Dodd-Frank Wall Street Reform and Consumer Protection Act · NBFC Nonbank Financial Company NRSRO...

Dodd-Frank Wall Street Reform andConsumer Protection Act

July 2010

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Principal Defined Terms 1

Selected Highlights 2

Title I Systemic Risk Regulation 9

Title II Orderly Liquidation Authority 17

Title III Transfer of Powers to the Comptroller of the Currency, the Corporation, and the Board of Governors 23

Title IV Regulation of Advisers to Hedge Funds and Others 27

Title V Insurance 33

Title VI Improvements to Regulation of Bank and Savings AssociationHolding Companies and Depository Institutions 39

Title VII Wall Street Transparency and Accountability 49

Title VIII Payment, Clearing, and Settlement Supervision 59

Title IX Investor Protections and Improvements to the Regulation of Securities 63

A - Increasing Investor Protection 64

B - Increasing Regulatory Enforcement and Remedies 66

C - Improvements to the Regulation of Credit Rating Agencies 69

D - Improvements to the Asset-backed Securitization Process 73• Risk Retention in Syndicated Lending

E - Accountability and Executive Compensation 77

F - Improvements to the Management of the Securities and Exchange Commission 80

G - Strengthening Corporate Governance 82

H - Municipal Securities 83

I - Public Company Accounting Oversight Board, Portfolio Margining, and Other Matters 85

J - Securities and Exchange Commission Match Funding 87

Title X Bureau of Consumer Financial Protection 89

Title XI Federal Reserve System Provisions 95

Title XII Improving Access to Mainstream Financial Institutions 99

Title XIII Pay It Back Act 101

Title XIV Mortgage Reform 103

Title XV Miscellaneous 107

Title XVI Section 1256 Contracts 111

Contents

© Clifford Chance US LLP, 2010

1 Dodd-Frank Wall Street Reform and Consumer Protection Act

Principal Defined TermsDefined TermAdvisers Act Investment Adviser’s Act of 1940 AUM Assets Under ManagementBCFP Bureau of Consumer Financial ProtectionBDC Business Development CompanyBHC Bank Holding Company BHCA Bank Holding Company ActCDS Credit Default SwapsCFTC Commodity Futures Trading CommissionDFMU Designated Financial Market UtilitiesExchange Act or 1934 Act Securities Exchange Act of 1934FDIA Federal Deposit Insurance ActFDIC Federal Deposit Insurance Corporation FHC Financial Holding CompanyFHFA Federal Housing Finance AgencyFinancial Crisis Fund Financial Crisis Special Assessment FundFinancial Oversight Council Council of Inspectors General On Financial OversightFINRA Financial Industry Regulatory AuthorityFIO Federal Insurance OfficeFRA Federal Reserve Act FRB Federal Reserve Board or Board of the Federal ReserveGAO Government Accountability Office GASB Government Accounting Standards BoardILC Industrial Loan CompanyIMF International Monetary FundInvestment Company Act or 1940 Act Investment Company Act of 1940LIBHC Large, Interconnected Bank Holding Company Mortgage Reform Act Mortgage Reform and Anti-Predatory Lending ActMSRB Municipal Securities Rulemaking Board NAIC National Association of Insurance CommissionersNBFC Nonbank Financial Company NRSRO Nationally Recognized Statistical Rating OrganizationOCC Office of the Comptroller of the CurrencyOFR Office of Financial Research OIA Office of the Investor AdvocateOLA Orderly Liquidation AuthorityOTC Over-the-Counter OTS Office of Thrift Supervision Oversight Council or Council Financial Stability Oversight Council PCAOB Public Company Accounting Oversight BoardQFC Qualified Financial ContractSEC Securities and Exchange CommissionSecurities Act or 1933 Act Securities Act of 1933SEF Swap Execution FacilitySIPA Securities Investor Protection Act of 1970SIPC Securities Investor Protection CorporationSLHC Savings and Loan Holding CompanySPV Special Purpose VehicleSRO Self-regulatory OrganizationTAGP Transaction Account Guarantee ProgramTARP Troubled Assets Relief Program

Selected HighlightsTitle I:Financial Stability Oversight CouncilThe Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) provides for the establishment of a Financial StabilityOversight Council (the “Council”) comprised of the heads of the financial regulatory agencies. The Council is generally tasked withidentifying and responding to systemic risks and its duties include, among other things: (i) designating systemically important “nonbankfinancial companies”; (ii) making recommendations concerning the establishment of heightened regulatory capital standards, leverage,liquidity, contingent capital, resolution plans, concentration limits, short term debt limits, enhanced disclosures and overall riskmanagement standards for systemically important bank holding companies and “nonbank financial companies;” (iii) collection offinancial information for assessing systemic risks; and (iv) making recommendations to member agencies concerning supervisorystandards, priorities, and principles.

A nonbank financial company that the Council determines could pose a threat to the financial stability of the United States (“NBFC”) isrequired to register with, and is subject to supervisory and prudential standards imposed by, the Federal Reserve. Large, interconnectedbank holding companies (“LIBHCs”) are also generally treated as systemically important.

If the Federal Reserve determines that a bank holding company (“BHC”) with total consolidated assets of $50 billion or more or NBFCposes a grave danger to the financial stability of the United States, the Federal Reserve, upon affirmative vote of not less than 2/3 of themembers of the Council, shall require the subject company to: (i) terminate activities; (ii) impose conditions on the conduct of activities;(iii) limit any expansion; or (iv) dispose of assets or off-balance-sheet items.

Office of Financial ResearchAn Office of Financial Research is established within the Treasury Department to support the Council and the financial regulatoryagencies by, among other things: (i) collecting data; (ii) standardizing the types of data reported and collected; and (iii) developing toolsfor risk management and monitoring.

Federal Reserve Authority Over NBFCs and LIBHCsThe Federal Reserve may require reports and examine any NBFC and its subsidiaries to assess: (i) the nature of the operations and thefinancial condition of the company; (ii) the risk the company may pose to the financial system and its systems for monitoring andcontrolling such risks; and (iii) compliance with regulatory requirements. If the Federal Reserve determines that an NBFC is not incompliance with Federal Reserve regulations or poses a threat to financial stability, the Federal Reserve may recommend anenforcement action to the NBFC’s primary financial regulator and, if the primary financial regulator does not take an enforcement actionacceptable to the Federal Reserve, the Federal Reserve will have a back-up authority to itself impose such an enforcement action.

The Federal Reserve is required, on its own or pursuant to recommendations by the Council, to establish prudential standards anddisclosure requirements to NBFCs and BHCs with total consolidated assets of $50 billion or more (also referred to herein as “LIBHCs”)that are more stringent than the requirements applicable to BHCs and that may increase in stringency depending on a number offactors. Such standards include: (i) risk-based capital requirements; (ii) leverage limits; (iii) liquidity requirements; (iv) overall riskmanagement requirements; (v) resolution plan and credit exposure requirements; and (vi) concentration limits. Such prudential standardsmay also include: (i) contingent capital requirements; (ii) enhanced public disclosures; (iii) short-term debt limits; and (iv) such otherprudential standards that the Federal Reserve determines are appropriate.

The Act imposes a minimum capital requirement that prohibits depository institution holding companies to include qualifying trustpreferred securities in Tier I capital. The inclusion in Tier I capital of such instruments issued prior to May 19, 2010 will be phased outover a 3 year period commencing on January 1, 2013. Depository institution holding companies with total consolidated assets of lessthan $15 billion will be able to continue to include in Tier I capital trust preferred securities issued prior to May 19, 2010.

Title II: Orderly Liquidation AuthorityThe Act creates a new regime for liquidation of nonbank financial companies whose potential collapse may jeopardize financial stabilityin the United States. Under the new regime, generally modeled after the existing framework for failed insured depository institutions,the Federal Deposit Insurance Corporation (the “FDIC”) is authorized to seize exclusive control of a failing nonbank financial companyand administer its liquidation in accordance with the Act’s provisions.


Dodd-Frank Wall Street Reform and Consumer Protection Act 2

Title III: Transfer of Powers to the Comptroller of the Currency, the Corporation, and theBoard of GovernorsAbolishment of the OTSOne year after the date of enactment, the powers and duties of the Office of Thrift Supervision (“OTS”) will be transferred to theFederal Reserve, the OCC, and the FDIC. Effective 90 days after the transfer date the OTS will be abolished. The Act does notabolish, however, the Federal savings association charter. Within 18 months of enactment of the Act, the Government AccountabilityOffice (“GAO”) will conduct a study to determine whether it is necessary to eliminate the exemption from the BHCA definition of a“bank” for such institutions.

Deposit Insurance ReformsThe FDIC generally defines the term “assessment base” as the amount equal to the average consolidated assets of the insureddepository institution during the assessment period minus the average tangible equity of the insured depository institution during theassessment period. The Act permanently increases the standard maximum deposit insurance amount from $100,000 to $250,000.The Act extends until January 1, 2013 the FDIC’s Transaction Account Guarantee Program.

Title IV: Regulation of Advisers to Hedge Funds and OthersTitle IV amends several provisions of the Investment Advisers Act of 1940, most significantly by eliminating the private adviserexemption from registration under such Act. Title IV provides certain new exemptions from registration, including for advisers to privatefunds with AUM under $150 million and venture capital funds regardless of AUM. Title IV would leave the definition of “venture capitalfund” to future rulemaking and also permits the SEC to determine the registration requirements applicable to the advisers of “mid-sized” private funds based on the level of systemic risk posed by such funds.

Title V: InsuranceSubtitle A seeks to improve the system of insurance regulation by focusing on mitigation of systemic risk with respect to insuranceand bridging gaps in insurance regulation. The title seeks to accomplish this by: (i) establishing the Federal Insurance Office; and (ii)facilitating international coordination of insurance regulation through prudential measures.

Subtitle B seeks to reform insurance regulation of nonadmitted insurance and reinsurance through setting uniform measures,streamlining standards, and clarifying the governing State law in the reporting, payment, and allocation of premium taxes, licensingsurplus lines brokers and regulating credit for reinsurance and reinsurer solvency.

Title VI: Improvements to Regulation of Bank and Savings Association Holding Companiesand Depository InstitutionsMoratorium and Study On ILCs, Credit Card Banks and Certain Trust CompaniesThe Act imposes a three year moratorium on approval of FDIC insurance applications and change in control applications by industrialloan companies (“ILCs”), credit card banks, and certain trust companies (“trust banks”) that are directly or indirectly owned orcontrolled by a commercial firm. ILCs, credit card banks, trust banks, and savings associations are currently exempted from thedefinition of a “bank” under the BHCA and their holding companies are not regulated as BHCs. Within 18 months of enactment of theAct, the Government Accountability Office (“GAO”) will conduct a study to determine whether it is necessary to eliminate theexemption from the BHCA definition of a “bank” for such institutions.

Reports and Examinations of Functionally Regulated SubsidiariesThe Act generally expands the examination powers of the Federal Reserve with respect to functionally regulated subsidiaries. The Actalso eliminates the current limitations on the rulemaking, prudential, supervisory, and enforcement authority of the Federal Reserve withrespect to functionally regulated subsidiaries of BHCs.

Supervision of Non-Functionally-Regulated Holding Company SubsidiariesThe Act provides that the Federal Reserve shall examine the activities of a non-depository institution subsidiary (other than afunctionally regulated subsidiary or a subsidiary of a depository institution) in the same manner, subject to the same standards, andwith the same frequency as required if such activities were conducted in the lead insured depository institution. The appropriateFederal banking agency for the lead depository institution of a depository institution holding company shall have back-up examinationand enforcement authority with respect to such subsidiaries.



Well Managed And Well Capitalized Requirement for FHCs And Certain TransactionsCurrently, BHCs may qualify for FHC status that permits them to engage in an expanded range of financial activities if their depositoryinstitution subsidiaries are well capitalized and well managed. The Act requires the FHC itself to meet the well capitalized and wellmanaged criteria. The Act also requires BHCs seeking to make interstate bank acquisitions to meet the well capitalized and wellmanaged criteria.

Amendments to Inter-Affiliate Transaction RestrictionsThe Act contains a number of amendments to Section 23A of the Federal Reserve Act (“FRA”) governing transactions between a bank andits affiliates. Among other things, the Act subjects repurchase agreements to the collateralization requirements of Section 23A and appliesthe quantitative, qualitative, and collateral requirements of Section 23A to securities borrowing and lending transactions and derivativetransactions with an affiliate to the extent that such transactions cause the bank or its subsidiaries to have a credit exposure to the affiliate.

Lending Limits CoverageCurrently, the total loans and extensions of credit by a national bank to a person are subject to certain limits. The Act expands thedefinition of “loans and extensions of credit” to include credit exposures to a person arising out of derivative transactions, repurchaseagreements, reverse repurchase agreements, and securities lending and borrowing transactions. The Act also provides that an insuredState bank may engage in a derivative transaction only if the relevant State’s law with respect to lending limits takes into considerationcredit exposure to derivative transactions.

Securities Firms Holding CompaniesThe Act repeals the elective investment bank holding company regulatory framework, pursuant to which investment banks were ableto elect to be supervised on consolidated basis by the SEC pursuant to the US Securities Exchange Act of 1934, and institutes anelective regulatory framework for “securities holding companies” under the authority of the Federal Reserve.

A securities holding company that is required by a foreign regulator to be subject to comprehensive consolidated supervision is able toregister with the Federal Reserve to become a “supervised securities holding company.” A supervised securities holding company issubject to the provisions of the BHCA, other than section 4 of the Act, and is fully subject to the Federal Reserve’s supervision andregulation powers under the BHCA.

The Volcker RuleThe Volcker Rule generally prohibits “proprietary trading” and “sponsoring” or acquiring of any ownership interest in “private equity funds” or“hedge funds” by insured depository institutions, insured depository institution holding companies, BHCs, and their affiliates (collectively“banking entities”). NBFCs engaged in such activities are subject to certain additional capital requirements and quantitative limits.

Subject to any restrictions or limitations that the appropriate Federal banking agencies, the SEC, and the CFTC may impose, thegeneral prohibition on proprietary trading activities does not apply with respect to: (i) the trading of obligations of the United States,obligations of any state or political subdivision of a state, and obligations of or instruments issued by Ginnie Mae, Fannie Mae, orFreddie Mac; (ii) trading of securities and other instruments in connection with underwriting or market-making-related activities; (iii) risk-mitigating hedging activities in connection with and related to individual or aggregated positions, contracts, or other holdings; (iv)trading on behalf of customers; (v) certain trading activities by regulated insurance companies; and (vi) trading activities conductedsolely outside of the United States by companies that are not directly or indirectly controlled by a company organized under US law.

Subject to any restrictions or limitations that the appropriate Federal banking agencies, the SEC, and the CFTC may impose, thegeneral prohibition on “sponsoring” or investing in “private equity funds” or “hedge funds” does not apply to: (i) investments in smallbusiness investment companies, as that term is defined in section 103 of the Small Business Investment Act of 1958; (ii) investmentsdesigned to promote the public welfare; (iii) an investment made solely outside the United States provided that the company makingthe investment or conducting the activity is not directly or indirectly owned or controlled by a company organized under US law andthat no ownership interest in the target hedge fund or private equity fund is offered or sold to US residents; and (iii) organizing andoffering a private equity or hedge fund, including serving as a general partner, managing member, or trustee of the fund and selectingor controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or managementof the fund, provided that: (a) the fund is organized and offered only in connection with the provision of bona fide trust, fiduciary, orinvestment advisory services provided by the banking entity or NBFC to customers; (b) the banking entity or NBFC does not acquiremore than a de minimis ownership interest in the fund; (c) the banking entity or NBFC does not guarantee, assume, or otherwiseinsure the obligations of the fund; (d) the banking entity or NBFC does not share the same name or its variation with the fund; (e) no



director or employee of the banking entity or NBFC has an ownership interest in the fund (except for directors or employees directlyengaged in providing services to the fund); and (f) the banking entity or NBFC discloses to investors that any losses of the fund areborne solely by the investors and not by the banking entity.

A banking entity is able to make and retain an investment in a hedge fund or private equity fund that the banking entity organizes andoffers, provided that within a year of the establishment of the fund (with the possibility of two one-year extensions) the ownershipinterest of the banking entity in the fund shall be reduced through redemption, sale, or dilution to less than 3 percent of the totalownership interest in the fund. The aggregate investments by a banking entity in hedge funds or private equity funds may not exceed3 percent of the Tier 1 capital of the banking entity.

Concentration LimitsSubject to recommendations by the Council, a financial company is not able to merge or consolidate with another company if the totalconsolidated liabilities of the acquiring company upon consummation of the transaction exceeds 10 percent of the aggregateconsolidated liabilities of all financial companies as of the year end preceding the transaction. This limit does not apply to: (i) anacquisition of a bank in default or in danger of default or receiving FDIC assistance; or (ii) transaction that results only in de minimisincrease of the liabilities of the financial company.

Title VII: Wall Street Transparency and AccountabilityTitle VII of the Act provides for significant reforms of the over the counter (OTC) derivatives market, grants significant authority to the SECand the CFTC to regulate derivatives and market participants and requires clearing and exchange trading of most derivatives transactions.

Title VIII: Payment, Clearing, and Settlement SupervisionTitle VIII is intended to reform transaction clearance and settlement provisions to mitigate systemic risk in the financial system and topromote financial stability. The Act seeks to accomplish this by: (i) designating certain entities and activities as systemically important;(ii) facilitating the creation of risk management standards; and (iii) providing regulators with increased examination, enforcement andinformation gathering authority. Designated entities are also granted access to the Fed’s discount window.

Title IX: Investor Protections and Improvements to the Regulation of SecuritiesTitle IX seeks to increase investor protections by, among other things, requiring the SEC to study and consider establishing a fiduciarystandard of care for broker-dealers commensurate to that applicable to registered investment advisers. It also includes provisions: (i)establishing additional whistleblower protections; (ii) increasing the SEC’s authority to seek collateral bars; (iii) requiring the SEC tosubmit annual reports on its regulatory activities; and (iv) strengthening aspects of corporate governance. Subtitle H significantlyimpacts the regulation of the municipal securities industry by, for example: (i) requiring municipal advisors (e.g., persons who advisemunicipal entities) to register with the SEC; (ii) expanding the authority of the Municipal Securities Rulemaking Board (“MSRB”); and (iii)creating an Office of Municipal Securities within the SEC to administer SEC rules regarding municipal securities and coordinaterulemaking and enforcement actions with the MSRB.

Subtitle C of Title IX: Improvements to the Regulation of Credit Rating AgenciesSubtitle C of Title IX of the Act contains credit rating agency provisions which seek to address the varied conflict of interest problemsthat Congress has determined arise in the governance of credit rating agencies and the issuance of credit ratings.

Subtitle D of Title IX: Improvements to the Asset-backed Securitization ProcessAmendments to the Securities Exchange Act and the Securities Act included in Subtitle D of Title IX of the Act operate to: (i) introducea new definition of “asset-backed security” that is broader than the definition contained in Regulation AB under the Securities Act; (ii)require that the Federal banking agencies and the SEC (and, with respect to residential mortgage assets, jointly with the Secretary ofHousing and Urban development and the Federal Housing Finance Agency), coordinated by the Chairman of the Oversight Council,prescribe rules and regulations setting out criteria, requirements and guidelines for entities being “securitizers” and “originators” (asdefined in Subtitle D) in transactions involving asset-backed securities to retain certain amounts of credit risk with respect to theassets underlying or collateralizing such asset-backed securities; (iii) set minimum standards for the credit risk retention regulations tobe promulgated by the Federal banking agencies and the SEC; (iv) impose certain new disclosure and diligence requirements forissuers of asset-backed securities, including disclosing in registration statements information regarding underlying assets and thenature of asset review conducted by the asset-backed securities issuer, in addition to removing an exemption from registration forcertain mortgage-backed securities; (v) direct the SEC to prescribe regulations requiring that NRSROs describe, in their rating reports,



the representations, warranties and enforcement mechanisms contained in the security issues that they rate and how suchrepresentations, warranties and enforcement mechanisms differ from those in similar asset-backed securities issuances; and (vi)require a macroeconomic effects study on the risk retention requirements and other amendments implemented under Subtitle D within180 days of enactment of the Act.

Risk retention regulations are required to be promulgated by the appropriate Federal agencies and the SEC within 270 days followingthe enactment of the Exchange Act section included in Subtitle D of Title IX, and will be required to be effective (i) one year afterpublication in the Federal Register for securitizers and originators of asset-backed securities backed by residential mortgages, and (ii)two years after such publication for securitizers and originators of all other classes of asset-backed securities. SEC regulationsrequiring rating agency disclosure of representations and warranties contained in asset-backed securities transactions, and regulationsrequiring asset diligence and disclosure of diligence reviews by issuers, are to be promulgated within 180 days following theenactment of Subtitle D of Title IX.

Syndicated LendingThe Act contains certain risk retention provisions (colloquially referred to as “skin-in-the-game” provisions) that require any “securitizer” toretain a portion of the credit risk of any asset transferred, sold or conveyed by the securitizer to a third party. Please see page 75 for abrief discussion of the skin-in-the-game provisions and potential effects on the syndicated loan market.

Subtitle E of Title IX: Accountability and Executive CompensationThe Act contains significant executive compensation-related reforms, which include the following:

n A separate non-binding resolution subject to shareholder vote (commonly referred to as “say-on-pay”) to approve certain executivecompensation, to be included in proxy or consent or authorization materials, and a separate vote as to payments and benefitsbased on a change in control (“golden parachutes”), unless such golden parachute amounts are included in the generalcompensation disclosure and resolution;

n Various requirements pertaining to compensation committee matters, including the independence of compensation committees,compensation consultants and other advisors;

n Additional executive compensation disclosure requirements, including the disclosure of the relationship between executivecompensation that was actually paid (and which is required to be disclosed) and a company’s financial performance;

n Requirements to develop and implement a clawback policy with respect to awards of incentive-based compensation if financialson which such amounts are awarded prove inaccurate;

n Requirement to disclose its employee and director hedging policy;

n Requirement for standards to be established by the Federal Reserve to prohibit excessive compensation by holding companies ofdepository institutions; and

n A prohibition of brokers from voting shares on the election of directors, executive compensation or other significant matters, asdetermined by the SEC.

Title X: Bureau of Consumer Financial ProtectionTitle X creates a new Bureau of Consumer Financial Protection to centralize responsibility (currently dispersed among the federalbanking regulators and other agencies) for implementing, examining and enforcing compliance with federal consumer financialprotection laws and establishes certain new consumer protection measures.

Title XI: Federal Reserve System ProvisionsAmendments to Emergency Lending AuthorityThe Act amends Section 13 of the Federal Reserve Act (“FRA”) to prohibit the Federal Reserve from extending credit in unusual andexigent circumstances to an individual, partnership, or corporation other than through a “program or facility with broad-based eligibility.”

Review of Special Federal Reserve Credit FacilitiesThe Act authorizes the GAO to conduct reviews, including on-site examinations of the Federal Reserve, any open market transactionor discount window advance that meets the definition of “covered transaction” in section 11(s) of the FRA (“covered transactions”),and any program or facility, including any SPV or other entity, established by or on behalf of the Federal Reserve (a “credit facility”)pursuant to section 13 of the FRA, if the GAO determines that such reviews are appropriate.



Emergency Financial Stabilization ProgramsUpon written determination of the FDIC and the Federal Reserve, the FDIC will create a widely available program to guarantee theobligations of solvent insured depository institutions or insured depository institutions holding companies (including their affiliates)during times of severe economic distress, except that such program may not include the provision of equity in any form.

Federal Reserve Governance AmendmentsThe FRA will be amended to prohibit directors representative of the stockholding banks to vote for the appointment of FederalReserve Bank presidents. No later than one year after the enactment of the Act, the GAO will audit the governance of the FederalReserve Bank system. The GAO should also conduct an audit of all financial assistance provided by the Federal Reserve during theperiod from December 1, 2007 until the enactment of the Act. The Act mandates the Federal Reserve to publish on its websiteinformation about the financial assistance it has provided during the period from December 1, 2007 until the enactment of the Act.

Title XII: Improving Access to Mainstream Financial InstitutionsTitle XII is intended to encourage initiatives for financial products and services that are appropriate and accessible for millions ofAmericans who are not fully incorporated into the financial mainstream. It seeks to accomplish this goal by, among other things:(i) expanding access to mainstream financial institutions; (ii) providing low-cost alternatives to small dollar loans; and (iii) providinggrants to establish loan-loss reserve funds.

Title XIII: Pay It Back ActTitle XIII will cause the reduction of TARP funding to $475 billion and cause certain recaptured, returned and repaid proceeds andfunds, such as the proceeds from the sales of Fannie Mae and Freddie Mac, to be applied solely toward deficit reduction, providedthat, under certain circumstances, the President will be able to waive the recapture of certain funds, preventing their applicationtoward deficit reduction, and reserve such funds for future appropriation.

Title XIV: Mortgage ReformThe Mortgage Reform and Anti-Predatory Lending Act (the “Act”) is a response to the residential mortgage crisis and perceivedpredatory lending practices, foreclosure scams and a lack of public education on the financial risks of homeownership. The Act providessupport for homeowners throughout the home buying and ownership process, including obtaining a mortgage, refinancing, disputeswith lenders and possible foreclosures. The Act also requires the completion of several studies and the creation of new programs. Theregulations required to give effect to the various provisions of the Act, however, will take effect within two and half years.

Title XV: MiscellaneousTitle XV of the Act requires the US Executive Director of the IMF to evaluate proposed loans to a country whose public debt exceedsits gross domestic product and to oppose such proposed loans if the loan is not likely to be repaid in full. In addition, Title XV requiresany 1934 Act reporting company that uses certain minerals to make certain disclosures regarding whether these minerals originated inthe Democratic Republic of Congo or an adjoining country.

Title XVI: Section 1256 ContractsSection 1601 of the Act defines a “section 1256 contract” under the Internal Revenue Code to exclude (i) any securities futurescontract or option on such a contract unless such contract or option is a dealer securities futures contract, or (ii) any interest rateswap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, creditdefault swap, or similar agreement.



Title I.Systemic RiskRegulation


Financial Stability OversightCouncilCouncil Establishment The Act provides for the establishment ofa Financial Stability Oversight Council (the“Council”). The Council is chaired by theSecretary of the Treasury and comprisesthe heads of the Federal Reserve, theOffice of the Comptroller of the Currency(“OCC”), the Securities and ExchangeCommission (“SEC”), the CommodityFutures Trading Commission (“CFTC”),the Federal Deposit InsuranceCorporation (“FDIC”), the Federal HousingFinance Agency (“FHFA”), the Bureau ofConsumer Financial Protection (“BCFP”),the National Credit Union Administration,and an independent member appointedby the President with insurance expertise.The Council shall meet no less frequentlythan quarterly and will make decisions bymajority vote.

Council DutiesThe Council is generally tasked withidentifying and responding to systemicrisks and its duties, among other things,include: (i) designating systemicallyimportant “nonbank financial companies”and financial market utilities and payment,clearing, and settlement activities; (ii)making recommendations concerning theestablishment by the Federal Reserve ofheightened regulatory capital standards,leverage, liquidity, contingent capital,resolution plans, concentration limits,enhanced disclosures and overall riskmanagement standards for systemicallyimportant bank holding companies and“nonbank financial companies;” (iii)collection of financial information frommember agencies for assessing systemicrisks; and (iv) making recommendationsto member agencies concerningsupervisory standards, priorities,and principles.

Nonbank Financial HoldingCompanies Defined A “nonbank financial company” is anycompany that is predominantly engaged

in activities that are financial in nature (asdefined in section 4(k) of the BankHolding Company Act (“BHCA”)). Acompany is predominantly engaged infinancial activities if it derives more than85 percent of its gross revenues fromsuch activities or its consolidated assetsrelated to such activities represent 85percent or more of consolidated assets.

Designation of SystemicallyImportant Financial HoldingCompanies A nonbank financial company that theCouncil determines could pose a threatto the financial stability of the UnitedStates (“NBFC”) is required to registerwith, and is subject to supervisory andprudential standards imposed by theFederal Reserve. Foreign nonbankfinancial companies may also bedeemed to be systemically importantand subjected to supervision andregulation by the Federal Reserve if theCouncil determines that materialfinancial distress or the nature, scope,size, scale, concentration,interconnectedness, or mix of theactivities of the foreign nonbank financialcompany could pose a threat to thefinancial stability of the United States. Inmaking such a determination, theCouncil shall consult with theappropriate home country supervisor, ifany, of the foreign nonbank financialcompany that is being considered for

such a determination. Large,interconnected bank holding companies(“LIBHCs”) are also generally treated assystemically important.

The factors that the Council must considerin designating a nonbank financialcompany as systemically important shallinclude: (i) extent of leverage; (ii) amountand nature of the company’s financialassets and liabilities; (iii) extent and natureof off-balance sheet exposures; (iv) extentand nature of transactions andrelationships of the company with othersignificant financial companies; (v) theimportance of the company as a source ofcredit for households, businesses,government entities, and as a source ofliquidity for the US financial system; and(vi) any other risk-related factors that theCouncil deems appropriate.

Any bank holding company (“BHC”) withtotal consolidated assets of $50 billion ormore as of January 1, 2010, whichreceived financial assistance under theCapital Purchase Program establishedunder the Emergency EconomicStabilization Act of 2008, that ceases tobe a BHC will automatically be treated asan NBFC subject to supervision andregulation by the Federal Reserve.

An NBFC may establish an intermediateholding company, under which it conductsfinancial activities subject to prudentialstandards and Federal Reservesupervision; nonfinancial activities of the

“A nonbank financial company that the Councildetermines could pose a threat to the financial stabilityof the United States is required to register with, and issubject to supervisory and prudential standardsimposed by, the Federal Reserve. Foreign nonbankfinancial companies may also be deemed to besystemically important and subjected to supervisionand regulation by the Federal Reserve. Large,interconnected bank holding companies are alsogenerally treated as systemically important.”

Systemic Risk Regulation



company shall not be subject to prudentialstandards and Federal Reserve supervision.

Prudential StandardsRecommendations To mitigate systemic risk the Council maymake recommendations to the FederalReserve concerning the establishmentand enhancement of prudential standardsapplicable to NBFCs and LIBHCs. Inmaking such recommendations, theCouncil may: (i) differentiate amongcompanies that are subject to heightenedstandards on an individual basis or bycategory, taking into consideration theircapital structure, riskiness, complexity,financial activities, size, and any otherrisk-related factors that the Councildeems appropriate; or (ii) recommend anasset threshold higher than $50 billion forthe application of any standard.

The enhanced supervision and prudentialstandards that the Council mayrecommend include: (i) enhanced risk-based capital requirements; (ii) leveragelimits; (iii) liquidity requirements; (iv)resolution plan (“living will”) and creditexposure report requirements; (v)concentration limits; (vi) a contingentcapital requirement (requiring a minimumamount of contingent capital that is

convertible to equity in times of financialdistress); (vii) enhanced public disclosures;(viii) short term debt limits; and (ix) overallrisk management requirements.

In making recommendations concerningthe applicability of enhanced supervisionand prudential standards with respect toforeign-based NBFCs or LIBHCs, theCouncil shall give due regard to theprinciples of national treatment andcompetitive equality and shall take intoaccount the extent to which an NBFC orLIBHC is subject on a consolidated basisto home country standards that arecomparable to those applied to financialcompanies in the United States. Also,before requiring the submission of reportsfrom a company that is a foreign NBFC orforeign-based LIBHC, the Council shall, tothe extent appropriate, consult with theappropriate foreign regulator of suchcompany and, whenever possible, rely oninformation already being collected bysuch foreign regulator, with Englishtranslation. Further, more generally, inexercising its duties with respect to foreignNBFCs or LIBHCs and cross-borderactivities and markets, the Council shallconsult with appropriate foreign regulatoryauthorities, to the extent appropriate.

Activity Limitations and Divestitures The Act provides that if the FederalReserve determines that a BHC with totalconsolidated assets of $50 billion or moreor NBFC poses a grave danger to thefinancial stability of the United States, theFederal Reserve, upon affirmative vote ofnot less than 2/3 of the members of theCouncil, shall require the subject companyto: (i) terminate activities; (ii) imposeconditions on the conduct of activities; (iii)limit any expansion; or (iv) dispose ofassets or off-balance-sheet items.

Office of Financial ResearchAn Office of Financial Research (“OFR”)shall be established within the TreasuryDepartment. The OFR will be headed bya Director appointed by the Presidentwith consent of the Senate. The purposeof the OFR is to support the Council andthe financial regulatory agencies by,among other things: (i) collecting data,including financial transaction andposition data; (ii) standardizing the typesof data reported and collected; and (iii)developing tools for risk managementand monitoring. The OFR shall issuerules, regulations, and orders to theextent necessary to carry out its duties.The financial regulatory agencies, inconsultation with the OFR, shallimplement regulations promulgated bythe OFR to standardize the types andformats of data reported and collected onbehalf of the Council. The OFR shall havethe power to issue subpoenas(enforceable in a district court) for theproduction of data that the OFR isauthorized to collect. The OFR is fundedby an assessment on NBFCs and BHCswith total consolidated assets of $50billion or more.

The OFR shall prepare and make public:(i) a financial company reference database;(ii) a financial instruments referencedatabase; and (iii) standards for reporting


“The enhanced supervision and prudential standardsthat the Council may recommend includes: (i) enhancedrisk-based capital requirements; (ii) leverage limits; (iii)liquidity requirements; (iv) resolution plan (“living will”)and credit exposure report requirements; (v)concentration limits; (vi) a contingent capital requirement(requiring a minimum amount of contingent capital thatis convertible to equity in times of financial distress); (vii)enhanced public disclosures; (viii) short term debt limits;and (ix) overall risk management requirements.”


financial transactions and positions data tothe OFR. The OFR shall not, however,make public any “confidential data.”

