ADVISORY Dodd-Frank Act

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1 ADVISORY Ddd-Frank Act July 21, 2010 FINAL VOLCKER RULE PROVISIONS On July 21, 2010, President Obama signed int law the Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act (the Act). The Act subjects many financial institutins t an expanded framewrk f regulatry versight that is likely t require thse institutins t change the way that they perate. In particular, Sectin 619 f the Act impses limitatins n prprietary trading and fund spnsrship and investment activities by certain banking entities and nnbank financial cmpanies. Sectin 619, which is based n prpsals first advanced by Frmer Chairman f the Federal Reserve Paul Vlcker, is cmmnly referred t as the Vlcker Rule. As described in mre detail belw, subject t certain exceptins, the Vlcker Rule amends the Bank Hlding Cmpany Act f 1956 t prhibit banks and ther banking entities frm engaging in prprietary trading and frm spnsring r investing in private equity r hedge funds. The Vlcker Rule als prhibits banks and ther banking entities frm extending credit t, r engaging in ther cvered transactins with, private equity r hedge funds that they advise, manage, spnsr, r rganize. Any transactins between a banking entity and any such fund that are nt prhibited must be entered int n arms-length market terms. Finally, the Vlcker Rule tasks the Federal Reserve Bard with impsing additinal capital and quantitative limits n systemically imprtant nnbank financial cmpanies that engage in prprietary trading r that spnsr r invest in private equity r hedge funds. The Vlcker Rule des nt take immediate effect. Rather, the new Financial Stability Oversight Cuncil established by Sectin 111 f the Act (the FSOC) is directed first t cmplete a study f the Vlcker Rule that includes recmmendatins fr its implementatin. The FSOC must cmplete the study within six mnths f the Act s enactment. Within nine mnths f cmpletin f the study, the apprpriate federal banking agencies, the SEC, the CFTC, and the Federal Reserve Bard are required t issue final rules implementing the Vlcker Rule. The prvisins f the Vlcker Rule take effect n the earlier f (i) 12 mnths fllwing the date final rules are issued, and (ii) tw years after the Act s enactment. Cvered entities generally have tw years t bring their activities and investments int cmpliance, subject t the availability f up t three ne-year extensins r, in the case f certain investments in illiquid funds, ne extensin f up t five years. Prhibitin n Prprietary Trading Subject t the exemptins described belw under Exemptins frm Prhibitins n Prprietary Trading and Spnsring r Investing in Private Equity r Hedge Funds, the Act amends the Bank Hlding Cmpany Act t expressly prhibit prprietary trading by banks and ther cvered entities. What Kind f Entities Are Subject t the Prhibitin? Any banking entity, which is defined as any insured depsitry institutin, any cmpany that cntrls an insured depsitry institutin r is treated as a bank hlding cmpany fr purpses f sectin 8 f the Internatinal Banking Act f 1978, and any affiliate r subsidiary f any such entity. Certain institutins that functin slely in a trust r fiduciary capacity and BEIJING BRUSSELS LONDON NEW YORK SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON

2 accept depsits n a limited basis are expressly exempted frm the definitin f banking entity. What Is Prprietary Trading? With respect t a particular institutin, engaging as a principal fr the trading accunt f that institutin in any transactin t purchase r sell, r therwise acquire r dispse f, (i) any security, derivative, r cntract f sale f a cmmdity fr future delivery, (ii) any ptin n any f the freging, and (iii) any ther security r financial instrument as the applicable regulatrs may determine. The trading accunt f an institutin is defined as (i) any accunt used t acquire r take psitins in securities r financial instruments principally fr the purpse f selling in the near-term r therwise with the intent t resell in rder t prfit frm shrt-term price mvements, and (ii) any ther accunt as the applicable regulatrs may determine. Prhibitin n Spnsring r Investing in Private Equity r Hedge Funds Subject t the exemptins described belw under Exemptins frm Prhibitins n Prprietary Trading and Spnsring r Investing in Private Equity r Hedge Funds, the Act amends the Bank Hlding Cmpany Act t expressly prhibit banks and ther cvered entities frm spnsring, r frm acquiring r retaining any equity, partnership, r ther wnership interest in, a private equity r hedge fund. What Kind f Entities Are Subject t the Prhibitin? Any banking entity, as defined abve with respect t the prhibitin n prprietary trading. What Is a Hedge Fund r Private Equity Fund fr Purpses f the Prhibitin? A hedge fund r private equity fund is (i) any issuer that wuld be an investment cmpany but fr the exemptins prvided by sectin 3(c)(1) r 3(c)(7) f the Investment Cmpany Act f 1940, and (ii) any similar fund as the applicable regulatrs may determine. Sectin 3(c)(1) f the Investment Cmpany Act f 1940 is available t funds wned by 100 r fewer investrs. Sectin 3(c)(7) is available t funds wned slely by qualified purchasers. This definitin is brad enugh t pick up venture capital funds as well as mre traditinal private equity and hedge funds. What Des it Mean t Spnsr a Private Equity r Hedge Fund? T spnsr a fund means: serving as a general partner, managing member, r trustee f the fund; in any manner selecting r cntrlling (r having emplyees, fficers, directrs, r agents wh cnstitute) a majrity f the directrs, trustees, r management f a fund; r sharing with a fund, fr crprate, marketing, prmtinal, r ther purpses, the same name r a variatin f the same name. Exemptins frm Prhibitins n Prprietary Trading and Spnsring r Investing in Private Equity r Hedge Funds Permitted Activities. Subject t the blanket limitatins described belw and t any further limitatins impsed by the applicable regulatrs, the fllwing activities are expressly exempted 2

