Many Provisions of the Dodd-Frank Act Become Effective on July 21, 2011 the One-Year Anniversary of Its Enactment

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1 Many Provisions of the Dodd-Frank Act Become Effective on July 21, 2011 the One-Year Anniversary of Its Enactment SUMMARY The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or the Act ) was signed into law by President Obama on July 21, Many of its provisions became effective the next day (July 22, 2010), but many other provisions will become effective July 21, 2011 the one-year anniversary of its enactment. This memorandum outlines the statutory provisions of the Act that become effective on, or require that an action be taken by a regulatory agency by, July 21, 2011 (or, with respect to Title VII, July 16, ) and the status of associated rulemakings, if any. Several of the provisions that become effective July 21, 2011 do so by amendment to other existing statutes. In most cases, the Dodd-Frank Act does not explicitly require implementing regulations with respect to these provisions. Even where regulations are not expressly required, many of these automatically effective provisions create difficult interpretive issues for which regulatory guidance would be helpful or even essential. In some of these cases, therefore, the appropriate federal regulatory agencies either have proposed regulations implementing such provisions or otherwise announced that new regulations in connection therewith are on the agency s rulemaking agenda. For a number of other provisions that become effective July 21, 2011, the Dodd-Frank Act explicitly requires certain federal regulatory agencies to promulgate implementing regulations by July 21, The sheer magnitude of the regulatory rulemaking under the Act and the difficulty of the implementation and interpretive issues arising thereunder, as well as other demands, have made it impossible for the regulators to finalize all such rules by July 21, In any event, the Dodd-Frank Act provisions described in this memorandum will be in force on that date, irrespective of whether implementing regulations have been proposed, finalized or will be forthcoming in the future. Accordingly, there may be a period of uncertainty as institutions must abide by these newly effective statutory requirements even in New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 the absence of regulations to help clarify the various interpretive issues that inevitably will arise given the breadth and scope of the Act. Some of these required regulations have been proposed, but final rules have not yet been adopted. This is the case, for example, with rules under Section 932 of the Act, proposed by the Securities and Exchange Commission ( ) in June 2011 but not yet finalized. 2 A table summarizing the status of those rules required by the Dodd-Frank Act to be completed by July 21, 2011 that are not yet complete is attached as Annex A hereto. also requires various federal regulatory agencies to conduct studies, many of which are required to be completed by July 21, It appears that a number of these studies will not be completed by this deadline. The table below lists such Dodd-Frank Act provisions and the corresponding page number of this memorandum where you can find further information related thereto. AUTOMATICALLY EFFECTIVE PROVISIONS TOPIC TION PAGE Removal of Restrictions on FRB Authority over BHCs Section Removal of Restrictions on FRB Authority over SLHCs Section Source of Strength Section Required Examination of Nondepository Institution Subsidiaries Section Capital Rules for BHCs and SLHCs Section Well-Capitalized and Well-Managed Requirements Section Acquisition of Bank Shares by BHCs Section New Required Application for Large Acquisitions Section Consideration of Systemic Financial Stability in Applications Sections 604(d),(f) 7 Transfer of OTS Functions and Supervisory Authority Section Required Agency Actions Section Identification of OTS Regulations to Be Enforced Section Collection of Supervision Fees Section Elimination of Federal Prohibitions of Interest on Demand Deposits Section Additional Restrictions on Transactions with Affiliates and Insiders Section Revised Regulatory Framework for Securities Holding Companies Sections 617, HOLA Amendments Regarding Dividends by Mutual Holding Companies Section Realignment of the Board of Directors of the FDIC Section Investment Adviser Reforms Title IV 13 Bureau of Consumer Financial Protection Title X 14-2-

3 TOPIC TION PAGE Transfer of Authority to the CFPB Section Consumer Transactions Section 1100E 16 Consumer Reports Section 1100F 16 Small Business Impact Section 1100G 16 Reasonable Fees and Rules for Payment Card Transactions Section Nonadmitted and Reinsurance Reform Act of 2010 Title V 17 Derivative Reforms Title VII 18 For up-to-date information on agency actions and additional summaries and memoranda, please visit Sullivan & Cromwell LLP s Dodd-Frank Developments database (available at I. BANKING REFORMS EFFECTIVE JULY 21, 2011 A. ENHANCED FEDERAL RESERVE EXAMINATION AND SUPERVISORY AUTHORITY 1. Removal of Restrictions on Federal Reserve Reporting, Examination and Enforcement Authority Section 604 of the Dodd-Frank Act removes from the Bank Holding Company Act (the BHC Act ) many of the restrictions imposed under the Gramm-Leach-Bliley Act 3 on the authority of the Board of Governors of the Federal Reserve System (the FRB ) to require reports from, examine, adopt prudential rules for, impose restraints on or take enforcement and other actions against functionally regulated subsidiaries of bank holding companies ( BHCs ) (for instance, broker-dealers, registered investment advisers, investment companies and state-regulated insurance subsidiaries). Section 604 becomes effective July 21, 2011, 4 but the FRB has not adopted, or proposed, implementing regulations. Because these subsidiaries remain functionally regulated, we do not believe they need to adopt new procedures or policies at this time. In connection with the Act s elimination of the Office of Thrift Supervision ( OTS ), Section 606 also amends the Home Owners Loan Act ( HOLA ), effective July 21, 2011, to provide the FRB with the same extensive supervisory authority over savings and loan holding companies ( SLHCs ) and their subsidiaries, including functionally regulated subsidiaries Source of Strength Section 616 of the Act amends the Federal Deposit Insurance Act (the FDI Act ) to codify the FRB s source-of-strength doctrine for the bank subsidiaries of BHCs and to expand it to cover SLHCs and any other company (including a BHC) that controls an insured depository institution, with respect to their insured depository institution subsidiaries. This represents an expansion not only of the scope of entities -3-

