FINANCIAL SERVICES REGULATION DESKBOOK

Transcription

1 FINANCIAL SERVICES REGULATION DESKBOOK

2 PLI S COMPLETE LIBRARY OF TREATISE TITLES ART LAW Art Law: The Guide for Collectors, Investors, Dealers & Artists BANKING & COMMERCIAL LAW Asset-Based Lending: A Practical Guide to Secured Financing Equipment Leasing Leveraged Leasing Hillman on Commercial Loan Documentation Hillman on Documenting Secured Transactions: Effective Drafting and Litigation Maritime Law Answer Book BANKRUPTCY LAW Bankruptcy Deskbook Personal Bankruptcy Answer Book BUSINESS, CORPORATE & SECURITIES LAW Accountants Liability Anti-Money Laundering: A Practical Guide to Law and Compliance Antitrust Law Answer Book Broker-Dealer Regulation Conducting Due Diligence in a Securities Offering Consumer Financial Services Answer Book Corporate Compliance Answer Book Corporate Legal Departments: Practicing Law in a Corporation Corporate Political Activities Deskbook Corporate Whistleblowing in the Sarbanes-Oxley/Dodd-Frank Era Covered Bonds Handbook Cybersecurity: A Practical Guide to the Law of Cyber Risk Derivatives Deskbook: Close-Out Netting, Risk Mitigation, Litigation Deskbook on Internal Investigations, Corporate Compliance, and White Collar Issues Directors and Officers Liability: Current Law, Recent Developments, Emerging Issues Doing Business Under the Foreign Corrupt Practices Act EPA Compliance and Enforcement Answer Book Exempt and Hybrid Securities Offerings Fashion Law and Business: Brands & Retailers Financial Institutions Answer Book: Law, Governance, Compliance Financial Product Fundamentals: Law, Business, Compliance Financial Services Mediation Answer Book Financial Services Regulation Deskbook Financially Distressed Companies Answer Book Global Business Fraud and the Law: Preventing and Remedying Fraud and Corruption Hedge Fund Regulation Initial Public Offerings: A Practical Guide to Going Public Insider Trading Law and Compliance Answer Book Insurance and Investment Management M&A Deskbook International Corporate Practice: A Practitioner s Guide to Global Success Investment Adviser Regulation: A Step-by-Step Guide to Compliance and the Law Life at the Center: Reflections on Fifty Years of Securities Regulation Mergers, Acquisitions and Tender Offers: Law and Strategies Mutual Funds and Exchange Traded Funds Regulation Outsourcing: A Practical Guide to Law and Business Privacy Law Answer Book Private Equity Funds: Formation and Operation Proskauer on Privacy: A Guide to Privacy and Data Security Law in the Information Age Public Company Deskbook: Complying with Federal Governance & Disclosure Requirements SEC Compliance and Enforcement Answer Book Securities Investigations: Internal, Civil and Criminal

3 Securities Law and Practice Deskbook The Securities Law of Public Finance Securities Litigation: A Practitioner s Guide Social Media and the Law Soderquist on Corporate Law and Practice Sovereign Wealth Funds: A Legal, Tax and Economic Perspective A Starter Guide to Doing Business in the United States Technology Transactions: A Practical Guide to Drafting and Negotiating Commercial Agreements Variable Annuities and Variable Life Insurance Regulation COMMUNICATIONS LAW Advertising and Commercial Speech: A First Amendment Guide Sack on Defamation: Libel, Slander, and Related Problems Telecommunications Law Answer Book EMPLOYMENT LAW Employment Law Yearbook ERISA Benefits Litigation Answer Book Labor Management Law Answer Book ESTATE PLANNING AND ELDER LAW Blattmachr on Income Taxation of Estates and Trusts Estate Planning & Chapter 14: Understanding the Special Valuation Rules International Tax & Estate Planning: A Practical Guide for Multinational Investors Manning on Estate Planning New York Elder Law Stocker on Drawing Wills and Trusts HEALTH LAW FDA Deskbook: A Compliance and Enforcement Guide Health Care Litigation and Risk Management Answer Book Health Care Mergers and Acquisitions Answer Book Medical Devices Law and Regulation Answer Book Pharmaceutical Compliance and Enforcement Answer Book IMMIGRATION LAW Fragomen on Immigration Fundamentals: A Guide to Law and Practice INSURANCE LAW Business Liability Insurance Answer Book Insurance Regulation Answer Book Reinsurance Law INTELLECTUAL PROPERTY LAW Copyright Law: A Practitioner s Guide Faber on Mechanics of Patent Claim Drafting Federal Circuit Yearbook: Patent Law Developments in the Federal Circuit How to Write a Patent Application Intellectual Property Law Answer Book Kane on Trademark Law: A Practitioner s Guide Likelihood of Confusion in Trademark Law Patent Claim Construction and Markman Hearings Patent Law: A Practitioner s Guide Patent Licensing and Selling: Strategy, Negotiation, Forms Patent Litigation Pharmaceutical and Biotech Patent Law Post-Grant Proceedings Before the Patent Trial and Appeal Board Substantial Similarity in Copyright Law Trade Secrets: A Practitioner s Guide

