Financial Reform Watch : Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, the agencies charged with implementing the Act have begun laying the groundwork for managing their new responsibilities.

The Department of Treasury’s Assistant Secretary for Financial Institutions Michael Barr provided a window into the action during his remarks to the Chicago Club yesterday. The first meeting of the Financial Stability Oversight Council (FSOC) – the council of financial regulators charged with managing systemic risk – will be in September. The Treasury is currently working to stand up the new Office of Financial Research that will support the FSOC by collecting and analyzing data pertaining to systemic risk. Internationally, Treasury is working to raise capital requirements – the ratios and the quality of the underlying capital – and also institute explicit, quantitative liquidity requirements. According to Barr, the Dodd-Frank reforms also require that, “Regulators must supplement existing approaches to supervision with mandatory ‘stress tests,’ credit exposure reporting, and ‘living wills,’ so that they can adequately assess the potential impact of the activities and risk exposures of these firms on each other, on critical markets, and on the broader financial system.”

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On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Act provides the most sweeping overhaul of the regulation of the U.S. financial services industry and financial markets since the aftermath of the Great Depression. The Act represents Congress’ attempt to address the myriad of issues arising out of the financial crisis and marks the conclusion of over a year’s effort to craft a legislative solution designed to avoid another financial crisis. The legislation requires an overhaul of the regulatory landscape and establishes a new regulatory scheme to govern certain public companies, banks, insurance companies, hedge funds, as well as other companies in the financial services industry.

The new legislation is designed to address systemic risk in the U. S. financial system and remediate the “too big to fail” issues which required government bailouts of several large financial services companies during the financial crisis. The legislation also implements new corporate governance and disclosure requirements applicable to public companies, increases the regulatory requirements applicable to banks, insurance companies and hedge funds and subjects certain large financial services companies to regulation by the Federal Reserve Board (the “FRB”).

The new legislation adds several new corporate governance and disclosure requirements applicable to companies listed on U.S. stock exchanges and in some instances, other publicly-traded companies, including:

• a requirement for having a non-binding shareholder vote on compensation of specified executive officers and in certain instances golden parachute provisions;
• a requirement for more stringent rules and disclosure applicable to compensation committees;
• a requirements for additional disclosure requirements related to executive compensation;
• the elimination of discretionary voting by brokers in connection with the election of directors, executive compensation issues or other significant matters;
• authorization for the SEC to adopt rules related to proxy access; and
• a requirement to adopt clawback policies with respect to employment arrangements of executives of companies seeking to list on a U.S. stock exchange.

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While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has been widely identified as having a broad and sweeping impact on the financial markets as a whole, it will most certainly also have a dramatic impact on the structuring and implementation of asset-backed securities. More particularly, the parties involved in structuring and executing collateralized debt obligations (“CDOs”) and collateralized loan obligations (“CLOs”) may be significantly impacted by the risk retention (or “skin-in-the-game”) requirements under Section 941 of the Dodd-Frank Act (the “Risk Retention Requirements”). Important elements establishing the mechanics and implementation of the Risk Retention Requirements will remain unclear, however, until regulators promulgate further required rules.

As set forth in the Dodd-Frank Act, the Risk Retention Requirements direct that distinct regulations be issued by the Federal banking agencies and the Securities and Exchange Commission (the “Commission”) for each category of ABS, including residential mortgages, commercial mortgages, auto loans, and any other applicable categories of Asset-Backed Securities. The risk retention rules must be prescribed within 270 days after enactment (i.e., by April 15, 2011) and must go into effect within two years after the date final rules are published for all asset classes other than residential mortgages (i.e., not later than April 15, 2013).

The Dodd-Frank Act defines “Asset-Backed Securities” as “a fixed-income or other security collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including (i) a collateralized mortgage obligation; (ii) a collateralized debt obligation; (iii) a collateralized bond obligation; (iv) a collateralized debt obligation of asset-backed securities; (v) a collateralized debt obligation of collateralized debt obligations; and (vi) a security that the Commission, by rule, determines to be an asset-backed security for purposes of this section.” While the statutory language makes it clear that the Risk Retention Requirements apply to CDOs, it does not expressly include CLOs. Presumably, CLOs will be included in the regulations either by application of a broad definition of “collateralized debt obligations” or by express inclusion by the Commission as an asset-backed security subject to the Risk Retention Requirements.

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On July 16, 2010, Blank Rome presented a webinar on The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010.