4 obligated to act as a source of strength (that is, SLHCs and other companies that control insured depository institutions as well as BHCs) but also an expansion of the entities covered (that is, not just banks controlled by another company but any insured depository institution subsidiary, including industrial loan companies as well as savings associations). 6 The term source of financial strength is defined for purposes of Section 616 as the ability of a company to provide financial assistance to its insured depository institution subsidiaries in the event of financial distress at such subsidiaries. The appropriate federal banking agency for such a depository institution may require reports from the company that controls the insured depository institution to assess its ability to serve as a source of strength and to enforce compliance with the source-of-strength requirement. Section 616 s statutory requirements become effective July 21, Although Section 616 requires the appropriate federal banking agencies to jointly issue final rules to carry out this section by July 21, 2012, no final regulations have been adopted. FDIC. The Federal Deposit Insurance Corporation (the FDIC ) lists among its planned objectives, between August and December 2011, an initiative to issue a joint notice of proposed rulemaking and request for public comment ( NPR ) (with other federal banking agencies) requiring a BHC, SLHC, and any other company that controls an insured depository institution to serve as a source of financial strength for such depository institution. 7 FRB. On June 17, 2011, the FRB issued an NPR that would amend its Regulation Y to require a large U.S. BHC to submit capital plans on an annual basis and to provide prior notice under certain circumstances before making a capital distribution. 8 Under this NPR, each capital plan submitted by a large BHC would be required to contain a discussion of how the BHC would, under stressful conditions, serve as a source of strength for its depository institution subsidiaries. In addition, the FRB has stated, in the FRB Notice of Intent to Apply Certain Supervisory Guidance to SLHCs (the FRB Notice of Intent ), that one of the objectives in establishing the supervisory program to be applied to SLHCs is ensuring that each SLHC can serve as a source of strength for its subsidiary depository institutions. 9 OCC. There have been no issuances to date from the Office of the Comptroller of the Currency (the OCC ) regarding source-of-strength issues. Prior to the adoption of implementing regulations by the federal banking agencies, we believe that no special actions need to be taken by companies required to serve as a source of strength, except that no capital distribution should be made without advising the FRB as recommended in its June 17 th NPR. We anticipate that the federal banking agencies will continue to apply the source-of-strength requirement in the same manner as the FRB did prior to the Dodd-Frank Act. -4-

5 3. Required Examination of Nondepository Institution Subsidiaries Section 605 of the Dodd-Frank Act amends the FDI Act to require the FRB to conduct examinations of the activities of nondepository institution subsidiaries of BHCs and SLHCs (other than functionally regulated subsidiaries or subsidiaries of a depository institution) that are permissible for the depository institution subsidiaries of the holding company (such as mortgage banking or consumer finance activities). In conducting these examinations, the FRB must consult and coordinate with any state regulator of the subsidiary. This amendment becomes effective July 21, The Act does not require the FRB to issue implementing regulations. Nonetheless, in the FRB Notice of Intent, the FRB states that its supervisory program for SLHCs may entail heightened review of the activities of nonbank subsidiaries of SLHCs. Section 605 also grants back-up examination and enforcement authority to the OCC and other appropriate federal banking agencies if the FRB does not conduct the examination in the manner required by the provision. In addition, Section 605 provides specific authority for the OCC, FDIC and FRB to assess fees on nondepository institution subsidiaries for the costs of examination. The OCC issued an NPR on May 26, 2011 that, among other things, proposes an assessment methodology for federal savings associations under Section 318 of the Act (as discussed in further detail below). The OCC indicates, without further discussion, that the proposals in such NPR, when adopted, also will implement Section Capital Rules for BHCs and SLHCs BHCs. Section 616 of the Dodd-Frank Act amends the BHC Act, effective July 21, 2011, to provide specific authorization for the FRB to issue orders and regulations relating to the capital requirements of BHCs. In establishing these rules, the FRB must seek to make the requirements countercyclical, so that the amount of capital a company is required to maintain increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the company. 11 SLHCs. Section 616 provides the FRB with the same authority for capital requirements with respect to SLHCs under HOLA, including seeking to make capital requirements countercyclical. This provision becomes effective July 21, In the FRB Notice of Intent, the FRB notes that a material difference between the OTS and FRB supervisory programs for holding companies is the assessment of capital adequacy with respect to SLHCs. SLHCs were not previously subject to explicit regulatory capital requirements. The FRB has informally indicated that it may take some time to promulgate capital requirements for SLHCs, particularly for SLHCs that have significant nonfinancial assets (and are grandfathered under Section 10(c)(9)(C) of HOLA). The FRB has further indicated that it may need to develop individual capital requirements for SLHCs. It should be noted that the FRB currently is considering a variety of capital-related matters. For example, the FRB is working on an NPR that would implement the internationally agreed Basel III standards for -5-

