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1Morrison & Foerster Capital Markets

Financial services regulatory reform

in the United States.

NEWimproved!

&

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Almost everyone we know in the United States has been, or ultimately will be, affected by the financial crisis. The breadth, severity, duration and lingering impact of the crisis have made comprehensive financial services regulatory reform inevitable. In the following pages, we offer our perspective concerning the current status of the key regulatory reform initiatives. This discussion is intended to be a summary, does not purport to be complete, and will likely require updating as events reveal themselves during the remainder of this year. Periodic updates will be available on our dedicated webpage at http://www.mofo.com/resources/regulatory-reform/.

http://www.mofo.com/resources/regulatory-reform/

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Artwork by Odd Todd

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COMMODITIES AND DERIVATIVES REFORM(as of March 15, 2010)

The House of Representatives passed a comprehensive financial regulatory reform package in December 2009. Similar legislation is currently being considered by the Senate. Taken together, the bills move the largely unregulated over-the-counter (OTC) derivatives market one step closer to being subject to a comprehensive and far-reaching regulatory regime.

OTC “swaps” regulated by CFTC; OTC “security-based swaps” regulated by SEC; banking regulators retain jurisdiction over certain aspects of banks’ OTC derivatives activities (e.g., capital and margin requirements, prudential requirements)

“Swap” excludes, among other things, foreign exchange swaps and forwards (unless otherwise determined by the CFTC and the Treasury); sales of non-financial commodities for deferred shipment or delivery that are intended to be physically settled; any note, bond or evidence of indebtedness that is a security; and security-based swaps

A “security-based swap” is an agreement, contract, or transaction that would be a swap and that is primarily based on, or relates to, a single security or loan, a narrow-based security index, or a single issuer or the issuers of securities in a narrow-based security index but excludes an agreement, contract or transaction if it is based on an exempted security (other than a municipal security) and is not a put, call or other option

OTC “swaps” regulated by CFTC; OTC “security-based swaps” regulated by SEC; Financial Institutions Regulatory Administration retains jurisdiction over certain aspects of banks’ OTC derivatives activities (e.g., capital and margin requirements, prudential requirements)


A “security-based swap” is an agreement, contract, or transaction that would be a swap and that is primarily based on, or relates to, a single security or loan, a narrow-based security index, or a single issuer or the issuers of securities in a narrow-based security index but excludes an agreement, contract or transaction if it is based on a government security

OTC “swaps” regulated by CFTC; OTC “security-based swaps” regulated by SEC; banking regulators retain jurisdiction over certain aspects of banks’ OTC derivatives activities (e.g., capital and margin requirements, prudential requirements)


A “security-based swap” is an agreement, contract, or transaction that would be a swap and that is primarily based on, or relates to, a single security or loan, a narrow-based security index, or a single issuer or the issuers of securities in a narrow-based security index but excludes an agreement, contract or transaction if it is based on a government security

Title III (the Derivative Markets Transparency and Accountability Act of 2009) of the Wall Street

Reform and Consumer Protection Act of 2009, passed by the House on December 11, 2009

Regulatory Framework

Title VII (the Over-the-Counter Derivatives Markets Act of 2009) of the Senate Discussion

Draft of the Restoring American Financial Stability Act of 2009, released by Senator Dodd

on November 10, 2009

Title VII (the Over-the-Counter Derivatives Markets Act of 2010) of the Restoring American

Financial Stability Act of 2010, released by Senator Dodd on March 15, 2010

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COMMODITIES AND DERIVATIVES REFORM (continued)(as of March 15, 2010)

A (security-based) swap must be cleared if a clearinghouse will accept the derivative for clearing and the CFTC (SEC) has determined (either on its own initiative or upon request by a clearinghouse) that the derivative is required to be cleared