3 frm the prhibitins n prprietary trading and spnsring r investing in private equity r hedge funds. Exemptin fr Spnsrship f and Investment in Funds Offered in Cnnectin with an Investment Advisry Business. A banking entity is permitted t rganize and ffer a private equity r hedge fund, and may serve as spnsr t such a fund, if (i) the banking entity prvides bna fide trust, fiduciary, r investment advisry services as part f its business, (ii) the fund is rganized and ffered nly in cnnectin with such services and nly t custmers f such services, (iii) the banking entity des nt guarantee r therwise assume r insure the bligatins r perfrmance f the fund, (iv) the banking entity des nt share the same name, r variatin f the same name, with the fund, (v) n directr r emplyee f the banking entity has an wnership interest in the fund unless he r she is directly engaged in prviding services t the fund, and (vi) certain ther cnditins are met. A banking entity may als make r retain an wnership interest in a private equity r hedge fund that it rganizes and ffers, prvided that any such wnership interest is either (i) a seed capital investment made in rder t establish the fund and attract unaffiliated investrs, r (ii) a de minimis investment. Within ne year f establishing a fund, the banking entity s wnership interest in the fund must represent n mre than three percent f the fund s ttal wnership. The banking entity must actively seek unaffiliated investrs t dilute its investment in the fund t such level. The Federal Reserve Bard may extend the ne-year perid fr an additinal tw years under certain circumstances. The banking entity s investment in any private equity r hedge fund must be immaterial t the banking entity, as defined by the applicable regulatrs, and in any event the aggregate amunt f all such investments may nt exceed three percent f its Tier 1 capital. Underwriting and Market-Making Activities. Purchases, sales, acquisitins, r dispsitins f securities and ther instruments in cnnectin with underwriting r market-making-related activities, t the extent such activities are designed nt t exceed the reasnably-expected near-term demands f clients, custmers, r cunterparties are permitted. Risk-Mitigating Hedging Activities. Hedging activities that are designed t reduce specific risks t the banking entity in cnnectin with and related t individual r aggregated psitins, cntracts, r ther hldings f such entity are permitted. Custmer-Driven Investments. Purchases, sales, acquisitins, r dispsitins f securities and ther instruments n behalf f custmers are permitted. Activities Outside f the United States. Prprietary trading cnducted slely utside f the United States by a banking entity pursuant t paragraph 9 r paragraph 13 f Sectin 4(c) f the Bank Hlding Cmpany Act is permitted, prvided that the banking entity is nt cntrlled directly r indirectly by a banking entity that is rganized under the law f the United States r ne r mre States. 1 1 Paragraph 9 f Sectin 4(c) is available t freign cmpanies the greater part f whse business is cnducted utside f the United States, while paragraph 13 f Sectin 4(c) is available t freign cmpanies that d n business in the United States except as an incident t their internatinal r freign business. 3

