The Dodd-Frank Act. July 16, 2013 Presented by Anna Pinedo NY Morrison & Foerster LLP All Rights Reserved mofo.com

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1 2012 Morrison & Foerster LLP All Rights Reserved mofo.com The Dodd-Frank Act July 16, 2013 Presented by Anna Pinedo NY

2 Agenda Dodd-Frank overview and status report Systemic regulation and oversight Institutions Prudential supervision Resolution Capital Activities Derivatives Volcker Rule Securitization Ratings Markets Payment, clearing, and settlement This is MoFo. 2

3 Overview and Status Report This is MoFo. 3

4 Rulemaking Progress This is MoFo. 4

5 Dodd-Frank Act Quite a number of the required rulemakings have been finalized (or nearly so), including, for example: Many of the Title IX securitization and ratings requirements Many of the mortgage related provisions (ability to pay, QM) Much of the Title VII framework (including swap dealer registration) Living will requirements and the OLA framework Many of the capital requirements But, then again, many of the most important issues to be addressed are still to come: Margin requirements Volcker Rule Risk retention requirements Lincoln ( push out ) amendment This is MoFo. 5

6 Key Provisions Capital Rules for Banks Volcker Rule New Agencies More stringent capital rules Limits on leverage Elimination of trust preferred securities Contingent capital? Derivatives Central clearing and exchange trading Swaps push-out provision Capital and margin requirements Enhanced Prudential Standards Discourages excessive growth and complexity Council can impose 15:1 debt-toequity ratio Concentration limits for non-affiliates Living wills Risk committees Limits proprietary trading Regulates investments in hedge funds and private equity funds 3% limit (3% of bank Tier 1 capital cap / 3% of fund capital cap) Banks may engage in permitted activities Rules to Protect Consumers & Investors Consumer Agency Deposit insurance permanently increased to $250,000 Mortgage regulations Investment advice standards of care Requires hedge fund and private equity fund advisors to register with SEC Securitization Skin in the Game Rules Regulations affecting Credit Rating Agencies Corporate governance and executive compensation restrictions Insurance Office Consumer Financial Protection Bureau Financial Stability Oversight Council Federal Insurance Office (Treasury) New Office of Minority and Women Inclusion Investor Advisory Committee Office of Investor Advocate (SEC) Office of Credit Ratings (SEC) Credit Rating Agency Board (SEC) Office of Financial Literacy Office of Financial Research (Treasury) Office of Housing Counseling (HUD) Office of Fair Lending and Equal Opportunity (Fed) Office of Financial Protection for Older Americans (Fed) This is MoFo. 6

7 Impact Relative to Bank Size $15 BN (Small Banks) No phase - out of trust preferred securities: effectively grandfathered permanently Primary federal regulator is OCC (National Banks/Thrifts) or FDIC (State Banks/Thrifts) No requirement for risk committees if size is less than $10BN $15-50BN (Medium Sized Banks) Primary federal regulator is OCC (National Banks/Thrifts) or FDIC (State Banks/Thrifts) Trust preferred securities will be phased-out 1 >$50BN (Large Banks) Systemically Importa nt Institutions (> BN) Costs of unwinding failing firms will be borne by large banks Required to submit resolution plans (living wills) Regulated by Federal Reserve (holding companies) and OCC Financial Stability Oversight Council can impose 15:1 debt-to-equity ratio Requires stress testing Subject to new Orderly Liquidation Authority provisions Systemically Important Financial Institutions to be defined Notes: 1 No phase-out of trust preferred securities for Bank Holding Company subsidiaries of foreign banking organizations. Instead, they will receive full credit for inclusion in Tier 1 Capital for a 5 year period, after which they will be excluded. This is MoFo. 7