Exception to the clearing requirement applies if one of the counterparties (i) is not a (security-based) swap dealer or major (security-based) swap participant, (ii) is using (security-based) swaps to hedge or mitigate commercial risk, including operating or balance sheet risk, (iii) notifies the CFTC (SEC) how it generally meets its financial obligations associated with entering into non-cleared (security-based) swaps, and (iv) elects in its sole discretion for the clearing exception to apply

Cleared (security-based) swaps must be traded on an exchange or swap execution facility, to the extent that an exchange or swap execution facility makes the (security-based) swaps available for trading

Non-cleared (security-based) swaps must be reported to a (security-based) swap repository or, if none, to the (SEC) CFTC

A (security-based) swap must be cleared, unless the CFTC (SEC) conditionally or unconditionally exempts it from the clearing requirement, if:

i. no clearinghouse will accept it for clearing; or ii. one of the counterparties to the (security-based)

swap (I) is not a (security-based) swap dealer or major (security-based) swap participant and (II) does not meet the eligibility requirements of any clearinghouse that clears the (security-based) swap

Each group, category, type or class of (security-based) swaps that a clearinghouse seeks to accept for clearing must be approved by the CFTC (SEC)

The CFTC and SEC must jointly adopt rules identifying (security-based) swaps or any group, category, type or class of (security-based) swaps that, although not submitted for approval by a clearinghouse, should be accepted for clearing

Cleared (security-based) swaps must be traded on an exchange or alternative swap execution facility, to the extent that an exchange or swap execution facility makes the (security-based) swap available for trading


A (security-based) swap must be cleared, unless: i. no clearinghouse will accept it for clearing; or ii. the CFTC (SEC), in consultation with

the Financial Stability Oversight Council, conditionally or unconditionally exempts it from the clearing requirement if one of the counterparties to the (security-based) swap (i) is not a (security-based) swap dealer or major (security-based) swap participant and (ii) does not meet the eligibility requirements of any clearinghouse that clears the (security-based) swap

A (security-based) swap that is exempt from the clearing requirement must be cleared upon the request of a party to the (security-based) swap

Each group, category, type or class of (security-based) swaps that a clearinghouse seeks to accept for clearing must be approved by the CFTC (SEC)

The CFTC and SEC must jointly adopt rules identifying (security-based) swaps or any group, category, type or class of (security-based) swaps that, although not submitted for approval by a clearinghouse, should be accepted for clearing

Cleared (security-based) swaps must be traded on an exchange or alternative swap execution facility, to the extent that an exchange or swap execution facility makes the (security-based) swap available for trading

• Defines “alternative swap execution facility” as an electronic trading system with pre-trade and post-trade transparency in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the system, but that is not an exchange




Clearing, Exchange Trading and Reporting






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Creates many new types of registrants: (security-based) swap dealers, major (security-based) swap participants, (security-based) swap repositories, and swap execution facilities with respect to (security-based) swaps

A major (security-based) swap participant is any person who is not a (security-based) swap dealer and (i) maintains a substantial net position in outstanding (security-based) swaps, excluding positions held primarily for hedging, reducing or otherwise mitigating its commercial risk, or (ii) whose outstanding (security-based) swaps create substantial net counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets

(Security-based) swap dealers and major (security-based) swap participants are subject to capital and margin requirements, reporting and recordkeeping requirements, business conduct standards, documentation standards, and disclosure standards (both to counterparties and applicable regulators)

CFTC (SEC) authorized to establish aggregate position limits and large trader reporting requirements for (security-based) swaps

Unlawful for non-eligible contract participants (ECPs) to enter into swaps unless entered into on an exchange

Unlawful for any person to effect a security-based swap with or for a non-ECP unless entered into on an exchange

Offers and sales of security-based swaps to non-ECPs must be registered, absent an exemption from registration other than under section 3 or 4 of the Securities Act of 1933


A major (security-based) swap participant is any person who is not a (security-based) swap dealer and whose outstanding (security-based) swaps create net counterparty credit exposures (current or potential future exposures) to other market participants that would expose those other market participants to significant credit losses in the event of the person’s default