4 LITIGATION American Arbitration: Principles and Practice Class Actions and Mass Torts Answer Book Electronic Discovery Deskbook Essential Trial Evidence: Brought to Life by Famous Trials, Films, and Fiction Expert Witness Answer Book Evidence in Negligence Cases Federal Bail and Detention Handbook How to Handle an Appeal Medical Malpractice: Discovery and Trial Product Liability Litigation: Current Law, Strategies and Best Practices Sinclair on Federal Civil Practice Trial Handbook REAL ESTATE LAW Commercial Ground Leases Friedman on Contracts and Conveyances of Real Property Friedman on Leases Holtzschue on Real Estate Contracts and Closings: A Step-by-Step Guide to Buying and Selling Real Estate Net Leases and Sale-Leasebacks TAX LAW The Circular 230 Deskbook: Related Penalties, Reportable Transactions, Working Forms The Corporate Tax Practice Series: Strategies for Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Financings, Reorganizations & Restructurings Foreign Account Tax Compliance Act Answer Book Internal Revenue Service Practice and Procedure Deskbook International Tax & Estate Planning: A Practical Guide for Multinational Investors International Tax Controversies: A Practical Guide International Trade Law Answer Book: U.S. Customs Laws and Regulations Langer on Practical International Tax Planning The Partnership Tax Practice Series: Planning for Domestic and Foreign Partnerships, LLCs, Joint Ventures & Other Strategic Alliances Private Clients Legal & Tax Planning Answer Book Transfer Pricing Answer Book GENERAL PRACTICE PAPERBACKS Anatomy of a Mediation: A Dealmaker s Distinctive Approach to Resolving Dollar Disputes and Other Commercial Conflicts Attorney-Client Privilege Answer Book Drafting for Corporate Finance: Concepts, Deals, and Documents Pro Bono Service by In-House Counsel: Strategies and Perspectives Smart Negotiating: How to Make Good Deals in the Real World Thinking Like a Writer: A Lawyer s Guide to Effective Writing & Editing Working with Contracts: What Law School Doesn t Teach You Order now at Or call (800) Mon. Fri., 9 a.m. 6 p.m. Practising Law Institute 1177 Avenue of the Americas New York, NY When ordering, please use Priority Code NWS9-X.

5 FINANCIAL SERVICES REGULATION DESKBOOK by Arthur S. Long Incorporating Release #4 April 2018 # Practising Law Institute New York City #38525

6 This work is designed to provide practical and useful information on the subject matter covered. However, it is sold with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. QUESTIONS ABOUT THIS BOOK? If you have questions about replacement pages, billing, or shipments, or would like information on our other products, please contact our customer service department at info@pli.edu or at (800) 260-4PLI. For any other questions or suggestions about this book, contact PLI s editorial department at: plipress@pli.edu. For general information about Practising Law Institute, please visit Legal Editor: Carol Benedicto Copyright 2012, 2013, 2015, 2017, 2018 by Practising Law Institute. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Practising Law Institute. LCCN: ISBN:

7 About the Author ARTHUR S. LONG is a partner and Co-Chair of the Financial Institutions Group of Gibson, Dunn & Crutcher. He has represented domestic and foreign banking organizations in New York since the late 1990s. He advises on the regulatory implications of mergers and acquisitions transactions; private equity and fund investments; the offering of new financial products, including derivatives; compliance and enforcement issues; bank insolvency issues; and, in the case of foreign banks, establishing U.S. branch and other offices. Mr. Long is currently advising domestic and foreign financial institutions on Dodd-Frank implementation matters, including the Volcker Rule, living wills, and the heightened prudential standards applicable to systemically significant financial institutions. During the Financial Crisis, he provided advice in connection with The Federal Reserve Bank of New York s emergency loan to American International Group, Inc.; Her Majesty s Treasury s plan to provide support to the U.K. banking system, including obtaining relief from the U.S. Bank Holding Company Act for the U.K.-government-controlled company that was the controlling shareholder of The Royal Bank of Scotland Group plc and Lloyds Banking Group plc; and Citigroup s proposed rescue of Wachovia Corporation. Mr. Long is a graduate of Harvard College and Harvard Law School, where he was an editor of The Harvard Law Review. He clerked for Associate Justice Clarence Thomas of the United States Supreme Court during October Term (Fin. Servs. Reg., Rel. #4, 4/18) vii