6 U.S. financial institutions, which we understand that the FRB currently is aiming to release by the end of the summer. The NPR is expected to address a variety of heretofore open issues, including whether the full panoply of Basel III provisions will be applied to all U.S. banks or whether certain provisions will be applied to a particular institution depending on its size or other factors Heightened Standards and Requirements for Expansion Approval a. Well-Capitalized and Well-Managed Requirements BHCs. Section 606 of the Act amends the BHC Act, effective July 21, 2011, to require that a BHC that is a financial holding company ( FHC ), and therefore permitted to engage in the expanded financial activities authorized by the Gramm-Leach-Bliley Act, be and remain well-capitalized and wellmanaged. Currently, these requirements do not apply to the FHC itself but only to the FHC s depository institution subsidiaries. Thus, BHCs that have elected to be treated as FHCs will need to meet these new standards beginning on July 21, 2011 for this election to continue to be effective. Although the Act does not require the FRB to issue implementing regulations, the FRB lists an NPR implementing this requirement as one of its initiatives planned for the period from October to December We expect that the FRB will amend Regulation Y in order to conform to Section 606. We assume that the standards for BHCs will be basically the same as those currently applied to their depository subsidiaries. SLHCs. Section 606 also amends HOLA, effective July 21, 2011, to require an SLHC engaging or seeking to engage in the expanded financial activities permissible under Section 4(k) of the BHC Act to meet the same well-capitalized/well-managed and other standards required for an FHC to conduct these activities, including maintaining at each of its subsidiary depository institutions a satisfactory rating under the Community Reinvestment Act of 1977 with respect to its record of meeting community credit needs. The SLHC also must conduct the applicable activity in accordance with the same terms, conditions and requirements that apply to the conduct of such activity by an FHC under the BHC Act and FRB regulations and interpretations. In addition, an SLHC seeking to acquire control of a company (other than an insured depository institution) with consolidated assets exceeding $10 billion on or after July 21, 2011 would need to obtain the prior approval of the FRB as discussed below. Although this amendment is selfeffectuating, the FRB lists an NPR to implement this change as one of its initiatives planned for the period from July to September b. Acquisition of Bank Shares by BHCs Effective July 21, 2011, Section 607 of the Dodd-Frank Act amends the BHC Act to require that a BHC seeking approval to acquire shares of a bank located outside the BHC s home state be well-capitalized and well-managed. Similarly, the Bank Merger Act is amended to require that the surviving bank in an interstate merger transaction be well-capitalized and well-managed. As a practical matter, the FRB currently applies those tests. -6-

7 c. New Required Application for Large Acquisitions Section 604 of the Dodd-Frank Act amends Section 4(k) of the BHC Act to add a new application requirement before an FHC may acquire a nonbank company with $10 billion or more in total consolidated assets. This requirement becomes effective July 21, Nonetheless, we understand that the FRB has been requesting such applications since the Act s enactment. Although this amendment is self-effectuating, the FRB lists an NPR to implement this requirement as one of its initiatives planned for the period from October to December d. Consideration of Systemic Financial Stability in Applications Section 604(d) and Section 604(f) of the Act require the appropriate federal banking agency to consider the risk to the stability of the U.S. banking or financial system in any application under the BHC Act to acquire shares of a bank or under the Bank Merger Act to merge with or acquire the assets of a bank. This requirement also applies to any notice or application to engage in, or acquire shares of a nondepository institution engaged in, a financial activity under Section 4 of the BHC Act. These statutory amendments become effective July 21, Although this amendment is self-effectuating, the FRB lists an NPR to implement these changes as one of its initiatives planned for the period from October to December The other federal banking agencies have not given any indication of their rulemaking plans with respect to these provisions. 6. Transfer of OTS Functions and Supervisory Authority Title III of the Dodd-Frank Act abolishes the OTS, reassigning its responsibility for the supervision of savings associations and SLHCs to the other federal banking agencies as described below. 14 This change also transfers to the new appropriate federal banking agency the prompt corrective action powers over insured depository institutions and the cease-and-desist, removal, civil money penalty and other enforcement authorities provided under the FDI Act for insured depository institutions, BHCs, SLHCs, nondepository institution subsidiaries of BHCs or SLHCs, and their institution-affiliated parties. Section 311 of the Act requires this transfer of the OTS s supervisory responsibility to be completed on the transfer date, which is defined as July 21, Although Section 311 authorizes the Secretary of the Treasury to extend this date for up to six months upon certain findings, the Secretary has determined not to delay the transfer. Therefore, the shift of functions and supervisory authority set out below will occur on July 21, Section 313 provides that the OTS will be abolished within 90 days of the date of transfer of authority. The Act establishes two requirements in order to facilitate the transition process: (i) the FDIC, OCC, and FRB must publish in the Federal Register a list of those OTS regulations that they will start enforcing on July 21, 2011 and (ii) these agencies and the OTS must issue a joint implementation plan on or before six months after the enactment of the Dodd-Frank Act. The federal banking agencies issued a plan -7-