8 Key Impacts for Banks The legislative changes will have a substantial impact on banking institutions Capital Requirements Higher capital requirements for systemically important banks (>$50bn) Council can impose a 15:1 debt-to-equity limit Higher capit al requirements for activities such as derivatives trading and securitization Mix of Capital Business Mix Returns G reater emphasis on common equity given desired focus on s impler, more transparent, loss absorbing capital E limination or phasing out of some non - common equi ty components of Tier 1 capital Creation of the Consumer Financial Protection Bureau and the associated administrative burden / costs likely to result in increased emphas is of commercial banking business going forward Transition away from higher risk activities such as prop rietary trading and derivatives trading Increased capital requirements, de - emphasis on risk - taking, and higher administrative costs ( Consu mer Financial Protection Bureau, elevated FDIC assessments, etc.) will dilute shareholder returns Impact on debit card interchange fee along with Reg E impact on overdraft fees will further impair profits Valuation Lower shareholder return s and growt h profile will result in banks trading at lower price/book multiple s M&A Will see increased divestitures of business es / investments that may ultimately receive unfavorable capital treatment Minority interests, financial firm investments, PE/he dge fund investments Large cap M&A less prominent given heightened scrutiny on systemically important institutions; more likely to see more regional/ bolt - on acquisitions Regulatory Oversight Increased oversight given creation of Financial Sta bility Oversight Council, Consumer Financial Protection Bureau, Office of Credit Ratings, Office of Housing Counseling, etc. Federal Reserve to have heightened regulatory power/authority Legislation does not, however, address FNMA and FHLMC This is MoFo. 8

9 Specific Provisions in Detail Provision / Area Details Federal Reserve Board ( Fed ) In addition to current authority, the Fed would oversee large, systemically-important nonbank institutions, be responsible for setting and enforcing stricter standards for disclosure, capital, and liquidity, and be authorized to break up large companies with Council approval Covered BHCs and nonbank financial companies designated as Covered Nonbank Companies 1 shall be subject to the Fed s heightened prudential standards The Senate agreed to the House provision authorizing the GAO to conduct a one-time audit of the Fed s 2008 emergency lending program and to provide ongoing audits of discount window and open market operations with a two-year lag The President will not have authority to appoint the president of the New York Federal Reserve Board Financial Stability Oversight Council ( Council ) Led by the Treasury Department, the ten-member Council shall include regulators from the Fed, Securities and Exchange Commission ( SEC ), Federal Housing Finance Agency, Commodity Futures Trading Commission and other agencies. State securities, insurance and banking regulators and credit unions lobbied for and won non-voting seats. The Council shall determine whether a nonbank financial company be subject to stricter prudential standards for financial stability standards depending on a number of factors. With a 2/3 vote, the Council can impose higher capital requirements on lenders or place broker-dealers and hedge funds under the authority of the Fed The Council shall have authority to force companies to divest holdings if their structure poses a grave threat to U.S. financial stability The Council would be able to overrule the Consumer Financial Protection Bureau Consumer Financial Protection Bureau ( Bureau ) The Bureau, which serves as a consumer watchdog, shall be located within the Fed as an autonomous entity with an independent budget led by a presidentially appointed director The Bureau shall write consumer-protection rules for firms that offer financial services or products and enforce those rules for banks and credit unions with more than $10 billion in assets. Bank regulators will continue to examine consumer practices at smaller financial institutions The Bureau is authorized to regulate credit cards and mortgages, but not auto dealers who make auto loans 1 Covered BHCs are BHCs with $50 billion or more in total consolidated assets. Covered Nonbank Companies are nonbank financial companies whose failure would pose a grave threat to U.S. financial stability This is MoFo. 9

10 Specific Provisions in Detail (cont d) Provision / Area Details Too Big to Fail: Orderly Resolution Process and Funding Thrift Charter The Act grants the FDIC, which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms whose collapse would threaten U.S. financial stability The House agreed to Senate language that grants the FDIC a line of credit with the Treasury Department to pay for the up-front costs of breaking up troubled firms, but the government would have to establish a repayment plan The House dropped its bid to create a $150 billion resolution fund. Instead, conferees agreed to follow the Senate measure where the costs of unwinding failing firms will be borne by financial firms with more than $50 billion in assets through fees imposed after a collapse. The Act explicitly bars the use of taxpayer funds to rescue failing financial companies The Office of Thrift Supervision shall be abolished with its authority relating to Federal savings associations, State savings associations, and savings and loan holding companies will be transferred to the Office of the Comptroller of the Currency, the FDIC, and the Fed, respectively The Thrift Charter has been preserved, thereby preventing insurance companies that own thrifts from being transformed into bank holding companies and subject to the Volcker Rule Capital Standards: Leverage The Council will impose a 15-to-1 maximum leverage ratio on firms that pose a grave threat to the national economy where imposition of such a leverage limit would mitigate risk Risk Retention Requirements for Securitized Debt Broker-Dealer s and Investment Advisor's Standard of Care Banks that package loans will be subject to a 5% risk retention requirement, thus affecting credit card debt, auto loans, mortgages, and other securitized debt Loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture, and the U.S. Department of Veterans Affairs will be exempt from this requirement Regulators will have flexibility to tailor risk-retention rules to specific products (e.g., setting underwriting standards as a form of risk retention) The SEC will conduct a six-month study and then issue rulemaking under its existing authority The SEC will implement rules within the parameters laid out in the House bill, which allows brokers to offer clients services associated with principal trading Pay It Back To fund the cost of the Act, (1) the TARP Program shall end one year early to raise $10 billion, and (2) the FDIC premium ratio shall be increased to 1.35 from 1.15 to raise $9 billion This is MoFo. 10

