Dodd-Frank Wall Street Reform and Consumer Protection Act€¦ ·

Dodd-Frank Wall Street Reform andConsumer Protection Act

June 2010

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In the pre-dawn hours of Friday, June 25, US Senate and House of Representativesconferees voted to send to the floors of their respective chambers of Congress anagreed version of the financial services regulatory reform legislation now known as theDodd-Frank Bill. It is likely to become law in this form.

The vote in the conference committee was along party lines, with Democrats in favorand Republicans opposed. The House conferees voted 20 to 11 to approve the Billand the Senate conferees voted 7 to 5 in favor. The legislation agreed upon inconference is expected to receive final Congressional approval during the week ofJune 28 and to be presented to President Obama for his signature before July 4.

Introduction

The Dodd-Frank Bill is the product of a financial services regulatory reform effort initiated by the Obama Administration following theglobal financial crisis. It would make a variety of changes specific to the US regulatory framework – including provisions for monitoringand reducing systemic risk, reallocating authority among the federal regulators, creating a consumer protection regime for retailfinancial products and services, and mandating an unprecedented number of studies, reports, and regulations on matters rangingfrom fundamental to trivial. In important respects, however, the Bill appears intended by the Administration to allow the United Statesto lead by example. Now that a US framework has been established, the Administration is encouraging financial authorities elsewhereto pursue a coordinated response to systemic risk, inadequate supervision and the staggering social costs of widespread bank failure.

The following summary provides an immediate overview of the Dodd-Frank Bill as it has emerged from the conference committee. Oncethe Bill is signed into law and the official statutory text is released, we plan to focus on specific areas of the legislation that are ofparticular interest to our friends and clients throughout the global Clifford Chance network, with an emphasis on some common themes:

n Like many other pieces of complex legislation to come out of the US Congress in recent years, the Dodd-Frank Bill relies on federalagency rulemaking to give content and meaning to Congress’ own general declarations and broad, often ambiguous, statements ofintent. Throughout the Bill are sweeping delegations of authority to federal banking, securities and commodities regulators. Congressinstructs the agencies to define technical financial terms used in the legislation without elaboration as to their meaning; to exemptvarious classes of persons, products and transactions from the many provisions of the Bill that appear likely to have unintendedconsequences; and to study and report back to Congress on many controversial proposals. We believe that the rulemaking process –conducted under deadlines set forth in the Dodd-Frank Bill as well as public notice-and-comment requirements – will be critical to anyassessment of the ultimate impact of the legislation on the regulated activities of financial market participants.

n While the Dodd-Frank Bill would affect a very wide range of internationally-active as well as purely domestic financial institutions, it byno means would pre-empt the ongoing efforts of financial regulatory authorities outside the United States – particularly within theEuropean Union – to shape their own responses to the global financial crisis. For example, consideration of the EU’s proposedAlternative Investment Fund Managers (AIFM) Directive may be stalled for the moment, but is likely to resume later this year, furthershifting the regulatory landscape for fund managers, investors and counterparties. Just as the crisis has necessitated a coordinatedgovernmental response, we believe that participants in the global financial markets will need to coordinate their response to thediffering – and in some cases overlapping and even conflicting – modes of regulatory reform in the United States and elsewhere.

n As proposed rules and regulations are written and the meaning of the new statute comes into focus, we believe that flexible andinnovative transactional solutions will distinguish the financial market participants who are most adaptable to the new regulatoryenvironment. The challenges of restructuring operations, divesting business units and raising additional capital under difficultmarket conditions will put a premium on solutions that maximize the range of potential options while minimizing risk.

In many respects, the real work on US financial services regulatory reform begins now. The debate over the broad contours of thereform are over, but the true scope and impact of the reform on the industry will be determined over the coming months and years. Asis always the case when major changes occur in the financial services industry, those entities that embrace the changes, engage inthe rulemaking process and seek new business opportunities in light of the changed landscape will be those that are most successful.

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 Financial Crisis Assessment Fund 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 “Bill”) would provide for the establishment of a FinancialStability Oversight Council (the “Council”) comprised of the heads of the financial regulatory agencies. The Council would be generallytasked with identifying and responding to systemic risks and its duties would include, among other things: (i) designating systemicallyimportant “nonbank financial companies”; (ii) making recommendations concerning the establishment of heightened regulatory capitalstandards, leverage, liquidity, contingent capital, resolution plans, concentration limits, short term debt limits, enhanced disclosuresand overall risk management standards for systemically important bank holding companies and “nonbank financial companies;” (iii)collection of financial information for assessing systemic risks; and (iv) making recommendations to member agencies concerningsupervisory standards, priorities, and principles.

A nonbank financial company that the Council determines could pose a threat to the financial stability of the United States (“NBFC”)would be required to register with, and would be subject to supervisory and prudential standards imposed by, the Federal Reserve.Large, interconnected bank holding companies (“LIBHCs”) would also generally be 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 would be established within the Treasury Department to support the Council and the financialregulatory agencies by, among other things: (i) collecting data; (ii) standardizing the types of data reported and collected; and (iii)developing tools for 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 would be required, on its own or pursuant to recommendations by the Council, to establish prudential standardsand disclosure 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 anumber of factors. Such standards would include: (i) risk-based capital requirements; (ii) leverage limits; (iii) liquidity requirements; (iv)overall risk management requirements; (v) resolution plan and credit exposure requirements; and (vi) concentration limits. Suchprudential standards may also include: (i) contingent capital requirement; (ii) enhanced public disclosures; (iii) short-term debt limits; and(iv) such other prudential standards that as the Federal Reserve determines are appropriate.

The Bill imposes a minimum capital requirement that would prohibit 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, would be phasedout over a 3 year period commencing on January 1, 2013. Depository institution holding companies with total consolidated assets ofless than $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 Bill would create a new regime for liquidation of nonbank financial companies whose potential collapse may jeopardize financialstability in the United States. Under the new regime, generally modeled after the existing framework for failed insured depositoryinstitutions, the Federal Deposit Insurance Corporation (the “FDIC”) would be authorized to seize exclusive control of a failing nonbankfinancial company and administer its liquidation in accordance with the Bill’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 the enactment, the powers and duties of the Office of Thrift Supervision (“OTS”) would be transferred to theFederal Reserve, the OCC, and the FDIC. Effective 90 days after the transfer date the OTS would be abolished. The Bill would notabolish, however, the Federal savings association charter. Within 18 months of enactment of the Bill, the Government AccountabilityOffice (“GAO”) would 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 would generally define 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 Bill permanently increases the standard maximum deposit insurance amount from $100,000 to $250,000.The Bill would extend until January 1, 2013, the FDIC’s Transaction Account Guarantee Program.

Title IV: Regulation of Advisers to Hedge Funds and OthersTitle IV would amend several provisions of the Investment Advisers Act of 1940, most significantly by eliminating the private adviserexemption from registration under such act. Title IV would provide certain new exemptions from registration, including for advisers toprivate funds with AUM under $150 million and venture capital funds regardless of AUM. Title IV would leave the definition of “venturecapital fund” to future rulemaking and would also permit the SEC to determine the registration requirements applicable to the advisersof “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 Bill 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”) would 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 Bill generally expands the examination powers of the Federal Reserve with respect to functionally regulated subsidiaries. The Billalso 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 Bill 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 would be required if such activities were conducted in the lead insured depository institution. Theappropriate Federal banking agency for the lead depository institution of a depository institution holding company shall have back-upexamination and 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 expanded range of financial activities if their depositoryinstitution subsidiaries are well capitalized and well managed. The Bill would require the FHC itself to meet the well capitalized and wellmanaged criteria. The Bill would also require BHCs seeking to make interstate bank acquisitions to meet the well capitalized and wellmanaged criteria.

Amendments To Inter-Affiliate Transaction RestrictionsThe Bill 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 Bill 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 Bill 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 Bill 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 Bill would repeal the elective investment bank holding company regulatory framework, pursuant to which investment banks wereable to elect to be supervised on consolidated basis by the SEC pursuant to the US Securities Exchange Act of 1934, and wouldinstitute an elective 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 would beable to register with the Federal Reserve to become a “supervised securities holding company.” A supervised securities holdingcompany would be subject to the provisions of the BHCA, other than section 4 of the Bill, and would be fully subject to the FederalReserve’s supervision and regulation 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 would be 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 would 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” would 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 would be able to make and retain an investment in a hedge fund or private equity fund that the banking entityorganizes and offers, provided that within a year after the establishment of the fund (with the possibility of two one-year extensions)the ownership interest of the banking entity in the fund shall be reduced through redemption, sale, or dilution to less than 3 percent ofthe total ownership interest in the fund. The aggregate investments by a banking entity in hedge funds or private equity funds may notexceed 3 percent of the Tier 1 capital of the banking entity.

Concentration LimitsSubject to recommendations by the Council, a financial company would not be able to merge or consolidate with another company ifthe total consolidated liabilities of the acquiring company upon consummation of the transaction would exceed 10 percent of theaggregate consolidated liabilities of all financial companies as of the year end preceding the transaction. This limit would not apply to:(i) an acquisition of a bank in default or in danger of default or receiving FDIC assistance; or (ii) transaction that results only in deminimis increase of the liabilities of the financial company.

Title VII: Wall Street Transparency and AccountabilityTitle VII of the Bill 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 Bill 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 would also be 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 would significantlyimpact 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 Bill 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 Bill 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 Bill.

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 Bill contains certain risk retention provisions (colloquially referred to as “skin-in-the-game” provisions) that would require any“securitizer” to retain a portion of the credit risk of any asset transferred, sold or conveyed by the securitizer to a third party. Please seepage 75 for a brief discussion on the skin-in-the-game provisions and potential effects on the syndicated loan market.

Subtitle E of Title IX: Accountability and Executive CompensationThe Bill 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 would create 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 would establish certain new consumer protection measures.

Title XI: Federal Reserve System ProvisionsAmendments to Emergency Lending AuthorityThe Bill 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 Bill 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 would 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 would 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 Bill, GAO would 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 Bill. The Bill 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 Bill.

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) providing grantsto establish loan-loss reserve funds.

Title XIII: Pay It Back ActTitle XIII would cause the reduction of TARP funding to $550 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 would 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 Bill requires the U.S. 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: Financial Crisis Assessment Fund*The Bill would establish a Financial Crisis Special Assessment Fund (the “Fund”). The Fund shall be funded from risk-based specialassessments imposed by the Council on financial companies with total consolidated assets of $50 billion or more and financialcompanies that manage hedge funds with $10 billion or more of assets under management. The Council would be directed to collectin the aggregate the lesser of: (i) $19 billion; and (ii) 133 percent of the amount necessary to fully offset the net deficit effects of theprovisions of the Bill from its enactment through September 2020, which amount shall be determined by the Director of the Office ofManagement and Budget.



*This title of the Bill was deleted shortly after the initial publication of this memorandum.



Title I.Systemic RiskRegulation


Financial Stability OversightCouncilCouncil Establishment The Bill would provide for theestablishment of a Financial StabilityOversight Council (the “Council”). TheCouncil would be chaired by theSecretary of the Treasury and wouldcomprise the heads of the FederalReserve, the Office of the Comptroller ofthe Currency (“OCC”), the Securities andExchange Commission (“SEC”), theCommodity Futures 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 would make decisionsby majority vote.

Council DutiesThe Council would generally be taskedwith identifying and responding tosystemic risks and its duties, among otherthings, would include: (i) designatingsystemically important “nonbank financialcompanies” and financial market utilitiesand payment, clearing, and settlementactivities; (ii) making recommendationsconcerning the establishment by theFederal Reserve of heightened regulatorycapital standards, leverage, liquidity,contingent capital, resolution plans,concentration limits, enhanced disclosuresand overall risk management standardsfor systemically important bank holdingcompanies and “nonbank financialcompanies;” (iii) collection of financialinformation from member agencies forassessing systemic risks; and (iv) makingrecommendations to member agenciesconcerning supervisory standards,priorities, and principles.

Nonbank Financial HoldingCompanies Defined A “nonbank financial company” is any

company that is predominantly engagedin 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”) would be required toregister with, and would be subject tosupervisory and prudential standardsimposed by, the Federal Reserve.Foreign nonbank financial companiesmay also be deemed to be systemicallyimportant and subjected to supervisionand regulation by the Federal Reserve ifthe Council 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 the appropriatehome country supervisor, if any, of theforeign nonbank financial company that

is being considered for such adetermination. Large, interconnectedbank holding companies (“LIBHCs”)would also generally be 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 would automatically be treatedas an NBFC subject to supervision andregulation by the Federal Reserve.

An NBFC may establish an intermediateholding company, under which it wouldconduct financial activities subject toprudential standards and Federal Reserve

“A nonbank financial company that the Councildetermines could pose a threat to the financial stabilityof the United States would be required to register with,and would be subject to supervisory and prudentialstandards imposed by, the Federal Reserve. Foreignnonbank financial companies may also be deemed tobe systemically important and subjected to supervisionand regulation by the Federal Reserve. Large,interconnected bank holding companies would alsogenerally be treated as systemically important.”

Systemic Risk Regulation



supervision; nonfinancial activities of thecompany 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 would include: (i) enhancedrisk-based capital requirements; (ii)leverage limits; (iii) liquidity requirements;(iv) resolution plan (“living will”) and creditexposure report requirements; (v)concentration limits; (vi) a contingentcapital requirement (requiring a minimum

amount of contingent capital that isconvertible 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 Bill would provide 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 would be headedby a Director appointed by the Presidentwith consent of the Senate. The purposeof the OFR would be to support theCouncil and the financial regulatoryagencies by, among other things: (i)collecting data, including financialtransaction and position data; (ii)standardizing the types of data reportedand collected; and (iii) developing toolsfor risk management and monitoring. TheOFR shall issue rules, regulations, andorders to the extent necessary to carryout its duties. The financial regulatoryagencies, in consultation with the OFR,shall implement regulations promulgatedby the OFR to standardize the types andformats of data reported and collected onbehalf of the Council. The OFR shall havethe power to issue subpoena(enforceable in a district court) for theproduction of data that the OFR isauthorized to collect. The OFR would befunded by an assessment on NBFCs andBHCs with total consolidated assets of$50 billion 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 would include: (i)enhanced risk-based capital requirements; (ii) leveragelimits; (iii) liquidity requirements; (iv) resolution plan (“livingwill”) 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 Bill would provide that the FederalReserve may require reports and examineany NBFC and its subsidiaries to assess: (i)the nature of the operations and thefinancial condition of the company; (ii) therisk the company may pose to the financialsystem and 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

would have a back-up authority to itselfimpose such an enforcement action.

Prior Approval Requirements NBFCs would 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 would be eliminated withrespect to NBFCs and BHCs with totalconsolidated assets of $50 billion or more.In addition to BHCA’s existing standardsfor approval of nonbanking acquisitions,the Federal Reserve would be required toconsider risks to financial stability that mayarise out of such acquisitions.