8 governing the transfer of OTS responsibilities, personnel and property to the Congressional Banking Committees in April 2011, and the FRB and FDIC, but not the OCC, have proposed rules implementing the transition. In addition, the OCC and the FDIC jointly published in the Federal Register, on July 6, 2011, a list of the OTS regulations that they will continue to enforce on July 21, It is unclear, however, at this time how much (if any) of the implementing rulemaking will be finalized by that date. Therefore, certain details regarding the transfer of supervisory authority from the OTS may very well be unknown at that time. a. Transfer of OTS Functions Under Section 312, the functions and authority of the OTS with respect to savings associations and SLHCs are to be transferred as follows: the supervision of federal savings associations is transferred to the OCC; the supervision of state savings associations is transferred to the FDIC; the supervision of SLHCs is transferred to the FRB; the rulemaking authority of the OTS for savings associations is transferred to the OCC; the rulemaking and other authorities of the OTS for SLHCs are transferred to the FRB; the rulemaking authority of the OTS under HOLA with respect to transactions with affiliates and insiders and anti-tying prohibitions is transferred to the FRB; and a deputy comptroller within the OCC is to be designated to supervise and examine federal savings associations. b. Required Agency Actions In January 2011 (revised in April), the OCC, FDIC, FRB and OTS submitted a joint OTS transition implementation plan pursuant to Section 327 of the Dodd-Frank Act to the Congressional Banking Committees. 15 The plan provides an overview of actions taken and proposed by the agencies to implement Section 301 through Section 326 of the Act and covers matters such as: transfer of personnel; transfer of authority and responsibilities regarding oversight of federal savings associations, state savings associations and SLHCs; transfer of OTS examination staff; continuation of thrift industry reporting requirements; continuation of suits, existing orders, resolutions, determinations, agreements and regulations; transfer of funds, property, records, contracts and other assets; and disposition of OTS affairs. In continuation of this joint transition plan, the federal banking agencies have issued NPRs or other releases to implement certain provisions under Title III as discussed below. -8-

9 i. OCC On May 26, 2011, the OCC published an NPR governing the transfer to the OCC of all functions of the OTS and the OTS Director and setting out the OCC s assumption of responsibility for the examination, supervision and regulation of federal savings associations, including enforcement authority for all OTS orders and resolutions in effect the day before July 21, The NPR also addresses the transfer to the OCC of OTS rulemaking authority relating to all savings associations, both state and federal, as well as enforcement authority for all OTS orders and resolutions in effect the day before July 21, ii. FRB The FRB Notice of Intent discusses how the FRB plans to supervise SLHCs, starting on the July 21, 2011 transfer date. The FRB states its objective of assessing the condition, performance and activities of SLHCs on a consolidated risk-based basis in a manner that is consistent with the FRB s established approach for BHCs, taking into account any unique characteristics of SLHCs and the requirements of HOLA. The FRB then identifies three elements of its current BHC supervisory program that it believes are particularly critical to evaluate effectively the consolidated condition of holding companies and describes how it intends to apply each to SLHCs: the FRB s consolidated supervision program for large and regional holding companies; the FRB s supervisory program for small, noncomplex holding companies; and the FRB s holding company rating system. The FRB expects that its program will entail more rigorous review than under the OTS, including with regard to nondepository institution subsidiaries, and that, as mentioned above, it intends to introduce formal regulatory capital requirements for SLHCs, which have not previously applied to such financial institutions. 17 The FRB invited public comments on its Notice of Intent on or before May 23, 2011 and noted that it plans to issue formal guidance or NPRs after July 21, c. Identification of OTS Regulations to Be Enforced Section 316(b) of the Act provides for continuation and enforcement of OTS regulations transferred by Title III of the Act and requires the federal banking agencies to issue a joint notice, by July 21, 2011, of the OTS regulations that they will continue to enforce. On July 6, 2011, the OCC and FDIC issued a joint notice, as required under Section 316 of the Act, in which they identify those OTS regulations that are continued under Section 316 that the OCC, with respect to federal savings associations, and the FDIC, with respect to state savings associations, will enforce. 18 The FRB has indicated that it expects to publish a list of all OTS regulations that it will continue to enforce for SLHCs in the period from July to September In addition to the OCC and FDIC joint rule, the OCC has indicated that it plans to issue separately an interim final rule, effective July 21, 2011, with a request for public comment which republishes those OTS -9-