This legislation will affect everyone, from financiers working on Wall Street to publicly-traded companies in all industries to consumers on Main Street. To view a video presentation of the topics discussed during the webinar please click on the individual links below.

The Blank Rome team addressed the following provisions of the financial reform bill:

• Political Overview—the Evolution of the Financial Reform Legislation
• Executive Compensation and Shareholder Rights—New Rules for "Say-on-Pay" and Independent Compensation Committees
• New Rules for Banks and Derivatives—Capital Requirements, Bank Fees and "the Volcker Rule", Central Clearing and Trading, Increased Market Transparency, and Regulating Foreign Exchange Transactions
• Hedge Funds—SEC Registration, Providing Systemic Risk Data, and Expanded State Supervision
• Funeral Plans and Restructuring—Periodic Reporting for Rapid Shutdown and the Consequences of Non-Compliance
• Questions and Answers

To download a PDF copy of the presentation, please click here.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which was signed into law on July 21, 2010, has an immediate effect on many private securities offerings. Specifically, the Act revises the net worth test for determining whether an individual investor is an “accredited investor” for purposes of Regulation D and Section 4(6) of the Securities Act of 1933 (the “Securities Act”).

Regulation D is the exemption under the federal securities laws that many issuers, including venture capital firms and real estate and private equity funds, rely upon to raise capital from investors in non-public offerings. This exemption is also often relied upon in many non-public M&A transactions in which the acquiror uses its stock as acquisition consideration. Section 4(6) is a statutory exemption available for private placements solely to accredited investors.

Section 413 of the Act requires the SEC to make a change to the net worth test contained in the definition of “accredited investor” that is applicable to all offerings exempt under Regulation D (especially Rule 506) and Section 4(6) of the Securities Act. Under the net worth test, an investor must have (either individually or together with the investor’s spouse) more than $1 million of net worth at the time of the purchase. As amended by Section 413 of the Act, the value of the investor’s primary residence is now excluded from the calculation of net worth. The SEC has indicated in a Compliance & Disclosure Interpretation (“C&DI”) dated July 23, 2010 that the amount of any indebtedness secured by the principal residence should be netted from the value of the residence (except where the amount of the debt exceeds the fair market value of the residence and the lender has recourse to the investor personally for such excess, in which case such excess liability is deducted from net worth).

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To download the final, enrolled version of the Dodd Frank Wall Street Reform and Consumer Protection Act, please click here.
 

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Earlier today, President Obama signed into law the Dodd Frank Wall Street Reform and Consumer Protection Act—marking the completion of the legislative road and the beginning of the regulatory road for the financial reform bill that is now the law of the land.

In his remarks at the bill signing, the president thanked congressional leaders, praised the effort, and described the package as a "...set of reforms to empower consumers and investors, to bring the shadowy deals that caused this crisis into the light of day, and to put a stop to taxpayer bailouts once and for all."

The 2,300 page bill now falls into the hands of the Treasury Secretary and other financial regulators to execute. In the coming days and weeks, Financial Reform Watch will be "watching" for many things including whom the president nominates to be the head of the new Consumer Financial Protection Bureau; when the first meeting of the Financial Stability Oversight Council will be scheduled; and which proposed rules begin to flow from the financial regulators tasked with implementing the mandates of the Dodd Frank Act.

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This afternoon the Senate passed the Dodd Frank Wall Street Reform and Consumer Protection Act by a vote of 60 to 39.  As expected, all but three Republicans -- Senators Scott Brown (MA), Olympia Snowe (ME) and Susan Collins (ME) -- voted against the bill, and Sen. Russ Feingold (D-WI) was the only Democrat to vote against it. The president is expected to sign the legislation next week.

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As expected, the Senate voted 60-38 this morning to invoke cloture on the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) conference report, setting up a final vote that is slated to occur around 2 p.m.

Republican Senators Scott Brown (MA), Olympia Snowe (ME) and Susan Collins (ME) joined all but one Senate Democrat – Wisconsin Senator Russ Feingold – in voting to invoke cloture. Senator Chuck Grassley (R-IA), the only other Republican to support H.R. 4173 in May, switched his vote to “no” due to concerns over the derivatives language, along with the spending offsets that were included during the later stages of negotiations.

Following the expected final passage of H.R. 4173 this afternoon, the bill will then be sent to President Obama, who will likely sign it into law sometime next week.
 

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