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9 Acknowledgments I have received considerable support from my firm, Davis Polk & Wardwell LLP, during the writing of this book. I am particularly grateful to my partner, Randall Guynn, for offering me the opportunity to write it; in addition, the book has benefited from the contributions of numerous Davis Polk associates and senior lawyers: Cristina Regojo, Lena Kiely, Michael Steinberg, Brandon Smith, Colleen Hobson, Ashley Harris, Christine Graham, Priya Bindra, Anjali Bonner, Louise Bennetts, Andrew Fei, and Joerg Riegel. In addition to their efforts, the materials that Davis Polk s Financial Institutions Group as a whole gathered and produced on the lengthy legislative process culminating in Dodd-Frank s enactment, under the energetic direction of my partner Meg Tahyar, made my task far easier than if I had been starting from scratch. Jeannie Quigley, the best of legal secretaries, helped me greatly with this project, as she does with all others. I also want to express my gratitude to the Davis Polk lawyers who spawned my interest in the field of bank regulation when I was younger Fritz Link, Randal Quarles, and Robin Maxwell each a wonderful teacher and true colleague. Finally, I appreciate the patience of my family my wife, Wendy, and children, Arthur and Mado during the time it took to complete this work, and it is to them that I dedicate it. Arthur S. Long New York, New York October 2012 (Fin. Servs. Reg., Rel. #4, 4/18) ix

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11 Introduction Signed into law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ) is the most significant piece of financial legislation since the Great Depression. It is the culmination of a lengthy legislative process that followed the financial crisis of the fall of 2008, during which Fannie Mae and Freddie Mac were placed into conservatorship, Lehman Brothers filed for bankruptcy protection, American International Group, Inc. received an $85 billion emergency loan from the Federal Reserve Bank of New York and a 79.9% preferred stock investment by the U.S. Treasury, Morgan Stanley and Goldman Sachs became bank holding companies, Wachovia Corporation was purchased by Wells Fargo Corporation, and Citigroup and Bank of America Corporation received substantial U.S. government financial assistance all this just in the United States alone. Throughout the world, other very large financial institutions either failed or, if they were deemed (as was often the case) Too Big to Fail, they received government assistance ranging from equity investments to debt guarantees to all-out nationalization. This unprecedented, worldwide Bailout, and the destruction of trillions in dollars of private wealth by the Panic of 2008, created a difficult political climate for the banking sector, driven in no small part by government and popular views of the significant compensation that the sector had received in the decade leading up to the crisis. In addition, it became apparent that in many jurisdictions financial institutions had become so large and complex that a global panic would threaten not only the institutions themselves, but their national governments, which were required to borrow substantial sums to shore up their financial systems. Governments around the world are still facing unprecedented public sector deficits, in many cases tied to the worldwide banking crisis, its effects on their economies, and the government assistance provided in its aftermath. In the United States, the Dodd-Frank Act is a comprehensive attempt to address the evils responsible for the financial crisis, as perceived by the majority in Congress that enacted the legislation. At over 840 pages for its 16 titles, it is a massive production, and one (Fin. Servs. Reg., Rel. #4, 4/18) xi