The CFTC (SEC) is authorized to establish aggregate position limits and large trader reporting requirements for (security-based) swaps

Unlawful for non-ECPs to enter into swaps unless entered into on an exchange




A major (security-based) swap participant is any person who is not a (security-based) swap dealer and (i) who maintains a substantial net position in outstanding (security-based) swaps, excluding positions held primarily for hedging, reducing, or otherwise mitigating commercial risk, or (ii) whose failure to perform under the terms of its (security-based) swaps would cause significant credit losses to its (security-based) swap counterparties


The CFTC (SEC) is authorized to establish aggregate position limits and large trader reporting requirements for (security-based) swaps

Unlawful for non-ECPs to enter into swaps unless entered into on an exchange





Regulation of Market Participants







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Jurisdictional disputes between the CFTC and SEC may be brought by either Commission for expedited review by the United States Court of Appeals for the District of Columbia Circuit

Disputes as to certain joint rulemaking by the CFTC and SEC may be resolved, at the request of either Commission, by the Financial Services Oversight Counsel

Increases eligibility requirements for eligible ECPs State and local gaming and bucket shop laws

preempted in the case of security-based swaps between ECPs or traded on an exchange and swaps; additionally, security-based swaps may not be regulated as insurance under state law

For purposes of sections 13 and 16 of the Securities Exchange Act of 1934, the purchase or sale of a security-based swap will constitute beneficial ownership of the underlying equity security only to the extent that the SEC determines, in consultation with the Treasury and applicable banking regulators, that such purchase or sale provides incidents of ownership comparable to direct ownership of the equity security and that it is necessary to achieve the purposes of section 13

At the request of a non-dealer counterparty to a non-cleared (security-based) swap, the (security-based) swap dealer must segregate the counterparty’s collateral and hold it at an independent third-party custodian

Where the CFTC and SEC fail to jointly prescribe uniform rules and regulations where required under the Act, the Agency for Financial Stability, in consultation with the CFTC and SEC, will prescribe the required rules and regulations, which will remain in effect until rescinded by the Agency for Financial Stability or until the effective date of a corresponding rule prescribed jointly by the CFTC and SEC

Increases eligibility requirements for ECPs State and local gaming and bucket shop laws are

preempted in the case of security-based swaps between ECPs or traded on an exchange; the current preemption in the Commodity Exchange Act remains

Sections 13 and 16 of the Securities Exchange Act of 1934 are made applicable to security-based swaps


Where the CFTC and SEC fail to jointly prescribe uniform rules and regulations where required under the Act, the Financial Stability Oversight Council shall, at the request of either Commission, resolve the dispute within a reasonable time after receiving the request, after consideration of relevant information provided by each Commission, and by agreeing with one of the Commissions regarding the entirety of the matter or by determining a compromise position

Increases eligibility requirements for ECPs State and local gaming and bucket shop laws are

preempted in the case of security-based swaps between ECPs or traded on an exchange; the current preemption in the Commodity Exchange Act remains

Sections 13 and 16 of the Securities Exchange Act of 1934 are made applicable to security-based swaps


• Any such segregation must be made by a (security-based) swap dealer on fair and reasonable terms on a non-discriminatory basis



Other






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CREDIT RATING AGENCY REFORM(as of March 15, 2010)

The Credit Rating Agency Reform Act passed in 2006 requires credit rating agencies (CRAs) to register with the SEC and submit reports. However, the recent financial crisis further eroded investor confidence in CRA ratings and demonstrated that more needs to be done to address conflict of interest and disclosure concerns. Recently proposed amendments to SEC rules attempt to address these issues and recent legislation goes even further.