The OFR shall develop independentanalytical capabilities and computingresources to, among other things: (i)develop and maintain metrics andreporting systems for systemic risk; (ii)monitor, investigate, and report onchanges in system-wide risk levels andpatterns; (iii) conduct, coordinate, andsponsor research to support and improveregulation of financial entities andmarkets; (iv) evaluate and report on stresstests; and (v) promote best practices forfinancial risk management.

Federal Reserve Authorityover NBFCs and LIBHCsRegulatory Reports andExamination Authority The Act provides that the Federal Reservemay require reports and examine anyNBFC and its subsidiaries to assess: (i) thenature of the operations and the financialcondition of the company; (ii) the risk thecompany may pose to the financial systemand its systems for monitoring andcontrolling such risks; and (iii) compliancewith regulatory requirements. The FederalReserve shall coordinate with an NBFC’sprimary financial regulator and, to the fullestextent possible, use existing examinationreports or other available supervisoryinformation prior to requiring reports andconducting examinations of NBFCs.

Enforcement Authority If the Federal Reserve determines that anNBFC is not in compliance with FederalReserve regulations or poses a threat tofinancial stability, the Federal Reserve mayrecommend an enforcement action to theNBFC’s primary financial regulator and, ifthe primary financial regulator does nottake an enforcement action acceptable tothe Federal Reserve, the Federal Reserve

has a back-up authority to itself imposesuch an enforcement action.

Prior Approval Requirements NBFCs will be treated as BHCs forpurposes of Section 3 of the BHCA.NBFCs and BHCs with total consolidatedassets of $50 billion or more shallgenerally be required to seek FederalReserve approval prior to acquiring sharesof companies with assets of $10 billion ormore engaged in financial activities otherthan activities authorized under Section4(c)(8) and 4(k)(4)(E) of the BHCA.

BHCA exemptions from the prior noticerequirements for nonbanking acquisitionsfor well managed and well capitalizedinstitutions are eliminated with respect toNBFCs and BHCs with total consolidatedassets of $50 billion or more. In addition tothe BHCA’s existing standards for approvalof nonbanking acquisitions, the FederalReserve is required to consider risks tofinancial stability that may arise out of suchacquisitions.

Prudential Standards The Federal Reserve is required, on its ownor pursuant to recommendations by theCouncil, to establish prudential standardsand disclosure requirements for NBFCsand BHCs with total consolidated assets of$50 billion or more (for ease of reference

we shall also refer to such BHCs as“LIBHCs”) that are more stringent than therequirements applicable to BHCs and thatmay increase in stringency depending on anumber of factors. In prescribing morestringent prudential standards the FederalReserve may, on its own or pursuant to arecommendation by the Council,differentiate among companies on anindividual basis or by category, taking intoconsideration their capital structure,riskiness, complexity, financial activities,size, and any other risk-related factors thatthe Federal Reserve deems appropriate.The Federal Reserve may, pursuant to arecommendation by the Council, establishan asset threshold higher than $50 billionfor the application of any standard.

In applying the enhanced prudentialstandards to foreign NBFCs or foreign-based LIBHCs, the Federal Reserve shallgive due regard to the principle of nationaltreatment and competitive equality, takinginto account the extent to which theforeign NBFC or foreign-based LIBHC issubject on a consolidated basis to homecountry standards that are comparable tothose applied to financial companies inthe United States.

The Federal Reserve has a broadmandate to establish prudential standardsfor NBFCs and LIBHCs that shall include:


“The Act provides that if the Federal Reserve determinesthat a BHC with total consolidated assets of $50 billionor more or NBFC poses a grave danger to the financialstability of the United States, the Federal Reserve, uponaffirmative vote of not less than 2/3 of the members ofthe Council, shall require the subject company to:(i) terminate activities; (ii) impose conditions on theconduct of activities; (iii) limit any expansion; or (iv) disposeof assets or off-balance-sheet items.”


(i) risk-based capital requirements; (ii)leverage limits; (iii) liquidity requirements;(iv) overall risk management requirements;(v) resolution plan and credit exposurerequirements; and (vi) concentration limits.Such prudential standards may alsoinclude: (i) contingent capital requirement;(ii) enhanced public disclosures; (iii) short-term debt limits; and (iv) such otherprudential standards that the FederalReserve determines are appropriate.

Capital Adequacy Requirements The Act requires the Federal bankingagencies to establish minimum leverageand risk-based capital requirements on aconsolidated basis for insured depositoryinstitutions, their holding companies, andNBFCs that shall be no less than theleverage and risk-based capitalrequirements currently in effect for FDIC-insured depository institutions under thePrompt Corrective Action frameworkestablished by the FDIA (the “minimumcapital requirement”). There are somedifferences in the regulatory capitaltreatment currently applicable to FDIC-insured depository institutions and BHCsand, as a result of the minimum capitalrequirement, BHCs are no longer able toinclude certain instruments in Tier Icapital, most notably, qualifying trustpreferred securities. The inclusion in Tier Icapital of such instruments issued priorto May 19, 2010, shall be phased outover a 3 year period commencing onJanuary 1, 2013. Depository institution

holding companies with totalconsolidated assets of less than $15billion are able to continue to include inTier I capital such instruments issuedprior to May 19, 2010.

The Act clarifies that the minimum capitalrequirement does not require depositoryinstitution holding companies to deductfrom regulatory capital investments infinancial subsidiaries (even though insureddepository institutions are required todeduct such investments), unless suchcapital deduction is otherwise required bythe appropriate regulatory agency.

Depository institution holding companies notpreviously supervised by the FederalReserve and bank holding companysubsidiaries of foreign banking organizationsshall become subject to the leverage and

minimum risk-based capital requirements 5years after the enactment of the Act.

In addition, the Federal bankingagencies shall establish capitalrequirements applicable to all depositoryinstitutions, their holding companies,and NBFCs that shall address the risksthat such institutions pose to “otherpublic and private stakeholders,”including specifically the risks arisingfrom: (i) significant volumes of activity inderivatives, securitizations, financialguarantees, repurchase agreements,and securities borrowing and lending; (ii)concentrations in assets with reportedvalues based on models rather thanhistorical cost; and (iii) concentration inmarket share for any activity that wouldsubstantially disrupt financial markets ifthe institution unexpectedly ceasesthe activity.

The Federal Reserve may promulgateregulations that require NBFCs andLIBHCs to maintain a minimum amount ofcontingent capital that is convertible toequity in times of financial distress.

GAO Capital StudiesThe Government Accountability Office(“GAO”) shall conduct a study of the use ofhybrid capital instruments as a component


“The Federal Reserve is required, on its own or pursuantto recommendations by the Council, to establishprudential standards and disclosure requirements toNBFCs and BHCs with total consolidated assets of $50billion or more that are more stringent than therequirements applicable to BHCs and that may increasein stringency depending on a number of factors.”

“The Federal Reserve has a broad mandate to establishprudential standards for NBFCs and LIBHCs that shallinclude: (i) risk-based capital requirements; (ii) leveragelimits; (iii) liquidity requirements; (iv) overall risk managementrequirements; (v) resolution plan and credit exposurerequirements; and (vi) concentration limits. Such prudentialstandards may also include: (i) contingent capitalrequirement; (ii) enhanced public disclosures; (iii) short-termdebt limits; and (iv) such other prudential standards that theFederal Reserve determines are appropriate.”


of Tier I capital. GAO shall also be tasked tostudy capital requirements applicable to USintermediate holding companies of foreignbanks that are BHCs or savings and loanholding companies (“SLHCs”). Within 18months of the enactment of the Act, theGAO shall submit reports summarizing theresults of the studies to the Congressionalbanking committees, which shall includespecific recommendations for legislative orregulatory action regarding the treatment ofhybrid capital instruments, including trustpreferred shares.

Special Leverage Requirement The Federal Reserve shall require anLIBHC or an NBFC to maintain a debt toequity ratio of no more than 15 to 1,upon a determination by the Councilthat such a company poses a “gravethreat” to the financial stability of theUnited States and the imposition of suchrequirement is necessary to mitigate therisk that such company poses to thefinancial stability of the United States.The computation of capital for purposesof meeting the leverage requirementshall take into account any off-balance-sheet activities of the company.

Living Wills The Federal Reserve is specificallyrequired to issue rules within 18 monthsof enactment of the Act that require

NBFCs and LIBHCs to periodically submitto the Federal Reserve, the Council, andthe FDIC: (i) report of exposures to otherNBFCs and LIBHCs; and (ii) a plan forrapid and orderly resolution in the event ofmaterial financial distress or failure (“livingwill”). If the Federal Reserve and the FDICdetermine that a living will is not credibleor adequate, the company is required tore-submit the living will within a time framespecified by the Federal Reserve and theFDIC. Failure to resubmit a credible planmay result in the imposition of morestringent capital, leverage, or liquidityrequirements or restrictions on thegrowth, activities or operations of thecompany. If the company fails to resubmita living will that remedies the deficiencieswithin 2 years of the imposition of more

stringent prudential requirements, theFederal Reserve and the FDIC, inconsultation with the Council, may orderdivestiture of assets or operations of thecompany.

Short-term Debt Limits The Federal Reserve may by regulationprescribe a limit on the amount of short-term debt, including off-balance-sheetexposures, that may be accumulated byany LIBHC and NBHC. Any such limitshall be based on the short-term debt ofthe company as a percentage of capitalstock and surplus of the company or onsuch other measures as the Board ofGovernors considers appropriate. TheFederal Reserve shall define by regulationthe meaning of “short-term debt” but theterm does not include insured deposits.

Credit Exposure Concentration Limits The Federal Reserve shall prohibit byregulation credit exposures by NBFCs andLIBHCs to an unaffiliated company thatexceeds 25 percent of the capital andsurplus of the company. The FederalReserve is authorized to lower the 25percent threshold. The Act defines theterm “credit exposure” very broadly toinclude: extensions of credit, repurchaseagreements, securities borrowing andlending, guarantees, letters of credit, and


“BHCs are no longer able to include certain instruments inTier I capital, most notably, qualifying trust preferredsecurities. The inclusion in Tier I capital of suchinstruments issued prior to May 19, 2010, shall bephased out over a 3 year period commencing on January1, 2013. Depository institution holding companies withtotal consolidated assets of less than $15 billion are ableto continue to include in Tier I capital such instrumentsissued prior to May 19, 2010.”

“The Act would require the Federal Reserve to conductannual “stress tests,” in coordination with the appropriateprimary financial regulatory agency, to determine whetherNBFCs and LIBHCs have sufficient capital to absorblosses as a result of adverse economic conditions. TheFederal Reserve shall publish a summary of the testresults and shall require NBFCs and LIBHCs to updatetheir living wills as the Federal Reserve determinesappropriate, based on the results of such tests.”


“all purchases of or investments insecurities issued by the company.” TheFederal Reserve is granted broaddiscretion to expand and carve outexemptions from the definition of coveredcredit exposures.

Risk Management Standards The Federal Reserve shall require publiclytraded NBFCs and BHCs with totalconsolidated assets of $10 billion or moreto establish a risk committee responsiblefor the oversight of the enterprise-widerisk management practices. The FederalReserve may require publicly traded BHCswith total consolidated assets of less than$10 billion to also establish riskcommittees. The risk committees shallinclude a number of independentdirectors to be determined by the FederalReserve based on the nature ofoperations, size of assets, and othercriteria the Federal Reserve deemsappropriate, and shall include at least 1risk management expert with experiencein identifying, assessing, and managingrisk exposures of large, complex firms.

Stress Tests The Act requires the Federal Reserve toconduct annual “stress tests,” incoordination with the appropriate primaryfinancial regulatory agency, to determinewhether NBFCs and LIBHCs have sufficient

capital to absorb losses as a result ofadverse economic conditions. The FederalReserve shall publish a summary of the testresults and shall require NBFCs andLIBHCs to update their living wills as theFederal Reserve determines appropriate,based on the results of such tests.

The Act also requires NBFCs and LIBHCsto conduct semiannual stress tests;financial companies with totalconsolidated assets of more than $10,000shall conduct annual stress tests. Acompany subject to the stress testrequirement shall report the stress testresults to the Federal Reserve and itsprimary financial regulatory agency. EachFederal primary financial regulatoryagency shall issue rules establishing theform and content of such reports,specifying the methodology for theconduct of stress tests and requiringpublic release of the stress test results.

Prompt Corrective Action The Federal Reserve, in consultation withthe Council and the FDIC, shallpromulgate regulations for earlyremediation of financial distress of NBFCsand LIBHCs that requires definingregulatory capital and liquidity thresholdsof financial decline that triggers, amongother things, a capital restoration plan andcapital raising requirements, limits on

transactions with affiliates, managementchanges, and asset sales. Essentially, theAct requires the establishment of aremediation framework for NBFCs andLIBHCs modeled on the PromptCorrective Action framework currentlyapplicable to insured depositoryinstitutions.

Organization Structure Requirements The Federal Reserve shall promulgateregulations to: (i) establish criteria fordetermining whether to require NBFCs toestablish an intermediate holdingcompany in which to conduct financialactivities; and (ii) to establish anyrestrictions on transactions between suchintermediate company and its affiliates. Acompany that directly or indirectly controlssuch an intermediate holding companyshall be required to serve as a source ofstrength to its subsidiary intermediateholding company.

Special FDIC Examination AuthorityThe FDIC is authorized to conduct aspecial examination of any depositoryinstitution, NBFC, or LIBHC, to determinethe condition of such depository institutionfor insurance purposes, or of such NBFCor LIBHC for the purpose of implementingthe resolution authority provided for inthe Act. The FDIC may not use thisspecial examination authority with respectto a company that is in a generallysound condition.

New Standard for Approval andTermination of US Offices of ForeignBanks and Broker-Dealers The Act adds an additional standard forapproval of US banking offices of foreignbanks, which requires, in the case of a“foreign bank that presents a risk to thestability of United States financial system”,the Federal Reserve to consider whetherthe home country of the foreign bank hasadopted, or is making demonstrable


“The Act also authorizes the Federal Reserve, afternotice and opportunity for a hearing, to terminate thebanking activities for any “foreign bank that presents arisk to the stability of United States financial system” ifthe home country of the foreign bank has not adoptedor made demonstrable progress toward adopting anappropriate system of financial regulation to mitigatesuch risk.”


progress toward adopting, an appropriatesystem of financial regulation for thefinancial system of such home country tomitigate such risk. The Act also authorizesthe Federal Reserve, after notice andopportunity for a hearing, to terminate thebanking activities for any “foreign bankthat presents a risk to the stability ofUnited States financial system” if the homecountry of the foreign bank has notadopted or made demonstrable progresstoward adopting an appropriate system offinancial regulation to mitigate such risk.

Similarly, the Act provides that the SECmay consider, in determining whether topermit a foreign person or an affiliate of aforeign person that presents a risk to thestability of the United States financialsystem to register as a United Statesbroker or dealer, whether the homecountry of the foreign person has adoptedor made demonstrable progress towardadopting an appropriate system offinancial regulation to mitigate such risk.The SEC may also determine to terminatethe registration a foreign person or an

affiliate of a foreign person that presents arisk to the stability of the United Statesfinancial system if the Commissiondetermines that the home country of theforeign person has not adopted, or madedemonstrable progress toward adopting,an appropriate system of financialregulation to mitigate such risk.

The Act does not specify how adetermination should be made as towhether a foreign bank or person poses arisk to the stability of United States financial

system. It is likely that such determinationwill be similar to the determination ofsystemic importance and will likelyencompass large, interconnected foreignbanking organizations and broker-dealers.

International Policy Coordination The Act contains explicit provisionsrequiring the President, the Council, theTreasury, and the Federal Reserve toconsult and coordinate with foreigncounterparts to address matters relatingto systemic risk.


“The SEC may also terminate the registration a foreignperson or an affiliate of a foreign person that presents arisk to the stability of the United States financial systemif the Commission determines that the home country ofthe foreign person has not adopted, or madedemonstrable progress toward adopting, anappropriate system of financial regulation to mitigatesuch risk.”

Title II.Orderly LiquidationAuthority


IntroductionThe Act creates a new regime forliquidation of financial companieswhose potential collapse mightjeopardize financial stability in theUnited States (“Covered FinancialCompanies”). The orderly liquidationauthority (“OLA”) contemplated by theAct allows the Federal DepositInsurance Corporation (the “FDIC”) toseize exclusive control of a failingnonbank financial company or bankholding company if the TreasurySecretary in consultation with the Boardof the Federal Reserve (“FRB”) and theFDIC determined that such a companypresented a systemic risk. The FDICadministers the liquidation of such aCovered Financial Company as receiverin accordance with the OLA provisions.Once a failing Covered FinancialCompany is placed under the OLA, anyinsolvency proceedings under the USBankruptcy Code will be preempted,and the debtor will be liquidated, andmay not be reorganized or rehabilitated.

With certain variations, the OLA is largelymodeled after the existing framework forinsolvent banks under the FDIA.

OLA Process Limited toCovered FinancialCompanies and CoveredBroker DealersAn OLA proceeding may be initiated onlywith respect to a Covered FinancialCompany, which is a “financial company”designated as a “covered financialcompany” by the Treasury Secretary.

Financial CompaniesThe OLA potentially applies to thefollowing types of entities organizedunder the laws of a state or of the UnitedStates (each, a “Financial Company”):

n a bank holding company;

n a non-bank financial companysupervised by the FRB;

n any company “predominantlyengaged” in activities that the FRBhas determined are “financial innature” or incidental thereto (afinancial company is deemed to be“predominantly engaged” in financialactivities if at least 85% of its and allits affiliates’ consolidated revenuesare derived from activities that arefinancial in nature); and

n any subsidiary of any of theforegoing that is predominantlyengaged in activities that the FRBhas determined are financial innature (other than an insureddepository institution).

Comment: Not Applicable to ForeignSubsidiaries and No ConsolidationRights. The Act does not permit OLAproceedings to apply to non-USentities. Nor does the Act give anyrights to the receiver to consolidate anentity with a subsidiary or affiliate in anOLA proceeding, although the Act doesnot explicitly prohibit such consolidationunder existing principles ofsubstantive consolidation.

Covered Financial CompaniesAn OLA proceeding may be invokedonly if each of the FRB and the FDIC,by a supermajority of two-thirds of theboard of the FRB or the FDIC,recommend an OLA proceeding. TheSecretary of the Treasury (inconsultation with the President) mustthen determine whether the FinancialCompany satisfies each element of thefollowing test:

1. Default or Danger of DefaultFirst, a Financial Company must be in“default or danger of default,” a conditionwhich is deemed to occur if:

n a bankruptcy case has been, or likelywill be, commenced with respect toa Financial Company; or

n the Financial Company has incurred,or is likely to incur, losses that willdeplete all or substantially all of the

Financial Company’s capital with noreasonable prospect to avoid suchdepletion; or

n the obligations of the FinancialCompany to creditors and othersexceed, or are likely to exceed, itsassets; or

n the Financial Company is, or is likelyto be, unable to pay its obligations inthe normal course of business.

2. Systemic Risk DeterminationSecond, the failure of the FinancialCompany has serious adverse effectson financial stability in theUnited States.

3. No Viable Private SectorAlternative to OLA Proceeding

Third, no viable private sector alternativeis available to prevent the default.

4. OLA Proceeding AppropriateFourth, any effect of commencing an OLAproceeding with respect to the FinancialCompany’s creditors, shareholders andrelevant market participants is appropriategiven the scope of the adverse impact onfinancial stability in the United States as awhole.

5. OLA Proceeding Mitigates AdverseEffects of Default

Fifth, the actions proposed under theOLA mitigate the adverse effects on theUS financial system.

6. Order to Convert Debt InstrumentsSixth, a federal agency orders theFinancial Company to convert all itsconvertible debt instruments that aresubject to regulatory order.

Registered Broker-DealersFor a registered broker-dealer or for afinancial company in which the largest USsubsidiary is a registered broker-dealer,the initial recommendation for an OLAproceeding must come from the SEC(rather than the FDIC) as well as the FRB.

Orderly Liquidation Authority



Insurance CompaniesFor an insurance company or for afinancial company in which the largest USsubsidiary is an insurance company, theinitial recommendation for an OLAproceeding must come from the Directorof the Federal Insurance Office (ratherthan the FDIC) as well as the FRB. Theliquidation or rehabilitation of insurancecompanies and any insurance subsidiariesof a Covered Financial Company remainssubject to the applicable state insurancelaws, although the FDIC is authorized tocommence judicial action in a state courtif the relevant state insurance regulatorfails to commence any proceeding within60 days after the failing insurancecompany is determined to be a CoveredFinancial Company.

FDIC Insured Depository InstitutionsThe liquidation of insured depositoryinstitutions would be subject to theexisting FDIA procedures.

Receivership Powers underthe OLAAppointment of the FDIC as ReceiverIf the Treasury Secretary determines that acompany is a Covered Financial Company,as described above, it will notify thecompany and the FDIC. If the company’sboard consents, the FDIC will be appointedas receiver. If the company does notconsent, the Treasury Secretary’sdetermination is subject to judicial reviewand, if the court agrees with the TreasurySecretary’s determination or fails to act,then the FDIC will be appointed as receiver.

Appointment of SIPC as TrusteeIf the relevant Covered FinancialCompany is a registered broker-dealer,the FDIC appoints the Securities InvestorProtection Corporation (“SIPC”) to act astrustee of the failing Covered Broker

Dealer and has full authority to liquidatethe failing registered broker-dealer inaccordance with the Securities InvestorProtection Act of 1970 (the “SIPA”)liquidation provisions.

Exclusion of US Bankruptcy Code andOther Bankruptcy ProceedingsUpon the appointment of the FDIC asreceiver or SIPC as trustee, as applicable,any bankruptcy proceeding involving theCovered Financial Company will bedismissed.

The FDIC as Receiver of CoveredFinancial CompaniesThe FDIC, when acting as receiver of aCovered Financial Company, will havebroad powers that largely mirror its existingreceivership powers under the FDIA. Asreceiver under the OLA, the FDIC succeedsto the rights, title, powers and privileges ofthe Covered Financial Company andoperates the Covered Financial Companywith all of the powers of its members orshareholders, directors and officers.

1. General PowersUnder the OLA, the FDIC may, amongother things:

n liquidate and wind-up the affairs ofthe Covered Financial Company;

n appoint itself as receiver of anysubsidiary (other than an insureddepository institution, insurancecompany, or registered broker-dealer)that is in default or in danger ofdefault, under certain circumstances;

n exercise subpoena powers;

n create a bridge financial company toacquire the Covered FinancialCompany’s assets;

n merge the Covered FinancialCompany with another company ortransfer any asset or liability of the

Covered Financial Company withoutany approval or consent;

n at any time after its appointment asreceiver, request a stay in any judicialaction or proceeding in which theCovered Financial Company is orbecomes a party for a period of up to90 days (which request must begranted by the court);

n utilize private sector services tomange and dispose of assets.

2. Substantive Treatment of CreditorClaims; Avoidance andRepudiation Powers

Generally, the FDIC, in its capacity asreceiver of a Covered Financial Company,has powers substantially similar to those itpresently has under the FDIA. In addition,the Act also includes provisions relating tosubstantive treatment of creditor claimsthat are based on the correspondingprovisions set forth under the U.S.Bankruptcy Code, intended to address abroader range of activities than those of adepository institution.

Under the Act, the FDIC has the authorityto avoid fraudulent and preferentialtransfers, disaffirm or repudiate anyburdensome contracts or leases, andenforce any contract notwithstanding anyprovisions for termination, default,acceleration, or exercise of rights uponinsolvency (with carveouts for qualifiedfinancial contracts similar to those setforth under the U.S. Bankruptcy Codeand discussed below).

In addition, the Act provides that adefault may not be declared under acontract with a Covered FinancialCompany for a period of 90 days afterthe appointment of the FDIC without theFDIC’s consent.



3. Priority of Expenses andUnsecured Claims

The OLA modifies the existing priority ofunsecured claims under the FDIA bygiving wage and benefit claims of non-executive employees priority over generalunsecured and subordinated debtcreditors, but subordinating any suchclaims of senior executive employees ofthe Covered Financial Company to alljunior creditor obligations.

4. Treatment of CreditorsThe FDIC as receiver is expresslypermitted not to treat similarly situatedcreditors in a similar manner and inaccordance with the priority of paymentif: (i) all similarly situated creditors receiveat least an amount they would havereceived in a liquidation proceedingunder the U.S. Bankruptcy Code and (ii)such disparate treatment, in the FDIC’sdiscretion, is necessary to maximizevalue of the Covered FinancialCompany’s assets, continue operationsof the receivership, or minimize lossesrealized upon disposition of the assets.

5. Coordination with ForeignFinancial Authorities

The FDIC as a receiver is required tocoordinate, to the maximum extentpossible, with any appropriate foreignfinancial authorities regarding the orderlyliquidation of a Covered FinancialCompany that has any assets oroperations outside of the United States.

6. Qualified Financial Contracts; SafeHarbor Provisions

Qualified financial contracts are definedas swap agreements, securitiescontracts, repurchase agreements,forward contracts and commoditycontracts (collectively, “QFCs”). The Actincludes safe harbor provisions for QFCsthat are similar to the QFC-relatedprovisions contained in the FDIA and

stays counterparties from exercisingtermination, close out and netting rightsunder a QFC with a Covered FinancialCompany for one business day after theappointment of the FDIC as receiver (the“QFC Transfer Period”), during whichperiod the FDIC as receiver may transferall QFCs to a bridge financial company orother acquirer.

n QFC Transfers. During the QFCTransfer Period, the FDIC as receivermust either (i) transfer all QFCsbetween the Covered FinancialCompany and an individualcounterparty (and the counterparty’saffiliates) to the same financialinstitution, or (ii) not transfer anyQFCs involving that counterparty(and the counterparty’s affiliates).The FDIC as receiver may transferthe QFCs to a non-U.S. financialinstitution only if the contractualrights of the counterparty to suchQFCs are enforceable substantiallyto the same extent as set out underthe OLA.

n QFC Safe Harbor Provisions. At anytime following the expiration of theQFC Transfer Period, the non-defaulting counterparty to a QFC is notstayed from exercising any of its rightsto terminate the QFC and alloutstanding transactions, net and setoff any termination amounts, andliquidate and apply any collateraltransferred to it by the CoveredFinancial Company under a relevantsecurity arrangement in connectionwith the QFC. In addition, absent thecounterparty’s actual intent to hinder,delay, or defraud the Covered FinancialCompany, any of its creditors or theFDIC as receiver, the FDIC is not ableto reclaim or avoid any collateraltransfer made by the Covered FinancialCompany in respect of any QFC.

n Repudiation of QFCs by the FDIC asreceiver. The FDIC as receiver, in itsdiscretion, is permitted to repudiateQFCs and terminate any outstandingtransactions, but is required to either(i) terminate all QFCs between theCovered Financial Company and anindividual counterparty (and thecounterparty’s affiliates) or (ii) notterminate any QFCs involving thoseparties.

n “Walkaway” Clauses Unenforceable.Any clause in a QFC that extinguishesa payment obligation of a non-defaulting party to a Covered FinancialCompany solely due to the CoveredFinancial Company’s insolvency isdeemed a “walkaway” clause andwould be unenforceable under theOLA regime.

7. Enforcement of ContractsGuaranteed by a Covered FinancialCompany

With respect to any contracts that areguaranteed by a Covered FinancialCompany subject to a receivership ofthe FDIC, the FDIC as receiver has aright to enforce obligations of a primaryobligor that ordinarily is subject totermination upon the insolvency of itscredit support provider if: (i) within theQFC Transfer Period that is applicable tosuch Covered Financial Company, theguarantee and all related assets andliabilities are transferred to, andassumed by, a third party, or,alternatively, (ii) the FDIC providesadequate protection with respect tosuch obligations.

8. The FDIC Receivership ProceedingsDuration Is Limited

The term of the FDIC’s receivership of aCovered Financial Company is limited toan initial period of three years, subject totwo one-year extensions.



SIPC and Registered Broker-DealersThe FDIC is required to appoint SIPC astrustee for the liquidation of a registeredbroker-dealer subject to an OLAproceeding. The FDIC’s involvement islimited to providing funding andexercising certain powers, including theestablishment of a bridge financialcompany, transferring assets andliabilities, repudiating contracts anddetermining claims. If the FDICestablishes a bridge financial companywith respect to a failing broker-dealer,the FDIC transfers all customer accountsand all customer property to suchfinancial company unless the transfer ofcustomer property would adverselyaffect the FDIC’s ability to avoid serious

impact on the U.S. financial system, orSIPC determines that customer propertyis transferred to another registeredbroker-dealer.

SIPC is entitled to exercise all of itspowers under the SIPA but would nothave jurisdiction over assets andliabilities transferred by the FDIC to anybridge financial company. QFCs to whicha broker-dealer is a party are governedexclusively by the OLA’s safe harborprovisions.

Orderly Liquidation FundThe Act establishes an orderly liquidationfund, intended to provide funding for theOLA proceedings, that are held at the

Treasury and managed by the FDIC. TheFDIC has authority to issue obligations tothe Treasury to fund the OLA. The FDIC isrestricted from incurring any obligationduring the first 30 days of liquidation thatresults in total obligations outstandingexceeding the sum of 10% of the totalconsolidated assets of the CoveredFinancial Company subject to an OLAproceeding. Thereafter, the FDIC maybecome obligated for up to 90% of the fairvalue of the total consolidated assets ofeach Covered Financial Company that areavailable for repayment.

The FDIC is required to charge risk-based assessments if necessary to repayobligations to the Treasury within fiveyears of issuance.


Title III.Transfer of Powers tothe Comptroller of theCurrency, theCorporation, and theBoard of Governors


Abolishment of the OTSOne year after the date of the enactmentof the Act the powers and duties of theOffice of Thrift Supervision (“OTS”)shall be transferred to the FederalReserve, the OCC, and the FDIC. Thetransfer date may be postponed butcannot be later than 18 months after theenactment of the Act. Within 180 daysafter the enactment of the Act theFederal Reserve, the OCC, and theOTS shall jointly submit a plan detailingthe steps that will be taken to accomplishthe transfer. All functions of the OTSrelating to the supervision and regulationof SLHCs and their subsidiaries (otherthan depository institution subsidiaries)shall be transferred to the FederalReserve. All functions of the OTS relatingto the supervision and regulation offederal savings associations shall betransferred to the OCC. All functions ofthe OTS relating to the supervisionand regulation of State savingsassociations shall be transferred to theFDIC. Effective 90 days after the transferdate the OTS would be abolished. TheAct does not abolish, however, theFederal savings association charter. TheOCC shall designate a DeputyComptroller, who shall be responsible forthe supervision and examination offederal savings associations.

No later than the transfer date theFederal Reserve, the OCC and the FDICshall identify and publish a list of theregulations that will continue in effect and

will be enforced by the respective agency.The Act contains a number of savingsprovisions, including provisions ensuringthe continued effect of all orders,resolutions, determinations, agreements,regulations, interpretations, and otheradvisory material issued by the OTS.

Agency FundingThe Act provides that the OCC maycollect an assessment, fee, or othercharges from entities subject to itssupervision as the OCC determinesnecessary or appropriate to carry itsresponsibilities. In determining theappropriate charge the OCC may takeinto account the nature and scope of theactivities of the entity, the amount andtype of its assets, its financial andmanagerial condition, and any otherfactor the OCC deems to be appropriate.

The Federal Reserve is similarlyauthorized to collect an assessment, fee,or other charges from BHCs and SLHCswith assets of $50 billion or more, andNBFCs, that are equal to the totalexpenses the Federal Reserve estimatesare necessary to carry out its supervisoryresponsibilities with respect to suchcompanies.

The FDIC is authorized to assess the costof any examination of any depositoryinstitution against the institution or as theFDIC determines is necessary orappropriate to carry out itsresponsibilities.

Deposit Insurance ReformsThe FDIC shall define the term“assessment base” as the amount equalto the average consolidated assets of theinsured depository institution during theassessment period minus the averagetangible equity of the insured depositoryinstitution during the assessment period.In the case of an insured depositoryinstitution that is a “custodial bank” (aterm to be defined by the FDIC) or abanker’s bank the assessment-basedamount is further reduced by an amountthe FDIC determines is appropriate forsuch institutions.

The Act requires that FDIC depositinsurance premiums be raised withrespect to banks with more than $10billion in assets, and requires that theFDIC increase its ratio of reserves to totalindustry deposits from 1.15% to at least1.35%.

The Act permanently increases thestandard maximum deposit insuranceamount from $100,000 to $250,000. TheAct also extends, until January 1, 2013,the FDIC’s Transaction AccountGuarantee Program (“TAGP”). Under theTAGP the FDIC fully insures the netamount maintained by a depositor in anoninterest-bearing transaction accountat an insured depository institution. Theterm ‘noninterest-bearing transactionaccount’ means a deposit or account (i)with respect to which interest is neitheraccrued nor paid; (ii) on which thedepositor or account holder is permittedto make withdrawals by negotiable ortransferable instrument, payment ordersof withdrawal, telephone or otherelectronic media transfers, or other similaritems for the purpose of makingpayments or transfers to third parties orothers; and (iii) on which the insureddepository institution does not reserve theright to require advance notice of anintended withdrawal.

Transfer of Powers to the Comptroller of the Currency, theCorporation, and the Board of Governors


“The FDIC shall define the term “assessment base” asthe amount equal to the average consolidated assets ofthe insured depository institution during the assessmentperiod minus the average tangible equity of the insureddepository institution during the assessment period.The Act extends, until January 1, 2013, the FDIC’sTransaction Account Guarantee Program.”