11 Systemic Regulation and Oversight This is MoFo. 11

12 The New Regulatory Environment How we arrived here Nature and tenor of historic bank regulation: prudentially-oriented but disaggregated Perceived failings of the existing regulatory structure: no effective means to see the whole picture The Dodd-Frank approach to bank and financial services supervision: reconfigure bank regulatory structure to Create a scheme of systemic regulation Create the tools to regulate connectivities in the financial markets Reduce moral hazard Increase the level and scope of regulation in key areas Impose activities limitations in perceived high-risk areas This is MoFo. 12

13 The New Regulatory Environment (cont d) What has and has not changed in financial services regulation? What has changed: SIFI regulatory scheme for BHCs Systemic ( connectivity ) regulatory authorities An expanded and enterprise-level resolution scheme for important financial services firms A regulatory scheme for risky activities across classes of financial institutions Consolidated and focused consumer regulatory regime A new class of nonbank financial institutions (nonbank SIFIs) that is subject to Federal, bank-focused financial supervision (FRB) This is MoFo. 13

14 The New Regulatory Environment cont d) What has and has not changed in financial services regulation? What has not changed: Historic prudential focus of financial supervision remains in place With one exception (OTS), the same regulatory agencies remain responsible for financial supervision Historic legal and supervisory tools of the financial regulatory agencies are all still in place Historic regulatory attitudes, and institutional differences among regulators; in fact, there may be a trend back to historic attitudes This is MoFo. 14

15 SIFIs SIFIs under U.S. law Bank holding companies and FBOs with $50 billion or more in consolidated assets Approximately 34 U.S. companies Approximately 99 FBOs Nonbank financial companies designated by the Financial Stability Oversight Council Material financial distress Nature, scope, size, scale, concentration, interconnectedness, or mix of activities Must be predominantly engaged in financial activities an issue for the Federal Reserve This is MoFo. 15

16 The New Regulatory Environment (cont d) The elements of the SIFI regulatory regime Enhanced supervisory and prudential standards (sections 115 and 165) Comprehensive early action, enforcement and resolution authority (sections 121, 165(d), 162, 166 and 172; Title II) More intrusive reporting requirements (section 116 and 161) Activities standards and limitations (sections 120, 163, 164 and 173) Nonbank SIFI organization and regulation (section 167) Regulation of systemically important payments clearance and settlement facilities (Title VIII) This is MoFo. 16

17 The New Regulatory Environment (cont d) The challenges of the SIFI regime The SIFI regulatory regime is nominally directed at an identified class of important financial services firms. It could, however, apply to a potentially large universe of organizationally and financially diverse financial services firms with very different business lines and risk postures. The SIFI regime must be tailored to take into account the different business operations, geographic locations, market/counterparty exposures and risk management systems of affected SIFIs. In addition, SIFI activities and risk profiles will be dynamic resulting in increases and decreases in SIFI risk profiles. In short, the SIFI regime is unlikely to be a one size fits all regime. This is MoFo. 17

18 The New Regulatory Environment (cont d) The implications of the SIFI regime for non-sifi institutions The more stringent prudential standards that may be developed for risky activities (Section 120) at the SIFI level may also trickle down to a broader range of banking organizations. Notwithstanding some of the new legal authorities given by Dodd-Frank, the basic framework of the financial regulatory system and its operation has not changed (other than to become more intense and more prescriptive). This is MoFo. 18

