Financial Regulatory Reform: Chairman Dodd Releases New Legislation to Reform Financial Services Industry Regulation and Enhance Consumer Protection

March 17, 2010

Gibson Dunn is closely tracking government responses to the recent turmoil that has catalyzed a dramatic and rapid reshaping of our capital and credit markets.  We are providing updates on key regulatory and legislative issues, as well as information on legal and oversight issues that we believe could prove useful as firms and other entities navigate these changing times.

We have assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed in this alert.  For additional information, please feel free to contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) or C. F. Muckenfuss (202-955-8514, cmuckenfuss@gibsondunn.com) in the firm’s Washington, D.C. office, Kimble Cannon (310-229-7084, kcannon@gibsondunn.com) in the firm’s Los Angeles office, or any member of the firm’s Financial Regulatory Reform Group.

Chairman Dodd Releases Financial Regulatory Reform Bill

On Monday, March 15, 2010, Chairman Dodd released his proposal entitled the "Restoring American Financial Stability Act" (the "March 15 Print"), which is the successor to a previous regulatory reform bill he had unveiled in November 2009.  The bill arrives after weeks of negotiations with Senate Banking Committee Republicans, first with Ranking Member Shelby and most recently with Senator Corker.  During Chairman Dodd’s negotiations with Senator Corker, there was considerable speculation that the two would be able to compromise on some of the more controversial aspects of the bill and achieve a bipartisan product.  Talks ultimately faltered, however, on several key sticking points, including the independence and authority of a proposed consumer financial protection agency and corporate governance issues.

This bill follows both Chairman Dodd’s earlier draft and H.R. 4173, the "Wall Street Reform and Consumer Protection Act," which the House passed in December, with no Republican support, 223-202.  The bill released by Chairman Dodd not only builds on his November draft but also contains a number of new provisions, including some that were the product of bipartisan negotiations among Senate Banking Committee members.  The resolution authority title, for example, includes some language agreed to by Senators Warner and Corker, who comprised a bipartisan working group tasked with drafting on that topic.  Title I, too, on financial stability, includes concepts negotiated between Chairman Dodd and others.  It is particularly noteworthy that despite the recent criticism on both sides of the aisle in the Senate of the Federal Reserve Board (the "Board") and its chairman, Ben Bernanke, the authority of the Board would be substantially expanded under the March 15 Print.

The bill as a whole includes a number of provisions that are of concern to the business community.  It contains aggressive consumer protection provisions, an expansive "Volcker Rule" aimed at proprietary trading and hedge fund and private equity investments, corporate governance provisions, and a derivatives framework that would subject corporate America and speculators alike to new and costly regulatory requirements. 

As of this writing, Republicans on the Senate Banking Committee had yet to decide upon a strategy for the mark-up of the regulatory reform bill, set to take place the week of March 22nd.  If the mark-up takes place as planned and is completed, it is likely that the bill will be ordered reported on a party-line vote, which would cloud its prospects for passage on the Senate floor.  Hence, while Chairman Dodd has expressed his intention to complete a mark-up of the bill by March 26th, it would not be surprising to see the mark-up postponed in the hope of reaching a bipartisan accord.

Table of Contents 

1.   Financial Stability (Title I)

2.   Orderly Liquidation Authority (Title II)

3.   Elimination of the Office of Thrift Supervision and Agency Reorganization (Title III)

4.   Insurance (Title V)

5.   Enhanced Regulation Of Depository Institution Holding Companies (Title VI)

6.   Derivatives Regulation (Title VII)

7.   Investor Protections and Improvements to the Regulation of Securities (Title IX)

8.   Consumer Financial Protection (Title X)


Title I. Financial Stability

Summary

Title I of the March 15 Print seeks to increase financial marketplace transparency, enabling regulators to identify risks to financial stability.

  • A newly established "Financial Oversight Council" would focus on identifying and monitoring systemic risks posed by financial firms and financial activities and practices, with an "Office of Financial Research" providing the Council with technical expertise and data collection support services. 
  • By a 2/3 vote, the Council would be able to determine which bank holding companies and U.S. and foreign nonbank financial companies would be subject to enhanced supervision by the Federal Reserve Board, based on the perceived risk a company poses to financial stability in the United States. 
  • It also address these risks by requiring the designated nonbank financial companies to meet new enhanced standards to be developed by the Board.  These more stringent rules will also apply to all bank holding companies with assets over $50 billion unless the Council or Board determines to raise the threshold amount. 

Under Title I, the Board of Governors of the Federal Reserve (hereafter the "Board") is responsible for promulgating stricter prudential standards applicable to the nonbank financial companies subject to its supervision and bank holding companies with assets of at least $50 billion.  The Board would have the authority to require reports from and conduct examination of these companies, as well as subject these companies to early remediation requirements in the case of a company experiencing financial distress.  If the Board determines that a large, complex company poses a grave threat to the financial stability of the United States it may–as a last resort and with a 2/3 vote of the Council–require such company to take mitigatory action such as divesting some of its holdings or selling assets. 

The Financial Stability Oversight Council’s authority would be somewhat restricted compared to its counterpart under H.R. 4173.  For example, most significant actions by the Council, such as subjecting a nonbank financial company to the Board’s supervision, require a 2/3 vote including the affirmative vote of the Secretary of the Treasury, rather than a simple majority.  Further, under H.R. 4173 the Council would have the potential authority to subject any bank holding company to Board oversight and stricter prudential regulations if it was deemed necessary to mitigate risk to the financial system.  The Council’s authority under the March 15 Print, however, is limited to those bank holding companies with assets of greater than $50 billion.

Financial Stability Oversight Council

1.   Financial Stability Oversight Council Established

The March 15 Print establishes a new regulatory agency, the "Financial Stability Oversight Council" (hereinafter the "Council"), under subtitle A of Title I.  The Council would be composed of the following voting members: the Secretary of the Treasury, the Chairman of the Federal Reserve Board of Governors, the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau, the Chairman of the Securities Exchange Commission, the Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Financial Agency, and an independent member with insurance expertise to be appointed by the President, with the advice and consent of the Senate, for a six year term.  Further, the Director of the Office of Financial Research would serve in an advisory capacity as a nonvoting member of the Council.  The Secretary of the Treasury will serve as the chairperson of the Council. 

The Council would meet at least quarterly, or at the call of the Chairperson or a majority of the members then serving.  The bill authorizes the Council to appoint special advisory, technical, or professional committees in order to help it carry out its functions, including an advisory committee of state regulators.  However, the Federal Advisory Committee Act would not apply to the Council or any of it committees.  Non-government employees would be permitted to serve on such committees and they would be compensated at Level III of the Executive Schedule (under Section 5314 of title 5, United States Code), but their names would be published on a list by the Council.

2.   Council Authority

According to Title I, the purposes of the Council are threefold: (1) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure of large, interconnected bank holding companies[1] or nonbank financial companies[2]; (2) to promote market discipline by eliminating shareholders’, creditors’, and counterparties’ expectations that the government will shield them from losses in the event of failure; and (3) to respond to emerging threats to the stability of the United States financial markets.

In order to effectuate these goals, the Council would be tasked with the following duties:

  • Collect information from member agencies[3] and other Federal and State financial regulatory agencies and, if necessary, direct the Office of Financial Research to collect information from bank holding companies and nonbank financial companies;
  • Provide direction to, and request data and analyses from, the Office of Financial Research to support the Council’s work;
  • Monitor the financial services marketplace in order to identify potential threats to the financial stability of the United States;
  • Facilitate information sharing and coordination among the member agencies and other Federal and State agencies regarding domestic financial services policy development, rulemaking, examinations, reporting requirements, and enforcement actions;
  • Recommend to the member agencies general supervisory priorities and principles reflecting the outcome of discussions among the member agencies;
  • Identify gaps in regulation posing risks to financial stability of the United States;
  • Require supervision by the Board for nonbank financial companies that may pose risks to the financial stability of the United States in the event of their material financial distress or failure, pursuant to section 113;
  • Make recommendations to the Board concerning the establishment of heightened prudential standards for risk-based capital, leverage, liquidity, contingent capital, resolution plans and credit exposure reports, concentration limits, enhanced public disclosures, and overall risk management for nonbank financial companies (and bank holding companies) supervised by the Board;
  • Identify systemically important financial market utilities and payment, clearing, and settlement activities, and require such utilities and activities to be subject to standards established by the Board;
  • Make recommendations to primary financial regulatory agencies to apply new or heightened standards and safeguards for financial activities or practices that could create or increase risks of significant liquidity, credit, or other problems spreading among bank holding companies, nonbank financial companies, and U.S. financial markets;
  • Provide a forum for discussion and analysis of emerging market developments and financial regulatory issues, as well as resolution of jurisdictional disputes among the Council members; and
  • Annually report to and testify before Congress on (1) the Council’s activities, (2) the significant financial market developments and potential emerging threats to financial stability, (3) all determinations made under section 113 or title VIII, and (4) recommendations to enhance the integrity, efficiency, competitiveness, and stability of United States financial markets, to promote market disciple, and to maintain investor confidence.

With regard to its information collecting duties, the Council could request the submission of and receive any data or information from the Office of Financial Research and member agencies necessary to monitor the financial services marketplace to identify potential risks to the United States’ financial stability or to carry out any of Title I’s provisions.  Specifically, acting through the Office of Financial Research, the Council could require the submission of periodic and other reports from any nonbank financial company or bank holding company for the purpose of assessing the extent to which the company itself (or an activity in which it engages) poses a threat to financial stability.  However, before requiring such a report from a nonbank financial company or bank holding company that is regulated by a member agency or other primary financial regulatory agency, the Council would need to coordinate with such agency and, whenever possible, rely on information available from the Office of Financial Research or such agencies.  Information, data, and reports collected under this subtitle must remain confidential, and the submission of such data or information by a company would not constitute a waiver of any privilege arising under Federal or State law.

If the Council is unable to determine whether the activities of a nonbank financial company pose a threat to financial stability based on such information collected, discussions with management, and other publicly available information, the Council could request the Board conduct an examination of the nonbank financial company for the sole purpose of determining whether it should be supervised by the Board for the purposes of Title I.

3.   Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies

Under the March 15 Print, the Council could determine that a U.S. nonbank financial company is to be supervised by the Board and subject to prudential standards if the Council finds material financial distress at the company would pose a threat to the financial stability of the United States.  Such a determination would require an affirmative vote of at least 2/3 of Council members then serving, including the affirmative vote by the Chairperson (the Secretary of the Treasury).  This authority would be non-delegable.

The Council would need to consider the following criteria in making its decision to subject a nonbank company to the Board’s supervision and stricter prudential standards:

  • The degree of leverage of the company;
  • The amount and nature of the financial assets of the company;
  • The amount and types of the company’s liabilities, including its degree of reliance on short-term funding;
  • The extent and type of the company’s off-balance sheet exposures;
  • The extent and type of the transactions and relationships between the company and other significant nonbank financial companies and bank holding companies;
  • The importance of the company as a source of credit for households, businesses, and state and local governments, as well as its importance as a source of liquidity for the United States financial system;
  • The recommendation of a Council member;
  • The operation of, or ownership interest in, any clearing, settlement, or payment business of the company;
  • The extent to which assets are managed rather than owned by the company and the ownership of assets under management is diffuse; and
  • Any other factors that the Council deems appropriate.

Prior to making a determination under section 113, the March 15 Print would require the Council to consult with the primary financial regulatory agency, if one exists, for each nonbank financial company or subsidiary of a nonbank financial company that is being considered for supervision by the Board.

With regard to foreign nonbank financial companies, the Council could determine that a foreign nonbank financial company that has substantial assets or operations in the United States must be supervised by the Board and subject to prudential standards in accordance with Title I if it determines that material financial distress at the company would pose a threat to the financial stability of the United States.  Again, such a determination requires an affirmative vote of 2/3 of Council members then serving, including an affirmative vote by the Chairperson.  The Council would need to consider most of the same factors enumerated above with respect to U.S. nonbank companies in making its determination (with the exception of the operation or ownership of clearing, payment or settlement business).

The Council would need to provide written notice to a nonbank financial company that the Council had determined it will be subject to supervision by the Board and prudential standards under Title I, as well as an explanation of the basis for such a determination.  Within 30 days of receiving such notice, the nonbank financial company could request a written or oral hearing before the Council to contest the proposed determination.  If the request is timely, the Council would need to determine a time and place at which the company could appear to submit written materials or, at the Council’s discretion, give oral testimony or argument.  No later than 60 days after such hearing, the Council would need to notify the nonbank financial company of its final determination.  If the company does not make a timely request for a hearing, the Council would need to notify the company of its final determination within 10 days after the request could have been made.

The Council would be permitted to waive the notice and hearing requirements if it determined, by a 2/3 vote (including affirmative vote of the Chairperson), that such waiver is necessary or appropriate to prevent or mitigate threats posed by the nonbank financial company to financial stability.  Notice of the waiver would need to be provided to the company as soon as possible, no later than 24 hours after the determination is made.  The company could request a written or oral hearing to contest the waiver, no later than 10 days after receipt of such notice, and the Council would need to hold such a hearing within 15 days of receiving this request and then make its final determination within 30 days.

Judicial review of the Council’s final determinations would be available.  After a nonbank financial company receives a final determination, it could bring an action in the U.S. district court for the district where the company’s home office is located or in the District of Columbia.  Review would be limited to whether the final determination was arbitrary and capricious.

Annually, at a minimum, the Council would need to reevaluate its determination to subject a U.S. or foreign nonbank company to the supervision of the Board and stricter prudential standards.  If 2/3 of Council members, including an affirmative vote by the Chairperson, determine the company no longer meets the standards for such a determination, then the determination could be rescinded.

4.   Registration of Nonbank Financial Companies Supervised by the Board

Within 180 days after the Council makes a final determination under section113 of the March 15 Print that a nonbank financial company is to be supervised by the Board, the company would need to register with the Board on forms to be prescribed by the Board. 

5.   Enhanced Supervision and Prudential Standards for Nonbank Financial Companies Supervised by the Board and Certain Bank  Holding Companies

The March 15 Print would give the Council the authority to make recommendations to the Board concerning the establishment and refinement of prudential standards and reporting disclosure requirements applicable to nonbank financial companies supervised by the Board and large, interconnected bank holding companies.  Such prudential standards would need to be (1) more stringent than those applicable to other nonbank financial companies and bank holding companies and (2) increase in stringency based on certain enumerated considerations.  Such standards would not apply to any bank holding company with total consolidated assets of less than $50 billion, and the Council could recommend an asset threshold greater than that for the applicability of any particular standard.

Prudential standards generally.  The recommendations of the Council could include:

  • Risk-based capital requirements;
  • Leverage limits;
  • Liquidity requirements;
  • Resolution and credit exposure report requirements;
  • Concentration limits;
  • A contingent capital requirement;
  • Enhanced public disclosures; and
  • Overall risk management requirements.

In making recommendations concerning these prudential standards, the Council would need to take into consideration differences among nonbank financial companies supervised by the Board and bank holding companies based on: (1) the "section 113" factors (see above); (2) whether the company owns an insured depository institution; (3) nonfinancial activities and affiliations of the company; and (4) any other factors that the Council determines appropriate.  The Council would need to, to the extent possible, ensure that small changes in the section 113 factors, such as degree of leverage and amount of assets and liabilities, will not result in sharp, discontinuous changes in the established prudential standards.  Further, in making recommendations concerning standards that would apply to foreign nonbank financial companies supervised by the Board, the Council would need to give due regard to the principle of national treatment and competitive equity.

Contingent capital.  With regard to contingent capital, the Council would be required to conduct a study of the feasibility, benefits, costs and structure of a contingent capital requirement for nonbank financial companies supervised by the Board and large, interconnected bank holding companies.  The study would evaluate the degree to which the requirement would enhance the safety and soundness of companies subject to it, as well as evaluate the characteristics and amounts of convertible debt that should be required, the costs to companies, and the effects on the structure and operation of credit markets and the international competitiveness of companies, among other things.  Within two years of the Act’s enactment, the Council would need to submit a report to Congress regarding the study.  After submitting such a report, the Council could make recommendations to the Board to require any nonbank financial company supervised by the Board and any large, interconnected bank holding company to maintain a minimum amount of long-term hybrid debt that is convertible to equity in times of financial stress. 