12 FINANCIAL SERVICES REGULATION DESKBOOK that does not cease to be controversial. The Dodd-Frank Act, among other achievements, creates two new significant federal regulatory authorities the Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB); requires significant heightened prudential standards for systemically significant financial companies; prohibits, subject to exceptions, banks from engaging in proprietary trading, and sponsoring and investing in hedge funds and private equity funds; requires U.S. banks and other entities that receive federal financial assistance to push-out much of their derivatives businesses to affiliates; creates a new Orderly Liquidation Authority for systemic financial firms; imposes increased prudential regulation on banks and their holding companies; and, for the first time, comprehensively regulates derivatives activities. Proponents of the Dodd-Frank Act have strongly articulated their views that the legislation paves the way for a stronger and sounder financial system. Critics of the Dodd-Frank Act have been no less vocal. Although they may not have summoned the words of a 19th Century Republican Senator, Roscoe Conkling, that [w]hen Samuel Johnson said that patriotism is the last refuge of the scoundrel, he was unconscious of the then undeveloped capabilities and uses of the word Reform, 1 such critics have unceasingly argued that for all of its length and complexity, the Dodd-Frank Act does not adequately address the Too Big to Fail problem (and likely makes it worse); does not address what will likely be the costliest aspect of the Panic of 2008, the huge losses at Fannie Mae and Freddie Mac; and materially and adversely affects the availability of credit in a U.S. economy that is still dependent on government support, if no longer on life support. A great deal of ink has been spent on these arguments, and this Deskbook does not seek to determine who has the better side. Only time will tell whether the legislation and its implementing regulations will really result in a much safer and sounder financial sector, or whether the Dodd-Frank Act will be the legislative equivalent of the Treaty of Versailles not a lasting peace, but merely an armistice for twenty years 2 until the next debacle in the banking sector wreaks havoc on at least one G-20 economy. 1. See, e.g., ALFRED RONALD CONKLING, 3 THE LIFE AND LETTERS OF ROSCOE CONKLING: ORATOR, STATESMAN, ADVOCATE Maréchal Ferdinand Foch, quoted in, e.g., Ruth Henig, Versailles and After, , p. 52. xii

13 Introduction Rather, the Deskbook seeks to gather in one place the most significant provisions of the Dodd-Frank Act and its implementing regulations, organized by subject matter and accompanied by commentary on the practical effects of the legislation on industry practice, including pointing out areas of legal ambiguity that must be solved only by advocacy with the relevant regulators. This Deskbook first describes the system of U.S. financial regulation that predated the financial crisis, then turns to the principal events of the crisis itself and the immediate U.S. government response, and then considers the most significant aspects of the Dodd-Frank Act and its implementing regulations. (Fin. Servs. Reg., Rel. #4, 4/18) xiii

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15 Table of Chapters Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 U.S. Bank Regulators at the Onset of the Financial Crisis The Financial Crisis Critical Events Initial Regulatory Responses to the Financial Crisis Systemic Regulation: Financial Stability Oversight Council Orderly Liquidation Authority The Volcker Rule Bank Regulatory Reform Investment Adviser and Securities Law Reforms Derivatives Reform Consumer Financial Protection Bureau (Fin. Servs. Reg., Rel. #4, 4/18) xv

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17 Table of Contents About the Author... vii Acknowledgments...ix Introduction...xi Table of Chapters...xv Chapter 1 U.S. Bank Regulators at the Onset of the Financial Crisis 1:1 Introduction :2 Office of the Comptroller of the Currency :2.1 Overview :2.2 Regulation and Supervision of National Banks :2.3 Preemption :3 The Federal Reserve Board :3.1 Overview :3.2 Structure and Funding :3.3 Establishing Monetary Policy :3.4 Regulation of State Member Banks :3.5 Regulation of Bank Holding Companies and Financial Holding Companies :3.6 Regulation of Non-U.S. Banks :3.7 Consumer Protection Regulations :3.8 Banking Services: Payment Systems and Discount Window Lending [A] Payment Systems: Clearance and Settlement [B] Discount Window :4 Federal Deposit Insurance Corporation :4.1 Overview :4.2 Deposit Insurance :4.3 Regulation of State Non-Member Banks and Savings Associations :4.4 Activities of State-Chartered Banks and Savings Associations :4.5 Non-U.S. Activities of State Non-Member Banks :4.6 Retail Deposit Funding by Non-U.S. Banks :4.7 Bank Insolvency Regime (Fin. Servs. Reg., Rel. #4, 4/18) xvii

18 FINANCIAL SERVICES REGULATION DESKBOOK 1:5 Office of Thrift Supervision :5.1 Overview :5.2 Regulation of U.S. Thrifts :5.3 Interpretation of HOLA and Preemption :5.4 Regulation of U.S. Thrift Holding Companies :5.5 Non-U.S. Activities of Savings and Loan Holding Companies :6 The National Credit Union Administration :6.1 Overview :6.2 Role and Responsibility of the NCUA :7 Federal Housing Finance Agency :7.1 Overview :7.2 FHLB Banks [A] Overview [B] Office of Finance :7.3 Supervision and Regulation :7.4 Enforcement Chapter 2 The Financial Crisis Critical Events 2:1 Introduction :2 Time Line of the Crisis :3 Details of Major Events :3.1 Bear Stearns Liquidity Crisis and Merger with JPMorgan :3.2 The IndyMac and Washington Mutual Failures and the Role of the Office of Thrift Supervision :3.3 Conservatorship of Fannie Mae and Freddie Mac :3.4 Too Big to Fail I: Lehman, Merrill, and AIG :3.5 Too Big to Fail II: Citigroup and Bank of America Chapter 3 Initial Regulatory Responses to the Financial Crisis 3:1 Introduction :2 Emergency Lending by the Federal Reserve :2.1 Overview :2.2 Term Securities Lending Facility :2.3 Rescue of Bear Stearns :2.4 Primary Dealer Credit Facility :2.5 Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility :2.6 Commercial Paper Funding Facility xviii