Subject to Section 11 liability for use of credit ratings in registration statements

Revocation of Regulation FD exemption Revocation of “expert” exemption under Rule

436(g) CRAs not covered by forward-looking safe harbor


Duty to report issuer violations of law to appropriate authorities


Duty to report violations of law to appropriate authorities

Statements made by CRAs are not forward-looking statements for purposes of safe harbor

Enforcement and penalty provisions of the Exchange Act apply to CRA statements

Modifies “state of mind” requirement for private securities fraud actions against CRAs for money damages

Conflicts of interest Qualitative and quantitative methodologies and

assumptions used Prior rating errors made Other information required by SEC

Qualitative and quantitative methodologies and assumptions used

Prior rating errors made Third party reports and credible information

received from independent sources Other information required by SEC

Qualitative and quantitative methodologies and assumptions used

Prior ratings errors made Third party reports and credible information

received from independent sources SEC to issue rules requiring CRAs to disclose

information on initial ratings and subsequent changes; disclosures to be comparable across CRAs

SEC must require each CRA to accompany publication of each rating with a prescribed form that details, among other things, ratings methodologies

If providing ratings, CRAs cannot provide: - Risk management services;

- Advice or consultation relating to mergers, sales or disposition of assets, or not related to a securities issuance;

- Any other activity according to SEC rules

SEC to adopt rules separating rating activities from sales and marketing activities

SEC to promulgate rules separating rating activities from sales and marketing activities

SEC may impose fines, including fines for failure to supervise Each CRA must establish internal controls and

procedures CRAs must submit an annual report to the SEC,

including a certification regarding internal controls and procedures

The Wall Street Reform and Consumer Protection Act of 2009, passed by the House on

December 11, 2009

Liability

Disclosure

Prohibited Activities

Senate Discussion Draft released by Senator Dodd on November 10, 2009

Senate Draft Bill: Restoring American Financial Stability Act, released by Senator Dodd on

March 15, 2010

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CREDIT RATING AGENCY REFORM (continued)(as of March 15, 2010)

Reduce conflict of interest concerns by maintaining a website disclosing fees earned, number of issuances rated and issuer standings for current year and two prior years

Compliance officers cannot participate in determining ratings or methodologies, or participate in sales activities or setting of compensation levels for certain employees

Maintain CRA records of ratings over time on CRA website for investors to review

Compliance officers cannot participate in determining ratings or methodologies, or in sales activities or setting of compensation levels for certain employees

Compliance report required annually CRA must maintain record of ratings over time and

publish on website for investors to review SEC to promulgate additional regulations; SEC may

suspend or revoke a CRA’s registration for violations

SEC to set rules, review due diligence and methodologies used

CRAs must have Board of Directors with at least 1/3 (minimum of two) members being independent for policy and procedure oversight

CRAs that earned less than $250 million in comp in last full fiscal year may deregister as NRSRO

SEC to set rules Annual internal control reports submitted to SEC SEC may suspend CRA’s right to rate certain types

of securities

Establishes SEC Office of Credit Ratings; director of Office reports to SEC Chairman

Establishes fines, penalties for CRAs; administers SEC rules applicable to CRAs SEC to conduct annual exam of each CRA; SEC to

report on CRA exams

Due diligence reports prepared by third parties for issuers must be certified and provided to CRAs

SEC may propose additional rules relating to ratings of structured products

Due diligence reports prepared by third parties for issuers must be certified and provided to CRAs

CRA analysts must pass exams and continue education SEC study of independence and alternative models

Due diligence reports prepared by third parties for issuers must be certified and provided to CRAs SEC to conduct a study and promulgate rules

regarding requisite standards, experience and qualifications for CRA analysts

SEC must issue rules regarding ratings procedures and methodologies

SEC rules must require that CRAs establish, maintain and enforce policies and procedures that define and disclose the meaning of any ratings symbol

SEC to conduct a study regarding independence of CRAs

Additional studies required to be conducted, including studies regarding alternative business models; reliance on ratings within various markets; reliance on ratings by various federal agencies


December 11, 2009

Conflict of Interest

Oversight

Other



March 15, 2010

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SECURITIZATION REFORM(as of March 23, 2010)

Securitization of subprime mortgages was identified as contributing to the financial crisis. The shift of credit risk to off-balance sheet vehicles was a major focal point for regulators. As a result, earlier this year, the FASB revised accounting rules and provided guidance relating to sales of financial assets and consolidation of certain off-balance sheet entities. In December 2009, the FDIC announced proposed rulemaking amending its securitization safe harbor rules to require financial institutions to retain more of the credit risk from securitizations and to reflect the recent accounting changes. On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act, which will impose a 30% withholding tax on foreign financial institutions, including offshore securitization vehicles in certain circumstances. Below are the key securitization reform measures we expect Congress to address in 2010.