4 The acquisitin r retentin f any equity, partnership, r ther wnership interest in, r spnsrship f, a private equity r hedge fund by a banking entity slely utside f the United States pursuant t paragraph 9 r paragraph 13 f Sectin 4(c) f the Banking Hlding Cmpany Act is permitted, prvided that (i) n wnership interest in such fund is ffered fr sale r sld t a resident f the United States, and (ii) the banking entity is nt cntrlled directly r indirectly by a banking entity that is rganized under the law f the United States r ne r mre States. Investments in Gvernment and Gvernment-Related Obligatins. Permitted activities include purchases, sales, acquisitins, r dispsitins f bligatins issued by (i) the United States r any agency f the United States, (ii) Ginnie Mae, Fannie Mae, Freddie Mac, any Federal Hme Lan Bank, the Federal Agricultural Mrtgage Crpratin, r any Farm Credit System institutin, r (iii) any State r plitical subdivisin f a State. Investments by Insurance Cmpanies and Their Affiliates. Purchases, sales, acquisitins, r dispsitins f securities and ther instruments by a regulated insurance cmpany, r any affiliate f a regulated insurance cmpany, fr the general accunt f such regulated insurance cmpany are generally permitted, subject t certain cnditins. Public Plicy Exemptins. Permitted activities include investments in small business investment cmpanies (as defined in sectin 103 f the Small Business Investment Act f 1958), investments designed t prmte the public welfare as prvided in 12 U.S.C. 24(11), and certain investments related t tax-qualified rehabilitated building r certified histric structure prjects. Blanket Limitatins. Nne f the permitted activities described abve are permitted if the activity: wuld invlve r result in a material cnflict f interest (as defined by the applicable regulatrs) between the banking entity and its clients, custmers, r cunterparties; wuld result, directly r indirectly, in a material expsure by the banking entity t highrisk assets r high-risk trading strategies (as such terms are defined by the applicable regulatrs); r wuld pse a threat t the safety and sundness f the banking entity r t the financial stability f the United States. Treatment f Certain Securitizatin Activities. The Act als specifically prvides that nthing in the Vlcker Rule shuld be cnstrued as limiting r restricting the ability f a banking entity t sell r securitize lans in a manner therwise permitted by law. Limitatins n Transactins and Other Relatinships with Private Equity and Hedge Funds The Act als impses limitatins n relatinships and transactins between banks and ther cvered entities, n the ne hand, and certain related private equity and hedge funds, n the ther hand. What Kind f Entities Are Subject t the Limitatins? Any banking entity, as defined abve with respect t the prhibitin n prprietary trading. What Is a Hedge Fund r Private Equity Fund fr Purpses f the Limitatins? Hedge fund and private equity fund are defined as described abve with respect t the prhibitin n spnsring r investing in such funds. 4

5 What Are the Limitatins? N banking entity that serves, directly r indirectly, as the investment manager, investment adviser, r spnsr t a private equity r hedge fund, r that rganizes and ffers a private equity r hedge fund, and n affiliate f any such banking entity, may enter int a cvered transactin with any such fund r with any private equity r hedge fund cntrlled by any such fund. Cvered transactin is defined by sectin 23A f the Federal Reserve Act and includes, amng ther things, (i) any lan r extensin f credit t the fund, (ii) any purchase f r investment in securities issued by the fund, (iii) the issuance f a guarantee, acceptance, r letter f credit n behalf f the fund, and (iv) any derivatives transactin r transactin that invlves the brrwing r lending f securities, in either case t the extent that the transactin causes the cvered entity t have credit expsure t the fund. The Federal Reserve Bard may permit a banking entity t enter int prime brkerage transactins with a private equity r hedge fund in which a private equity r hedge fund managed, advised, r spnsred by such banking entity has taken an wnership interest, prvided that the Federal Reserve Bard cncludes that such transactins are cnsistent with the safe and sund peratin and cnditin f the banking entity and certain ther cnditins are met. Any ther transactins between a banking entity and any private equity r hedge fund fr which it serves as investment manager, investment adviser, r spnsr, r that it has rganized and ffered, must be n arms length market terms, cnsistent with the requirements f sectin 23B f the Federal Reserve Act. Prpriety Trading and Spnsrship and Investment Limitatins Applicable t Certain Nnbank Financial Cmpanies The Act amends the Federal Bank Hlding Cmpany Act t direct the Federal Reserve Bard t impse additinal capital and quantitative limits n systemically imprtant nnbank financial cmpanies that engage in prprietary trading r spnsr r invest in private equity r hedge funds. What Kind f Entities and Activities are Subject t the Limitatins? Nnbank financial cmpanies that have been designated fr prudential regulatin by the Federal Reserve Bard under Sectin 113 f the Act and that engage in prprietary trading r spnsr, r acquire r retain an equity, partnership, r ther wnership interest in, any private equity r hedge fund, in each case as thse cncepts are applied t banking entities in the prhibitins described abve. 2 What Exemptins Apply? Nnbank financial cmpanies are nt subject t any additinal capital r quantitative limits with respect t activities described abve under Exemptins frm Prhibitins n Prprietary Trading and Spnsring r Investing in Private Equity r Hedge Funds, prvided the activities cmply with the blanket limitatins described in that sectin. 2 The Act authrizes the FSOC t subject nnbank financial cmpanies that the FSOC determines are systemically imprtant t regulatin and supervisin by the Federal Reserve Bard. A nnbank financial cmpany is generally defined as a cmpany, ther than a bank hlding cmpany, that is predminantly engaged in financial activities. 5

