On February 18, 2014, the Board of Governors of the Federal Reserve System (the “FRB”) approved a final rule (the “Final Rule”) implementing certain of the “enhanced prudential standards” mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”). The Final Rule applies the enhanced prudential standards to (i) U.S. bank holding companies (“U.S. BHCs”) with $50 billion (and in some cases, $10 billion) or more in total consolidated assets and (ii) foreign banking organizations (“FBOs”) with (x) a U.S. banking presence, through branches, agencies or depository institution subsidiaries, and (y) depending on the standard, certain designated amounts of assets worldwide, in the United States or in U.S. non-branch assets. The Final Rule’s provisions are the most significant, detailed and prescriptive for the largest U.S. BHCs and the FBOs with the largest U.S. presence—those with $50 billion or more in total consolidated assets and, in the case of FBOs, particularly (and with increasing stringency) for FBOs with combined U.S. assets of $50 billion or more or U.S. non-branch assets of $50 billion or more.
Archive for the ‘Legislative & Regulatory Developments’ Category
In an article recently posted to SSRN I addressed certain issues faced by the SEC in the ongoing Title III rulemaking process under the JOBS Act of 2012, enacted into law by Congress in April 2012. The SEC issued proposed rules to implement Title III in October 23, 2013, and has yet to issue final rules.
Title III of the JOBS Act created an exemption from registration for the offer and sale of so-called “crowdfunded” securities under the Securities Act of 1933, allowing the offer and sale of securities to an unlimited number of unaccredited investors without registration with the SEC, on an Internet-based platform, through intermediaries (portals) which are either registered broker-dealers or SEC licensed “funding portals.” Title III also provided for a number of built-in investor protections, including limitations on the amount invested, a limitation on the amount an issuer may raise in a 12 month period ($1 million), detailed financial and non-financial disclosure in connection with the offering, and ongoing annual issuer disclosure. Congress left much of the details of Title III in the hands of the SEC, to be fleshed out in the rulemaking process.
Our observations on the Federal Reserve’s final rule:
1. Delayed effective date and higher threshold: Foreign Banking Organizations (FBOs) eked out several small victories in the final rule—in particular, the July 2015 compliance date has been pushed to July 2016 and smaller FBOs (i.e., those with under $50 billion in US non-branch assets) are no longer required to form an Intermediate Holding Company (IHC). The changes reflect the Federal Reserve’s attempt to respond to FBOs’ concerns, especially that smaller FBOs did not pose as much risk to US financial stability.
Pursuant to Section 165 of the Dodd-Frank Act, the Federal Reserve has issued a final rule to establish enhanced prudential standards for large U.S. bank holding companies (BHCs) and foreign banking organizations (FBOs).
U.S. BHCs: The final rule represents the latest in a series of U.S. regulations that apply heightened standards to large U.S. BHCs. As the graphic below illustrates, under the emerging post-Dodd-Frank prudential regulatory landscape for U.S. BHCs, the number and stringency of prudential standards generally increase with the size of the banking organization.
On February 12, the White House released the widely anticipated Framework for Improving Critical Infrastructure Cybersecurity (“the Framework”). Developed pursuant to Executive Order 13636 (issued in February 2013), the Framework strongly encourages companies across the financial, communications, chemical, transportation, healthcare, energy, water, defense, food, agriculture, and other critical infrastructure sectors to implement and comply with its voluntary standards. The provisions set forth in the Framework may establish a new baseline for industry standard practices, and may impact or guide FTC enforcement actions and plaintiff data breach lawsuits.
U.S. financial regulators found themselves on the receiving end of an outpouring of concern from law makers last Wednesday about the risks to the banking sector and debt markets from the treatment of collateralized loan obligations (“CLOs”) in the Volcker Rule final regulations. Regulators and others have come to realize that treating CLOs as if they were hedge funds is a problem and we now understand from Governor Tarullo’s testimony that the treatment of CLOs is at the top of the list for the new interagency Volcker task force. But what, if any, solutions regulators will offer—and whether they will be enough to allow the banking sector to continue to hold CLOs and reduce the risks facing debt markets—remains to be seen.