Prudential Standards The Federal Reserve would be required, onits own or pursuant to recommendationsby the Council, to establish prudentialstandards and disclosure requirements forNBFCs and BHCs with total consolidatedassets of $50 billion or more (for ease of

reference we shall also refer to such BHCsas “LIBHCs”) that are more stringent thanthe requirements applicable to BHCs andthat may increase in stringency dependingon a number of factors. In prescribingmore stringent prudential standards theFederal Reserve may, on its own orpursuant to a recommendation by theCouncil, differentiate among companies onan individual basis or by category, takinginto consideration 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 would have a broadmandate to establish prudential standardsfor NBFCs and LIBHCs that shall include:


“The Bill 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 Bill would require 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 would no longer beable to include certain instruments in Tier Icapital, most notably, qualifying trustpreferred securities. The inclusion in Tier Icapital of such instruments issued prior toMay 19, 2010, shall be phased out over a3 year period commencing on January 1,2013. Depository institution holding

companies with total consolidated assetsof less than $15 billion would be able tocontinue to include in Tier I capital suchinstruments issued prior to May 19, 2010.

The Bill clarifies that the minimum capitalrequirement would 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 andminimum risk-based capital requirements 5

years after the enactment of the Bill.

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 component ofTier I capital. GAO shall also be tasked to


“The Federal Reserve would be required, on its own orpursuant to 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 would have a broad mandate toestablish prudential standards for NBFCs and LIBHCs thatshall include: (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.”


study 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 Bill, 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 leverage requirement shalltake into account any off balance sheetactivities of the company.

Living Wills The Federal Reserve would be specificallyrequired to issue rules within 18 monthsof enactment of the Bill that would requireNBFCs and LIBHCs to periodically submit

to 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 would berequired to re-submit the living will withina time frame specified by the FederalReserve and the FDIC. Failure to resubmita credible plan may result in theimposition of more stringent capital,leverage, or liquidity requirements orrestrictions on the growth, activities oroperations of the company. If thecompany fails to resubmit a living will thatremedies the deficiencies within 2 yearsafter the imposition of more stringent

prudential requirements, the FederalReserve and the FDIC, in consultationwith the Council, may order divestiture ofassets or operations of the company.

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 measure as the Board ofGovernors considers appropriate. TheFederal Reserve shall define by regulationthe meaning of “short-term debt” but theterm shall 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 would be authorized to lower the25 percent threshold. The Bill woulddefine the term “credit exposure” verybroadly to include: extensions of credit,repurchase agreements, securitiesborrowing and lending, guarantees, lettersof credit, and “all purchases of or


“BHCs would no longer be able to include certaininstruments in Tier I capital, most notably, qualifying trustpreferred securities. 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 would beable to continue to include in Tier I capital suchinstruments issued prior to May 19, 2010.”

“The Bill 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.”


investments in securities issued by thecompany.” The Federal Reserve would begranted broad discretion to expand andcarve out exemptions from the definitionof covered credit 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 Bill would require the Federal Reserveto conduct annual “stress tests,” incoordination with the appropriate primaryfinancial regulatory agency, to determinewhether NBFCs and LIBHCs have sufficientcapital to absorb losses as a result of

adverse 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 Bill also would require NBFCs andLIBHCs to conduct semiannual stresstests; 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 would require definingregulatory capital and liquidity thresholdsof financial decline that would trigger,among other things, a capital restorationplan and capital raising requirements,limits on transactions with affiliates,

management changes, and asset sales.Essentially, the Bill would require theestablishment of a remediation frameworkfor NBFCs and LIBHCs modeled on thePrompt Corrective Action frameworkcurrently applicable 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 would be authorized to conducta special 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 Bill. 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 Bill would add an additional standardfor approval of US banking offices offoreign banks, which would require for 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 demonstrableprogress toward adopting, an appropriate


“The Bill would also authorize 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.”


system of financial regulation for thefinancial system of such home country tomitigate such risk. The Bill would alsoauthorize the Federal Reserve , after noticeand opportunity for a hearing, to terminatethe banking 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 Bill would provide that theSEC may consider, in determiningwhether to permit a foreign person or anaffiliate of a foreign person that presents arisk to the stability of the United Statesfinancial system to register as a UnitedStates broker 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 anaffiliate of a foreign person that presents a

risk 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 Bill does not specify how adetermination should be made as towhether a foreign bank or person poses arisk to the stability of United States financialsystem. It is likely that such determination

would be similar to the determination ofsystemic importance and would likelyencompass large, interconnected foreignbanking organizations and broker-dealers.

International Policy Coordination The Bill 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 Bill creates a new regime forliquidation of financial companies whosepotential collapse might jeopardizefinancial stability in the United States(“Covered Financial Companies”).The orderly liquidation authority (“OLA”)contemplated by the Bill would allowthe Federal Deposit InsuranceCorporation (the “FDIC”) to seizeexclusive control of a failing nonbankfinancial company or bank holdingcompany if the Treasury Secretary inconsultation with the Board of theFederal Reserve (“FRB”) and the FDICdetermined that such a companypresented a systemic risk. The FDICwould administer the liquidation of sucha Covered Financial Company asreceiver in accordance with the OLAprovisions. Once a failing CoveredFinancial Company is placed under theOLA, any insolvency proceedings underthe U.S. Bankruptcy Code will bepreempted, and the debtor will beliquidated, and may not be reorganizedor 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 theUnited States (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 would bedeemed to be “predominantlyengaged” in financial activities if atleast 85% of its and all its affiliates’consolidated revenues are derivedfrom activities that are financial innature); 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 Bill does not permit OLAproceedings to apply to non-U.S.entities. Nor does the Bill give any rightsto the receiver to consolidate an entitywith a subsidiary or affiliate in an OLAproceeding, although the Bill does notexplicitly 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 would be 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 would have serious adverseeffects on 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 would beappropriate given the scope of theadverse impact on financial stability in theUnited States as a whole.

5. OLA Proceeding Would MitigateAdverse Effects of Default

Fifth, the actions proposed under theOLA would mitigate the adverse effectson the U.S. 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 largestU.S. subsidiary is a registeredbroker-dealer, the initial recommendationfor an OLA proceeding must come fromthe SEC (rather than the FDIC) as well asthe FRB.

Orderly Liquidation Authority



Insurance CompaniesFor an insurance company or for afinancial company in which the largestU.S. subsidiary is an insurance company,the initial 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 wouldremain subject to the applicable stateinsurance laws, although the FDIC wouldbe authorized to commence judicial actionin a state court if the relevant stateinsurance regulator fails to commence anyproceeding within 60 days after the failinginsurance company is determined to be aCovered Financial 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 would appoint the SecuritiesInvestor Protection Corporation (“SIPC”)to act as trustee of the failing Covered

Broker Dealer and would have fullauthority to liquidate the failing registeredbroker-dealer in accordance with theSecurities Investor Protection Act of1970 (the “SIPA”) liquidation provisions.

Exclusion of U.S. Bankruptcy Codeand Other 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,would have powers substantially similar tothose it presently has under the FDIA. Inaddition, the Bill also includes provisionsrelating to substantive treatment ofcreditor claims that are based on thecorresponding provisions set forth underthe U.S. Bankruptcy Code, intended toaddress a broader range of activities thanthose of a depository institution.

Under the Bill, the FDIC would have theauthority to avoid fraudulent andpreferential transfers, disaffirm orrepudiate any burdensome contracts orleases, and enforce any contractnotwithstanding any provisions fortermination, default, acceleration, orexercise of rights upon insolvency (withcarveouts for qualified financial contractssimilar to those set forth under the U.S.Bankruptcy Code and discussed below).

In addition, the Bill 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 would be requiredto coordinate, 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 Billincludes safe harbor provisions for QFCsthat are similar to the QFC-relatedprovisions contained in the FDIA and

would stay 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 (andthe counterparty’s affiliates). TheFDIC as receiver may transfer theQFCs to a non-U.S. financialinstitution only if the contractualrights of the counterparty to suchQFCs would be enforceablesubstantially to the same extent asset out under the OLA.

n QFC Safe Harbor Provisions. At anytime following the expiration of the QFCTransfer Period, the non-defaultingcounterparty to a QFC would not bestayed 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 connection withthe 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 would not beable to 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, would be permitted torepudiate QFCs and terminate anyoutstanding transactions, but wouldbe required to either (i) terminate allQFCs between the Covered FinancialCompany and an individualcounterparty (and the counterparty’saffiliates) or (ii) not terminate anyQFCs involving those parties.

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 wouldbe deemed 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 would be subjectto termination upon the insolvency of itscredit support provider if: (i) within theQFC Transfer Period that would beapplicable to such Covered FinancialCompany, the guarantee and all relatedassets and liabilities are transferred to,and assumed 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 would belimited to an initial period of three years,subject to two 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 involvementwould be limited to providing fundingand exercising certain powers, includingthe establishment of a bridge financialcompany, transferring assets andliabilities, repudiating contracts anddetermining claims. If the FDICestablishes a bridge financial companywith respect to a failing broker-dealer, theFDIC would transfer all customeraccounts and all customer property tosuch financial company unless thetransfer of customer property wouldadversely affect the FDIC’s ability to

avoid serious impact on the U.S.financial system, or SIPC determines thatcustomer property would be transferredto another registered broker-dealer.

SIPC would be entitled to exercise all ofits powers 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 would begoverned exclusively by the OLA’s safeharbor provisions.

Orderly Liquidation FundThe Bill establishes an orderly liquidationfund, intended to provide funding for theOLA proceedings, that would be held at

the Treasury and managed by the FDIC.The FDIC would have authority to issueobligations to the Treasury to fund theOLA. The FDIC would be restricted fromincurring any obligation during the first 30days of liquidation that would result in totalobligations outstanding exceeding the sumof 10% of the total consolidated assets ofthe Covered Financial Company subject toan OLA proceeding. Thereafter, the FDICmay become obligated for up to 90% ofthe fair value of the total consolidatedassets of each Covered FinancialCompany that are available for repayment.

The FDIC would be required to chargerisk-based assessments if necessary torepay obligations to the Treasury withinfive years 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 Bill 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 Bill. Within 180 daysafter the enactment of the Bill 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. TheBill would 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 Bill 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 Bill would provide 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 would be similarlyauthorized to collect an assessment, fee,or other charges from BHCs and SLHCs,with 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 would be authorized to assessthe cost of any examination of anydepository institution against theinstitution or as the FDIC determines isnecessary or appropriate 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 insured depositoryinstitution that is a “custodial bank” (aterm to be defined by the FDIC) or abanker’s bank the assessment basedamount would be further reduced by anamount the FDIC determines isappropriate for such institutions.

The FDIA provides that if at the end of acalendar year, the reserve ratio of theDeposit Insurance Fund exceeds 1.5percent of estimated insured deposits,the FDIC shall declare the excess amountas dividends to be paid to insureddepository institutions. The Bill wouldamend the FDIC Act to provide that theFDIC may, in its sole discretion, suspendor limit the declaration of such dividends.

The FDIA would also be amended toprovide that the reserve ratio designatedby the FDIC for any year may exceed 1.5percent of estimated insured deposits(previously the reserve ratio was cappedat 1.5 percent).

The Bill would permanently increase thestandard maximum deposit insuranceamount from $100,000 to $250,000. TheBill would also extend, 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 orders

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 Bill would extend, until January 1, 2013, the FDIC’sTransaction Account Guarantee Program.”


of 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.

De Novo Branching byFederal SavingsAssociationsThe Bill would provide that a savingsassociation that becomes a bank may: (1)continue to operate any branch or agencythat the savings association operatedimmediately before the savings

association became a bank; and (2)establish, acquire, and operate additionalbranches and agencies at any locationwithin any State in which the savingsassociation 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, would permitestablishment of the branch if the bankwere a State bank chartered by suchState.

“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 Bill would eliminate theexemption from registration under theAdvisers Act that is currently providedto investment 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 Bill would requirethe registration of most investmentadvisers to privately offered funds thatcurrently use the exemption. The Billwould also establish, however,exemption from registration forinvestment advisers to certain types ofalternative investment funds: all privatefunds (basically, hedge funds andprivate equity funds) with AUM under$150 million and all “venture capitalfunds” (the definition of which is also tobe determined by the SEC), regardless

of AUM. Notwithstanding theexemptions, all exempt investmentadvisers would still be 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 Bill and theAdvisers Act, “private fund” would bedefined as an issuer that would be 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 Bill 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 Bill 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 would onlyapply if the assets under

management of such private fundinvestment adviser are, in theaggregate, less than $150 million.

• Definition. The Bill would define“private fund” as an issuer thatwould be an investment company,as defined in the InvestmentCompany Act, but for Section3(c)(1) or Section 3(c)(7) of theInvestment 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 Bill, under the heading “Regulation of Advisers to Hedge Funds and Others” (alsocalled the “Private Fund Investment Advisers Registration Act of 2010”), expands thejurisdiction of the Securities and Exchange Commission (the “SEC”) over fundsponsors 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 Bill, 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 Bill would provide a limitedexemption from registration under theAdvisers Act to any “foreign privateadviser,” defined as any investmentadviser who (i) has no place of businessin the United States, (ii) has, in total,fewer than 15 clients and investors inthe U.S. in private funds advised by theinvestment adviser, (iii) has aggregateassets under management attributableto clients in the U.S. and investors in theU.S. in private funds advised by theinvestment adviser of less than $25million or such higher amount as theSEC may, by rule, deem appropriate, (iv)does not hold itself out to the public inthe U.S. as an investment adviser, and(v) does not act as (a) an investmentadviser to an investment companyregistered under the InvestmentCompany Act or (b) a company that has

elected to be a business developmentcompany (a “BDC”) under theInvestment Company Act (and has notwithdrawn 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 nationalsecurities exchanges would be modifiedby the Bill to carve-out from suchexemption an investment adviser to anyprivate 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))would be modified by the Bill to statethat any such investment adviserregistered with the CFTC that alsoserves as an investment adviser to anyprivate fund would still qualify for theexemption unless, after the date of theenactment of the Bill, the business ofthe adviser should becomepredominantly the provision ofsecurities-related advice.

Establishment of Exemption forAdvisers to Small BusinessInvestment Companies The Bill would add 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 Bill would exclude any family office,as defined by rule, regulation or order ofthe SEC, from the definition of“investment adviser” under the AdvisersAct, thereby excluding family offices fromthe registration, record-keeping andreporting requirements of the AdvisersAct. There is no deadline on the SECdefining the term “family office,” but theSEC would be directed to define itconsistently with the previous policy of theSEC for granting exemptive relief for familyoffices, recognizing the range oforganizational, management andemployment structures and arrangementsemployed by family offices. The Bill wouldalso exclude 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 same



terms 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, inthe 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 Bill would 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) would otherwise be required toregister with 15 or more States.

Record-Keeping, ReportingAnd Custody RequirementsCollection of Systemic Risk Data The Bill would permit the SEC to add tothe existing 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 contained

therein. Such information would include,for each private fund, a description of: (a)the amount of assets under managementand use of leverage, including off-balance sheet leverage; (b) counterpartycredit 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 would be requiredto be maintained for however long theSEC deems necessary and appropriateand copies of such records would needto be made available to the SEC withoutundue effort, expense or delay, asreasonably requested by the SEC orits representatives.

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

Information Sharing with the Council The Bill would require 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 Bill would require the Council tomaintain the confidentiality of all suchinformation received. The SEC and theCouncil would not be able to becompelled to disclose any report orinformation required to be filed with theSEC, unless doing so would require theSEC or the Council, as applicable, towithhold information from Congress, uponan agreement of confidentiality, or wouldprevent the SEC or the Council, asapplicable, from complying with (i) arequest for information from any otherFederal department or agency or any self-regulatory organization (“SRO”) requestingthe information for purposes within thescope of its jurisdiction or (ii) an order of aU.S. court in an action brought by theUnited States or the SEC. Anydepartment, agency or SRO that receivesreports or information of a registeredinvestment adviser to a private fund fromthe SEC would be required to keep suchreports and information confidential to thesame extent as the SEC. The SEC, theCouncil and any department, agency orSRO that receives such reports orinformation would be exempt from FOIAwith respect to such information.

Proprietary Information Under the Bill, proprietary information ofan investment adviser ascertained by theSEC from any report required to be filedwith the SEC would be subject to thesame limitations on public disclosure asany facts ascertained during anexamination, as provided for under theAdvisers Act. Such proprietary informationis deemed to include sensitive, nonpublicinformation regarding (i) the investment ortrading strategies of the investmentadviser, (ii) analytical or researchmethodologies, (iii) trading data, (iv)



computer hardware or softwarecontaining intellectual property and (v) anyadditional information that the SECdetermines to be proprietary.

Annual Report to CongressThe Bill would require 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 Bill would specifically authorizethe SEC to make, issue, amend andrescind such rules and regulationsdefining technical, trade and other termsused under the Advisers Act.

Anti-fraud Rule Notwithstanding the SEC’s broad rule-making authority, the Bill would preventthe SEC 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 Bill would require the SEC and theCFTC to promulgate rules jointly, within12 months of the Bill’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 Bill would require registeredinvestment advisers to take such steps to

safeguard client assets over which suchadviser has custody, including, withoutlimitation, verification of such assets by anindependent public accountant, as theSEC may, by rule, prescribe. The SECalready promulgates such rules under theanti-fraud provisions of the Advisers Act.

Accredited InvestorStandardThe Bill would empower the SEC to adjustthe “accredited investor” standard, whichis set forth in Rules 215 and 501 of theSecurities Act of 1933, as amended (the“Securities Act”), although it should benoted that the Bill 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 Bill would require theSEC to adjust the net worth standard so

that the 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 would beadjusted periodically by the SEC),excluding the value of such naturalperson’s primary residence, except that,upon enactment of the Bill, such networth standard excluding the primaryresidence would be $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 Bill would permit theSEC to review 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 would beempowered, by notice and commentrulemaking, to make such adjustments tothe definition “accredited investor” as itdeems appropriate (though it may notmake any modifications to the net worthstandard described 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 Bill would require the GAO toconduct a study on the compliancecosts associated with the Advisers Act




rules regarding custody of funds orsecurities of clients by investmentadvisers and the additional costs if therules relating to operationalindependence were eliminated. Suchstudy would be required to becompleted, and a report submitted toCongress, within 3 years of the Bill’senactment.

Accredited Investor Criteria The Bill would require the GAO to conducta study 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 Bill’s enactment.

SRO to Oversee Private Funds The Bill would require the GAO toconduct a study on the feasibility of

forming an SRO to oversee private fundswithin one year of the Bill’s enactment.

Short-Selling The Bill would require the SEC to conducta study on the state of short-selling onnational securities exchanges and in over-the-counter markets within two years ofthe Bill’s enactment. The Bill would requirethe SEC to conduct a study on thefeasibility, costs and benefits of requiringthe public reporting of real-time shortsales positions of publicly listed securitiesor reporting such short positions in realtime only to the SEC and the FinancialIndustry Regulatory Authority within oneyear of the Bill’s enactment. The Bill wouldrequire the SEC to conduct a study onthe feasibility, costs and benefits ofconducting a voluntary pilot program inwhich public companies would agree tohave all trades of their shares marked

“short,” “market-maker short,” “buy,”“buy-to-cover” or “long” and reported inreal time within one year of the Bill’senactment.

Adjustments for InflationThe Bill would require the SEC to indexfor inflation 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 would become effective one yearafter the 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 Bill;

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 U.S. 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 Bill, Section 523 would prohibit a Statefrom collecting fees relating to thelicensing of surplus lines brokers unlessthe State has laws or regulations thatprovide for its participation in the nationalinsurance producer database of theNational Association of InsuranceCommissioners (“NAIC”), or an equivalentdatabase for the issue and renewal ofsurplus 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 will not be requiredto make a due diligence search todetermine whether the insurance soughtcould be obtained 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 wouldgovern exclusively. Further, if thedomiciliary State of a reinsurer is anNAIC-accredited State or has financialsolvency requirements substantiallysimilar to the requirements necessary forNAIC accreditation, then no other Statemay require the reinsurer to provide anyinformation in addition to the informationalready required by the domiciliary State.A State other than the domiciliary State ofa reinsurer may receive a copy of anyfinancial statement filed with itsdomiciliary State.




Title VI.Bank HoldingCompany RegulatoryEnhancements


Moratorium and Study onILCs, Credit Card Banks andCertain Trust CompaniesThe Bill would define the term“commercial firm” as any companywhose consolidated annual grossrevenues derived from financial andbanking activities represent less than 15percent of the total consolidated annualgross revenues of the company. The Billwould impose 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 would result inthe target being owned or controlled,directly or indirectly, by a commercial firm,unless: (i) the target institution is indanger of default; (ii) the transactionentails the bona fide merger oracquisition of one commercial firm with orby another commercial firm; or (iii) thechange in control results from anacquisition of voting shares of a publiclytraded company if, after the acquisition,the acquiring 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 theBill, 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 to fulfillits supervisory responsibilities from a“functionally regulated subsidiary” of aBHC that is not required by anotherregulator, the Federal Reserve shall firstrequest such report from the appropriatefunctional regulator. The Bill wouldeliminate this provision and would allowthe Federal Reserve to obtain suchreports directly from the functionallyregulated subsidiary. The Bill would alsoauthorize the Federal Reserve to obtainreports from subsidiaries of a BHC (otherthan depository institution or functionallyregulated subsidiaries) for purposes ofmonitoring compliance with applicableprovisions of any Federal law (not justlaws that the Federal Reserve hasspecific jurisdiction to enforce).Functionally regulated subsidiaries includeregistered broker-dealers, investmentadvisers, investment companies, andinsurance companies.

The Bill would also generally expand theexamination powers of the FederalReserve with respect to functionallyregulated subsidiaries. In addition to theFederal Reserve’s existing authority toexamine any subsidiary of a BHC to

assess safety and soundness risks tothe BHC and any depositary institutionsubsidiaries of the BHC, the Bill wouldauthorize 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 Bill wouldexpand this authority to includeexamination for compliance with anyapplicable Federal law (not just thosethat the Federal Reserve has specificjurisdiction to enforce). With respect toinsured depository institution orfunctionally regulated subsidiaries,however, the Federal Reserve’sexamination authority would continueto be limited to monitoring compliancewith Federal laws that the FederalReserve 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 Bill theFederal Reserve would no longer berequired “to forgo, to the fullest extentpossible,” an examination, but shallprovide reasonable notice and consultwith the relevant functional regulatorprior to commencing an examinationand shall, to the fullest extent possible,rely on existing reports and avoidduplication of examination activities andreporting requirements.

“The Bill would generally expand the examinationpowers of the Federal Reserve with respect tofunctionally regulated subsidiaries.”


Bank Holding Company Regulatory Enhancements


The Bill would also eliminate 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 Bill would provide 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 would be required toconsider the extent to which suchmergers or acquisitions would increasethe risks to the stability of the US bankingor financial system.

Prior Approval for CertainAcquisitions of FinancialAssetsCurrently, a BHC that is or is treated as afinancial holding company (“FHC”) maygenerally engage in financial activitieswithout the prior approval of the FederalReserve. The Bill would require priorFederal Reserve approval for anytransaction in which the totalconsolidated assets to be acquired by anFHC exceed $10 billion (suchtransactions, however, would not besubject to the anti-trust review that isgenerally conducted in connection withacquisition applications by BHCs).

Supervision of Non-Functionally-RegulatedHolding CompanySubsidiariesThe Bill would provide 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 wouldbe required 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 examination ofa non-depository institution subsidiaryas prescribed in the Bill. 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 non-depository institutionsubsidiary. If the Federal Reserve doesnot take an enforcement actionsatisfactory to the appropriate Federalbanking agency within 60 days fromreceiving 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 inexpanded range of financial activities iftheir depository institution subsidiaries arewell capitalized and well managed. TheBill would require the FHC itself to meetthe well capitalized and well managedcriteria. The Bill would also imposeidentical requirements on SLHCs.

The Bill would also require BHCs seekingto make interstate bank acquisitions tomeet the well capitalized and wellmanaged criteria. A bank resulting froman interstate merger would also have tobe well capitalized and well managed forthe merger transaction to receiveregulatory approval.



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 Billwould amend these provisions with aprovision that simply states that an “affiliate”includes “any investment fund with respectto which a member bank or affiliate thereofis an investment 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 (2) clarify that advising afund is sufficient for the fund to be deemedto be an affiliate (it is not necessary for thebank or its affiliates to have sponsored thefund or to have a contractual or otherspecific arrangements or relationships withthe fund).

Definition of a “Covered Transaction”The Bill would amend the definition of a“covered transaction” to indicate that

repurchase agreements are a form of anextension of credit. This amendmentwould subject repurchase agreements tothe collateralization requirements ofSection 23A. Currently, repurchaseagreements between a bank and itsaffiliates are subject to the quantitativeand qualitative requirements of Section23A but are not subject to the mandatorycollateral requirements.

The Bill would also expand the definitionof 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 Bill wouldsubject such transactions to the collateralrequirements of Section 23A.Furthermore, the Bill would extend thecollateral requirements of Section 23A toany “credit exposure” to an affiliate.

Authority to Grant Exemptions The Bill would eliminate the currentauthority of the Federal Reserve toexempt transactions by any bank with itsaffiliates from the requirements of Section23A by order. The Federal Reservewould retain its current authority toprovide an exemption by regulation fromthe requirements of Section 23A and B ifit finds that such exemption would be inthe public interest and consistent with

the purposes of Section 23A or 23B,however, the Bill would essentially grantthe FDIC a veto power over any suchexemptions. The Federal Reserve wouldbe authorized, however, to exempt byorder inter-affiliate transactions of statemember banks if it finds jointly with theFDIC that the exemption is in the publicinterest and consistent with the purposesof Section 23A and the FDIC finds thatthe exemption does not present anunacceptable risk to the DepositInsurance Fund. In the case of nationalbanks and federal savings associations,the OCC would be authorized to provideexemptions by order from the inter-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 would beauthorized to exempt transactions byorder after a joint finding with the FederalReserve that the transaction is in thepublic interest and consistent with thepurposes of Section 23A and that theexemption does not present anunacceptable risk to the DepositInsurance Fund.


“The Bill would expand 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 Bill would subject such transactions tothe collateral requirements of Section 23A.”


Treatment of Netting Arrangements The Bill would authorize the FederalReserve to issue regulations orinterpretations with respect to the mannerin which netting agreements betweenbanks and their affiliates may be takeninto account in determining the amount ofcovered transactions. Such aninterpretation shall be issued jointly withthe appropriate Federal banking agencyfor the respective bank 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 is not limited toless than 10 percent of the bank’s capitaland surplus). The Bill would eliminate thisexemption and transactions between abank and any of its financial subsidiarieswould be fully subject to the requirementsof Section 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 Bill wouldexpand the definition of “loans andextensions of credit” to include creditexposures to a person arising out ofderivative transactions, repurchaseagreements, reverse repurchaseagreements, and securities lending andborrowing transactions. The Bill also wouldprovide that an insured State bank mayengage in a derivative transaction only ifthe relevant State’s law with respect tolending limits takes into considerationcredit exposure to derivative transactions.

Restriction on Conversion ofTroubled BanksThe Bill would generally prohibit theapproval of banking charter conversionapplications (from state to federal and viceversa) during any period in which theinstitution is subject to a cease and desistorder or other formal enforcement actionor a memorandum of understandingissued against the institution.

De Novo BranchingInto StatesThe Bill would confer to national banks andout-of-state-chartered banks the authorityto establish de novo branches in a state asif the national bank or out-of-state-chartered bank were chartered in that state.

Amendments to Restrictionson Transactionswith InsidersThe Bill would extend the application oflending limits to insiders to creditexposures arising from derivativetransactions, repurchase and reverserepurchase agreements, and securitieslending or borrowing transactions.

The Bill would provide that insureddepository institutions may not purchaseor sell an asset to an executive officer,director, or principal shareholder of theinsured depository institution or any relatedinterest of such a person (as those termsare defined in Section 22 of the FRA)unless: (i) the transaction is on market

terms; and (ii) if the transaction exceeds10 percent of the depository institution’scapital and surplus, the transaction mustbe approved by majority of disinteresteddirectors of the board of the institution.The Federal Reserve, in consultation withthe OCC and the FDIC, may issue rulesimplementing these provisions. Theexisting restrictions on purchases ofproperty between a bank and its directorsor related interests in Section 22(d) of theFRA would be repealed.

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 Bill would explicitly authorizethe Federal Reserve to implementregulatory capital requirements for BHCsand SLHC. The Bill would also providethat in establishing capital adequacyrequirements for BHCs, SLHCs, andinsured depository institutions the FederalReserve and the appropriate Federalbanking agencies shall seek to make suchrequirements countercyclical. Further, theBill would codify the Federal Reserve’slong-standing “source of strength”doctrine, pursuant to which BHCs areexpected to serve as a source of financialstrength to their subsidiary depositoryinstitutions. The Bill would also imposethe source of strength requirement on anyother company (other than a BHC) thatcontrols, directly or indirectly, an insured


“The appropriate Federal banking agencies shall 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.”


depository institution. The appropriateFederal banking agencies shall jointlyissue rules implementing the source ofstrength doctrine and may require holdingcompanies of depository institutions toreport periodically for purposes ofassessing the ability of the holdingcompany to comply with the source ofstrength requirement.

Securities FirmsHolding CompaniesThe Bill would repeal the electiveinvestment bank holding companyregulatory framework, pursuant to whichinvestment banks were able to elect to besupervised on consolidated basis by theSEC pursuant to the US SecuritiesExchange Act of 1934. The Bill wouldinstitute an elective regulatory frameworkfor “securities holding companies” underthe authority of the Federal Reserve. Theterm “securities holding company” wouldbe generally defined as any legal entitythat owns or controls one or more brokersor dealers registered with the SEC that isnot subject to comprehensiveconsolidated supervision by any regulator.

