President Obama signed into law the 2,300-plus page H.R. 4173 — the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on July 21st.
Because of the size and scope of the legislation, Congress will still need to conduct 47 studies, produce 74 reports and form seven new government agencies to oversee the new rules.
The Dodd-Frank Act was crafted to reduce the U.S. banking systems exposure to a repeat of the 2008 melt-down of the U.S. and worldwide banking system. However, like every other piece of legislation moving through Congress over the past two years, the path to passage was anything but smooth — with some factions saying the bill over-regulates the financial services sector and the added costs of complying with these new rules will fall primarily on individual consumers.
Based on the Whitehouse’s website, the Dodd-Frank Act was crafted to avoid a repeat of the “Too Big to Fail” bailouts which have occurred over the past two years:
“The Obama Administration has made Wall Street reform a top priority since day one and it will now become a reality. Wall Street Reform will hold Wall Street accountable, protect and empower American consumers with the strongest consumer protections ever, increase transparency in financial dealings — including in the derivatives market — and end taxpayer bailouts once and for all.”
Following is a brief summary of the more significant areas of focus by Congress and the Obama Administration:
I. New Fees/Funding and Taxes
Interchange Fees — One of the more controversial and heavily lobbied, provisions in the Act is the “Interchange Fees” which are mandated in the legislation. The actual rates to be paid by credit card merchants to banks, credit unions and other credit card companies are left to the Federal Reserve to establish. The Act includes language that the fees charged must be “reasonable and proportional.” Many commentators believe that the majority of these interchange fees will be passed through to consumers, rather than shouldered by the financial institutions.
Bank and Hedge Fund Revisions — Some of the more extensive provisions in the Act apply to large hedge funds. Expansive modifications to disclosures, fee structures and client/government reporting are included in the bill.
More details regarding the hedge fund impact can be accessed at:
One of the business-friendly provisions in the Act is the allowance of banks to pay interest on business checking accounts. The Act now repeals the prohibition on banks paying interest on demand deposits.
A positive provision for consumers involves an increase in deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008 for some taxpayers who may have incurred losses due to heavy deposit concentrations in certain financial institutions that failed.
II. Compensation Regulations
The Act adds governmental “Say on Pay” for executive compensation. Section 951 of the Dodd-Frank Act requires public companies to solicit a non-binding shareholder vote to approve the compensation of their executive officers beginning January 21, 2011. This must be done at least every three years, but may be done more frequently depending on the shareholders’ action. While this vote can be nonbinding, it could impact the compensation practices in the future.
Beginning on January 21, 2011, there will be a required vote at all shareholder meetings regarding proposed mergers or similar transactions. The shareholders must now vote on any and all “Golden Parachutes” and to approve executive/officer compensation that is related to the transaction.
The Dodd-Frank Act also requires a disclosure of the relationship between senior executive pay and specific performance measures for the various executives. Section 953 of the Act also requires annual disclosures of the median total compensation of all the employees of the company other than the CEO, the compensation of the CEO and the ratio of the two. The Act also contains a provision that mandates that the executives return any excess pay attributable to reliance on inflated financial results.
III. Mortgage Reform
To minimize a repeat of the 2007-2008 residential-mortgage meltdown, Congress has adopted a number of common-sense provisions. Following is a summary provided by the Senate Banking Committee:
- Requires Lenders Ensure a Borrower's Ability to Repay: Establishes a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.
- Establishes Penalties for Irresponsible Lending: Consumers will hold lenders and mortgage brokers who don’t comply with new standards accountable for as much as three years of interest payments and damages, plus attorney’s fees (if any). This protects borrowers against foreclosure for violations of these standards.
- Expands Consumer Protections for High-Cost Mortgages: Expands the protections available under federal rules on high-cost loans by lowering the interest rate and the points and fee triggers that define high-cost loans.
- Requires Additional Disclosures for Consumers on Mortgages: Lenders must disclose the maximum a consumer could pay on a variable-rate mortgage with a warning that payments will vary based on interest-rate changes.