Resolution plan and credit exposure reports.  The Council could make recommendations to the Board concerning the plan for rapid and orderly resolution that each nonbank financial company subject to Board supervision and large, interconnected bank holding company is required to have in the event of material financial distress or failure.  Further, the Council could make recommendations to the Board concerning the advisability of requiring such a company to report periodically to the Council, the Board, and the Federal Deposit Insurance Corporation (hereinafter the "Corporation") on the nature and extent to which the company has credit exposure to other significant nonbank financial companies and significant bank holding companies and the degree to which such companies have credit exposure to it.

Concentration limits.  In order to limit the risk that the failure of any individual company could pose to nonbank financial companies supervised by the Board, the Council could make recommendations to the Board to prescribe standards to limit such risks, under section 165 of the March 15 Print, which would govern the Board’s establishment of enhanced prudential standards.

Enhanced public disclosures.  The Council could recommend to the Board that it require periodic public disclosures by large, interconnected bank holding companies and by nonbank financial companies supervised by the Board in order to support market evaluation of the risk profile, capital adequacy and risk management capabilities of such companies.

6.   Reports

The Council, acting through the newly established Office of Financial Research, could require a bank holding company with total consolidated assets of $50 billion or greater, or a nonbank financial company supervised by the Board and any subsidiary thereof, to submit certified reports to keep the Council informed as to:

  • The financial condition of the company;
  • Systems for monitoring and controlling financial, operating, and other risks;
  • Transactions with any subsidiary that is a depository institution; and
  • The extent to which the activities and operations of the company and any subsidiary thereof could, under adverse circumstances, have the potential to disrupt financial markets or affect the overall financial stability of the United States.

That said, the Council would be required to, to the extent possible, use existing reports and other publicly available information before requiring such reports. 

7.   Treatment of Certain Companies That Cease to Be Bank Holding Companies

Section 117 of the March 15 Print applies to any entity or a successor entity that was a bank holding company with total consolidated assets of at least $50 billion as of January 1, 2010 and received financial assistance under or participated in the Capital Purchase Program under TARP.  If such an entity ceases to be a bank holding company at any time after January 1, 2010, it would be required to be treated as if it were a nonbank financial company that the Council had made a determination to subject to Board supervision.  Before being treated as a supervised nonbank company, the entity could request an oral or written hearing to appeal this decision.  After the hearing, the Council would be required to submit a report stating the basis for its decision to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services.  The Council would then notify the entity of its final decision.  Such decision would need to include a consideration of whether the company meets the "section 113" standards (see above) and the definition of the term "nonbank financial company" under section 102 of the March 15 Print (see above). 

8.   Council Funding

The Council’s expenses would be treated as expenses of, and paid by, the Office of Financial Research. 

9.   Resolution of Supervisory Jurisdictional Disputes Among Member Agencies

The Council could resolve disputes among two or more member agencies if certain requirements are met — namely, if one of the agencies requests the Council’s involvement, if the dispute concerns jurisdiction over a particular bank holding company, nonbank financial company, or financial activity or product, and the Council determines that the agencies cannot resolve the dispute without the Council’s interference. 

10.   Additional Standards Applicable to Activities or Practices for Financial Stability Purposes

Under the March 15 Print, the Council could also issue recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards for a financial activity or practice that the Council finds could create the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies or the U.S. financial markets.  Before making such a recommendation, the Council would need to consult with the primary financial regulatory agency and provide notice and opportunity for public comment.  Further, the new or heightened standards and safeguards must take costs to long-term economic growth into account.  The conduct of the activity or practice may be prescribed in specific ways (such as limiting its scope or applying particular capital or risk management requirements) or the practice may be prohibited in its entirety.

Each primary financial regulatory agency could impose, require reports regarding, examine for compliance with, and enforce the standards recommended by the Council with respect to the companies it regulates.  Such authority would be in addition to, and would not limit, the agency’s other authority.  The primary agency would need to impose the standards recommended by the Council or similar standards that the Council deems acceptable.  If the primary financial regulator chooses not to do so, it would need to explain such decision in writing within 90 days of receiving the Council’s recommendation.

The Council would be required to report to Congress on the recommendations issued under this section, as well as the implementation or failure to implement such recommendations by the primary financial regulatory agency.

If the Council determines that a financial activity or practice no longer requires any standards or safeguards, it could recommend to the primary financial regulatory agency that such standards be rescinded.  The primary financial regulatory agency would then be required to determine whether the standards should remain in effect.

11.   Mitigation of Risks to Financial Stability

If the Board determines that a bank holding company with total consolidated assets of $50 billion or more, or a nonbank financial company supervised by the Board, poses a grave threat to the financial stability of the United States, the Board could take certain mitigatory action with respect to such company.  Namely, upon a 2/3 vote of the Council, the Board could require the company to (1) terminate one or more activities; (2) impose conditions on the manner in which the company conducts one or more activities; or (3) sell or otherwise transfer assets or off-balance sheet items to unaffiliated entities, if the Board determines that actions under (1) and (2) are inadequate to mitigate a threat to the financial stability of the United States.

The bank holding company with total consolidated assets of $50 billion or more would be required to receive notice that it is being considered for mitigatory action, the basis for such a consideration, and the specific mitigatory action being considered.  The company could then request a written or oral hearing to contest the proposed mitigatory action.  Upon timely receipt of such a request, the Board would need to set a time and place for the submission of written materials (or oral arguments, at its discretion).  The Board would need to notify the company of its final decision within 60 days of such hearing.

In determining whether mitigatory action is appropriate, the Board would need to take into consideration the "section 113" factors (see above), as applicable.  With regard to foreign nonbank financial companies subject to Board supervision and foreign-based bank holding companies, the Board could prescribe regulations regarding the application of mitigatory action to such companies giving due regard to the principle of national treatment and competitive equity.

Office of Financial Research

12.   Office of Financial Research Established

The March 15 Bill establishes the "Office of Financial Research" (hereafter the "Office") within the Department of the Treasury.  The Office would be headed by a Director, appointed by the President with the advice and consent of the Senate for a term of six years.  The individual serving as the Director could not also serve as the head of any financial regulatory agency.  In consultation with the Chairperson, the Director would need to establish the annual budget of the office and may fix the number of and appoint and direct all employees of the Office.

Any department or agency could provide services, funds, facilities, staff and other support services to the Office or any special advisory, technical, or professional committee appointed by the Office.  The Director could procure temporary and intermittent services under section 3109(b) of title 5 and is authorized to enter into an perform contracts and acquire, lease and sell property.

The Director and any Office staff who has had access to transaction or position data or business confidential information about financial entities required to report to the Office could not, for a period of one year after seeing such information, be employed by or provide advice or consulting services to a financial company (regardless of whether such entity is required to report to the Office).

13.   Purpose and Duties of the Office

The March 15 Print establishes the Office in order to support the Council in fulfilling its purposes and duties and to support the member agencies.  Specifically, the Office would:

  • Collect data on behalf of the Council and provide such data to the Council and member agencies;
  • Standardize the types and formats of data reported and collected;
  • Perform applied research and essential long-term research;
  • Develop tools for risk measurement and monitoring;
  • Perform other related services; and
  • Make the results of the activities of the Office available to financial regulatory agencies.

The Office could share data and information, including software developed by the Office, with the Council and member agencies, so long as it is maintained with at least the same level of security as used by the Office and is not shared with any individual or entity without the Council’s permission.  Further, the Office could sponsor and conduct research projects and assist, on a reimbursable basis, with financial analyses undertaken at the request of other Federal agencies that are not member agencies.  The Office, in consultation with the Chairperson, would be required to issue rules, regulations and orders only to the extent necessary to carry out its above described purposes and duties.  Member agencies would need to implement regulations promulgated by the Office to standardize the types and formats of data reported and collected on behalf of the Council.

The Director of the Office would need to annually report to and testify before the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services on the activities of the Office, including the work of the Data Center and Research and Analysis Center, and the Office’s assessment of significant financial market developments and potential emerging threats to the financial stability of the United States.  No prior review of such testimony would be allowed by any officer or United States agency.

The Director could require by subpoena the production of data by a financial company upon a written finding that such data is required for the Office to carry out its functions and that the Office has coordinated with the member agency or other primary financial regulatory agency responsible for regulating such company.  Such subpoena would be enforceable by order of any appropriate U.S. district court. 

14.   Organizational Structure, Responsibilities of Primary Programmatic Units

Two separate entities would be established within the Office in order to carry out its programmatic responsibilities–the "Data Center" and the "Research and Analysis Center."

The Data Center, acting on behalf of the Council, would collect, validate and maintain data from member agencies, commercial data providers, publicly available data sources, and other financial entities.  To this end, the Office could, on behalf of the Council, require the submission of periodic and other reports from any financial company for the purpose of assessing the extent to which the company itself or a financial activity or market in which it participates poses a threat to the financial stability of the United States.  The Office would need to coordinate with the member agency or other primary financial regulatory agency responsible for regulating the company and rely on information available from such agencies whenever possible, in lieu of requiring an additional report.  The Office would be required to promulgate regulations regarding the type and scope of data to be collected by the Data Center.

As part of its specific responsibilities, the Data Center would need to prepare and publish, in manner easily accessible to the public, (1) a financial company reference database; (2) a financial instrument reference database, and (3) formats and standards for Office data, including standards for reporting financial transaction and position data to the Office.  However, such publication would not include any confidential data, and the Director must ensure that data are kept secure and protected against unauthorized disclosure.  The Data Center would also need to maintain a catalogue of financial entities and instruments reported to the Office.  Data collected and maintained by the Data Center would be available to the Council and member agencies to support their regulatory responsibilities.  Certain data would be provided to financial industry participants and the general public to increase market transparency and facilitate research on the financial system, to the extent that intellectual property rights and business confidential information are protected.

The Research and Analysis Center, on behalf of the Council, would be tasked with developing and maintaining independent analytical and capabilities and computing resources–

  • To develop and maintain metrics and reporting systems from risks to the financial stability of the U.S.;
  • To monitor and investigate and report on changes in system-wide risk levels and patterns to the Council and congress;
  • To conduct, coordinate, and sponsor research to support and improve regulation of financial entities and markets;
  • To evaluate and report on stress tests or other stability-related evaluations of financial entities overseen by member agencies;
  • To maintain expertise in such areas as necessary to support specific requests for advice and assistance from financial regulators;
  • To investigate disruptions and failure in the financial markets, report findings, and make recommendations to the Council based on those findings;
  • To conduct studies and provide advice on the impact of policies related to systemic risk; and
  • To promote best practices for financial risk management. 

Within two years of the Act’s enactment and annually thereafter, the Office would be required to prepare and submit a report to Congress that assesses the state of the U.S. financial system.  The report would need to include an analysis of threats to the financial stability of the United States, the status of the Office’s efforts in meeting its mission, and key findings from the research and analysis of the financial system by the Office.

15.   Funding

Under the bill, a "Financial Research Fund" would be established in the Treasury, which would consist of all interim funding given to the Office by the Board as well as all assessment that the Office receives.  The Board would be required to provide the Office with an amount of funding sufficient to cover the expenses of the Office during the first two years of its operation.  Thereafter, the Office would be self-funded through assessments applicable to bank holding companies with total consolidated assets of $50 billion or greater and nonbank financial companies supervised by the Board.  The assessment schedule would be established by the Secretary with the approval of the Council, and would take into account differences among such companies, based on the considerations for establishing prudential standards under section 115.  To the extent the assessments do not fully cover the Office’s expenses, the Board would make up this shortfall.

16.   Transition Oversight

The transition oversight section of the March 15 Print consists of administrative provisions that aim to ensure that the Office has an orderly and organized startup, attracts and retains a qualified workforce, and establishes a comprehensive employee training and benefits program.  The Office would be required to develop and report to Congress on a training and workforce development plan, a workplace flexibilities plan, and a recruitment and retention plan.

Board Authority over Designated Nonbank Financial Companies and Bank Holding Companies over $50 Billion

17.   Reports by and Examinations of Nonbank Financial Companies by the Board

Under subtitle C of the March 15 Print, the Board could require reports regarding and examine any nonbank financial company it supervises (and any subsidiary thereof) to determine:

  • The nature of the operations and financial condition of the company and such subsidiary;
  • The financial, operational, and other risks within the company that may pose a threat to the safety and soundness of such company or to the financial stability of the United States;
  • The systems for monitoring and controlling such risks; and
  • Compliance by the company with requirements of Subtitle C.

To the fullest extent possible, however, the Board would need to use reports and supervisory information that the company has provided to other federal or state regulatory agencies, information otherwise obtainable from such agencies or that is required to be reported publicly, and externally audited financial statements of such company or subsidiary.  The Board would also be required to seek to rely on reports of examination of any depository institution subsidiary or functionally regulated subsidiary made by the primary financial regulatory agency.  Further, the Board would coordinate with the appropriate primary financial regulatory agency before requiring a report, requesting information, or beginning an examination.

18.   Enforcement

If the Board determines that a condition, practice, or activity of a depository institution subsidiary or functionally regulated subsidiary of a nonbank financial company supervised by the Board does not comply with the regulations or orders under Title I, or otherwise poses a threat to financial stability, the Board could recommend that the primary financial regulatory agency for the subsidiary initiate a supervisory action or enforcement proceeding.  Such a recommendation would need to be accompanied by a written explanation of the Board’s concerns.  If the agency does not initiate an action or enforcement proceedings within 30 days of receiving this recommendation, the Board would need to report this failure to the Council.

19.   Acquisitions

According to subtitle C of the March 15 Print, a nonbank financial company supervised by the Board would need to be deemed to be and treated as a bank holding company for the purposes of section 3 of the Bank Holding Company Act of 1956 (hereafter the "BHC Act"), which governs acquisitions made by bank holding companies.  To this end, the nonbank financial company subject to Board supervision would be prohibited from acquiring direct or indirect ownership or control of any voting shares of any bank if doing so would lead the company to own or control more than 5% of the voting shares of the bank.  Further, such company or subsidiary thereof (other than a bank) would be prohibited from acquiring all or substantially all of the assets of a bank, and prohibited from merging or consolidating with any other bank holding company.  This prohibition would not apply in certain circumstances, as detailed in Section 3(a) of the BHC Act. 

Furthermore, under the March 15 Print, a bank holding company with total consolidated assets of at least $50 billion or a nonbank financial company supervised by the Board would need to provide notice to the Board if it seeks to acquire direct or indirect ownership or control of any voting shares of any company (other than an insured depository institution) that is engaged in financial activities under section 4(k) of the BHC Act and has total consolidated assets of $10 billion or more.  This prior notice requirement would not apply, however, to the acquisition of shares that would qualify for exemptions under section 4(c) or section 4(k)(4)(E) of the BHC Act.

20.   Prohibition Against Management Interlocks Between Certain Financial Companies

A nonbank financial company supervised by the Board would be treated as a bank holding company for the purposes of the Depository Institutions Management Interlocks Act, which prohibits interlocks between management officials at depository organizations and other unaffiliated depository institutions with offices in the same community, and depository institutions and unaffiliated depository institutions with offices in the same relevant metropolitan statistical area and with total assets of $50 million or more each.  Further, a management official of a depository organization with total assets exceeding $2.5 billion could not serve at the same time as a management official of an unaffiliated organization with total assets exceeding $1.5 billion, regardless of the location of the two depository organizations (these thresholds are revised by the FDIC). 

The March 15 Print provides, however, that notwithstanding section 7 of the Depository Institutions Management Interlocks Act, the Board is not allowed to permit service by a management official of a nonbank financial company supervised by the Board as a management official of any bank holding company with assets of at least $50 billion or other nonaffiliated nonbank financial company supervised by the Board. 