December 18, 2013 may well mark an historic turning point in the ability of small business to effectively access capital in the private and public markets under the federal securities regulatory framework. On that day the Commissioners of the U.S. Securities and Exchange Commission met in open session and unanimously authorized the issuance of proposed rules  intended to implement Title IV of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”)—a provision widely labeled as “Regulation A+”—and whose implementation is dependent upon SEC rulemaking. Title IV, entitled “Small Company Capital Formation”, was intended by Congress to expand the use of Regulation A—a little used exemption from a full blown SEC registration of securities which has been around for more than 20 years—by increasing the dollar ceiling from $5 million to $50 million. Both the scope and breadth of the SEC’s proposed rules, and the areas in which the SEC expressly seeks public comment, appear to represent an opening salvo by the SEC in what is certain to be a fierce, long overdue battle between the Commission and state regulators, the SEC determined to reduce the burden of state regulation on capital formation—a burden falling disproportionately on small business—and state regulators seeking to preserve their autonomy to review securities offerings at the state level.
The recent financial crisis and subsequent events  show the dangers that can result when banks trade for their own accounts while disregarding their customers’ interests. During the financial crisis, U.S. taxpayers were forced to cover losses sustained by major financial institutions that resulted from speculative proprietary trading activities.  While several factors combined to cause the financial crisis, proprietary trading by major financial institutions was a key contributor to that crisis.  In particular, proprietary trading by deposit-taking institutions exposed a bank’s capital—and FDIC-insured deposits—to unacceptable risks and saddled taxpayers with massive losses. 
On October 23, 2013, the SEC voted unanimously to propose Regulation Crowdfunding,  the rules related to the offer and sale of securities through crowdfunded private offerings, as set forth in Title III of the Jumpstart Our Business Startups (“JOBS”) Act. FINRA then published its proposed rules governing the licensing and regulation of so-called “funding portals,” a new type of limited-purpose regulated intermediary solely for these offerings. Crowdfunding itself is not new. Websites like Kickstarter and IndieGoGo help all sorts of businesses, organizations and people raise money through small individual contributions for an identifiable idea or business. Until the JOBS Act, however, crowdfunding could not be used to offer or sell securities to the general public. Issuers and intermediaries relying on Regulation Crowdfunding expect to further democratize investing in start-ups, because any investor, whether or not accredited, may invest in these securities.
To permit crowdfunding, JOBS Act Title III added two provisions to the Securities Act of 1933: (1) Section 4(a)(6), which creates a new exemption to allow issuers to use crowdfunding to offer and sell securities in unregistered offerings and (2) Section 4A, which requires certain disclosures to be made by crowdfunding issuers and sets forth requirements for crowdfunding intermediaries. Proposed Regulation Crowdfunding and the proposed FINRA rules would implement these statutory provisions and create the regulatory framework for crowdfunding. Both agencies have sought comment on all aspects of their proposed rules, which are due in early February.
On August 28, 2013, a consortium of U.S. banking, housing and securities regulators (the “Agencies”)  re-proposed the joint regulations (the “Re-Proposed Rules”), to implement Section 15G of the Securities Exchange Act of 1934. Section 15G requires the Agencies to prescribe joint regulations to require “any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells or conveys to a third party.”  This has popularly been referred to as a “skin in the game” requirement intended to align the interests of those originating or aggregating loans with the interests of investors in securitizations of those loans. The Re-Proposed Rules are the Agencies’ second attempt at rulemaking under Section 15G, the first coming with proposed joint regulations released on April 14, 2011 (the “Initial Proposed Rules”). 
Both the Initial Proposed Rules and the Re-Proposed Rules would generally require a “securitizer” to retain at least 5 percent of the credit risk associated with the assets backing a securitization transaction, subject to various exemptions and offsets. The Initial Proposed Rules prescribed some basic forms of risk-retention that could be used in any type of securitization, as well as some forms of risk-retention that would apply only to specific types of securitizations (such as those involving revolving asset master trusts, which are common to credit-card and automobile floorplan securitization, CMBS transactions, certain federal agency securities issuances, and ABCP conduits).  The Re-Proposed Rules appear to be dramatically simpler than the Initial Proposed Rules and address many of the more significant issues presented by the Initial Proposed Rules. Nevertheless, the Re-Proposed Rules present a number of issues of their own.