10 regulations that the OCC will enforce as of the transfer date. Similarly, on June 21, 2011, the FDIC s Board of Directors issued an interim final rule, effective July 21, 2011, with a request for public comment to revise a number of existing FDIC administrative and procedural final rules to reflect the FDIC s supervision of state savings associations. 19 The FDIC plans to issue a second interim final rule, also effective July 21, 2011, which will republish certain OTS rules for which the FDIC has rulemaking authority. 7. Collection of Supervision Fees Under Section 318 of the Dodd-Frank Act, the federal banking agencies are authorized, and, in the case of the FRB, required, to collect assessments from the financial institutions they supervise. These provisions take effect on July 21, Although the Act does not direct rulemaking by the federal banking agencies, the OCC and FRB have nonetheless taken steps to finalize implementing regulations as discussed below. OCC. Section 318 of the Dodd-Frank Act amends the Federal Reserve Act (the FRA ) to authorize the OCC to collect an assessment fee or other charge from any entity for which it is the appropriate federal banking agency to carry out its supervisory responsibilities. On May 26, 2011, the OCC published an NPR in which it proposes a phased-in approach to assessing federal savings associations, providing for two cycles before these financial institutions are assessed under this new rule. 20 Under the OCC s current regulation, assessments on national banks are due on March 31 and September 30 of each year. During the first two assessment cycles after July 21, 2011, the OCC proposes to base federal savings association assessments on either the OCC s assessment regulation (as amended to include federal savings associations) or the former OTS assessment structure, whichever yields the lower assessment for that savings association. After the March 2012 assessment, the OCC proposes to assess all national banks and federal savings associations using the OCC s assessment structure. Comments on the NPR were due on or before June 27, Final rules are not expected to be in place before July 21, FRB. Section 318 of the Act amends the FRA to require the FRB to assess supervisory fees against BHCs, SLHCs and certain nonbank financial companies regulated by the FRB. The FRB lists an NPR implementing this requirement as one of its initiatives planned for the period from July to September FDIC. Section 318 amends the FDI Act to authorize the FDIC to assess the cost of any regulatory or special examination it conducts of a depository institution or other entity against the institution or entity examined. The FDIC has not issued any NPRs to date and does not include rulemaking with respect to this assessment with its initiatives planned through December

11 8. Elimination of Federal Prohibitions of Interest on Demand Deposits Section 627 of the Act amends the FRA, HOLA and the FDI Act, effective July 21, 2011, to repeal the federal prohibitions on the payment by insured depository institutions of interest on demand deposits. Accordingly, banks and federal savings associations will be authorized, but not required, to offer customers new interest-bearing demand deposit accounts. This provision, which has received relatively little attention, could have a serious negative impact on net interest margins of financial institutions in a higher-rate environment. does not require rulemaking to implement Section 627. Nonetheless, the FRB and FDIC are amending their respective regulations to address these provisions as discussed below. FRB. Section 627 eliminates the statutory authority under which the FRB implemented its Regulation Q (which prohibits the payment of interest on demand deposits by member banks, national banks and any federal or state uninsured branch or agency of a foreign bank). On July 12, 2011, the FRB approved a final rule repealing Regulation Q and the FRB s published interpretations of Regulation Q effective July 21, OCC. In a June 24, 2011 bulletin, the OCC notified national banks that Section 627 will be effective July 21, The OCC referenced the FRB s repeal of Regulation Q and associated amendments (which, at the time, were proposed in an NPR) and alerted national banks that the statutory provisions take effect even in the absence of final regulations. Accordingly, the OCC advised national banks to make the appropriate changes to their practices, policies, and/or disclosures as necessary to comply with these provisions. 22 FDIC. On July 14, 2011, the FDIC issued a final rule that rescinds 12 C.F.R. Part 329 the regulation implementing the prohibition on the payment of interest on demand deposits with respect to state nonmember banks effective July 21, At the same time, the FDIC moved the definition of interest contained in that part of its regulations to the definition provisions contained in 12 C.F.R. Part 330 because the definition has continued relevance in determining whether an account qualifies for the temporary unlimited insurance coverage that Section 343 of the Act provides for noninterest-bearing transaction accounts. In addition, the FDIC has indicated on its website that it imposes no specific conditions on insured depository institutions that must be satisfied on or after July 21, 2011 to begin paying interest on demand deposit accounts Additional Restrictions on Transactions with Affiliates and Insiders Effective July 21, 2011, Section 615 of the Dodd-Frank Act prohibits an insured depository institution from purchasing an asset from, or selling an asset to, an executive officer, director or principal shareholder of the institution, or any related interest of that person (as these terms are defined in the FRB s Regulation O), unless the transaction is on market terms. If the transaction represents more than 10% of -11-

12 the capital stock and surplus of the insured depository institution, the transaction must be approved in advance by a majority of members of the board of directors who do not have an interest in the transaction. Section 615 also provides that the FRB may issue regulations necessary to define the terms and carry out the purposes of Section 615 and, before doing so, it must consult with the OCC and the FDIC regarding these rules. The FRB has not issued any NPRs to date and does not include an NPR or other guidance under this provision with its initiatives planned through December 2011, so it is unclear at this time whether or when there will be regulations concerning this new restriction. 10. Revised Regulatory Framework for Securities Holding Companies Section 617 of the Dodd-Frank Act amends the Securities Exchange Act of 1934 (the Exchange Act ) to eliminate the elective investment bank holding company framework, effective July 21, Nonbank securities firms will no longer be able to elect to become investment bank holding companies subject to regulation by the. These provisions were in place to permit companies to elect to be supervised on a consolidated basis if required by foreign regulators. In its place, Section 618 established a framework for securities holding companies that are required by a non-u.s. regulator or provision of non-u.s. law to be subject to comprehensive consolidated supervision to register with, and be supervised by, the FRB. That framework became effective July 22, Section 618 does not require rulemaking by the FRB implementing the new framework. From July 22, 2010, the FRB was required to accept registration from financial institutions, and to put in place processes to handle recordkeeping and reporting from such institutions. 11. HOLA Amendments Regarding Dividends by Mutual Holding Companies Section 625 of the Act amends HOLA by adding a requirement that any savings association subsidiary of a mutual holding company provide the appropriate federal banking agency and the FRB with 30 days prior notice of a proposed declaration of any dividend and invalidates any dividend declared without such notice. Section 625 also provides that a mutual holding company may waive the right to receive any dividend from a subsidiary in certain circumstances if it provides 30 days prior notice to the FRB of the proposed waiver. The FRB may not object to the waiver if the waiver would not be detrimental to the safe and sound operation of the subsidiary savings association, the board of directors of the holding company expressly determines that the waiver is consistent with their fiduciary duties to the mutual members of the holding company and the mutual holding company meets certain qualifications. This amendment will be effective July 21, Although Section 625 does not require the FRB to promulgate implementing regulations, the FRB lists implementation of Section 625 as one of its initiatives planned for the period from July to September