21.   Enhanced Supervision and Prudential Standards for Nonbank Financial Companies Supervised by the Board and Certain Bank Holding Companies

In order to prevent or mitigate risks to financial stability, the March 15 Print would require the Board to establish prudential standards and disclosure requirements applicable to nonbank financial companies supervised by the Board and large, interconnected bank holding companies.  It could do so either on its own initiative or pursuant to the Council’s recommendations.  Such standards would be more stringent than the standards applicable to nonbank financial companies and bank holding companies that do not present similar risks to financial stability and must increase in stringency based on certain considerations.  Such standards would not apply to any bank holding company with total consolidated assets of less than $50 billion, and the Board may establish a higher asset threshold for the applicability of any particular standard.

The prudential standards established would need to include: risk-based capital requirements, leverage limits, liquidity requirements, resolution plan and credit exposure report requirements, and concentration limits.  Additional standards could include a contingent capital requirement, enhanced public disclosures, and overall risk management requirements.

Contingent Capital.  After reporting to Congress as required by section 115 of the March 15 Print, the Board could promulgate regulations that require each nonbank financial company supervised by the Board and large bank holding companies to maintain a minimum amount of long-term debt that is convertible to equity in times of financial stress.  In devising such a requirement, the Board would be required to consider the results of the Council’s study under section 113 of the March 15 Print, an appropriate transition period, and the capital requirements applicable to the company, as well as other factors that the Board deems appropriate.

Resolution Plans.  The March 15 Print provides that each nonbank financial company supervised by the Board and large, interconnected bank holding company must submit a plan for rapid and orderly resolution in the event of material financial distress or failure.  Further, such a company would be required to report periodically to the Council, the Board, and the Corporation on the nature and extent to which the company has credit exposure to other significant nonbank financial companies and significant bank holding companies and the degree to which such companies have credit exposure to it.  The Board would then review the resolution plan, notify the company of any deficiencies, and require the company to resubmit a plan if such deficiencies are identified.  If a company fails to timely submit a resolution plan or comply with required revisions, the Board and Corporation could impose more stringent capital, leverage, or liquidity requirements or restrictions on the growth, activities, or operations of the company or its subsidiaries until the company submits a plan and remedies all deficiencies.  If the Board has imposed more stringent requirements on the company and the company has still failed, within a two year period, to resubmit the resolution plan with required revisions, the Board and the Corporation (in consultation with the Council) could then direct the company to divest certain assets or operations to facilitate an orderly resolution of the company under title 11 of the U.S. Code.

Concentration Limits.  The Board would need to prescribe regulations that prohibit each nonbank financial company supervised by the Board and each large, interconnected bank holding company from having credit exposure[4] to any unaffiliated company that exceeds 25% of the capital stock and surplus of the company (or a lower amount if the Board determines necessary to mitigate risks to financial stability).

In prescribing such standards, the Board would need to take into account differences among the nonbank financial companies supervised by the Board and the large, interconnected bank holding companies, based on the criteria considered by the Council in making its decision to subject a nonbank company to Board supervision (such as the company’s leverage, amount and nature of financial assets, and liabilities), whether the company owns an insured depository institution, and whether the company engages in nonfinancial activities or affiliations.  The Board would need to submit an annual report to Congress regarding the implementation of such standards and the use of these standards to mitigate risks to the financial stability of the United States. 

The subsection governing these concentration limits, as well as any related regulations and orders by the Board, would not be effective until 3 years after the March 15 Print is enacted.

Enhanced Public Disclosures.  In order to support market evaluation of the risk profile, capital adequacy, and risk management capabilities of a company, the Board could prescribe, by regulation, periodic public disclosures by nonbank financial companies supervised by the Board and large, interconnected bank holding companies.

Risk Committee. Under the March 15 Print, the Board would need to require each publicly traded nonbank financial company it supervises to establish a risk committee within one year of being subject to the Board’s supervision.  Further, each bank holding company that is publicly traded and has assets of at least $10 billion would need to establish a risk committee.  The Board would have discretion as to whether to require publicly traded bank holding companies with assets of less than $10 billion to establish such a committee.

The risk committee would be responsible for the oversight of the enterprise-wide risk management practices of the given company.  It would need to include independent directors (the exact number to be determined by the Board) and at least one risk management expert. 

Stress Tests.  The Board would need to conduct analyses in which nonbank financial companies supervised by the Board and large interconnected bank holding companies are subject to evaluation as to whether the companies have the capital, on a total consolidated basis, necessary to absorb losses as a result of adverse economic conditions.

22.   Early Remediation Requirements

According to the March 15 Print, the purpose of early remediation requirements would be to establish a series of specific remedial actions to be taken by a nonbank financial company supervised by the Board or a large, interconnected bank holding company that is experiencing financial distress, in order to minimize the probability of insolvency and the resulting harm to U.S. financial stability.  Thus, the Board would need to prescribe regulations establishing such remediation requirements, which:

  • Define measures of the financial condition of the company including regulatory capital, liquidity measures, and other forward-looking indicators, and
  • Establish requirements that increase in stringency as the financial condition of the company declines, including requirements at initial stages of financial decline, such as limits on capital distributions, acquisitions and asset growth, and requirements at later stages of financial decline, including a capital restoration plan and capital-raising requirements, limits on transactions with affiliates, management changes, and asset sales.

23.   Affiliations

The March 15 Print specifically states that nothing in subtitle C will be construed to require a nonbank financial company supervised by the Board, or a company that controls a nonbank financial company supervised by the Board, to conform its activities to the requirements of section 4 of the BHC Act.

However, if the nonbank financial company supervised by the Board conducts activities that are not financial in nature (under section 4(k) of the BHC Act), the Board could require the company to establish an intermediate holding company in which it must conduct its financial activities.  The holding company would need to be established pursuant to Board regulations, no later than 90 days after the nonbank financial company is subject to Board supervision.  The activities that are determined to be financial in nature under section 4(k) of the BHC Act would not include internal financial activities, such as internal treasury, investment, and employee benefit functions.  The company could continue to conduct such internal financial activities so long as at least 2/3 of the assets or revenues generated from the activity are attributable to such company.

The Board would be required to promulgate regulations to establish the criteria for determining whether to require the nonbank financial company to establish an intermediate holding company.  Further, the Board could promulgate regulations to establish restrictions or limitations on transactions between the holding company and the nonbank financial company subject to its supervision, if necessary to prevent unsafe and unsound practices.  Such regulations could not, however, restrict or limit any transaction in connection with the bona fide acquisition or lease by an unaffiliated person of assets, goods, or services.

24.   Regulations

The Board would be required to issue final regulations to implement subtitle C within 18 months after the transfer date.

25.   Avoiding Duplication

The March 15 Print provides that the Board will take any action that the Board deems appropriate to avoid imposing requirements under subtitle C that are duplicative of requirements applicable to bank holding companies and nonbank financial companies under other provisions of the law. 

26.   Safe Harbor

The March 15 Print requires the Board to promulgate regulations on behalf of, and in consultation with, the Council, which set forth criteria for exempting certain types of classes of U.S. nonbank financial companies or foreign nonbank financial companies from supervision by the Board.  In developing these criteria, the Board would need to take into account the "section 113" criteria for determining whether such a company should be subject to Board supervision.  The Board and the Council would need to review these regulations at least every five years and revise these regulations and criteria as necessary. 

The Chairperson of the Board and the Chairperson of the Council would be required to submit a joint report to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services no later than 30 days after the regulations are issued or revised.  This report would need to detail the rationale for exemption and empirical evidence supporting the criteria for exemption.

Application to Non-U.S. Companies and Affiliates

Summary

Title I of the March 15 Print, entitled "Financial Stability" (hereafter "Title I") – like the similar provisions contained in H.R. 4173 — seeks to extend the regulatory overview by the Federal Reserve over certain foreign nonbanking financial companies.  In many respects, the Federal Reserve’s scope of authority over these foreign entities is the same as provided under the Title over U.S. nonbanking financial companies.  However, in exercising its regulatory authority, Title I directs the Federal Reserve (and the Council) to consider principles of national treatment and competitive equity — considerations that are not specified under Title I for regulating domestic entities.

Discussion of Key Provisions

1.   Scope of Financial Companies at Issue

Title I defines a "foreign nonbanking financial company" as a company (i) incorporated or organized in a country other than the U.S. and (ii) substantially engaged in activities in the U.S. that are of a financial nature, as defined under Section 4(k) of the BHC Act.

Further, the term "nonbanking financial company," as used in Title I, includes both "U.S. nonbanking financial companies" and foreign nonbank financial companies.  Regarding the authority of the Board with respect to foreign nonbanking financial companies, references in Title I to "company" or "subsidiary" includes only U.S. activities and subsidiaries of such foreign companies. 

2.    Supervision and Regulation of Certain Foreign Nonbanking Financial Companies That Pose Systemic Risks

The Council, by a vote of 2/3 of its members, including the affirmative vote of the Chairperson, is authorized under Title I to subject certain foreign nonbanking financial companies to supervision by the Board and to specified prudential standards.  This authority only applies if the foreign nonbanking financial company has substantial assets or operations in the U.S., and if the Council were to determine that material financial distress at the foreign nonbank financial company would pose a threat to the financial stability of the United States.

Determinations of whether to supervise a foreign nonbanking financial company or to subject it to prudential standards are based on similar factors as apply to a U.S. nonbanking financial company.  However, with regard to foreign-based bank holding companies and foreign nonbanking financial companies, Title I directs the Council in recommending prudential standards to give "due regard" to the principle of national treatment and competitive equity.  This reflects a sensitivity to regulatory oversight that may be provided by foreign authorities, as well as maintaining the competitiveness of U.S. markets in attracting the investments of foreign financial companies.

3.   Mitigation of Risks to Financial Stability

If the Board determines that a nonbanking financial company (including a foreign nonbanking financial company) poses a "grave threat" to the financial stability of the United States, the Board, with concurrence by a vote of 2/3 of the members of the Council, may require termination of activities, other conditions on activities, or the sale or transfer of assets.

Similar to the other provisions described above, principles of national treatment and competitive equity may be given due regard in applying these provisions to foreign nonbanking financial companies and foreign-based bank holding companies.  However, there is a material difference in the wording of this provision as Title I specifies that the Board "may" prescribe regulations concerning these considerations.  By its plain language, the Board is not required to adopt any such regulations.  In addition, as with the other provisions under Title I, exactly how the principles of national treatment and competitive equity will be applied is not specified and therefore will be subject to interpretation and implementation by the Council and Board, respectively.

4.   Resolution Authority Considerations

In connection with the resolution authority provisions, Title II of the March 15 Print directs the Corporation, in its role as receiver for a covered financial company, to coordinate with the appropriate foreign financial authorities regarding liquidation of any covered financial company that has assets or operations in a country other than the United States.  The Corporation is also authorized to enlist the assistance of foreign financial authorities in connection with foreign investigations.

5.   Foreign Private Fund Advisers

The March 15 Print would amend section 203 of the Investment Advisers Act of 1940 and subject private fund advisers to registration requirements, but it would maintain an exemption for foreign private fund advisers.  Note that this provision is similar to one contained in the House bill, H.R. 4173.

6.   Securities Holding Companies

A securities holding company (defined as owning or controlling one or more brokers or dealers registered with the SEC and that does not fall within other specified categories) that is required by foreign law or by a foreign regulator to have comprehensive consolidated supervision may qualify as a supervised securities holding company subject to the supervision of the Board.  This provision does not apply to foreign nonbanking financial companies posing systemic risks subject to Board supervision under Title I (as described above), and entities subject to comprehensive consolidated supervision by a foreign regulator.  As part of this supervision, the supervised securities holding company would be required to make and keep records and provide such records to the Board and subject itself to examinations by the Board (although the Board is instructed, to the extent possible, to reply on existing records and examinations available to other authorities).  The Board would also be authorized to adopt capital adequacy and other risk management standards applicable to the supervised securities holding companies.  Finally, provisions under section 8 of the Federal Deposit Insurance Act (hereafter, the "FDI Act") concerning actions that the Federal Reserve may take when a bank holding company engages in unsafe practices apply to supervised securities holding companies as well.  Note that these provisions are also very similar to those contained in the House bill, H.R. 4173.

7.   Proprietary Trading

The restrictions on proprietary trading do not apply to investments or activities conducted by a company pursuant to section 4(c)(9) and (13) of the BHC Act solely outside the U.S. to the extent the company is not directly or indirectly controlled by a company organized under the laws of the United States.

Title II.  Orderly Liquidation Authority

Summary

Title II of the March 15 Print, entitled "Orderly Liquidation Authority" (hereafter "Title II"), like the resolution authority provisions of H.R. 4173, seeks to mitigate the effects from the collapse of a large, systemically significant financial company.  Title II creates a new framework for resolution of financial companies whose failure would pose systemic risks to the U.S. economy (the "Orderly Liquidation Regime").  These systemically significant financial companies are referred to as "covered financial companies" or "CFCs."  Title II is patterned primarily after the FDI Act but some limited features of title 11 of the United States Code (the "Bankruptcy Code") have been adopted.  Title II is applicable to financial companies that otherwise would have been subject to the Bankruptcy Code or the Securities Investor Protection Act ("SIPA").  Financial companies that are determined to fall under the Orderly Liquidation Regime are removed from eligibility under the Bankruptcy Code or SIPA.

Initiation of the resolution of a CFC under the Orderly Liquidation Regime begins when the Corporation and the Board make a recommendation as to whether the Secretary of the Treasury ("Secretary") should appoint the Corporation as receiver for a financial company.  The recommendation must include a number of items, including an evaluation of whether a covered financial company is in default or danger of default and a description of the effect that default would have on the financial stability of the United States.  The Secretary must then determine, based on the written recommendation and after consultation with the President, whether sufficient reasons exist to initiate the Orderly Liquidation Regime under the standards set in the Title.  If the standards set in Title II are met, the Secretary would then petition the Orderly Liquidation Authority Panel (the "Panel"), a three judge panel composed of Bankruptcy Judges from the District of Delaware, for an order authorizing the Secretary to appoint the Corporation  as receiver of the financial company.  If the order is granted, the Corporation would then resolve the CFC under the provisions of the Orderly Liquidation Regime.  If the CFC is a broker-dealer ("covered brokers and dealers" or "CBDs") then the Securities Investor Protection Corporation (the "SIPC") is also appointed as the trustee and special liquidation rules will apply. 

Under Title II, the Corporation, as receiver, would have broad powers over a CFC, including the ability to sell or transfer any asset of the CFC.  The FDIC would also be given authority, with the consent of the Secretary, to expend money from the newly created Orderly Liquidation Fund (the "Fund") to assist in the resolution of the CFC.  The Fund would be created from risk-based assessments on certain financial companies.  The Corporation could also run the day-to-day business of the CFC, as well as create and transfer a CFC’s assets and liabilities to a bridge company, while dissolving the remaining entity.  Title II would authorize the Corporation to take these actions to liquidate the financial company and minimize any impact the collapse of the CFC would have on the financial stability of the United States. 

As the receiver, the Corporation would oversee the distribution of assets under the claims process.  Under Title II, the Corporation would make the initial determination whether and in what amount to allow or disallow a claim.  A claimant whose claim is disallowed could, within a limited time period after the Corporation’s disallowance decision, file a suit to allow such claim in the U.S. district court for the district in which the principal place of business of the CFC is located.  The FDIC’s maximum liability for an allowed claim against the CFC would be limited to the amount such claim would have received if the CFC had been liquidated under chapter 7 of the Bankruptcy Code and the Orderly Liquidation Regime had not been commenced.  These procedures and distribution requirements ensure that creditors are provided with a minimum amount of protection in connection with the Orderly Liquidation Regime, the primary goal of which is preservation of financial stability of the United States. 

Discussion of Key Provisions

1.   Scope of Financial Companies at Issue 

Title II defines "financial companies," to include any company incorporated or organized under any provision of Federal or State law and is (a) a bank holding company, as defined in section 2(a) of the Bank Holding Company Act; (b) a nonbank financial company under the supervision of the Federal Reserve Board under this Title; (c) a company that is predominantly engaged in activities that the Federal Reserve Board has determined are financial in nature or incidental thereto; and (d) any subsidiary of the foregoing.  Title II excludes subsidiaries that are insured depository institutions and insurance companies from the definition of a "financial company."