19 Enhanced Prudential Standards Statutory requirements Enhanced prudential standards include: Risk-based capital and leverage; Liquidity; Risk management; Resolution plans and credit exposure reports; Concentration limits; Short-term debt limits; and Stress testing. Requirements for stress testing and for risk committees apply to bank holding companies with $10 billion or more in consolidated assets. This is MoFo. 19

20 Resolution and Liquidation Resolution planning U.S. requirements rapid and orderly liquidation under bankruptcy code Orderly Liquidation Authority Criteria FDIC appointed as receiver $50 billion line of credit OLA institutions not synonymous with SIFIs Non-SIFI could, at the time, present material risk SIFI could be resolved in bankruptcy Confidential/Subject to Attorney Client Privilege 20

21 Orderly Liquidation Authority Confidential/Subject to Attorney Client Privilege 21

22 Orderly Liquidation Authority (cont d) The utility of the OLA approach will depend in large measure on international coordination The US and UK have been working together on a common approach Also, bank holding companies would have to have sufficient assets at the BHC level Banking agencies have been discussing a new senior debt requirement at the BHC level Confidential/Subject to Attorney Client Privilege 22

23 Activities This is MoFo. 23

24 Derivatives This is MoFo. 24

25 Title VII Overview Objectives of Title VII Reduce systemic risk posed by the swaps market to the U.S. financial system Increase transparency of the swaps market, particularly as to both pre and post execution pricing Enhance the integrity of the swaps market and improve the conduct of major market participants Confidential/Subject to Attorney Client Privilege 25

26 Title VII Overview (cont d) Regulates products Swaps Security-based swaps (SBSs) Regulates entities Swap dealers Security-based swap dealers Major swap participants (MSPs) Major security-based swap participants Derivatives Clearing Organizations (DCOs) Swap Execution Facilities (SEFs) Swap Data Repositories (SDRs) Splits regulation between CFTC and SEC CFTC regulates swaps, swap dealers and major swap participants SEC regulates security-based swaps, security-based swap dealers and major security-based swap participants Confidential/Subject to Attorney Client Privilege 26

27 Volcker Rule This is MoFo. 27

28 Volcker Rule Two broad prohibitions: No proprietary trading. No ownership interest in or sponsorship of a private equity fund or a hedge fund. Note that entities with a bank functioning solely in a trust or fiduciary capacity are exempt from these prohibitions. Confidential/Subject to Attorney Client Privilege 28

29 Volcker Rule (cont d) Proprietary trading means: Engaging as principal For the trading account Of the covered banking entity In the purchase or sale of one or more covered financial positions. A covered financial position includes a swap. A covered banking entity includes an insured depository institution and any affiliates or holding companies. A trading account is an account in which positions are held in order to realize gains from short-term price appreciation. Generally, positions held for 60 days or less are deemed to be traded positions and are subject to Volcker restrictions. Positions held for more than 60 days generally are exempt This is MoFo. 29

30 Volcker Rule (cont d) Several exemptions Proprietary trading Market making Risk-mitigating hedging Underwriting Trading outside the U.S. Trading in the U.S., state, and local government debt. No exemption for non-u.s. sovereign debt. Hedge funds and private equity funds Customer funds, but firm s investment limited to 3% of fund s capital one year after fund is established. Fund activity outside the U.S. This is MoFo. 30

31 Compliance and reporting Structure of Required Compliance Program The proposed rules would create compliance and reporting requirements to assure that (i) covered banking entities comply with the substantive requirements of the Volcker Rule and implementing regulations, and (ii) the financial regulatory agencies can monitor and supervise such compliance These requirements broadly include: A compliance program that is reasonably designed to assure and monitor compliance with proprietary trading and covered fund activities and investments Reporting and recordkeeping requirements for covered trading and covered fund activities This is MoFo. 31

32 Compliance and reporting (cont d) Structure of Required Compliance Program Certain banking entities that are actively and substantially engaged in trading activities would be subject to more stringent and detailed compliance and reporting requirements that are imposed on a tiered basis, depending on the quantitative level of these activities All of these requirements, by all accounts, will be costly and burdensome for many banking entities to implement This is MoFo. 32