13 12. Realignment of the Board of Directors of the FDIC On July 21, 2011, Section 336 of the Dodd-Frank Act adds the Director of the Bureau of Consumer Financial Protection (the CFPB ) to the Board of Directors of the FDIC and removes the OTS Director. Therefore, the CFPB will hold a seat on the FDIC Board when a Director of the CFPB is properly seated. As discussed in further detail below, President Obama has recently indicated that he will appoint Richard Cordray for the position but Mr. Cordray almost certainly will not be confirmed by the Senate prior to July 21, II. INVESTMENT ADVISER REFORMS Title IV of the Act, entitled the Private Fund Investment Advisers Registration Act of 2010, makes several changes to the registration requirements of the Investment Advisers Act of 1940 (the Advisers Act ). Under Title IV, the is required to finalize implementing rules by July 21, On June 22, 2011, the adopted final rules to implement Title IV of the Act regarding investment advisers, notably including advisers to private funds, such as hedge funds and private equity funds. 25 Although Title IV and the new rules become effective July 21, 2011, the has provided additional time for advisers to come into compliance with the new registration requirements. Together, these provisions will: require advisers to hedge funds and other private funds who have previously been exempt from registration under the private adviser exemption to register with the by March 30, 2012, or with the states, unless they fall within one of the new exemptions under the Dodd-Frank Act; reallocate regulatory oversight authority for mid-sized advisers between the and the states, as required by the Dodd-Frank Act; establish a uniform method for advisers to calculate their assets under management ( AUM ) for regulatory purposes in order to determine registration requirements and exemptions; implement three exemptions from registration created by the Dodd-Frank Act for advisers solely to venture capital funds, advisers solely to private funds with less than $150 million in aggregate AUM in the U.S. and certain foreign private advisers; establish expanded reporting requirements for registered advisers and new reporting requirements for certain unregistered advisers relying upon the venture capital fund adviser and private fund adviser exemptions under the Dodd-Frank Act; amend and expand Form ADV to accommodate use by both registered advisers and unregistered exempt reporting advisers and reflect the additional reporting, categorization and disclosure requirements required by the Dodd-Frank Act; and define family offices to be excluded from the definition of investment adviser under the Advisers Act. The also concurrently adopted final rules defining the term family office to implement a new statutory exception from the definition of investment adviser. These rules become effective August 29,

14 All investment advisers subject to registration or reporting will be required to do so on Form ADV, which must be submitted electronically through the Investment Adviser Registration Depository (the IARD ). The IARD has not yet been modified to accommodate the filing of Amended Form ADV by, and the has indicated that new registration statements and reports will not be accepted before, January 2, Investment advisers who are required to register with the will have until March 30, 2012 to come into compliance with the new regulations (although the cautions that they should file Form ADV no later than February 14, 2012 in order to be registered by March 30), and investment advisers who are required to deregister with the and register with a state will have until June 28, 2012 to come into compliance, although they must identify themselves as subject to deregistration by March 30, III. CONSUMER AND INVESTOR PROTECTION A. BUREAU OF CONSUMER FINANCIAL PROTECTION Title X of the Dodd-Frank Act, entitled the Consumer Financial Protection Act of 2010 (the CFPA ), created the CFPB, which will nominally be housed within the FRB but will function as an autonomous agency. The CFPB will become responsible, effective July 21, 2011, for most of the consumer financial services regulatory authority now given to the federal banking regulators and other agencies. The CFPB s primary functions include the supervision of covered persons for compliance with federal consumer financial law and the promulgation of regulations implementing those laws. 27 The CFPB has broad authority to issue rules to implement, and to enforce, the federal consumer financial laws. The Act includes several specific grants of authority to the CFPB relating to particular consumer protections. Section 1062 requires the Secretary of the Treasury to specify a date for both the transfer of existing functional and regulatory powers and the grant of new rulemaking authority. The Secretary has selected July 21, 2011 as the designated transfer date. 28 The CFPB also has the power to prohibit the marketing, sale or enforcement of the terms of a consumer financial product that does not conform to the CFPA s or CFPB s rules on unfair, abusive or deceptive acts and practices; violations of recordkeeping or reporting requirements; and knowingly or recklessly providing substantial assistance to another person in connection with an unfair, abusive or deceptive act or practice. provides for a Director to head the CFPB. On, the President indicated that he will nominate Richard Cordray, the former attorney general of Ohio, as the CFPB s Director. Mr. Cordray joined the CFPB in December 2010 as the leader of its enforcement division. President Obama previously appointed Harvard Law Professor Elizabeth Warren to serve as an Assistant to the President, and the Secretary of the Treasury appointed her as a Special Advisor, delegating to her his management powers under Title X with respect to the CFPB and giving her responsibility for overseeing -14-