While Title II excludes subsidiaries of a financial company that are insurance companies from the definition of "financial company," insurance holding companies would not be excluded and may fall within the purview of the Title.  Financial companies that are insurance companies would be excluded under the Title and are resolved under State law but the Corporation could stand in the place of a State regulatory agency for the resolution of such insurance company under State law if the regulatory agency fails to file for judicial action within a specified amount of time. 

2.   Initiation of Resolution Proceedings

Under the March 15 Print, the process for an orderly liquidation for a financial company would begin when the Corporation and the Board, on their own initiative or at the request of the Secretary, make a written recommendation that an orderly liquidation proceeding should be commenced with respect to a financial company.  The Securities Exchange Commission (the "SEC") and the Board would make the written recommendation if the company is a broker or dealer.  The Secretary (in consultation with the President) would need to then determine whether to petition the Panel for an order authorizing the appointment of the Corporation as receiver for the covered financial company.  In making this determination, the Secretary would be obligated to make several findings: that the financial company is in default or danger of default; that the failure of the financial company under otherwise applicable Federal or State law would have serious adverse effects on U.S. financial stability; that no viable private sector alternative exists; that any effect on the claims or interest of creditors, counterparties and shareholders of the financial company as a result of the action taken under the Title is appropriate; that any action taken under the Orderly Liquidation Regime would avoid or mitigate serious adverse effects on U.S. financial stability; and that a Federal regulatory agency has ordered the financial company to convert all of its convertible debt instruments. 

If the Secretary makes these determinations, then the Secretary would petition the Panel to issue an order authorizing the appointment of the Corporation as receiver for the financial company (and, in the case of a CBD, the SIPC as trustee).  If the Panel, after reviewing the findings of the Secretary, concludes that there is substantial evidence to support the Secretary’s finding that the financial company is in default or in danger of default, the Panel would need to enter an order granting the petition and authorizing the appointment of the Corporation as receiver (and, in the case of a CBD, SIPC as trustee).  Default or danger of default is defined as where the financial company has, or will, commence a case under the Bankruptcy Code; the financial company has incurred losses that will deplete all or substantially all of its capital; the assets of the financial company are less than its obligations to creditors; the financial company is unable to pay its obligations in the normal course of business; or the financial company consents to the appointment of the FDIC as receiver.

3.   The Panel; Appeals

Title II of the March 15 Print directs the Chief Bankruptcy Judge of the Delaware Bankruptcy Court to appoint the Panel.  The Panel would be composed of three Delaware Bankruptcy Judges.  In making the appointment, the Chief Bankruptcy Judge is directed to consider each Judge’s expertise in financial matters.  The sole function of the Panel would be to review the Secretary’s petition that the FDIC be appointed as receiver for a financial company, as provided above.

Title II provides the financial company will be given notice of the filing of the petition and an opportunity to be heard by the Panel.  It also allows the financial company or the Secretary to file, no later than 30 days after the date of the final decision of the Panel, an appeal of such decision to the U.S. Court of Appeals for the Third Circuit (hereafter the "Court of Appeals"), provided, however, that the Court of Appeals would not have jurisdiction to hear any appeal by a financial company if it acquiesced or consented to the appointment of a receiver by the Secretary.  A petition for writ of certiorari to review a decision by the Court of Appeals may be filed with the Supreme Court no later than 30 days after the date of the final decision of the Court of Appeals.

While the insolvency of most financial companies would still be governed by the Bankruptcy Code, if a financial company is determined to be a covered financial company and placed under the new Orderly Liquidation Regime, such financial company automatically becomes ineligible to be a debtor under the Bankruptcy Code.  Unlike the resolution authority provisions in the House Bill, Title II requires a judicial determination before a proceeding under the Orderly Liquidation Regime may begin.  While the time allotted for review by the Panel (24 hours) is short and the standard of review (substantial evidence of the determination that the financial company is in default or in danger of default) is deferential to the Secretary, the company that is the subject of the petition would be entitled to participate in the proceedings before the Panel.  The inability to appeal a decision of the Panel if the financial company acquiesced or consented to the appointment of a receiver provides significant leverage for arm twisting by the Corporation of the officers and directors of the financial company.

4.   Funding

 Title II creates the Fund.  The Fund would be established through risk-based assessments on financial companies; the Fund is fully capitalized by such assessments in five (5) to ten (10) years.  The Fund’s target size would be set at $50 billion.  The Corporation could borrow from the Secretary only after the cash and cash equivalents held by the Fund have been drawn.  However, once this event has occurred, the Corporation, as receiver, could sell its obligations to the Secretary, but the Corporation could not issue obligations if the aggregate amount of such obligations outstanding exceeds the sum of cash or cash equivalent held by the Fund and 90 percent of the assets of each CFC that are available to repay the Corporation. 

After the Fund has reached its target size, the Corporation would suspend risk-based assessments on companies unless the Fund falls below the target size, the Corporation is appointed receiver of a CFC and the Fund incurs a loss during the initial capitalization period or the Corporation determines that such assessments are necessary to repay any obligations issued by the Corporation to the Secretary.  The Fund would be replenished through the proceeds received under the liquidation of the CFC and through risk-based assessments. 

Assessments are made on bank holding companies with total consolidated assets over $50 billion and nonbank financial companies supervised by the Board.  Assessments are imposed on a graduated basis with financial companies having greater assets assessed at a higher rate.  Title II imposes a list of factors for the Corporation to consider when imposing such assessments, which includes the risks the financial company poses on the U.S. economy. 

Title II includes both a pre- and a post-funding assessment process.  The language makes it likely that the largest financial companies would shoulder a significant portion of both the ex ante and ex post assessment burdens.  Unlike the House Bill, Title II of the March 15 Print sets a time-line for the Fund to meet its target size through assessments. 

5.   Transparency and Disclosure 

The Secretary, within 48 hours after the appointment of the Corporation as receiver, would be required to provide a summary of the reasoning behind the initiation of the Resolution Proceeding to certain members of Congress.  The Corporation, as receiver, would have an obligation to file schedules of the covered financial company’s assets and liabilities as of the appointment of the Corporation as receiver under the Title in essentially the same form as in a case under the Bankruptcy Code.  The Title requires these schedules to be filed within sixty (60) days after the commencement of the resolution proceedings.  Title II also imposes other reporting requirements on the Corporation.

The requirement to file disclosure schedules and satisfy other reporting requirements provides more transparency than is provided in the FDI Act or the House bill, H.R. 4173.  This should provide creditors with key information, promote public confidence in the resolution process and avoid the appearance of impropriety.  The rules and procedures for the reporting requirements are to be developed subsequent to passage of the legislation, so it remains to be seen whether sufficient information will actually be disclosed in a timely manner to ensure that the foregoing goals are satisfied.

6.   Treatment of Secured Claims and Security Entitlements

Title II generally protects security interests granted to secured creditors where the CFC holds the assets or property which is subject to such security interests, and provides that such secured creditors shall be secured to the extent of the fair market value of their collateral.  The Corporation would be able to prime a secured creditor’s collateral position to secure a loan for a bridge company but it must provide such creditor with adequate protection, and the Corporation would have the burden of proof on whether adequate protection has been provided.  An under-secured creditor would also have an unsecured, deficiency claim.  The Corporation’s maximum liability for the deficiency claim of a secured creditor would be limited to what such creditor would have been entitled to receive if the covered financial company had been liquidated under chapter 7 of the Bankruptcy Code, again assuming that no Orderly Liquidation Regime had been commenced.  The determination as to what a secured creditor would be entitled to receive on its allowed deficiency claim would be made by the Corporation.  Title II allows preference and fraudulent conveyance challenges of perfected security interests.  Title II also precludes avoidance of any legally enforceable and perfected interests in customer property.

Title II is slightly ambiguous but there is language and clear intent to protect legally enforceable and perfected security interests.  A secured creditor has first claim to the fair market value of the assets that secure such creditor’s claim.  There is no express provision as to the point in time at which such fair market value is measured.  Thus, there may be disagreement about the appropriate measurement date for the fair market value of the collateral and even whether fair market value is evaluated assuming initiation or absence of the Orderly Resolution Regime.  Each of these issues could have a meaningful impact on a secured creditor.  For example, the fair market value of a parcel of real estate may be significantly different if the valuation is made during the crisis without commencement of an Orderly Liquidation Regime, during the crisis with implementation of an Orderly Liquidation Regime or at some point subsequent to the resolution of the crisis.

7.   Miller/Moore Haircut Language

Title II of the March 15 Print does not contain any language that would treat any portion of a secured claim as an unsecured claim. 

Note that the House bill, H.R. 4173, contains language that allows the FDIC to treat any claim arising under a qualified financial contract ("QFC") as if it were an unsecured claim for an amount of up to ten (10) percent of the otherwise secured claim.  Such "haircuts" could be used as necessary to satisfy any amounts owed to the United States or the Systemic Dissolution Fund created under the House bill.  The lack of such haircut in Title II will increase certainty related to the treatment of QFCs and likely favorably impact pricing and availability of these financial instruments.

8.   Priority of Unsecured Claims

Title II gives priority to claims of the U.S. against the CFC, including any obligation owed to the Fund, over other unsecured creditors.  In addition, Title II allows any obligation "necessary and appropriate" for the smooth resolution of the CFC to qualify as an administrative expense, which is given the highest priority level among unsecured creditors. 

9.   Valuation

Title II provides that the maximum liability of the Corporation to any creditor of the CFC is the amount such creditor would have received in a chapter 7 liquidation of the CFC in the absence of a proceeding under the Orderly Liquidation Regime.  The Corporation may make additional payments to a claimant if the Corporation determines that such actions would minimize losses to the Corporation as receiver.  Title II contains special provisions for the valuation of claims in the resolution of a covered broker or dealer. 

10.   Disputed Claims

Title II provides that the Corporation, within approximately 180 days or so after a claim is filed, will make the initial determination as to whether and in what amount to allow or disallow such claim.  An expedited determination procedure is available for the resolution of claims secured by a legally valid and enforceable or perfected security interest if the claimant can show irreparable injury will result from the normal claims’ determination process.  A claimant that disagrees with the proposed treatment may, within a limited time period after the Corporation’s disallowance decision, file a suit to allow such claim in the U.S. district court for the district in which the principal place of business of the CFC is located.  The Title does not specify the standard of review to be applied by the U.S. district court.

11.   Preferences and Fraudulent Transfers 

Title II provides that the Corporation may avoid preferential and fraudulent transfers made in the period prior to the commencement of the resolution proceedings, in order to conserve assets of the estate to be distributed among all its creditors.  The preferential and fraudulent transfer provisions of Title II are similar, but not identical, to those set forth in the Bankruptcy Code. 

Adoption of the Bankruptcy Code preference and fraudulent conveyance standards adds certainty and predictability to the resolution process.  Creditors know and understand these rules.  However, it is important to note that the Title does not include any language providing that, in interpreting the preference and fraudulent conveyance provisions, precedent under the Bankruptcy Code will be utilized and, indeed, the Corporation opposed the inclusion of any such language.  Moreover, while Title II allows a transferee to assert many of the defenses set forth in the Bankruptcy Code to prevent the avoidance of a transfer, not all such defenses are preserved.  A transferee has the defenses provided under sections 546(b) and (c), 547(c) and 548(c) of the Bankruptcy Code but does not have the defense available under 546(e).  That section, among other things, protects from avoidance under the Bankruptcy Code payments that are settlement payments.

12.   Set-Off

Similar to the Bankruptcy Code, Title II allows the set-off of mutual debts owed by the CFC to a debtor against a claim of the CFC against the debtor.  However, there are additional limitations regarding the set-off rights of creditors.

The set-off provision is patterned after section 553 of the Bankruptcy Code.  In contrast, the House Bill and the FDI Act have no specific set-off provision.  However, unlike the Bankruptcy Code, a creditor’s set-off right does not entitle it, in effect, to a secured claim.  Rather, the set-off claim is treated as a priority unsecured claim which is paid behind administrative claims and certain other obligations, but before general unsecured claims.

13.   Automatic Stay and Qualified Financial Contracts

Under Title II, counterparties are stayed from terminating, liquidating and netting rights under QFCs for five (5) business days while the Corporation determines whether to terminate or transfer the QFCs of the covered financial company.  This period is intended to give the Corporation time to choose whether to transfer all or none of the QFCs, claims and property of any counterparty and its affiliates to another financial institution which is not the subject of receivership, bankruptcy or other insolvency proceeding, including to a "Bridge Company." 

Title II provides for a longer automatic stay than the FDI Act or the House bill, H.R. 4173, which provides for an automatic stay of all QFCs for one business day, giving the FDIC additional time to review and analyze the QFCs of a CFC. 

14.   Contract Assumption/Rejection

Title II allows the assumption, assignment and rejection of executory contracts, unexpired leases and other contracts which are "burdensome" whose disaffirmance would promote the orderly administration of the affairs of the CFC. 

The assumption, assignment and rejection provisions do not correspond to those in the Bankruptcy Code.  The Bankruptcy Code provides restrictions on the extent to which contracts and leases can be assumed and assigned.  Under the Bankruptcy Code, executory contracts and unexpired leases cannot be assumed and assigned without first curing all defaults, compensating for damages and providing adequate assurance of future performance.  None of these standards are set forth in the Title.  Title II also does not include the Bankruptcy Code’s restrictions on the ability to assign certain types of executory contracts. 

15.   Precedent and Rulemaking

Title II requires the Corporation to prescribe rules and regulations the Corporation considers necessary and appropriate to implement Title II.  Title II provides that these rules and regulations should harmonize the Orderly Liquidation Regime with other insolvency law.

There are no provisions that relevant precedent under the Bankruptcy Code and Bankruptcy Rules should govern a proceeding involving the CFC.  Thus, creditors will not be able to rely on this precedent to provide predictability or certainty. 

Title III.   Elimination of the Office of Thrift Supervision and Agency Reorganization

Summary

Title III of the March 15 Print eliminates OTS and restructures regulatory authority for holding companies among the three remaining federal banking agencies.  It is intended to streamline bank supervision and create clear lines of responsibility among bank regulators.  Today there are four Federal banking agencies that could be given the authority to supervise large systemically significant institutions, small local ones, Federal and State banks and thrifts, and holding companies.  The March 15 Print calls for the elimination of one regulator, the OTS, and would streamline responsibilities of the remaining three.  Much of the mechanics of this transfer of regulatory authority is contained within Title III, while a number of the substantive provisions for depository institutions and holding companies are included within Title VI.  The new lines of responsibility broadly would be as follows: 

  • FDIC: would regulate state banks and thrifts of all sizes and bank holding companies of state banks with assets below $50 billion.
  • OCC: would regulate national banks and Federal thrifts of all sizes and the holding companies of national banks and Federal thrifts with assets below $50 billion.  The Office of Thrift Savings would be eliminated, existing thrifts would be grandfathered in, but no new charters for Federal thrifts would be granted.
  • Federal Reserve: would regulate bank and thrift holding companies with assets of over $50 billion, where the Fed’s capital market experience will enhance its supervision.  The Federal Reserve would be charged with finding risks in the bank holding company or its subsidiaries.  The Vice Chair of the Federal Reserve would be responsible for supervision and will report semi-annually to Congress. 

1.   Transfer of Powers and Duties

Abolishment of the OTS.  Section 313 of the March 15 Print abolishes the Office of Thrift Supervision (hereafter the "OTS") and the position of Director of the OTS.  Certain mechanics of abolishing the agency, including relating to savings provisions such as providing for the continuation of suits and the continuation of existing orders and regulations, are provided for in section 316, whereas changing references in Federal law to the agencies taking on former OTS responsibilities is covered in section 317.

