Geron Morgan

The Dodd-Frank Wall Street Reform and Consumer Protection Act, formerly the Restoring American Financial Stability Act of 2010, pushed out of the conference committee June 24, 2010, and through the House on June 30, only to sit on the Senate floor for the July Fourth holiday.

This legislation snowballed through the convergence, picking up numerous provisions.  Here is a quick summary of the conference report:

Bureau of Consumer Financial Protection

• The bureau will be established under the Federal Reserve System (the Fed), with the director to be appointed by the president and confirmed by the Senate.
• The bureau will have authority to write rules for consumer protections governing all financial institutions offering consumer financial services and products.
• An Office of Fair Lending and Equal Opportunity is to be established under this bureau.
• The bureau will have examination and enforcement authority over institutions with greater than $10 billion in assets and will have ride-along authority for institutions with less than $10 billion.

Thrift Charters

• The thrift charter will be preserved and new charters will be permitted.
• The Office of Thrift Supervision will be effectively merged into the Office of the Comptroller of the Currency (OCC) through dissolution and re-establishment.

Financial Stability Oversight Council

• The council will comprise the heads of specified financial regulatory bodies.
• The council will make recommendations to the Fed for increasingly strict rules as companies grow in size and complexity, including companies that pose risks to the financial system.
• Duties will include consideration of emerging accounting issues.
• Upon a two-thirds vote, the council may require downsizing of companies that pose systemic risk to financial markets.

Deposit Insurance

• Assessment will now be based on consolidated total assets rather than domestic deposits.
• Deposit insurance per customer will increase to $250,000, retroactive to January 1, 2008.
• The Transaction Account Guarantee Program, excluding NOW accounts, is extended to December 31, 2012.

Executive Compensation “Say on Pay”

• The program gives annual shareholder approval of executive compensation.
• Independence is now mandatory for compensation committee members, and the program gives the committee authority to hire external compensation consultants.
• Disclosures are required for “pay vs. performance.”

Debit Interchange Fees

• The Fed will set fees for debit interchange, with consideration for transaction fraud and the incremental cost of each transaction.
• Cards issued by banks with less than $10 billion in assets, as well as government-issued cards, are exempt from this provision.

The Collins Amendment

• The Collins Amendment is revised, allowing Trust Preferred Securities (TruPS) to be included in Tier 1 capital as follows:
• Bank holding companies (BHCs) with less than $500 million in assets are excluded from the provision (small bank holding company provision, allowing TruPS).
• BHCs with less than $15 billion in assets and TruPS issued prior to May 19, 2010, may grandfather in the TruPS and include them in Tier 1 capital.
• BHCs with more than $15 billion in assets will have the TruPS phased out of Tier 1 capital incrementally over three years, beginning January 1, 2013.

The Volcker Rule

• The rule is amended to allow investment up to 3 percent of Tier 1 capital in hedge funds and private equity funds.
• Restrictions (segregation of trading desk and bank proprietary funds) are introduced for nonbank financial firms supervised by the Fed.

Other Provisions

• SOX 404 - Sarbanes Oxley 404 auditor attestation requirements are amended to exclude small publicly traded companies with less than $75 million in market capitalization.
• Industrial Loan Corporation (ILC) charters – A three-year moratorium is placed on new ILC charters.
• Derivatives – Continued bank participation in simple base derivative activities (swaps and floors) is structured to hedge against interest rate risk.
• OCC preemption – State laws would need to “prevent or significantly interfere” with the business of banking before OCC preemption is enacted.
• Lending limits – Calculation for state banks is preserved.  State and national banks engaging in derivative transactions must include the effect of these transactions in calculation, potentially lowering lending limits.
• Orderly liquidation authority – The Federal Deposit Insurance Corporation (FDIC) will have the authority to take apart large failing financial institutions.  Any fund losses will be recovered by additional FDIC assessments for institutions with more than $50 billion in assets.
• Demand deposit interest – Banks are now allowed to pay interest on business demand deposit accounts.
• Risk retention – A 5 percent lender risk retention requirement is in place for securitized loans in the secondary market.  Exemptions are allowed for low-risk loans, residential mortgages, Federal Housing Administration, Farmer Mac and other agency loans.
• Credit rating agencies – The law requires disclosure of methodology and establishes legal responsibility for lack of due diligence in reporting.
• Alternative investments – Large hedge funds and private equity funds are required to register with the U.S. Securities Exchange Commission, subjecting funds to federal regulation.
• Federal Insurance Office – The law introduces a regulatory body for insurance companies.
• TARP reduction – The amount of authorized Troubled Asset Relief Program (TARP) funds decreased from $700 billion to $475 billion.  The law prohibits issuance of new TARP funds, but requires recycling of repayments.
• Relief for unemployed homeowners – $1.5 billion is offered to unemployed homeowners and existing Neighborhood Stabilization Programs.

A close vote is expected when the Senate reconvenes July 12, 2010.  Institutions big and small are bracing for the impact.  For additional information on how this legislation will affect your institution, contact your BKD advisor.