De Novo Branching byFederal SavingsAssociationsThe Act provides that a savingsassociation that becomes a bank may: (1)continue to operate any branch or agency

that the savings association operatedimmediately before the savingsassociation became a bank; and (2)establish, acquire, and operate additionalbranches and agencies at any locationwithin any State in which the savings

association operated a branchimmediately before the savingsassociation became a bank, if the law ofthe State in which the branch is located,or is to be located, permits establishmentof the branch if the bank were a Statebank chartered by such State.

“Upon written determination of the FDIC and the FederalReserve the FDIC shall create a widely available programto guarantee the obligations of solvent insureddepository institutions or insured depository institutionsholding companies (including their affiliates) during timesof severe economic distress, except that such programmay not include the provision of equity in any form.”


26


Dodd-Frank Wall Street Reform and Consumer Protection Act

Title IV.Regulation of Advisersto Hedge Funds andOthers

Registration RequirementsElimination of Private AdviserExemptionThe Act eliminates the exemption fromregistration under the Advisers Actthat is currently provided toinvestment advisers who, during thecourse of the prior 12 months, havehad fewer than 15 clients and whoneither hold themselves out generallyto the public as investment advisersnor act as investment advisersto investment companiesregistered under the InvestmentCompany Act of 1940 (the “InvestmentCompany Act”).

Establishment of Exemption forVenture Capital Fund Advisers andSmall Private Fund Advisers Due to the elimination of the privateadviser exemption, the Act requires theregistration of most investment advisersto privately offered funds that currentlyuse the exemption. The Act alsoestablishes, however, exemption fromregistration for investment advisers tocertain types of alternative investmentfunds: all private funds (basically, hedgefunds and private equity funds) withAUM under $150 million and all “venturecapital funds” (the definition of which isalso to be determined by the SEC),regardless of AUM. Notwithstanding the

exemptions, all exempt investmentadvisers are still subject tocertain reporting requirements asdescribed in the sidebar, “Exemptionsto Registration Requirements.”

Regulation of Advisers to Hedge Funds and Others

Definition of “Private Fund” For all purposes of the Act and theAdvisers Act, “private fund” would bedefined as an issuer that is aninvestment company as defined in theInvestment Company Act but forSection 3(c)(1) or Section 3(c)(7) of theInvestment Company Act, which setforth the “100 holders” and “qualifiedpurchasers” exemptions, respectively.

Exemptions to RegistrationRequirementsn Venture Capital Funds

• Exemption. The Act would amendthe Advisers Act by adding anexemption to the registrationrequirements of the Advisers Act forinvestment advisers to one or moreventure capital funds (and solely tosuch venture capital fund(s)).

• Cap. There would be no cap on theassets under management of suchventure capital fund investmentadvisers for the exemption to apply.

• Definition. The SEC would berequired to issue final rules to definethe term “venture capital fund”within one year.

• Reporting. Despite being exemptfrom registration under the AdvisersAct, the SEC would require suchadvisers to maintain such recordsand provide to the SEC suchannual or other reports as the SECdetermines necessary orappropriate in the public interest orfor the protection of investors.

n Small Private Funds

• Exemption. The Act would amendthe Advisers Act by adding anexemption to the registrationrequirements of the Advisers Act forinvestment advisers to one or moreprivate funds (and solely to suchprivate funds).

• Cap. Such exemption only appliesif the assets under management of

such private fund investmentadviser are, in the aggregate, lessthan $150 million.

• Definition. The Act defines “privatefund” as an issuer that is aninvestment company, as defined inthe Investment Company Act, butfor Section 3(c)(1) or Section 3(c)(7)of the Investment Company Act.

• Reporting. Despite being exemptfrom registration under the AdvisersAct, the SEC will require suchadvisers to maintain such recordsand provide to the SEC suchannual or other reports as the SECdetermines necessary orappropriate in the public interest orfor the protection of investors.

The Investment Advisers Act of 1940 (the “Advisers Act”) is generally the means bywhich Congress has attempted to regulate sponsors of investment funds. Title IV ofthe Act, under the heading “Regulation of Advisers to Hedge Funds and Others”(also called the “Private Fund Investment Advisers Registration Act of 2010”),expands the jurisdiction of the Securities and Exchange Commission (the “SEC”) overfund sponsors by substantially amending the Advisers Act.



Establishment of SEC Discretion toRequire Registration of Mid-SizedPrivate Fund AdvisersAfter various, failed attempts to carve-outan additional exemption for private equityfund advisers with assets undermanagement over $150 million (but undera certain cap, at one point proposed as$1 billion), Congress finally agreed toleave the registration of what it refers toas “mid-sized” private funds to thediscretion of the SEC. “Mid-sized” is notdefined in the Act, but Congress doesdirect the SEC to take into account thesize, governance, and investment strategyof private funds to determine whetherthey pose systemic risk in prescribingregulations and examination procedureswith respect to the registration ofinvestment advisers to mid-sized privatefunds which reflect the level of systemicrisk posed by such funds.

Establishment of Limited Exemptionfor Foreign Private Advisers The Act provides a limited exemptionfrom registration under the Advisers Actto any “foreign private adviser,” definedas any investment adviser who (i) has noplace of business in the United States,(ii) has, in total, fewer than 15 clientsand investors in the U.S. in private fundsadvised by the investment adviser, (iii)has aggregate assets undermanagement attributable to clients in theU.S. and investors in the U.S. in privatefunds advised by the investment adviserof less than $25 million or such higheramount as the SEC may, by rule, deemappropriate, (iv) does not hold itself outto the public in the U.S. as aninvestment adviser, and (v) does not actas (a) an investment adviser to aninvestment company registered underthe Investment Company Act or (b) acompany that has elected to be a

business development company (a“BDC”) under the Investment CompanyAct (and has not withdrawn its election).

Modification of Exemption forIntrastate Advisers The existing exemption from registrationfor any investment adviser whose clientsare all residents of the state within whichsuch investment adviser maintains itsprincipal office and place of businessand who does not advise with respect tosecurities listed on any national securitiesexchanges is modified by the Act tocarve-out from such exemption aninvestment adviser to any private fund.

Modification of Exemption forAdvisers Registered with the CFTCThe existing exemption from registrationfor any investment adviser that isregistered with the Commodity FuturesTrading Commission (the “CFTC”) (solong as such adviser does not act as (a)an investment adviser to an investmentcompany registered under theInvestment Company Act or (b) acompany that has elected to be a BDC(and has not withdrawn its election)) ismodified by the Act to state that anysuch investment adviser registered withthe CFTC that also serves as aninvestment adviser to any private fundstill qualifies for the exemption unless,after the date of the enactment of theAct, the business of the adviser shouldbecome predominantly the provision ofsecurities-related advice.

Establishment of Exemption forAdvisers to Small BusinessInvestment Companies The Act adds an exemption fromregistration for any investment adviser,other than one which has elected to be aBDC, who solely advises certain smallbusiness investment companies.

Exclusion of Family Offices The Act excludes any family office, asdefined by rule, regulation or order of theSEC, from the definition of “investmentadviser” under the Advisers Act, therebyexcluding family offices from theregistration, record-keeping and reportingrequirements of the Advisers Act. There isno deadline on the SEC defining the term“family office,” but the SEC is directed todefine it consistently with the previouspolicy of the SEC for granting exemptiverelief for family offices, recognizing therange of organizational, management andemployment structures and arrangementsemployed by family offices. The Act alsoexcludes any person who was notregistered or required to be registeredunder the Advisers Act as of January 1,2010 solely because the person providesinvestment advice (and was engagedbefore January 1, 2010 in providinginvestment advice) to (i) natural personswho, at the time of their applicableinvestment, are officers, directors oremployees of the family office who (a)have invested with the family office beforeJanuary 1, 2010 and (b) are “accreditedinvestors” as defined in Regulation Dunder the Securities Act of 1933, asamended, or the successors-in-interestthereto, (ii) any company ownedexclusively and controlled by members ofthe family of the family office, or as theSEC may prescribe by rule, (iii) anyinvestment adviser registered under theAdvisers Act that provides investmentadvice to the family office and whoidentifies investment opportunities to thefamily office, and invests in suchtransactions on substantially the sameterms as the family office invests, butdoes not invest in other funds advised bythe family office, and whose assets as towhich the family office directly or indirectlyprovides investment advice represent, in



the aggregate, not more than 5% of thevalue of the total assets as to which thefamily office provides investment advice.

Effective Increase of Minimum AUMRequired for Registration from $25million to $100 millionThe Act does not require investmentadvisers (i) required to be registered as aninvestment adviser with the State in whichit maintains its principal office and place ofbusiness, which registration subjects suchadviser to examination and (ii) with AUMof $25 million to $100 million (or suchhigher amount as the SEC may deemappropriate), to register under theAdvisers Act unless such investmentadviser (a) is an adviser to an investmentcompany registered under the InvestmentCompany Act, (b) has elected to be aBDC (and has not withdrawn its election)or (c) is otherwise required to register with15 or more States.

Record-Keeping, ReportingAnd Custody RequirementsCollection of Systemic Risk Data The Act permits the SEC to add to theexisting record-keeping and reportingobligations of registered investmentadvisers the requirements (i) to maintainsuch records, and file with the SEC suchreports, regarding private funds advisedby the investment adviser as necessaryand appropriate in the public interest andfor the protection of investors, or for theassessment of systemic risk by theCouncil and (ii) to provide and makeavailable to the Council those reports orrecords or the information containedtherein. Such information includes, foreach private fund, a description of: (a)the amount of assets under managementand use of leverage, including off-balance sheet leverage; (b) counterparty

credit risk exposure; (c) trading andinvestment positions; (d) valuationpolicies and practices of the fund; (e)types of assets held; (f) sidearrangements or side letters, wherebycertain investors in a fund obtain morefavorable rights or entitlements thanother investors; (g) trading practices; and(h) such other information as the SECdeems necessary and appropriate, whichmay include the establishment ofdifferent reporting requirements fordifferent classes of fund advisers, basedon the type or size of private fund beingadvised. Such records are required to bemaintained for however long the SECdeems necessary and appropriate andcopies of such records will need to bemade available to the SEC withoutundue effort, expense or delay, asreasonably requested by the SEC orits representatives.

Periodic and Special Examinations The Act permits the SEC to conductperiodic and, in its discretion, specialexaminations of the records of privatefunds maintained by registeredinvestment advisers.

Information Sharing with the Council The Act requires the SEC to makeavailable to the Council copies of allreports, documents, records andinformation filed with or provided to theSEC by a registered investment adviserwith respect to a private fund as theCouncil may consider necessary for thepurpose of assessing the systemic riskposed by such private fund.

Confidentiality of Information SharedThe Act requires the Council to maintainthe confidentiality of all such informationreceived. The SEC and the Council are

not able to be compelled to disclose anyreport or information required to be filedwith the SEC, unless doing so requiresthe SEC or the Council, as applicable, towithhold information from Congress,upon an agreement of confidentiality, orprevents the SEC or the Council, asapplicable, from complying with (i) arequest for information from any otherfederal department or agency or anyself-regulatory organization (“SRO”)requesting the information for purposeswithin the scope of its jurisdiction or (ii)an order of a US court in an actionbrought by the United States or theSEC. Any department, agency or SROthat receives reports or information of aregistered investment adviser to aprivate fund from the SEC is required tokeep such reports and informationconfidential to the same extent as theSEC. The SEC, the Council and anydepartment, agency or SRO thatreceives such reports or information areexempt from FOIA with respect to suchinformation.

Proprietary Information Under the Act, proprietary information ofan investment adviser ascertained by theSEC from any report required to be filedwith the SEC is subject to the samelimitations on public disclosure as anyfacts ascertained during an examination,as provided for under the Advisers Act.Such proprietary information is deemed toinclude sensitive, nonpublic informationregarding (i) the investment or tradingstrategies of the investment adviser, (ii)analytical or research methodologies, (iii)trading data, (iv) computer hardware orsoftware containing intellectual propertyand (v) any additional information that theSEC determines to be proprietary.



Annual Report to CongressThe Act requires the SEC to reportannually to Congress on how the SEChas used the data collected to monitorthe markets for the protection of investorsand the integrity of the markets.

Delegation to the SEC In addition to the above noted provisionsthat delegate certain rule-making authorityto the SEC and to the general rule-makingauthority of the SEC under the AdvisersAct, the Act specifically authorizes theSEC to make, issue, amend and rescindsuch rules and regulations definingtechnical, trade and other terms usedunder the Advisers Act.

Anti-fraud Rule Notwithstanding the SEC’s broad rule-making authority, the Act prevents theSEC from extending the scope of theexisting anti-fraud rule of the Adviser’s Actto include an investor in a private fundmanaged by an investment adviser, ifsuch private fund has entered into anadvisory contract with such adviser.

CFTC and SEC Coordination The Act requires the SEC and the CFTCto promulgate rules jointly, within12 months of the Act’s enactment, afterconsultation with the Council, to establishthe form and content of the reportrequired to be filed under the Advisers Actby investment advisers registered underboth the Advisers Act and the CommodityExchange Act.

Custody of Client AccountsThe Act requires registered investmentadvisers to take such steps to safeguardclient assets over which such adviser hascustody, including, without limitation,verification of such assets by anindependent public accountant, as theSEC may, by rule, prescribe. The SEC

already promulgates such rules under theanti-fraud provisions of the Advisers Act.

Accredited InvestorStandardThe Act empowers the SEC to adjust the“accredited investor” standard, which isset forth in Rules 215 and 501 of theSecurities Act of 1933, as amended (the“Securities Act”), although it should benoted that the Act only cites Rule 215. Byway of background, an issuer seeking anexemption from the registrationrequirements of the Securities Act for aprivate offering may rely on the safe harborprovided by Regulation D contained inRules 501-508 promulgated under theSecurities Act. The definition of“accredited investor” is a key element ofthe Regulation D safe harbor, as a privateoffering may be to an unlimited number ofaccredited investors (though sponsors areeffectively capped at 499 investors toavoid certain requirements under theSecurities Exchange Act of 1934, asamended) and most Regulation D offeringsare made exclusively to accreditedinvestors due to the onerous informationrequired to be provided to any non-accredited investors (who are capped at35 in any event). The “accredited investor”standard is meant to reflect investors whoare presumed to be sophisticated or whohave a high net worth.

Included in the existing definition of“accredited investor” is any natural personwho has an individual net worth (or jointnet worth with such person’s spouse) ofover $1 million. The Act requires the SECto adjust the net worth standard so thatthe individual net worth of any naturalperson, or joint net worth with the spouseof that person, at the time of purchase, isover $1 million (as such amount isadjusted periodically by the SEC),

excluding the value of such naturalperson’s primary residence, except that,upon enactment of the Act, such networth standard excluding the primaryresidence is $1 million.

An “accredited investor” also currentlyincludes any natural person who had anindividual income in excess of $200,000in each of the two most recent years orjoint income with such person’s spouse inexcess of $300,000 in each of thoseyears and has a reasonable expectationof reaching the same income level in thecurrent year. The Act permits the SEC toreview the definition of “accreditedinvestor” as applied to natural persons todetermine whether the income standardshould be adjusted or modified for theprotection of investors, in the publicinterest and in light of the economy. Aftersuch review, the SEC is empowered, bynotice and comment rulemaking, to makesuch adjustments to the definition“accredited investor” as it deemsappropriate (though it may not make anymodifications to the net worth standarddescribed above).

The SEC is compelled to review theentire defined term “accredited investor”once every 4 years and, thereupon, bynotice and comment rulemaking, makesuch adjustments to the term as itdeems appropriate.

GAO and SEC StudiesCustody Rule Costs The Act requires the GAO to conduct astudy on the compliance costsassociated with the Advisers Act rulesregarding custody of funds or securitiesof clients by investment advisers and theadditional costs if the rules relating tooperational independence wereeliminated. Such study is required to be




completed, and a report submitted toCongress, within 3 years of the Act’senactment.

Accredited Investor Criteria The Act requires the GAO to conduct astudy on the appropriate criteria fordetermining the financial thresholds orother criteria needed to qualify foraccredited investor status and eligibility toinvest in private funds within three years ofthe Act’s enactment.

SRO to Oversee Private Funds The Act requires the GAO to conduct astudy on the feasibility of forming anSRO to oversee private funds within oneyear of the Act’s enactment.

Short-Selling The Act requires the SEC to conduct astudy on the state of short-selling onnational securities exchanges and in over-the-counter markets within two years ofthe Act’s enactment. The Act requires theSEC to conduct a study on the feasibility,costs and benefits of requiring the publicreporting of real-time short sales positionsof publicly listed securities or reportingsuch short positions in real time only tothe SEC and the Financial IndustryRegulatory Authority within one year ofthe Act’s enactment. The Act requires theSEC to conduct a study on the feasibility,costs and benefits of conducting avoluntary pilot program in which publiccompanies agrees to have all trades oftheir shares marked “short,” “market-

maker short,” “buy,” “buy-to-cover” or“long” and reported in real time within oneyear of the Act’s enactment.

Adjustments for InflationThe Act requires the SEC to index forinflation the dollar amount measures todetermine who is a qualified client forpurposes of paying a performance fee toa registered investment adviser. It alsocalls for a rounding to the nearest$100,000 when making suchdetermination.

EffectivenessTitle IV becomes effective one year afterthe date of enactment.


Title V.Insurance


Federal Insurance OfficeSection 502 establishes a FederalInsurance Office (the “Office”) within theDepartment of Treasury, headed by aDirector (the “Director”) to be appointedby the Secretary of Treasury (the“Secretary”) and amends Title 31 of theUnited States Code by adding Section313 Federal Insurance Office. Section313 (d) defines the scope of the Office’sauthority to cover all lines of insuranceexcept: health insurance, humanservices, long term care insurance notincluded with life or annuity insurancecomponents and crop insurance. The roleof the Office will not include any generalsupervisory or regulatory authority overthe business of insurance, and itsestablishment does not limit the authorityof any other financial regulatory agency.

Functions of the OfficeAn “insurer” includes any personengaged in the business of insurance,including reinsurance.

An “affiliate,” with respect to an insurer,is any person who controls, iscontrolled by, or is under commoncontrol with the insurer.

Section 313(c) authorizes the Office toadvise the Secretary and the FinancialStability Oversight Council on domesticand international prudential insurancepolicy issues, and at the direction ofthe Secretary to:

n monitor the insurance industrygenerally, including identifying anyissues or gaps in the regulation ofinsurers that may pose a systemicrisk to the national insurance industryor the financial system;

n recommend to the Financial StabilityOversight Council that it designate aninsurer and its affiliates to be subjectto regulation as a nonbank financialcompany pursuant to Title I of the Act;

n develop federal policy on prudentialaspects of international insurancematters, participate in theInternational Association of InsuranceSupervisors and assist the Secretaryto negotiate International InsuranceAgreements on Prudential Measures(written bilateral or multilateralagreements entered into between theUnited States and a foreigngovernment, authority, or regulatoryentity regarding prudential measuresapplicable to the business ofinsurance or reinsurance);

n consult with the States and theirinsurance regulators regardinginsurance matters, includingprudential insurance matters, ofnational importance; and

n perform any other duties assigned bythe Secretary.

Information GatheringAuthoritySection 313(e) authorizes the Office tocollect information required to perform itsduties, including through informationsharing agreements, and to requireinsurers and their affiliates (except forsmall insurers which do not meet aminimum size threshold to bedetermined by the Office) to submit dataand information which is not otherwiseavailable publicly or through analternative source. Any confidentialityprovisions of such non-public informationwill be preserved.

International InsuranceAgreements and Preemptionof State Insurance MeasuresThe Director may, in accordance withSection 313(f), determine that a Stateinsurance measure is preempted forbeing inconsistent with an InternationalInsurance Agreement on PrudentialMeasures or treats non-United Statesinsurers subject to an internationalinsurance agreement less favorably thana domestic insurer. However, it will nototherwise affect State insurancemeasures governing insurer’s rates,premiums, underwriting, sales practicesor coverage requirements.

Consultation with Statesand Retention of ExistingState Regulatory AuthorityThe Director will consult with Stateinsurance regulators individually orcollectively in performing the functions ofthe Office. Further, the functions of theoffice do not include any generalsupervisory or regulatory authority overthe business of insurance, and States willretain general regulatory authority overthe insurance industry.

Studies and ReportsIn addition to functions of the Officelisted above, Section 313(n) states thatthe Director will submit certain reportson actions taken by the Office, theinsurance industry, improvements andrecommendations on insuranceregulation and the global reinsurancemarket and its affect on insurance inthe US to the President and/or theCommittees on Financial Services andWays and Means of the House of

Subtitle A seeks to improve the system of insurance regulation by focusing onmitigation of systemic risk with respect to insurance and bridging gaps in insuranceregulation. The title seeks to accomplish this by: (i) establishing the Federal InsuranceOffice; and (ii) facilitating international coordination of insurance regulation throughprudential measures.

Subtitle A—Federal Insurance Office



Representatives and the Committees onBanking, Housing and Urban Affairs andFinance. In preparing such reports andrelated studies, the Director shouldconsider systemic risk regulation,capital standards, consumer protection,national uniformity and internationalcoordination. Section 313(n) providesthat the study and report on improvinginsurance regulation should additionallyexamine the potential costs andbenefits of Federal regulation ofinsurance, including:

n the potential to minimize regulatoryarbitrage;

n the feasibility of Federal regulation ofonly certain lines, leaving other lines tostate regulation;

n the impact of developments in foreigninsurance regulations on potentialFederal regulation; and

n potential consequences of subjectinginsurance companies to a Federalresolution authority, including anyimpact on State insurance guarantyfund systems, policyholder protectionand the international competitivenessof insurance companies.

Covered Agreements onPrudential MeasuresSection 314 generally authorizes theSecretary and the United States TradeRepresentative to jointly negotiateinternational covered agreements relatingto prudential measures on behalf of theUnited States, as long as they first consultwith the Committees on Financial Servicesand Ways and Means of the House ofRepresentatives and the Committees onBanking, Housing and Urban Affairs andFinance of the Senate.



Nonadmitted InsuranceNationwide System of Premium TaxesCongress intends that each State adoptuniform nationwide requirements andprocedures for the report, payment,collection, and allocation of premium taxeson nonadmitted insurance. Section 521seeks to grant the authority to requirepayment of premium tax for nonadmittedinsurance exclusively to home States, whileprocedures are to be established to allocatethe premium taxes paid to an insured'shome State among States, including a taxallocation report to be filed annually bybrokers and insureds with independentlyprocured insurance with their home Stateindicating the premiums attributable toproperties or exposures in each State.

n The term “home State” refers generallyto the State in which an insuredmaintains its principal place ofbusiness or, in the case of anindividual, the individual’s principalresidence. If 100 percent of theinsured risk is located out of suchState, then it refers to the State towhich the greatest percentage of theinsured’s taxable premium for thatinsurance contract is allocated.

n The term “nonadmitted insurance”means any property and casualtyinsurance placed directly or through abroker with a nonadmitted insurereligible to accept such insurance.

Regulation of Nonadmitted Insuranceby the Insured’s Home StateSection 522 grants exclusive authority tothe insured’s home State to regulate theplacement of nonadmitted insurance aswell as the licensing of the surplus linesbrokers who sell or negotiate insurance

with such insured; and further, deems thelaws or regulations of any other States tobe preempted with respect to the insured(except for any restrictions on theplacement of workers’ compensationinsurance with a nonadmitted insurer).

Participation in National ProducerDatabaseAfter the expiration of the two-year periodbeginning on the date of the enactment ofthe Act, Section 523 prohibits a State fromcollecting fees relating to the licensing ofsurplus lines brokers unless the State haslaws or regulations that provide for itsparticipation in the national insuranceproducer database of the NationalAssociation of Insurance Commissioners(“NAIC”), or an equivalent database for theissue and renewal of surplus lines brokers’licenses.

Uniform StandardsSection 524 goes on to require States toadopt nationwide uniform eligibilityrequirements for nonadmitted insurers,and to prohibit surplus lines brokers fromdealing with nonadmitted insurers listedon the Quarterly Listing of Alien Insurersmaintained by the NAIC.

Streamlined Application forCommercial PurchasersSurplus lines brokers seeking to placenonadmitted insurance for an exemptcommercial purchaser are not required tomake a due diligence search to determinewhether the insurance sought could beobtained by admitted insurers if:

n the broker has disclosed to theexempt commercial purchaser that theinsurance may or may not be availablefrom the more regulated admitted

market and may provide greaterprotection; and

n the exempt commercial purchaserrequests in writing for the broker toplace such insurance from anonadmitted insurer after receivingthe disclosure.

Study on the Effects on theNonadmitted Insurance MarketSection 526 requires the GAO of theUnited States to conduct a study of thenonadmitted insurance market todetermine the effects of this subtitle B onthe size and market share of thenonadmitted insurance market forproviding coverage typically provided bythe admitted insurance market. The GAOwill consult with the NAIC in conductingthe study to analyze:

n the change in the size and marketshare of the nonadmitted insurancemarket and in the number ofinsurance companies providing suchbusiness in the 18-month period thatbegins upon the effective date of thissubtitle B;

n any shift in coverage from theadmitted insurance market to thenonadmitted insurance market;

n the consequences of any change in thesize and market share, includingdifferences in the price and availability ofcoverage available in both the admittedand nonadmitted insurance markets;

n any shift in the volume of businessbetween admitted and nonadmittedinsurance for insurance companiesthat provide both admitted andnonadmitted insurance; and

Subtitle B seeks to reform insurance regulation of nonadmitted insurance andreinsurance through setting uniform measures, streamlining standards, andclarifying the governing State law in the reporting, payment, and allocation ofpremium taxes, licensing surplus lines brokers and regulating credit for reinsuranceand reinsurer solvency.

Subtitle B—State-Based Insurance Reform



n the extent of any change in the numberof individuals who have nonadmittedinsurance policies, the type of coverageprovided under such policies, andwhether such coverage is available inthe admitted insurance market.

A report on the findings of the study willbe submitted to the Committee onBanking, Housing, and Urban Affairs ofthe Senate and the Committee onFinancial Services of the House ofRepresentatives not later than 30 monthsafter the effective date of this subtitle B.

Reinsurance RegulationCredit for Reinsurance, ReinsuranceAgreements and Preemption ofExtraterritorial Application of State Lawn A “ceding insurer” refers to an insurer

that purchases reinsurance.

n The “domiciliary State” is the State inwhich the insurer or reinsurer isincorporated or licensed.

n Generally, “reinsurance” means theassumption by an insurer of all or partof a risk undertaken originally byanother insurer.

n A “reinsurer” is an insurer that (i) isprincipally engaged in the business ofreinsurance; (ii) does not conductsignificant amounts of direct insurance;and (iii) is not engaged in the businessof soliciting direct insurance.

Section 531 states that if the domiciliaryState of a ceding insurer is NAIC-accredited, or has financial solvencyrequirements similar to those necessary forNAIC accreditation, and recognizes creditfor reinsurance for the insurer’s ceded risk,then no other State may deny such creditfor reinsurance. Further, all laws,regulations, provisions, or other actions ofa State that is not the domiciliary State ofthe ceding insurer, except those withrespect to taxes on insurance income, arepreempted where they:

n restrict the rights of the ceding insurerto resolve disputes throughcontractual arbitration;

n require that a certain State’s lawgoverns the reinsurance contract,disputes arising from the reinsurancecontract, or requirements of thereinsurance contract;

n attempt to enforce a reinsurancecontract on terms different than thoseset forth in the reinsurance contract; or

n otherwise apply the laws of the Stateto reinsurance agreements of cedinginsurers not domiciled in that State.

Regulation of Reinsurer SolvencySection 532 proposes that in regulatingthe financial solvency of a reinsurer, if thedomiciliary State of the reinsurer is NAIC-accredited or has financial solvencyrequirements similar to the requirementsnecessary for NAIC accreditation, thenthe laws of the domiciliary State governsexclusively. Further, if the domiciliary Stateof a reinsurer is an NAIC-accredited Stateor has financial solvency requirementssubstantially similar to the requirementsnecessary for NAIC accreditation, then noother State may require the reinsurer toprovide any information in addition to theinformation already required by thedomiciliary State. A State other than thedomiciliary State of a reinsurer mayreceive a copy of any financial statementfiled with its domiciliary State.


Title VI.Bank HoldingCompany RegulatoryEnhancements


Moratorium and Study onILCs, Credit Card Banks andCertain Trust CompaniesThe Act defines the term “commercialfirm” as any company whoseconsolidated annual gross revenuesderived from financial and bankingactivities represent less than 15 percentof the total consolidated annual grossrevenues of the company. The Actimposes a three-year moratorium onapproval of FDIC insurance applicationsby industrial loan companies (“ILCs”),credit card banks, and certain trustcompanies (“trust banks”) that are directlyor indirectly owned or controlled by acommercial firm. Further, during thethree-year moratorium, the appropriatefederal banking agency may not approvea change in control of an ILC, credit cardbank, or a trust bank if it results in thetarget being owned or controlled, directlyor indirectly, by a commercial firm, unless:(i) the target institution is in danger ofdefault; (ii) the transaction entails thebona fide merger or acquisition of onecommercial firm with or by anothercommercial firm; or (iii) the change incontrol results from an acquisition ofvoting shares of a publicly tradedcompany if, after the acquisition, theacquiring shareholder (or group ofshareholders acting in concert) holds lessthan 25 percent of any class of the votingshares of the company.

ILCs, credit card banks, trust banks andsavings associations are currentlyexempted from the definition of a “bank”under the BHCA and their holdingcompanies are not regulated as BHCs.Within 18 months of enactment of theAct, the GAO shall conduct a study todetermine whether it is necessary toeliminate the exemption from the BHCAdefinition of a “bank” for such institutions.The study, among other things, shall: (i)determine the adequacy of the federalbank regulatory framework applicable tothese institutions, including any inter-affiliate transaction restrictions; and (ii)

evaluate the potential consequences ofsubjecting these institutions to therequirements of the BHCA, including withrespect to the availability and allocationof credit, the stability of the financialsystem and the economy, the safe andsound operation of each category ofinstitution, and the impact on the types ofactivities in which such institutions, andthe holding companies of suchinstitutions, may engage.

Reports and Examinationsof Functionally RegulatedSubsidiariesCurrently, the BHCA provides that if theFederal Reserve requires a report tofulfill its supervisory responsibilities froma “functionally regulated subsidiary” of aBHC that is not required by anotherregulator, the Federal Reserve shall firstrequest such report from theappropriate functional regulator. The Acteliminates this provision and wouldallow the Federal Reserve to obtainsuch reports directly from thefunctionally regulated subsidiary. TheAct also authorizes the Federal Reserveto obtain reports from subsidiaries of aBHC (other than a depository institutionor functionally regulated subsidiaries) forthe purposes of monitoring compliancewith applicable provisions of anyfederal law (not just laws that theFederal Reserve has specific jurisdictionto enforce). Functionally regulatedsubsidiaries include registered broker-dealers, investment advisers,investment companies, and insurancecompanies.

The Act also generally expands theexamination powers of the FederalReserve with respect to functionallyregulated subsidiaries. In addition to theFederal Reserve’s existing authority to

examine any subsidiary of a BHC toassess safety and soundness risks tothe BHC and any depositary institutionsubsidiaries of the BHC, the Actauthorizes the Federal Reserve toexamine any subsidiary of a BHC toobtain information concerning any riskswithin the bank holding companysystem that may pose a threat to theUS financial system. The FederalReserve is also currently authorized toexamine bank holding companies andtheir subsidiaries for compliance withthe BHCA and any other federal lawthat the Federal Reserve has specificjurisdiction to enforce. The Act expandsthis authority to include examination forcompliance with any applicable federallaw (not just those that the FederalReserve has specific jurisdiction toenforce). With respect to insureddepository institutions or functionallyregulated subsidiaries, however, theFederal Reserve’s examination authoritycontinues to be limited to monitoringcompliance with federal laws that theFederal Reserve has specific jurisdictionto enforce.

Currently the BHCA requires theFederal Reserve to forego, to the fullestextent possible, an examination of afunctionally regulated subsidiary and toreview instead examination reportsprepared by the appropriate functionalregulator. Pursuant to the Act theFederal Reserve is no longer required“to forgo, to the fullest extent possible,”an examination, but shall providereasonable notice and consult with therelevant functional regulator prior tocommencing an examination and shall,to the fullest extent possible, rely onexisting reports and avoid duplication ofexamination activities and reportingrequirements.

“The Act generally expands the examination powers ofthe Federal Reserve with respect to functionallyregulated subsidiaries.”


Bank Holding Company Regulatory Enhancements


The Act also eliminates the currentlimitations under Section 10A of theBHCA on the rulemaking, prudential,supervisory, and enforcement authority ofthe Federal Reserve with respect tofunctionally regulated subsidiaries ofBHCs. The Act provides the FederalReserve with the same authority toregulate and examine SLHC and theirsubsidiaries, including functionallyregulated subsidiaries, as is conferred tothe Federal Reserve with respect to BHCsunder the BHCA.

New Factor in Bank andNon-Bank AcquisitionsWhen reviewing proposals by BHCs tomerge with or acquire other bankingorganizations or nonbank entities, theFederal Reserve is required to considerthe extent to which such mergers oracquisitions will increase the risks tothe stability of the US banking orfinancial system.

Prior Approval for CertainAcquisitions of FinancialAssetsCurrently, a BHC that is or is treatedas a financial holding company (“FHC”)may generally engage in financialactivities without the prior approval ofthe Federal Reserve. The Act requiresprior Federal Reserve approval for anytransaction in which the totalconsolidated assets to be acquired byan FHC exceed $10 billion (suchtransactions, however, are not subject tothe antitrust review that is generallyconducted in connection with acquisitionapplications by BHCs).