6 Anti-Evasin Prvisins The Vlcker Rule prvides the applicable regulatrs with the authrity t rder a banking entity r a nnbank financial cmpany t terminate any activity r dispse f any investment that the regulatr has reasnable cause t believe functins as an evasin f the requirements f the Vlcker Rule. The applicable regulatrs are als directed t issue rules requiring internal cntrls and recrdkeeping t insure cmpliance with the prvisins f the Vlcker Rule. Study, Rule-Making Prcess, and Effective Date FSOC Study. The FSOC is required t cmplete a study f the Vlcker Rule within six mnths f the Act s enactment. The study must include recmmendatins fr implementing the Vlcker Rule in rder t achieve certain enumerated purpses. These purpses include, amng ther things, t prtect taxpayers and cnsumers and enhance financial stability, limit the inapprpriate transfer f federal subsidies t unregulated entities, reduce cnflicts f interest, and limit activities that have previusly caused undue risk r lss in banking entities and certain nnbank financial cmpanies. Rule-Making Prcess. N later than nine mnths after the date that the FSOC cmpletes its study, the apprpriate federal banking agencies, the SEC, the CFTC, and the Federal Reserve Bard must adpt rules carrying ut the Vlcker Rule. The regulatrs are required t cnsult and crdinate with ne anther t assure that the final rules are cmparable and cnsistent. Rulemaking authrity is allcated amng the regulatrs as fllws: with respect t insured depsitry institutins, jintly t the apprpriate federal banking agencies; with respect t any entity fr which the CFTC is the primary financial regulatr under the Act, t the CFTC; with respect t any entity fr which the SEC is the primary financial regulatr under the Act, t the SEC; and with respect t any ther entity, t the Federal Reserve Bard. Effective Date. The prvisins f the Vlcker Rule take effect n the earlier f (i) 12 mnths after the date f the issuance f final rules by the regulatrs, and (ii) tw years after the Act s enactment. Transitin Perid. A banking entity r nnbank financial cmpany generally has tw years frm the date n which the Vlcker Rule prvisins take effect t bring its activities and investments int cmpliance. The regulatrs may impse additinal capital and ther requirements during the transitin perid. Generally-Available Extensins. The Federal Reserve Bard may, by rule r rder, extend the tw-year perid fr nt mre than ne year at a time and up t an aggregate f three years if it determines that such an extensin is cnsistent with the purpses f the Vlcker Rule and wuld nt be detrimental t the public interest. Extensins fr Investments in Illiquid Funds. The Federal Reserve Bard may als extend the transitin perid t permit a banking entity t take r retain its equity, partnership, r ther wnership interest in, r therwise prvide additinal capital t, an illiquid fund, prvided the extensin is necessary in rder fr the banking entity t fulfill a cntractual bligatin that was in effect n May 1, Any such extensin must be limited t n mre than five years. 6

7 An illiquid fund is a hedge fund r private equity fund that (i) as f May 1, 2010, was principally invested in, r was invested and cntractually cmmitted t principally invest in, illiquid assets such as prtfli cmpanies, real estate investments, and venture capital investments, and (ii) makes all investments pursuant t, and cnsistent with, an investment strategy t principally invest in illiquid assets. Rule-Making with Respect t Transitin Perids. The Act requires the Federal Reserve Bard t issues rules implementing the transitin-perid prvisins f the Vlcker Rule n later than six mnths after the Act s enactment. If yu wuld like t discuss the Act and ur capabilities t assist yu in the upcming rulemaking prcess, please cntact the fllwing members f ur firm: Stuart Stck sstck@cv.cm D. Jean Veta jveta@cv.cm Mark Pltkin mpltkin@cv.cm Keith Nreika knreika@cv.cm David Martin dmartin@cv.cm Tim Clark tclark@cv.cm David Engvall dengvall@cv.cm Carey Rberts crberts@cv.cm Michael Nnaka mnnaka@cv.cm Philipp Tamussin ptamussin@cv.cm This infrmatin is nt intended as legal advice. Readers shuld seek specific legal advice befre acting with regard t the subjects mentined herein. Cvingtn & Burling LLP, an internatinal law firm, prvides crprate, litigatin and regulatry expertise t enable clients t achieve their gals. This cmmunicatin is intended t bring relevant develpments t ur clients and ther interested clleagues. Please send an t unsubscribe@cv.cm if yu d nt wish t receive future s r electrnic alerts Cvingtn & Burling LLP, 1201 Pennsylvania Avenue, NW, Washingtn, DC All rights reserved. 7

AMENDMENTS TO NASDAQ RULES ON COMPENSATION COMMITTEES

March 2013 AMENDMENTS TO NASDAQ RULES ON COMPENSATION COMMITTEES Summary. The Securities and Exchange Cmmissin recently apprved the fllwing amendments t the NASDAQ listing rules relating t cmpensatin cmmittees: