CFPB Seeks To Regulate Six Non-Banking Sectors

The Consumer Financial Protection Bureau (CFPB) could soon oversee 100,000 firms, bureau officials said last week. Elizabeth Warren and the CFPB leadership held a press call Thursday, outlining six areas that could soon be subject to CFPB oversight. The six areas are debt collection; consumer reporting; consumer credit and related activities; money transmitting, check cashing and related activities; prepaid cards and debt relief services. The bureau is not permitted to begin regulating non-bank firms until a director is confirmed, which is not likely to happen before the July 21, 2011 Dodd-Frank implementation date when the bureau officially opens its doors.

While the Obama Administration said that the CFPB’s ability to oversee these non-bank product is key to reigning in the previously unregulated “shadow banking” industry, House Republicans continue their attacks on the bureau, and have vowed to go to any lengths necessary to block President Obama from naming Elizabeth Warren as the bureau’s director through a recess appointment. Rep. Patrick McHenry (R-NC) said he is concerned that the CFPB will have “virtually unchecked” power.

The CFPB is currently seeking comment on how it should supervise non-bank firms. The comment period will be open until mid-August, and the final regulations must be in place by July 21, 2012, according to the Dodd-Frank Consumer Protection and Wall Street Reform Act.

Cybersecurity: The New Financial Regulatory Reform

While the SEC and CFTC may be stalled in completing new regulations of the financial sector, the Obama Administration is moving ahead full-force, introducing a Cybersecurity Proposal that could mean changes for the financial sector.

As it stands, there are 48 different state cybersecurity statutes, making it difficult for large, national and international firms to navigate the complex regulatory structure, particularly when state statutes conflict. The Administration’s proposal would create a single, national cybersecurity and data breach notification standard, which many companies say will make compliance easier.

Not so for financial firms, however. The majority of existing state statutes exempt financial firms, leaving the industry to be governed by its own best practices and agency guidance. Under the proposal, many financial firms will be designated covered critical infrastructure, and thus subject to additional regulations and oversight in the interest of protecting national economic security. These entities will be required to establish and submit cybersecurity and risk mitigation plans, and will be subject to period evaluations by the Department of Homeland Security (DHS).

The financial services industry has come out largely in support of the measure, saying that a national standard will simplify compliance and codify the efforts that financial firms are already making, though it has called for more sector-specific regulation by individual agencies, rather than by DHS.

House Republicans have come out strongly against the proposal. During a hearing last month, House Judiciary Subcommittee on Intellectual Property, Competition, and the Internet Chairman Bob Goodlatte (R-VA) said mandatory federal standards are unrealistic given how quickly technology advances and cybersecurity needs change. Rep. Darrell Issa (R-CA) expressed concerns that the “voluntary” information-sharing described in the bill isn’t truly voluntary when the federal government has the ability to “make life miserable for private-sector companies.” The Administration counters that the proposal takes a “light touch” when regulating privately-owned critical infrastructure. Senate Republicans have yet to weigh in, and it is unclear how active they will be on this issue, when not a single Republican Senator attended Wednesday’s Senate Banking Committee Hearing on Data Security in the Financial Sector.

EVENT: The Impact of Dodd-Frank on the Loan Market: Broad Principles and Practical Implications

Blank Rome joins the Loan Syndications and Trading Association (LSTA) and Morrison & Foerster to present a program on “The Impact of Dodd-Frank on the Loan Market: Broad Principles and Practical Implications” on July 12, 2011.

Blank Rome partners, J.C. Boggs and Marianne Caulfield, join the panel to discuss:

  • Dodd-Frank one year later, the current state of play on the Hill and the regulatory agencies
  • Major regulatory activities of interest to the loan trading market (Volcker, derivatives, capital and risk management)
  • Dodd-Frank and the Loan Market: The Future of CLOs, Derivatives and Loan Participations
  • How Dodd-Frank derivatives  rules affect risk participations (including LMA funded participations) and what alternatives are available

This presentation will be held:


July 12, 2011
4:00 p.m.–6:00 p.m.
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, NW, Washington, DC


To register, please click here

House Financial Services Committee Continues Efforts to Chip Away at Dodd-Frank

The House Financial Services Committee voted Wednesday to approve several measures that would scale back provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

As lawmakers prepare for the bill’s July 21, 2011 implementation date, House Republicans passed several measures narrowing the scope of the bill, including a measure that would exempt companies that manage up to $50 million in securities from having to register with the Securities and Exchange Commission; a bill exempting most private equity fund advisers from having to register with the SEC; a bill repealing the provision in Dodd-Frank requiring publically-traded companies to disclose their employees’ median compensation separately from their CEO pay packages; and a bill creating a legal framework for the use of covered bonds.