Supervision of Non-Functionally-RegulatedHolding CompanySubsidiariesThe Act provides that the FederalReserve shall examine the activities of anon-depository institution subsidiary(other than a functionally regulatedsubsidiary or a subsidiary of adepository institution) of a depositoryinstitution holding company in the samemanner, subject to the same standards,and with the same frequency as isrequired if such activities wereconducted in the lead insured depositoryinstitution. The Federal Reserve shallconsult and coordinate suchexaminations with any State regulatorsupervising such non-depositoryinstitution subsidiaries.

The appropriate federal banking agencyfor the lead depository institution of adepository institution holding companymay recommend, in writing, that theFederal Reserve conduct an examinationof a non-depository institution subsidiaryas prescribed in the Act. If the FederalReserve fails to: either (i) commencesuch examination within 60 days of suchrecommendation; or (ii) provide a writtenexplanation addressing the concerns ofthe appropriate federal banking agency,the appropriate federal banking agencymay conduct such an examination todetermine whether the activities of suchsubsidiaries: (A) present safety andsoundness risks to any depositoryinstitution subsidiary of the depositoryinstitution holding company; (B) areconducted in accordance withapplicable Federal law; and (C) aresubject to appropriate systems formonitoring and controlling the financial,operating, and other material risks of the

activities that may pose a material threatto the safety and soundness of thedepository institution subsidiaries of theholding company.

The appropriate federal banking agencyfor the lead depository institution of adepository institution holding companymay recommend, in writing, that theFederal Reserve take enforcementaction against a non-depositoryinstitution subsidiary. If the FederalReserve does not take an enforcementaction satisfactory to the appropriatefederal banking agency within 60 daysfrom receiving the recommendation, theappropriate federal banking agency maytake the recommended enforcementaction as if the non-depositoryinstitution subsidiary were an insureddepository institution.

Well Managed and WellCapitalized Requirement forFHCs, SLHCs, and CertainTransactionsCurrently, BHCs may qualify for FHCstatus that permits them to engage in anexpanded range of financial activities iftheir depository institution subsidiaries arewell capitalized and well managed. TheAct requires the FHC itself to meet thewell capitalized and well managed criteria.The Act also imposes identicalrequirements on SLHCs.

The Act also requires BHCs seeking tomake interstate bank acquisitions to meetthe well capitalized and well managedcriteria. A bank resulting from an interstatemerger would also have to be wellcapitalized and well managed for themerger transaction to receive regulatoryapproval.



Amendments to Inter-Affiliate TransactionRestrictionsDefinition of “Affiliate” Currently, Section 23A of the FederalReserve Act (“FRA”) provides that an“affiliate” includes: (i) any company that issponsored and advised on a contractualbasis by the member bank or any of itsaffiliates; and (ii) any investment companywith respect to which a member bank orany of its affiliates is an investment advisoras defined in Section 2(a)(20) of theInvestment Company Act of 1940. The Actamends these provisions with a provisionthat simply states that an “affiliate” includes“any investment fund with respect to whicha member bank or affiliate thereof is aninvestment adviser.” In addition to thecurrent Section 23A provisions concerningthe treatment of sponsored and advisedcompanies and investment companies asaffiliates, Regulation W, which implementsSection 23A, provides that the term affiliateincludes any other investment fund forwhich the member bank or any of itsaffiliates serves as an investment adviser, ifthe member bank and its affiliates own orcontrol more than 5 percent of any class ofvoting securities or of the equity capital ofthe fund. The amendment to Section 23Aappears to be intended to: (i) eliminate the5 percent ownership requirement inRegulation W for a fund advised by amember bank or its affiliates to be treatedas an affiliate; and (ii) clarify that advising afund is sufficient for the fund to bedeemed to be an affiliate (it is notnecessary for the bank or its affiliates tohave sponsored the fund or to havecontractual or other specific arrangementsor relationships with the fund).

Definition of a “Covered Transaction”The Act amends the definition of a“covered transaction” to indicate that

repurchase agreements are a form of anextension of credit. This amendmentsubjects repurchase agreements to thecollateralization requirements of Section23A. Currently, repurchase agreementsbetween a bank and its affiliates aresubject to the quantitative and qualitativerequirements of Section 23A but are notsubject to the mandatory collateralrequirements.

The Act also expands the definition of a“covered transaction” to includesecurities borrowing and lendingtransactions and derivative transactionswith an affiliate to the extent that suchtransactions cause the bank or itssubsidiaries to have a credit exposure tothe affiliate. Moreover, the Act subjectssuch transactions to the collateralrequirements of Section 23A.Furthermore, the Act extends thecollateral requirements of Section 23A toany “credit exposure” to an affiliate.

Authority to Grant Exemptions The Act eliminates the current authorityof the Federal Reserve to exempttransactions by any bank with itsaffiliates from the requirements ofSection 23A by order. The FederalReserve retains its current authority toprovide an exemption by regulation fromthe requirements of Section 23A and B ifit finds that such exemption is in thepublic interest and consistent with the

purposes of Section 23A or 23B,however, the Act essentially grants theFDIC a veto power over any suchexemptions. The Federal Reserve isauthorized, however, to exempt by orderinter-affiliate transactions of statemember banks if it finds jointly with theFDIC that the exemption is in the publicinterest and consistent with thepurposes of Section 23A and the FDICfinds that the exemption does notpresent an unacceptable risk to theDeposit Insurance Fund. In the case ofnational banks and federal savingsassociations, the OCC is authorized toprovide exemptions by order from theinter-affiliate transaction requirements ofSection 23A if it finds jointly with theFederal Reserve that the exemption is inthe public interest and consistent withthe purposes of Section 23A and theFDIC does not object on the basis thatthe exemption presents an unacceptablerisk to the Deposit Insurance Fund.Similarly, in the case of state non-member banks and state savingsassociations the FDIC is authorized toexempt transactions by order after ajoint finding with the Federal Reservethat the transaction is in the publicinterest and consistent with thepurposes of Section 23A and that theexemption does not present anunacceptable risk to the DepositInsurance Fund.


“The Act expands the definition of a “coveredtransaction” to include securities borrowing and lendingtransactions and derivative transactions with an affiliateto the extent that such transactions cause the bank orits subsidiaries to have a credit exposure to the affiliate.Moreover, the Act subjects such transactions to thecollateral requirements of Section 23A.”


Treatment of Netting Arrangements The Act authorizes the Federal Reserve toissue regulations or interpretations withrespect to the manner in which nettingagreements between banks and theiraffiliates may be taken into account indetermining the amount of coveredtransactions. Such an interpretation willbe issued jointly with the appropriatefederal banking agency for the respectivebank or affiliate.

Financial Subsidiaries Currently, although subsidiaries of banksare generally not treated as affiliates forpurposes of the inter-affiliate transactionrestrictions of Section 23A, financialsubsidiaries of banks are treated asaffiliates. Nonetheless, Section 23A doesnot impose the individual quantitative limiton covered transactions between a bankand any of its financial subsidiaries (i.e.,transactions between a bank and any ofits financial subsidiaries are not limited toless than 10 percent of the bank’s capitaland surplus). The Act eliminates thisexemption and transactions between abank and any of its financial subsidiariesare fully subject to the requirements ofSection 23A and B.

Lending Limits Coverage Currently, the total loans and extensions ofcredit by a national bank to a person aresubject to certain limits. The Act expandsthe definition of “loans and extensions ofcredit” to include credit exposures to aperson arising out of derivativetransactions, repurchase agreements,reverse repurchase agreements, andsecurities lending and borrowingtransactions. The Act also provides that aninsured State bank may engage in aderivative transaction only if the relevantState’s law with respect to lending limitstakes into consideration credit exposure toderivative transactions.

Restriction on Conversion ofTroubled BanksThe Act generally prohibits the approval ofbanking charter conversion applications(from state to federal and vice versa)during any period in which the institutionis subject to a cease and desist order orother formal enforcement action or amemorandum of understanding issuedagainst the institution.

De Novo BranchingInto StatesThe Act confers to national banks and out-of-state-chartered banks the authority toestablish de novo branches in a state as ifthe national bank or out-of-state-charteredbank were chartered in that state.

Amendments to Restrictionson Transactionswith InsidersThe Act extends the application of lendinglimits to insiders to credit exposuresarising from derivative transactions,repurchase and reverse repurchaseagreements, and securities lending orborrowing transactions.

The Act provides that insured depositoryinstitutions may not purchase or sell anasset to an executive officer, director, orprincipal shareholder of the insureddepository institution or any related interestof such a person (as those terms aredefined in Section 22 of the FRA) unless:(i) the transaction is on market terms; and

(ii) if the transaction exceeds 10 percent ofthe depository institution’s capital andsurplus, the transaction must be approvedby majority of disinterested directors of theboard of the institution. The FederalReserve, in consultation with the OCC andthe FDIC, may issue rules implementingthese provisions. The existing restrictionson purchases of property between a bankand its directors or related interests inSection 22(d) of the FRA would berepealed.

Authority to Impose CapitalRequirements for BHCs Currently, the Federal Reserve requiresBHCs to maintain minimum regulatorycapital even though the Federal Reservehas no such explicit authority under theBHCA. The Act explicitly authorizes theFederal Reserve to implement regulatorycapital requirements for BHCs and SLHC.The Act provides that in establishingcapital adequacy requirements for BHCs,SLHCs, and insured depositoryinstitutions the Federal Reserve and theappropriate federal banking agencies shallseek to make such requirementscountercyclical. Further, the Act codifiesthe Federal Reserve’s long-standing“source of strength” doctrine, pursuant towhich BHCs are expected to serve as asource of financial strength to theirsubsidiary depository institutions. The Actalso imposes the source of strengthrequirement on any other company (otherthan a BHC) that controls, directly orindirectly, an insured depository institution.


“The appropriate Federal banking agencies will jointlyissue rules implementing the source of strength doctrineand may require holding companies of depositoryinstitutions to report periodically for purposes ofassessing the ability of the holding company to complywith the source of strength requirement.”


The appropriate federal banking agenciesshall jointly issue rules implementing thesource of strength doctrine and mayrequire holding companies of depositoryinstitutions to report periodically forpurposes of assessing the ability of theholding company to comply with thesource of strength requirement.

Securities FirmsHolding CompaniesThe Act repeals the elective investmentbank holding company regulatoryframework, pursuant to which investmentbanks were able to elect to be supervisedon consolidated basis by the SECpursuant to the US Securities ExchangeAct of 1934. The Act institutes an electiveregulatory framework for “securitiesholding companies” under the authority ofthe Federal Reserve. The term “securitiesholding company” is generally defined asany legal entity that owns or controls oneor more brokers or dealers registered withthe SEC that is not subject tocomprehensive consolidated supervisionby any regulator.

The Act provides that a securities holdingcompany that is required by a foreignregulator to be subject to comprehensiveconsolidated supervision may register withthe Federal Reserve to become a“supervised securities holding company.”The Federal Reserve may prescribe byregulation the requirements for registration.

A supervised securities holding companyshall make and keep records and submitreports as required by the FederalReserve. A supervised securities holdingcompany is subject to the provisions ofthe BHCA, other than section 4 of theAct. Accordingly, a supervised securitiesholding company is not subject to thenonbanking activity restrictions of theBHCA but would be fully subject to theFederal Reserve’s supervision and

regulation powers under the BHCA.Furthermore, the Act explicitly providesthat the Federal Reserve shall haveexamination authority over supervisedsecurities holding companies and shallhave the authority to prescribe capitaladequacy and other risk managementstandards for such entities. The FederalReserve shall impose such standards byregulation or order and may differentiateamong supervised securities holdingcompanies taking into consideration: (i)the differences among types of businessactivities carried out by the supervisedsecurities holding company; (ii) theamount and nature of the financial assetsof the supervised securities holdingcompany; (iii) the amount and nature ofthe liabilities of the supervised securitiesholding company, including the degree ofreliance on short-term funding; (iv) theextent and nature of the off-balance sheetexposures of the supervised securitiesholding company; (v) the extent andnature of the transactions andrelationships of the supervised securitiesholding company with other financialcompanies; (vi) the importance of thesupervised securities holding company asa source of credit for households,businesses, and state and localgovernments, and as a source of liquidityfor the financial system; and (vii) thenature, scope, and mix of the activities ofthe supervised securities holdingcompany. The Act also confers to the

Federal Reserve the same enforcementauthority with respect to supervisedsecurities holding companies as isconferred to the Federal Reserve withrespect to BHCs under the FDIA.

The Volcker RuleThe Volcker Rule generally prohibits“proprietary trading” and “sponsoring” oracquiring of any ownership interest in“private equity funds” or “hedge funds” byinsured depository institutions, insureddepository institution holding companies,BHCs, and their affiliates (collectively“banking entities”). NBFCs engaged insuch activities will be subject to certainadditional capital requirements andquantitative limits, except that suchadditional capital requirements andquantitative limits shall not apply withrespect to proprietary transactions orhedge or private fund-related activitiesthat are exempted from the provisions ofthe Volcker Rule.

The Council is tasked to complete a studyno later than six months after enactmentof the Act and to make recommendationson implementing the provisions of theVolcker Rule. The appropriate federalbanking agencies, the SEC, and theCFTC will consider the findings of thestudy and will promulgate jointlyimplementing regulations no later thannine months after the date of thecompletion of the study by the Council.


“The Act provides that a securities holding company thatis required by a foreign regulator to be subject tocomprehensive consolidated supervision may registerwith the Federal Reserve to become a supervisedsecurities holding company. A supervised securitiesholding company is subject to the provisions of theBHCA, other than section 4 of the Act.”


The Act explicitly provides that such ruleswill impose additional capital requirementsand quantitative limitations, includingdiversification requirements, regarding anyproprietary trading activities or hedge orprivate fund-related activities that areexempted from the provisions of theVolcker Rule if deemed to be appropriateto protect the safety and soundness ofbanking entities engaged in suchactivities.

The Volcker Rule provisions will becomeeffective on the earlier of 12 months afterthe issuance of implementing regulationsor 2 years after the Act’s enactment. TheAct provides for a transition period of twoyears (with the possibility of up to threeone-year extensions) after the effectivedate of the Volcker Rule provisions forbanking entities to bring their operationsinto compliance with the relevantregulatory requirements. With respect toinvestments in “illiquid funds” the FederalReserve may grant one additionalextension of the compliance period for upto 5 years. An “illiquid fund” is generallydefined as a hedge fund or a privateequity fund that is contractuallycommitted to invest principally in illiquidassets, such as portfolio companies, realestate and venture capital investments.

Proprietary TradingThe term “proprietary trading” is definedas engaging as a principal for the tradingaccount of the banking entity or NBFC inany transaction to purchase or sell, orotherwise acquire or dispose of, any

security, any derivative, any contract ofsale of a commodity for future delivery, anyoption on any such security, derivative, orcontract, or any other security or financialinstrument that the appropriate federalbanking agencies, the SEC, and the CFTCmay determine by rule.

Subject to any restrictions or limitationsthat the appropriate federal bankingagencies, the SEC, and the CFTC mayimpose, the general prohibition onproprietary trading activities shall notapply with respect to: (i) the trading ofobligations of the United States,obligations of any state or politicalsubdivision of a state, and obligations ofor instruments issued by Ginnie Mae,Fannie Mae, or Freddie Mac; (ii) trading ofsecurities and other instruments inconnection with underwriting or market-making-related activities; (iii) risk-mitigatinghedging activities in connection with andrelated to individual or aggregatedpositions, contracts, or other holdings; (iv)trading on behalf of customers; (v) certaintrading activities by regulated insurancecompanies; and (vi) trading activitiesconducted solely outside of the UnitedStates by companies that are not directlyor indirectly controlled by a companyorganized under US law.

The GAO will conduct a study of the risksand conflicts associated with proprietarytrading by banking entities. The Actauthorizes the GAO to access informationnecessary for producing its report, andprovides (with limited exceptions) that anysuch information will be kept confidential.

The study will evaluate whetherproprietary trading presents (i) a materialsystemic risk to the stability of the USfinancial system, (ii) a material risk to thesafety and soundness of the coveredentities, and (iii) material conflicts ofinterests between such entities andclients. The study must also evaluate (i)whether adequate disclosure regardingthe risks and conflicts of proprietarytrading is provided to depositors, tradingand asset management clients, andinvestors in such entities and (ii) whetherbanking, securities, and commoditiesregulators of institutions that engage inproprietary trading have adequatesystems and controls to monitor andcontain any risks and conflicts of interestrelating to proprietary trading.

Investing in, Sponsoring, andManaging Private Equity andHedge Funds The terms “private equity fund” and“hedge fund” shall mean an entity exemptfrom registration as an investmentcompany pursuant to Sections 3(c)(1) or3(c)(7) of the Investment Company Act of1940, or a similar fund as jointlydetermined by the appropriate Federalbanking regulators. The term to “sponsor”a fund is defined in the Act as: (i) servingas a general partner, managing member,or trustee of the fund; (ii) selecting orcontrolling (or having employees, officers,directors, or agents who constitute) amajority of the fund’s directors, trustees,or management of the fund; or (iii) sharingthe same name, or a variation thereof,with the fund for corporate, marketing,promotional, or other purposes.

Subject to any restrictions or limitationsthat the appropriate federal bankingagencies, the SEC, and the CFTC mayimpose, the general prohibition on“sponsoring” or investing in “privateequity funds” or “hedge funds” will notapply to: (i) investments in small business


“The Volcker Rule generally prohibits “proprietarytrading” and “sponsoring” or acquiring of anyownership interest in “private equity funds” or “hedgefunds” by insured depository institutions, insureddepository institution holding companies, BHCs, andtheir affiliates.”


investment companies, as that term isdefined in section 103 of the SmallBusiness Investment Act of 1958; (ii)investments designed to promote thepublic welfare; (iii) an investment madesolely outside the United States providedthat the company making the investmentor conducting the activity is not directly orindirectly owned or controlled by acompany organized under US law andthat no ownership interest in the targethedge fund or private equity fund isoffered or sold to US residents; and (iv)organizing and offering a private equity orhedge fund, including serving as ageneral partner, managing member, ortrustee of the fund and selecting orcontrolling (or having employees, officers,directors, or agents who constitute) amajority of the directors, trustees, ormanagement of the fund, provided that:(a) the fund is organized and offered onlyin connection with the provision of bonafide trust, fiduciary, or investmentadvisory services provided by the bankingentity to customers; (b) the banking entitydoes not acquire more than a de minimisownership interest in the fund; (c) thebanking entity does not guarantee,assume, or otherwise insure theobligations of the fund; (d) the bankingentity does not share the same name orits variation with the fund; (e) no directoror employee of the banking entity has anownership interest in the fund (except fordirectors or employees directly engagedin providing services to the fund); and (f)the banking entity discloses to investors

that any losses of the fund are bornesolely by the investors and not by thebanking entity.

A banking entity will be able to make andretain an investment in a hedge fund orprivate equity fund that the banking entityorganizes and offers, provided that withina year after the establishment of the fund(with the possibility of two one-yearextensions) the ownership interest of thebanking entity in the fund shall bereduced through redemption, sale, ordilution to less than 3 percent of the totalownership interest in the fund. Theaggregate investments by a banking entityin hedge funds or private equity fundswould be limited to 3 percent of Tier Icapital of the banking entity.

Banking entities may continue to serve as

investment adviser or manager to a hedgefund or a private equity fund. However,the Act prohibits a banking entity or NBFCthat organizes or has an affiliate thatserves as an investment manager oradviser of a hedge fund or private equityfund from entering into coveredtransactions, as defined in section 23A ofthe FRA, with such hedge fund or privateequity fund. Notwithstanding the limitationstated above, the Federal Reserve maypermit a banking entity or a NBFC toenter into any prime brokeragetransaction with any hedge fund or privateequity fund in which a hedge fund orprivate equity fund managed, organized,or advised by such banking entity orNBFC has taken an equity, partnership, orother ownership interest, provided thatcertain conditions are met. Alltransactions between a banking entity orNBFC with an affiliate that serves as aninvestment manager or adviser of a hedgefund or private equity fund and such fundshall be subject to section 23B of the FRAand shall be on market terms.

The Act permits the appropriate federalbanking agencies, the SEC, and theCFTC to exempt by rule from theprovisions of the Volcker Rule any activity


“The Act permits the appropriate Federal bankingagencies, the SEC, and the CFTC to exempt by rulefrom the provisions of the Volcker Rule any activity theagencies determine promotes and protects the safetyand soundness of the banking entity or NBFC and thefinancial stability of the United States.”

“A banking entity would be able to make and retain aninvestment in a hedge fund or private equity fund thatthe banking entity organizes and offers, provided thatwithin a year after the establishment of the fund (withthe possibility of two one-year extensions) the ownershipinterest of the banking entity in the fund shall bereduced through redemption, sale, or dilution to lessthan 3 percent of the total ownership interest in thefund. The aggregate investments by a banking entity inhedge funds or private equity funds are limited to 3percent of Tier I capital of the banking entity.”

47


the agencies determine promotes andprotects the safety and soundness of thebanking entity or NBFC and the financialstability of the United States.

No transaction or activity that may fallwithin an exemption from the provisionsof the Volcker Rule shall be permitted ifthe transaction or activity: (i) involvesmaterial conflict of interest between thebanking entity and its clients orcounterparties; (ii) results in an unsafeor unsound exposure; (iii) poses a threatto the safety and soundness of thebanking entity; or (iv) poses a threat tothe financial stability of the UnitedStates.

Concentration Limits Subject to recommendations by theCouncil, a financial company may notmerge or consolidate with anothercompany if the total consolidated liabilitiesof the acquiring company uponconsummation of the transaction exceed10 percent of the aggregate consolidatedliabilities of all financial companies as ofthe year end preceding the transaction.This limit shall not apply to: (i) anacquisition of a bank in default or indanger of default or receiving FDICassistance; or (ii) a transaction that resultsonly in de minimis increase of the liabilitiesof the financial company.

For purposes of the concentration limitsthe term “financial company” is definedas: (i) insured depository institution; (ii) anycompany that controls an insureddepository institution; (iii) NBFC; and (iv)foreign bank or company treated as aBHC. The Act defines the term “liabilities”as the total risk-weighted assets of thefinancial company less the total regulatorycapital of the company (foreign-basedfinancial companies must count only risk-based assets and capital of their USoperations). The Federal Reserve shallissue regulations implementing theconcentration limit provisions and mayissue interpretations or guidanceregarding the application of such limits toindividual financial companies.

Currently, the BHCA contains a depositcap on interstate acquisitions of banks byBHCs. Section 3 of the BHCA providesthat the Federal Reserve may not approvean acquisition by a BHC of a bank with a

home state other than the home state ofthe BHC if the acquirer BHC controls, orupon consummation of the transactioncontrols more than 10 percent of the totalamount of deposits of insured depositoryinstitutions in the United States (the “10percent deposit cap”). The Act extendsthe 10 percent deposit cap with respectto: (i) interstate bank merger transactions;(ii) interstate acquisitions by BHCs ofinsured depository institutions that are not“banks” under the BHCA’s definition of a“bank;” and (iii) interstate acquisitions ofinsured depository institutions by SLHCs.The 10 percent deposit cap shall notapply to an acquisition of an insureddepository institution in default or indanger of default or receiving FDICassistance.

Interest-Bearing TransactionAccounts AuthorizedThe Act repeals the prohibition onpayment of interest on demand deposits.The repeal of the prohibition shall takeeffect one year after enactment of the Act.

“The Act repeals theprohibition on payment ofinterest on demanddeposits. The repeal ofthe prohibition shall takeeffect one year afterenactment of the Act.”


“Subject to recommendations by the Council, a financialcompany may not merge or consolidate with anothercompany if the total consolidated liabilities of theacquiring company upon consummation of thetransaction exceed 10 percent of the aggregateconsolidated liabilities of all financial companies as of theyear end preceding the transaction.”

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Title VII.Wall StreetTransparency andAccountability


Definitions of Swap andSecurity-Based SwapSwaps

The Act defines swaps, which will beregulated by the CFTC, as options,contingent forwards, exchanges ofpayment or transactions that are basedon an underlying financial product, or acontract that becomes known as a swapin the market. Interest rate swaps,currency swaps, foreign exchangeswaps, total return swaps and creditdefault swaps are explicitly defined as“swaps”. The definition of swapsspecifically excludes:

n contracts for sale of commoditiesfor future delivery,

n the sale of a non-financialcommodity for deferred delivery,so long as the transaction isintended to be physically settled,

n any put or call that is subject tothe securities laws,

n any foreign exchange put, call oroption that is traded on a nationalexchange,

n non-contingent sales of securitiessubject to the securities laws,

n contingent sales of securities notdependent on thecreditworthiness of a party otherthan a party to the agreement,

n agreements based on a securityand entered into with anunderwriter for the purpose ofcapital raising (but not for thepurpose of risk management),

n agreements with the FederalReserve or the Federal

Government and any agencythereof,

n security-based swaps, and

n certain foreign exchange contractsas described below.

Security-Based Swaps

Security-based swaps, which will beregulated by the SEC, are defined asswaps which are based on a narrow-based security index, a single security orloan and the occurrence or non-occurrence of an event relating to a singleissuer of a security (or the issuers of anarrow-based security index). A narrow-based security index is generally definedas an index with nine or fewercomponents.

Unless the context requires otherwise, thismemorandum will refer to either swaps orsecurity-based swaps as “swaps”.

Mixed Swaps/Identified BankingProducts

“Mixed swaps”, which have elements ofboth swaps and security-based swaps,will be defined jointly by the SEC and theCFTC, and will be regulated by the SECas security-based swaps. Rules for novelswap products will be determined jointlyby the SEC and the CFTC.

Identified banking products, whichinclude deposits, letters of credit andloan participations (but not swaps), willnot be regulated as swaps, unless therelevant bank regulator deems them tobe swaps or the product is entered intoby a bank that is not federally regulatedand which is using such bankingproducts to evade derivatives regulation.

Credit Default Swaps

Credit default swaps (CDS) areconsidered swaps under the Act. Itappears that single name CDS, whetherloan-based or security-based, areconsidered security-based swapsregulated by the SEC while CDS on broadportfolios are swaps but not security-based swaps, and therefore regulated bythe CFTC.

Foreign Exchange

Foreign exchange options are swaps.Foreign exchange forwards and swapsare also regulated as swaps, although theTreasury Secretary may make a writtendetermination to exempt foreignexchange forwards and swaps fromregulation under the Act. Even if soexempted, foreign exchange forwardsand swaps still need to be reported andremain subject to the business conductstandards applicable to swap dealersunder the Act. It is not clear if cash-settled foreign exchange swaps andforwards could be exempted by theTreasury Secretary.

Commodity Swaps Intended to bePhysically Settled

The definition of a swap excludescontracts for any sale of a non-financialcommodity for deferred delivery so longas the transaction is intended to bephysically settled. The Act does notprovide any guidance as to how “intend”will be defined, and whether the treatmentof a swap will change if the partiesdecided not to physically settle such swapon a later date.


Derivatives Reform

Title VII of the Act provides for significant reforms of the over the counter (OTC)derivatives market, grants significant authority to the SEC and the CFTC to regulatederivatives and market participants and requires clearing and exchange trading ofmost derivatives transactions.


Market ParticipantsPush Out Rule

The Act provides that no federalassistance may be provided to any swapdealer, major swap participant (other thanany major swap participant that is aninsured depository institution), swapexecution facility or derivatives clearingorganization. Such prohibition would notapply to a FDIC-insured depositoryinstitution that limited its swap activities to(a) hedging and other risk managementactivities related to its own activities, and(b) acting as a swap dealer in transactionsinvolving rates or reference assets that anational bank may invest in. However,depository institutions are prohibited fromacting as a swap dealer for credit defaultswaps referencing unless such swaps arecleared by a clearing organization. Thispermits banks to act as dealers withrespect to interest rate swaps, currencyswaps and certain credit default swaps.

Federal assistance is defined to includeadvances from the Federal Reserve anduse of FDIC funds for the purposes ofpurchasing debt, assets or equity,guaranteeing any debt or entering intoany other arrangements.

The Act provides that a depositoryinstitution may receive a period(determined by the appropriate bankingregulator and the SEC or the CFTC, asapplicable) of not more than 24 months todivest or spin-off its swap entity whilefederal assistance. The prohibition offederal assistance will be effective twoyears from the effective date of the Act.

Definition of Swap Dealers and MajorSwap Participants

1. DealersThe Act regulates “swap dealers” and“security-based swap dealers”. (In thismemorandum, “swap dealer” refers toeither.) A swap dealer is any person that

holds itself out as a dealer in swaps, thatmakes a market in swaps, regularly entersinto swaps with counterparties in theordinary course of business or its ownaccount or engages in any activitycausing it to be commonly known in thetrade as a swap dealer or market maker,provided that an insured depositoryinstitution will not be considered a swapdealer if it enters into a swap with acustomer in connection with originating aloan with such customer. A person maybe designated as a swap dealer for asingle class, type, or category of swapsand not considered to be a swap dealerfor other types, classes or categories.

A swap dealer does not include a personthat buys or sells swaps for its ownaccount, but not as a part of a regularbusiness. It seems likely, by analogy torequirements for securities dealers, that aswap dealer would not include a personwho trades in swaps but does not seek tomake a market or hold itself out to othersas a dealer.

2. Major Swap ParticipantsA “major swap participant” is a person thatis not a swap dealer but (a) that maintainsa substantial position in swaps for anymajor swap category (other than forhedging or mitigating its own commercialrisks and excluding positions maintainedby pension plans), (b) whose outstandingpositions create substantial counterpartyexposure that could have serious adverseeffects on the financial stability of USfinancial markets or (c) that is a financialentity that is highly leveraged and maintainsa substantial position in any major swapcategory. The CFTC or the SEC, asapplicable, will define the term “substantialposition” at a prudent threshold for theeffective monitoring, management andoversight of entities that are systemicallyimportant or can significantly impact theUS financial system. The definition of major

swap participant excludes any entitywhose primary business is providingfinancing, and which uses derivatives forthe purpose of hedging underlyingcommercial risks related to interest rateand foreign currency exposures, 90percent or more of which arise fromfinancing that facilitates the purchase orlease of products, and 90 percent or moreof which are manufactured by the parentcompany or another subsidiary of theparent company. (In this memorandum“major swap participant” refers to both“major swap participants” and “majorsecurity-based swap participants”.)

Comment: Definition of Major SwapParticipant: One critical item that remainsto be determined is who will be covered bythe definition of major swap participant. Anentity that uses swaps to hedgecommercial risk may be covered by thisdefinition if it has significant swap positionswhich are not all for hedging purposes. Forfunds, one issue will be whether allmembers of a fund group with substantialswap positions must register or if there isany way of isolating the position in onefund. As the CFTC and the SEC will havesignificant discretion to define major swapparticipants, this determination may remainunclear until the final rules are released.

Extension of Scope of Regulation toSwap Dealers and Major SwapParticipants

1. RegistrationThe Act requires all swap dealers andmajor swap participants to register withthe CFTC (with respect to swaps) or theSEC (with respect to security-basedswaps). A swap dealer or major swapparticipant must register with the CFTC orthe SEC even if the swap dealer or majorswap participant is otherwise regulated:thus, for example, a swap dealer mustregister with the CFTC even if the swapdealer is a US bank and is a security-




based swap dealer registered withthe SEC.

2. Regulatory RequirementsThe Act directs the SEC and the CFTC tojointly adopt prudential requirements forswap dealers and major swapparticipants. However, the Act givesprudential regulatory authority to bankingregulators over banks and branches offoreign banks.

3. Capital and MarginCapital requirements will be imposed withrespect to each swap entered into by aswap dealer or a major swap participant.The capital requirement for depositoryinstitutions will be set jointly by theappropriate federal agencies inconsultation with the CFTC and the SECand the capital requirement for non-depository institutions will be set by theCFTC (with respect to swap dealers andmajor swap participants) or the SEC (withrespect to security-based swap dealersand security-based major swapparticipants). In addition, the capitalrequirements established for non-clearedswaps shall be appropriate to offset thesubstantially higher risk associated withnon-cleared swaps.

Margin requirements for both initial andvariation margin will be imposed withrespect to each non-cleared swapentered into by a swap dealer or a majorswap participant. The margin requirementfor depository institutions will be set bythe appropriate federal agency inconsultation with the CFTC or the SEC,as applicable, and the margin requirementfor non-depository institutions will be setby the CFTC or the SEC, as applicable,and shall be at least as strict as thecapital requirement for depositoryinstitutions. In addition, the marginrequirements established for non-clearedswaps shall be appropriate to offset the

substantially higher risk associated withnon-cleared swaps.

Comment: Capital for Non-BankMajor Swap Participants: It is notentirely clear how capital requirements forswaps will be imposed on major swapparticipants that are otherwiseunregulated and that are not subject tocapital requirements.

Comment: Determination of CapitalRequirement: In imposing capitalrequirements, the CFTC shall take intoaccount the risks associated with othertypes or classes of swaps engaged in andthe other activities conducted by suchentity that are not otherwise subject toregulation. Therefore, the capitalrequirements of a swap dealer or a majorswap participant may be significantlygreater than for the swaps which subjectsuch entity to regulation.

Comment: Margin Determination: It isunclear how margin will be imposed onswaps. The Act mentions initial andvariation margin. Customarily, variationmargin relates to mark-to-marketvaluations of swaps and it is not clearhow initial margin will be determined.

4. Business conduct rulesThe CFTC or the SEC, as the case maybe, will also enact business conduct ruleswith respect to swap dealers and majorswap participants. Such rules will providefor, among other things, maintenance ofrecords (including emails and call

recordings), disclosure of risks andconflicts of interest, reporting,appointment of a chief compliance officerand the establishment of a standardof care.