19 3:2.7 Term Asset-Backed Securities Loan Facility :2.8 Summary :3 Troubled Asset Relief Program :3.1 Establishment :3.2 TARP Programs [A] Capital Purchase Program [B] Capital Assistance Program [C] Targeted Investment Program [D] Asset Guarantee Program [E] Automobile Industry Financing Program [F] Making Home Affordable Program :3.3 Management, Implementation, and Oversight [A] Oversight Bodies [B] Table of Contents Executive Compensation for TARP Recipients :3.4 Outcome :4 Temporary Liquidity Guarantee Program :4.1 Overview :4.2 Debt Guarantee Program :4.3 The Transaction Account Guarantee Program Chapter 4 Systemic Regulation: Financial Stability Oversight Council 4:1 Introduction :2 Antecedents :2.1 Paulson Treasury Blueprint :2.2 Geithner Treasury White Paper :3 House and Senate Bills :3.1 House Bill Wall Street Reform and Consumer Protection Act :3.2 Senate Bill :4 Enacted Legislation :4.1 Overview :4.2 Systemic Designation Authority :4.3 Recommending Standards :4.4 Systemic Designation Nonbank Financial Company [A] Overview [B] Exclusions from the Definition of Nonbank Financial Companies [C] Factors for Systemically Important Designation [D] Appeal and Review of Systemically Important Designation (Fin. Servs. Reg., Rel. #4, 4/18) xix

20 FINANCIAL SERVICES REGULATION DESKBOOK [E] Anti-Evasion Provision [F] Potential Exemptions :4.5 Systemically Significant Bank Holding Companies :5 Enhanced Prudential Standards :5.1 Overview :5.2 Requirements for Designing Heightened Prudential Standards :5.3 Particular Prudential Standards: Inclusion of Off-Balance Sheet Activities in Computing Capital Requirements :5.4 Contingent Capital :5.5 Limits on Credit Exposures to Non-Affiliates :5.6 Risk Committees at Public Nonbank SIFIs and Certain BHCs :5.7 Resolution Plans ( Living Wills ) :5.8 Credit Exposure Reports :5.9 Enhanced Public Disclosures :5.10 Short-Term Debt Limits :5.11 Stress Tests :5.12 Early Remediation :5.13 Kanjorksi Amendment: Asset Sales and Breakup Powers :5.14 Leverage Limit :6 Designating Particular Activities and Practices :7 Registration of Nonbank SIFIs :8 Intermediate Holding Companies :9 Nonbank SIFIs: Reports, Examinations, and Enforcement :10 Bank Holding Company Act Activities Restrictions and Acquisition Limits :11 Application to Non-U.S. Financial Companies :11.1 Overview :11.2 Recommendation and Application of Standards to Non-U.S. Banking Entities :11.3 Specific Modification of Systemic Risk Provisions :11.4 Treatment of Non-U.S. Nonbank Financial Companies: Designation :11.5 Extraterritorial Application for Non-U.S. Nonbank SIFIs :12 Office of Financial Research :13 FSOC Regulations Relating to the Designation Process :13.1 Overview :13.2 Proposed Regulation on Systemic Designation xx