House Financial Services Committee Chairman Spencer Bachus (R-AL) said that all of the bills were designed to create jobs. Reps. David Schweikert (R-AZ), Robert Hurt (R-VA) and Nan Hayworth (R-NY), who introduced three of the provisions, said their bills remove burdensome regulations that are both costly and unnecessary for small businesses.

Throughout the markup, Rep. Barney Frank (D-MA), ranking member of the committee and one of the architects of Dodd-Frank, expressed his frustrations with the various new provisions and made several failed attempts to amend them. When House Republicans said that they were concerned about finding sufficient funding for the SEC to fulfill all of its new regulatory obligations, Frank said that Congress should not scale back regulation because of budgetary limitations, citing the cost of the war in Afghanistan, and saying that the Congress can certainly find the necessary funding for the regulatory agencies. He went on to say that the costs of failing to regulate the financial markets are significantly higher.

A Ship Without A Captain: What Director-less CFPB Will Actually Look Like

As the July 21, 2011 Dodd-Frank implementation date rapidly approaches, it is becoming increasingly likely that the Bureau of Consumer Financial Protection will not have a Senate-confirmed director by the time its new authority begins. While some have tried to downplay the significance of the CFPB assuming authority without a director, it could seriously hinder the bureau’s ability to do so much as open its doors, let alone effectively regulate.

According to Title X of Dodd-Frank, the director is appointed by the President with the advice and consent of the Senate. Once confirmed, the director serves as the sole head of the CFPB. Dodd-Frank enumerates the director’s responsibilities clearly: appointing and directing all bureau employees; establishing all offices within the bureau; reporting to Congress; submitting budget requests to the Federal Reserve; requiring reports of covered firms; and prescribing rules and issuing orders and guidance, among others.

Additionally, there are a number of responsibilities assigned to “The Bureau,” though Dodd-Frank does not establish who has authority over The Bureau, if not the director. Assuming a case can be made for some other leadership structure, however, The Bureau is tasked with exclusively enforcing federal consumer financial law. The Bureau also may take action against those participating in unlawful acts, engage in joint investigations, conduct hearings and adjudication proceedings, and commence civil action against those who violate federal consumer financial law.

While this would suggest that The Bureau would have some capabilities absent a director, it may not be quite that easy. First, Dodd-Frank at times fails to clearly delineate where the exclusive authority of the director begins and ends as opposed to The Bureau as a whole. While this could arguably help The Bureau perform its duties without a director, there’s a second, stickier problem. The director has the sole authority to staff The Bureau, as well as to request and budget funding from the Federal Reserve. Consequently, even if The Bureau could find the statutory authority to perform some regulatory functions, it would be hard-pressed to do so without funding or personnel.

If a director is not confirmed by July 21, Dodd-Frank permits two courses of action. First, the Secretary of the Treasury may submit a request to Congress to delay the implementation date. The law requires that implementation cannot be delayed for more than 18 months, meaning that the Administration would only gain 6 months to get a nominee confirmed. Alternatively, Dodd-Frank states that the Secretary of the Treasury is authorized to perform the functions of The Bureau until the director is confirmed by the Senate, though it is unclear whether this authority expires on July 21.

Secretary Geithner has not yet announced plans to take either of these steps, but with only a month to go and Republicans in the House and the Senate vowing that they will go to any means necessary to block the confirmation of presumptive nominee Elizabeth Warren, delaying the implementation may be the Secretary’s only option.

Banks To Challenge Interchange Fees in Court

After an oh-so-close loss in the Senate last week, the banking industry is now planning to take the fight over debit card interchange fees to court.