5. Responsibilities to special entitiesAny swap dealer or major swapparticipant that enters into a contractwith, or advises a federal agency, stateagency, city, county, municipality, pensionplan or endowment must act with aheightened standard towards suchcounterparty. If the swap dealer or majorswap participant acts as advisor to anysuch entity, it will be required to act inthe best interest of such entity and willmake a reasonable effort to ensure thatany swap recommended by such advisoris in the best interests of such specialentity. If the swap dealer acts as acounterparty to such entity, it will berequired to disclose the capacity in whichit is acting and to have reasonable basisto believe that the entity has a qualifiedindependent advisor, which is (a)independent, (b) sufficientlyknowledgeable, (c) independent of theswap dealer, (d) makes appropriatedisclosures and (e) will provide writtenrepresentations regarding fair pricing andthe appropriateness of the transaction.

Non-US Entities

The Act does not contain explicitexemptions for non-US swap dealers ornon-US major swap participants.However, provisions of the Act relating toswaps will not apply to activities outside

“Title VII of the Act introduces significant reforms to theover the counter derivatives market by granting theSEC and the CFTC authority to regulate swap dealersand major swap participants and requiring clearing andexchange trading of most derivatives transactions.”


the U.S. unless such activities contravenerules adopted by the regulators or, forswaps but not security-based swaps,have a direct effect on the US Also, if theCFTC or the SEC determine thatregulation of swaps in a foreign countryundermines the stability of the USfinancial system, the CFTC or the SECmay, in consultation with the Treasury, barentities domiciled in such country fromany swap activities in the US

There is some precedent, outside thederivatives context, for regulationsgoverning US activities of non-USfinancial institutions (such as SEC Rule15a-6 for securities activities and CFTCPart 30 for futures activities). However,the Act does not contemplate suchregulations and, even if such regulationsare adopted, they may significantlyrestrict the US activities of non-USderivatives firms.

Clearing and ExecutionRequirementsCentral Clearing of Swaps

1. Mandatory ClearingThe Act requires all swaps to be clearedthrough a derivatives clearing organizationregulated by the CFTC (with respect toswaps) or a securities clearing agencyregulated by the SEC (with respect tosecurity-based swaps) or a derivativesclearing organization that is exempt fromregistration by requiring any person that isparty to a swap to submit such swap to aclearing organization. Prior to acceptingany new category, type, or class of swapfor clearing, a clearing organization willsubmit such type of swap for approval tothe CFTC or the SEC, as applicable. Inaddition, the CFTC or the SEC, asapplicable, may require the clearing of aswap that has not been requested to becleared by any clearing organization, butmay not require any clearing organization

to clear a swap if the clearing of thatswap adversely affects the financialintegrity of the clearing organization.Swaps entered into prior to theapplication of the mandatory clearingrequirement or prior to the passage of theAct will be exempted from the mandatoryclearing requirement, although suchswaps will be required to be reported. Themandatory clearing requirement shallcome into force 180 days after theenactment of the Act.

2. Exemptions from ClearingA swap is not required to be cleared ifno clearing organization is willing toclear such swap. In addition, anycounterparty that is (a) not a financialentity, (b) using swaps to hedge ormitigate commercial risk, and (c) notifiesthe CFTC or the SEC, as applicable, asto how it generally meets its financialobligations associated with entering intonon-cleared swaps is not be subject tothe mandatory clearing requirement.(Such counterparty may, however,request that a swap it enters into becleared and is entitled to choose theclearing organization.)

The Act defines a financial entity as:

n a swap dealer or major swapparticipant,

n a person predominantly engaged inbanking or financial activities,

n a commodity pool or a private fundthat make use of the 3(c)(1) or the3(c)(7) exemption from registrationunder the 1940 Act,

n anyone required to be registered withthe CFTC or the SEC (other than apublic company), or

n an employee benefit plan.

The SEC or the CFTC, as applicable, maychoose to exclude from the definition offinancial entity depository institutions, farm

credit system institutions and creditunions with total assets up to $15 billion.

In addition, affiliates of entities exemptfrom the clearing requirement (includingaffiliates predominantly engaged inproviding financing for the purchase of themerchandise or manufactured goods ofsuch entity) may use the exemption if (a)the affiliate is acting as an agent for theexempt entity (or any other exempt entity),(b) the affiliate uses the swap to hedgecommercial risk of the exempt entity; and(c) the affiliate does not fall into any of theabove categories and is not a bankholding company.

Any swap that is not required to becleared shall nevertheless be subject toreporting requirements, and must bereported to a swap data repository or theCFTC or the SEC, as applicable.

Comment: Major Swap Participants:The Act provides that major swapparticipants must register with respect toa certain type, class or category of swap.However, the exemption from clearing isdenied to any person that is a major swapparticipant. Therefore, it appears that anentity that is a major swap participant withrespect to one category of swaps maynot be able to use the exemption fromclearing for other types of swaps. Forexample, an oil company that may beconsidered a major swap participant withrespect to oil derivatives may not be ableto avail itself of the exemption fromclearing for interest rate swaps.

Execution of Swaps

All swaps that are required to be clearedare also required to be executed on aregulated exchange or a swap executionfacility (SEF) unless no exchange or SEF iswilling to list the swap. An SEF is defined asa trading system or platform that is not anexchange but that allows multiple




participants to execute or trade swaps (butnot other types of contracts) by acceptingbids and offers made by other participantsand that is open to multiple participants.Entities exempt from the clearingrequirement are also exempt from theexecution requirement.

Reporting of Swaps

1. Reporting by Market ParticipantsThe Act requires each party that entersinto a swap to report such swap to aswap data repository or a security-basedswap data repository (in this memorandumswap data repository will refer to either), orif there is no swap data repository thataccepts such a swap, to the CFTC or theSEC, as applicable.

Swaps that were entered into prior to theenactment of the Act are required to bereported to a swap data repository or theCFTC or the SEC, as applicable, within 30days of the issuance of the final rule,which rule must be issued not later than90 days of the enactment of the Act, orsuch other period as determined by theregulators. This reporting requirement isapplicable to all swap participants and isnot limited to swap dealers or major swapparticipants.

Any entity that enters into a non-clearedswap which is not accepted by a swapdata repository shall be required tomaintain books and records with respectto such swap in a way that the SEC orthe CFTC may require, which shall beopen to inspection by various regulatorsas well as the Department of Justice.

2. Public ReportingThe CFTC and the SEC will require real-time public reporting by clearingorganizations. The CFTC and the SEC, asapplicable, will also make available to thepublic the aggregate data on swaptrading volumes and positions of swaps

that are not cleared by clearingorganizations but are instead reported toswap repositories or the regulators. TheCFTC and the SEC will promulgate rulesthat ensure that such public reportingdoes not identify the participants.

Collateral Requirements for Swaps

If margin is provided under a non-clearedswap, the counterparty that is not a swapdealer or a major swap participant mayrequire that the segregation of initial (butnot variation) margin with a third partycustodian. The regulators may permit theuse of non-cash collateral if doing so isconsistent with the financial integrity of themarkets and the stability of the USfinancial system.

Only a CFTC-registered futurescommission merchant will be permitted toaccept and hold margin with respect to acleared swap and only an SEC-registeredbroker, dealer or security-based swapdealer will be permitted to accept andhold margin with respect to a clearedsecurity-based swap.

Regulation of ClearingOrganizations, SEFs andSwap RepositoriesClearing Organizations

All derivatives clearing organizations thatclear swaps must be registered with theCFTC (or with the SEC in the case ofsecurity-based swaps). Clearing agenciesregistered with the SEC on the date of theenactment of the Act may be deemed tobe registered as a derivatives clearingorganization. The CFTC may exempt SECregistered and non-US clearingorganizations that are subject to similarscrutiny in their home jurisdictions and theSEC may also exempt CFTC registeredand non-US clearing organizations thatare subject to similar scrutiny in their

home jurisdictions. Each clearingorganization will be required to publiclydisclose, on a daily basis, the settlementprices, volume and open interest for eachsettled contract. In addition, clearingorganizations will be required to complywith certain core principles, including:

n maintaining adequate financialresources to withstand the default ofthe business participant that has theclearing organization’s highestexposure and to cover its operatingexpenses for a year,

n maintaining appropriate admissionstandards for members and swaps tobe cleared and ways to monitorcompliance with such standards, and

n the inclusion of market participants onits governing board.

SEFs

All systems or platforms that trade orprocess swaps (other than CFTC-designated contract markets) must beregistered as SEFs with the CFTC or withthe SEC in the case of SEFs thatexecute trades in security-based swaps.Exchanges may also operate SEFs andmay use the same electronic tradeexecution system, although they arerequired to identify whether the trading istaking place on the exchange or on theSEF. SEFs are also subject tocompliance with certain core principles,including:

n establishing and enforcing trading andparticipation rules that will deterabuses,

n establishing trading procedures andmonitoring trading to preventmanipulation, price distortion ordisruption of the market,

n establishing and enforcing rules toallow the SEF to collect information,which information will be shared with



the CFTC and/or the SEC, asapplicable,

n establishing position limits, which,shall be set no lower than any positionlimits established by the CFTC or theSEC, and

n maintaining adequate financialresources to cover its operatingexpenses for a year.

Comment: Contract Markets: The Actprovides new “core principles” forcontract markets, which are similar to thecore principles of SEFs. In addition, theAct amends the Commodity ExchangeAct to permit the CFTC to set marginrequirements with respect to contractmarkets.

Comment: Ownership by SwapDealers and Major Swap Participants:Within 180 days the CFTC will determinewhether to adopt rules to limit theownership of, or voting rights with respectto, any clearing agency, SEF or contractmarket by bank holding companies, swapdealers and major swap participants. TheCFTC and the SEC will also adopt rules tomitigate conflicts of interest for swapdealers and major swap participants withrespect to clearing agencies, SEFs andcontract markets in which a swap dealeror major swap participant has a debt orequity investment.

Swap Data Repositories

The Act provides that each entity thatacts as a swap data repository or asecurity-based swap data repository (inthis memorandum, “swap datarepository” refers to either) must beregistered with, and will be subject toexamination by, the CFTC or the SEC,as applicable, and any entity that actsas both a swap data repository and asecurity-based swap data repository isrequired to register with both

commissions. Clearing organizations arepermitted to register as swap datarepositories. The relevant commissionswill prescribe the data elements requiredto be collected by swap datarepositories from each swap as well asdata collection and maintenancestandards, which standards will besimilar to those imposed on clearingorganizations.

Swap data repositories are required to

n accept all data required to becollected by the SEC or the CFTC, asapplicable,

n confirm the accuracy of swapinformation with both counterparties,

n maintain swap data in the formprescribed by the SEC or the CFTC,

n provide electronic access to the SECor the CFTC (or a designee),

n maintain privacy of swap datareceived, and

n establish automated systems formonitoring and analyzing swap data.

Swap data repositories are required toprovide any held swap data to variousregulators upon request (including foreignregulators), but only if such regulatorsagree to abide by the confidentialityprovisions applicable to such swap datarepository and agree to indemnify theswap data repository for any litigationexpenses arising from the provision of anysuch information. Swap data repositoriesshall also be subject to compliance withcertain core principles, including (a) notadopting any rule that is an unreasonablerestraint on trade or imposes an anti-competitive burden on trading, clearing orreporting transactions, (b) establishingtransparent governance arrangementsthat fulfill the public interest and supportthe aims of the Federal Government and(c) establishing conflict of interest rules.

Foreign Boards of Trade

1. GeneralThe CFTC may require any foreign boardof trade to register with the CFTC if itprovides its US members with directaccess to the electronic trading system ofthe foreign board of trade. In making itsdecision, the CFTC shall consider whethersuch foreign board of trade is subject tocomparable regulation in such foreignboard of trade’s home jurisdiction and theCFTC’s previous decisions with respect tosuch foreign board of trade.

2. Linked ContractsA foreign board of trade may not providedirect access to US persons with respectto an agreement that settles against theprice of one or more contracts listed fortrading on a contract market or SEFregistered with the CFTC unless suchforeign board of trade daily publishestrade data, adopts position limits, has theability to prevent or reduce the threat ofprice manipulation, provides the CFTCinformation regarding large positions andaggregate trader positions and agrees topromptly notify the CFTC of certainevents. Foreign boards of trade that werepreviously exempted by the CFTC willcontinue to be exempted for 180 daysafter the enactment of this Act, but will berequired to comply afterwards.

Preventing Manipulation –Position Limits, LargeTrader ReportingPosition Limits

1. SwapsThe Act requires the CFTC to imposeaggregate position limits on contractstraded on exchanges, SEFs, foreignboards of trade as well as swaps that arenot traded on an exchange or SEF butwhich perform a significant discoveryfunction, provided that bona fide hedges



in physical commodities are excluded. Indetermining whether or not a swapperforms a “significant discoveryfunction”, the CFTC will consider pricelinkage, arbitrage, material price referenceand material liquidity. The Act alsoprovides the CFTC with the ability toexempt, conditionally or unconditionally,any market participant or any type orclass of swap from position limitrequirements. The provisions regardingposition limits with respect tocommodities will be effective as of thedate of the enactment of the Act, otherthan in respect of excluded commoditiesand agricultural commodities.

2. Security-based swapsThe Act requires the SEC to impose limitson the size of positions in any security-based swap held by any person. The SECmay require a person to aggregate theirposition in (a) any security-based swapand any security, loan or group ofsecurities on which such security-basedswap is based, or (b) any security-basedswap and any security (or securities) aterm of which is the basis for a materialterm of such security-based swap. TheSEC may exempt, conditionally orunconditionally, any person, swap ortransaction from position limitrequirements. The SEC may also requireself regulating organizations to setaggregate position limits with respect totheir members.

Large Trader Reporting

Any position in a swap that had asignificant price discovery function andwhich exceeds a size specified by the SECor the CFTC, as applicable, may not beentered into unless reported to theapplicable commission. Any personentering into such a swap is required tokeep records of it.

Comment: These Restrictions May beDifficult to Implement: Establishing theamount of the position limit or the size ofa large trade could be difficult, and it isnot clear whether position limits are linkedto the notional amount of a swap positionor to an underlying asset.

Manipulation and False Information

The Act prohibits persons from usingmanipulative or deceptive practices inconnection with swaps. In addition, theAct makes clear that false reporting ofmarket information or conditions thataffect the price of commodities areexpressly prohibited.

Comment: False Reporting Unclear: Itis not entirely clear what “false reportingof market information” encompasses. Forinstance, a bespoke transaction betweentwo parties that involves a swap whichdoes not trade at its true market valuemay be caught by the broad definition of“false reporting”, as it could be deemedto provide a false view of the market atthe time.

Restricting Retail MarketsA. Prohibition on Retail OTC Swaps

The Act prohibits any person that is not aneligible contract participant (discussedbelow) from entering into a swap unlesssuch swap trades on an exchange (but notan SEF). Notwithstanding the exemptionsprovided in sections 3 and 4 of theSecurities Act, the Act also prohibits theoffer or sale of a security-based swap thatis not registered with the SEC to a personwho is not an eligible contract participant.Eligible contract participant currentlyincludes an entity or an individual with over$10 million in assets and an individual withover $5 million in assets who enters into aswap for the purposes of risk management,and the Act provides regulatory authority to

the CFTC and SEC to further define eligiblecontract participant.

Prohibition on Retail OTC CommodityTransactions

The Act generally prohibits a transactionin any commodity which is not traded onan exchange if the transaction is with aperson who is not an eligible contractparticipant or eligible commercial entityand if the contract is leveraged ormargined, or financed by one of theparties. (An eligible commercial entity is,broadly, an eligible contract participantwith a commercial use for the relevantswap.) The Act excludes the followingcontracts from this prohibition:

n securities,

n swaps,

n foreign currency transactions,

n sales for physical delivery that occurwithin 28 days (or such other periodas the CFTC may determine) or thatare made in connection with the line ofbusiness of buyer and seller,

n identified banking products,

n contracts that are listed on nationalsecurities exchanges, and

n limited categories of other contracts.

Agricultural producers, packers, andhandlers are deemed to be eligiblecommercial entities.

Comment: The prohibition on retailOTC commodity contracts, ifleveraged, margined or financed, ispotentially very broad. “Commodity” isvery broadly defined under the currentlaws, so this prohibition on retail non-exchange traded commodity transactions(that are margined, leveraged or financed)could potentially affect a very wide range oftransactions. The exclusion for agriculturalbusinesses raises the question as to whyother small businesses are not excluded.



Securities LawsApplication of Securities Laws toSecurity-Based Swaps

The Act generally amends the SecuritiesExchange Act and the Securities Act toinclude securities-based swaps in thedefinition of security and to expand the anti-fraud provisions for securities-based swaps.

Beneficial Ownership/CorporateInsider Rules

The Act expands Section 13 of theExchange Act (which requires reportingof ownership of listed shares in excess ofcertain levels) and Section 16 (which setsrequirements for transactions bycorporate insiders) so that security-based swaps are covered by thesesections if the SEC, after consultationwith prudential regulators and theTreasury, ruled that the purchase of asecurity-based swap (or a type of

security-based swap) confers beneficialownership of the underlying security onthe purchaser.

MiscellaneousExemptions

The Act exempts swaps and security-based swaps from state gaming andbucket-shop laws as well as insurancelaws. The Act also exempts security-basedswaps from state securities laws (otherthan general anti-fraud laws).

Comment: Exemption from InsuranceLaws: This exemption will prevent theregulation of credit default swaps asinsurance by state insurance regulators.

Non-preemption of the FederalEnergy Regulatory Commission

The Act does not restrict the FERC’sregulatory authority or the authority of

state regulatory agencies to set ratesand tariffs, and the CFTC may exempt aswap that is entered into under a tariff orrate schedule approved by a stateregulatory agency.

International Harmonization

The Act provides that in order to promoteconsistent global swap regulation, theSEC, the CFTC and the Treasury willconsult and coordinate with foreignregulators and enter into informationsharing agreements with foreignregulators as may be necessary to protectinvestors and swap counterparties.

General Rule-Making Timeframe

The SEC and the CFTC will be required topromulgate the rules and regulationrequired of each of them under the Actnot later than 360 days after the date ofenactment of the Act, unless expresslystated otherwise.

Title VIII.Payment, Clearing, andSettlement Supervision


Identification ofSystemically ImportantActivitiesSection 804 authorizes the FinancialStability Oversight Council (“OversightCouncil”) to designate whether a financialmarket utility or payment, clearing orsettlement activity is, or is likely tobecome, systemically important.

n A “financial market utility” is anyentity that manages or operates amultilateral system for the purpose oftransferring, clearing, or settlingpayments, securities, or otherfinancial transactions among financialinstitutions or between financialinstitutions and the person.Securities and futures exchangessolely providing facilities to comparedata respecting the terms ofsettlement of securities or futurestransactions effected on suchexchange are excluded from thisdefinition. Similarly, certain marketintermediaries (e.g., broker-dealers,investment advisers, and futurescommission merchants) acting onbehalf of financial market utilities arealso excluded.

n “Payment, clearing or settlementactivity” includes any activity carriedout by one or more financialinstitutions to facilitate the completionof financial transactions. Financialtransactions include funds transfers,securities contracts, forwardcontracts, repurchase agreements,swaps, and financial derivativescontracts. They do not include, for

example, any offers or sales ofsecurities under the 1933 Act, or anyquotation, order entry, negotiation, orother pre-trade activity.

n “Systemic importance” means anysituation where the failure of or adisruption to the functioning of afinancial market utility or the conductof a payment, clearing or settlementactivity could create, or increase, therisk of significant liquidity or creditproblems spreading among financialinstitutions or markets and therebythreaten the stability of the financialsystem.

A financial market utility or payment,clearing or settlement activity may onlybe “designated” (or have such statusrescinded) by a two-thirds vote of theOversight Council (including the vote ofits chairperson). When identifyingdesignated activities, the OversightCouncil must consider, among otherthings, the aggregate monetary value oftransactions processed, exposure of thefinancial market utility or a financialinstitution to its counterparties, and theeffect a failure or disruption has oncritical markets, financial institutions orthe broader financial system. Generally,the Oversight Council must also consultwith relevant supervisory agencies andthe Board of Governors, publish noticeof the designation in the federal register,and afford industry participants anopportunity to challenge suchdesignation through a writtensubmission or oral argument.

Establishment of RiskManagement StandardsSection 805 authorizes the Board ofGovernors to prescribe risk managementstandards governing (i) payment,clearing and settlement activities ofdesignated financial market utilities, and(ii) the conduct of designated activitiesby financial institutions (e.g., riskmanagement policies and procedures,margin and collateral requirements, etc.).Such standards must be designed topromote robust risk management,promote safety and soundness, reducesystemic risks, and support the stabilityof the broader financial system. TheCFTC and SEC are each authorized toprescribe regulations, in consultationwith the Board of Governors, containingrisk management standards.

Special Rules forDesignated FinancialMarket UtilitiesUnder Section 806, the Board ofGovernors provides designated financialmarket utilities (“DFMU”) with access tothe Federal Reserve Bank discountwindow. It requires a DFMU, based onstandards established by the Board ofGovernors, to give advance notice to itssupervisory agency and the Board ofGovernors of any proposed change toits rules, procedures or operations thatcould materially affect the nature or levelof risks presented by the DFMU. Absentan emergency situation, if the Board ofGovernors or the supervisory agencyobjects to the change within 60 days,


Payment, Clearing, and Settlement Supervision

Title VIII reforms the transaction clearance and settlement process to mitigate systemicrisk in the financial system and to promote financial stability. The Act seeks toaccomplish this by: (i) designating certain entities and activities as systemicallyimportant; (ii) facilitating the creation of risk management standards; and (iii) providingregulators with increased examination, enforcement and information gathering authority.Designated entities are also granted access to the Fed’s discount window.



the DFMU may not make the change.Section 813 also requires the SEC,CFTC and Board of Governors to worktogether and develop common riskmanagement supervision programs forcertain clearing entities.

Examination andEnforcement Authority Section 807 sets out the examination andenforcement authority over DFMUs. It firstrequires the applicable supervisory agencyfor a DFMU (e.g., the SEC for a broker-dealer) to conduct annual examinations ofthe DFMU, and allows the examination ofoutside service providers supplyingservices integral to the operation of theDFMU. Such agencies must consult withthe Board of Governors, which may, at itsdiscretion participate in examinations ofDFMUs. The Board of Governors may alsorecommend that a supervisory agency takeenforcement action against a DFMU.Finally, the Board of Governors, afterconsulting with the Oversight Council andthe supervisory agencies, may takeemergency enforcement action against aDFMU itself if: (i) it determines that there isan imminent risk of substantial harm tofinancial institutions, critical markets, or the

broader financial system; and (ii) theimminent risk of harm precludes the Boardof Governors from recommendingenforcement action to a supervisoryagency.

Similarly, section 808 establishesexamination and enforcement authorityover financial institutions that engage indesignated activities. Specifically, it wouldauthorize financial regulators to examineand take enforcement action against eachfinancial institution subject to the Board ofGovernors’ risk management standardswith respect to a designated activity. TheBoard of Governors also has backupexamination and enforcement authorityover such institutions.

Information GatheringAuthoritySection 809 generally authorizes theOversight Council to require any financialmarket utility or financial institution

engaged in payment, clearing orsettlement activities to submitinformation to the Oversight Council forthe purpose of making the requiredsystemic importance determination. TheBoard of Governors and OversightCouncil must coordinate with theappropriate financial regulator beforedirectly requesting material informationfrom, or imposing reporting orrecordkeeping requirements on, anyfinancial market utility or financialinstitution.

Section 809 does not only allow thesharing of information collected amongthe Oversight Council, Board ofGovernors, and relevant financialservices regulators and authorities; butalso with state financial institutionsupervisory agencies, and foreignregulators and authorities, subject toreasonable assurances of confidentialityand lawful use.

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“Section 806 allows designated financial market utilitiesto access the Federal Reserve Bank discount window”

Title IX.Investor Protectionsand Improvementsto the Regulation ofSecurities



Establishment of the InvestorAdvisory CommitteeSection 911 establishes the InvestorAdvisory Committee to advise andconsult with the SEC on, among otherthings, regulatory priorities, feestructures, effectiveness of disclosures,and investor protection. Section 915establishes a new Office of the InvestorAdvocate (“OIA”) within the SEC, andsection 919D requires the appointmentof an OIA Ombudsman. The purpose ofthis office is, in general, to assistinvestors in resolving problems with theSEC and self-regulatory organizations.

Amendments to the Exchange ActSubtitle A amends the Exchange Act to:(i) streamline the SEC’s approval ordisapproval of rule changes proposed byself-regulatory organizations andexchanges (section 916); (ii) authorize theSEC to engage in investor testing for thepurpose of evaluating any of its rules orprograms (section 912); and (iii) authorizethe SEC to issue rules designatingdocuments or information broker-dealersmust provide to retail investors before

such investors purchase an investmentproduct or service (section 919).

Study and Rulemaking Regarding theObligations of Brokers, Dealers andInvestment Advisers to RetailInvestorsSection 913 requires the SEC to conducta study evaluating the effectiveness ofexisting legal or regulatory standards ofcare for brokers, dealers, investmentadvisers and their respective associatedpersons when providing personalizedinvestment advice concerning securitiesto retail investors. This study must identifyany legal or regulatory gaps or overlap insuch standards that can be addressed byrule or statute. Specifically, the SEC isrequired to consider, among other things,the potential impacts of:

n Requiring broker-dealers to meet thefiduciary standard currently imposedon investment advisers for providingpersonalized investment advice aboutsecurities to retail customers;

n Eliminating the broker-dealerexclusion from the definition ofinvestment adviser under the AdvisersAct; and

n Authorizing the SEC to create a self-regulatory organization for investmentadvisers.

The SEC must report the study results toCongress within one year of the Act’senactment. This report must (i) describethe SEC’s findings, conclusions andrecommendations including a descriptionof its considerations, analysis and the

A – Increasing Investor Protection

Title IX directs toward improving and strengthening investor protection and theauthority and operations of the SEC. It directs the SEC to study and consider rulessubjecting broker-dealers to a fiduciary standard of care similar to the standardapplicable to investment advisers. It also includes provisions: (i) establishing additionalwhistleblower protections; (ii) increasing the SEC’s authority to seek collateral bars onviolators of the Exchange Act and Advisers Act; (iii) requiring the SEC to submit annualreports to Congress on its activities; and (iv) strengthening aspects of corporategovernance. Subtitle H of Title IX significantly impacts regulation of the municipalsecurities industry by, for example: (i) requiring municipal advisors (e.g., persons whoadvise municipal entities) to register with the SEC; (ii) expanding the authority of theMSRB over municipal advisors; and (iii) creating an Office of Municipal Securitieswithin the SEC to administer SEC rules regarding municipal securities and coordinaterulemaking and enforcement actions with the MSRB.

“The SEC is required to conduct a study evaluating theeffectiveness of existing legal or regulatory standards ofcare for brokers, dealers, investment advisers and theirrespective associated persons, when providingpersonalized investment advice concerning securities toretail investors.”



public input considered; (ii) an analysis ofany legal or regulatory gaps or overlap inthe protection of retail customers; and (iii)whether the SEC requires additionalstatutory authority to address such gapsor overlap. If the SEC identifies anyregulatory gaps or overlap as describedabove, it must commence a rulemakingwithin two years of the Act’s enactment.

Additional StudiesSubtitle A requires the completion ofadditional studies associated with

securities regulation, including studies bythe: (i) SEC identifying and proposingmethods to improve financial literacyamong retail investors (section 917); (ii)GAO on mutual fund advertising (section918); (iii) GAO on the potential conflicts ofinterest between the staffs of theinvestment banking and equity and fixedincome securities analyst functions withinthe same securities firm (section 919A);(iv) SEC on improving investor access toregistration information on investmentadvisers and broker-dealers (section

919B); (v) GAO to evaluate theeffectiveness of State and Federalregulations governing financial plannersand identify any gaps (section 919C); and(vi) SEC on enhancing investment adviserexaminations (section 914).

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SEC Authority to IssueRules Related to MandatoryPre-Dispute ArbitrationSection 921 amends the Exchange Actand the Advisers Act to authorize theSEC to consider prohibiting or limiting theuse of mandatory pre-dispute arbitrationagreements by broker-dealers andinvestment advisers.

Whistleblower ProtectionSection 922 amends the Exchange Actas follows:

n Authorize the SEC to pay awards towhistleblowers who voluntarilyprovide original information to theCommission that led to thesuccessful enforcement actionresulting in monetary sanctions inexcess of $1 million. The award ispaid in an aggregate amount of notless than 10% but not more than30% of the amount of the sanctions.The SEC considers the followingcriteria in determining the amount ofthe award: (i) the significance of theinformation provided by thewhistleblower to the success of theenforcement action; (ii) the degree ofassistance provided by thewhistleblower; (iii) the programmaticinterest of the SEC in deterringviolations by making awards towhistleblowers; and (iv) such relevantfactors as the SEC may establish bythe rule or regulation.

n No award is provided to certaingovernment employees,whistleblowers who are convicted ofa criminal violation related to theenforcement action for which he orshe would otherwise receive anaward, or whistleblowers who gainthe information through an audit orwho fail to submit information to theSEC in the form the agency requires.Similarly, a whistleblower is notentitled to an award if he knowinglyprovides false information to theSEC.

n Any determination by the SEC underthis section, including whether, towhom, or in what amount to makeawards are at the discretion of theSEC. Except for determinations onthe amount of the award, any otherdetermination may be appealed to theappropriate US Court of Appealswithin 30 days after the SEC issuesits decision.

n Establish an Investor Protection Fundfor paying awards to whistleblowersand to fund the activities of the SEC’sInspector General through certainmonetary sanctions.

n Require the SEC to report toCongress annually on thewhistleblower award program.

n Prohibit employers from retaliatingagainst whistleblowers and provide anexpress private right of action againstemployers who do so. The actionmust be brought within 6 years afterthe date on which the violationoccurred, or no more than 3 yearsafter the date when facts material tothe right of action are known orreasonably should have been knownby the employee, and in no eventmore than 10 years after the date onwhich the violation occurs. Anindividual prevailing in such an actionwill obtain relief includingreinstatement, 2 times the back payotherwise owed with interest, andcompensation for litigation costs,expert witness fees, and reasonableattorneys’ fees.

n Information provided by awhistleblower that could reasonably

be expected to reveal the identity ofthe whistleblower is generallyrequired to be kept confidential andprivileged as an evidentiary matter,but may be used in a criminalinvestigation and shared with theAttorney General or certain otherforeign, federal or state agencies atthe SEC’s discretion.

n Establish a separate office within theSEC to administer and enforce the newwhistleblower provisions of the Act.

Sections 923 and 924 make certainconforming amendments forwhistleblower protection to the federalsecurities laws and set forthimplementation and transition provisionsfor whistleblower protection, respectively.

Collateral BarsSection 925 permits the SEC to imposecollateral bars under the Exchange Actand the Advisers Act prohibiting violatorsfrom associating with a broad range ofSEC regulated entities. This is adeparture from the current standard thatlimits collateral bars solely from entitiesregulated under the particular statutoryprovisions under which the violationoccurred.

Disqualification of Felons and other“Bad Actors” from Regulation DOfferingsSection 926 requires the SEC to issuerules disqualifying an offering or sale ofsecurities as a Regulation D offeringwhere the person offering the securities:(i) is subjected to a final order of a Statesecurities commission or certain otherstate agencies that (1) bars the personfrom association with regulated entities or

B – Increasing Regulatory Enforcement and Remedies

“The SEC’s enforcement authority is expanded toinclude those who aid and abet primary violators of theSecurities Act and 1940 Act, and recklessness satisfiesthe intent standard for such claims.”


from engaging in the business ofsecurities, insurance and banking or insavings association or credit unionactivities, or (2) constitutes a final orderbased on a violation of any law orregulation that prohibits fraudulent ormanipulative conduct within the 10 yearperiod ending on the date of the filing orsale; or (ii) has been convicted of a felonyor misdemeanor in connection with thepurchase or sale of any security orinvolving the making of any false filingwith the SEC.

Clarification Regarding Section 205of the Advisers ActSection 928 amends the Advisers Act toclarify that Section 205 of the Act, whichdeals with investment advisory contracts,does not apply to state-registeredinvestment advisers.

Fair Funds AmendmentsSection 929B permits the SEC to addcivil penalty payments to a fundestablished for the benefit of the victimsof a securities law violation regardless ofwhether the SEC also obtainsdisgorgement against the violator, as isrequired by current law.

Nationwide Service of SubpoenasSection 929E amends the Securities Act,the Exchange Act, the Advisors Act, andthe Investment Company Act to makenationwide service of subpoenasavailable to the SEC in civil actions it filesin federal district courts.

Formerly Associated PersonsSection 929F amends the Exchange Actto make it clear that the SEC may bringsuits against persons formerly associated

with a registered entity to preventindividuals from avoiding a penalty or barsimply because they are no longerassociated with the registered entity.

SIPC ReformsSection 929H makes variousamendments to the Securities InvestorProtection Act, including increasing thecash limit of protection and defining thestandard maximum cash advanceamount.

Protecting Confidentiality ofMaterials Submitted to the SECSection 929I amends the Exchange Actto provide that, except in certaincircumstances, the SEC cannot becompelled to disclose records orinformation obtained from registeredpersons for use by the SEC infurtherance of its regulatory and oversightpurposes, and is also exempt fromFreedom of Information Act requestsunder 5 U.S.C. § 552. Similaramendments to the Investment CompanyAct and Advisers Act apply for records orinformation provided to the SEC underthose statutes.

Expansion of Audit Information to beProduced and ExchangedSection 929J provides that a foreignpublic accounting firm must, if requested,produce its audit work papers to the SECand PCAOB if it “performs materialservices upon which a registered publicaccounting firm relies in the conduct ofan audit or interim review, issues an auditreport, performs audit work, or conductsinterim reviews.” It also provides that anyregistered public accounting firm in thatinstance must produce the foreign firm’s

audit work papers, if asked, and securethe agreement of the foreign firm that itwill cooperate as a condition of suchreliance.