15 the development of the CFPB. It is unclear at this time whether Professor Warren will remain in her current position until a Director is confirmed for the CFPB. 1. Transfer of Authority to the CFPB Section 1066 of the Dodd-Frank Act does permit the Secretary of the Treasury to perform two functions in the absence of a Senate-confirmed Director: (i) provide the CFPB with administrative services prior to the designated transfer date (which, as noted above, is July 21, 2011) and (ii) exercise authority under Subtitle F of Title X, entitled Transfer of Functions and Personnel; Transitional Provisions. On July 21, 2011, Subtitle F of Title X transfers the following functions to the CFPB and, in the absence of a Senate-confirmed Director, Section 1066(a) authorizes the Secretary of the Treasury to perform them: prescribe rules, issue orders and produce guidance related to the federal consumer financial laws that were, prior to July 21, 2011, within the authority of the FRB, OCC, OTS, FDIC and National Credit Union Administration ( NCUA ); conduct examinations (for federal consumer financial law purposes) of banks, savings associations and credit unions with total assets in excess of $10 billion and their affiliates; prescribe rules, issue guidelines and conduct studies under the enumerated consumer laws that were previously within the authority of the Federal Trade Commission; conduct all consumer protection functions relating to the Real Estate Settlement Procedures Act of 1974, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 and the Interstate Land Sales Full Disclosure Act (previously within the authority of the Department of Housing and Urban Development ( HUD )); enforce those consumer financial protection functions that are transferred to the CFPB, with respect to financial institutions with total assets in excess of $10 billion and their affiliates; and replace the FRB, OCC, OTS, FDIC, NCUA and HUD in any lawsuit or proceeding that was commenced by or against one of the transferor agencies prior to July 21, 2011, with respect to a consumer financial protection function transferred to the CFPB. The authority of the Secretary of the Treasury under Section 1066(a) to perform the functions described above for the CFPB terminates when a Director is confirmed by the Senate, rather than on July 21, If the CFPB does not have a Senate-confirmed Director by July 21, 2011, the CFPB continues to operate under the grant of authority defined in Section 1066(a). Section 1066(b) of the Dodd-Frank Act provides that the Department of the Treasury may provide administrative services necessary to support the CFPB until July 21, The authority under Section 1066(b) terminates on July 21, Bank Supervision Scope of bank supervision program. On July 12, 2011, the CFPB outlined its approach to supervising large depository institutions to ensure compliance with federal consumer financial protection laws, beginning on July 21, The CFPB will conduct examinations to help ensure that consumer financial practices at large banks conform to consumer financial protection legal requirements. The CFPB s bank -15-

16 supervision program will oversee the 111 depository institutions that have total assets over $10 billion as well as subsidiaries and all other affiliates of these institutions. Supervision process. As set forth in a July 12, 2011 release from the Department of the Treasury, 29 CFPB supervision will be an ongoing process of pre-examination scoping and review of information, data analysis, on-site examinations, and regular communication with regulated entities and prudential regulators, as well as follow-up monitoring. Monitoring is intended to be a constructive process, ensuring that, where required, consumer risks are addressed and compliance programs are strengthened. 30 During an examination, the CFPB will assess each institution s internal ability to detect, prevent and remedy violations that may harm consumers. If an examined institution is not fully compliant, the CFPB may seek corrective actions, including strengthening the institution s programs and processes to ensure that such violations do not recur and, where appropriate, that remedies are instituted. When necessary, examiners will coordinate and work closely with CFPB s enforcement staff to implement appropriate enforcement actions to address harm to consumers. Next steps. On July 21, 2011, the CFPB will reach out to banks and their affiliates to establish channels of communication and to introduce them to the agency s supervision and examination process. The CFPB will provide additional information via letters to the 111 covered depository institutions and will conduct informational roundtables starting in early August Additional Provisions 31 Consumer transactions. Effective July 21, 2011, Section 1100E of the Act amends the Consumer Leasing Act by increasing the threshold for exempt consumer leases from $25,000 to $50,000 and also provides that this threshold must be adjusted annually by any annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Section 1100E also increases the Truth in Lending Act thresholds for exempt consumer credit transactions to $50,000. Although the Act does not require the FRB to implement any rulemaking under this Section, on April 4, 2011 the FRB issued final rules making corresponding changes to its Regulation W, which implements the Consumer Leasing Act, Regulation Z, which implements the Truth in Lending Act, and the accompanying staff commentary for each such regulation to conform this guidance to these amendments. 32 These rules become effective July 21, Consumer reports. Section 1100F of the Act amends the Fair Credit Reporting Act, effective July 21, 2011, to provide consumers with their numerical credit score in cases where the score resulted in an adverse credit action. does not require the FRB to issue implementing regulations. Nevertheless, on July 6, 2011, the FRB issued a final rule, effective July 21, 2011, implementing Section 1100F of the Act. Small business impact. Effective July 21, 2011, rulemaking by the CFPB is subject to additional review requirements under the Regulatory Flexibility Act for its effect on small businesses (and small nonprofits -16-

