1 august 6, 2012 2012 student loan legal meeting scott d. samlin partner t +1 212 398 5819...
TRANSCRIPT
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August 6, 2012
2012 STUDENT LOAN LEGAL MEETING
Scott D. Samlin
Partner
T +1 212 398 5819
snrdenton.com
Curtis Stefanak
Counsel
T +1 212 768 6748
snrdenton.com
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Proposed Risk Retention Rules
Risk retention rules are found in Title IX of Dodd-Frank, titled “Investor Protection
and Securities Reform Act of 2010”
– Regulations relating to risk retention for asset-backed securities are to be
promulgated by the SEC, the OCC, the FDIC, the Federal Reserve and, for
residential mortgages, HUD and the Federal Housing Finance Agency
– Expansive definition of “asset-backed security,” which includes securities
backed by managed pools, but excludes synthetics and securities issued by a
finance company to its parent if no securities are held by a third party
• Dodd-Frank generally requires the regulations to provide for credit risk
retention of 5% of any asset underlying an asset-backed security, or less
than 5% if the assets transferred meet underwriting standards to be
prescribed by regulation
• Risk retention requirements may be allocated between the securitizer and
the originator
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Volcker Rule
Section 619 of the Dodd-Frank Act is commonly knows as the Volcker Rule
The Volcker Rule prohibits banking entities from engaging in proprietary trading for
the entity’s own account
The joint regulators issued a notice of proposed rule making (“MPR”) on
November 7, 2011 totaling nearly 300 pages
The MPR would also prohibit banking entities from loaning, sponsoring or having
specified relationships with hedge funds or private equity funds
A significant internal compliance program was mandated
Comments were originally due by January 13, 2012
A final rule may be available in September, 2012
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Proposed Volcker Rule - Background
Rule initially proposed on October 11, 2011 jointly by the Board of Governors of
the Federal Reserve System (“Fed”), Office of Comptroller of the Currency
(“OCC”), Federal Deposit Insurance Corporation (“FDIC”) and Securities and
Exchange Commission (“SEC”) would implement Section 13 of the Bank Holding
Company Act of 1956 (“BHC”) as added by Section 619 of the Dodd Frank Act
(the “Volcker Rule”)
“Restrictions on Proprietary Trading and Certain Interests in, and Relationships
with, Hedge Funds and Private Equity Funds.” The release was approximately
560 pages. The comment period was initially scheduled to end January 13, 2012.
Was extended to February 13, 2012. Approximately 17,000 comment letters
received. The Rule was not ready for adoption in June, as initially proposed, but
may be ready by September 2012.
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Proposed Volcker Rule - Background
This presentation relates primarily to the effect of the proposed rule on bank sponsorship of
Student Loan Funds and the downstream effect on Student Loan Fund investors if the rule
were adopted as proposed without the changes recommended by the sponsor/investor
community. The proposed rule represents a threat to the continued viability of the Student
Loan Fund as an asset class
The proposed rule has created several principal areas of interest to bank sponsors of Student
Loan Funds and the investors in those funds:
– To what extent investment in and ownership of Student Loan Funds by banking entities
will continue
– To what extent sponsorship of Student Loan Funds by banking entities may continue
– Which transactions between bank sponsors of Student Loan Funds and such funds may
be prohibited as a result of the proposed rule
– What effect reduced bank sponsorship may have on the prospects for nonbank Student
Loan investors and the secondary market for Student Loan Fund interests
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Investment in and Sponsorship of Student Loan Funds by Banking Entities
The Volcker proposal states that banking entities (banks, their holding companies,
affiliates or subsidiaries, and nonbank financial companies supervised by the Fed)
are prohibited from sponsoring or acquiring or retaining interests in or engaging in
proprietary trading with hedge funds or private equity funds (funds exempt from
the definition of investment company under the ’40 Act pursuant to Sections 3(c)
(1) and 3(c)(7) thereof).
The Commissions have advised that collective investment vehicles that rely on
exemptions other than 3(c)(1) and 3(c)(7) will not be “private funds” subject to the
Volcker rule.
Student Loan Funds may be obligated to rely on Sections 3(c)(1) and 3(c)(7) if
elements of the securitization process prevent the issuer from relying on the
alternative exemption provided in Rule 3a-7 for issuers of asset-backed securities.
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Investment in and Sponsorship of Student Loan Funds by Banking Entities
If Student Loan Funds were subject to the restrictions on ownership and
sponsorship applicable to hedge funds and private equity funds, it is likely that:
– Banks would be required to divest themselves of ownership interests in Student
Loan Funds (covered funds may not constitute more than 3% of a bank’s Tier I
capital)
– Banks would be unlikely to engage in guarantee and other transactions with
funds they sponsor. The loss of these guarantees would certainly reduce the
attractiveness of these investments to other banks and commercial investors.
– Safe to say that such a reading would have a serious deleterious effect on the
Student Loan Fund market.
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Transactions Between Student Loan Funds and Banking Entities
Proposed rule generally prohibits banking entities from engaging in any
transaction with a hedge fund or private equity fund if the transaction would be a
covered transaction as defined in Section 23A of the Federal Reserve Act
Covered transactions include :
• Providing guarantees to Student Loan Funds
• Making loans to or extend credit to Student Loan Funds
• Purchasing assets from Student Loan Funds
• Accepting securities from Student Loan Funds as collateral security
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A Way Out?
Student Loan Funds should be exempt from the proposed Volcker rule’s
restrictions on sponsorship, ownership and transactions with private funds
– Several ways to achieve this:
• Clarify that Student Loan Funds are “public welfare investments” (relates
only to ownership and sponsorship) or
• Provide a new, explicit exemption from the provisions of the proposed rule
• Create explicit exemption for transactions between banking entities and the
Student Loan Funds in which they invest or otherwise sponsor
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About SNR Denton
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