- Housing Counseling: Establishes an Office of Housing Counseling within HUD to boost homeownership and rental housing counseling.
- Emergency Mortgage Relief:Building on a successful Pennsylvania program, provides $1 billion for bridge loans to qualified unemployed homeowners with reasonable prospects for reemployment to help cover mortgage payments until they are reemployed.
- Foreclosure Legal Assistance: Authorizes a Housing Urban Development (HUD)-administered program for making grants to provide foreclosure legal assistance to low- and moderate-income homeowners and tenants related to home ownership preservation, home foreclosure prevention and tenancy associated with home foreclosure.
IV. Wall Street Oversight and Accountability
Based on prepared remarks made by Michael S. Barr, assistant treasury secretary of Financial Institutions, on August 10th to the Chicago Club, the following summary of the oversight provisions was provided to Club Members:
“The Act establishes the Financial Stability Oversight Council, with clear responsibility for examining emerging threats to our financial system regardless of where they come from. The Council is chaired by the Secretary of the Treasury and its membership includes the heads of the financial regulatory agencies. The Council has a critical role in the management of systemic risk: to designate firms for heightened supervision by the Federal Reserve and to make recommendations to the Fed and other federal financial regulators concerning the establishment of heightened prudential standards.”
The Senate’s banking website provides additional details regarding the Council’s structure. The Council will be made up of 10 federal financial regulators and an independent member and five nonvoting members, the Financial Stability Oversight Council will be charged with identifying and responding to emerging risks throughout the financial system. The Council will be chaired by the Treasury Secretary and include the Federal Reserve Board, the U.S. Securities Exchange Commission (SEC), U.S. Commodity Futures Trading Commission (CFTC), Office of the Controller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), National Credit Union Administration (NCUA), the new Consumer Financial Protection Bureau and an independent appointee with insurance expertise. The five nonvoting members include Office of Financial Regulation (OFR), FIO and state banking, insurance and securities regulators.
“The Act also establishes an Office of Financial Research (OFR) within the Treasury Department — to support the Council through the collection and analysis of data concerning risk in the financial system. The OFR will be able to gather critical financial information not available elsewhere — looking across the whole financial system and providing insight to the Council and its member agencies, Congress and the public.”
The Act also provides that the new Bureau of Consumer Financial Protection will not have authority over various qualified employee benefit and compensation plans as well as IRC Section 529 plans.
These new regulatory bodies will have the power to write and enforce rules over credit card issuers/consumers, mortgages and other types of financial products. The office will have very broad consumer protection powers over banks and credit unions controlling at least $10 billion in assets.
Since auto dealers were determined to already be reasonably regulated by other federal and state agencies, they will be exempted from the new consumer protection office oversight.
V. Sarbanes-Oxley Relief
The Dodd-Frank Act also provides immediate relief from the onerous Sarbanes-Oxley audit provisions for approximately 5,000 smaller public companies. Based on a 2007 study by Financial Executives International, the average “accredited filer” incurred outside audit and legal fees associated with Sarbanes-Oxley compliance of $846,000. Under the Dodd-Frank Act, public companies with less than $75 million of market capitalization (non-accredited filer) will no longer be subject to the Sarbanes-Oxley requirements.
VI. New ‘Gold Standard’ for Congo Conflict Minerals
A somewhat esoteric provision added to the Act concerns a requirement that public companies using minerals from the Congo region must ensure that the minerals were mined with reputable and employee-friendly companies.
Manufacturers Disclosure:Requires those who file with the SEC and use minerals originating in the Democratic Republic of Congo in manufacturing, to disclose measures taken to exercise due diligence on the source and chain of custody of the materials and the products manufactured.
Illicit Minerals Trade Strategy:Requires the State Department to submit a strategy to address the illicit minerals trade in the region and a map to address links between conflict minerals and armed groups and establish a baseline against which to judge effectiveness.
The above summary represents just the tip of the iceberg. Practitioners, congressional staffers and a handful of Representatives and Senators will continue reviewing, interpreting and implementing the vast array of provisions contained in the Act for years to come.