The Bill 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 would be subject to theprovisions of the BHCA, other thansection 4 of the act. Accordingly, asupervised securities holding companywould not be subject to the nonbankingactivity restrictions of the BHCA but would

be fully subject to the Federal Reserve’ssupervision and regulation powers underthe BHCA. Furthermore, the Bill explicitlyprovides that the Federal Reserve shallhave examination authority oversupervised securities holding companiesand shall have the authority to prescribecapital adequacy and other riskmanagement standards for such entities.The Federal Reserve shall impose suchstandards by regulation or order and maydifferentiate among supervised securitiesholding companies taking intoconsideration: (i) the differences amongtypes of business activities carried out bythe supervised securities holdingcompany; (ii) the amount and nature ofthe financial assets of the supervisedsecurities holding company; (iii) theamount and nature of the liabilities of thesupervised securities holding company,including the degree of reliance on short-term funding; (iv) the extent and nature ofthe off-balance sheet exposures of thesupervised securities holding company; (v)the extent and nature of the transactionsand relationships of the supervisedsecurities holding company with otherfinancial companies; (vi) the importance ofthe supervised securities holdingcompany as a source of credit forhouseholds, businesses, and state andlocal governments, and as a source ofliquidity for the financial system; and (vii)the nature, scope, and mix of theactivities of the supervised securities

holding company. The Bill would alsoconfer to the Federal Reserve the sameenforcement authority with respect tosupervised securities holding companiesas is conferred to the Federal Reservewith respect to BHCs under the FDIA.

The Volcker RuleThe Volcker Rule generally would prohibit“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 shall 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 would be tasked to completea study no later than six months afterenactment of the Bill and to makerecommendations on implementing theprovisions of the Volcker Rule. Theappropriate Federal banking agencies, theSEC, and the CFTC shall consider thefindings of the study and shall promulgatejointly implementing regulations no laterthan nine months after the date of the


“The Bill 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 would be subject to the provisions ofthe BHCA, other than section 4 of the act.”


completion of the study by the Council.The Bill explicitly provides that such rulesshall impose additional capitalrequirements and quantitative limitations,including diversification requirements,regarding any proprietary trading activitiesor hedge or private fund-related activitiesthat are exempted from the provisions ofthe Volcker Rule if deemed to beappropriate to protect the safety andsoundness of banking entities engaged insuch activities.

The Volcker Rule provisions shall becomeeffective on the earlier of 12 months afterthe issuance of implementing regulationsor 2 years after the Bill’s enactment. TheBill would provide for a transition period oftwo years (with the possibility of up tothree one-year extensions) after theeffective date of the Volcker Ruleprovisions for banking entities to bringtheir operations into compliance with therelevant regulatory requirements. Withrespect to investments in “illiquid funds”the Federal Reserve may grant oneadditional extension of the complianceperiod for up to 5 years. An “illiquid fund”is generally defined as a hedge fund or aprivate equity fund that is contractuallycommitted to invest principally in illiquidassets, such as portfolio companies, realestate, and venture capital investments.

Proprietary TradingThe term “proprietary trading” would bedefined as engaging as a principal for thetrading account of the banking entity orNBFC in any transaction to purchase or

sell, or otherwise 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 shall conduct a study of therisks and conflicts associated withproprietary trading by banking entities.The Bill would authorize the GAO toaccess information necessary forproducing its report, and provides (with

limited exceptions) that any suchinformation will be kept confidential. Thestudy would evaluate whether proprietarytrading presents (i) a material systemic riskto the stability of the U.S. financialsystem, (ii) a material risk to the safetyand soundness of the covered entities,and (iii) material conflicts of interestsbetween such entities and clients. Thestudy must also evaluate (i) whetheradequate disclosure regarding the risksand conflicts of proprietary trading isprovided to depositors, trading and assetmanagement clients, and investors insuch entities and (ii) whether banking,securities, and commodities regulators ofinstitutions that engage in proprietarytrading have adequate systems andcontrols to monitor and contain any risksand conflicts of interest relating toproprietary 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 Bill 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 “private


“The Volcker Rule generally would prohibit “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.”


equity funds” or “hedge funds” shall notapply to: (i) investments in small businessinvestment 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 engaged

in providing services to the fund); and (f)the banking entity discloses to investorsthat any losses of the fund are bornesolely by the investors and not by thebanking entity.

A banking entity would be able to makeand retain an investment in a hedge fundor private equity fund that the bankingentity organizes and offers, provided thatwithin a year after the establishment ofthe fund (with the possibility of two one-year extensions) the ownership interest ofthe banking 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 asinvestment adviser or manager to a hedgefund or a private equity fund. However,the Bill would prohibit a banking entity orNBFC that organizes or has an affiliatethat serves 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 Bill would permit the appropriateFederal banking agencies, the SEC, andthe CFTC to exempt by rule from the


“The Bill would permit the appropriate Federal bankingagencies, the SEC, and the CFTC to exempt by rulefrom the provisions of the Volcker Rule any activity theagencies determine would promote and protect thesafety and soundness of the banking entity or NBFCand the financial 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 would be limited to3 percent of Tier I capital of the banking entity.”

47


provisions of the Volcker Rule any activitythe agencies determine would promoteand protect the safety and soundness ofthe banking entity or NBFC and thefinancial stability of the United States.

No transaction or activity that may fallwithin an exemption from the provisions ofthe Volcker Rule shall be permitted if thetransaction or activity: (i) would involvematerial conflict of interest between thebanking entity and its clients orcounterparties; (ii) would result in anunsafe or unsound exposure; (iii) wouldpose a threat to the safety and soundnessof the banking entity; or (iv) would pose athreat to the financial stability of theUnited States.

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 wouldexceed 10 percent of the aggregateconsolidated liabilities of all financialcompanies as of the year end precedingthe transaction. This limit shall not applyto: (i) an acquisition of a bank in default orin danger of default or receiving FDICassistance; or (ii) transaction that resultsonly in de minimis increase of the liabilitiesof the financial company.

For purposes of the concentration limitsthe term “financial company” would bedefined as: (i) insured depositoryinstitution; (ii) any company that controlsan insured depository institution; (iii)NBFC; and (iv) foreign bank or companytreated as a BHC. The Bill would definethe term “liabilities” as the total risk-weighted assets of the financial companyless the total regulator capital of thecompany (foreign-based financialcompanies must count only risk-basedassets and capital of their US operations).The Federal Reserve shall issueregulations 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 transactionwould control more than 10 percent of thetotal amount of deposits of insureddepository institutions in the United States(the “10 percent deposit cap”). The Billwould extend the 10 percent deposit capwith respect to: (i) interstate bank mergertransactions; (ii) interstate acquisitions byBHCs of insured depository institutionsthat are not “banks” under the BHCA’sdefinition of a “bank;” and (iii) interstateacquisitions of insured depositoryinstitutions by SLHCs. The 10 percentdeposit cap shall not apply to anacquisition of an insured depositoryinstitution in default or in danger of defaultor receiving FDIC assistance.

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

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


“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 would exceed 10 percent of the aggregateconsolidated liabilities of all financial companies as of theyear end preceding the transaction.”

48



Title VII.Wall StreetTransparency andAccountability


Definitions of Swap andSecurity-Based SwapSwaps

The Bill 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 Bill. Itappears that single name CDS, whetherloan-based or security-based, would beconsidered security-based swapsregulated by the SEC while CDS on broadportfolios would be swaps but notsecurity-based swaps, and thereforeregulated by the CFTC.

Foreign Exchange

Foreign exchange options would beswaps. Foreign exchange forwards andswaps would also be regulated asswaps, although the Treasury Secretarymay make a written determination toexempt foreign exchange forwards andswaps from regulation under the Bill.Even if so exempted, foreign exchangeforwards and swaps would still need tobe reported and remain subject to thebusiness conduct standards applicable toswap dealers under the Bill. It is not clearif cash-settled foreign exchange swapsand forwards 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 Bill does notprovide any guidance as to how “intend”will be defined, and whether the treatmentof a swap would change if the partiesdecided not to physically settle such swapon a later date.


Derivatives Reform

Title VII of the Bill 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 Bill provides that no Federal assistancemay be be provided to any swap dealer,major swap participant (other than anymajor swap participant that is an insureddepository institution), swap executionfacility or derivatives clearing organization.Such prohibition would not apply to anFDIC-insured depository institution thatlimited its swap activities to (a) hedging andother risk management activities related toits own activities, and (b) acting as a swapdealer in transactions involving rates orreference assets that a national bank mayinvest in. However, depository institutionsare prohibited from acting as a swap dealerfor credit default swaps referencing unlesssuch swaps are cleared by a clearingorganization. This would permit banks toact as dealers with respect to interest rateswaps, currency swaps and certain creditdefault 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 Bill 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 whileremaining eligible for Federal assistance.The prohibition of Federal assistance willbe effective two years from the effectivedate of the Bill.

Definition of Swap Dealers and MajorSwap Participants

1. DealersThe Bill regulates “swap dealers” and“security-based swap dealers”. (In thismemorandum, “swap dealer” refers to

either.) A swap dealer is any person thatholds 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 a 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 U.S.financial 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 the

U.S. financial system. The definition ofmajor 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 Bill 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 swap




dealer is a U.S. bank and is a security-based swap dealer registered withthe SEC.

2. Regulatory RequirementsThe Bill directs the SEC and the CFTC tojointly adopt prudential requirements forswap dealers and major swapparticipants. However, the Bill 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-cleared

swaps shall be appropriate to offset thesubstantially 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 Bill mentions initial andvariation margin. Customarily, variationmargin relates to mark-to-marketvaluations of swaps and it is not clearhow initial margin would 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 of

records (including emails and callrecordings), 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 asuch entity, it will be required to act inthe best interest of such entity and willmake a reasonable efforts 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) is independent of theswap dealer, (d) makes appropriatedisclosures and (e) will provide writtenrepresentations regarding fair pricing andthe appropriateness of the transaction.

Non-U.S. Entities

The Bill does not contain explicitexemptions for non-U.S. swap dealers ornon-U.S. major swap participants.However, provisions of the Bill relating to

“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.”


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

There is some precedent, outside thederivatives context, for regulationsgoverning U.S. activities of non-U.S.financial institutions (such as SEC Rule15a-6 for securities activities and CFTCPart 30 for futures activities). However,the Bill does not contemplate suchregulations, and even if such regulationswere adopted, they may significantlyrestrict the U.S. activities of non-U.S.derivatives firms.

Clearing and ExecutionRequirementsCentral Clearing of Swaps

1. Mandatory ClearingThe Bill 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, but

may not require any clearing organizationto clear a swap if the clearing of thatswap would adversely affect the financialintegrity of the clearing organization.Swaps entered into prior to theapplication of the mandatory clearingrequirement or prior to the passage of theBill 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 Bill.

2. Exemptions from ClearingA swap is not required to be cleared if noclearing organization is willing to clearsuch swap. In addition, any counterpartythat is (a) not a financial entity, (b) usingswaps to hedge or mitigate commercialrisk, and (c) notifies the CFTC or theSEC, as applicable, how it generallymeets its financial obligations associatedwith entering into non-cleared swapswould not be subject to the mandatoryclearing requirement. (Such counterpartymay, however, request that a swap itenters into be cleared and would beentitled to choose the clearingorganization.)

The Bill 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, and

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

n an employee benefit plan.

The SEC or the CFTC, as applicable, maychoose to exclude from the definition of

financial entity depository institutions, farmcredit 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 Bill 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 an




exchange but that allows multipleparticipants 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 Bill requires each party that enters intoa swap to report such swap to a swapdata repository or a security-based swapdata repository (in this memorandum swapdata repository will refer to either), or ifthere is no swap data repository thatwould accept such a swap, to the CFTCor the SEC, as applicable.

Swaps that were entered into prior to theenactment of the Bill would be required tobe reported to a swap data repository orthe CFTC or the SEC, as applicable,within 30 days of the issuance of the finalrule, which rule must be issued not laterthan 90 days of the enactment of the Bill,or such 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 shall require real-time public reporting by clearingorganizations. The CFTC and the SEC, asapplicable, will also make available to thepublic the aggregate data on swap

trading volumes and positions of swapsthat 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 U.S.financial 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 Bill may be deemed tobe registered as a derivatives clearingorganization. The CFTC may exempt SECregistered and non-U.S. clearingorganizations that are subject to similarscrutiny in their home jurisdictions and theSEC may also exempt CFTC registeredand non-U.S. clearing organizations that

are subject to similar scrutiny in theirhome 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 wouldbe required to identify whether thetrading is taking place on the exchangeor on the SEF. SEFs are also subject tocompliance with certain core principles,including:

n establishing and enforcing trading andparticipation rules that would 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 withthe 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 Billprovides new “core principles” forcontract markets, which are similar to thecore principles of SEFs. In addition, theBill amends the Commodity Exchange Actto 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 Bill 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

shall be required to register with bothcommissions. Clearing organizations willbe permitted 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 shall berequired 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 will be 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 would be anunreasonable restraint on trade or imposean anti-competitive burden on trading,clearing or reporting transactions, (b)establishing transparent governancearrangements that fulfill the public interestand support the aims of the Federal

Government and (c) establishing conflictof interest rules.

Foreign Boards of Trade

1. GeneralThe CFTC may require any foreign boardof trade to register with the CFTC if itprovides its U.S. 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 U.S. persons withrespect to an agreement that settlesagainst the price of one or more contractslisted for trading on a contract market orSEF registered 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 Bill requires the CFTC to imposeaggregate position limits on contractstraded on exchanges, SEFs, foreignboards of trade as well as swaps that are



not traded on an exchange or SEF butwhich perform a significant discoveryfunction, provided that bona fide hedgesin 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 Bill 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 Bill, otherthan in respect of excluded commoditiesand agricultural commodities.

2. Security-based swapsThe Bill 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 person

entering into such a swap would berequired to keep 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 Bill prohibits persons from usingmanipulative or deceptive practices inconnection with swaps. In addition, theBill 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 Bill 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 Bill 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 a

swap for the purposes of risk management,and the Bill provides regulatory authority tothe CFTC and SEC to further define eligiblecontract participant.

Prohibition on Retail OTC CommodityTransactions

The Bill generally prohibits a transaction inany commodity which is not traded on anexchange 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 Bill 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 rangeof transactions. The exclusion for



agricultural businesses raises the questionas to why other small businesses are notexcluded.

Securities LawsApplication of Securities Laws toSecurity-Based Swaps

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

Beneficial Ownership/CorporateInsider Rules

The Bill 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 would be covered by thesesections if the SEC, after consultation

with prudential regulators and theTreasury, ruled that the purchase of asecurity-based swap (or a type ofsecurity-based swap) confers beneficialownership of the underlying security onthe purchaser.

MiscellaneousExemptions

The Bill exempts swaps and security-based swaps from state gaming andbucket-shop laws as well as insurancelaws. The Bill 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 Bill 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 Bill 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 shall be requiredto promulgate the rules and regulationrequired of each of them under the Bill notlater than 360 days after the date ofenactment of the Bill, unless expresslystated otherwise.



Title VIII.Payment, Clearing, andSettlement Supervision


Identification ofSystemically ImportantActivitiesSection 804 would authorize 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 1 or more financial institutionsto facilitate the completion of financialtransactions. Financial transactionsinclude funds transfers, securitiescontracts, forward contracts,repurchase agreements, swaps, andfinancial derivatives contracts. Theydo not include, for example, any

offers or sales of securities under the1933 Act, or any quotation, orderentry, negotiation, or other pre-tradeactivity.