Sharing Privileged Information withOther Authorities Section 929K amends the ExchangeAct to allow the SEC and domestic andforeign securities authorities and lawenforcement authorities to shareinformation without waiving any privilegeapplicable to that information. It alsoprevents the SEC from being compelledto disclose privileged informationobtained from a foreign securitiesauthority or law enforcement authority, ifthe foreign authority represented to theSEC in good faith that the information isprivileged.

Enhanced Application of AntifraudProvisionsSection 929L expands the Exchange Actmarket manipulation and short salesauthority by:

n Extending Section 9 (marketmanipulation) and 10(a)(1) (shortsales) to cover any security “otherthan a government security,” ratherthan just securities “registered on anational securities exchange.”

n Extending Section 9(b) (options) tonon-exchange transactions in options.

n Amending Section 9(c) to extendSection 9 to all brokers and dealers,not just “member[s] of a nationalsecurities exchange.”

n Amending Section 15(c)(1)(A) to coverexchange transactions, not just over-the-counter transactions.

Aiding and Abetting AuthorityThe Exchange Act and the Advisers Actcurrently permit the SEC to bringactions for aiding and abetting violationsof those statutes. Section 929Mextends the SEC’s enforcement


“Recordkeeping and examination requirements forcustodians who hold property of clients of investmentcompanies and investment advisers are expanded.”



authority to file actions against personswho aid and abet primary violators ofthe Securities Act and the InvestmentCompany Act. Section 929O alsomakes clear that recklessness satisfiesthe intent standard for aiding andabetting liability in SEC enforcementactions under the Exchange Act. Inaddition, Section 929N would amendthe Advisers Act to authorize the SECto impose penalties for aiding andabetting violations of that Act.

Additional ProvisionsSubtitle B also:n Authorizes the SEC to impose civil

penalties in cease and desistproceedings.

n Extends the SEC’s antifraudjurisdiction to cover significant stepsin furtherance of a violation outsidethe US and cover foreign conductwith foreseeable substantial effectswithin the US

n Applies control person liability in SECenforcement proceedings.

n Expands recordkeeping and

examination requirements forcustodians who hold property ofclients of investment companies orinvestment advisers.

n Gives the SEC authority to adoptrules requiring more timely reportingby persons acquiring more than 5%ownership interest in an issuer.

n Extends fingerprinting requirements topersonnel of national securitiesexchanges and national securitiesassociations.

n Invalidates any contractual provisionsrequiring persons to waivecompliance with SRO rules.

n Requires the SEC to completeinvestigations and examinations withincertain time frames.

n Allows SIPC assessments andpenalties for fraud under theSecurities Investors Protection Act(“SIPA”), and establishes increasedcivil and criminal penalties for personswho misrepresent SIPC membershipor SIPA coverage.

n Prohibits manipulative short sales andrequires that customers be notifiedthat they may elect not to allow theirsecurities to be used in connectionwith short sales and that the brokermay receive compensation if theshares are so used.

n Requires the SEC to solicit publiccomment and conduct a study todetermine the extent to which privaterights of action under the antifraudprovisions of the securities lawsshould be extended to cover: (1)conduct within the US thatconstitutes a significant step infurtherance of the violation, even if itoccurs outside the US and involvesonly foreign investors; and (2)conduct occurring outside the USthat has “a foreseeable substantialeffect” within the US.

n Requires the GAO to conduct a studyon the impact of authorizing a privateright of action against any personwho aids or abets another person inviolation of the securities laws.


Subtitle C of Title IX of the Actsignificantly alters the regulation of creditrating agencies. Congressional findingsassert that the credit rating agenciescontributed to the financial crisis of 2008by assigning ratings to asset-backedsecurities that proved to be inaccurate,leading to mismanagement of risks byinvestors in reliance on such “inaccurate”ratings. Based on these findings, reformof the US credit rating system hasbecome a focal point of Congressionalfinancial reform efforts. Unless otherwisespecified, the SEC is required by the Actto issue final regulations not later thanone year after the date of enactment ofthe Act.

In the course of its deliberations,Congress has debated over acontroversial provision that significantlychanges the system for assigning initialcredit ratings. Rather than establishingsuch a mechanism, however, the Actrequires the SEC to conduct a study onits effectiveness. Please refer to thesummary under “Studies” for a descriptionof this study.

New managementrequirementsTo manage conflicts of interest, Section932 of the Act requires each nationallyrecognized statistical rating organization(“NRSRO”) to establish an internal controlsystem, in addition to the creation ofcertain management positions.

Internal control structureEach NRSRO is required to establish,maintain, enforce, and document aninternal control structure governing theimplementation of and adherence topolicies, procedures and methodologiesfor determining credit ratings. Annually,each NRSRO is required to submit tothe Commission an internal controlsreport attesting to such actions taken.

Corporate governance Section 932 requires at least half, but nofewer than two, of the members of theboard to be “independent”, with nofinancial stake in credit ratings.Independent directors are not permitted,other than in his or her capacity as amember of the board, to accept anyconsulting, advisory, or othercompensatory fee from the NRSRO or beassociated with an NRSRO and will bedisqualified from any deliberation involvinga specific rating in which the independentboard member has a financial interest inthe outcome of the rating. The Actrequires that “a portion” of theindependent directors includes users ofratings from an NRSRO.

The compensation of the independentdirectors is not permitted to be linked tothe business performance of the NRSROand the term of office is not permitted toexceed five years.

The board of directors, in addition to itsoverall responsibilities, is required tooversee the establishment, maintenanceand enforcement of policies andprocedures for determining credit ratingsand managing conflicts of interest, as wellas for developing an internal controlsystem.

Compliance officerEach NRSRO is required to designate anindividual to serve as a complianceofficer. The compliance officer isresponsible for addressing complaintsregarding the credit ratings issued andcompliance with securities laws andinternal policies and procedures requiredunder the Act. The compliance officer isrequired to submit an annual reportattesting to such NRSRO’s compliancewith the securities laws and internalpolicies and procedures. The complianceofficer, while serving in such capacity, isnot permitted to perform any functionthat may interfere with his or her duties,including performing credit ratings,participating in the development ofratings methodologies or models,performing marketing or sales functions,or participating in establishingcompensation.

Regulation of conflicts of interestUnder the Act, the SEC uses itsauthority to prohibit, or require thedisclosure of, any conflicts of interestrelating to the issuance of credit ratingsby an NRSRO, including withoutlimitation, conflicts of interest relating tothe provision of consulting, advisory, orother services by an NRSRO to theobligor, or any affiliate

Look-back requirementEach NRSRO is required to establish,maintain and enforce policies andprocedures reasonably designed toensure that, in any case in which anemployee of a person subject to acredit rating of the NRSRO or the issuer,underwriter, or sponsor of a security ormoney market instrument subject to a

C – Improvements to the Regulation of Credit Rating Agencies

Qualification standards for creditrating analystsNot later than one year after the dateof enactment of this Act, Section 936requires that the SEC issue rules thatare reasonably designed to ensure thatany person employed by an NRSRO toperform credit ratings meets standardsof training, experience andcompetence necessary to produceaccurate ratings for the categories ofissuers whose securities the personrates. Such credit rating analysts willbe tested for knowledge of the creditrating.

Treatment of NRSRO subsidiariesIf an NRSRO is a subsidiary of a parententity, the board of directors of theparent entity will satisfy the requirementby designating a committee of suchboard of directors, where at least halfof the members of the committee areindependent, and at least one memberof the committee is a user of ratingsfrom an NRSRO.




credit rating of the NRSRO alsoparticipated in any capacity indetermining credit ratings for the personor the securities or money marketinstruments during the one-year periodpreceding the date an action was takenwith respect to the credit rating, theNRSRO is required to conduct a reviewto determine whether any conflicts ofinterest of the employee influenced thecredit rating and take action to revisethe rating if appropriate. Such policiesand procedures are subject to review bythe SEC not less frequently thanannually and whenever such policies arematerially modified or amended.

Each NRSRO is required to submit tothe SEC a report in any case suchNRSRO knows or can reasonably beexpected to know where a personassociated with such NRSRO within theprevious five years obtains employmentwith any obligor, issuer, underwriter, orsponsor of a security or money marketinstrument for which the organizationissued a credit rating during the 12-month period prior to such employment,if such employee was a senior officer of

such NRSRO, or participated orsupervised an individual whoparticipated in any capacity indetermining credit ratings for suchobligor, issuer, underwriter, or sponsor.Such report is made public by the SEC.

New disclosurerequirementsIn an effort to increase transparency,Section 932 of the Act would subjectNRSROs to increased disclosurerequirements.

Elements of required disclosureSuch disclosure is required to include:

n the credit ratings produced;

n the main assumptions and principles used in constructing the procedures andmethodologies;

n the potential limitations of the credit ratings;

n information on the uncertainty of the credit rating;

n whether and to what extent third party due diligence services have been used,including findings or conclusions of such third party, and written certification bythe third party;

n a description of the data relied upon for determining the credit rating;

n a statement regarding an overall assessment of the quality of information availableand considered in producing a rating;

n information relating to conflicts of interest;

n an explanation of the potential volatility of the credit rating;

n information relating to the historical performance of the rating and the expectedprobability of default and expected loss; and

n information on the sensitivity of the rating to assumptions made by the NRSRO.

Credit rating assignment requirementsThe procedures and methodologies, including qualitative andquantitative data and models, used by NRSROs in the issuanceof credit ratings are required to be:

n approved by the board of the NRSRO, or equivalentorganizational body or officer; and

n in accordance with the internal policies and procedures ofthe NRSRO for the development and modification of creditrating procedures and methodologies.

When material changes to credit rating procedures andmethodologies are made, the NRSRO is required to:

n consistently apply the changes to all credit ratings to whichthe changed procedures and methodologies apply;

n to the extent the changes are made to rating surveillanceprocedures and methodologies, apply the changes to then-current credit ratings by the NRSRO within a reasonabletime period; and

n publicly disclose the reason for the change.

Independent informationIn producing a credit rating, Section 935 requires that anNRSRO considers information about an issuer that theNRSRO has, or receives from a source other than the issuer orunderwriter, that the NRSRO finds credible and potentiallysignificant to a rating decision.

Universal ratings symbolsUnder Section 938, each NRSRO is required to establish,maintain, and enforce written policies and procedures thatassess the possibility that an issuer of a security or moneymarket instrument will default or fail to make timely payments,clearly define and disclose the meaning of any symbol usedby the NRSRO to denote a credit rating, and apply anysymbol consistently for all types of securities and moneymarket instruments for which the symbol is used.


Initial credit ratingsEach NRSRO is required to publiclydisclose information on the initial creditratings determined by such NRSRO foreach type of obligor, security, and moneymarket instrument, and any subsequentchanges to such credit ratings. Suchdisclosures are required to includeperformance information over a range ofyears and for a variety of types of creditratings, including for credit ratingswithdrawn by the NRSRO, and arerequired to be made freely available bythe NRSRO on an easily accessibleportion of its website, and in writing,when requested.

To allow users of credit ratings tocompare the performance of creditratings across NRSROs, such disclosuresare required to be made comparableamong NRSROs.

Form for disclosuresEach NRSRO is required to prescribe aform, accompanying the publication ofeach credit rating, that disclosesinformation relating to the assumptionsunderlying the credit rating proceduresand methodologies, the data relied on todetermine the credit rating, and, ifapplicable, how the NRSRO used serviceror remittance reports, and with whatfrequency, to conduct surveillance of thecredit rating. Such disclosure is requiredto be made readily available to users ofcredit ratings. The content of thesedisclosures is required to be provided in amanner that is directly comparable acrosstypes of securities.

Notification for users of credit ratingsEach NRSRO is required to notify usersof credit ratings of the version of aprocedure or methodology, includingqualitative and quantitative inputs, used

with respect to a particular credit rating,when a material change is made to suchprocedure or methodology, when asignificant error is identified in aprocedure or methodology that mayresult in credit rating actions, and of thelikelihood of a material change to aprocedure or methodology used thatmay result in a change in currentcredit ratings.

New penalties for violationsUnder Section 932 of the Act, anyNRSRO in violation of any rulespromulgated under the Act may have itsregistration revoked by the SEC.

Any person who is associated with, whois seeking to become associated with, or,at the time of the alleged misconduct,

who was associated or was seeking tobecome associated with an NRSRO maybe censured, suspended, barred frombeing associated with such NRSRO, orhave his or her activities or functionslimited by the Commission. Additionally, aperson responsible for supervisinganother individual, in failing to reasonablyprevent a violation of the securities lawsby such individual, may face penalties forsuch omission.

The Office of Credit RatingsIn order to administer the new rules underthe Act, Section 932 requires that theSEC establish a new administrative officewithin the SEC, the Office ofCredit Ratings.

Rule-making authorityThe Office of Credit Ratings will have theauthority to establish rules, fines, andother penalties applicable to any NRSROthat violates the requirements relating tocredit rating regulation under the Act.Such rules, fines and penalties will beestablished in order to promote accuracyin credit ratings issued by NRSROs andto ensure that such ratings are not undulyinfluenced by conflicts of interest.

Annual exams and reportsThe Office of Credit Ratings will berequired to conduct an annualexamination of each NRSRO, reviewingsuch subjects as compliance,management of conflicts of interest,implementation of ethics policies,governance, processing of complaints,and post-employment activities of formerstaff of such NRSRO. Findings acquiredfrom such examination will be madeavailable to the public in an annual report,including the responses by such NRSROto any material regulatory deficienciesidentified by the SEC, and whether suchNRSRO has appropriately addressed therecommendations of the SEC.

Referring tips to law enforcementor regulatory authoritiesEach NRSRO is required to refer to theappropriate law enforcement orregulatory authorities any informationthat the NRSRO receives from a thirdparty and finds credible that allegesthat an issuer of securities rated by theNRSRO has committed or iscommitting a material violation of lawthat has not been adjudicated by aFederal or State court.


“The overriding public policy concern evidenced in theAct is to align incentives among originators, securitizersand investors.”

Elimination of exemption from FairDisclosure RuleUnder Section 939B, not later than 90days after the date of enactment of thisAct, the SEC is required to removefrom Regulation FD (17 C.F.R. 243.100)the exemption for entities whoseprimary business is the issuance ofcredit ratings.



Private actionsUnder Section 933 of the Act, a privateaction for money damages broughtagainst a credit rating agency is deemedsufficient where the complaint states withparticularity facts giving rise to a stronginference that the credit rating agencyknowingly or recklessly failed to conducta reasonable investigation of the ratedsecurity with respect to the factualelements relied upon by its ownmethodology for evaluating credit risk orto obtain reasonable verification of suchfactual elements from other sources thatthe credit rating agency considered to becompetent and that were independent ofthe issuer and underwriter.

StudiesUnder Section 939 of the Act, the SECand the GAO are required to conductseveral studies examining differentaspects of credit rating agencies.

The SEC is required to undertake astudy on the feasibility and desirability ofstandardizing credit ratings terminology,standardizing the market stressconditions under which ratings areevaluated, requiring a quantitativecorrespondence between credit ratingsand a range of default probabilities andloss expectations, and standardizingcredit rating terminology across assetclasses.

The SEC is required to conduct a studyof the independence of NRSROs andhow that independence affects theratings issued by the NRSROs. Suchstudy will evaluate the management ofconflicts of interest raised by an NRSROproviding other services and the potentialimpact of rules prohibiting an NRSROthat provides a rating to an issuer fromproviding other services to the issuer.

The SEC undertakes a study examiningalternative methods for addressing theconflict of interest problems inherent in anissuer-pays credit rating agency system.Following the study, the SEC has therule-making authority to establish asystem for the assignment of NRSROs todetermine the initial credit ratings ofstructured finance products in a mannerthat prevents the issuer, sponsor, orunderwriter of the structured financeproduct from selecting the NRSRO thatwill determine the initial credit ratings andmonitor such credit ratings.

The GAO is required to conduct a studyon alternative means for compensatingNRSROs in order to create incentives forNRSROs to provide more accuratecredit ratings.

The GAO is also required to conduct astudy of the feasibility and merits ofcreating an independent professionalorganization for rating analysts employedby NRSROs.

Statutory referencesUnder Section 939 of the Act, statutoryreferences to “investment grade” in theFDIA have been replaced with “standardsof credit-worthiness as established by theCorporation.” In the Investment CompanyAct of 1940, references to “investment

grade” have been replaced with“standards of credit-worthiness as theCommission shall adopt.” In Section5136A of title LXII of the Revised Statutesof the United States (12 U.S.C. 24a),references to “any applicable rating” havebeen replaced with “standards of credit-worthiness established by theComptroller of the Currency.” In theSecurities Exchange Act of 1934,references to “is rated in one ofthe…highest rating categories by at leastone [NRSRO]” are replaced with “meetsstandards of credit-worthiness asestablished by the Commission.”

Review of reliance on ratingsEach federal agency is required to review any regulation issued by such agency thatrequires the use of an assessment of the credit-worthiness of a security or moneymarket instrument and any references to or requirements in such regulations regardingcredit ratings.

Each such agency would be required to modify any such regulations identified by thereview to remove any reference to or requirement of reliance on credit ratings and tosubstitute in such regulations such standard of credit-worthiness as each respectiveagency shall determine as appropriate for such regulations.

Effect of Rule 436(G)Under Section 939G of the Act, Rule436(G), promulgated by the SEC underthe Securities Act of 1933, has noforce or effect. Rule 436(G) exemptscredit ratings issued by NRSROs frombeing considered a part of theregistration statement prepared andcertified by a person under Sections 7and 11 of the Act.


D – Improvements to the Asset-Backed Securitization ProcessSubtitle D of Title IX of the Act amendsthe Securities Exchange Act and theSecurities Act with respect to thetreatment of asset-backed securities,specifically focusing on credit riskretention, disclosure in respect of asset-backed securities and due diligenceanalysis. The overriding public policyconcern evidenced in the Act is to alignincentives among originators, securitizersand investors so as to address the creditquality of assets underlying asset-backedsecurities and disclosure in respect ofsuch assets and the transactions andparties relating thereto.

The Act does not use the definition ofasset-backed security in SEC RegulationAB (17 C.F.R. §229.1101(c)) (“Reg AB”),but rather introduces a new definition forits purposes as a new SecuritiesExchange Act Section 3(a)(77): a fixed-income or other security collateralized byany type of self-liquidating financial asset(including a loan, a lease, a mortgage, ora secured or unsecured receivable) thatallows the holder of the security toreceive payments that depend primarilyon cash flow from the asset, and anyother security that the SEC, by rule,determines to be an asset-backedsecurity for purposes of this definition,but excluding any “security issued by afinance subsidiary held by the parentcompany or a company controlled bythe parent company, if none of thesecurities issued by the financesubsidiary are held by an entity that isnot controlled by the parent company.”The examples included in the Actdefinition of asset-backed security are:(1) collateralized mortgage obligations;(2) collateralized debt obligations(“CDOs”); (3) collateralized bondobligations; (4) CDOs of asset-backedsecurities; and (5) CDOs of CDOs.Notably, unlike the asset-backedsecurity definition in Reg AB, the Actdoes not impose additional conditions,such as issuer activity restrictions andunderlying asset performancecharacteristics, resulting in a broader

pool of securities potentially qualifying as“asset-backed securities” for purposesof the Act and the regulationspromulgated thereunder.

Having defined the scope of securitieswhich are impacted by the terms ofSubtitle D, the Act proposed by theConference Committee for purposes ofreconciling the bills passed by the Senateand the House, sets out the amendmentsto the Securities Exchange Act and theSecurities Act for purposes of the topicsmentioned above.

Credit Risk RetentionThe principal provisions which form thebasis for credit risk retention requirementsare set out in Section 941 of the Act. Inparticular, a new Section 15G to theSecurities Exchange Act is createdthereby. Section 15G directs (1) federalbanking agencies and the SEC to jointlyprescribe regulations that require “anysecuritizer to retain an economic interestin a portion of the credit risk for any assetthat the securitizer, through the issuanceof an asset-backed security, transfers,sells or conveys to a third party”, and (2)the Federal banking agencies, the SEC,the Secretary of Housing and UrbanDevelopment and the Federal HousingFinance Agency to jointly prescriberegulations to require “any securitizer toretain an economic interest in a portion ofthe credit risk for any residentialmortgage asset that the securitizer,through the issuance of an asset-backedsecurity, transfers, sells, or conveys to athird party”, which regulations in bothinstances must be prescribed within270 days of the enactment of suchnew Section 15G. The Act defines“securitizer” as “(A) an issuer of anasset-backed security; or (B) a personwho organizes and initiates an asset-backed securities transaction by selling ortransferring assets, either directly or

indirectly, including through an affiliate, tothe issuer.”

As further described below, the Actrequires that the implementingregulations adopted by the Federalbanking agencies and the SEC meetcertain minimum standards, subject toa general exemptive authority given tothe rulemaking bodies. Thesestandards are:

n prohibiting a securitizer from directlyor indirectly hedging or otherwisetransferring the credit risk that it isrequired to retain with respect toan asset;

n requiring that a securitizer retain atleast 5 percent of the credit risk forany asset transferred, sold orconveyed through an asset-backedsecurity, unless it is a “qualifiedresidential mortgage” asset or iscollateralized solely by “qualifiedresidential mortgages”. This fivepercent risk retention requirement willbe subject to certain additionalexceptions further discussed below;

n requiring that a securitizer retain lessthan 5 percent of the credit risk if anasset is not a “qualified residentialmortgage”, but the originator meetsthe minimum underwriting standardsof Section 15G;

n specifying the (i) permissible forms ofrisk retention for purposes of Section15G, (ii) the minimum duration of therisk retention required under Section15G, and (iii) a carve out from the riskretention requirement if all the assetscollateralized are “qualified residentialmortgages;”

n requiring that the risk retentionrequirements apply to any insureddepository institution acting as asecuritizer;

“Assets, in this context, include loans.”




n in the case of commercial mortgages,specifying the permissible types,forms, and amounts of risk retentionthat meet the requirements of Section15G; which, as determined by thefederal banking agencies and theSEC, may include (1) specified amountor percentage of total credit riskretained, (2) permissibility of third partyacquisition of first-loss position, (3)vetted underwriting standards and (4)adequate representations andwarranties and related enforcementmechanisms;

n providing for certain exemptions, suchas exempting securitizations of assetsissued or guaranteed by the US, or anagency of the US (excluding FannieMae or Freddie Mac) or asset-backedsecurities issued or guaranteed by anyState, political subdivision of a Stateor territory or any publicinstrumentality of a State or territorythat is exempt from registration underSection 3(a)(2) of the Securities Act;

n establishing appropriate standards forretention of an economic interest withrespect to CDOs, securitiescollateralized by CDOs and similarinstruments collateralized by otherasset-backed securities;

n permitting allocations of risk-retentionrequirements between securitizers andoriginators of assets sold tosecuritizers; and

n establishing asset classes withseparate rules for securitizers ofdifferent classes of assets, andunderwriting standards established bythe federal banking agencies for suchclasses that specify the terms,conditions and characteristics of aloan within the asset class thatindicate low credit risk.

In implementing the standards by whichrisk retention would be allocatedbetween securitizers and originators,the federal banking agencies and SEC

are required to reduce the risk retentionpercentage applicable to securitizers bythe percentage of risk retention requiredof originators and to consider (1)whether the assets sold to securitizershave terms, conditions andcharacteristics that reflect low creditrisk, (2) whether secondary marketactivity creates incentives for imprudentorigination of the relevant type of assetssold to the securitizer, and (3) thepotential impact of risk retentionobligations on access to credit onreasonable terms for consumers andbusinesses (which may not include thetransfer of credit risk to a third party).The Act defines “originator” forpurposes of Section 15G as “a personwho (A) through the extension of creditor otherwise, creates a financial assetthat collateralizes an asset backedsecurity; and (B) sells an asset to asecuritizer.”

As previously mentioned, The Act grantsthe Federal banking agencies and theSEC broad power to adopt exemptions,exceptions or adjustments to the rulesissued in relation to Section 15G,including in respect of the risk retentionrequirements for classes of institutions orassets and the prohibition on hedgingretained credit risk by securitizers, subjectto the requirement that such exemptions,exceptions or adjustments (1) help ensurehigh quality underwriting standards andencourage appropriate risk managementpractices by securitizers and originators,(2) improve access to credit onreasonable terms, or (3) otherwise be inthe public interest and for the protectionof investors. Any loan or other financialasset made, insured, guaranteed orpurchased by any institution that is underthe supervision of the Farm CreditAdministration, including the FederalAgricultural Mortgage Corporation, andany residential, multi-family, or health carefacility mortgage loan asset, orsecuritization of the same, insured orguaranteed by the US or an agency of theUS (which will not include Fannie Mae,

Freddie Mac or the Federal home loanbanks), are also exempt from any riskretention provisions.

The Federal banking agencies, the SEC,the Department of Housing and UrbanDevelopment and the Federal HousingFinance Agency are required to jointlydefine the term “qualified residentialmortgage” and issue regulations toexempt qualified residential mortgagesfrom risk retention requirements. Thedefinition is required to take intoconsideration certain underwriting andproduct features (examples of which areset out in Section 15G) that historicalloan performance data indicate a lowerdefault risk, and will exclude asset-backed securities collateralized bytranches of other asset-backedsecurities. Further, the SEC is directed torequire an issuer, for each issuance of anasset-backed security collateralizedsolely by qualified residential mortgages,to certify that it has evaluated theeffectiveness of its internal supervisorycontrols for ensuring all such assets arequalified residential mortgages.

The chairperson of the Financial StabilityOversight Council coordinates all jointrulemaking under Section 13G.

The regulations issued under Section15G will be required to be effectiveone year after publication in theFederal Register for securitizers andoriginators of asset-backed securitiesbacked by residential mortgages, andtwo years after such publication forsecuritizers and originators of all otherclasses of asset-backed securities.

Enforcement of these rules is by theappropriate federal banking agency (forany securitizer that is an insureddepository institution) or by the SEC (forany securitizer that is not an insureddepository institution). Section 15G doesnot address who is responsible forenforcement against originators.


Disclosure and Reportingfor Asset-Backed SecuritiesSection 942 of the Act amends Section15(d) of the Exchange Act and Section 7of the Securities Act in order to add newasset-backed securities disclosure andreporting obligations. Section 15(d) isamended to remove the exemption fromExchange Act filing requirements forasset-backed securities held by fewerthan 300 persons. Further, theamendment gives the SEC rulemakingauthority to provide for differentsuspension or termination rules forasset-backed securities of any class,and authority to classify issuers andprescribe requirements for classes ofissuers under Section 15(d) of theExchange Act.

In addition, Section 7 of the Securities Actis amended to require the SEC to adoptregulations under such Section 7 requiringeach issuer of asset-backed securities todisclose, for each tranche or class ofsecurity, information regarding the assetsbacking that security. The SEC is requiredto set standards for the format of the dataprovided to facilitate comparison of suchdata across securities in similar types ofasset classes, and has to, at a minimum,require such issuers to disclose asset-level or loan-level data if necessary forinvestors to independently perform duediligence. Such data has to include: (1)data having unique identifiers relating toloan brokers or originators, (2) the natureand extent of compensation of the brokeror originator, and (3) the amount of riskretention by the originator and thesecuritizer.

Asset-Backed OfferingsSection 943 of the Act directs the SEC to,not later than 180 days after the dateof enactment of the Act, prescriberegulations on the use of representationsand warranties in the asset-backedsecurities market to require each NRSROto include in any report accompanying a

credit rating: a description of therepresentations, warranties andenforcement mechanisms available toinvestors, and how they differ from therepresentations, warranties andenforcement mechanisms in issuances ofsimilar securities. In addition, suchregulations also require any securitizer todisclose fulfilled and unfulfilled repurchaserequests so that investors may identifyunderwriting deficiencies amongoriginators.

Section 944 of the Act eliminates theexisting exemption from registration underSection 4(5) of the Securities Act whichaddressed certain mortgage-backedsecurities (e.g. involving offers or sales ofone or more promissory notes directlysecured by a first lien on a single parcel ofreal estate upon which is located adwelling or other residential or commercialstructure, and as further set out in Sections4(5)(A) and (B) of the Securities Act).

Due Diligence andDisclosureSection 945 of the Act amends Section 7of the Securities Act to direct the SEC toissue, not later than 180 days after thedate of enactment of this section ofthe Act, rules relating to registrationstatements required to be filed by issuersof asset-backed securities to require suchissuers to perform reviews of the assetsunderlying their securities and disclose thenature of such reviews.

The Act requires that the Chairman of theFSOC carry out a study on themacroeconomic effects of the riskretention requirements and otheramendments under Subtitle D of Title IXof the Act, with emphasis on potentialbeneficial effects with respect tostabilizing the real estate market. Thestudy includes the effects of risk retentionon real estate asset price bubbles andinvolves both retroactive analysis andprospective analysis. The prospectiveanalysis would take into consideration

proactive adjustments to required riskretention percentages for creditors andsecuritizers and a comparable analysis ofproactive adjustment of mortgageorigination requirements, includingassessments and recommendations forwhat entity could carry out suchadjustments, how they should be carriedout and how any related legislation shouldbe implemented. The Chairman will issuea report to Congress on this study within180 days of the enactment of Subtitle D.

Conflicts of InterestProvision Relating toSecuritizationSection 621 of the Act provides that anunderwriter, placement agent, initialpurchaser, or sponsor of an asset-backsecurity generally shall not, for one yearfollowing the closing of the securitizationtransaction, engage in any transactionthat involves any material conflict ofinterest with respect to any investor in “atransaction arising out of such activity.”Exemptions from this general conflicts ofinterest prohibition are provided for certainhedging activities and transactions inasset-backed securities made pursuant tounderwriting and certain othercommitments and for bona fide market-making in the asset backed security.

Risk Retention (Skin-in-the-Game) Requirements –Potential Upheaval of theSyndicated Lending MarketAvertedAs previously discussed in thismemorandum, the Act contains certainrisk retention provisions (colloquiallyreferred to as “skin-in-the-game”provisions) that require, under Section941, any “securitizer” to retain anunhedged economic interest in a portionof the credit risk of any asset that thesecuritizer transfers, sells or conveys to athird party. Section 941 of the Act definesthe term “securitizer” as: (i) an issuer of anasset-backed security (including




mortgage-backed securities); or (ii) aperson who organizes and initiates anasset-backed securities transaction byselling or transferring assets, either directlyor indirectly, including through an affiliate,to the issuer. Assets, in this context,include loans.

Pursuant to the skin-in-the-gameprovisions of the Act, a securitizer isgenerally required to retain not less thanfive-percent of the credit risk of any assetthat is transferred, sold or conveyed to athird party. Section 941, however, permitsregulatory agencies to lower the 5%threshold if the originator of the assetsmeets underwriting standards prescribedby regulations for the asset class inquestion, e.g., loans. The underwritingstandards, as described by Section 941 ofthe Act, must “ensure high qualityunderwriting standards for the securitizersand originators of assets…and encourageappropriate risk management practices.”The regulations required by the Act also

define the permissible forms of riskretention and the minimum duration ofrequired risk retention. Pursuant to Section941, federal government agenciesresponsible for promulgating theseregulations and enforcing the skin-in-the-game provisions are the SEC, with respectto any securitizer that is not an insureddepository institution, and the federalbanking agencies, with respect to anysecuritizer that is an insured depositoryinstitution. Furthermore, the Act chargesthe Chairperson of the Oversight Councilwith coordinating all joint rulemakingrequired pursuant to these provisions. Andwithin 180 days of enacting the Act intolaw, pursuant to Section 946, theChairperson must issue a report on thestudy of “the macroeconomic effects of therisk retention requirements under [theseprovisions], and the amendments made by[these provisions], with emphasis placedon potential beneficial effects with respectto stabilizing the real estate market.”

The Act has been the result of aconference committee reconciling twoindividual bills passed by the House ofRepresentatives and the Senate, onDecember 11, 2009 and May 20, 2010,respectively. With respect to risk retentionrequirements, the two bills differedsignificantly because the House Act wouldhave extended the skin-in-the-gameprovisions to all creditors and thuspotentially could have had far-reachingeffects on the syndicated lending market(including certain interpretations of theHouse Act that would have limitedsyndicates to a maximum of 20 lenders).Since the Act essentially adopts the Senateapproach, its impact on syndicating lendingshould be more limited – although asset-backed loans aggregated into collateralizedloan obligations (CLOs), collateralized debtobligations (CDOs) and other securitizationstructures will still be affected in asignificant way.


Say-on-PayNew Section 14A has been added to theExchange Act which provides thatbeginning with annual or other meetingsof shareholders occurring six monthsafter the Act’s enactment for which theproxy solicitation rules require executivecompensation disclosure, publiccompanies are generally required toinclude in their proxy or consent orauthorization materials for such meeting aseparate non-binding resolution subjectto shareholder vote (commonly referredto as “say-on-pay”) to approve thecompensation of executives whosecompensation is required to be disclosedin such materials.

Proxy materials for any meeting of anissuer occurring more than six monthsafter the Act’s enactment at whichshareholders are asked to vote on anyacquisition, merger, consolidation,proposed sale or other disposition of allof the assets of an issuer are required todescribe in a “clear and simple” form andin accordance with regulations to beestablished by the SEC, any agreements,understandings and arrangementsaffecting the compensation of a namedexecutive officer of the issuer (includingarrangements with an acquirer of theissuer) that is based upon or relates tosuch corporate events. Arrangementsdisclosed pursuant to this rule aregenerally subject to a separate non-binding shareholder vote.

The SEC may exclude issuers or classesof issuers from the voting requirements,with specific consideration given to theeffect on small issuers.