21 Table of Contents Table 4-1 Groupings of the Statutory Factors :13.3 Final Regulation on Systemic Designation :13.4 FSOC Final FOIA Regulation :14 Federal Reserve Proposed and Final Regulations on Predominantly Engaged in Financial Activities for FSOC Designation Purposes :14.1 Proposed Regulation Predominantly Engaged in Financial Activities :14.2 Supplemental Notice of Proposed Rulemaking on Predominantly Engaged in Financial Activities :14.3 Final Regulation Predominantly Engaged in Financial Activities :14.4 Final Regulation on Significant Bank Holding Company and Significant Nonbank Financial Company :15 FSOC Nonbank SIFI Designations :15.1 Nonbank SIFI Designations of American International Group and GE Capital Corporation :15.2 Nonbank SIFI Designations of Prudential Financial and MetLife, Inc :15.3 MetLife s Court Challenge to Its Designation :15.4 February 2015 Changes to FSOC Designation Procedures :15.5 Enhanced Prudential Standards Order for GE Capital Corporation :15.6 Rescission of Designation of GE Capital :15.7 Rescission of Designation of AIG :16 Title VIII Designation of Systemically Important Financial Market Utilities :17 Federal Reserve Final Rule on Risk-Management Standards for the Operations Relating to the Payment, Clearing and Settlement Activities of Designated Financial Market Utilities :18 Trump Treasury Report on FSOC Designations Chapter 5 Orderly Liquidation Authority 5:1 Introduction :2 Administration Antecedents :2.1 Paulson Treasury Blueprint :2.2 Geithner Treasury Rules of the Road :2.3 Geithner Treasury White Paper :3 House and Senate Bills :3.1 House Bill :3.2 Senate Bill :4 Orderly Liquidation Authority As Enacted (Fin. Servs. Reg., Rel. #4, 4/18) xxi

22 FINANCIAL SERVICES REGULATION DESKBOOK 5:4.1 Coverage Limitations: Financial Companies :4.2 Designating a Financial Company As a Covered Financial Company :4.3 Authority to Transfer Assets or Liabilities :4.4 Duration of Receivership :4.5 Funding of Title II Liquidation :4.6 FDIC Super Powers : Bankruptcy Code Approach :4.7 Liquidation Priorities :4.8 Officers and Directors :4.9 Required Rulemaking, Reports, and Studies :5 Post-Enactment Regulatory Actions :5.1 FDIC Final Rule: 12 C.F.R. Part [A] Subpart A [B] Subpart B [C] Subpart C :5.2 Final Rule on Treatment of Mutual Insurance Holding Companies :5.3 Final Rule on Maximum Obligation Limitation :5.4 Final Rule on Enforcement of Subsidiary and Affiliate Contracts by the FDIC As Receiver of a Covered Financial Company :5.5 FDIC Definition of Predominantly Engaged in Activities That Are Financial in Nature or Incidental Thereto Under Title II :6 The FDIC s Single Point of Entry Strategy :7 ISDA Protocol and Final Rule on QFCs and Cross-Defaults :8 Federal Reserve Final TLAC Rule :9 Criticism of the OLA and SPOE Chapter 6 The Volcker Rule 6:1 Introduction :2 Antecedents :2.1 Prior Restrictions on Trading and Fund Activities :2.2 Obama Administration Focus [A] Administration Financial Reform Efforts [B] Treasury Department Proposal [C] Merkley-Levin Proposal [D] Final Language :3 The Volcker Rule Statutory Text :3.1 Proprietary Trading Prohibition :3.2 Private Fund Prohibition xxii

23 6:3.3 Anti-Evasion Provision and Systemically Important Nonbanks :3.4 Effective Date, Conformance Period, and Illiquid Funds :4 FSOC Study :4.1 Findings :4.2 Fundamental Principles to Guide Rulemaking and Implementation [A] Five Fundamental Principles [B] Permitted Activities [B][1] Market-Making Activities [B][2] Risk-Mitigating Hedging [B][3] Underwriting [B][4] Loan Trading and Securitization [B][5] Asset-Liability Management :4.3 Challenges in Implementing the Proprietary Trading Ban :4.4 Supervisory Framework :4.5 Activities by Insurance Companies :4.6 Private Funds [A] Hedge Funds and Private Equity Funds [B] Similar Funds [C] Banking Entity :5 Federal Reserve s Transition Rules :5.1 Banking Entities [A] Conformance Period and Extensions [B] Additional Extension Period of Up-to-Five-Years [B][1] Illiquid Funds [B][2] Contractual Obligation to Be Invested Principally in Illiquid Assets [B][3] Effect of Illiquid Funds Definition [C] Table of Contents Process and Factors for Granting Extensions of Two-Year Conformance Period :5.2 Nonbank Financial Companies :6 Proposed Rules of the Federal Reserve, FDIC, OCC and the SEC :6.1 Overview :6.2 Proprietary Trading Prohibition [A] Definitions [B] Permitted Activity Determination [B][1] Market Making [B][2] Underwriting [B][3] Hedging [B][4] Trading in Government Obligations [B][5] Trading on Behalf of Customers (Fin. Servs. Reg., Rel. #4, 4/18) xxiii