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 would haveon critical markets, financial institutionsor the broader financial system.Generally, the Oversight Council mustalso consult with relevant supervisoryagencies and the Board of Governors,publish notice of the designation in thefederal register, and afford industryparticipants an opportunity to challengesuch designation through a writtensubmission or oral argument.

Establishment of RiskManagement StandardsSection 805 would authorize the Boardof Governors to prescribe riskmanagement standards governing (i)payment, clearing and settlementactivities of designated financial marketutilities, and (ii) the conduct ofdesignated activities by financialinstitutions (e.g., risk managementpolicies and procedures, margin andcollateral requirements, etc.). Suchstandards must be designed to promoterobust risk management, promote safetyand soundness, reduce systemic risks,and support the stability of the broaderfinancial system. The CFTC and SECwould each be authorized to prescriberegulations, in consultation with theBoard of Governors, containing riskmanagement standards.

Special Rules forDesignated FinancialMarket UtilitiesUnder Section 806, the Board ofGovernors would provide designatedfinancial market utilities (“DFMU”) withaccess to the Federal Reserve Bankdiscount window. It would also require aDFMU, based on standards establishedby the Board of Governors, to giveadvance notice to its supervisory agencyand the Board of Governors of anyproposed change to its rules,procedures or operations that couldmaterially affect the nature or level ofrisks presented by the DFMU. Absent anemergency situation, if the Board of


Payment, Clearing, and Settlement Supervision

Title VIII would reform the transaction clearance and settlement process to mitigatesystemic risk in the financial system and to promote financial stability. The Bill 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 would also be granted access to the Fed’s discount window.



Governors or the supervisory agencyobjects to the change within 60 days,the DFMU may not make the change.Section 813 would also require 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. Itwould first require the applicablesupervisory agency for a DFMU (e.g., theSEC for a broker-dealer) to conduct annualexaminations of the DFMU, and wouldallow the examination of outside serviceproviders supplying services integral to theoperation of the DFMU. Such agenciesmust consult with the Board of Governors,which may, in its discretion participate inexaminations of DFMUs. The Board ofGovernors may also recommend that asupervisory agency take enforcementaction against a DFMU. Finally, the Boardof Governors, after consulting with theOversight Council and the supervisoryagencies, may take emergencyenforcement action against a DFMU itselfif: (i) it determines that there is an imminentrisk of substantial harm to financial

institutions, critical markets, or the broaderfinancial system; and (ii) the imminent riskof harm precludes the Board of Governorsfrom recommending enforcement action toa supervisory agency.

Similarly, section 808 would establishexamination 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 would also havebackup examination and enforcementauthority over such institutions.

Information GatheringAuthoritySection 809 would generally authorizethe Oversight Council to require anyfinancial market utility or financialinstitution engaged in payment, clearing

or settlement 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 would 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 would allow designated financial marketutilities to access the Federal Reserve Bank discountwindow”



Title IX.Investor Protectionsand Improvementsto the Regulation ofSecurities



Establishment of the InvestorAdvisory CommitteeSection 911 would establish the InvestorAdvisory Committee to advise andconsult with the SEC on, among otherthings, regulatory priorities, feestructures, effectiveness of disclosures,and investor protection. Section 915would establish a new Office of theInvestor Advocate (“OIA”) within the SEC,and section 919D would require theappointment of an OIA Ombudsman.The purpose of this office would be, ingeneral, to assist investors in resolvingproblems with the SEC and self-regulatory organizations.

Amendments to the Exchange ActSubtitle A would amend the ExchangeAct to: (i) streamline the SEC’s approvalor disapproval of rule changes proposedby self-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 would require the SEC toconduct a study evaluating theeffectiveness of existing legal orregulatory standards of care for brokers,dealers, investment advisers and theirrespective associated persons whenproviding personalized investment adviceconcerning securities to retail investors.This study must identify any legal orregulatory gaps or overlap in suchstandards that can be addressed by ruleor statute. Specifically, the SEC is

required 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’s

A – Increasing Investor Protection

Title IX would direct 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 would significantly impact 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 would be required to conduct a studyevaluating the effectiveness of existing legal or regulatorystandards of care for brokers, dealers, investmentadvisers and their respective associated persons, whenproviding personalized investment advice concerningsecurities to retail investors.”



enactment. This report must (i) describethe SEC’s findings, conclusions andrecommendations including a descriptionof its considerations, analysis and thepublic 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 would require the completionof additional studies associated withsecurities regulation, including studies bythe: (i) SEC identifying and proposingmethods to improve financial literacy

among 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 (section919B); (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 would amend the ExchangeAct and 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 would amend the ExchangeAct as 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 awardwould be paid in an aggregateamount of not less than 10% but notmore than 30% of the amount of thesanctions. The SEC would considerthe following criteria in determiningthe amount of the award: (i) thesignificance of the informationprovided by the whistleblower to thesuccess of the enforcement action;(ii) the degree of assistance providedby the whistleblower; (iii) theprogrammatic interest of the SEC indeterring violations by making awardsto whistleblowers; and (iv) suchrelevant factors as the SEC mayestablish by the rule or regulation.

n No award would be provided tocertain government employees,whistleblowers who are convicted of acriminal 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 would notbe entitled to an award if heknowingly provides false informationto the SEC.

n Any determination by the SEC underthis section, including whether, towhom, or in what amount to makeawards are in 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 would generally berequired 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 Bill.

Sections 923 and 924 would makecertain conforming amendments forwhistleblower protection to the federalsecurities laws and set forthimplementation and transition provisionsfor whistleblower protection, respectively.

Collateral BarsSection 925 would permit the SEC toimpose collateral bars under theExchange Act and the Advisers Actprohibiting violators from associating witha broad range of SEC regulated entities.This would be a departure from thecurrent standard that limits collateral barssolely from entities regulated under theparticular statutory provisions underwhich the violation occurred.

Disqualification of Felons and other“Bad Actors” from Regulation DOfferingsSection 926 would require the SEC toissue rules disqualifying an offering or saleof securities 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 would be expandedto include those who aid and abet primary violators ofthe Securities Act and 1940 Act, and recklessnesswould satisfy the 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 would amend the AdvisersAct to clarify that Section 205 of the Act,which deals with investment advisorycontracts, does not apply to state-registered investment advisers.

Fair Funds AmendmentsSection 929B would permit the SEC toadd civil 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 would amend theSecurities Act, the Exchange Act, theAdvisors Act, and the InvestmentCompany Act to make nationwide serviceof subpoenas available to the SEC in civilactions it files in federal district courts.

Formerly Associated PersonsSection 929F would amend theExchange Act to make it clear that theSEC may bring suits against persons

formerly associated with a registeredentity to prevent individuals from avoidinga penalty or bar simply because they areno longer associated with the registeredentity.

SIPC ReformsSection 929H would make 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 would amend the ExchangeAct to 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 would provide 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 would also providethat any registered public accounting firm

in that instance must produce the foreignfirm’s audit work papers, if asked, andsecure the agreement of the foreign firmthat it will cooperate as a condition ofsuch reliance.

Sharing Privileged Information withOther Authorities Section 929K would amend theExchange Act to allow the SEC anddomestic and foreign securitiesauthorities and law enforcementauthorities to share information withoutwaiving any privilege applicable to thatinformation. It would also prevent theSEC from being compelled to discloseprivileged information obtained from aforeign securities authority or lawenforcement authority, if the foreignauthority represented to the SEC in goodfaith that the information is privileged.

Enhanced Application of AntifraudProvisionsSection 929L would expand theExchange Act market manipulation andshort sales authority 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 bring actionsfor aiding and abetting violations ofthose statutes. Section 929M would


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



extend the SEC’s enforcement authorityto file actions against persons who aidand abet primary violators of theSecurities Act and the InvestmentCompany Act. Section 929O would alsomake 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 SEC toa impose penalties for aiding andabetting violations of that Act.

Additional ProvisionsSubtitle B would also:n Authorize the SEC to impose civil

penalties in cease and desistproceedings.

n Extend the SEC’s antifraud jurisdictionto cover significant steps infurtherance of a violation outside theU.S. and cover foreign conduct withforeseeable substantial effects withinthe U.S.

n Apply control person liability in SECenforcement proceedings.

n Expand recordkeeping andexamination requirements forcustodians who hold property ofclients of investment companies orinvestment advisers.

n Give the SEC authority to adopt rulesrequiring more timely reporting bypersons acquiring more than 5%ownership interest in an issuer.

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

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

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

n Allow SIPC assessments andpenalties for fraud under theSecurities Investors Protection Act(“SIPA”), and establish increased civiland criminal penalties for personswho misrepresent SIPC membershipor SIPA coverage.

n Prohibit manipulative short sales andrequire that customers be notified thatthey 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 Require 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 Require 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 Bill wouldsignificantly alter 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 U.S. credit rating system hasbecome a focal point of Congressionalfinancial reform efforts. Unless otherwisespecified, the SEC would be required bythe Bill to issue final regulations not laterthan one year after the date ofenactment of the Bill.

In the course of its deliberations,Congress has debated over acontroversial provision that wouldsignificantly change the system forassigning initial credit ratings. Rather thanestablishing such a mechanism, however,the Bill would require the SEC to conducta study on its effectiveness. Please referto the summary under “Studies” for adescription of this study.

New managementrequirementsTo manage conflicts of interest, Section932 of the Bill would require eachnationally recognized statistical ratingorganization (“NRSRO”) to establish aninternal control system, in addition to thecreation of certain management positions.

Internal control structureEach NRSRO would be required toestablish, maintain, enforce, anddocument an internal control structuregoverning the implementation of andadherence to policies, procedures, andmethodologies for determining creditratings. Annually, each NRSRO would berequired to submit to the Commission aninternal controls report attesting to suchactions taken.

Corporate governance Section 932 would require at least half,but no fewer than two, of the members ofthe board to be “independent”, with nofinancial stake in credit ratings.Independent directors would not bepermitted, other than in his or hercapacity as a member of the board, toaccept any consulting, advisory, or othercompensatory fee from the NRSRO or beassociated with an NRSRO and would bedisqualified from any deliberation involvinga specific rating in which the independentboard member has a financial interest inthe outcome of the rating. The Bill wouldrequire that “a portion” of theindependent directors include users ofratings from an NRSRO.

The compensation of the independentdirectors would not be permitted to belinked to the business performance of theNRSRO and the term of office would notbe permitted to exceed five years.

The board of directors, in addition to itsoverall responsibilities, would be requiredto oversee the establishment,maintenance, and enforcement of policiesand procedures for determining creditratings and managing conflicts of interest,as well as for developing an internalcontrol system.

Compliance officerEach NRSRO would be required todesignate an individual to serve as acompliance officer. The compliance officerwould be responsible for addressingcomplaints regarding the credit ratingsissued and compliance with securitieslaws and internal policies and proceduresrequired under the Bill. The complianceofficer would be required to submit anannual report attesting to such NRSRO’scompliance with the securities laws andinternal policies and procedures. Thecompliance officer, while serving in suchcapacity, would not be permitted toperform any function that may interferewith his or her duties, includingperforming credit ratings, participating inthe development of ratingsmethodologies or models, performingmarketing or sales functions, orparticipating in establishingcompensation.

Regulation of conflicts of interestUnder the Bill, the SEC would use 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 would be required toestablish, maintain and enforce policiesand procedures reasonably designed toensure that, in any case in which anemployee of a person subject to a creditrating of the NRSRO or the issuer,underwriter, or sponsor of a security or

C – Improvements to the Regulation of Credit Rating Agencies

Qualification standards for creditrating analystsNot later than one year after the dateof enactment of this Bill, Section 936would require that the SEC issue rulesthat are reasonably designed to ensurethat any person employed by anNRSRO to perform credit ratingsmeets standards of training,experience and competence necessaryto produce accurate ratings for thecategories of issuers whose securitiesthe person rates. Such credit ratinganalysts would be tested forknowledge of the credit rating.

Treatment of NRSRO subsidiariesIf an NRSRO is a subsidiary of a parententity, the board of directors of theparent entity would satisfy therequirement by designating acommittee of such board of directors,where at least half of the members ofthe committee are independent, and atleast one member of the committee isa user of ratings from an NRSRO.




money market instrument subject to acredit 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 would be required to conduct areview to determine whether any conflictsof interest of the employee influenced thecredit rating and take action to revise therating if appropriate. Such policies andprocedures would be subject to review bythe SEC not less frequently than annuallyand whenever such policies are materiallymodified or amended.

Each NRSRO would be required tosubmit to the SEC a report in any casesuch NRSRO knows or can reasonablybe expected 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 ofsuch NRSRO, or participated orsupervised an individual who participatedin any capacity in determining creditratings for such obligor, issuer,underwriter, or sponsor. Such reportwould be made public by the SEC.

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

Elements of required disclosureSuch disclosure would be 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 would be 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 would be 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 informationIIn producing a credit rating, Section 935 would require that anNRSRO consider information about an issuer that the NRSROhas, 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 would be required toestablish, maintain, and enforce written policies andprocedures that assess the possibility that an issuer of asecurity or money market instrument will default or fail tomake timely payments, clearly define and disclose themeaning of any symbol used by the NRSRO to denote acredit rating, and apply any symbol consistently for all typesof securities and money market instruments for which thesymbol is used.


Initial credit ratingsEach NRSRO would be required topublicly disclose information on the initialcredit ratings determined by suchNRSRO for each type of obligor, security,and money market instrument, and anysubsequent changes to such creditratings. Such disclosures would berequired to include performanceinformation over a range of years and fora variety of types of credit ratings,including for credit ratings withdrawn bythe NRSRO, and would be required to bemade freely available by the NRSRO onan easily accessible portion of itswebsite, and in writing, when requested.

To allow users of credit ratings tocompare the performance of creditratings across NRSROs, such disclosureswould be required to be madecomparable among NRSROs.

Form for disclosuresEach NRSRO would be required toprescribe a form, accompanying thepublication of each credit rating, thatdiscloses information relating to theassumptions underlying the credit ratingprocedures and methodologies, the datarelied on to determine the credit rating,and, if applicable, how the NRSRO usedservicer or remittance reports, and withwhat frequency, to conduct surveillance ofthe credit rating. Such disclosure wouldbe required to be made readily availableto users of credit ratings. The content ofthese disclosures would be required to beprovided in a manner that is directlycomparable across types of securities.

Notification for users of credit ratingsEach NRSRO would be required to notifyusers of 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 Bill, anyNRSRO in violation of any rulespromulgated under the Bill 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 Bill, Section 932 would require thatthe SEC establish a new administrativeoffice within the SEC, the Office ofCredit Ratings.

Rule-making authorityThe Office of Credit Ratings would havethe authority to establish rules, fines, andother penalties applicable to any NRSROthat violates the requirements relating tocredit rating regulation under the Bill.Such rules, fines and penalties would 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 would 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 would 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 would be required torefer to the appropriate lawenforcement or regulatory authoritiesany information that the NRSROreceives from a third party and findscredible that alleges that an issuer ofsecurities rated by the NRSRO hascommitted or is committing a materialviolation of law that has not beenadjudicated by a Federal or State court.


