ots auhoriy over such companies is

ransferred o he Federal Reserve under tile III of he Ac.

the federal bank reulaors are also required, subjec o

he recommendaions of he Council, o develop addiional


21/94


22/94

22

Issuers wih ousandin securiies ha will be phased ou

as tier 1 componens under ecion 171 may wan o wai

for he udies and Federal Reserve rule chanes before

makin a decision on redempion. the Ac poenially

has creaed muliple capial evens ha would permi

redempion, if he rus-preferred securiies are no oher-

wise redeemable.

All oranizaions subjec o enforcemen acions and

capial plans will wan o updae heir plans early o avoid

surprise and beer conrol heir desinies. the phase-

ou and phase-ins under ecion 171 provide opporuni-

ies for beer plannin, alhouh he bank reulaors may

become more skepical of capial componens limied by

ecion 171.

mall BHCs will wan o ensure ha heir capial srucures

are mainained.

Conress should consider direcin he Comproller

general o sudy he Acs effecs upon smaller holdin

companies up o $15 billion in asses, and add an inflaion

adjusmen o any rulemakin.

the Ac reverses he Federal Reserves lon-sandin rule

of allowin insiuions ha are no inernaionally acive

o issue larer amouns of rus-preferred securiies as a

percenae of tier 1 capial.

Forein bankin oranizaions will wan o consider he

capial srucure of heir Inermediae HCs, and wheher

i may be advanaeous or no o allow heir Inermediae

HCs o raise capial and funds in he .. and oher mar-

kes. Cerain forein oranizaions may deermine no o

remain .. reisrans owin o he new limis on tier 1

capial insrumens available o he Inermediae HCs

under he Ac.

All bankin and financial services companies subjec o

he Amendmen will wan o closely monior reulaory

rulemakin in heir area, and plan alernaive capial sruc-

ures o operae bes wih he final decisions made under

he Ac, and in lih of poenial fuure raionalizaion of he

Amendmen and reulaions when he udies are due.

All insiuio

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