The first such shareholder vote also mustallow shareholders to decide whetherfuture votes on executive compensationshould occur every one, two or threeyears, but in all events a vote must bepermitted no less than once everythree years.

The provision expressly states that therequired shareholder vote is not bindingon the company or its board of directors,and will not be construed as (i) overrulinga decision by the company or its board ofdirectors, (ii) creating or implying anyadditional fiduciary duties or change infiduciary duties of the company or itsboard of directors, or (iii) restricting orlimiting the ability of shareholders to makeother executive compensation-relatedproposals in proxy materials.

The SEC is directed to issue rules thatrequire institutional investors to discloseat least annually their voting incompensation-related matters

Compensation Committee MattersGeneral

New Section 10C has been added to theExchange Act, which provides that nolater than 360 days after the date of theAct’s enactment, the SEC must by ruledirect the national securities exchangesand national securities associations toprohibit the listing of any security of acompany (subject to certain exceptionsnoted below) that does not comply withthe below rules regarding compensationcommittees

n The SEC rules must provide (i)procedures whereby a company willbe provided with a reasonableopportunity to cure any defects thatare the basis for such prohibitionbefore the prohibition will be imposed,and (ii) that a national securitiesexchange or national securitiesassociation may exempt a category ofcompanies from the belowrequirements as they deem

appropriate, including taking intoconsideration the potential impact onsmaller reporting companies.

n The requirements described below donot apply to any “controlledcompany” (i.e., a company that islisted on a national securitiesexchange or national securitiesassociation and that holds an electionfor its board of directors in whichmore than 50% of the voting power isheld by an individual, a group oranother company), or to limitedpartnerships, companies inbankruptcy proceedings, open-endedmanagement investment companiesthat are registered under theInvestment Company Act of 1940, ora foreign private issuer that providesannual disclosures to shareholders ofthe reasons that the foreign privateissuer does not have an independentcompensation committee.

Independence of CompensationCommittee

The SEC rules require that each memberof a compensation committee of acompany be a member of the board ofdirectors and be “independent.”

n SEC rules require that in establishingthe independence of committeemembers, a national securitiesexchange or national securitiesassociation will consider factors thataffect independence, including (i) thesource of compensation of acompensation committee member,including any consulting, advisory orother compensatory fee paid by thecompany to such member, and (ii)whether the compensation committee

E – Accountability and Executive Compensation

“The Act seeks greater transparency as to thecompany’s decisions on executive compensation,including the relationship between executivecompensation and company performance.”




member is affiliated with the companyor any of its subsidiaries or affiliates.

n A national securities exchange ornational securities association mayexempt a particular relationship fromthe above requirements as itdetermines is appropriate, and maytake into account the size of acompany and any other relevantfactors.

The SEC directs national securitiesexchanges and national securitiesassociations to prohibit the listing of anyequity security of a company that doesnot comply with the above rules.

Independence of CompensationConsultants and Other Advisors

A compensation committee may onlyselect a compensation consultant, legalcounsel or other advisor to thecompensation committee afterconsidering certain factors to beestablished by the SEC, which includethe following: (i) the provision of otherservices to the company by the personthat employs the advisor, (ii) the amountof fees received from the company bysuch person as a percentage of the totalrevenue of such person, (iii) the policiesand procedures of such person that aredesigned to prevent conflicts of interest,(iv) any business or personal relationshipof such advisor with a member of thecompensation committee, and (v) anystock of the company owned by suchadvisor. The independence standardsestablished by the SEC must becompetitively neutral among categories ofconsultants, counsel and advisors.

Compensation Committee AuthorityRelating to Consultants, Funding andDisclosure

A compensation committee has theauthority in its discretion to engage acompensation consultant, legal counseland other advisors, and would be directly

responsible for the appointment,compensation and oversight of the workof such consultant, legal counsel andother advisors.

n The Act expressly states that theserules may not be construed to requirethe committee to implement or act inaccordance with advice orrecommendations of suchconsultants, counsel or advisors, or toaffect the committee’s right toexercise its own judgment.

Each company would be required toprovide for appropriate funding, asdetermined by the compensationcommittee, for the payment of reasonablecompensation to such consultant,counsel and advisors.

Beginning with annual meetings ofshareholders (or special meetings in lieuthereof) occurring one year after the dateof the Act’s enactment, public companieswould generally be required to disclose intheir proxy or consent solicitationmaterials for a meeting whether (i) thecompensation committee retained orobtained the advice of a compensationconsultant, and (ii) any conflict of interestwas raised by the work of suchconsultant and, if so, the nature of theconflict and how it is being addressed.

n The disclosure requirement does notappear to apply to independent legalcounsel or other advisors.

Executive Compensation DisclosuresA new subsection (i) is added to Section14 of the Exchange Act which providesthat the SEC will enact rules pursuant towhich each issuer is generally required todisclose in its annual proxy or consentsolicitation materials for its annualmeeting a clear description ofcompensation required to be disclosedunder Rule 402, including information thatshows the relationship between executivecompensation that was actually paid (and

which is required to be disclosed) and thefinancial performance of the companyover a five-year period, taking intoaccount any change in the value of theshares of stock and dividends of thecompany and any distributions.

n Such disclosure may include graphicrepresentations of the requiredinformation.

The SEC is required to amend Rule 402so that each public company would alsogenerally be required to disclose (i) themedian annual total compensation of allemployees of the company (except theCEO), (ii) the annual total compensationof the CEO, and (iii) the ratio of themedian employee annual totalcompensation to that of the CEO.

Clawback of ExecutiveCompensationA new section 10D is added to theExchange Act that requires the SEC todirect national securities exchanges andnational securities associations to prohibitthe listing of companies that do notdevelop and implement a “clawback”policy, as described below.

n Companies are required to developpolicies relating to the disclosure ofincentive-based compensation that isbased on financial informationrequired to be reported under thesecurities laws.

n Companies are required to providethat in the event of an accountingrestatement due to materialnoncompliance of the company withfinancial reporting requirements underapplicable securities laws, thecompany will recover from any currentor former executive officer any excessincentive-based compensation(including stock options) paid duringthe three-year period preceding therestatement that was based onerroneous data.


Employee and Director Hedging PolicyDisclosureSubsection (j) is added to Section 14 ofthe Exchange Act which provides that theSEC will by rule require that each publiccompany disclose in its annual proxy orconsent solicitation materials for an annualmeeting whether any employee or director(or a designee of such persons) is allowedto purchase financial instruments that aredesigned to hedge or offset any decreasein the market value of equity securities thatwere granted to them by the company ascompensation, or otherwise held by them,directly or indirectly.

n Such hedging instruments include, butmay not be limited to, prepaid variableforward contracts, equity swaps,collars and exchange funds.

Excessive Compensation by HoldingCompanies of Depository InstitutionsSubsection (i) is added to Section 5 of theBHCA of 1956 which provides that nolater than 180 days after the firstanniversary of the Act’s enactment, theFederal Reserve, in consultation with theOCC and the FDIC, is required to establishstandards prohibiting as an unsafe andunsound practice any compensation planof a bank holding company or savings andloan holding company that (i) provides anemployee, director or principal shareholderwith excessive compensation, fees orbenefits, or (ii) could lead to materialfinancial loss to such holding company.

n The standards are intended to becomparable to the FDIC standardsunder Section 39 of the FDIA and totake into consideration the

compensation standards describedin Section 39(c) of the FDIA andthe views and recommendations ofthe Comptroller of the Currency andthe FDIC.

Broker VotingSection 6(b) of the Exchange Act isamended to provide that all nationalsecurities exchanges and nationalsecurities associations are required toprohibit member brokers from votingshares on the (i) election of a director, (ii)executive compensation (which includesthe “say-on-pay” vote, discussed above),or (iii) any other significant matter, asdetermined by the SEC, unless thebrokers have received voting instructionsfrom the beneficial owner of such shares.




Report and Certification ofInternal SupervisoryControlsSection 961 requires the SEC to submit anannual report to Congress on its conductof examinations of registered entities,enforcement investigations, and review ofcorporate financial securities filings. Thereport must contain (i) an assessment ofthe effectiveness of the SEC’s internalsupervisory controls and the proceduresapplicable to SEC staff who perform theseexaminations, investigations, and reviews;(ii) certification by the directors of thedivisions of Enforcement, CorporationFinance, and Office of ComplianceInspections and Examinations; and (iii) asummary of the review conducted by theGAO of the adequacy and effectiveness ofthe SEC’s internal supervisory controlstructure and examination, investigation,and review procedures.

Triennial Report on PersonnelManagementSection 962 requires the GAO to submita report to Congress once every threeyears on the quality of personnelmanagement by the SEC. The reportmust include an evaluation of (i) theeffectiveness of supervisors in using theskills, talents, and motivation ofemployees; (ii) the criteria for promotingemployees; (iii) the fairness of theapplication of the promotion criteria; (iv)the competence of the professional staff;(v) initiatives to increase the competenceof the staff; (vi) the efficiency of internalcommunication between different units ofthe SEC and the Commission’s efforts topromote such communication; (vii) staffturnover and numbers; and (viii) actionstaken against those who have not fulfilledtheir duties and the circumstances underwhich the SEC has issued a notice oftermination to employees. Furthermore,the Comptroller must evaluate anyimprovements made by the SEC sincethe submission of its previous report and

provide recommendations for how theCommission can more effectively andefficiently use its human resources. Within90 days of the Comptroller’s report, theSEC is required to submit a reportdescribing the actions it has taken inresponse to the Comptroller’srecommendations.

Annual Financial Controls Audit Section 963 requires the SEC to submitan annual report, attested to by theChairman and Chief Financial Officer, toCongress describing the responsibility ofSEC management for establishing andmaintaining an adequate internal controlstructure and procedures for financialreporting. The GAO will also have tosubmit and attest to an annual report toCongress that assesses the effectivenessof the SEC’s internal control structure andprocedures for financial reporting.

Report on the Oversight of NationalSecurities Associations Section 964 requires the GAO to submita report to Congress two years after thedate of enactment of this Act, and everythree years thereafter that evaluates theSEC’s oversight of SROs with respect to(i) the governance of SROs, including theidentification and management ofconflicts of interest and an analysis of theimpact of any conflicts of interest on theregulatory enforcement or rulemaking ofSROs; (ii) the examinations carried out bySROs, including the expertise ofexaminers; (iii) the executivecompensation practices of SROs; (iv) thearbitration services provided by SROs; (v)SROs’ review of members’ advertising;(vi) cooperation with State securities

administrators; (vii) the methods,sufficiency, and how funds are investedby SROs and the corresponding impacton regulatory enforcement; (viii) policiesregarding the employment of formeremployees of SROs; (ix) the ongoingeffectiveness of the rules of SROs; (x) thetransparency of governance and activitiesof SROs; and (xi) any other issue theComptroller deems has an impact on theeffectiveness of SROs.

Compliance Examiners Section 965 amends Section 4 of theExchange Act to require the SEC’sDivision of Trading and Markets andDivision of Investment Management tohave a staff of examiners to performcompliance inspections and examinationsof the entities under the jurisdiction ofthat division and to report to the directorof that division.

Suggestion Program for Employeesof the Commission Section 966 amends the Exchange Actby inserting a new Section 4D. It wouldrequire the SEC’s Inspector General toestablish and maintain a confidentialtelephone hotline or other electronicmeans to receive suggestions fromemployees for improvements in the workefficiency, effectiveness, productivity, anduse of resources of the SEC and toreceive allegations of waste, abuse,misconduct, or mismanagement withinthe SEC. The Inspector General has toconsider any suggestions or allegations,recommend appropriate action inresponse to such suggestions orallegations, and submit an annual reportto Congress describing the suggestions

F – Improvements to the Management of the Securities andExchange Commission

“The SEC is required to submit an annual report toCongress on its conduct of examinations of registeredentities, enforcement investigations, and review ofcorporate financial securities filings.”



or allegations made, the recommendationsmade or actions taken by the InspectorGeneral, and any actions the SEC took inresponse to such suggestions orallegations.

Commission Organizational Study andReformSection 967 requires the SEC to hire anindependent consultant with expertise inorganizational restructuring and theoperations of capital markets to examinethe internal operations, structure, funding,and the need for comprehensive reform ofthe SEC, as well as the SEC’s relationshipwith and the reliance on SROs and otherentities relevant to the regulation ofsecurities and the protection of securitiesinvestors that are under the SEC’soversight. The consultant must issue areport with recommendations 150 daysafter being retained that includes a studyof (i) the possible elimination of redundantunits; (ii) improving communicationsbetween SEC offices and divisions; (iii) the

need to establish a clear chain-of-command structure, particularly forenforcement examinations andcompliance inspections; (iv) the effect ofhigh-frequency trading and othertechnological advances on the market andwhat the SEC requires to monitor theeffect of such advances; (v) the SEC’shiring authorities, workplace policies, andpersonal practices; (vi) whether the SEC’soversight and reliance on SROs promotesefficient and effective governance for thesecurities markets; and (vii) whetheradjusting the SEC’s reliance on SROs isnecessary. Every six months during the 2-year period following issuance of theconsultant’s report, the SEC must issue areport to Congress describing itsimplementation of the consultant’srecommendations.

Study on SEC Revolving DoorSection 968 requires the GAO to conducta study and issue a report no later thanone year after the enactment of the Act

that (i) reviews the number of employeeswho leave the SEC to work for financialinstitutions; (ii) determines how manyemployees who leave the SEC worked oncases that involved financial institutionsregulated by the SEC; (iii) reviews thelength of time employees work for theSEC before leaving for financialinstitutions; (iv) reviews the existing internalcontrols and makes recommendations onstrengthening such controls to ensure thatformer SEC employees working atfinancial institutions did not assist suchinstitutions in violating SEC or federal rulesor regulations while employed with theSEC; (v) determines if greater post-SECemployment restrictions are necessary toprevent SEC employees from beingemployed by financial institutions; (vi)determines if the volume of former SECemployees employed by financialinstitutions has led to inefficiencies inenforcement; and (vii) makesrecommendations to Congress.



Proxy Access Section 971 amends the proxy rules togive the SEC the authority to require thatsolicitation of a proxy, consent orauthorization by an issuer includes anominee submitted by a shareholder. TheSEC will be allowed under theamendment to issue rules relating to thisrequirement and exempt an issuer orclass of issuers from its rules. Section971 also affirmatively permits the SEC torequire that shareholders be allowed touse an issuer’s proxy materials for thepurpose of nominating individuals to theissuer’s board of directors.

Disclosures Regarding Chairman andCEO Structures

Section 972 requires the SEC to issuerules within 180 days of the enactment of

the Act requiring an issuer to disclose toits shareholders in the annual proxy sentto the issuer’s investors why the issuerhas either:

(1) chosen the same person to serve aschairman of the board of directors andchief executive officer (or in equivalentpositions); or

(2) chosen different individuals to serve aschairman of the board of directors and

chief executive officer (or in equivalentpositions of the issuer).

With respect to this section, it is unclearwhether these requirements would alterthe SEC’s current rule that requiresissuers to disclose their reasons foradopting their form of board leadershipstructure, including disclosures that areessentially the same as what isprescribed in the section.

G – Strengthening Corporate Governance

“The SEC could require that shareholders be able to usean issuer’s proxy materials for the purpose of nominatingindividuals to the issuer’s board of directors.”


Registration and Regulationof Municipal AdvisorsSection 975 requires municipal advisorsto register with the SEC. A municipaladvisor is defined as a person who ‘’(i)provides advice to or on behalf of amunicipal entity or obligated person withrespect to municipal financial products orthe issuance of municipal securities,including advice with respect to thestructure, timing, terms, and other similarmatters concerning such financialproducts or issues; or (ii) undertakes asolicitation of a municipal entity.” The Acthowever, expressly excludes from thenew definition (and therefore SECjurisdiction) a broker, dealer, or municipalsecurities dealer serving as anunderwriter, any registered investmentadvisor / registered commodity advisor,attorneys providing legal advice, andengineers. The Act also expressly createsa fiduciary relationship between amunicipal advisor and a client, stating “Amunicipal advisor and any personassociated with such municipal advisorshall be deemed to have a fiduciary dutyto any municipal entity for whom suchmunicipal advisor acts as a municipaladvisor, and no municipal advisor mayengage in any act, practice, or course ofbusiness which is not consistent with amunicipal advisor’s fiduciary duty or thatis in contravention of any rule of theBoard.”

n The Act also expands the authority ofthe Municipal Securities RulemakingBoard (the “MSRB”) to municipaladvisors.

• The MSRB will include eight“public representative” individualswho are independent of broker-

dealers, municipal securitiesdealers, or municipal advisors andseven “regulated representatives”who are associated with broker-dealers, municipal securitiesdealers or municipal advisors; allof whom are to be knowledgeableof matters related to the municipalsecurities markets. The number of“public representatives” must at alltimes exceed the number of“regulated representatives.”

• The MSRB will have expandedrulemaking authority, includingover advice provided to or onbehalf of a municipal entity or“obligated person” by brokerdealers, municipal securitiesdealers and municipal advisors.

• FINRA must request guidancefrom the MSRB about theinterpretation of MSRB rules. TheMSRB, in turn, may assist theSEC or any SRO in enforcementactions conducted pursuant to theMSRB’s rules.

n Section 975 defines “Municipalfinancial products” as municipalderivatives, guaranteed investmentcontracts, and investment strategies.The regulation of municipal derivativesis to be set by the municipal securitiessection of the Act and will apply toany municipal derivative.

Studies of Disclosure, Markets andRegulation Sections 976 and 977 require studies of(i) the disclosure made by issuers ofmunicipal securities; and (ii) the municipalsecurities market.

n The Act requires the GAO to conducta study of the size of the municipalsecurities markets and the issuersand investors, and of the disclosuresprovided by issuers to investors.Specifically, the study (i) compares thedisclosure municipal issuers arerequired to provide with the disclosurecorporate issuers must provide, (ii)evaluates the costs and benefits toissuers and investors from requiringadditional financial disclosures bymunicipal issuers, and (iii) makesrecommendations relating todisclosure requirements for municipalissuers, including the advisability ofthe repeal of Section 15B(d) of theExchange Act (commonly known asthe “Tower Amendment”).

n The Act also requires the GAO toconduct a study of the municipalsecurities markets, analyzing (i)mechanisms for trading, quality oftrade executions, markettransparency, trade reporting, pricediscovery, settlement clearing, andcredit enhancements, (ii) the needs ofmarkets and investors and the impactof recent innovations, (iii)recommendations on how to improvethe transparency, efficiency, fairness,and liquidity in the municipal securitiesmarkets, and (iv) potential uses ofderivatives in municipal markets. TheSEC is required to respond to thisreport within 180 days thereafter,stating the actions the SEC had takenin response to the report.

Funding For GovernmentalAccounting Standards BoardSection 978 establishes that theGovernment Accounting StandardsBoard (“GASB”) will be funded byassessing entities registered with the SEC“a reasonable annual accounting supportfee.” The Section further defines the roleand importance of the Government

H – Municipal Securities


“Municipal securities advisers (e.g., persons who advisemunicipal entities) have to register with the SEC.”



Accounting Standards Board (“GASB”),and requires a study by the SEC thatevaluates the role and importance of theGASB in municipal securities markets,including with respect to the board’sfunding. The SEC will submit this reportto Congress within 180 days afterenactment of the Act.

Creation of Office of MunicipalSecurities. Section 979 creates an Office ofMunicipal Securities within the SEC toadminister SEC rules with respect tomunicipal securities and to coordinatewith the MSRB for rulemaking andenforcement actions. The director of the

Office of Municipal Securities will report tothe chairman of the SEC.


The Act makes a number of changes toexpand the role and function of thePCAOB.

Foreign Oversight Authorities Section 981 authorizes the PCAOB toshare information with any non-USauditor oversight authority (defined as anygovernmental body or other entityempowered by a non-US government toinspect or enforce laws relating to publicaccounting firms) without that informationlosing its privileged status. The PCAOBmay share this information, if, amongother things, it finds that collaboration isnecessary to protect investors, and if theforeign auditor oversight authorityprovides assurances of confidentiality

Auditors of Broker-DealersSection 982 gives the PCAOB theauthority to inspect registered publicaccounting firms that audit brokers anddealers (unless they are found to beexempt from the program), as well asissuers (as is currently the case). It alsorequires auditors of brokers and dealersto register with the PCAOB and to pay anannual accounting support fee to thePCAOB. Finally, the PCAOB will bepermitted to refer investigations to anSRO with jurisdiction over the relevantbroker or dealer.

Portfolio marginingSection 983 adds portfolio marginingaccounts carried as securities accountspursuant to a portfolio margining programapproved by the SEC to the definition of“Customer Property” found in theSecurities Investor Protection Act of1970.

Securities Lending Under Section 984, the SEC is requiredto promulgate rules that are designed toincrease the transparency of informationavailable to brokers, dealers, and

investors with respect to securitieslending.

Council of Inspectors General ofFinancial Oversight Section 987 establishes a Counsel ofInspectors General On FinancialOversight (the “Council”).

n The Council will be chaired by theInspector General of the Departmentof the Treasury and composed of theinspectors general of the (i) Board ofGovernors of the Federal ReserveSystem, (ii) the Commodity FuturesTrading Commission, (iii) theDepartment of Housing and UrbanDevelopment, (iv) the Department ofthe Treasury, (v) the Federal DepositInsurance Corporation, (vi) the FederalHousing Finance Agency, (vii) theNational Credit Union Administration,(viii) the SEC, and (ix) the TroubledAsset Relief Program.

n The purpose of the Council is tofacilitate the sharing of informationamong inspectors general, with afocus on concerns that may apply tothe broader financial sector and waysto improve financial oversight.

n In addition, agency heads, includingthe Chair of the SEC, are requiredunder Section 989H to addressdeficiencies identified in any InspectorGeneral report, or certify to both

Houses of Congress that no action isnecessary.

n Section 988 requires the InspectorGeneral to conduct a review when ashare insurance fund experienceslosses. The report must include (i) adescription of the reasons why theproblems of the credit union resultedin a material loss to the Fund; and (ii)recommendations for preventing anysuch loss in the future.

Senior Investor Protections Section 989A establishes a programunder which the Office of FinancialLiteracy of the Bureau may make grantsto States and State securities, insuranceand consumer protection agencies toassist in identifying, investigating andprosecuting cases involving misleading orfraudulent marketing of financialproducts.

Exemption For Nonaccelerated Filers Section 989G, in addition to creating anexception to Section 404 of the Sarbanes-Oxley Act of 2002 for non-acceleratedfilers, also instructs the SEC to “conduct astudy to determine how the Commissioncould reduce the burden of complying withsection 404(b) of the Sarbanes-Oxley Actof 2002 for companies whose marketcapitalization is between $75,000,000 and$250,000,000 for the relevant reportingperiod while maintaining investorprotections for such companies.”

I – Public Company Accounting Oversight Board, PortfolioMargining, and Other Matters


“A Council of Inspectors General of Financial Oversightwill be formed to facilitate the sharing of informationamong inspectors general (including representativesfrom the SEC and CFTC), with a focus on concerns thatmay apply to the broader financial sector and ways toimprove financial oversight.”



GAO Study Regarding Exemption ForSmaller Issuers Section 989I mandates that the GAOshall carry out a study on the impact ofthe amendments made by this Act tosection 404(b) of the Sarbanes-Oxley Actof 2002, including:

n Whether issuers that are exempt fromsuch section 404(b) have fewer ormore restatements of publishedaccounting statements than issuersthat are required to comply with suchsection 404(b);

n The cost of capital for issuers that areexempt from such section 404(b)compared to the cost of capital forissuers that are required to complywith such section 404(b);

n Whether there is any difference in theconfidence of investors in the integrityof financial statements of issuers thatcomply with such section 404(b) andissuers that are exempt fromcompliance with such section 404(b);

n Whether issuers that do not receivethe attestation for internal controlsrequired under such section 404(b)should be required to disclose the lackof such attestation to investors; and

n The costs and benefits to issuers thatare exempt from such section 404(b)that voluntarily have obtained theattestation of an independent auditor.

Promoting the Adoption of CertainNAIC Model Regulations Finally, Section 989J adopts a number ofprovisions intended to promote theadoption of model regulations enhancingthe protection of seniors and otherconsumers in the context of certaininsurance and annuity policies.



Section 991 amends section 31 of theExchange Act to require the SEC tocollect transaction fees and assessmentsdesigned to cover the costs to thegovernment of the annual appropriationto the SEC by Congress. The SEC mustadjust its fee rates to a uniform adjustedrate that is reasonably likely to produceaggregate fee collections equal to theregular appropriation to the SEC byCongress for that fiscal year. By March 1of the fiscal year the SEC must determinewhether, based on the actual aggregatedollar volume of sales during the first 5months of the fiscal year, the baselineestimate used is reasonably likely to be10 percent (or more) greater or less thanthe actual aggregate dollar volume ofsales for the fiscal year. If the SEC sodetermines, it must adjust the rates to auniform adjusted rate that, for the

remainder of the year, is reasonably likelyto produce aggregate fee collectionsequal to the regular appropriation to theSEC by Congress for the fiscal year. Inmaking its revised estimate, the SECmust consult with the CongressionalBudget Office and the Office ofManagement and Budget.

Beginning in fiscal year 2012, and eachfiscal year thereafter, subtitle J will amendsection 35 of the Exchange Act(Authorization of Appropriations) torequire the SEC to prepare and submit abudget to the President and copies of thebudget to Congress. The President mustsubmit each budget submitted by theSEC to Congress in unaltered form alongwith the annual budget for theAdministration submitted by thePresident. The SEC’s requested budget

must contain (i) an itemization of theamount of funds necessary to carry outthe functions of the SEC; (ii) an amount tobe designated as contingency funding toaddress unanticipated needs; and (iii) adesignation of any activities for whichmulti-year budget authority would besuitable. Additionally, the Act establishesan SEC reserve fund, which the SEC isable to use for any function it determinesis necessary to carry out its functions.The amount deposited in the fund maynot exceed $50,000,000 each year, andthe balance in the fund may not exceed$100,000,000. Any excess fees the SECcollects from registration fees must bedeposited in the general fund of theTreasury and are not available to theSEC.

J – Securities and Exchange Commission Match Funding

Title X.Bureau of ConsumerFinancial Protection

EstablishmentTitle X of the Act, under the heading“Bureau of Consumer FinancialProtection”, also called the “ConsumerFinancial Protection Act of 2010”,establishes in the Federal ReserveSystem an independent bureau to beknown as the “Bureau of ConsumerFinancial Protection” (the “Bureau”). TheBureau is an executive agency andregulates the offering and provision ofconsumer financial products or servicesunder the federal consumer financiallaws. The Bureau seeks to implementand, where applicable, enforce federalconsumer financial law consistently forthe purpose of ensuring that allconsumers have access to markets forconsumer financial products and servicesand that markets for consumer financialproducts and services are fair,transparent and competitive.

IndependenceNotwithstanding being situated in theFederal Reserve System, the Bureau isessentially autonomous. The Bureau isan executive agency whose director (the“Director”) is nominated by the Presidentand confirmed by the Senate.Notwithstanding the Federal ReserveAct, the Board of Governors of theFederal Reserve System would not beable to (i) intervene in any matter orproceeding before the Director, includingexaminations or enforcement actions,unless otherwise specifically provided bylaw; (ii) appoint, direct, or remove anyofficer or employee of the Bureau; (iii)merge or consolidate the Bureau, or anyof the functions or responsibilities of theBureau, with any division or office of theBoard of Governors or the FederalReserve banks; (iv) approve or reviewany rule or order of the Bureau; or (v)delay or prevent the issuance of any ruleor order of the Bureau. In addition tofulfilling other interim reportingrequirements to Congress, the Directorpresents a semi-annual report to thePresident and to Congress on, and is

required to appear before Congressconcurrently with the submission of thereport to discuss, the significantproblems faced by consumers inshopping for or obtaining consumerfinancial products and services, theBureau’s budget request, rules andorders adopted by the Bureau,complaints collected by the Bureau,various actions taken and analyses ofthe Bureau’s efforts in accomplishing itsmission and in increasing workforce andcontracting diversity.

Funding of Bureau and Authorizationof Appropriations for 2010-2014 The Federal Reserve System is required tofund the Bureau each year in thedetermination of the Director, not toexceed a set percentage of its earnings forsuch period, but the Bureau’s financialstatements are not consolidated withthose of the Federal Reserve System. TheAct authorizes the appropriation of $200million for each of fiscal years 2010-2014 ifthe Director determined that such fundswere necessary and submitted a report tothe President and Congress regarding the

funding of the Bureau and the extent towhich its funding needs exceeds its actualfunding.

ObjectivesThe Act authorizes the Bureau toexercise its authorities under federalconsumer financial law for the purposesof ensuring that, with respect toconsumer financial products andservices: (i) consumers are provided withtimely and understandable information tomake responsible decisions aboutfinancial transactions; (ii) consumers areprotected from unfair, deceptive, orabusive acts and practices and fromdiscrimination; (iii) outdated,unnecessary, or unduly burdensomeregulations are regularly identified andaddressed in order to reduceunwarranted regulatory burdens; (iv)federal consumer financial law isenforced consistently, without regard tothe status of a person as a depositoryinstitution, in order to promote faircompetition; and (v) markets forconsumer financial products and


Unfair or Abusive?The Bureau will be able to prescribe rules applicable to a covered person or serviceprovider identifying and prohibiting as unlawful unfair, deceptive or abusive acts orpractices in connection with any transaction with a consumer for a consumerfinancial product or service, or the offering of a consumer financial product or service.

An act or practice will not be ruled unfair unless the Bureau has a reasonable basisto conclude that (i) the act or practice causes or is likely to cause substantial injuryto consumers which is not reasonably avoidable by consumers and (ii) suchsubstantial injury is not outweighed by countervailing benefits to consumers or tocompetition. In determining whether an act or practice is unfair, the Bureau mayconsider established public policies as evidence to be considered with all otherevidence. Such public policy considerations would not be able to serve as a primarybasis for such determination.

An act or practice will not be ruled abusive unless it (i) materially interferes with theability of a consumer to understand a term or condition of a consumer financialproduct or service or (ii) takes unreasonable advantage of (a) a lack of understandingon the part of the consumer of the material risks, costs, or conditions of the productor service, (b) the inability of the consumer to protect the interests of the consumer inselecting or using a consumer financial product or service or (c) the reasonablereliance by the consumer on a covered person to act in the interests of the consumer.

Bureau of Consumer Financial Protection




services operate transparently andefficiently to facilitate access andinnovation.

Federal Consumer Financial Law All authority to prescribe rules or issueorders or guidelines pursuant to anyfederal consumer financial law, includingperforming appropriate functions topromulgate and review such rules, ordersand guidelines, and the examinationauthority concomitant thereto, held by theBoard of Governors (and any FederalReserve bank, as the context requires),the Federal Deposit InsuranceCorporation, the Federal TradeCommission, the National Credit UnionAdministration, the Office of theComptroller of the Currency, the Office ofThrift Supervision, and the Department ofHousing and Urban Development, and theheads of those agencies, is transferred tothe Bureau. No such authority istransferred from the Federal TradeCommission Act.

Consumer Financial Products andServices Consumer financial products and servicesmeans financial products and servicesoffered or provided for use by consumersprimarily for personal, family or householdpurposes. Such financial products andservices include, but are not limited to:extending credit and servicing loans;extending or brokering leases of personalor real property; providing real estatesettlement services or performingappraisals of real estate or personalproperty; engaging in deposit-takingactivities, transmitting or exchangingfunds, or otherwise acting as a custodianof funds or any financial instrument for useby or on behalf of a consumer; selling,providing or issuing stored value (excludingprepaid special purpose cards orcertificates issued in a specified amountby a merchant, retailer or other seller of

nonfinancial goods or services) or paymentinstruments; providing check cashing,check collection, or check guarantyservices; and providing payments or other

financial data processing products orservices to a consumer by anytechnological means. The Act specificallyexcludes from such definition the business

Covered PersonsSupervision of Nondepository Covered PersonsThe Bureau requires reports and conduct examinations on a periodic basis of anycovered person who (i) originates or brokers consumer real-estate secured loans, (ii) isa “larger participant of a market for other consumer financial products or services,” asdefined by rulemaking of the Bureau in consultation with the Federal Trade Commission(the “FTC”), (iii) offers or provides to a consumer any private education loan, (iv) offers orprovides to a consumer a payday loan or (v) the Bureau has reasonable cause, basedon complaints collected through the system under the Act, to determine, by order, afternotice to the covered person and a reasonable opportunity for the covered person torespond, has engaged in conduct that poses risks to consumers with regard to theoffering or provision of consumer financial products or services, for purposes of (a)assessing compliance with the requirements of federal consumer financial law, (b)obtaining information about the activities and compliance systems or procedures ofsuch person and (c) detecting and assessing risks to consumers and to markets forconsumer financial products and services. Among the factors that the Bureau wouldtake under consideration in its rulemaking is the asset size of the covered person, thevolume of transactions involving consumer financial products or services in which thecovered person engages, the risks to consumers created by the provision of suchconsumer financial products or services and the extent to which such institutions aresubject to oversight by State authorities for consumer protection. The Bureau and theFTC would coordinate enforcement actions.

Supervision of Very Large Banks, Savings Associations and Credit UnionsThe Bureau has exclusive authority to require reports and conduct examinations on aperiodic basis of any covered person that is (i) an insured depository institution withtotal assets of more than $10 billion and any affiliate thereof or (ii) an insured creditunion with total assets of more than $10 billion and any affiliate thereof for purposesof (a) assessing compliance with the requirements of federal consumer financial laws,(b) obtaining information about the activities subject to such laws and the associatedcompliance systems or procedures of such persons and (c) detecting and assessingrisks to consumers and to markets for consumer financial products and services. TheBureau would have primary enforcement authority.