Timing of Transfer.  The timing of the transfer of powers and duties from the OTS to the remaining bank regulators is set in this subtitle.  Initially scheduled for one year after the date of enactment of the Act, the Secretary of the Treasury in consultation with each of the four bank regulators can extend the period for an additional six months if certain procedural requirements (written notice to House and Senate bank regulatory committees) are met.  The Secretary of the Treasury is also required to publish a notice of the transfer date within 270 days of enactment of the Act.

OTS Powers and Duties Transferred.  The functions of the OTS, which would be dissolved by the March 15 Print, are divided up between the remaining Federal bank regulators in section 312 of the Senate bill as follows: 

  • Board of Governors of the Federal Reserve:  The Board would be charged with supervision of savings and loan holding companies that have $50 billion or more in total consolidated assets and any of their subsidiaries, including all rulemaking authority that the OTS formerly had over these companies.  The Board would also receive all rule-making authority of the OTS relating to transactions with affiliates and extension of credit to executive officers, directors, and principal shareholders.
  • Comptroller of the Currency:  The Comptroller would be charged with supervision of savings and loan holding companies that have both (i) less than $50 billion in total consolidated assets and (ii) either only Federal insured depository institution subsidiaries or both Federal and State depository institution subsidiaries where the total consolidated assets of all the Federal depository institution subsidiaries exceeds the total consolidated assets of all of the State depository institution subsidiaries (in which case the Comptroller supervises all of the company’s subsidiaries, including all rulemaking authority that the OTS formerly had over these companies).  The Comptroller would also receive all rulemaking authority of the OTS relating to savings associations and Federal savings associations.
  • Federal Deposit Insurance Corporation:  The Corporation would be charged with supervision of savings and loan holding companies that have both (i) less than $50 billion in total consolidated assets and (ii) either only State insured depository institution subsidiaries or both Federal and State depository institution subsidiaries where the total consolidated assets of all the State depository institution subsidiaries exceeds the total consolidated assets of all of the Federal depository institution subsidiaries (in which case the FDIC supervises all of the company’s subsidiaries, including all rulemaking authority that the OTS formerly had over these companies).  The FDIC also would take on all OTS functions relating to State savings associations (except for the rulemaking authority transferred to the Comptroller).

Board Functions Transferred.  The bank holding company functions of the Board would be transferred as follows: 

  • Comptroller of the Currency:  The Comptroller would receive all functions of the Board (including the Federal reserve bank) relating to the supervision of any bank holding company having less than $50 billion in consolidated assets that has either (i) only Federal insured depository institution subsidiaries or both Federal and State depository institution subsidiaries where the total consolidated assets of all the Federal depository institution subsidiaries exceeds the total consolidated assets of all of the State depository institution subsidiaries (in which case the Comptroller supervises all of the company’s subsidiaries).  However, no Board rule making authority would be transferred (that is, the Board would retain all rulemaking authority under the Bank Holding Company Act).
  • Corporation.  The FDIC would receive all functions of the Board (including the Federal reserve bank) relating to the supervision of any bank holding company having less than $50 billion in consolidated assets that has either (i) only State insured depository institution subsidiaries or (ii) both Federal and State depository institution subsidiaries where the total consolidated assets of all the State depository institution subsidiaries exceeds the total consolidated assets of all of the Federal depository institution subsidiaries (in which case the FDIC supervises all of the company’s subsidiaries).  However, no Board rule making authority would be transferred (that is, the Board would retain all rulemaking authority under the Bank Holding Company Act). 

Consultation in Rulemaking Requirements.  Before proposing or adopting regulations under this section that apply to savings and loan holding companies having less than $50 billion in total consolidated assets, the Board would need to consult with the Comptroller and the Corporation.  In addition, before proposing or adopting regulations applicable to State savings associations, the Comptroller would need to consult with the Corporation. 

Determination of Total Consolidated Assets.  Calculating total consolidated assets determines which Federal regulator will have supervision over an institution.  March 15 Print section 312(e) provides that the Comptroller, the FDIC and the Board will jointly issue regulations within 180 days of enactment of the Act specifying the source data for determining the total consolidated assets of a depository institution, bank holding company or savings and loan holding company and also the interval and frequency at which total consolidated assets will be determined.  These regulations would need to use information contained in regulatory reports, audited financial statements and comparable sources and must set determination intervals that avoid undue disruption in regulatory oversight, facilitate transfers of regulatory responsibility and are not shorter than 2 years.  However, until these joint regulations are issued, the March 15 Print provides that total consolidated assets will be determined for a depository institution by reference to the total consolidated assets reported on the most recent Consolidated Report of income and Condition or Thrift Financial Report filed with the Corporation or OTS, for a bank holding company by reference to the Consolidated Financial Statements (the FR Y-9C) filed with the Board, and for a savings and loan holding company by reference to the most recent Thrift Financial Report filed with the OTS. 

Funding of the Office of the Comptroller – Promoting Parity in Supervision Fees.  The March 15 Print provides, at section 318, that the Comptroller may collect an assessment as needed to carry out its responsibilities.  It also provides that, with regard to examination fees, the Comptroller must submit to the Board of Directors of the Corporation a proposal to promote parity in the examination fees paid by State and Federal depository institutions with total consolidated assets of less than $50 billion.  This plan is to propose a transfer from the Corporation to the Comptroller of a percentage of the amount that the Comptroller estimates is needed to carry out its responsibilities associated with supervising Federal depository institutions with less than $50 billion in total consolidated assets. 

Funding of the Board.  The Board would have the power to collect assessments from all bank holding companies with total consolidates assets of $50 billion or more, savings and loan holding companies with total consolidated assets of $50 billion or more and nonbank financial companies supervised by the Board under section 113 of the Act, that equal the total expenses the Board estimates is needed to carry out its responsibilities with respect to these companies.   

2.   Transitional Provisions

Subtitle B of Title III relates to the mechanics of closing the OTS.  Section 321, for example, relates to the interim use of funds, personnel and property between the date the Senate bill becomes law and the date the powers of the OTS are transferred to the three remaining Federal bank regulators.  In general, consultation and cooperation on transitional decisions is required between the OTS, the Comptroller, the Corporation and the Board.  The employees of the OTS would be transferred to the Comptroller and the Corporation as determined by the OTS, Comptroller and Corporation.  Transferred employees get credit for time served working for Federal home loan banks or a Federal reserve bank as though they worked for a Federal agency.  In addition, no OTS employee holding a permanent position on the day before the date an employee is transferred can be involuntarily separated or involuntarily reassigned outside the locality pay area for 2 years after the transfer date, nor can they be paid less than the basic rate of pay the employee received during the pay period immediately before the date the employee was transferred for 2 years, except for cause. 

3.   Federal Deposit Insurance Corporation

Subtitle C strikes the provision of the FDI Act that allowed the Corporation to establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund.  It also sets a formula for the assessment base.  That formula, set out in section 331(b), is the average total consolidated assets of an insured depository institution minus the sum of the average tangible equity of the institution and the average long-term unsecured debt of the institution.  Note that secured loans are included in the assessment base.  The March 15 Print also provides for the Corporation to submit a finding to Congress that the assessment base formula reduces the effectiveness of the risk-based assessment system of the Corporation within a year, in which case it can use a different formula.

4.   Termination of Federal Thrift Charter

Subtitle D provides that the OTS and Comptroller may not issue charters for a Federal savings association.  However, it also provides that any savings association that becomes a bank may continue to operate any branch or agency that it operated immediately before becoming a bank.

Title V.   Insurance

Summary

Title V of the March 15 Print would establish an "Office of National Insurance," which would be responsible for monitoring the insurance industry, coordinating international insurance issues, and conducting a study on ways to modernize insurance regulation.  Further, Title V would seek to streamline the regulation of surplus lines insurance and reinsurance through state-based regulatory reforms. 

Key Provisions

1.   Office of National Insurance

Title V would establish an Office of National Insurance within the Department of the Treasury (hereinafter "the Office").  The Office would be headed by a Director, to be appointed by the Secretary. 

The scope of the Office’s authority will extend to all lines of insurance except health insurance.  Among other things, the Office will have the authority to:

  • Monitor all aspects of the insurance industry, identifying issues or gaps in regulation that could contribute to systemic crisis in the insurance industry;
  • Recommend to the Financial Stability Oversight Council that it designate an insurer (and its affiliates) as an entity subject to the Board of Governor’s supervision under Title I;
  • Coordinate Federal efforts and develop Federal policy on the prudential aspects of international insurance matters;
  • Determine whether state insurance measures are preempted by International Insurance Agreements on Prudential Measures; [5]
  • Consult with states and state insurance regulators regarding insurance matters of national and international importance; and
  • Advise the Secretary on major domestic and prudential international insurance policy issues.

In order to carry out these functions, the Office would be authorized to receive and collect data and information from the insurance industry and insurers.  The Director could, upon a written finding, require by subpoena an insurer to produce data or information necessary for the Office to carry out its functions.  The Office, however, could not require a small insurer to submit such data or information, with the threshold for the minimum size for such exemption to be established by the Office. 

With regard to preemption of state insurance measures, the March 15 Print prescribes that a state insurance measure would be preempted only to the extent that such measure (1) results in less favorable treatment of a non-U.S. insurer domiciled in a foreign jurisdiction that is subject to an international, prudential insurance agreement than a United States insurer and (2) is inconsistent with an International Insurance Agreement on Prudential Matters.  Before making a determination regarding such preemption, the Director would need to comply with Title V’s notice requirements.  The language of Title V clarifies that the Office will not have authority to preempt any state insurance measure governing rates, premiums, underwriting, sales practices, coverage requirements, or state antitrust laws applicable to insurance.  Further, nothing in this section will preempt any state insurance measure governing the capital or solvency of an insurer except to the extent that such state insurance measure directly results in less favorable treatment of a non-U.S. insurer. 

The March 15 Print provides that, beginning on September 30, 2011, the Director must submit an annual report to the President, the Senate Committee on Banking, Housing, and Urban Affairs, and the House Committee on Financial Services, which describes the insurance industry, any actions taken by the Office regarding the preemption of state insurance measures, and any other information deemed relevant or requested by the Committees. 

Finally, no later than 18 months after Title V is enacted, the Director would need to conduct a study and submit a report to Congress on how to modernize and improve the system of insurance regulation in the United States.  This study and report would be guided by considerations of systemic risk regulation, capital standards, consumer protection, the degree of national uniformity of state insurance regulation, the regulation of insurance companies and affiliates on a consolidated basis, and international coordination of insurance regulation.  The March 15 Print also enumerates additional factors that the study should examine including the costs, benefits, feasibility, and effects of potential Federal regulation of insurance, as well as the potential consequences of subjecting insurance companies to a Federal resolution authority. 

The newly established Office of National Insurance would be primarily an information collection and monitoring agency, with some authority in the realm of international insurance agreements.  These provisions largely mirror those governing the Federal Insurance Office under H.R. 4173.  The language of the bill makes clear that the Office has no general supervisory or regulatory authority over the business of insurance.  It preserves the primary role of states in regulating insurance, in so far as the Office is barred from preempting state insurance laws governing rates, premiums, coverage requirements, antitrust laws, underwriting, or sales practices.  That said, the March 15 Print does direct the Office to conduct a study that considers the potential risks and benefits of a Federal system of insurance regulation. 

2.   State-Based Insurance Reforms — Nonadmitted Insurance & Reinsurance

Under Subtitle B of Title V, no state other than the home state of an insured could require any premium tax payment of nonadmitted insurance.  States could enter into a compact to allocate among themselves the premium taxes paid to an insured’s home state and, according to the bill, Congress intends that each state adopt nationwide uniform requirements, forms, and procedures that provide for the reporting, payment, collection, and allocation of such taxes.  Additionally, the placement of nonadmitted insurance would be subject to the statutory and regulatory requirements of the insured’s home state only.  Thus, the home state (and not any other state) could require a surplus lines broker to be licensed in order to sell, solicit, or negotiate such nonadmitted insurance.

The March 15 Print also provides for uniform standards for surplus lines eligibility among states, as well as streamlined applications for surplus lines brokers who seek to procure nonadmitted insurance for commercial purchasers. 

With regard to reinsurance, Title V establishes regulations pertaining to credits for reinsurance and the preemption of certain state law as it applies to a ceding insurer.  Namely, the bill provides that if the domiciliary state[6] of a ceding insurer is an National Association of Insurance Commissioners (NAIC)-accredited state and it recognizes credit for reinsurance for the insurer’s ceded risk, then other states may not deny such credit.  Further, all laws, regulations, provisions, or other actions of a state that is not the domiciliary of the ceding insurer (except those with respect to taxes and assessments) would be preempted to the extent that they restrict the rights of the ceding insurer to resolve disputes pursuant to contractual arbitration or otherwise apply the state’s laws to reinsurance agreements of ceding insurers not domiciled in that state. 

Finally, the bill seeks to limit the regulation of a reinsurer’s financial solvency to its domiciliary state, so long as such that state is NAIC-accredited or has similar financial solvency requirements.  If this is the case, no other state could require the reinsurer to provide any additional financial information other than that required by the domiciliary state. 

Title V provides for state-based reforms that seek to streamline the regulation of surplus lines of insurance and reinsurance.  In particular, the bill seeks to assert the primary regulatory authority of an insured’s home state with regard to surplus lines and the insurer’s domiciliary state with respect to reinsurance. 

Title VI.   Enhanced Regulation of Depository Institution Holding Companies

Summary

Title VI sets out significant enhancements to the regulation of depository institutions and their holding companies, including an aggressive version of the much discussed "Volcker Rule". 

It places a three-year moratorium on acquisitions of, or the provision of deposit insurance to, any new credit card banks, industrial loan companies and trust banks (as defined in the title) by a "commercial firm".  It also defines "commercial firm" to mean any entity that derives at least 15% of its consolidated gross revenue from activities that are not financial in nature.  In addition, a study of these institutions is to be conducted by the Comptroller.

Title VI also changes existing law for banks, thrifts and their holding companies, including: requirements concerning examinations; a requirement that financial holding companies remain well capitalized and well managed; a source of strength requirement; a provision relating to interstate acquisitions; provisions relating to affiliate transactions; lending limits applicable to credit exposure on derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending and borrowing transactions; de novo branching; insider transactions; securities holding companies; and concentration limits.

As noted, the title also contains provisions referred to popularly and by the President as the "Volcker Rule".  The provisions constituting the Volker Rule include restrictions on capital market activity by banks and bank holding companies, restrictions on proprietary trading and limitations on relationships with hedge funds and private equity funds.

Key Provisions

1.   Study and Moratorium on New Credit Card Banks, Industrial Loan Companies, and Trust Banks Controlled by a Commercial firm

Title VI of the March 15 Print prohibits the Corporation from approving an application for deposit insurance for a industrial bank, a credit card bank, or a trust bank that is directly or indirectly owned or controlled by a commercial firm, which is received after November 10, 2009.  Further, the bill provides that the appropriate Federal banking agency must disapprove a change of control (under section 7(j) of the FDI Act) for such a company if the change would result in direct or indirect control of the industrial bank, credit card bank, or trust bank by a commercial firm.  Exceptions are provided in the case that such company is in danger of default, or the change of control results from the merger or whole acquisition of a commercial firm that already controls the company with another commercial firm.  These moratoriums are to remain in effect for three years after the enactment of Title VI. 

Additionally, the March 15 Print requires the Government Accountability Office to conduct a study of whether it is necessary to eliminate exceptions to the bank holding company definition contained in sections 2(a) and 2(c) of the BHC Act.  The study would need to identify the types and number of institutions excepted from section 2of the BHC Act, as well as determine the adequacy of the Federal bank regulatory framework applicable to these institutions and evaluate the potential consequences of subjecting such companies to the BHC Act. 