33 Compliance and reporting (cont d) Compliance Program Required Minimum Elements for all Banking Entities (Section 20) Internal written policies and procedures System of internal controls Management framework that clearly delineates responsibility and accountability for Volcker Rule compliance Independent testing of compliance program effectiveness Training for trading personnel/managers and other appropriate personnel Making/keeping records sufficient to demonstrate compliance, which must be provided to a banking entity s regulatory agency on request and maintain for a period of not less than 5 years This is MoFo. 33

34 Compliance and reporting (cont d) Compliance Program Enhanced Requirements for Certain Banking Entities (Section 20 and Appendix C) Affected banking entities ( Appendix C banking entities ) are: Those that engage in proprietary trading and have total worldwide trading assets and liabilities of either (i) equal or greater than $1 billion, or (ii) 10% or more of total assets, measured on a average gross sum basis as determined on the last day of each of the four prior calendar quarters. Those that invest in or have relationships with covered funds where (i) aggregate investments in covered funds, or (ii) average total assets of covered funds sponsored or advised by the banking entity, are equal or greater than $1 billion, measured as of the last day of each of the four prior calendar quarters This is MoFo. 34

35 Compliance and reporting (cont d) Enhanced Requirements for Appendix C Banking Entities Significantly more detailed requirements for covered trading activities, covered fund activities or investments Program requirements Internal policies and procedures Internal controls Accountability requirements Independent testing Training Recordkeeping These requirements are similar but not identical for proprietary trading and covered fund activities (and therefore are discussed separately below) This is MoFo. 35

36 Compliance and reporting (cont d) Compliance Program Conditional Exclusion Conditional exclusion for banking entities to the extent not engaged in activities or investments prohibited or restricted by the proprietary trading or covered fund rules Existing compliance policies and procedures must be designed to prevent the banking entity from engaging in covered activities, and require a banking entity to develop the required compliance program before engaging in covered activities Some questions regarding the practical impact and utility of this conditional exclusion Trading in exempted instruments Investment portfolio purchases Impact of high risk activities/systemic risk requirements This is MoFo. 36

37 Volcker Rule Regulatory developments Proposed rule published by banking agencies and SEC on Nov. 7, CFTC published substantively identical rule on Feb. 14, Comments on proposed rule Approximately 18,000 comments filed. Unprecedented number of comments from foreign regulators. All issues covered, but particular focus on market making exemption. Agencies currently reviewing comments to determine what questions must be answered in order to produce a final rule or to re-propose a rule. Official action seems unlikely until the fall of this year at the earliest. Effective date of statute remains July 21, Board has stated that conformance deadline is July 21, 2014, but possible that recordkeeping and reporting requirements will take effect earlier. This is MoFo. 37

38 Volcker and Lincoln The implementation of the Volcker Rule and the Lincoln Amendment, including any revisions to these provisions, are likely to have a significant impact on the development and structure of the derivatives market, both in the U.S. and globally The state of play on the Volcker Rule has been very hard to assess The agencies are still trying to develop the final rule, which they hope to have out later this year, maybe even later this spring or this summer. The expectation is that what is developed will be materially different from what was proposed, but there is no good insight as to the nature of these differences Seems clear that the agencies are having a hard time coming to consensus on what the final rule should look like and are being deliberately very close-mouthed at the stage This is MoFo. 38

39 Volcker and Lincoln (cont d) Regarding the Lincoln Amendment In January 2013, the OCC published guidance notifying federally-chartered insured depository institutions that the OCC was prepared to grant applications to delay compliance with Section 716 (the Swaps Pushout Rule ) for up to two years. The Swaps Pushout Rule will become effective on July 16, According to media reports, several banks were granted the additional two years. There are legislative proposals that also would address the Swaps Pushout Rule. The original drafting error (as acknowledged by Senators Dodd and Lincoln) regarding the treatment of U.S. branches of foreign banks was only recently resolved This is MoFo. 39

40 Securitization Confidential/Subject to Attorney Client Privilege 40

41 Dodd-Frank Securitization Perspective In the mind of Congress in mid-2010, securitization was a major contributing factor, if not cause, of financial crisis and thus one of the principal reasons for the enactment of D-F Relatively few D-F provisions specifically target securitization, but securitization-related concerns permeate the entirety of D-F Also, many securitization issues were already being addressed by regulators and accounting profession before Congress caught up by enacting D-F This section of the presentation will address the status of: D-F provisions specifically addressing securitization ( core D-F securitization provisions) Generally applicable D-F provisions that significantly impact securitization ( noncore D-F securization provisions) Significant non-d-f legal, regulatory and accounting developments affecting securitization This is MoFo. 41