The Federal Reserve has yet to issue a finalized rule, but once it does, the banking industry is likely to file suit, claiming that the Fed has misinterpreted the Dodd-Frank Wall Street Reform and Consumer Protection Act. The industry claims that the so-call Durbin Amendment, which imposed the cap, allows banks to make a “reasonable and proportional” profit. The industry also claims that the Fed is not taking into account the various costs associated with operating a debit card network.

Minnesota-based TCF National Bank sued the Federal Reserve in October 2010, challenging the constitutionality of the rule. The first hearing is set for this week.

Under the Dodd-Frank Act, debit card fees, which currently average about 44 cents per transaction, are capped at about 12 cents per transaction. Sens. Tester (D-MT) and Corker (R-TN) introduced an amendment that would have delayed the implementation of the fee cap, but it failed to pass the Senate by a six vote margin. The final count was 54-45, with 60 votes needed for passage.

If You Can't Beat 'Em - Cut Their Funding

In yet another attempt to hinder the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the House Appropriations Committee passed two measures this week to dramatically cut the budgets of key regulatory agencies.

The 2012 Financial Services Appropriations Bill includes $12.2 billion for the Treasury Department, which is $929 million below last year’s level and nearly $2 billion below the President’s request. The bill also limits mandatory funds for the Consumer Financial Protection Bureau (CFPB) to $200 million and subjects it to annual appropriations, giving the House more oversight capability. In addition, the bill limits funding to the Office of Financial Stability to $200 million. The bill provides $1.2 billion for the Securities and Exchange Commission, which is equal to last year’s levels and $222 million below the President’s request.

The 2012 Agriculture Appropriations Bill includes $172 million for the CFTC, a 15 percent cut from last year and nearly half of the $308 million the President requested. Subcommittee Chairman Jack Kingston (R-GA) said the bill takes spending to pre-stimulus, pre-bailout levels while ensuring that the CFTC and other agencies “are provided the necessary resources to fulfill their duties.” CFTC Chairman Gary Gensler has been saying for over a month that the CFTC cannot possibly fulfill its new role under Dodd-Frank without additional resources, but Republicans counter that the CFTC has been granted too broad authority and has been overstepping its role.

Some members are taking it even further, with Rep. Scott Garrett (R-NJ) introducing an amendment yesterday which prohibits the CFTC to use appropriated funds to promulgate any final rules until 12 months after the final swaps rules are completed. The swaps rules are slated to be finalized in December 2011, which means the CFTC would be at a standstill until at least December 2012.

CFTC Gary Gensler told the Agriculture Committee yesterday that these budget cuts will stymie the agencies’ ability to enforce Dodd-Frank, which appears to be what the Republicans are banking on.

A Tale of Two Regulators...And Missed Deadlines

What a difference a year makes. In July 2010, one year seemed to be a perfectly reasonable timeframe for regulators to develop more than 150 rules, conduct 47 studies, create several new government offices, and engage in extensive hiring and agency reorganization. With the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act rapidly approaching, however, it is becoming increasingly clear that more time will be necessary in order to implement the financial reform law’s sweeping provisions.

In particular, when it comes to derivatives regulations, it appears that Congress bit off more than either the CFTC or SEC could chew. On Friday, the SEC announced that it would delay implementation of some of the new derivatives regulations that were set to take effect next month, while the CFTC voted on Monday to delay certain swaps rules until Dec. 31, 2011, in anticipation of missing the July deadline for completing the rules.

SEC officials said they are taking the additional time to ensure the clarity of the new rules and minimize market disruption. However, some lawmakers on Capitol Hill believe that such delays—which have yet to be specified—may cause as much disruption by preventing market participants from planning accordingly.

On Friday, House Agriculture Committee Chairman Frank Lucas (R-OK) sent a letter to CFTC Chairman Gary Gensler calling on regulators to reduce market uncertainty by clarifying various definitions, including the definition of a swap, which becomes effective on July 16, though it has yet to be finalized. The CFTC and SEC have recourse under a provision in Dodd-Frank to delay implementing regulations for no more than 60 days after they are finalized.