2.   Amendments to the BHC Act Regarding Reports and Examinations of Holding Companies and Regulation of Functionally Regulated Subsidiaries

Title VI amends the BHC Act to provide that the appropriate Federal banking agency for a bank holding company must, to the fullest extent possible, use reports that the company or its subsidiary has provided to other Federal or state regulatory agencies and rely on information provided in externally audited financial statements or otherwise available publicly or from other agencies, rather than requesting such information from the bank holding company.  Further, the appropriate regulatory agency is authorized to conduct examinations of the bank holding companies it regulates in order to determine the nature of these companies’ operations and risks posed.  In doing so, the appropriate Federal banking agency is directly to rely on examination reports made by other agencies and to coordinate with other regulators.  Further, the Home Owners’ Loan Act is amended so as to allow the appropriate Federal banking agency for a savings and loan holding company to conduct such examinations.

Title VI amends Section 5(c)(3) of the BHC Act so as to eliminate current language prohibiting the board from imposing capital requirements on certain functionally regulated subsidiaries of a bank holding companies.  It also strikes 5(c)(4) which relates to functional regulation of securities and insurance activities. 

3.    Acquisitions under the BHC Act

With regard to acquisitions, the March 15 Print amends the BHC act so as to direct appropriate Federal banking agencies to take into consideration the extent to which a proposed acquisition, merger, or consolidation between banks (or a bank and a nonbank) would result in greater or more concentrated risks to the stability of the United States banking or financial system.  The bill adds an exception to the general rule that approval is not required for a financial holding company to commence an activity or acquire a company under section 4 of the BHC Act.  Under this new language, a financial holding company must receive the prior approval of the appropriate Federal banking agency if it seeks to engage in a transaction in which it will acquired total consolidated assets exceeding $25 billion. 

4.   Oversight of Depository Institutions’ and Their Subsidiaries’ Activities

Title VI seeks to insert a new section 6 to the BHC Act, entitled "Assuring Consistent Oversight of Permissible Activities of Depository Institution Subsidiaries of Holding Companies."  Under this new section, the lead Federal banking agency for each depository institution holding company must conduct examinations of the activities of such institution and its subsidiaries in order to determine whether the activities present safety and soundness risks, are conducted in accordance with applicable law, and are subject to appropriate systems for monitoring and controlling financial risks.  Based on the information collected in such examinations, the banking agency may submit a recommendation to the Board  that it take enforcement action against a nondepository subsidiary of the depository institution where appropriate.  If the Board does not take such recommended enforcement action within a specified time period, the lead Federal agency may take such action.

5.   Requirement for Financial Holding Companies to Remain Well-Capitalized and Well Managed

The March 15 Print amends section 4(l)(1) of the BHC Act to add the condition that a bank holding company must be well-capitalized and well-managed in order to engage in expanded financial activities under the BHC Act.

6.   Enhancing Restrictions on Bank Transitions with Affiliates — Securities Lending and Derivatives Transactions

Section 608 of the March 15 Print enhances existing restrictions on bank transactions with affiliates by amending Section 23A of the Federal Reserve Act.  Specifically, the term "affiliate" is redefined to include "any investment funds with respect to which a member bank or affiliate thereof is an investment advisor," replacing a more complex provision that currently includes as an affiliate any company that is sponsored or advised on a contractual basis by a member bank or that is an investment company for which a member bank is an investment advisor as defined in the Investment Company Act.  Section 608 also amends the definition of "covered transaction" to move the reference to repurchase agreements – "a purchase of assets subject to an agreement to repurchase" — which reference currently appears in a provision relating to the purchase of assets to a provision relating to loans and extensions of credit.  In addition, securities lending transactions are added as a new element in the "covered transactions" definition, as are derivative transactions "to the extent that the transaction causes a member bank or a subsidiary to have credit exposure to the affiliate".  Similarly, section 608 also amends the section of the affiliate transactions rule relating to the provision of collateral in transactions with affiliates.  The types of transactions that must be secured with collateral would be expended to include specifically "any credit exposure of a member bank or a subsidiary to an affiliate resulting from a securities borrowing or lending transaction or a derivative transaction…"  Also, the section dealing with exceptions to the affiliate transactions rule is amended to add that the section does not apply to "having credit exposure resulting from a securities borrowing or lending transaction, or derivative transaction to" an affiliate that is fully secured by either obligations of the U.S., that are guaranteed by the U.S. or a segregated, earmarked deposit account with the member bank.

Section 608 also amends the rulemaking and additional exemptions provisions of the affiliate transactions rule to the following effect:

  • The Board would no longer to exempt transactions or relationships from the affiliate transaction rules "by order" but rather would need to do so "by regulation."
  • The Board would not only need to find that any exemption is in the public interest and consistent wit the purposes of the affiliate transactions rules, but also the Chairperson of the Corporation would need to receive notice of the Board’s finding that the exception was in the public interest and "not object, in writing" to the finding.

7.   Eliminating Exceptions for Transactions with Financial Subsidiaries

Title VI amends Section 23A(e) of the Federal Reserve Act by striking the paragraph that excepts transactions with financial subsidiaries from the rules governing the circumstances under which a bank and its subsidiaries may engage in a covered transaction with an affiliate.

8.   Limits on Lending to Insiders

The March 15 Print amends the current law regarding loans by member banks to their executive officers, directors, and principal shareholders by specifying that the term "loans and extensions of credit" includes: all direct or indirect advances of funds to a person made on the basis of any obligation of that person to repay the funds; any liability of a national banking association to advance funds to or on behalf of a person pursuant to a contractual commitment (to the extent specified by the Comptroller); and credit exposure to a person arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or securities borrowing transaction between the national banking association and the person.  Additionally, the bill applies these lending limits (contained in Section 5200 of the Revised Statutes of the United State) to each insured state bank in the same manner and to the same extent as if it were a national banking association.

The Federal Reserve Act section dealing with extensions of credit to executive officers, directors, and principal shareholders of member banks would also be amended by expanding the scope of "extension of credit" to include cases whether the member bank has credit exposure to a person arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction. 

Title VI also amends the FDI Act by inserting a new subsection that would prohibit an insured depository institution from purchasing an asset from or selling an asset to one of its executive officers, directors, or principal shareholders (or any related interest of such person) unless: (1) the transaction is on market terms and (2) the transaction is approved by the majority of the institution’s uninterested directors, if the transaction comprises of more than 10 present of the institution’s capital stock and surplus. 

9.   Conversions of Troubled Banks and Savings Associations

The bill amends the current law related to the conversion of national banking associations by inserting a new section that prohibits conversions of troubled banks and thrifts.  Specifically, under this new section, a national bank would be prohibited from converting to a state bank during any time in which it is subject to a cease and desist order, memorandum of understanding, or other enforcement action entered into with or issued by the Comptroller.  Likewise, the Comptroller would be prohibited from approving such a conversion during this time. 

The Home Owners’ Loan Act would also be amended to prohibit the conversion of a Federal savings association to a state savings association during any period of time in which such savings association is subject to a cease and desist order, memorandum of understanding, or other enforcement action entered into with or issued by the Director of the Office of Thrift Supervision or a state savings association supervisor. 

10.   Source of Strength Requirements

Title VI requires a bank holding company or savings and loan holding company that has a depository institution subsidiary to serve as a source of financial strength for that subsidiary.  If an insured depository institution is not a subsidiary of a bank holding company or savings and loan holding company, the appropriate Federal banking agency for the insured depository institution must require any company that directly or indirectly controls the insured depository institution to serve as a source of financial strength for it.

11.   Restrictions on Proprietary Trading by Banks and Bank Holding Companies — the Volcker Rule

Title VI requires the appropriate Federal banking agencies to jointly prohibit proprietary trading and investment in or sponsorship of hedge funds and private equity funds by an insured depository institution, a company that controls an insured depository institution or is treated as a bank holding company for purposes of the BHC Act, and any subsidiary of such company, subject to the recommendations and modifications of the Council.  Such prohibitions will not apply to investment in obligations of the United States or obligations and instruments of various agencies and associations, such as the Federal Home Loan Mortgage Corporation, or investment in a small business investment company.  Further, the prohibitions will not apply to investments or activities conducted by a foreign-organized company whose business is conducted outside the United States or a company that does no business inside the United States except as incident to its international business, provided that the company is not directly or indirectly controlled by a company that is organized under the laws of the United States. 

It is important to note that the prohibitions on proprietary trading and on engaging in covered transactions with hedge funds and private equity funds extend not only to depository institutions and companies engaged primarily in financial activities, but also to any "company that controls an insured depository institution" or is treated as a bank holding company, and any of their subsidiaries.  However, the additional capital requirements and quantitative limitations to be adopted by the Board would apply only to ‘nonbank financial companies supervised by the Board’ that engage in proprietary trading or sponsoring and investing in hedge funds and private equity funds.

The appropriate Federal agencies must also place limitations on the relationships that banks, their affiliates and bank holding companies can have with hedge funds and private equity funds.  When a bank, or its subsidiary or bank holding company, serves as an investment manager or adviser to a hedge or private equity fund, it cannot enter into covered transactions with the fund, and the fund as treated as if it were an affiliate of the bank. 

The March 15 Print also directs the Board to adopt rules imposing additional capital requirements and quantitative limits on nonbank financial companies supervised by the Board under section 113 of Title I, which engage in proprietary trading or sponsoring and investing in hedge funds and private equity funds.

12.    Concentration Limits on Large Financial Firms

Title VI places a concentration limit on large financial firms such that, subject to recommendations by the Council, a financial company may not merge or consolidate with, acquire all or substantially all of the assets of, or otherwise acquire control of another company if the total consolidated liabilities of the acquiring financial company would exceed 10% of the aggregate consolidated liabilities of all financial companies at the end of the year, as a result of the transaction.  This limit will not, however, apply to an acquisition of a bank in default or in danger of default, or transactions for which the Corporation provides assistance, or those that would result only in a de minimis increase in liabilities. 

Title VII.  Derivatives Regulation

Summary

Title VII of the March 15 Print would impose new regulations on the over-the-counter derivatives market.  Chairman Dodd’s summary of the bill indicates that the title is designed to "buffer the financial system from excessive risk-taking," and that, instead of reducing risk, some over-the-counter derivatives were used by traders "to make enormous bets with no regulatory oversight or rules and therefore exacerbated risk."  To address these risks, the legislation would impose clearing, margining, and exchange-trading as well as reporting and transparency requirements and would require regulators to consider risks to the financial system when writing rules and regulations.  The title also would impose higher capital and margin requirements on non-cleared and non-exchange traded transactions.

Like the House bill, H.R. 4173, Title VII would establish parallel regimes to regulate swap markets and security-based swap markets.  Subtitle A would regulate swap markets, which would be overseen by the CFTC; Subtitle B would impose parallel regulations on security-based swap markets, which would be overseen by the SEC.  Subtitle C includes a variety of other provisions, including standards for international harmonization and interagency cooperation.

Derivatives end-users have been advocating for an exemption from the clearing and other requirements imposed by the title.  The exemption contained in this title is not being received well by the end-user community because it does not provide much certainty as to which companies would be exempt.  Instead, the exemption turns on relatively general terms that are to be interpreted by the CFTC and SEC.  It is likely that the end-user community will seek to change this language in committee or on the floor.

It is also important to note that the derivatives title issued by Chairman Dodd is based largely on his November 2009 draft and includes a relatively small number of modifications.  At Chairman Dodd’s request, Senators Jack Reed and Judd Gregg have been working to produce a bipartisan derivatives title.  They are continuing to hammer out issues and have indicated that they plan to produce a replacement for this draft title either before the mark-up set to begin on March 22 or when the bill goes to the Senate floor as part of a Manager’s Amendment.  

Discussion of Key Provisions

1.   "Swap Dealer" and "Security-based Swap Dealer"

The term "[security-based] swap dealer"[7] would include any person "engaged in the business of buying and selling [security-based] swaps for such person’s own account, through a broker or otherwise."  The term does not include anyone who buys or sells swaps or security-based for his own account, either individually or in a fiduciary capacity, but does not do so as a part of regular business.

Swap dealers must register as such with the CFTC; security-based swap dealers must register with the SEC.

The definition of "swap dealer" is somewhat ambiguous as to whether it could encompass an affiliate of a company that enters into swap on behalf of the company or its affiliates but does not hold itself out as a dealer or make a market in swaps.  It is likely that the bill is not intended to include such entities within the definition of "swap dealer."  Assuming that is the case, the definition would benefit from additional clarity in this regard.

2.   "Major Swap Participant" and "Major Security-based Swap Participant"

Title VII defines "major [security-based] swap participant" as "any person who is not a [security-based] swap dealer and (i) who maintains a substantial net position in outstanding [security-based] swaps, excluding positions held primarily for hedging, reducing, or otherwise mitigating commercial risk; or (ii) whose failure to perform under the terms of its [security-based] swaps would cause significant credit losses to its [security-based] swap counterparties."  The SEC and CFTC would be given authority to implement the definition by rule or regulation "in a manner that is prudent for the effective monitoring, management, and oversight of the financial system." 

Major swap participants must register as such with the CFTC; major security-based swap participants must register with the SEC. 

These definitions are critical as they define the contours of the title’s end-user exemption.  The criterion set forth in (i) above is the same as that found in the House-passed regulatory reform bill.  It recognizes a distinction between swaps used to hedge risk and swaps used for other purposes, including speculation.  The criterion in (ii), however, is broader and the term "significant credit losses" is vague and, depending on its interpretation by the CFTC and SEC, could encompass many end-users.

3.   Joint Rulemaking

Title VII provides that the CFTC and the SEC shall jointly prescribe rules in a variety of areas, including defining key terms.  If the two commissions fail to prescribe rules jointly, the Financial Stability Oversight Council will prescribe the rules taking into consideration information provided by the commissions either by agreeing with one of the commissions or by determining a compromise position.  Similarly, the SEC and CFTC jointly must issue interpretations of the regulations for those interpretations to be effective.

4.   Clearing Requirement

Title VII would require parties to a [security-based] swap to submit the [security-based] swap for clearing to a registered derivatives clearing organization (DCO) or a DCO exempt from registration for swaps, or a registered clearing agency for security-based swaps.  While the only required exemption from clearing is for swaps that no clearing organization will accept, the CFTC or SEC are empowered to determine what types and categories of swaps need to be accepted for clearing.  Upon the application of a counterparty or on its own initiative, the CFTC or SEC may stay the clearing requirement with respect to a swap until the relevant commission reviews the [security-based] swap’s terms and the clearing arrangement.  The relevant commission may then determine whether it finds that clearing is in the public interest and consistent with Title VII.  If the commission determines that clearing is not mandatory for a [security-based] swap or class of swaps, then clearing still will be permissible for those [security-based] swaps. 

Title VII gives the CFTC and SEC, in consultation with the Financial Stability Oversight Council, the authority to exempt a swap from clearing requirements if one of the swap counterparties (1) is not a swap dealer or major swap participant and (2) does not meet the eligibility requirements of any derivatives clearing organization.

The lack of a clearing exemption for companies that are neither swap dealers nor major swap participants is problematic for end-users and represents a major step backwards from the language of the House bill from the perspective of end-users.

5.   Reporting Requirement

For any [security-based] swap that is not cleared, both counterparties must report the [security-based] swap to a registered [security-based] swap repository, or if no registered repository will accept the [security-based] swap, then to the CFTC or SEC.  The Title grandfathers [security-based] swaps entered into before the date of enactment–so long as they are reported, they are exempt from the clearing provisions.

6.   Trade Execution

Counterparties whose [security-based] swaps are subject to the clearing requirement must execute their transactions on a board of trade designated as a contract market or execute the transaction on an alternative swap execution facility (ASEF), unless no board of trade or ASEF makes the swap available to trade.  ASEFs are defined as electronic trading systems with pre- and post-trade transparency that are open to multiple system participants, but which are not exchanges (in the case of swaps) or designated contract markets (in the case of security-based swaps).

7.   Capital and Margin Requirements

Under Title VII, bank [security-based] swap dealers and major [security-based] swap participants must meet minimum capital requirements and minimum initial and variation margin requirements set by their primary financial regulator.  Non-bank [security-based] swap dealers and major [security-based] swap participants that do not have a primary financial regulator must meet minimum capital and initial and variation margin requirements set jointly by the SEC and CFTC.