5%−originators or securitizers (initial draft of bill required 10%)

Percentage retained can be raised or lowered based on underwriting standards used and/or due diligence procedures followed

Loans made by certain government agencies are exempt from the credit risk retention requirement

No hedging or transfer of risk (without consent of applicable regulator)

10%−securitizers only Securities issued by the U.S. government, any

U.S. government agency, or any U.S. government sponsored entity are exempt from the credit risk retention requirement

No hedging or transfer of risk (without consent of applicable regulator)

5%−to be allocated between originators and securitizers; allocation determined by whether assets have reduced credit risk, whether form or volume of transactions creates incentives for imprudent origination, and based on potential impact of retention on extending credit

Percentage retained can be lowered based on underwriting standards used

Exemptions available at regulators’ discretion No hedging or transfer of risk (without consent of

applicable regulator) Creation of different asset classes, which may be

subject to different regulations

Asset-level or data-level detail, including data with unique identifiers relating to loan brokers or originators, the nature and extent of the compensation of the broker or originator of the assets backing the security, and the amount of risk retention of the originator or securitizer of such assets

Fulfilled repurchase requests across all trusts aggregated by an originator, so investors may identify originators with clear underwriting deficiencies


Fulfilled repurchase requests across all trusts aggregated by an originator, so investors may identify originators with clear underwriting deficiencies

Due diligence analysis must be performed by securitizer and provided to investors


Fulfilled and unfulfilled repurchase requests across all trusts aggregated by an originator, so investors may identify originators with clear underwriting deficiencies

Due diligence analysis must be performed by securitizer and provided to investors


December 11, 2009

Credit Risk Retention

Disclosure



March 15, 2010

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SECURITIZATION REFORM (continued)(as of March 23, 2010)

Credit rating agencies must explain, in reports accompanying credit ratings, reps, warranties, and enforcement mechanisms available to investors and how they differ from reps, warranties and enforcement mechanisms in similar issuances



FASB is required to perform a study of the impact of FAS 166 and FAS 167 on securitizations and consolidation

Securitizers liable for rescission for loans that violate “ability to pay” and “net tangible benefit” standards under amended Truth in Lending Act

Regulations relating to credit risk retention requirements will become effective 1 year from enactment for residential mortgage assets and effective 2 years from enactment for all other asset classes


December 11, 2009

Reps and Warranties

Other



March 15, 2010

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INVESTOR PROTECTION REFORM(as of March 22, 2010)

The financial crisis took many investors by surprise. It became clear that investors in certain financial products, such as auction rate securities, did not understand how the secondary market for such securities functioned. Ponzi schemes were exposed at a rapid pace and clients lost faith in those with custody of their securities and/or funds. On December 30, 2009, the SEC adopted amended Rule 206(4) under the Investment Advisers Act to address certain custody issues. Congress also aims to increase investor protection as a means of bolstering investor confidence and bringing investors back to the capital markets.