42 Securitization Core D-F Securitization Provisions Section 941: Risk Retention and Definition of Qualified Residential Mortgage (QRM) Section 942: Exchange Act 15(d) Reporting Disclosure Section 943: Representations, Warranties and Repurchase Provisions Section 945: Issuer Due Diligence Section 621: Conflicts of Interest This is MoFo. 42

43 Securitization (cont d) Non-Core D-F Provisions Title II: Orderly Liquidation Authority (OLA) Provisions Section 619: Volcker Rule Title VII: Derivatives Section 939A: References to Credit Rating Agencies (CRAs) Market Risk Capital Rule ICA Rule 3a-7 Related Issue: ICA 3(c)(5)(C) Section 939F: Franken Amendment Section 939G: References to CRAs in Prospectuses Sections 1411 and 1412: Ability to Repay; Qualified Mortgage (QM) Definition This is MoFo. 43

44 Non-Dodd-Frank Reforms Accounting FAS 167/167 FDIC Sale Rule Regulation AB II Bank Capital Rules Rule 17g-5 CRD Article 122a This is MoFo. 44

45 Core Dodd-Frank Reforms Risk Retention D-F 941 Joint regulatory proposal 5% of credit risk must be retained Applies to both public and private ABS transactions Permissible forms: horizontal, vertical, L-shaped Cash premium over par value must be placed in a premium capture cash reserve account (PCCRA) No hedging or transfer of risk Exception for qualified residential mortgage (QRM) hotly debated Comment period ended 8/1/11; still no final rule This is MoFo. 45

46 Establishment of CFPB Consumer Financial Protection Bureau was established under the Dodd- Frank Act and began operation on July 21, 2011 The jurisdiction of the bureau includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies, and its most pressing concerns are mortgages, credit cards and student loans. Consolidates responsibilities from various federal regulatory bodies, including the Federal Reserve, the Federal Trade Commission, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Department of Housing and Urban Development. It writes and enforces bank rules, conducts bank examinations, monitors and reports on markets, as well as collects and tracks consumer complaints. 46

47 Consumer and Mortgage Lending Reform In January 2013, the Consumer Financial Protection Bureau issued the Ability-to-Repay and Qualified Mortgage rule Amends Reg Z to require lenders to account for a borrower s ability to repay Reg Z applies to all persons extending consumer credit to U.S. residents Final rule takes effect in January 2014 Ability-to-Repay Requirement For residential mortgages, creditors must make a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms 47

48 Consumer and Mortgage Lending Reform (cont d) Eight enumerated underwriting factors for creditors to consider, including: Borrower s income or assets (excludes assets securing the loan) Borrower s employment status Borrower s expected monthly payment for the loan Borrower s debt obligations Borrower s credit history 48

49 Consumer and Mortgage Lending Reform (cont d) Qualified Mortgage ( QM ) definition Residential mortgage loan that meets the following criteria: No excess upfront points and fees No negative amortization Term not exceeding 30 years Consumer cannot defer repayment of principal No balloon payment (with a very narrow exception) Income and financial resources must be verified and documented Limits on debt-to-income ratios QMs provide compliance safe harbor or rebuttable presumption that ability-to-repay requirements satisfied 49

50 Consumer and Mortgage Lending Reform (cont d) Consequences of the Ability-to-Repay and QM rule Complexity may create compliance challenges and litigation risks Restrictions may tighten access to credit Non-U.S. issuers not subject to these requirements may have an advantage over other market participants 50

51 Consumer and Mortgage Lending Reform (cont d) In January 2013, the Consumer Financial Protection Bureau issued new mortgage servicing standards focused on helping troubled borrowers Final rules take effect in January 2014 and apply to all U.S. servicers Among other items, the new standards: Forbid servicers from dual-tracking (i.e. evaluating a consumer for loan modifications at same time as preparing to foreclose) Require servicers to provide delinquent borrowers with direct and continuous access to servicing personnel Prevent servicers from making a first foreclosure notice or filing until a mortgage is at least 120 days delinquent Require servicers to provide written notice of loss mitigation options to borrowers Servicers that service less than 5,000 loans that they or an affiliate either own or originated are exempted 51