The capital requirements for bank [security-based] swap dealers and major [security-based] swap participants must be greater than zero for swaps cleared by a DCO or clearing agency.  If [security-based] swaps are not cleared, the capital requirement must be "substantially higher."  For non-bank [security-based] swap dealers and major [security-based] swap participants, the capital requirements must be "as strict or stricter than" the requirements prescribed for bank [security-based] swap dealers and major [security-based] swap participants. 

In consultation with the Financial Stability Oversight Council, the primary financial regulatory agency may exempt the counterparties from the margin requirements if one of the counterparties to the transaction is not a [security-based] swap dealer or major [security-based] swap participant, is using the swap as part of an effective hedge under GAAP, and is predominantly engaged in activities that are not financial in nature.  

For non-bank [security-based] swap dealers and major [security-based] swap participants, the CFTC and SEC shall jointly impose initial and variation margin requirements on all non-cleared [security-based] swap transactions.  The requirements must be "as strict or stricter than" those for banking institutions. 

In consultation with the Financial Stability Oversight Council, the CFTC or SEC may exempt a nonbank [security-based] swap dealer and major [security-based] swap participant from the margin requirements if one of the transaction’s counterparties is not a [security-based] swap dealer or major [security-based] swap participant, is using the swap as part of an effective hedge under GAAP and is predominantly engaged in non-financial activities. 

If a transaction has been exempted from margin requirements and any party requests that margin requirements be imposed, the exemption shall not apply.

The regulators may permit the use of noncash collateral.

The various regulatory agencies and commissions involved in setting margin requirements must set the requirements so that they are consistent with preserving the financial integrity of the swap markets and preserving U.S. financial system stability.

Though it purports to bring clarity to the financial regulatory system, the draft legislation would introduce a substantial amount of uncertainty for businesses trying to hedge their risk.  Prudential regulators must impose capital requirements "greater than zero" on the institutions they regulate, and the CFTC and SEC will work off of those requirements to impose capital requirements on non-bank institutions.  Those requirements must be "as strict or stricter than" the requirements imposed on banking institutions.  These terms are not defined and potentially could result in requirements that tie up significant amounts of capital.  The draft legislation does not tie the capital requirements to the actual risk of loss posed by these institutions.  Also, rationale behind the limitation that only non-financial entities can be exempted from the margin requirements is unclear and could adversely impact financial affiliates of non-financial firms.

8.   Position Limits

Title VII gives the CFTC and SEC authority to establish position limits, including related hedge exemption provisions, on the aggregate number of positions in contracts based on the same underlying commodity that may be held by any person, including any group or class of traders for each month.  The limits may be across contracts listed by designated contract markets, contracts traded on foreign boards of trade that allow U.S. participants direct access to their electronic trading and order matching system, and swap contracts that perform or affect a significant price discovery function with respect to regulated markets.

The SEC may direct self-regulatory organizations to adopt rules regarding position size in any security-based swap and any security on which a security-based swap may be based that may be held by a member of the SRO or a person for whom an SRO member effects transactions.

Alternative swap execution facilities also would be required to set position limits to prevent market manipulation.

9.   Swap and Security-Based Swap Reports

Under Title VII, persons that enter into [security-based] swaps must file reports with the CFTC or SEC, keep books and records of their transactions, including cash or spot transactions in any related security if the person enters into [security-based] swaps in any one day or periodically in an amount equal to or exceeding an amount set by the CFTC or SEC.  The books and records must be open at all time to the relevant commission.

10.   Foreign Boards of Trade

Title VII would authorize the CFTC to require registration of foreign boards of trade that provide access to its electronic trading and order matching systems to U.S. members or participants.  The Title would make it unlawful for foreign boards of trade to offer U.S. participants access to their systems unless the CFTC determines the board makes daily trading information public and the board adopts position limits, has authority to require participants to reduce or liquidate any position to prevent price manipulation or distortion, the disruption of the delivery or cash settlement process, or excessive speculation, and agrees to communicate certain information to the CFTC.

11.   International Harmonization

Title VII would require the SEC, CFTC, the Financial Stability Oversight Council, and the Treasury Department to consult and coordinate with foreign regulatory authorities regarding the establishment of consistent international standards for regulating swaps.  They also may enter into information-sharing arrangements with foreign authorities that they deem necessary or appropriate. 

12.   Interagency Communication

The SEC and CFTC would be required to establish a joint advisory committee to develop solutions to issues of common interest.  The committee would report twice a year to the Senate Banking Committee, House Financial Services Committee, and the House and Senate Agriculture Committees.

13.   Conflicts of Interest

The SEC and CFTC would be required to jointly adopt rules mitigating conflicts of interest in connection with a [security-based] swap dealer or major [security-based] swap participant’s conduct of business with a derivatives clearing organization, clearing agency, board of trade, or an alternative swap execution facility in which such a dealer or participant has a material debt or equity investment.

14.   Other Key Provisions

  • The CFTC and SEC must make aggregate data available to the public in a manner that does not disclose individual business transactions or market positions.
  • Clearing agencies and DCOs must segregate initial margin or collateral for the benefit of the counterparty.
  • The effective date would be 180 days after the Act’s date of enactment. 

Title IX.  Investor Protections and Improvements to the Regulation of Securities

Summary

Title IX, entitled "Investor Protections and Improvements to the Regulation of Securities," includes two subtitles relating to executive compensation reforms and corporate governance reforms.  Subtitle E, entitled "Accountability and Executive Compensation," and Subtitle G, entitled "Strengthening Corporate Governance," each include a handful of discrete proposals directed at addressing perceived shortcomings of governance and compensation practices.  Many of the provisions have been championed by shareholder activists and submitted as shareholder proposals at companies for the past several years.  These provisions are not the centerpiece of the March 15 Print, but nevertheless, their implications on issuers are significant. 

Discussion of Key Provisions

(Executive Compensation Provisions)

The executive compensation provisions contained in Subtitle E (sections 951-956) are similar to those in the prior version of the bill circulated by Chairman Dodd in November 2009, and are divided into two categories – those applicable to public companies and an additional provision applicable to bank holding companies.

Public Companies

1.   Say on Pay 

Title IX amends section 14 of the Exchange Act to require that public companies hold an advisory vote to approve the compensation of named executive officers as disclosed pursuant to the executive compensation requirements of Item 402 of Regulation S-K.  This "say on pay" provision would be applicable to meetings occurring six months after enactment.

The "say on pay" vote is not binding on the board of directors and may not be construed to overrule any board decision or create any additional or changed fiduciary duties.  However, the vote will not restrict or limit shareholders from submitting shareholder proposals relating to executive compensation.

2.   Independence of Compensation Committees

Title IX requires the SEC to direct the stock exchanges to prohibit the listing of any issuer that does not require each member of an issuer’s compensation committee to be independent under a definition of independence to be established by the stock exchanges.  In adopting this definition, the exchanges must consider the sources of compensation paid to compensation committee members (including any consulting, advisory or other compensatory fees paid) and whether the members are affiliated with the issuer.  The SEC must issue rules not later than 360 days after enactment. 

In order to address the requirements outlined in the Title, the definition of independence to be established by the stock exchanges will be stricter than the current definitions.  However, Title IX directs the SEC to grant the stock exchanges exemptive authority to exclude certain types of issuers based on size or other relevant factors.

3.   Compensation Committee Consultants and Legal Counsel

Title IX requires that any consultants or legal counsel ("Advisors") retained by compensation committees of publicly listed issuers to advise on executive compensation may only be selected after an issuer has taken into consideration independence factors to be established by the SEC.  Title IX directs those independence factors to include: (a) provision of other services by the person that employs the compensation Advisor ("Employer"), (b) the amount of fees received by the Employer as a percentage of its total revenue, (c) the Employer’s policies designed to prevent conflicts of interest, (d) any business or personal relationship of the Advisor with a member of the compensation committee, and (e) any stock of the issuer owned by an Advisor.  Title IX also requires that the compensation committee have the funding and authority to hire the Advisors and that the Advisors be directly responsible to the compensation committee.  Moreover, Title IX requires proxy disclosure about whether a compensation consultant is used, whether there are any conflicts of interest and how any such conflicts are being addressed.  The timeline for adoption requires the SEC to issue rules not later than 360 days after enactment.

Title IX applies most of its requirements to legal counsel in addition to compensation consultants or other advisors; however, the proxy disclosure requirement only applies to compensation consultants.  Similar to the exemptive authority relating to the compensation committee independence requirements described above, Title IX directs the SEC’s rules to grant the stock exchanges exemptive authority to exclude certain types of issuers based on size or other relevant factors.

4.   Compensation Disclosures 

   Title IX directs the SEC to adopt rules requiring companies to disclose in the annual proxy statement the relationship between executive compensation actually paid and the company’s financial performance, taking into account changes in the value of the shares of stock and dividends of the issuer and any distributions.  The disclosure may, but is not required to, include a graphic representation of this required information.

These types of disclosures generally are already provided in proxy statements, but this provision is more prescriptive than current requirements. 

5.   Recovery of Erroneously Awarded Compensation (Clawbacks) 

Title IX requires the SEC to direct the stock exchanges to prohibit the listing of any issuer that does not adopt "clawback" policies to recoup unearned payments awarded to executive officers as incentive compensation during a three year look back period if the company is required to prepare an accounting restatement based on erroneous data due to material noncompliance with any financial reporting requirement under the securities laws.  Title IX also includes a requirement regarding disclosure of the issuer’s policy on incentive based compensation that is based on reported financial information.

The clawback requirement will apply to both current and former executive officers.  In contrast to the clawback provision in the Sarbanes-Oxley Act of 2002, there is no requirement that the restatement result from misconduct.

6.   Hedging

Title IX directs the SEC to adopt rules requiring disclosure in an issuer’s proxy statement of whether its employees or directors may purchase financial instruments that are designed to hedge or offset decreases in the value of securities granted to employees or directors as a part of employee compensation or other securities held by the employees or directors.

While there is currently no SEC disclosure requirement for hedging policies, some companies address the issue in their proxy statements or in their insider/securities trading policies.

Bank Holding Companies

Title IX prohibits any bank holding company from maintaining any compensation plan that provides "excessive compensation, fees or benefits" to any employee, officer, director or principal shareholder or that "could lead to material financial loss" of the bank holding company.  The Board is directed to establish standards related to this prohibition within approximately 18 months following enactment of the Title, and to take into consideration the following factors:  (i) the combined value of all cash and noncash benefits provided to the individual, (ii) the compensation history of the individual, (iii) the financial condition of the institution, (iv) comparable compensation practices and comparable institutions, (v) postemployment benefits and (vi) any other factors deemed appropriate or relevant. 

Given that the overall focus of Title IX is on financial reform, it is not surprising that the only explicit substantive regulation on compensation practices applies to bank holding companies.  This reflects the general thinking that certain compensation practices at financial institutions encouraged harmful and excessive risk-taking that contributed to the economic collapse.  Although it may be upwards of two years before the Board issues detailed standards on what types of bank holding company compensation plans are prohibited, the Board provided insight on this matter in October 2009 when it published proposed guidance on banker compensation.  While the guidance did not mandate or prohibit specific pay provisions, it strongly suggested that proper risk management in the compensation context can be achieved through deferral of payments, longer performance periods, clawbacks and limiting or eliminating use of both "golden parachutes" for exiting executives and "golden handshakes" for new hires.

(Corporate Governance Provisions)

7.   Proxy Access

Title IX gives the SEC the authority to adopt rules relating to the ability of shareholders to nominate directors in company proxy statements, but does not require the SEC to exercise the authority as did the prior Dodd draft and the House bill. 

Title IX does not outline the specifics of any proxy access rule(s).  For instance, it does not specify required holding or ownership requirements, but leaves it to the SEC to provide by rule.  Note that the SEC currently has pending proposed rules relating to proxy access.

8.   Majority Voting

Title IX requires the SEC to direct the stock exchanges to require directors at publicly listed issuers to receive a majority of votes cast by shareholders in uncontested elections, and a plurality in contested elections, in order to be elected to the board of directors.  Further, the Title requires directors to tender their resignation if they do not receive a majority vote in an uncontested election. 

Title IX gives companies discretion to reject a resignation from a director who does not receive a majority vote in an uncontested election if the board unanimously rejects the resignation.  If the board exercises this discretion, the board must within 30 days disclose the specific reasons it chose not to accept the resignation, including a discussion of the analysis used in reaching that conclusion, and that the decision was in the best interests of the company and the shareholders.  Title IX empowers the SEC to exempt certain issuers based on size, market capitalization, public float, number of shareholders of record or other criteria.

9.   Separation of Chairman and CEO 

Title IX directs the SEC to adopt rules requiring public companies to disclose in their proxy statements the reasons why they have chosen the same person, or different people, to serve as Chairman and CEO.  The SEC must issue rules not later than 180 days after enactment.

The SEC’s recently adopted amendments to its proxy rules to require issuers to provide disclosure about their board’s leadership structure, including whether the positions of chairman and CEO are combined or separate, and why the structure is appropriate for the issuer.

Title X.  Consumer Financial Protection

Summary

Title X, the Consumer Financial Protection Act of 2010, creates a new independent watchdog with the authority to regulate the offering and provision of consumer financial products or services.  In contrast to the House financial regulatory reform bill, the March 15 Print creates a Bureau that will be housed inside the Federal Reserve rather than a new freestanding agency.

Consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, and Federal Trade Commission will be transferred to and consolidated in the Bureau of Consumer Financial Protection (hereinafter the "Bureau").  The Bureau shall seek to implement and enforce Federal consumer financial protection law for the purpose of ensuring that markets for consumer financial products and services are fair, transparent, and competitive.  The Bureau is charged with the mission and authority to ensure that consumers are provided with timely and comprehensible information about financial transactions and protected from unfair or deceptive acts and practices.  The Bureau’s primary functions are conducting financial education programs; collecting, investigating, and responding to consumer complaints; collecting and publishing information about the market for consumer financial products and identifying consumer risks; supervising persons that offer consumer financial products and services; undertaking enforcement actions to address violations of Federal consumer financial law; and issuing rules, orders, and guidance to implement Federal consumer financial law.   

Discussion of Key Provisions 

1.   Scope of Authority of the Bureau of Consumer Financial Protection

Title X covers any person that engages in offering or providing a consumer financial product or service.  A consumer financial product or service is a financial product or service offered or provided for use by consumers primarily for personal, family, or household purposes, or delivered, offered or provided in connection with such a consumer financial product or service. 

Financial products and services include extensions of credit and service of loans; real estate settlement services and property appraisals; taking deposits, transmitting or exchanging funds, or acting as a custodian of funds or any financial instrument for use by or on behalf of a consumer; sale, provision or issuance of a payment instrument or a stored value instrument over which the seller exercises substantial control; check cashing, collection, or guaranty services; financial data processing products or services; financial advisory services; and collection and provision of consumer report and credit history information. 

However, activities related to the writing of insurance or the reinsurance of risks are not within the purview of the Bureau.  In addition, the Bureau does not have authority with respect to credit extended directly by merchants, retailers, or sellers of nonfinancial services exclusively to enable a consumer to purchase a nonfinancial good or service.  The Bureau does not have authority over real estate brokerage activities, retailers of manufactured or modular homes, accountants or tax preparers, attorneys, employee benefit and compensation plans, or persons regulated by a state securities commission. 

Title X is not intended to modify the authority of the SEC or CFTC to adopt rules, initiate enforcement proceedings, or take other action with respect to persons or institutions regulated by those agencies.  However, the SEC and CFTC must consult and coordinate with the Bureau regarding rulemaking over any product or service subject to the Bureau’s jurisdiction. 

2.   Structure of the Bureau of Consumer Financial Protection

The Bureau will be housed within the Federal Reserve.  The Director of the Bureau will be appointed by the President and confirmed by the Senate for a five-year term.  The Director shall establish a Consumer Advisory Board.  Six of the Board’s members will be appointed by the Federal Reserve Bank Presidents.

In this regard, the Bureau of Consumer Financial Protection differs from the Consumer Financial Protection Agency proposed by the House bill.  The House bill would create a freestanding agency, whereas the March 15 Print would create a bureau within the Federal Reserve.  However, the March 15 Print includes provisions to ensure the "autonomy" of the new consumer protection bureau (see below).

3.   Autonomy of the Bureau of Consumer Financial Protection

The Board may delegate to the Bureau the authorities to examine persons subject to Board jurisdiction for compliance with Federal consumer financial laws.  The Board may not interfere intervene in any matters or proceedings before the Bureau, such as examinations or enforcement actions, unless specifically provided by law.  The Board is also prohibited from appointing, directing, removing any of the Bureau’s officers or employees, or consolidating any of the Bureau’s functions with any of the Board’s divisions or offices.  Furthermore, no rule or order of the Bureau will be subject to approval or review by the Board. 

 4.   Funding of the Bureau

The Board must transfer to the Bureau the funds reasonably necessary to carry out its authorities.  The Board may transfer up to 10% of its combined expenditures in 2011, 11% in 2012, and 12% in 2013 and every year thereafter. 

Unlike the House bill, the March 15 Print does not provide for assessments on covered persons to fund the Bureau.  Rather, it appears that the Bureau would be funded only through a transfer of funds from the Board and penalties collected through enforcement actions.

5.   Bureau’s Rulemaking Authority

The Bureau may take action to prevent a person from committing an unfair, deceptive, or abusive act under Federal law in connection with any consumer financial product or service transaction or offering.  The Director has authority to prescribe rules and issue orders and guidance to enable the Bureau to administer Federal consumer financial laws.  In prescribing rules, the Bureau must consider the potential costs and benefits to consumers and covered persons, including any potential reduction of consumer access to financial products or services.  The Bureau must consult with the prudential regulators and other appropriate Federal agencies before proposing a rule and during the comment process.  If a prudential regulator provides a written exception to the proposed rule, the Bureau must include the objection in its adopting release.  

The Bureau may issue rules to exempt any covered person from any provision of Title X or regulations under Title X as the Director deems necessary or appropriate.  In issuing such exemption, the Director must take into account the total assets of the covered person, its volume of transactions involving consumer financial products or services, and the extent to which existing laws or regulations adequately protect consumers. 

The Bureau may prescribe regulations to ensure timely, appropriate and effective disclosures of costs, benefits, and risks associated with any consumer financial product or service.  The Bureau may issue model disclosures, which are per se compliant.  The Bureau may permit a covered person to conduct a trial program to provide trail disclosures to consumers. 

By regulation, the Director may prohibit or impose conditions or limitations on the use of mandatory predispute arbitration agreements between a covered person and a consumer for a consumer financial product if such action is in the public interest and for the protection of consumers. 

 6.   Review of Bureau Rules and Regulations

The Bureau shall conduct an assessment of each significant rule or order it adopts and publish a report within five years.  In addition, on the petition of any of its member agencies, the Council may set aside any of the Bureau’s regulations if it decides by 2/3 vote that regulation would put the safety and soundness of the banking system or the stability of the financial sector at risk.  The agency must first attempt to work with the Bureau in good faith to resolve any concerns.  If this is unsuccessful, the agency must file its petition within 10 days after the publication of the regulation. 

The House bill does not include any comparable mechanism by which other agencies can challenge final rules issued by the Consumer Financial Protection Agency and have them set aside.  The March 15 Print reflects a more moderated balancing between consumer protection and safety and soundness considerations.

7.   Supervisory and Enforcement Authority

The Bureau shall periodically require reports and conduct examinations to assess compliance with Federal consumer financial law, obtain information about an institution’s activities and compliance procedures, and detect risks to consumers.  The Bureau also has the authority to collect information regarding the organization, business conduct, and practices of covered persons in order to conduct research on the provision of consumer financial products or services.  The supervisory program should be risk-based and take into consideration the asset size of the covered person, the volume of its transactions involving consumer financial products or services, the risks to consumers created by such financial products or services, and the extent to which such entities are subject to oversight by state authorities. 

To minimize regulatory burden, the Bureau shall coordinate its supervisory activities with the activities of prudential regulators and state bank regulatory authorities and use existing reports to the fullest extent possible.  If the proposed supervisory determinations of the Bureau and the prudential regulator conflict, the covered person may request a joint statement.  If the conflict is not resolved, the covered person may appeal to a governing panel consisting of a representative from the Bureau, a representative of the prudential regulator, and a representative from the Board, the Corporation, the NCUA, or the OCC.

8.   Enforcement Authority

To the extent that Federal law authorizes both the Bureau and another Federal agency to enforce Federal consumer financial law with regard to a non-depository person, the Bureau shall have exclusive authority.  To the extent that Federal law authorizes both the Bureau and another Federal agency to enforce Federal consumer financial law with regard to an insured depository institution with over $10 billion in assets, the Bureau shall have primary enforcement authority.  Any Federal agency may recommend to the Bureau, in writing, that the Bureau initiate a enforcement proceeding.  If the Bureau fails to do so within 120 days, the other agency may initiate a proceeding to the extent permitted by law.  The prudential regulator will have exclusive authority to bring enforcement actions against institutions with less than $10 billion in assets.  The Bureau may notify the prudential regulator of any violations, and the prudential regulator must respond to the Bureau within sixty days. 

9.   Joint Investigations

The Bureau may engage in joint investigations and requests for information with the Secretary of Housing and Urban Development, the Attorney General, or both.  Bureau investigators will have the authority to issue subpoenas requesting testimony or the production of materials, which are enforceable in Federal district court.  If the Agency has reason to believe that a person has documentary material or any information relevant to a violation, the Agency can issue a civil investigative demand.  If a person fails to comply with a civil investigative demand, the Bureau may file a petition for an order of enforcement in Federal district court. 

10.   Administrative proceedings

The Bureau may conduct hearings and adjudication proceedings, including cease-and-desist proceedings, to enforce compliance with Title X and any issued regulations, or any other Federal law that the Bureau is authorized to enforce. 

11.   Civil actions

The Bureau may also bring a civil action or seek civil penalties and equitable relief for violations of Title X, related regulations, or other consumer financial protection laws.  When commencing a civil action, the Bureau must notify the Attorney General. 

12.   Relief Available

In an administrative proceeding or court action, the Bureau may seek specific forms of relief including the rescission or reformation of contracts, refund of money or return of real property, restitution, disgorgement for unjust enrichment, payment of damages, public notification of the violation and related costs, limits on the entity’s activities or functions, or civil penalties.  Exemplary or punitive damages are not permitted.  The Bureau, state attorney general, or state regulator may recover the costs it incurred in connection with the action if it is the prevailing party.

First tier civil penalties are limited to $5,000 for each day during which the violation continues.  Second tier civil penalties, available when a person recklessly engages in a violation, are limited to $25,000 for each day during which the violation continues.  Third tier civil penalties, imposed for knowing violations, may not exceed $1,000,000 for each day during which the violation continues.  The penalty should reflect the size of financial resources and good faith of the person charged, the gravity of the violation, the severity of risks or losses to the consumer, any history of previous violations, and "such other matters as justice may require."  The Agency may also make referrals for criminal proceedings to the Attorney General whenever the Agency obtains evidence that a person has engaged in conduct that may constitute a violation of Federal criminal law.

13.   Whistleblower protection

Title X provides whistleblower protection in so far as a covered person or service provider is prohibited from terminating or discriminating against a covered employee because that employee has provided information to the Agency or any other state, local, or Federal entity..  Likewise, an employee cannot be terminated or discriminated against because he or she objected to or refused to participate in any activity, policy, practice, or assigned task that the employee reasonably believed to be in violation of any law, or constitute an unfair, deceptive, or abusive practice. 

14.   Preservation of State Law

State law that affords greater protection than Federal consumer protection laws under Title X will not be preempted.  Furthermore, the attorney general of any state may bring a civil action in state or Federal court to enforce the provisions of Title X with respect to any entity that is chartered, licensed, incorporated, or otherwise authorized to do business in that state.  However, state consumer financial laws that prevent or significantly interfere with a national bank’s exercise of its powers would also be preempted.

Like the March 15 Print, the House bill would effectively supplant the existing regime of "complete" preemption, under which all state laws that "touch upon" the business of banking are preempted, with  a milder form of "conflict" preemption, in which only conflicting state laws are preempted.  The March 15 Print specifies that more protective state laws are not in conflict.



  [1]   The term "bank holding company" has the same meaning as in section 2 of the Bank Holding Company Act of 1956.  A foreign bank or company that is treated as a bank holding company for purposes of the Bank Holding Company Act, pursuant to section 8(a) of the International Banking Act of 1978, is to be treated as a bank holding company for the purposes of Title I.  Sec. 102(a)(1). 

  [2]   The term "nonbank financial company" covers both a U.S. nonbank financial company and a foreign nonbank financial company.  A U.S. nonbank financial company is a company (other than a bank holding company or subsidiary thereof) that is incorporated or organized under the laws of the United States or any state and is substantially engaged in activities in the U.S. that are financial in nature, as defined in section 4(k) of the Bank Holding Company Act of 1956.  A foreign nonbank financial company means a company (other than one that is treated as a bank holding company or subsidiary thereof) that is incorporated or organized in a country other than the United States and is substantially engaged in, including through a branch in the U.S., financial activities in the U.S..

  [3]   The term "member agency" means an agency represented by a member of the Council.  Sec. 102(a)(3). 

  [4]   For the purposes of this paragraph, "Credit exposure" to a company means–all extensions of credit to the company, including loans, deposits, and lines of credit; all repurchase agreements and reverse repurchase agreement with the company; all securities borrowing and lending transactions with the company, to the extent that such transactions create credit exposure for the nonbank financial company supervised by the Board of Governors or large bank holding company; all guarantees, acceptances, or letters of credit issued on behalf of the company; all purchases of or investment in securities issued by the company; counterparty credit exposure to the company in connection with a derivative transaction between the nonbank financial company supervised by the Board of Governors or a large bank holding company and the company, and any other similar transactions that the Board of Governors, by regulation, determines to be a credit exposure for purposes of this section. 

[5]   "International Insurance Agreements on Prudential Matters" refers to a written bilateral or multilateral agreement entered into between the United States and a foreign government, authority, or regulatory entity regarding prudential measurers applicable to the business of insurance or reinsurance.  The Secretary of the Treasury is authorized to negotiate and enter into International Insurance Agreements on Prudential Measurers on behalf of the United States. 

  [6]   The "domiciliary state" refers to the state in which the insurer or reinsure is incorporated or entered through, and licensed. 

  [7]   Brackets used in the term "[security-based] swap dealer" reflect the parallel nature of the legislation as it addresses regulation of "swaps" by the CFTC and "security-based swaps" by the SEC.

 

Gibson, Dunn & Crutcher LLP

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) or C. F. Muckenfuss (202-955-8514, cmuckenfuss@gibsondunn.com) in the firm’s Washington, D.C. office, Kimble Cannon (310-229-7084, kcannon@gibsondunn.com) in the firm’s Los Angeles office, or any of the following members of the firm’s Financial Regulatory Reform Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)
John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)
Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)
Alan Platt – Washington, D.C. (202-887-3660, aplatt@gibsondunn.com)
Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com)

Securities Law and Corporate Governance Expertise
Ronald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)
K. Susan Grafton – Washington, D.C. (202-887-3554, sgrafton@gibsondunn.com)
Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)
Lewis Ferguson – Washington, D.C. (202-955-8249, lferguson@gibsondunn.com)
Barry Goldsmith – Washington, D.C. (202-955-8580, bgoldsmith@gibsondunn.com)
John H. Sturc – Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)
Dorothee Fischer-Appelt – London (+44 20 7071 4224, dfischerappelt@gibsondunn.com)
Alan Bannister – New York (212-351-2310, abannister@gibsondunn.com)
Adam H. Offenhartz – New York (212-351-3808, aoffenhartz@gibsondunn.com)
Mark K. Schonfeld – New York (212-351-2433, mschonfeld@gibsondunn.com)
George B. Curtis – Denver (303-298-5743, gcurtis@gibsondunn.com)
Paul J. Collins – Palo Alto (650-849-5309, pcollins@gibsondunn.com)
Robert C. Blume – Denver (303-298-5758, rblume@gibsondunn.com)
David P. Burns – Washington, D.C. (202-887-3786, dburns@gibsondunn.com)
Charles R. Jaeger – San Francisco (415-393-8331, cjaeger@gibsondunn.com)

Financial Institutions Law Expertise
C.F Muckenfuss – Washington, D.C. (202-955-8514, cmuckenfuss@gibsondunn.com)
Christopher Bellini – Washington, D.C. (202-887-3693, cbellini@gibsondunn.com)
Amy Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com)
Dhiya El-Saden – Los Angeles (213-229-7196, delsaden@gibsondunn.com)
Kimble C. Cannon – Los Angeles (310-229-7084, kcannon@gibsondunn.com)
Rachel Couter – London (+44 20 7071 4217, rcouter@gibsondunn.com)

Corporate Expertise
Howard Adler – Washington, D.C. (202-955-8589, hadler@gibsondunn.com)
Richard Russo – Denver (303-298-5715, rrusso@gibsondunn.com)
Dennis Friedman – New York (212-351-3900, dfriedman@gibsondunn.com)
Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)
Joerg Esdorn – New York (212-351-3851, jesdorn@gibsondunn.com)
Wayne P.J. McArdle – London (+44 20 7071 4237, wmcardle@gibsondunn.com)
Stewart McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com)

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, mgreaney@gibsondunn.com)

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, esopher@gibsondunn.com)
Jennifer Bellah Maguire – Los Angeles (213-229-7986, jbellah@gibsondunn.com)

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, jsharf@gibsondunn.com)
Alan Samson – London (+44 20 7071 4222, asamson@gibsondunn.com)
Fred Pillon – San Francisco (415-393-8241, fpillon@gibsondunn.com)
Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)
Michael F. Sfregola – Los Angeles (213-229-7558, msfregola@gibsondunn.com)
Andrew Lance – New York (212-351-3871, alance@gibsondunn.com)
Eric M. Feuerstein – New York (212-351-2323, efeuerstein@gibsondunn.com)
David J. Furman – New York (212-351-3992, dfurman@gibsondunn.com)
L. Mark Osher – Los Angeles (213-229-7694, mosher@gibsondunn.com)
Drew C. Flowers – Los Angeles (213-229-7885, dflowers@gibsondunn.com)
Teresa J. Farrell – Orange County (949-451-3895, tfarrell@gibsondunn.com)
 Deborah A. Cussen – San Francisco (415-393-8226, dacussen@gibsondunn.com)

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com)

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, mrosenthal@gibsondunn.com)
David M. Feldman – New York (212-351-2366, dfeldman@gibsondunn.com)
Oscar Garza – Orange County (949-451-3849, ogarza@gibsondunn.com)
Craig H. Millet – Orange County (949-451-3986, cmillet@gibsondunn.com)
Thomas M. Budd – London (+44 20 7071 4234, tbudd@gibsondunn.com)
Gregory A. Campbell – London (+44 20 7071 4236, gcampbell@gibsondunn.com)
Janet M. Weiss – New York (212-351-3988, jweiss@gibsondunn.com)
Matthew J. Williams – New York (212-351-2322, mjwilliams@gibsondunn.com)
J. Eric Wise – New York (212-351-2620, ewise@gibsondunn.com)

 Tax Law Expertise
 
Arthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)
 Paul Issler – Los Angeles (213-229-7763, pissler@gibsondunn.com)
 J. Nicholson Thomas – Los Angeles (213-229-7628, nthomas@gibsondunn.com)
 Jeffrey M. Trinklein – New York (212-351-2344, jtrinklein@gibsondunn.com)
 Romina Weiss – New York (212-351-3929, rweiss@gibsondunn.com)
 Benjamin H. Rippeon – Washington, D.C. (202-955-8265, brippeon@gibsondunn.com)

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)
Charles F. Feldman – New York (212-351-3908, cfeldman@gibsondunn.com)
Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)
Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com)
Amber Busuttil Mullen – Los Angeles (213-229-7023, amullen@gibsondunn.com

© 2010 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071

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