17 and local government entities), and the potential for its rules to increase their cost of credit pursuant to Section 1100G of the Dodd-Frank Act. B. REASONABLE FEES AND RULES FOR PAYMENT CARD TRANSACTIONS Under the Durbin Amendment (Section 1075 of the Dodd-Frank Act), effective July 21, 2011, a new Section 920 is added to the Electronic Fund Transfer Act regarding interchange transaction fees and rules for payment card transactions. Section 920 requires the FRB to establish rules regarding interchange fees charged by payment card issuers for electronic debit transactions and regarding implementation of a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer, with specific allowances for the costs of fraud prevention. It also restricts the ability of payment card networks to attempt to limit the ability of any person to offer discounts or incentives for the use of a competing network or an alternative form of payment and requires the FRB to issue rules barring issuers or payment card networks from placing certain restrictions on the number of payment card networks over which an electronic debit transaction may be processed or inhibiting the ability of a person which accepts debit cards from directing the routing of electronic debit transactions. There are statutory exemptions to the interchange fee limits for issuers with assets of less than $10 billion and for fees for transactions involving government-issued debit or prepaid cards. Although the Dodd- Frank Act generally gives the CFPB the authority to enforce the Electronic Fund Transfer Act s rulemaking, that enforcement authority under Section 920 is given exclusively to the FRB. Section 920(a), which relates to interchange transaction fees, becomes effective July 21, 2011, and does not require rulemaking. Section 920(b), which relates to network exclusivity arrangements and debit card transaction routing restrictions, requires the FRB to issue rules, no later than July 21, 2011, implementing this provision. The provision does not, however, set a date by which the rules must be effective. On June 30, 2011, the FRB issued a final rule to implement both Section 920(a) and Section 920(b) effective October 1, The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. The final rule also prohibits all issuers and networks from restricting to less than two unaffiliated networks the number of networks over which electronic debit transactions may be processed. The rule in effect allows for processing electronic debit transactions over multiple networks. Finally, the rule prohibits issuers and payment card networks from inhibiting a merchant s ability to direct the routing of an electronic debit transaction over any network that the issuer has enabled them to process on. IV. NONADMITTED AND REINSURANCE REFORM ACT OF 2010 Subtitle B of Title V of the Act, entitled the Nonadmitted and Reinsurance Reform Act of 2010 (the NRRA ), generally becomes effective July 21, 2011, subject to limited exceptions. -17-

18 The NRRA seeks to increase efficiency, reduce transaction costs and improve consumer access in the nonadmitted property and casualty insurance market (excess and surplus lines) and to reform the regulation of reinsurance markets. The main provisions become effective July 21, 2011 and implement such reforms by: requiring that the placement of nonadmitted insurance (property and casualty insurance placed with a nonadmitted insurer) across state lines be subject to the statutory and regulatory requirements of the insured s home state only, and preempting any other state s law, regulation, provision or action purporting to apply to such transactions; promoting the eligibility requirements of the National Association of Insurance Commissioners ( NAIC ) for nonadmitted insurers as the standard for the surplus lines marketplace by prohibiting states from (i) imposing eligibility requirements on nonadmitted insurers domiciled in the United States, except in accordance with the provisions of the NAIC s Non-Admitted Insurance Model Act addressing capital and surplus requirements or (ii) restricting surplus lines brokers from placing nonadmitted insurance with non-united States insurers listed on the NAIC s Quarterly Listing of Alien Insurers; prohibiting states from requiring that surplus lines brokers placing nonadmitted insurance with customers defined as exempt commercial purchasers investigate whether the desired coverage could be obtained from admitted insurers, subject to certain disclosure and consent requirements; preventing policyholders from having to make payments of state premium taxes to more than one state with respect to nonadmitted insurance, by prohibiting states other than the insured s home state from requiring premium payments for nonadmitted insurance, and encouraging states to adopt uniform requirements, such as interstate compacts, to allocate among states the premium taxes paid to the insured s home state; prohibiting states from denying credit for reinsurance to a ceding insurer if the ceding insurer s state of domicile is NAIC-accredited or has financial solvency requirements substantially similar to those necessary for accreditation, and recognizes credit for the insurer s ceded risk; preempting all state laws, regulations or other actions of states other than a ceding insurer s domiciliary state, except those relating to taxes or assessments, that purport to (i) restrict the ceding or assuming insurer s right to arbitrate disputes, (ii) require that a certain state s laws govern the reinsurance contract, (iii) enforce a reinsurance contract on terms different than those set forth in the contract or (iv) otherwise apply the laws of such state to reinsurance agreements of ceding insurers not domiciled therein; and placing sole responsibility for regulating a reinsurer s financial solvency with the reinsurer s domiciliary state, if that state is NAIC-accredited or has financial solvency requirements substantially similar to those necessary for accreditation, and providing that, in such case, no other state will be permitted to require the reinsurer to provide more financial information than it is required to file with its domiciliary state. V. DERIVATIVE REFORMS Title VII of the Dodd-Frank Act, entitled the Wall Street Transparency and Accountability Act of 2010, gives the Commodity Futures Trading Commission ( CFTC ) and the extensive new authority, and imposes significant requirements on those agencies, to regulate the over-the-counter ( OTC ) derivative markets, products and market participants. As a general matter, under Title VII, the CFTC has authority over swaps, swap dealers and major swap participants, and the has authority over security-based swaps ( SBS ), SBS dealers and major SBS participants. -18-