24 [B][6] Trading by a Regulated Insurance Company [B][7] Trading Solely Outside the United States [B][8] When Permissible Activity Is Impermissible [C] Material Conflict of Interest [D] Compliance Program :6.3 Private Funds Prohibition [A] Definitions [B] Fund Asset Management Activity [B][1] Overview [B][2] De Minimis Co-Investment Limits [C] FINANCIAL SERVICES REGULATION DESKBOOK Additional Categories of Permitted Fund Activities Outside Section 619(d)(1)(G) [D] Acquiring Fund Interests As a Hedge [E] Fund Activity Solely Outside the United States [F] Super 23A Provisions [G] Compliance Program :7 Federal Reserve Statement of Policy Regarding the Conformance Period Chapter 7 Bank Regulatory Reform 7:1 Introduction :2 Antecedents :2.1 Paulson Treasury Blueprint :2.2 Geithner Treasury White Paper and Proposed Legislation; Republican Alternative [A] Geithner Treasury White Paper and Proposed Legislation [B] Republican Alternative :2.3 House and Senate Bills [A] House Bill [B] Senate Bill :3 Abolition of the Office of Thrift Supervision and Thrift-Related Reforms :3.1 Abolition of the Office of Thrift Supervision [A] Overview [B] Division of Previous OTS Supervisory and Rulemaking Authority [B][1] Federal Reserve [B][2] OCC [B][3] FDIC [C] OTS Actions/Material Post-Transfer Date :3.2 Thrift-Related Reforms [A] Thrifts and Their Holding Companies [B] Regulation LL: Savings-and-Loan Holding Company Regulation xxiv

25 [B][1] Overview [B][2] Permissible Nonbanking Activities [B][2][a] Covered SLHCs Must Comply with FHC Requirements [B][2][b] Well Capitalized and Well Managed Standards [B][2][c] Affirmatively Electing Treatment As an FHC [B][2][d] Insurance Agency and Escrow Activities [B][3] Control Regulations [B][3][a] Control Determinations [B][3][b] Definition of Control [B][3][c] Federal Reserve Approach [B][4] Other Covered Issues [B][4][a] Application Processing [B][4][b] Notice of Change of Director or Senior Executive Officer [B][4][c] Prohibited Service at SLHCs [B][4][d] Management Official Interlocks [B][4][e] Investigative and Formal Examination Proceedings [B][4][f] Dividends by Subsidiary Savings Associations [B][4][g] Qualified Stock Issuances :4 Bank Holding Company Amendments :4.1 Exemptions from Bank Definitions :4.2 Supervision :5 Bank Acquisitions New Restrictions :5.1 BHC Act Section :5.2 Deposit Cap on Other Insured Depository Institution Holding Companies :5.3 Dodd-Frank Act Section 622 Concentration Limit Provision [A] Overview [B] FSOC Study [C] Table of Contents Bank Holding Companies Source of Financial Strength :6 Nonbanking Activities and Acquisitions New Restrictions :6.1 Dodd-Frank Act Sections 606(a) and 606(b) :6.2 Dodd-Frank Act Sections 163(b) and 604(e) :7 Changes to Bank Prudential Regulation :7.1 Overview :7.2 Amendments to Section 23A and 23B of the Federal Reserve Act :7.3 Transactions with Insiders :7.4 Lending Limits :7.5 Securities Holding Companies (Fin. Servs. Reg., Rel. #4, 4/18) xxv

26 FINANCIAL SERVICES REGULATION DESKBOOK 7:8 Enhanced Capital Requirements :9 Capital Plans, Stress Tests, and Living Wills :9.1 Overview :9.2 Capital Plans and Stress Tests :9.3 Living Wills :9.4 Credibility Review :10 Deposit Insurance Reforms :10.1 Overview :10.2 New Assessment Scheme :10.3 Deposit Insurance :11 Federal Reserve Reform and Emergency Stabilization :11.1 Overview :11.2 Section 13(3) Assistance :11.3 Emergency Financial Stabilization :11.4 Governance :11.5 TARP Chapter 8 Investment Adviser and Securities Law Reforms 8:1 Introduction :2 Investment Advisers Act Reforms :2.1 Investment Advisers Act of :2.2 Final SEC Rules [A] Overview [B] Venture Capital Funds [B][1] Overview [B][2] Twenty Percent Basket for Non-Qualifying Investments [B][3] Borrowing, Providing Guarantees, or [B][4] Incurring Leverage Investors Redemption or Other Liquidity Rights [B][5] Private Fund [B][6] Grandfather [C] Private Fund Adviser Exemption [D] Foreign Private Adviser Exemption [E] Changes to Threshold for SEC Registration [F] New Family Office Exemption [G] New Recordkeeping and Reporting Obligations [H] [I] Reporting Requirements for Exempt Reporting Advisers Other Statutory Provisions Affecting Investment Advisers xxvi