Supervision of Other Banks, Savings Associations and Credit UnionsThe Director is able to require reports from any covered person that is (i) an insureddepository institution with total assets of $10 billion or less or (ii) an insured creditunion with total assets of $10 billion or less, as necessary to support the role of theBureau in implementing federal consumer financial law, to support its examinationactivities, and to assess and detect risks to consumers and consumer financialmarkets. Other than requiring such reports, the prudential regulator would haveprimary authority to enforce the federal consumer financial laws with respect to suchcovered person.



of insurance or electronic conduit services.The “business of insurance” means thewriting of insurance or the reinsuring ofrisks by an insurer, including all actsnecessary to such writing or reinsuringand the activities relating to the writing ofinsurance or the reinsuring of risksconducted by persons who act as, or are,officers, directors, agents, or employees ofinsurers or who are other personsauthorized to act on behalf of suchpersons.

FunctionsGenerallyThe primary functions of the Bureau are:(i) conducting financial educationprograms through the establishment of anOffice of Financial Education; (ii) collecting,investigating and responding to consumercomplaints; (iii) collecting, researching,monitoring and publishing informationrelevant to the functioning of markets forconsumer financial products and servicesto identify risks to consumers and theproper functioning of such markets; (iv)generally supervising covered persons forcompliance with federal consumerfinancial law and taking appropriateenforcement action to address violationsof federal consumer financial law; (v)issuing rules, orders, and guidanceimplementing federal consumer financiallaw; and (vi) performing such supportactivities as may be necessary or useful tofacilitate the other functions of the Bureau.

Office of Financial EducationThe newly established Office of FinancialEducation’s mandate to improve thefinancial literacy of consumers includesproviding opportunities for consumers toaccess: (i) financial counseling, (ii)information to assist with the evaluation ofcredit products and the understanding ofcredit scores, (iii) savings, borrowing andother services found at mainstreamfinancial institutions, (iv) activities for

consumers (a) to prepare for educationalexpenses and the submission of financialaid applications, and other majorpurchases, (b) reduce debt and (c)improve their financial situation, (v)assistance in developing long-term savingsstrategies and (vi) wealth building andfinancial services during the preparationprocess to claim earned income taxcredits and federal benefits.

Telephone Hotline and Website forConsumer ComplaintsConsumer complaints are collected andtracked using a single, toll-free telephonenumber, a website and a centralizeddatabase. Complaints would be directedto various Federal and State agencies, asappropriate.

Office of Fair Lending and EqualOpportunitiesWithin the Bureau, the newly establishedOffice of Fair Lending and EqualOpportunity has the power to overseeand enforce federal laws intended toensure the fair, equitable andnondiscriminatory access to credit forindividuals and communities that areenforced by the Bureau; coordinate fairlending efforts of the Bureau with otherfederal agencies and State regulators topromote consistent, efficient and effectiveenforcement of federal fair lending laws;work with private industry, fair lending,civil rights, consumer and communityadvocates on the promotion of fairlending compliance and education; andprovide annual reports to Congress onthe efforts of the Bureau to fulfill its fairlending mandate.

Office of Service Member AffairsA newly established Office of ServiceMember Affairs is responsible forinitiatives specifically directed at servicemembers and their families inconnection with consumer financialproducts and services.

Office of Financial Protection forOlder AmericansA newly established Office of FinancialProtection for Older Americans would beresponsible for implementing activitiesdesigned to facilitate the financial literacyof individuals who are at least 62 yearsold on protection from unfair, deceptiveand abusive practices and on current andfuture choices.

Consumer Advisory BoardA newly established Consumer AdvisoryBoard advises and consults with theBureau in the exercise of its functionsunder the federal consumer financial lawsand provides information on emergingpractices in the consumer financialproducts or services industry, includingregional trends, concerns and otherrelevant information. Members of theConsumer Advisory Board are appointedby the Director and include experts inconsumer protection, financial services,community development, fair lending andcivil rights, and consumer financialproducts or services. Such members alsoinclude representatives of depositoryinstitutions that primarily serve underservedcommunities and representatives ofcommunities that have been significantlyimpacted by higher priced mortgage loans.

“The Bureau is permitted to promulgate rules requiringthe registration of covered persons, other than aninsured depository institution, insured credit union orrelated person.”

Covered Persons Covered person under the Act means anyperson that engages in offering orproviding a consumer financial product orservice and any affiliate of such person ifsuch affiliate acts as a service provider tosuch person.

Rulemaking Authority The Act provides the Bureau withrulemaking authority as may be necessaryor appropriate to enable the Bureau toadminister and carry out the purposesand objectives of the federal consumerfinancial laws, and to prevent evasionsthereof. In making such rules, it is requiredto consider the potential costs andbenefits to consumers and coveredpersons, including the potential reductionof access by consumers to consumerfinancial products, and the impact ofproposed rules on both covered personsand consumers in rural areas. The Bureauis able, by rule, conditionally orunconditionally to exempt any class ofcovered persons, service providers orconsumer financial products or servicesfrom any provision of the ConsumerFinancial Protection Act of 2010 or fromany rule promulgated thereunder, as theBureau determines necessary orappropriate, taking into consideration thetotal assets of the class of coveredpersons, the volume of transactionsinvolving consumer financial products orservices in which the class of coveredpersons engages and existing provisionsof law which are applicable to theconsumer financial product or service andthe extent to which such provisions

provide consumers with adequateprotections. The Bureau is permitted topromulgate rules requiring the registrationof covered persons, other than an insureddepository institution, insured credit unionor related person.

Collection of Information fromCovered PersonsIn order to support its rulemaking andother functions, the Bureau monitors theoffering and provision of consumerfinancial products and services for risks toconsumers, the results of whichmonitoring the Bureau will report annually.In order to conduct such monitoring, theBureau has the authority to gatherinformation from time to time regardingthe organization, business conduct,markets and activities of covered personsand service providers. In order to gathersuch information, the Bureau is able toutilize a variety of sources, includingexamination reports concerning coveredpersons and service providers, surveysand interviews with covered persons andservice providers, and availabledatabases, and is able to require coveredpersons and service providersparticipating in consumer financialservices to file with the Bureau, as theBureau may prescribe by rule or order,annual or special reports, or answers inwriting to specific questions, furnishinginformation. The Bureau also has accessto any report of examination or financialcondition made by a prudential regulatoror other Federal agency having jurisdictionover a covered person or service provider.

Review of Bureau Regulations On the petition of a member agency ofthe Council, the Council may stay theeffectiveness of, or set aside and therebyrender unenforceable, a final regulationprescribed by the Bureau, or anyprovision thereof, but only if the Councildecides that the regulation or provisionwould put the safety and soundness ofthe United States banking system or thestability of the financial system of theUnited States at risk. The Council alsohas to overcome high procedural bars(including a two-thirds vote) to stay or setaside any rulemaking by the Bureau.

Classes Excluded from Authority ofBureau The Bureau may not exercise anyrulemaking or other authority with respectto: merchants, retailers and other sellersof nonfinancial goods and services;licensed or registered real estate brokersor real estate agents; manufacturedhome retailers and modular homeretailers; accountants and tax preparers;attorneys as part of the practice of lawunder the laws of a State in which theattorney is licensed to practice law;persons regulated by a State insuranceregulator; employee benefit plans; anyspecified plan or arrangement (meaningany plan, account, or arrangementdescribed in section 220, 223, 401(a),403(a), 403(b), 408, 408A, 529, or 530 ofthe Internal Revenue Code of 1986 (the“Code”), or any employee benefit orcompensation plan or arrangement,including a plan that is subject to title I ofthe Employee Retirement IncomeSecurity Act of 1974, or any prepaidtuition program offered by a State);persons engaged in the activity ofestablishing or maintaining for the benefitof the employees of such person anyspecified plan or arrangement; personsengaged in the activity of establishing or



“The Bureau also has access to any report ofexamination or financial condition made by a prudentialregulator or other Federal agency having jurisdictionover a covered person or service provider.”

maintaining a qualified tuition programunder Section 529 of the Code; personsregulated by a State securitiescommission (i.e., no preemption of Statelaw, except where such State law isinconsistent with the proposed statute);persons regulated by the SEC or theCommodity Futures Trading Commission;persons regulated by the Farm CreditAdministration; activities relating tocharitable contributions; the business ofinsurance; any authority arising under theFair Housing Act; or any motor vehicledealer that is predominantly engaged inthe sale and servicing of motor vehicles,and/or the leasing and servicing of motorvehicles.

StudiesAmong the other, numerous studies thatare required under the Act, the Actrequires the GAO to conduct a studywithin one year of the Act’s enactment onthe effectiveness and impact of (i) variousappraisal methods, including the costapproach, the comparative salesapproach, the income approach, andother methods that may be available and(ii) the Home Valuation Code of Conduct.The Act also requires the Secretary of theTreasury to study ending theconservatorship of Fannie Mae, FreddieMac and reforming the housing financesystem and to submit such study toCongress no later than January 31, 2011.

Victims Relief FundThe Act establishes a Consumer FinancialCivil Penalty Fund in the Federal Reserve,into which would be deposited any civilpenalties from any judicial oradministrative action under Federalconsumer financial laws. Any amountstherein are paid to victims of Federalconsumer financial laws or, to the extentsuch victims cannot be located or suchpayments are otherwise not practicable,the Bureau may use such funds for thepurpose of consumer education andfinancial literacy programs.



Title XI.Federal ReserveProvisions


Amendments to EmergencyLending AuthorityThe Act amends Section 13 of theFederal Reserve Act (“FRA”) to prohibitthe Federal Reserve from extendingcredit in unusual and exigentcircumstances to an individual,partnership, or corporation other thanthrough a “program or facility with broad-based eligibility.” Section 13 is alsoamended to require the Federal Reserveto establish by regulation, in consultationwith the Secretary of the Treasury,policies and procedures governingemergency lending programs or facilities.The relevant regulation should ensurethat the emergency lending program orfacility is for the purpose of providingliquidity to the financial system as awhole, rather than assistance toindividual failing institutions. Theregulations shall also prescribe a“lendable value” of collateral designed toprotect taxpayers from losses.

The Federal Reserve shall establishprocedures to ensure that insolventinstitutions have no access to emergencylending programs and facilities. Suchprocedure may include a certificationfrom the CEO of the institution (or otherauthorized officer) that the institution isnot insolvent.

The Federal Reserve is prohibited fromestablishing an emergency lendingprogram or facility without the priorapproval of the Secretary of theTreasury. The Federal Reserve shall alsoprovide a report to the Congressionalbanking committees, no later than 7days after authorizing an emergencylending program. The report shallinclude: (i) justification for the assistance;(ii) identity of recipients; (iii) the date andamount of the assistance, and form inwhich the assistance was provided; and(iv) the material terms of the assistance(i.e., duration, collateral, interest, fees,corporate governance requirementsimposed, expected cost to thetaxpayers). The Federal Reserve shall

also provide written updates once every30 days on: (i) the value of collateralsecuring the assistance; (ii) interest andother revenue received under theprogram or facility; and (iii) the expectedcost to the taxpayer.

Review of Special FederalReserve Credit FacilitiesThe Act authorizes the GAO to conductreviews, including on-site examinationsof the Federal Reserve, any openmarket transaction or discount windowadvance that meets the definition of“covered transaction” in Section 11(s) ofthe FRA (“covered transactions”), andany program or facility, including anySPV or other entity, established by or onbehalf of the Federal Reserve (a “creditfacility”) pursuant to Section 13 of theFRA, if the GAO determines that suchreviews are appropriate. Such reviewsmay be performed solely for thepurposes of assessing: (i) theoperational integrity, accounting,financial reporting, and internal controlsof the credit facility or coveredtransaction; (ii) effectiveness of therelevant collateral policy; (iii) any bias infavor of any participants; and (iv) thepolicies governing third partycontractors. The GAO shall report toCongress within 90 days aftercompleting a review. The GAO shall notdisclose to any person or entity theidentifying details of and informationabout specific participants in a creditfacility; such information shall beredacted in reports submitted toCongress. The GAO shall release non-redacted versions of any report on a

credit facility one year after the effectivedate of termination of the credit facility.The GAO shall release a non-redactedversion of any report regarding coveredtransactions upon the release of theinformation regarding such coveredtransactions by the Federal Reserve asprovided in Section 11(s) of the FRA.

The Act also provides that the FederalReserve shall publicly disclose: (i) thenames and identifying details of eachborrower, participant or counterparty inany credit facility or covered transaction;(ii) the amount borrowed by ortransferred by or to a specific borrower,participant or counterparty in any creditfacility or covered transaction; (iii) theinterest rate or discount paid by eachborrower, participant or counterparty inany credit facility or covered transaction;and (iv) information identifying the typesand amounts of collateral pledged orassets transferred in connection withparticipation in any credit facility orcovered transaction. Such disclosureshall be made one year after theeffective date of the termination by theFederal Reserve of the authorization ofthe credit facility and, in the case of acovered transaction, on the last day ofthe eighth calendar quarter following thecalendar quarter in which the coveredtransaction was conducted. The FederalReserve is authorized to make suchdisclosure before the time specifiedabove if it determines that suchdisclosure is in the public interest andwould not harm the effectiveness of therelevant credit facility or the purpose orconduct of covered transactions.

“The Act amends Section 13 of the Federal ReserveAct to prohibit the Federal Reserve from extendingcredit in unusual and exigent circumstances to anindividual, partnership, or corporation other thanthrough a “program or facility with broad-basedeligibility.”


Federal Reserve Provisions



Emergency FinancialStabilization ProgramsUpon written determination of the FDICand the Federal Reserve, the FDIC shallcreate a widely available program toguarantee the obligations of solventinsured depository institutions or insureddepository institution holding companies(including their affiliates) during times ofsevere economic distress, except thatsuch program may not include theprovision of equity in any form. TheSecretary of the Treasury may request theFederal Reserve and the FDIC todetermine whether liquidity conditionsexist that warrant the use of anemergency stabilization program. TheGAO shall review and report to Congresson any determination to create anemergency stabilization program.

The maximum amount of any suchguarantee shall be determined by theSecretary of the Treasury in consultationwith the President and must be approvedby a joint resolution of Congress. Anincrease in the maximum amountauthorized should also be approved bythe Council.

The FDIC shall establish by regulation, inconsultation with the Secretary of theTreasury, policies and proceduresgoverning the issuance of emergencyguarantees. The FDIC shall chargeassessments to all participants in theprogram to offset projected and actuallosses and administrative expenses. TheFDIC may not borrow from the DepositInsurance Fund in connection with anemergency stabilization program but mayborrow funds from the Treasury.

The Act revokes the existing FDICauthority pursuant to Section 13(c) of theFDIA to establish any widely availabledebt guarantee program for which the Act

provides authority.

The FDIC shall be authorized to appointitself as a receiver for any insureddepository institution participating in anemergency stabilization program thatdefaults on any obligation guaranteed bythe FDIC. With respect to a participantcompany in default that is not an insureddepository institution the FDIC may: (i)require consideration of whether thecompany shall be resolved under theresolution authority provided for underthe Act; or (ii) require that the companyfile a petition for bankruptcy or file apetition for involuntary bankruptcy onbehalf of the company.

Federal ReserveGovernance AmendmentsThe FRA is amended to require that thepresidents of the Federal Reserve banksshall be appointed by the Class B andClass C directors of the banks, for a fiveyear term. Class B directors consists ofthree members, who represent the public.Class C directors consist of threemembers designated by the Board ofGovernors of the Federal ReserveSystem. Class A directors chosen by andrepresentative of the stockholding banksshall no longer be able to vote for theappointment of the president.

The Act amends the FRA to require theappointment of a second Vice Chairmanof the Board of Governors of the FederalReserve who shall be designated as “ViceChairman of Supervision.”

The Act also amends the FRA to explicitlyauthorize the Federal Reserve to “identify,measure, monitor, and mitigate risks tofinancial stability of the United States.”Further, the Board of Governors of theFederal Reserve shall not delegate to aFederal Reserve bank its functions for theestablishment of policies for thesupervision and regulation of firmssupervised by it.

No later than one year after theenactment of the Act, the GAO shall auditthe governance of the Federal Reservebank system. The GAO shall also conductan audit of all financial assistanceprovided by the Federal Reserve duringthe period from December 1, 2007, untilthe enactment of the Act.

The Act requires the Federal Reserve topublish on its website information aboutthe financial assistance it has providedduring the period from December 1,2007, until the enactment of the Act,including: (1) the identity of each entity towhich the Board of Governors hasprovided such assistance; (2) the type offinancial assistance provided; (3) the value

“Upon written determination of the FDIC and theFederal Reserve the FDIC shall create a widelyavailable program to guarantee the obligations ofsolvent insured depository institutions or insureddepository institution holding companies (includingtheir affiliates) during times of severe economicdistress, except that such program may not include theprovision of equity in any form.”



or amount of that financial assistance; (4)the date on which the financial assistancewas provided; (5) the specific terms of anyrepayment expected, including therepayment time period, interest charges,collateral, limitations on executivecompensation or dividends, and othermaterial terms; and (6) the specificrationale for each such facility or program.

Title XII.Improving Access toMainstream FinancialInstitutions


Section 1202 encourages initiatives forfinancial products and services that areappropriate and accessible for millions ofAmericans who are not fully incorporatedinto the financial mainstream.

Expanded Access toMainstream FinancialInstitutions Section 1204 authorizes the TreasurySecretary to establish a multiyearprogram of grants, cooperativeagreements, financial agencyagreements, and similar contracts orundertakings to promote initiativesdesigned to (i) enable low- andmoderate-income individuals to establishaccounts in a federally insured depositoryinstitution; and (ii) improve access to theprovision of accounts on reasonableterms for such individuals. Participation inthis program is restricted to eligibleentities, which include 501(c)(3)organizations, federally insured depositoryinstitutions, community developmentfinancial institutions, a State, local, ortribal government entity, or a partnershipor joint venture of one of these entities.The Treasury enacts regulationsgoverning program implementation andthe products and services to be offered,including small-dollar value loans andfinancial education and counselingrelating to conducting transactions in,and managing, accounts.

Low-Cost Alternatives toSmall Dollar Loans Section 1205 authorizes the TreasurySecretary to establish multiyeardemonstration programs by means of

grants, cooperative agreements, financialagency agreements, and similarcontracts or undertakings with eligibleentities to provide low-cost, small loansto consumers that provide alternatives tomore costly small dollar loans. Loansunder this section must be made onterms and conditions, and pursuant tolending practices, that are reasonable forconsumers. Furthermore, eligible entitiesawarded a grant under this section arerequired to take steps to ensure theprovision of financial literacy andeducation opportunities to eachconsumer provided with a loan.

Grants to Establish Loan-Loss Reserve FundsSection 1206 amends the CommunityDevelopment Banking and FinancialInstitutions Act of 1994. It would permitthe Community Development FinancialInstitutions Fund to provide funds to helpcommunity development financialinstitutions establish their own loan lossreserve funds to defray the costs andmitigate the losses of operating smalldollar loan programs, which areconsumer loans not exceeding $2,500,are repaid in installments, and have nopre-payment penalty, among other

conditions. Community developmentfinancial institutions must provide non-federal matching funds in an amountequal to 50 percent of the amount of anygrant received. Grants may not be usedto provide direct loans to consumers.However, grants may be used torecapture a portion or all of a defaultedloan made under such an institution’ssmall dollar loan program, or todesignate and utilize a fiscal agent forservices. This section also permits theFund to make technical assistancegrants for technology, staff support, andother costs associated with establishinga small dollar loan program.

Evaluation and Reports toCongress Section 1210 requires the TreasurySecretary to submit a report to Congressfor each fiscal year in which a programor project is carried out under this titlecontaining a description of the activitiesfunded, amounts distributed, andmeasurable results.


Improving Access to Mainstream Financial Institutions

“The Act establishes multiyear demonstration programsby means of grants, cooperative agreements, financialagency agreements, and similar contracts orundertakings with eligible entities to provide low-cost,small loans to consumers that provide alternatives tomore costly small dollar (e.g., “payday”) loans.”

Title XIII.Pay It Back Act


TARP AmendmentTitle XIII, the “Pay It Back Act” amendsthe Emergency Economic StabilizationAct of 2008 to reduce Troubled AssetsRelief Program authorization to $475billion, provided that the Secretary of theTreasury is able, with the concurrence ofthe Board of Governors of the FederalReserve System, to purchase troubledassets in an amount equal to amountsreceived by the Secretary before, on orafter the date of enactment of the Pay ItBack Act for repayment of the principal offinancial assistance by an entity that hasreceived financial assistance under theTARP, but only (i) to the extent necessaryto address what the Secretary has

determined to be an immediate andsubstantial threat to the economy arisingfrom financial instability and (ii) upontransmittal of such determination, inwriting, to the appropriate committees ofCongress.

Deficit ReductionThe Pay It Back Act causes the Secretaryof the Treasury to apply (i) all proceedsfrom the sale of any obligations of FannieMae and Freddie Mac and any federalhome loan bank obligations, (ii) any fundsprovided to any State by the AmericanRecovery and Reinvestment Act of 2009(the “Recovery Act”) that were rejected bysuch State and (iii) certain other

recaptured, returned and repaid fundssolely towards deficit reduction andprohibits the Secretary from using suchproceeds and funds to offset otherspending increases or revenuereductions. Such recaptured fundsinclude funds the appropriation of whichis permitted under the Recovery Act andthe Recovery Act is amended to rescindany such appropriations that are notobligated by December 31, 2012,provided that the President is able towaive any such rescission if the Presidentdetermines that it is not in the bestinterest of the Nation to rescind aspecific, unobligated amount.


Pay It Back Act

Title XIV.Mortgage Reform andAnti-PredatoryLending Act


Summary of ProvisionsThe Mortgage Reform and Anti-PredatoryLending Act (the “Act”) is a response tothe residential mortgage crisis andperceived predatory lending practices,foreclosure scams and a lack of publiceducation on the financial risks ofhomeownership. The Act providessupport for homeowners throughout thehome buying and ownership process,including obtaining a mortgage,refinancing, disputes with lenders andpossible foreclosures. The Act alsorequires the completion of several studiesand the creation of new programs. Theregulations required to give effect to thevarious provisions of the Act, however, willtake effect within two and a half years.

Obtaining a MortgageThe Act, which amends, among otherstatutes, the Truth in Lending Act (15U.S.C. 1631 et seq.) notes that thepurpose of the changes to mortgage loanorigination is to “assure that consumersare offered and receive residentialmortgage loans on terms that reasonablyreflect their ability to repay the loans andthat are understandable and not unfair,deceptive or abusive.” In that regard, theAct requires that all “mortgageoriginators” be qualified and be prohibitedfrom receiving financial compensation nottied to the amount of the principal (i.e.,prohibition on “steering incentives”).

The Act requires that regulations beenacted that would prohibit a mortgageoriginator from steering any consumer toa residential mortgage loan that theconsumer lacks a reasonable ability torepay, does not provide the consumerwith a net tangible benefit, or that haspredatory characteristics or effects, suchas excessive fees. The Act furthers requirethe regulation of mortgage originators torefrain from abusive or unfair lendingpractices or mischaracterizing theresidential mortgage loans available to theconsumer.

The Act places an emphasis on the roleof the creditor in ensuring that theconsumer has the ability to repay theresidential mortgage loan. The creditor isrequired to make a reasonable and goodfaith determination based on verified anddocumented information that theconsumer has a reasonable ability torepay the loan according to the terms ofthe loan. The creditor, in making thisdetermination, can consider theconsumer’s credit history, current incomeand other debt obligations, but the abilityto repay must take into account multipleloans and the fully amortized value of theloan over the term of the loan.

The Act requires that the creditor provideperiodic statements to the consumerregarding, among other things, theamount of the principal obligation, currentinterest rate, late payment fees andcontact details for obtaining informationregarding the mortgage.

The Act specifically addresses both “high-cost mortgages” and “higher-riskmortgages.” In relation to high-costmortgages, the Act prohibits offering sucha mortgage without providing theconsumer with pre-loan counseling,imposing “balloon payments” (i.e., paymentthat is twice as large as the prior scheduledpayment) and restricts refinancing. Withregard to subprime mortgages, prior tooffering such a mortgage a creditor mustfirst obtain and bear the cost of a writtenappraisal of the property.

RefinancingIn considering whether a consumer canrefinance his or her residential mortgage,the creditor must reasonably and in goodfaith determine that the refinanced loanwill provide a “net tangible benefit” to theconsumer, although the Act defers onhow such benefit is to be calculated ormeasured.

The Act also provides for a prohibition onprepayment penalties, except for withcertain “qualified mortgages.” Further, the

Act requires a creditor who offers aconsumer a residential mortgage thatincludes prepayment penalties to also offerto the consumer a residential mortgagethat does not include prepaymentpenalties.Likewise, the creditor mustprovide the consumer with informationregarding the acceptance of partialpayments and must, except in limitedcircumstances, ensure that consumerpayments are credited to the consumer’saccount on the date received.

Disputes with LendersThe Act specifically addresses arbitration inthe context of disputes betweenconsumers and lenders, and provides thatno residential mortgage loan or extensionof credit that is secured by a principaldwelling may include terms which requirearbitration or other non-judicial proceduresas a method for resolving disputes. TheAct does, however, allow for the parties toagree to arbitration after a dispute hasarisen. The Act also notes that no provisionof any residential mortgage loan shall beconstrued as a bar to a consumer bringingan action in an appropriate court ofcompetent jurisdiction.

A mortgage originator found liable for abreach of the Act is required to pay to theconsumer actual damages or three timesthe total of the compensation (direct orindirect) to the mortgage originator pluscosts and reasonable attorney fees.

ForeclosureThe Act allows a consumer to raise aviolation by the creditor of certainprovisions of the Truth in Lending Act,including the proposed revisions relatingto mortgage origination as a defense inforeclosure proceedings. The Act alsoincludes a provision for establishing aprogram for making grants to those whoare providing foreclosure legal assistanceto low- and moderate-incomehomeowners and tenants; however thefunding cannot be used in connectionwith class actions.


Mortgage Reform And Anti-Predatory Lending Act



Impact Studies and NewInitiativesThe Act requires that numerous studiesbe conducted, including a study by theGAO on the effects of the enactment ofthe Act on the availability andaffordability of credit for consumers,small business, homebuyers andmortgage lending; a study by theSecretary of Housing and UrbanDevelopment on the root causes ofdefault and foreclosures and the creationof a database on foreclosures anddefaults that will be made publiclyavailable, but with provisions forensuring the confidentiality of personally

identifiable information; a study by theGAO on possible improvements to theappraisal process; a GAO study reporton government efforts to combatmortgage foreclosure rescue scams andloan modification fraud; and a study onthe effect of drywall presence onforeclosures.

The Act also seeks the creation of theOffice of Housing Counseling, which willprovide counseling relating tohomeownership and residential mortageloans as well as grants to otherorganizations that will offer such counselingservices, a process for certifying variouscomputer software programs for

consumers to use in evaluating differentresidential mortgage loan proposals, andforeclosure rescue education programs.The Secretary of Housing and UrbanDevelopment will also be tasked withinforming homebuyers of the importance ofobtaining an independent home inspection.In addition, the Secretary will be required tospend 10% of the funds received to assistthe Neighborhood ReinvestmentCorporation, whose mandate is to assistwith foreclosures and to protectconsumers from foreclosure rescue scams.In addition, the Act requires the creation ofa Multifamily Mortgage ResolutionProgram, designed to protect renters.

Title XV.Miscellaneous


Restriction on use of USFunds for non-USGovernmentsSection 1501 of the Act amends TheBretton Woods Agreements Act, thelegislation controlling the United States’relationship with the InternationalMonetary Fund (“IMF”). The amendmentrequires the United States ExecutiveDirector of the IMF to evaluate proposedloans to a country whose public debtexceeds its gross domestic product andis not eligible for assistance from theInternational Development Association. Ifthe evaluation indicates that a proposedloan is not likely to be repaid in full, theUS Executive Director at the IMF willoppose the proposal. If the IMF doesgrant loan proposals to a country meetingthe conditions described above, theSecretary of the Treasury shall annuallyreport to Congress the likelihood that theloans made pursuant to such a proposalwill be repaid in full.

Congo Conflict MineralsSection 1502 of the Act regulates theexploitation and trade of columbite-tantalite, cassiterite, gold, and wolframite(“conflict minerals”) originating in theDemocratic Republic of Congo. Theregulation requires disclosure by anyreporting companies under the 1934 Actfor which a conflict mineral is “necessaryto the functionality or production of aproduct manufactured by that company.”

Within 270 days of the passing of theAct, the SEC will be required topromulgate rules requiring regulatedcompanies to report annually if any of theconflict minerals used in their productsoriginated in the Democratic Republic ofCongo or an adjoining country. Suchcompanies must also disclose measures,such as due diligence and chain-of-

custody reports, to ensure that theiractives involving the conflict minerals didnot directly or indirectly finance or benefitarmed groups in the Democratic Republicof Congo or an adjoining country. The Actalso sets out standards for independentthird party audits which reportingcompanies will be required to undertake.

A product that is determined not tocontain conflict minerals that directly orindirectly benefit or finance armed groupsin the Democratic Republic of Congo oran adjoining country may be labeled“DRC conflict free”. These reportingrequirements will terminate on the later ofcertification by the President that noarmed groups continue to be directlyinvolved and benefitting from commercialactivity involving conflict minerals or theday after the fifth anniversary of theenactment of the Act.

Section 1502 also requires the StateDepartment to submit to appropriateCongressional committees a strategy toaddress the linkages between humanrights abuses, armed groups, mining ofconflict minerals, and commercial productswithin 180 days of enactment of the Act.The State Department will also berequired, within the same timeframe, toproduce and publish a map of mineral-richzones, trade routes, and areas under thecontrol of armed groups in the DemocraticRepublic of the Congo and adjoiningcountries based on data from multiplesources, including the United Nations, theCongolese government and non-governmental organizations. The StateDepartment will be required to update themap every 180 days, for so long as theconflict mineral reporting requirementsreferred to above are in effect.

The GAO of the United States will submitperiodic reports to Congress assessingthe effectiveness of this system.

Reporting RequirementsRegarding Coal or otherMine SafetySection 1503 of the Act requires each1934 Act reporting company that is anoperator, or that has a subsidiary that isan operator, of a coal or other mine toinclude in its periodic reports specifiedsafety-related information, including thenumber of violations that have been citedby the Mine Safety and HealthAdministration (“MSHA”), the number ofviolations that could constitute a healthhazard, the total value of assessmentsproposed by the MSHA and the totalnumber of mining-related fatalities.

The section also requires such mineoperating companies to report imminentdanger orders and certain other findingsof the MSHA on Form 8 K.

Disclosure of Payments byResource Extraction IssuersSection 1504 of the Act requires the SECwithin 270 days of enactment of the Actto promulgate rules requiring eachresource extraction issuer to include in itsannual report information relating to anypayment made by the resource extractionissuer, a subsidiary of the resourceextraction issuer, or an entity under thecontrol of the resource extraction issuerto a foreign government or the FederalGovernment for the purpose of thecommercial development of oil, naturalgas, or minerals, including the type andtotal amount of such payments madefor each project of the resourceextraction issuer relating to thecommercial development of oil, naturalgas, or minerals and the type and totalamount of such payments made toeach government.


Miscellaneous

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Study by the GAOSection 1505 of the Act requires theGAO to assess the relativeindependence, effectiveness, andexpertise of presidentially appointedinspectors general and inspectors generalof designated federal entities and theeffects on independence of theamendments to the Inspector GeneralAct of 1978 made by the Act, and toreport the results of the assessment toCongress not later than one year after thedate of enactment of the Act.

Study on Core Deposits andBrokered DepositsSection 1506 of the Act requires the FDICto conduct a study to evaluate (1) thedefinition of core deposits for the purposeof calculating the insurance premiums ofbanks; (2) the potential impact on theDeposit Insurance Fund of revising thedefinitions of brokered deposits and coredeposits to better distinguish betweenthem; (3) an assessment of thedifferences between core deposits andbrokered deposits and their role in theeconomy and banking sector of the

United States; (4) the potential stimulativeeffect on local economies of redefiningcore deposits; and (5) the competitiveparity between large institutions andcommunity banks that could result fromredefining core deposits. The FDIC will berequired to report the results of the studyto Congress not later than one year afterthe date of enactment of the Act, withlegislative recommendations, if any, toaddress concerns arising in connectionwith the definitions of core deposits andbrokered deposits.


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Title XVI.Section 1256 Contracts


Section 1601 of the Act defines a“section 1256 contract” under the InternalRevenue Code to exclude (i) anysecurities futures contract or option onsuch a contract unless such contract oroption is a dealer securities futures

contract, or (ii) any interest rate swap,currency swap, basis swap, interest ratecap, interest rate floor, commodity swap,equity swap, equity index swap, creditdefault swap, or similar agreement.




Clifford Chance contactsTo discuss any of the issues in this publication, please contact one of our market experts below:

Thomas Pax Partner, Bank Regulatory

T: +1 202 912 5168E: [email protected]

David Felsenthal Partner, Derivatives


Nick Williams Partner, Insurance


Lewis Cohen Partner, Structured Capital Markets


Steven Kolyer Partner, Securitization


Jeffrey LiebermanPartner, Tax & ERISA


David DiBari Partner, Litigation


Jay BernsteinPartner, Corporate Finance


Jeff BermanPartner, Funds


Gareth Old Partner, Covered Bonds & Derivatives


Jason Young Partner, Syndicated Lending


Steven GattiPartner, Securities Regulatory


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This publication does not necessarily deal with every important topic nor coverevery aspect of the topics with which it deals. It is not designed to provide legalor other advice.

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