Broker-dealers and advisers have a fiduciary duty to retail customers

Prohibition or limit on use of mandatory arbitration SEC will have extraterritorial jurisdiction of

antifraud provisions under certain circumstances Recklessness standard for proving aiding and

abetting claim Post-resignation actions may be brought by SEC

for violations that occurred prior to resigning

Broker-dealers and advisers have a fiduciary duty to retail customers

Prohibition or limit on use of mandatory arbitration Recklessness standard for proving aiding and

abetting claims Broker-dealers and advisers must disclose certain

information about products and compensation

Study on imposing a uniform fiduciary duty on financial intermediaries who provide similar advisory services

Study on whether there are legal or regulatory gaps in standards in the protection of retail customers relating to the standards of care for various financial intermediaries

Prohibition or limit on use of mandatory arbitration SEC may issue rules regarding mandatory

disclosures to retain customers

SEC authority to require exams, documents, or other information from those providing custody services

New custody limits on advisers imposed under 206(4) of the Advisers Act

More advisers subject to state registration rather than SEC registration

SEC to review rule changes of self-regulatory organizations that affect custody of customer securities or funds

Advisers must use third parties for custody of certain client assets

Inflationary increase for definition of accredited investor

SEC to review rule changes of self-regulatory organizations that affect custody of customer securities or funds

Independent verification of client assets held in custody of adviser

Inflationary increase for definition of accredited investor

Section 13(f) of Exchange Act amended to provide disclosure of short sale activity on a transaction basis

SEC must disclose short sale activity on a monthly basis

Prohibition on manipulative short sales Notice to customers regarding securities lending

activity

Study on short selling Study on short selling


December 2, 2009

Liability

Custody and Client Requests

Short Sales



March 15, 2010

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INVESTOR PROTECTION REFORM (continued)(as of March 22, 2010)

SEC may share information with federal, foreign and state regulators and law enforcement without waiving privilege

Increased SEC funding SEC may engage in consumer testing Oversight of municipal financial advisers


SEC self-funded SEC may engage in consumer testing SEC subject to bi-annual GAO review


SEC self-funded SEC may engage in consumer testing Oversight of private funds managed by investment

advisers

Awards to whistleblowers Increase SIPA assessments and increase cash

advance limit to $250,000 to be in line with FDIC insurance

Smaller companies exempt from certain SOX requirements

Creation of Consumer Financial Protection Agency

Awards to whistleblowers Creation of SEC Investment Advisory Committee

and Office of Investor Advocate Study of financial literacy of mutual fund investors Special protection for senior investors

Awards to whistleblowers Creation of SEC Investor Advisory Committee Study on appropriate criteria for determining

accredited investor status and eligibility to invest in private funds

Special protection for senior investors Creation of Bureau of Consumer Financial

Protection (“BCFP”) which will have exclusive rulemaking authority of federal consumer financial protection laws

Creation of Office of Financial Literacy under the BCFP

Creation of Bureau of Fair Lending and Equal Opportunity

Establishment of Consumer Financial Protection Fund and Victims Relief Fund


December 2, 2009

SEC Powers

Other



March 15, 2010

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AGENCIES AND AGENCY OVERSIGHT REFORM(as of March 23, 2010)

The various government agencies regulating the financial industry with their varying rules and standards have led to certain entities not being regulated at all, with others subject to less oversight than their peer financial firms organized under different charters. The House passed legislation last November outlining each agency’s authority and increasing the types of entities subject to agency oversight. The Senate discussion draft bill overhauls the existing system. The Senate bill recently released by Senator Dodd adds to the changes provided for the House legislation.

Office of Thrift Supervision (OTS) to become a division of the Office of the Comptroller of the Currency (OCC)

Creation of the Consumer Financial Protection Agency (CFPA)

Creation of Federal Insurance Office (FIO)

Creation of the Financial Institutions Regulatory Administration (FIRA)

Limits role of Federal Deposit Insurance Corporation (FDIC) and Federal Reserve

Creation of Agency for Financial Stability (AFS) Creation of the Office of National Insurance within

Treasury (ONI)

Creation of the Financial Stability Oversight Council (Council)

Creation of the Office of Financial Research within the Treasury to support the Council

Creation of an independent Bureau of Consumer Financial Protection (Bureau)