“The overriding public policy concern evidenced in theBill 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 thisBill, the SEC would be required toremove from Regulation FD (17 C.F.R.243.100) the exemption for entitieswhose primary business is the issuanceof credit ratings.



Private actionsUnder Section 933 of the Bill, a privateaction for money damages broughtagainst a credit rating agency would bedeemed sufficient where the complaintstates with particularity facts giving rise toa strong inference that the credit ratingagency knowingly or recklessly failed toconduct a reasonable investigation of therated security 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 Bill, the SECand the GAO would be required toconduct several studies examiningdifferent aspects of credit rating agencies.

The SEC would be required toundertake a study on the feasibility anddesirability of standardizing creditratings terminology, standardizing themarket stress conditions under whichratings are evaluated, requiring aquantitative correspondence betweencredit ratings and a range of defaultprobabilities and loss expectations, andstandardizing credit rating terminologyacross asset classes.

The SEC would also be required toconduct a study of the independence ofNRSROs and how that independenceaffects the ratings issued by theNRSROs. Such study would evaluate themanagement of conflicts of interest raisedby an NRSRO providing other servicesand the potential impact of rulesprohibiting an NRSRO that provides arating to an issuer from providing otherservices to the issuer.

The SEC would undertake a studyexamining alternative methods foraddressing the conflict of interestproblems inherent in an issuer-pays creditrating agency system. Following thestudy, the SEC would have the rule-making authority to establish a system forthe assignment of NRSROs to determinethe initial credit ratings of structuredfinance products in a manner thatprevents the issuer, sponsor, orunderwriter of the structured financeproduct from selecting the NRSRO thatwill determine the initial credit ratings andmonitor such credit ratings.

The GAO would be required to conduct astudy on alternative means forcompensating NRSROs in order to createincentives for NRSROs to provide moreaccurate credit ratings.

The GAO would also be required toconduct a study of the feasibility andmerits of creating an independentprofessional organization for ratinganalysts employed by NRSROs.

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

grade” would be 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”would be replaced with “standards ofcredit-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]” would be replaced with“meets standards of credit-worthiness asestablished by the Commission.”

Review of reliance on ratingsEach Federal agency would be required to review any regulation issued by suchagency that requires the use of an assessment of the credit-worthiness of a security ormoney market instrument and any references to or requirements in such regulationsregarding credit 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 Bill, Rule436(G), promulgated by the SEC underthe Securities Act of 1933, would haveno force 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 Bill wouldamend the Securities Exchange Act andthe Securities 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 Bill 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 Bill would not use the definition ofasset-backed security in SEC RegulationAB (17 C.F.R. §229.1101(c)) (“Reg AB”),but rather would introduce a newdefinition for its purposes as a newSecurities Exchange Act Section 3(a)(77):a fixed-income or other securitycollateralized by any type of self-liquidating financial asset (including aloan, a lease, a mortgage, or a securedor unsecured receivable) that allows theholder of the security to receive paymentsthat depend primarily on cash flow fromthe asset, and any other security that theSEC, by rule, determines to be an asset-backed security for purposes of thisdefinition, but excluding any “securityissued by a finance subsidiary held by theparent company or a company controlledby the parent company, if none of thesecurities issued by the finance subsidiaryare held by an entity that is not controlledby the parent company.” The examplesincluded in the Bill definition of asset-backed security are: (1) collateralizedmortgage obligations; (2) collateralizeddebt obligations (“CDOs”); (3)collateralized bond obligations; (4) CDOsof asset-backed securities; and (5) CDOsof CDOs. Notably, unlike the asset-backed security definition in Reg AB, theBill does not impose additionalconditions, such as issuer activityrestrictions and underlying assetperformance characteristics, resulting in abroader pool of securities potentially

qualifying as “asset-backed securities” forpurposes of the Bill and the regulationspromulgated thereunder.

Having defined the scope of securitieswhich are impacted by the terms ofSubtitle D, the the Bill proposed by theConference Committee for purposes ofreconciling the bills passed by the Senateand the House, would set out theamendments to the Securities ExchangeAct and the Securities Act for purposesof the topics mentioned above.

Credit Risk RetentionThe principal provisions which would formthe basis for credit risk retentionrequirements are set out in Section 941of the Bill. In particular, a new Section15G to the Securities Exchange Actwould be created thereby. Section 15Gwould direct (1) Federal banking agenciesand the SEC to jointly prescriberegulations that would 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 would have to beprescribed within 270 days of theenactment of such new Section 15G.The Bill would define “securitizer” as “(A)an issuer of an asset backed security; or(B) a person who organizes and initiatesan asset-backed securities transaction by

selling or transferring assets, eitherdirectly or indirectly, including through anaffiliate, to the issuer.”

As further described below, the Bill wouldrequire that the implementing regulationsadopted by the Federal banking agenciesand the SEC meet certain minimumstandards, subject to a general exemptiveauthority given to the rulemaking-bodies.These standards would be:

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 would meet the requirements ofSection 15G; which, as determined bythe Federal 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, theFederal banking agencies and SEC

would be required to reduce the riskretention percentage applicable tosecuritizers by the percentage of riskretention required of originators and toconsider (1) whether the assets sold tosecuritizers have 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 Bill would define “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 Bill wouldgrant the Federal banking agencies andthe SEC broad power to adoptexemptions, exceptions or adjustments tothe rules issued in relation to Section15G, including in respect of the riskretention requirements for classes ofinstitutions or assets and the prohibitionon hedging retained credit risk bysecuritizers, subject to the requirementthat such exemptions, exceptions oradjustments (1) help ensure high qualityunderwriting standards and encourageappropriate risk management practices bysecuritizers and originators, (2) improveaccess to credit on reasonable terms, or(3) otherwise be in the public interest andfor the protection of investors. Any loan orother financial asset made, insured,guaranteed or purchased by anyinstitution that is under the supervision ofthe Farm Credit Administration, includingthe Federal Agricultural MortgageCorporation, and any residential, multi-family, or health care facility mortgageloan asset, or securitization of the same,insured or guaranteed by the US or anagency of the US (which will not include

Fannie Mae, Freddie Mac or the Federalhome loan banks), would also be exemptfrom any risk retention provisions.

The Federal banking agencies, the SEC,the Department of Housing and UrbanDevelopment and the Federal HousingFinance Agency would be required tojointly define the term “qualifiedresidential mortgage” and issueregulations to exempt qualified residentialmortgages from risk retentionrequirements. The definition would berequired to take into considerationcertain underwriting and product features(examples of which are set out in Section15G) that historical loan performancedata indicate a lower default risk, and willexclude asset-backed securitiescollateralized by tranches of other asset-backed securities. Further, the SECwould be directed to require an issuer,for each issuance of an asset-backedsecurity collateralized solely by qualifiedresidential mortgages, to certify that ithas evaluated the effectiveness of itsinternal supervisory controls for ensuringall such assets are qualified residentialmortgages.

The chairperson of the Financial Stabilityoversight counsel would coordiante alljoint rulemaking under Section 13G.

The regulations issued under Section15G would 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 would be bythe appropriate Federal banking agency(for any 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 Bill would amendSection 15(d) of the Exchange Act andSection 7 of the Securities Act in order toadd new asset-backed securitiesdisclosure and reporting obligations.Section 15(d) would be amended toremove the exemption from Exchange Actfiling requirements for asset-backedsecurities held by fewer than 300persons. Further, the amendment wouldgive the SEC rulemaking authority toprovide for different suspension ortermination rules for asset-backedsecurities of any class, and authority toclassify issuers and prescriberequirements for classes of issuers underSection 15(d) of the Exchange Act.

In addition, Section 7 of the Securities Actwould be amended to require the SEC toadopt regulations under such Section 7requiring each issuer of asset-backedsecurities to disclose, for each tranche orclass of security, information regarding theassets backing that security. The SECwould be required to set standards for theformat of the data provided to facilitatecomparison of such data across securitiesin similar types of asset classes, and wouldhave to, at a minimum; require such issuersto disclose asset-level or loan-level data, ifnecessary for investors to independentlyperform due diligence. Such data wouldhave to include: (1) data having uniqueidentifiers relating to loan brokers ororiginators, (2) the nature and extent ofcompensation of the broker or originator,and (3) the amount of risk retention by theoriginator and the securitizer.

Asset-Backed OfferingsSection 943 of The Bill would direct theSEC to, not later than 180 days afterthe date of enactment of the Act,prescribe regulations on the use ofrepresentations and warranties in theasset-backed securities market to requireeach NRSRO to include in any report

accompanying a credit rating: adescription of the representations,warranties and enforcement mechanismsavailable to investors, and how they differfrom the representations, warranties andenforcement mechanisms in issuances ofsimilar securities. In addition, suchregulations would also require anysecuritizer to disclose fulfilled andunfulfilled repurchase requests so thatinvestors may identify underwritingdeficiencies among originators.

Section 944 of the Bill would eliminate 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 Bill would amendSection 7 of the Securities Act to directthe SEC to issue, not later than 180days after the date of enactment ofthis section of the Bill, rules relating toregistration statements required to be filedby issuers of asset-backed securities torequire such issuers to perform reviews ofthe assets underlying their securities anddisclose the nature of such reviews.

The Bill would require that the Chairmanof the FSOC carry out a study on themacroeconomic effects of the riskretention requirements and otheramendments under Subtitle D of Title IXof the Bill, with emphasis on potentialbeneficial effects with respect tostabilizing the real estate market. Thestudy would include the effects of riskretention on real estate asset pricebubbles and involve both retroactiveanalysis and prospective analysis. Theprospective analysis would take into

consideration proactive adjustments torequired risk retention percentages forcreditors and securitizers and acomparable analysis of proactiveadjustment of mortgage originationrequirements, including assessments andrecommendations for what entity couldcarry out such adjustments, how theyshould be carried out and how any relatedlegislation should be implemented. TheChairman would issue a report toCongress on this study within 180 days ofthe enactment of Subtitle D.

Conflicts of InterestProvision Relating toSecuritizationSection 621 of the Bill 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 would involve 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 Bill contains certainrisk retention provisions (colloquiallyreferred to as “skin-in-the-game”provisions) that if enacted would require,under Section 941, any “securitizer” toretain an unhedged economic interest in aportion of the credit risk of any asset thatthe securitizer transfers, sells or conveysto a third party. Section 941 of the Billdefines the term “securitizer” as: (i) an




issuer of an asset-backed security(including mortgage-backed securities); or(ii) a person 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 Bill, a securitizer wouldgenerally be 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 Bill, must “ensure high qualityunderwriting standards for the securitizersand originators of assets…and encourageappropriate risk management practices.”The regulations required by the Bill alsowould define the permissible forms of risk

retention 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 Bill chargesthe Chairperson of the Oversight Councilwith coordinating all joint rulemakingrequired pursuant to these provisions. Andwithin 180 days of enacting the Bill 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 Bill has been the result of a conferencecommittee reconciling two individual billspassed by the House of Representatives

and the Senate, on December 11, 2009and May 20, 2010, respectively. Withrespect to risk retention requirements, thetwo bills differed significantly because theHouse bill would have extended the skin-in-the-game provisions to all creditors andthus potentially could have had far-reachingeffect on the syndicated lending market(including certain interpretations of theHouse bill that would have limitedsyndicates to a maximum of 20 lenders).Since the Bill 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 would be added to theExchange Act which provides thatbeginning with annual or other meetingsof shareholders occurring six monthsafter the Bill’s enactment for which theproxy solicitation rules require executivecompensation disclosure, publiccompanies would generally be 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 Bill’s enactment at whichshareholders are asked to vote on anyacquisition, merger, consolidation,proposed sale or other disposition of allof the assets of an issuer would berequired to describe in a “clear andsimple” form and in accordance withregulations to be established by the SEC,any agreements, understandings andarrangements affecting the compensationof a named executive officer of the issuer(including arrangements with an acquirerof the issuer) that is based upon orrelates to such corporate events.Arrangements disclosed pursuant to thisrule would be generally subject to aseparate 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 would be directed to issue rulesthat require institutional investors todisclose at least annually their voting incompensation-related matters

Compensation Committee MattersGeneral

New Section 10C would be added to theExchange Act, which provides that nolater than 360 days after the date of theBill’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 thatwould be the basis for suchprohibition before the prohibition willbe imposed, and (ii) that a nationalsecurities exchange or nationalsecurities association may exempt acategory of companies from thebelow requirements as they deem

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

n The requirements described belowwould not 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 would require that eachmember of a compensation committee ofa company be a member of the board ofdirectors and be “independent.”

n SEC rules would require that inestablishing the independence ofcommittee members, a nationalsecurities exchange or nationalsecurities association will considerfactors that affect independence,including (i) the source ofcompensation of a compensationcommittee member, including anyconsulting, advisory or othercompensatory fee paid by thecompany to such member, and (ii)

E – Accountability and Executive Compensation

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




whether the compensation committeemember 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 would direct 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 wouldinclude the following: (i) the provision ofother services to the company by theperson that employs the advisor, (ii) theamount of fees received from thecompany by such person as apercentage of the total revenue of suchperson, (iii) the policies and procedures ofsuch person that are designed to preventconflicts of interest, (iv) any business orpersonal relationship of such advisor witha member of the compensationcommittee, and (v) any stock of thecompany owned by such advisor. Theindependence standards established bythe SEC must be competitively neutralamong categories of consultants, counseland advisors.

Compensation Committee AuthorityRelating to Consultants, Funding andDisclosure

A compensation committee would havethe authority 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 Bill 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 Bill’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 would notappear to apply to independent legalcounsel or other advisors.

Executive Compensation DisclosuresA new subsection (i) would be added toSection 14 of the Exchange Act whichprovides that the SEC will enact rulespursuant to which each issuer is generallyrequired to disclose in its annual proxy orconsent solicitation materials for itsannual meeting a clear description ofcompensation required to be disclosedunder Rule 402, including information thatshows the relationship between executivecompensation that was actually paid (andwhich is required to be disclosed) and thefinancial performance of the company

over 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 would be required to amendRule 402 so that each public companywould also generally be required todisclose (i) the median annual totalcompensation of all employees of thecompany (except the CEO), (ii) the annualtotal compensation of the CEO, and (iii)the ratio of the median employee annualtotal compensation to that of the CEO.

Clawback of ExecutiveCompensationA new section 10D would be added tothe Exchange Act that would require theSEC to direct national securitiesexchanges and national securitiesassociations to prohibit the listing ofcompanies that do not develop andimplement a “clawback” policy, asdescribed below.

n Companies would be required todevelop policies relating to thedisclosure of incentive-basedcompensation that is based onfinancial information required to bereported under the securities laws.

n Companies would be required toprovide that in the event of anaccounting restatement due tomaterial noncompliance of thecompany with financial reportingrequirements under applicablesecurities laws, the company willrecover from any current or formerexecutive officer any excess incentive-based compensation (including stockoptions) paid during the three-yearperiod preceding the restatement thatwas based on erroneous data.