52 Credit Ratings Confidential/Subject to Attorney Client Privilege 52

53 Credit Ratings After Dodd-Frank Repeal of Rule 436(g) Removal of exemption from Regulation FD Removal of credit ratings from rules SEC oversight of credit rating agencies Liability reforms Required disclosures Prohibited activities Governance Conflicts of interest This is MoFo. 53

54 Repeal of Rule 436(g) Prior to repeal, Rule 436(g) exempted NRSROs from the requirement to provide a consent if ratings were included in a Securities Act registration statement or prospectus Following the repeal, the SEC Staff provided interpretive guidance on situations where consents of credit rating agencies would not be required, such as when: Ratings are included in FWPs that comply with Securities Act Rule 433 and in term sheets or press releases that comply with Securities Act Rule 134 Disclosure-related rating information is included in periodic reports (for example, disclosure relating to a change in a credit rating, liquidity of the issuer, or the terms of agreements that refer to credit ratings) Information is included or incorporated by reference in a registration statement on Form S-3 or F-3 that was declared effective prior to July 22, 2010 Separate relief was provided for issuers of asset-backed securities This is MoFo. 54

55 Removal from Regulation FD On September 29, 2010, the SEC adopted final rules amending Regulation FD to eliminate an exemption for credit rating agencies The amendments to Regulation FD were made pursuant to Section 939B, and became effective on October 4, 2010 As a practical matter, there was little impact on communications between issuers and credit rating agencies, because most credit rating agencies are already outside of the scope of Regulation FD because they are no longer considered advisers This is MoFo. 55

56 Markets Confidential/Subject to Attorney Client Privilege 56

57 Payment, Clearing & Settlement Title VIII Dodd-Frank Act Council can designate important payment, clearing and settlement activities ( designated activities ) carried out by financial institutions and financial market utilities ( FMUs ) engaged in such activities as being, or likely to become, systematically important ( 804 Dodd-Frank Act). Designation must be made by a 2/3 vote including an affirmative vote of the Treasury Secretary. Rescission of designation also requires a 2/3 vote by Council, including an affirmative vote of the Treasury Secretary. Systemically important means a situation where the failure of or a disruption to the functioning of a FMU or the conduct of a designated activity could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets, thereby threatening the stability of the U.S. financial system. This is MoFo. 57

58 Designated Activities Payment, clearing, or settlement activity means an activity carried out by one or more financial institutions to facilitate the completion of financial transactions. Does not include any offer or sale of a security under the Securities Act of 1933, or any quotation, order entry, negotiation, or other pre-trade activity or execution activity. Financial transactions are ( 803 Dodd-Frank Act): Funds transfers; Securities contracts; Contracts of sale of a commodity for future delivery; Forward contracts; Repurchase agreements; Swaps; Security-based swaps; Swap agreements; Security-based swap agreements; Foreign exchange contracts; and Any similar transaction that the Council determines to be a financial transaction. This is MoFo. 58

59 Systemically Important In determining whether a FMU or a designated activity is, or is likely to become, systemically important the Council has to consider the following factors: The aggregate monetary value of transactions processed by the FMU or carried out through the designated activity; The aggregate exposure of the FMU or a financial institution engaged in a designated activity to counterparties; The relationship, interdependencies, or other interactions of the FMU or the designated activity with other FMUs or designated activities; The effect that the failure of or a disruption to the FMU or the designated activity would have on critical markets, financial institutions, or the broader financial system; and Any other factors that the Council deems appropriate. This is MoFo. 59

60 Conclusion Confidential/Subject to Attorney Client Privilege 60

61 Systemic risk Despite the systemic risk approach that is incorporated into the Dodd- Frank Act, policymakers and critics have voiced a number of concerns: In the absence of international coordination, will U.S. efforts be effective? Will certain businesses move offshore? Will the possibility for regulatory arbitrage remain? Will regulators actually have the capability to review the massive amounts of data required to be shared with them? Will they be able to use the data to identify emerging threats? Are we creating new too-big-to-fail institutions, like CCPs? Will we diminish the utility of derivatives for risk mitigation? Will banks be able to generate shareholder returns? Without addressing the GSEs, have we addressed the housing finance system in the U.S.? Will more business operations move to non-banks, resulting in more powerful, potentially riskier non-bank entities? This is MoFo. 61