Creation of the Office of National Insurance within the Treasury

Creation of the Office of Credit Rating Agencies within the SEC

OTS division to regulate federal savings associations

FDIC to regulate state savings associations Federal Reserve to regulate savings and loan

holding companies and their non-savings association subsidiaries

CFPA to oversee markets for consumer financial products and services and protect investors from abuses and strip rulemaking power relating to these matters from agencies who currently have such power under the Truth in Lending Act, Fair Credit Reporting Act, Equal Credit Opportunity Act, and Real Estate Settlement Procedures Act; CFPA will have examination and enforcement powers

FIO to monitor and study insurance industry/issues and the adequacy of state insurance laws

FIRA to combine the functions of the OCC and OTS, the state bank supervisory functions of the FDIC and the Federal Reserve, and the bank holding company supervisory authority from the Federal Reserve

FDIC to focus on its jobs as deposit insurer, resolver of failed institutions and overseer of troubled banks

Federal Reserve to focus on monetary policy AFS consists of members from other agencies that

monitor systemic risk and make recommendations relating to capital adequacy, liquidity, etc.

ONI to monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the financial system

Federal Reserve Board to regulate bank and thrift holding companies with assets of $50 billion or more

OCC to regulate (i) national banks and federal thrifts of all sizes; and (ii) holding companies of national banks and federal thrifts with assets below $50 billion

FDIC to regulate (i) state banks and thrifts of all sizes; and (ii) bank holding companies of state banks with assets below $50 million

OTS to be eliminated SEC to require registration of hedge funds that

manage over $100 million as investment advisers; threshold for investment advisers subject to federal regulation to be raised from $25 million to $100 million

SEC to require registration of municipal financial advisers, swap advisers and investment brokers; Municipal Securities Rulemaking Board rules to be enforced by the SEC


December 11, 2009

Major Agency Changes

Major Changes in Agency Oversight

Senate Discussion Draft released bySenator Dodd on November 10, 2009

The Restoring American Financial Stability Act of 2010,

released by Senator Dodd on March 15, 2010

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AGENCIES AND AGENCY OVERSIGHT REFORM (continued)(as of March 23, 2010)

Definition of the following entities revised to bring more entities under supervision/regulation:

- Savings and Loan Holding Company - Bank Holding Company Creation of the Financial Services Oversight

Council, which is not an agency, but can provide recommendations relating to systemic risk, capital adequacy, liquidity, etc. to the various agencies

Certain financial entities may be designated as “specified” and subject to registration with FIRA and increased oversight by AFS

Regulators required to implement regulations that prohibit banks, bank holding companies and certain nonbank financial institutions from proprietary trading and investments and sponsorships of hedge funds and private equity funds.

Federal Reserve Board to have rule-making authority (and to act upon recommendations of the Council) with respect to rules prohibiting proprietary trading and investments and sponsorships of hedge funds and private equity funds

Large complex companies required to periodically submit “living wills” to regulators in the event of financial distress.


December 11, 2009

Other

Senate Discussion Draft released bySenator Dodd on November 10, 2009

The Restoring American Financial Stability Act of 2010,

released by Senator Dodd on March 15, 2010

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FINANCIAL STABILITY REFORM(as of March 23, 2010)

Numerous government agencies are responsible for regulating financial institutions. Commentators have noted that without a governing body to oversee the various agencies, we remain vulnerable to regulatory gaps and oversight failures. The House passed legislation creating a council to oversee financial institutions. The Senate discussion draft bill creates a similar agency.

Creation of Financial Services Oversight Council - Chaired by Secretary of Treasury - Voting members consist of heads of federal

financial regulatory agencies (Treasury, Federal Reserve, OTS, OCC, SEC, CFTC, FDIC, Federal Housing Finance Agency, National Credit Union Administration, and Consumer Financial Protection Agency)

- Federal Reserve to act as agent for the Council - Non-voting members consist of the Director of

the Federal Insurance Office, a state insurance commissioner, a state banking commissioner, and a state securities commissioner

Act by majority vote and be subject to audit and evaluation by GAO

Creation of Agency for Financial Stability - Chaired by a presidential appointee who is

subject to Senate confirmation - Members consisting of heads from federal

agencies (Treasury, SEC, FIRA, Federal Reserve, FDIC, CFPA, CFTC, independent member appointed by President with insurance experience)