Employee and Director Hedging PolicyDisclosureSubsection (j) would be added to Section14 of the Exchange Act which providesthat the SEC will by rule require that eachpublic company disclose in its annualproxy or consent solicitation materials foran annual meeting whether any employeeor director (or a designee of such persons)is allowed to purchase financialinstruments that are designed to hedge oroffset any decrease in the market value ofequity securities that were granted tothem by the company as compensation,or otherwise held by them, directly orindirectly.

n Such hedging instruments wouldinclude, but may not be limited to,prepaid variable forward contracts,equity swaps, collars and exchangefunds.

Excessive Compensation by HoldingCompanies of Depository InstitutionsSubsection (i) would be added to Section5 of the BHCA of 1956 which providesthat no later than 180 days after the firstanniversary of the Bill’s enactment, theFederal Reserve, in consultation with theOCC and the FDIC, would be required toestablish standards prohibiting as anunsafe and unsound practice anycompensation plan of a bank holdingcompany or savings and loan holdingcompany that (i) provides an employee,director or principal shareholder withexcessive compensation, fees or benefits,or (ii) could lead to material financial lossto 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 wouldbe amended 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 would require the SEC tosubmit an annual report to Congress on itsconduct of examinations of registeredentities, enforcement investigations, andreview of corporate financial securitiesfilings. The report must contain (i) anassessment of the effectiveness of theSEC’s internal supervisory controls and theprocedures applicable to SEC staff whoperform these examinations,investigations, and reviews; (ii) certificationby the directors of the divisions ofEnforcement, Corporation Finance, andOffice of Compliance Inspections andExaminations; and (iii) a summary of thereview conducted by the GAO of theadequacy and effectiveness of the SEC’sinternal supervisory control structure andexamination, investigation, and reviewprocedures.

Triennial Report on PersonnelManagementSection 962 would require the GAO tosubmit a report to Congress once everythree years 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 since

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

Annual Financial Controls Audit Section 963 would require the SEC tosubmit an annual report, attested to bythe Chairman and Chief Financial Officer,to Congress describing the responsibilityof SEC management for establishing andmaintaining an adequate internal controlstructure and procedures for financialreporting. The GAO would 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 would require the GAO tosubmit a report to Congress two yearsafter the date of enactment of this Act,and every three years thereafter thatevaluates the SEC’s oversight of SROswith respect to (i) the governance ofSROs, including the identification andmanagement of conflicts of interest andan analysis of the impact of any conflictsof interest on the regulatory enforcementor rulemaking of SROs; (ii) theexaminations carried out by SROs,including the expertise of examiners; (iii)the executive compensation practices ofSROs; (iv) the arbitration servicesprovided by SROs; (v) SROs’ review of

members’ advertising; (vi) cooperationwith State securities administrators; (vii)the methods, sufficiency, and how fundsare invested by SROs and thecorresponding impact on regulatoryenforcement; (viii) policies regarding theemployment of former employees ofSROs; (ix) the ongoing effectiveness ofthe rules of SROs; (x) the transparency ofgovernance and activities of SROs; and(xi) any other issue the Comptrollerdeems has an impact on theeffectiveness of SROs.

Compliance Examiners Section 965 would amend Section 4 ofthe Exchange 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 would amend the ExchangeAct by inserting a new Section 4D. Itwould require the SEC’s InspectorGeneral to establish and maintain aconfidential telephone hotline or otherelectronic means to receive suggestionsfrom employees for improvements in thework efficiency, effectiveness, productivity,and use of resources of the SEC and toreceive allegations of waste, abuse,misconduct, or mismanagement withinthe SEC. The Inspector General wouldhave to consider any suggestions orallegations, recommend appropriateaction in response to such suggestions or

F – Improvements to the Management of the Securities andExchange Commission

“The SEC would be required to submit an annual reportto Congress on its conduct of examinations ofregistered entities, enforcement investigations, andreview of corporate financial securities filings.”



allegations, and submit an annual report toCongress describing the suggestions orallegations 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 would require the SEC to hirean independent consultant with expertisein organizational 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 division; (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 would require the GAO toconduct a study and issue a report nolater than one year after the enactment ofthe Bill that (i) reviews the number ofemployees who leave the SEC to work for

financial institutions; (ii) determines howmany employees who leave the SECworked on cases that involved financialinstitutions regulated by the SEC; (iii)reviews the length of time employees workfor the SEC 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 would amend the proxy rulesto give the SEC the authority to requirethat solicitation of a proxy, consent orauthorization by an issuer include anominee submitted by a shareholder. TheSEC would be allowed under theamendment to issue rules relating to thisrequirement and exempt an issuer orclass of issuers from its rules. Section971 would also affirmatively permit theSEC to require that shareholders beallowed to use an issuer’s proxy materialsfor the purpose of nominating individualsto the issuer’s board of directors.

Disclosures Regarding Chairman andCEO Structures

Section 972 would require the SEC toissue rules within 180 days of the

enactment of the Bill requiring an issuerto disclose to its shareholders in theannual proxy sent to the issuer’s investorswhy the issuer has 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 would require municipaladvisors to register with the SEC. Amunicipal advisor is defined as a personwho ‘’(i) provides advice to or on behalfof a municipal entity or obligated personwith respect to municipal financialproducts or the issuance of municipalsecurities, including advice with respectto the structure, timing, terms, and othersimilar matters concerning such financialproducts or issues; or (ii) undertakes asolicitation of a municipal entity.” The Billhowever, would expressly exclude fromthe new 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 Bill 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 Bill also would expand theauthority of the Municipal SecuritiesRulemaking Board (the “MSRB”) tomunicipal advisors.

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

dealers, 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 Bill and will apply to anymunicipal derivative.

Studies of Disclosure, Markets andRegulation Sections 976 and 977 would requirestudies of (i) the disclosure made byissuers of municipal securities; and (ii) themunicipal securities market.

n The Bill would require the GAO toconduct a study of the size of themunicipal securities markets and the

issuers and investors, and of thedisclosures provided by issuers toinvestors. Specifically, the studywould (i) compare the disclosuremunicipal issuers are required toprovide with the disclosure corporateissuers must provide, (ii) evaluate thecosts and benefits to issuers andinvestors from requiring additionalfinancial disclosures by municipalissuers, and (iii) makerecommendations relating todisclosure requirements for municipalissuers, including the advisability ofthe repeal of Section 15B(d) of theExchange Act (commonly known asthe “Tower Amendment”).

n The Bill also would require the GAOto conduct 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 GovernmentAccounting Standards Board (“GASB”),and would require a study by the SECthat evaluates the role and importance ofthe GASB in municipal securities markets,

H – Municipal Securities


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



including with respect to the board’sfunding. The SEC would submit thisreport to Congress within 180 days afterenactment of the Bill.

Creation of Office of MunicipalSecurities. Section 979 would create 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 theOffice of Municipal Securities wouldreport to the chairman of the SEC.


The Bill would make a number ofchanges to expand the role and functionof the PCAOB.

Foreign Oversight Authorities. Section 981 would authorize the PCAOBto share information with any non-U.S.auditor oversight authority (defined as anygovernmental body or other entityempowered by a non-U.S. 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-Dealers.Section 982 would give 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 wouldalso require auditors of brokers anddealers to register with the PCAOB andto pay an annual accounting support feeto the PCAOB. Finally, the PCAOB wouldbe permitted to refer investigations to anSRO with jurisdiction over the relevantbroker or dealer.

Portfolio margining.Section 983 would add portfoliomargining accounts carried as securitiesaccounts pursuant to a portfoliomargining program approved by the SECto the definition of “Customer Property”found in the Securities Investor ProtectionAct of 1970.

Securities Lending. Under Section 984, the SEC would berequired to promulgate rules that aredesigned to increase the transparency ofinformation available to brokers, dealers,

and investors with respect to securitieslending.

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

n The Council would 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, would berequired under Section 989H toaddress deficiencies identified in anyInspector General report, or certify to

both Houses of Congress that noaction is necessary.

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 would establish 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 Oversightwould 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 would amend section 31 ofthe Exchange 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 wouldamend section 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 Bill wouldestablish an SEC reserve fund, which theSEC would be able to use for anyfunction it determines is necessary tocarry out its functions. The amountdeposited in the fund may not exceed$50,000,000 each year, and the balancein 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 would not be available tothe SEC.

J – Securities and Exchange Commission Match Funding



Title X.Bureau of ConsumerFinancial Protection

EstablishmentTitle X of the Bill, under the heading“Bureau of Consumer FinancialProtection”, also called the “ConsumerFinancial Protection Act of 2010”, wouldestablish in the Federal Reserve Systeman independent bureau to be known asthe “Bureau of Consumer FinancialProtection” (the “Bureau”). The Bureauwould be an Executive agency and wouldregulate the offering and provision ofconsumer financial products or servicesunder the Federal consumer financiallaws. The Bureau would seek toimplement and, where applicable, enforceFederal consumer financial lawconsistently for the purpose of ensuringthat all consumers have access tomarkets for consumer financial productsand services and that markets forconsumer financial products and servicesare fair, transparent and competitive.

IndependenceNotwithstanding being situated in theFederal Reserve System, the Bureauwould be essentially autonomous. TheBureau would be an Executive agencywhose director (the “Director”) would benominated by the President andconfirmed 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 review anyrule or order of the Bureau; or (v) delayor prevent the issuance of any rule ororder of the Bureau. In addition tofulfilling other interim reportingrequirements to Congress, the Directorwould present a semi-annual report to

the President and to Congress on, andwould be required to appear beforeCongress concurrently with thesubmission of the report to discuss, thesignificant problems faced byconsumers in shopping for or obtainingconsumer financial products andservices, the Bureau’s budget request,rules and orders 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 would berequired to fund the Bureau each year inthe determination of the Director, not toexceed a set percentage of its earnings forsuch period, but the Bureau’s financialstatements would not be consolidatedwith those of the Federal Reserve System.The Bill would authorize the appropriationof $200 million for each of fiscal years2010-2014 if the Director determined thatsuch funds were necessary and submitted

a report to the President and Congressregarding the funding of the Bureau andthe extent to which its funding needswould exceed its actual funding.

ObjectivesThe Bill would authorize 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 burdensome regulations areregularly identified and addressed in orderto reduce unwarranted regulatoryburdens; (iv) Federal consumer financiallaw is enforced consistently, withoutregard to the status of a person as adepository institution, in order to promotefair competition; and (v) markets forconsumer financial products and services


Unfair or Abusive?The Bureau would be able to prescribe rules applicable to a covered person orservice provider identifying and prohibiting as unlawful unfair, deceptive or abusiveacts or practices 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 would not be ruled unfair unless the Bureau has a reasonablebasis to conclude that (i) the act or practice causes or is likely to cause substantialinjury to 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 would 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




operate transparently and efficiently tofacilitate access and innovation.

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), theFederal Deposit Insurance Corporation,the Federal Trade Commission, theNational Credit Union Administration, theOffice of the Comptroller of the Currency,the Office of Thrift Supervision, and theDepartment of Housing and UrbanDevelopment, and the heads of thoseagencies, would be transferred to theBureau. No such authority would betransferred 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 ofnonfinancial goods or services) or payment

instruments; providing check cashing,check collection, or check guarantyservices; and providing payments or otherfinancial data processing products or

services to a consumer by anytechnological means. The Bill specificallywould exclude from such definition thebusiness of insurance or electronic conduit

Covered PersonsSupervision of Nondepository Covered PersonsThe Bureau would require 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 Bill, 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 would be the asset size of the coveredperson, the volume of transactions involving consumer financial products or services inwhich the covered person engages, the risks to consumers created by the provision ofsuch consumer financial products or services and the extent to which such institutionsare subject to oversight by State authorities for consumer protection. The Bureau andthe FTC would coordinate enforcement actions.

Supervision of Very Large Banks, Savings Associations and Credit UnionsThe Bureau would have exclusive authority to require reports and conductexaminations on a periodic basis of any covered person that is (i) an insureddepository institution with total assets of more than $10 billion and any affiliate thereofor (ii) an insured credit union with total assets of more than $10 billion and any affiliatethereof for purposes of (a) assessing compliance with the requirements of Federalconsumer financial laws, (b) obtaining information about the activities subject to suchlaws and the associated compliance systems or procedures of such persons and (c)detecting and assessing risks to consumers and to markets for consumer financialproducts and services. The Bureau would have primary enforcement authority.

Supervision of Other Banks, Savings Associations and Credit UnionsThe Director would be able to require reports from any covered person that is (i) aninsured depository institution with total assets of $10 billion or less or (ii) an insuredcredit union with total assets of $10 billion or less, as necessary to support the roleof the Bureau in implementing Federal consumer financial law, to support itsexamination activities, and to assess and detect risks to consumers and consumerfinancial markets. Other than requiring such reports, the prudential regulator wouldhave primary authority to enforce the Federal consumer financial laws with respectto such covered person.



services. The “business of insurance”means the writing of insurance or thereinsuring of risks by an insurer, includingall acts necessary to such writing orreinsuring and the activities relating to thewriting of insurance or the reinsuring ofrisks conducted by persons who act as, orare, officers, directors, agents, oremployees of insurers or who are otherpersons authorized to act on behalf ofsuch persons.

FunctionsGenerallyThe primary functions of the Bureauwould be: (i) conducting financialeducation programs through theestablishment of an Office of FinancialEducation; (ii) collecting, investigating andresponding to consumer complaints; (iii)collecting, researching, monitoring andpublishing information relevant to thefunctioning of markets for consumerfinancial products and services to identifyrisks to consumers and the properfunctioning of such markets; (iv) generallysupervising 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 wouldinclude providing opportunities forconsumers to access: (i) financialcounseling, (ii) information to assist withthe evaluation of credit products and theunderstanding of credit scores, (iii) savings,borrowing and other services found atmainstream financial institutions, (iv)

activities for consumers (a) to prepare foreducational expenses and the submissionof financial aid applications, and othermajor purchases, (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 would be collectedand tracked using a single, toll-freetelephone number, a website and acentralized database. Complaints wouldbe directed to various Federal and Stateagencies, as appropriate.

Office of Fair Lending and EqualOpportunitiesWithin the Bureau, the newly establishedOffice of Fair Lending and EqualOpportunity would have the power tooversee and enforce Federal lawsintended to ensure 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 would be 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 would advise and consult with theBureau in the exercise of its functionsunder the Federal consumer financial lawsand would provide information onemerging practices in the consumerfinancial products or services industry,including regional trends, concerns andother relevant information. Members of theConsumer Advisory Board would beappointed by the Director and wouldinclude experts in consumer protection,financial services, community development,fair lending and civil rights, and consumerfinancial products or services. Suchmembers would also includerepresentatives of depository institutionsthat primarily serve underservedcommunities and representatives ofcommunities that have been significantlyimpacted by higher priced mortgage loans.

“The Bureau would be permitted to promulgate rulesrequiring the registration of covered persons, other thanan insured depository institution, insured credit union orrelated person.”