Delays and missed deadlines are certainly not exclusive to the SEC and CFTC. More broadly, as of June 1, of the 87 total studies required under Dodd-Frank, 24 have been completed and two deadlines have been missed. Of the 385 total rulemakings required, 115 have been proposed, 24 have been finalized and 28 deadlines have been missed. With 17 studies and 109 rulemakings due in July 2010 alone, the coming month will be the true test of regulators’ progress—and it is a test they are not likely to pass.

DOWNLOAD:  CFTC Swap Regulation Factsheet (PDF)

Banks Lose and Retailers Win -- Senate Rejects the Tester-Corker Amendment to Delay Rule Capping Debit Card Fees

The attempt to delay the implementation of the “Durbin Amendment” – Sen. Richard Durbin’s (D-IL) amendment to the Dodd Frank Act that would cap what banks can charge for debit card interchange or “swipe fees” –failed to collect the 60 votes needed in the Senate this afternoon. Sponsored by Sens. Tester (D-MT) and Corker (R-TN), the amendment fell short by six votes -- the final count was 54-45.

Currently, swipe fees average 44 cents per transaction and generate more than $12 billion annually for financial institutions. Under the new Dodd-Frank framework, the fees would be capped at 12 cents per transaction starting on July 21, 2011 (the one-year anniversary of Dodd-Frank’s enactment).

The swipe fee debate has pitted banks against retailers and forced many in Congress to choose among friends. Banks have insisted that the current swipe fees are necessary to pay for security and consumer protections included with these transactions and to keep other banking fees low. Retailers have countered that the high fees force them to raise prices and are hurting small retailers. With Fortune 50 companies on both sides, both the banks and the retailers launched considerable lobbying efforts.

Though the retailers prevailed by a narrow margin, the banks did pick up some unlikely support. The Durbin amendment passed last year by a vote of 64-33. Of the 56 members still in the Senate who originally voted with Sen. Durbin, only 45 Senators today voted in support of Durbin’s position. The Tester-Corker amendment picked up eight cosponsors yesterday, four of whom voted for the Durbin Amendment last year: Sens. Michael Bennet (D-CO), Chris Coons (D-DE), Kay Hagan (D-NC) and Mike Crapo (R-ID). The Senators said they changed their positions due to concern over the Durbin amendment’s impact on small banks. Even more surprising, House Financial Services Committee Ranking Member Barney Frank (D-MA) announced this morning that he supports the Tester-Corker amendment and believes that the interchange fee cap requires further study.

Sen. Corker said it is unlikely that the Senate will address this matter again during this Congress. Meanwhile, several states, including Minnesota, Maine, Massachusetts and Rhode Island, are currently considering bills that would give retailers the authority to choose which cards to accept based on the cards’ associated fees.

SEC Adopts Final Rules Implementing Dodd-Frank Whistleblower Provisions

On May 25, 2011, the United States Securities and Exchange Commission ("SEC") adopted final rules implementing the new "Securities Whistleblower Incentives and Protection" provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The new provisions of the Dodd-Frank Act direct the SEC to pay awards, under certain conditions, to whistleblowers who voluntarily provide the SEC with significant information leading to successful SEC enforcement actions. Specifically, to be considered for an award, a whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.

Although the final rules contain several revisions to the proposed rules issued on November 3, 2010, a number of the incentives energizing the plaintiff's bar remain. For example, the final rules encourage—but still do not require—that a whistleblower report possible violations of federal securities laws internally before contacting the SEC directly. In addition, even though the final rules extend the time period in which a whistleblower may report a possible violation to the SEC after utilizing an internal complaint procedure from 90 to 120 days, the modest increase continues to place significant pressure on an employer's ability to conduct an effective internal investigation. The final rules also exclude certain individuals from consideration for an award, add a “reasonable belief” requirement to the anti-retaliation protections, and modify the definition of "whistleblower"—by requiring that a whistleblower provide information about a "possible violation . . . that has occurred, is ongoing, or is about to occur." The final rules will be effective 60 days after they are submitted to Congress or published in the Federal Register.

If you would like further information about the SEC's Final Rules implementing the Securities Whistleblower Incentives and Protection provisions of the Dodd-Frank Act or whistleblower and retaliation claims generally, please contact a member of Blank Rome LLP's Employment, Benefits and Labor Practice Group.