- Members serve six-year terms Not regulators, have rule-making authority only

Creation of Financial Stability Oversight Council - Chaired by Secretary of Treasury - Voting members consist of heads of federal

financial regulatory agencies (Treasury, Federal Reserve, OCC, SEC, CFTC, FDIC, Federal Housing Finance Agency, Bureau of Consumer Financial Protection, and independent member with insurance expertise appointed by President and confirmed by Senate)

- Federal Reserve to act as agent for the Council - Director of newly-created Office of Financial

Research will serve in an advisory capacity as a non-voting member

Act by majority vote and be subject to audit and evaluation by GAO


December 11, 2009

CouncilCreation



March 15, 2010

22

FINANCIAL STABILITY REFORM (continued)(as of March 23, 2010)

Monitor financial marketplace and identify threats to stability

Make formal recommendations and subject financial companies and financial activities to stricter prudential standards provided that the standards do not supersede consumer or investor protection laws under state and federal law (on both an industry wide basis and on an individual firm basis if firm is a Designated Company)

Subject Designated Companies to stricter requirements and oversight by Federal Reserve

Catch-all authority to take action to mitigate systemic risk

Request reports and information from all financial companies to assess financial market and potential threats

Monitor financial marketplace and identify threats to stability and regulatory gaps

Make formal recommendations and subject financial companies and financial activities to stricter prudential standards

Authority to take action to mitigate systemic risk and to request reports and information from all financial companies to assess financial market and potential threats

Require BHCs with a minimum of $10 billion to establish risk committees

Monitor financial marketplace and identify threats to stability and regulatory gaps

Make formal recommendations and subject financial companies and financial activities to stricter prudential standards

Authority to take action to mitigate systemic risk and to request reports and information from all financial companies through the Office of Financial Research to assess financial market and potential threats

Resolution authority over agency disputes Require BHCs with a minimum of $10 billion and

nonbank financial companies to establish risk committees

Act with 2/3 vote and an affirmative vote of of the Chairperson with respect to determinations that a nonbank financial company or a foreign nonbank financial company should be supervised by the Board of Governors, and subject to heightened standards, if such entity would pose risk to financial stability

Act with 2/3 vote and an affirmative vote of of the Chairperson to impose conditions on, or limited activites of, BHCs with over $50 billion in assets or nonbank financial companies if such activities pose a systemic risk


December 11, 2009

CouncilAuthority



March 15, 2010

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Significant market developments and details regarding the 50 largest financial institutions reported to Congress semi-annually

Financial institutions can appeal Council requirement to implement stricter standards

Authority for FDIC to create emergency guarantee program upon 2/3 vote of Council

Limit Bank Holding Company Act exemption to credit card banks and trust-only banks

Broader powers given to Federal Reserve

Significant market developments and recommendations reported semi-annually to Congress

Limit Federal Reserve emergency loans mostly to healthy firms, not failing firms

Financial institutions can appeal Agency requirements to implement stricter standards

FIRA registration and exam authority

Creation of Office of Financial Research Financial companies and nonbank financial

companies can appeal Council requirement to implement stricter standards

Study on feasibility, benefits, costs, and structure of a contingent capital requirement for nonbank financial companies

Recommendations to Board of Governors and federal regulators regarding concentration limits, public disclosures, credit exposure, maintenace of long-term hybrid debt convertible to equity and general financial information reports

If the applicable agency chooses not to implement any recommendation provided by the Council, it must provide a report explaining rationale


December 11, 2009

Other



March 15, 2010

FINANCIAL STABILITY REFORM (continued)(as of March 23, 2010)

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In conclusion

Although the House passed its reform bill in December 2009, Senate Republicans and Democrats are still far from reaching an agreement on a Senate version of a reform bill. Several more months of additional debate and dialogue will be required before final legislation takes shape.

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