27 8:3 Securities Law Reform :3.1 Investor Protection and Broker-Dealer-Related Provisions [A] Overview [B] Table of Contents SEC Study on Investment Adviser Standard of Care :3.2 Self-Regulatory Organization Rules :3.3 Securities Law Enforcement Provisions [A] Overview [B] SEC Final Whistleblower Rules :3.4 Extraterritorial Jurisdiction of Antifraud Provisions :4 Credit Rating Agencies :4.1 Overview :4.2 Governance and Compliance :4.3 Penalties and Liabilities :4.4 Conflicts of Interest :4.5 Procedures and Methodologies Rules :4.6 Disclosure :5 Securitization Reforms :5.1 Credit Retention Requirements :5.2 Conflict of Interest Prohibitions :6 Municipal Securities Reforms :6.1 Municipal Advisors and the Municipal Securities Rulemaking Board :6.2 Executive Compensation and Corporate Governance Chapter 9 Derivatives Reform 9:1 Introduction :2 Antecedents :2.1 Paulson Treasury Blueprint :2.2 Geithner Treasury Rules of the Road :2.3 Geithner Treasury White Paper :3 Administration and House Bills :3.1 Over-the-Counter Derivatives Markets Act of :3.2 Frank Proposal :4 Senate Action :5 Enacted Legislation :5.1 Overview :5.2 Jurisdictional Allocations: Swaps, Security-Based Swaps and Mixed Swaps (Fin. Servs. Reg., Rel. #4, 4/18) xxvii

28 FINANCIAL SERVICES REGULATION DESKBOOK 9:5.3 State Law Preemption :5.4 Regulated Market Participants: Swap Dealers and Major Swap Participants :5.5 Revisions to Existing Definitions of Certain Market Participants :5.6 New Mandatory Clearing of Swaps :5.7 New Mandatory Swap Trade Execution Requirements :5.8 Public Reporting of Swap Transaction Data :5.9 Other New Requirements Concerning Swaps :5.10 Capital and Margin Requirements :5.11 Protection of Counterparty Funds and Property :5.12 Position Limits and Large Swap Trader Reporting :5.13 Extraterritoriality :5.14 Exchange Act Beneficial Ownership Reporting :5.15 Conflicts of Interest :5.16 Enforcement Authority, Insider Trading, Disruptive Practices and Whistleblowers :5.17 Prohibition on Federal Assistance to Swaps Entities :5.18 Effectiveness and Exemptive Authority :6 Final Rulemakings: The First Two Years :6.1 From Enactment to July 31, :6.2 From July 31, 2011 to June 30, Chapter 10 Consumer Financial Protection Bureau 10:1 Introduction :2 Antecedents :2.1 Paulson Treasury Blueprint [A] Short-Term Recommendation [B] Long-Term Recommendation: Conduct of Business Regulatory Agency :2.2 Geithner Treasury White Paper [A] Overview [B] Consumer Financial Protection Agency :2.3 Administration and House Bills [A] Consumer Financial Protection Agency Act of [B] House Bill [B][1] Consumer Financial Protection Agency [B][2] CFPA Authority [B][3] Federal Preemption of State Law xxviii

29 Table of Contents [B][4] Funding [B][5] Other Provisions :2.4 Senate Bill [A] Overview [B] Bureau Within the Federal Reserve System [C] Federal Preemption of State Law [D] Durbin Amendment :3 Enacted Legislation The Consumer Financial Protection Bureau :3.1 Overview :3.2 Authority [A] Promulgate Regulations [B] Information Collection [C] Covered Parties [C][1] Covered Persons [C][2] Financial Products or Services [D] Exempt Persons and Activities :3.3 Preemption :3.4 Funding :3.5 Effective Date :3.6 Durbin Amendment :3.7 Other Provisions :4 Regulatory Developments :4.1 Overview :4.2 Initial CFPB Developments :4.3 Federal Reserve Final Durbin Amendment Rule :4.4 OCC Final Preemption Rule :4.5 Final Remittance Transfer Rule :4.6 Final Rules Defining Larger Participants of the Consumer Reporting and Debt Collection Markets Table of Authorities...T-1 Index... I-1 (Fin. Servs. Reg., Rel. #4, 4/18) xxix

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