Covered Persons Covered person under the Bill 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 Bill would provide 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 would berequired to consider the potential costsand benefits 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 Bureauwould be 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 would bepermitted to promulgate rules requiringthe registration of covered persons, otherthan an insured depository institution,insured credit union or related person.

Collection of Information fromCovered PersonsIn order to support its rulemaking andother functions, the Bureau would monitorthe offering 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 would have 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 would beable to utilize a variety of sources,including examination reports concerningcovered persons and service providers,surveys and interviews with coveredpersons and service providers, andavailable databases, and would be able torequire covered persons and serviceproviders participating in consumerfinancial services to file with the Bureau,as the Bureau may prescribe by rule ororder, annual or special reports, oranswers in writing to specific questions,furnishing information. The Bureau wouldalso have access to any report ofexamination or financial condition madeby a prudential regulator or other Federalagency having jurisdiction over a coveredperson 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 wouldalso have to overcome high proceduralbars (including a two-thirds vote) to stayor set aside any rulemaking by theBureau.

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 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; persons



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

engaged in the activity of establishing ormaintaining 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 thatwould be required under the Bill, the Billwould require the GAO to conduct astudy within one year of the Bill’senactment on the effectiveness andimpact of (i) various appraisal methods,including the cost approach, thecomparative sales approach, the incomeapproach, and other methods that maybe available and (ii) the Home ValuationCode of Conduct. The Bill would alsorequire the Secretary of the Treasury tostudy ending the conservatorship ofFannie Mae, Freddie Mac and reformingthe housing finance system and to submitsuch study to Congress no later thanJanuary 31, 2011.

Victims Relief FundThe Bill would establish a ConsumerFinancial Civil Penalty Fund in the FederalReserve, into which would be depositedany civil penalties from any judicial oradministrative action under Federalconsumer financial laws. Any amountstherein would be paid to victims ofFederal consumer financial laws or, to theextent such victims cannot be located orsuch payments are otherwise notpracticable, the Bureau may use suchfunds for the purpose of consumereducation and financial literacy programs.



Title XI.Federal ReserveProvisions


Amendments to EmergencyLending AuthorityThe Bill would amend 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 would alsobe amended to require the FederalReserve to establish by regulation, inconsultation with the Secretary of theTreasury, policies and proceduresgoverning emergency lending programsor facilities. The relevant regulationshould ensure that the emergencylending program or facility is for thepurpose of providing liquidity to thefinancial system as a whole, rather thanassistance to individual failing institutions.The regulations shall also prescribe a“lendable value” of collateral designed toprotect taxpayers from losses.

The Federal Reserve shall establishprocedure 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 would beprohibited from establishing anemergency lending program or facilitywithout the prior approval of theSecretary of the Treasury. The FederalReserve shall also provide a report tothe Congressional banking committees,no later than 7 days after authorizing anemergency lending program. The reportshall include: (i) justification for theassistance; (ii) identity of recipients; (iii)the date and amount of the assistance,and form in which the assistance wasprovided; and (iv) the material terms ofthe assistance (i.e., duration, collateral,interest, fees, corporate governancerequirements imposed, expected cost tothe taxpayers). The Federal Reserve

shall also provide written updates onceevery 30 days on: (i) the value ofcollateral securing the assistance; (ii)interest and other revenue receivedunder the program or facility; and (iii) theexpected cost to the taxpayer.

Review of Special FederalReserve Credit FacilitiesThe Bill would authorize the GAO toconduct reviews, including on-siteexaminations of the Federal Reserve,any open market transaction ordiscount window advance that meetsthe definition of “covered transaction” inSection 11(s) of the FRA (“coveredtransactions”), and any program orfacility, including any SPV or other entity,established by or on behalf of theFederal Reserve (a “credit facility”)pursuant to Section 13 of the FRA, ifthe GAO determines that such reviewsare appropriate. Such reviews may beperformed solely for the purposes ofassessing: (i) the operational integrity,accounting, financial reporting, andinternal controls of the credit facility orcovered transaction; (ii) effectiveness ofthe relevant collateral policy; (iii) anybias in favor of any participants; and (iv)the policies governing third partycontractors. 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 version of any report on a

credit facility 1 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 Bill 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 would be authorized to makesuch disclosure before the timespecified above if it determines thatsuch disclosure would be in the publicinterest and would not harm theeffectiveness of the relevant creditfacility or the purpose or conduct ofcovered transactions.

“The Bill would amend Section 13 of the FederalReserve Act to prohibit the Federal Reserve fromextending credit in unusual and exigentcircumstances to an individual, partnership, orcorporation other than through a “program or facilitywith broad-based eligibility.”


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 Bill would revoke the existing FDICauthority pursuant to Section 13(c) of theFDIA to establish any widely availabledebt guarantee program for which the Bill

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 Bill; or (ii) require that the companyfile a petition for bankruptcy or file apetition for involuntary bankruptcy onbehalf of the company.

Federal ReserveGovernance AmendmentsThe FRA would be amended to requirethat the presidents of the Federal Reservebanks shall be appointed by the Class Band Class C directors of the banks, for afive year term. Class B directors consistsof three members, who represent thepublic. Class C directors consist of threemembers designated by the Board ofGovernors of the Federal ReserveSystem. Class A directors chosen by andbe representative of the stockholdingbanks shall no longer be able to vote forthe appointment of the president.

The Bill would amend the FRA to requirethe appointment of a second ViceChairman of the Board of Governors of theFederal Reserve who shall be designatedas “Vice Chairman of Supervision.”

The Bill would also amend the FRA toexplicitly authorize the Federal Reserve to“identify, measure, monitor, and mitigaterisks to financial stability of the UnitedStates.” Further, the Board of Governorsof the Federal Reserve shall not delegateto a Federal Reserve bank its functions forthe establishment of policies for thesupervision and regulation of firmssupervised by it.

No later than one year after theenactment of the Bill, GAO shall audit thegovernance of the Federal reserve banksystem. The GAO shall also conduct anaudit of all financial assistance providedby the Federal Reserve during the periodfrom December 1, 2007, till theenactment of the Bill.

The Bill would require the Federal Reserveto publish on its website informationabout the financial assistance it hasprovided during the period fromDecember 1, 2007, till the enactment ofthe Bill, including: (1) the identity of eachentity to which the Board of Governorshas provided such assistance; (2) the typeof financial assistance provided; (3) the

“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.”



value or amount of that financialassistance; (4) the date on which thefinancial assistance was provided; (5) thespecific terms of any repaymentexpected, including the repayment timeperiod, interest charges, collateral,limitations on executive compensation ordividends, and other material terms; and(6) the specific rationale for each suchfacility or program.

Title XII.Improving Access toMainstream FinancialInstitutions


Section 1202 would encourage initiativesfor financial products and services thatare appropriate and accessible formillions of Americans who are not fullyincorporated into the financialmainstream.

Expanded Access toMainstream FinancialInstitutions Section 1204 would authorize theTreasury Secretary to establish amultiyear program 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 would be restricted toeligible entities, 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 would enact 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 would authorize theTreasury Secretary to establish multiyear

demonstration programs by means ofgrants, cooperative agreements, financialagency agreements, and similarcontracts or undertakings with eligibleentities to provide low-cost, small loansto consumers that would providealternatives to more costly small dollarloans. Loans under this section must bemade on terms and conditions, andpursuant to lending practices, that arereasonable for consumers. Furthermore,eligible entities awarded a grant underthis section would be required to takesteps to ensure the provision of financialliteracy and education opportunities toeach consumer provided with a loan.

Grants to Establish Loan-Loss Reserve FundsSection 1206 would amend theCommunity Development Banking andFinancial Institutions Act of 1994. Itwould permit the CommunityDevelopment Financial Institutions Fundto provide funds to help communitydevelopment financial institutionsestablish their own loan loss reservefunds to defray the costs and mitigatethe losses of operating small dollar loanprograms, which are consumer loans notexceeding $2,500, are repaid in

installments, and have no pre-paymentpenalty, among other conditions.Community development financialinstitutions must provide non-federalmatching funds in an amount equal to 50percent of the amount of any grantreceived. Grants may not be used toprovide 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 would also permitthe Fund to make technical assistancegrants for technology, staff support, andother costs associated with establishinga small dollar loan program.

Evaluation and Reports toCongress Section 1210 would require 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 Bill would establish multiyear demonstrationprograms by means of grants, cooperative agreements,financial agency agreements, and similar contracts orundertakings with eligible entities to provide low-cost,small loans to consumers that would provide alternativesto more costly small dollar (e.g., “payday”) loans.”

Title XIII.Pay It Back Act


TARP AmendmentTitle XIII, the “Pay It Back Act” wouldamend the Emergency EconomicStabilization Act of 2008 to reduceTroubled Assets Relief Programauthorization to $550 billion, providedthat the Secretary of the Treasury wouldbe able, with the concurrence of theBoard 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 necessary

to address what the Secretary hasdetermined 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 would cause theSecretary of the Treasury to apply (i) allproceeds from the sale of any obligationsof Fannie Mae and Freddie Mac and anyFederal home loan bank obligations, (ii)any funds provided to any State by theAmerican Recovery and ReinvestmentAct of 2009 (the “Recovery Act”) that

were rejected by such State and (iii)certain other recaptured, returned andrepaid funds solely towards deficitreduction and would prohibit theSecretary from using such proceeds andfunds to offset other spending increasesor revenue reductions. Such recapturedfunds include funds the appropriation ofwhich is permitted under the RecoveryAct and the Recovery Act would beamended to rescind any suchappropriations that are not obligated byDecember 31, 2012, provided that thePresident would be able to waive anysuch rescission if the Presidentdetermined that it would not be in thebest interest of the Nation to rescind aspecific, unobligated amount.


Pay It Back Act

Title XIV.Mortgage Reform andAnti-PredatoryLending Bill


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

Obtaining a MortgageThe Bill, which amends, among otherstatutes, the Truth in Lending Bill (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, theBill requires that all “mortgage originators”be qualified and be prohibited fromreceiving financial compensation not tiedto the amount of the principal (i.e.,prohibition on “steering incentives”).

The Bill requires that regulations beenacted that would prohibit a mortgageoriginator from steering any consumer to aresidential mortgage loan that theconsumer lacks a reasonable ability torepay, does not provide the consumer witha net tangible benefit, or that has predatorycharacteristics or effects, such asexcessive fees. The Bill would furtherrequire the regulation of mortgageoriginators to refrain from abusive or unfairlending practices or mischaracterizing theresidential mortgage loans available to theconsumer.

The Bill places an emphasis on the role ofthe creditor in ensuring that theconsumer has the ability to repay theresidential mortgage loan. The creditorwould be required to make a reasonableand good faith determination based onverified and documented information thatthe consumer 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 Bill 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 Bill specifically addresses both “high-cost mortgages” and “higher-riskmortgages.” In relation to high-costmortgages, the Bill prohibits offering such amortgage without providing the consumerwith pre-loan counseling, imposing “balloonpayments” (i.e., payment that is twice aslarge as the prior scheduled payment) andrestricts refinancing. With regard tosubprime mortgages, prior to offering sucha mortgage a creditor must first obtain andbear the cost of a written appraisal of theproperty.

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 Bill defers on howsuch benefit is to be calculated ormeasured.

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

Bill would require 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 Bill 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. TheBill, does however, allow for the parties toagree to arbitration after a dispute hasarisen. The Bill 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 Bill would allow a consumer to raisea violation by the creditor of certainprovisions of the Truth in Lending Bill,including the proposed revisions relatingto mortgage origination as a defense inforeclosure proceedings. The Bill 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 Bill



Impact Studies and NewInitiativesThe Bill requires that numerous studiesbe conducted, including a study by theGAO on the effects of the enactment ofthe Bill 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 Bill 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 Bill requires the creation ofa Multifamily Mortgage ResolutionProgram, designed to protect renters.



Title XV.Miscellaneous


Restriction on use of U.S.funds for non-U.S.governmentsSection 1501 of the Bill amends TheBretton Woods Agreements Bill, 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, theU.S. 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 Bill 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 the Bill,the SEC will be required to promulgaterules requiring regulated companies toreport annually if any of the conflictminerals used in their products originatedin the Democratic Republic of Congo oran adjoining country. Such companiesmust also disclose measures, such asdue diligence and chain-of-custody

reports, to ensure that their activesinvolving the conflict minerals did notdirectly or indirectly finance or benefitarmed groups in the Democratic Republicof Congo or an adjoining country. The Billalso 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 to that noarmed groups continue to be directlyinvolved and benefitting from commercialactivity involving conflict minerals or theday after the fifth anniversary of theenactment of the Bill.

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 commercialproducts within 180 days of enactment ofthe Bill. The State Department will also berequired, within the same timeframe, toproduce and publish a map of mineral-rich zones, trade routes, and areas underthe control of armed groups in theDemocratic Republic of the Congo andadjoining countries based on data frommultiple sources, including the UnitedNations, the Congolese government andnon-governmental organizations. TheState Department will be required toupdate the map every 180 days, for solong as the conflict mineral reportingrequirements referred 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 Bill 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 Bill requires the SECwithin 270 days of enactment of the Billto 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

109


Study By The GOASection 1505 of the Act requires theGOA of the United States to assess therelative independence, effectiveness, andexpertise of presidentially appointedinspectors general and inspectors generalof designated Federal entities and theeffects on independence of theamendments to the Inspector General Billof 1978 made by the Bill, and to reportthe results of the assessment toCongress not later than 1 year after thedate of enactment of the Act.

Study on Core Deposits andBrokered DepositsSection 1506 of the Bill 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 1 year after thedate of enactment of the Bill, withlegislative recommendations, if any, toaddress concerns arising in connectionwith the definitions of core deposits andbrokered deposits.


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Title XVI.Financial CrisisAssessment Fund*

*This title of the Bill was deletedshortly after the initial publication ofthis memorandum


The Bill would establish a Financial CrisisSpecial Assessment Fund (the "Fund").The Fund shall be funded from specialassessments imposed by the Council onfinancial companies with totalconsolidated assets of $50 billion or moreand financial companies that managehedge funds with $10 billion or more ofassets under management. The Councilwould be directed to collect in theaggregate the lesser of: (i) $19 billion; and(ii) 133 percent of the amount necessaryto fully offset the net deficit effects of theprovisions of the Bill from its enactmentthrough September 2020, which amount

shall be determined by the Director of theOffice of Management and Budget.

The FDIC shall collect the assessmentson behalf of the Council. The specialassessments shall be collected on anannual basis with the first payment dueno later than September 10, 2012.

The special assessments shall be risk-based. The Council shall establish a riskmatrix to be used in determining theamount of special assessments, whichshall take into account essentially thesame factors that the Council shallconsider in making a determination with

respect to whether a nonbank financialholding company is systemicallyimportant. The Council shall also considerany assessments imposed on an affiliateof the financial company pursuant to theFDIA, the Securities Investor ProtectionAct, the Federal Credit Union Act, andapplicable State insurance law. TheCouncil shall also consider differencesamong financial companies based oncomplexity of operations andorganization, interconnectedness, size,activities, and any other risk-related factorthe Council deems appropriate.


Financial Crisis Assessment Fund



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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