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Monthly Archives: May 2010

Financial Services Update – Issue 20

By Matt Jessee - Friday, May 28, 2010
Financial Regulatory Reform Bill

On Tuesday, the Senate appointed seven Democrats and five Republicans from the Banking and Agriculture Committees to the conference committee on H.R. 4173, the Wall Street Reform Act, which will negotiate a compromise between the House and Senate versions of the bill. The seven Senate Democrat conferees are Sens. Chris Dodd (D-CT), Tim Johnson (D-SD), Jack Reed (D-RI), Charles Schumer (D-NY), Blanche Lincoln (D-AR), Patrick Leahy (D-VT), and Tom Harkin (D-IA). The five Senate Republican conferees are Sens. Richard Shelby (R-AL), Mike Crapo (R-ID), Bob Corker (R-TN), Judd Gregg (R-NH), and Saxby Chambliss (R-GA).

Also on Tuesday, House Majority Leader Steny Hoyer (D-MD) said the House would not appoint conferees until the week of June 7-11, after the Memorial Day congressional recess. Speculation is that the House’s delay is intended to prevent House Republicans from offering politically painful motions ‘to instruct conferees’ on the floor prior to the appointments. House Financial Services Committee Chair Barney Frank (D-MA) also circulated a memo saying he would pick himself and Reps. Paul Kanjorski (D-PA), Luis Gutierrez (D-IL), Maxine Waters (D-CA), Mel Watt (D-NC), Gregory Meeks (D-NY), Dennis Moore (D-KS) and Rep. Carolyn Maloney (D-NY) as the Democratic representatives from the House to the financial reform conference committee. In the memo, Frank also laid out this proposed timeline, which could include coverage of open meetings on C-SPAN: Tuesday, June 8th: conferees appointed … Wednesday, June 9th: first open meeting of the conference, organizational matters and opening statements only. Tuesday, June 15th, Wednesday, June 16th, Thursday, June 17th: conference meets on substantive issues. Tuesday, June 22nd, Wednesday, June 23rd: conference meets on substantive issues. Thursday, June 24th: conference concludes with formal signing ceremony; conference report filed shortly thereafter. Monday, June 28th: Rules Committee meets to grant rule. Tuesday, June 29th: House passes conference report which gives the Senate three days to pass it before the beginning of the July 4th recess.

On Wednesday, Michael Barr, Assistant Treasury Secretary for Financial Institutions and Diana Farrell, Deputy Director of the National Economic Council, held a joint press conference about the Administration’s position on the financial regulatory reform bill. Both Barr and Farrell repeatedly deflected questions on the derivatives’ desk spinoff provision, authored by Sen. Blanche Lincoln (D-AR), which has drawn fierce opposition from business groups, Republicans and some Democrats. Lincoln, chairwoman of the Senate Agriculture Committee, faces a tough fight in the conference committee to persuade the House and Senate to maintain the provision. Along with the administration, Frank and Dodd have also not indicated they will support the provision in the conference.

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Will Trust Preferred Retain Tier 1 Capital Status?

By Barry Hester - Thursday, May 27, 2010

The Senate-approved version of the Restoring American Financial Stability Act of 2010 raises many issues for community banks.  Provisions added to it by the amendment of Senator Susan Collins (R-Maine), however, are drawing special attention.  The full text of the amendment can be found as Section 171 of the Senate-approved legislation.  The Senate unanimously consented to Senator Collins’ amendment by voice vote on May 13, 2010.

The amendment requires the various federal banking regulators to establish minimum leverage and risk-based consolidated capital requirements for all banks, all bank holding companies, and those non-bank financial firms subject to regulation by the Federal Reserve, regardless of size, that are no less than the capital requirements currently in effect for banks.  While unstated in the legislation, this amendment has two primary effects on community banks.  First, it eliminates the current regulatory exemption from consolidated capital requirements available to bank holding companies having less than $500 million in assets. Second, it would exclude trust preferred securities and bank holding company TARP CPP Preferred Stock from the consolidated Tier 1 treatment of bank holding companies.

The elimination of the small bank holding company exemption puts additional pressure on community bank holding companies to raise capital through the sale of common stock, as such holding companies will no longer merely need to assure that cash is down-streamed into the bank as Tier 1 capital.  However, for purposes of complying with regulator-mandated higher capital requirements at the bank level (whether by memorandum of understanding, IMCR, formal agreement or consent order), the treatment of the capital at the holding company level will continue to be of less importance than the treatment at the bank level.

Under the current regulations, subject to certain limitations, both trust preferred securities and TARP CPP cumulative preferred stock are treated as Tier 1 capital for bank holding companies.  However, neither are treated as Tier 1 capital if issued by a depository institution directly.  (The TARP CPP securities issued directly to banks without holding companies were originally issued in the form of non-cumulative preferred stock to preserve the Tier 1 treatment for such institutions.)  Current estimates are that there is approximately $129 billion in Tier 1 capital that would be eliminated by the disqualification of trust preferred securities as Tier 1 capital, which could force a corresponding $1.3 trillion deleveraging of bank balance sheets, and would cause an average decline of over 200 basis points in the capital ratios of publicly owned bank holding companies. (As background, the FDIC has always objected to the Federal Reserve’s determination, starting in 1996, that trust preferred securities should be included as Tier 1 capital.)

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Senate Publishes Text of Regulation Reform Bill

By Rob Klingler - Thursday, May 27, 2010

On May 26, 2010, the Senate released the official copy of the Senate-passed “Restoring American Financial Stability Act of 2010.”  Before becoming law, the senate-approved bill will need to be reconciled with the previously House-passed “Wall Street Reform and Consumer Protection Act of 2009.”  We understand the White House is pushing for reconciliation of the two bills before the Fourth of July congressional recess.

The reconciliation process can lead to dramatic changes in the final legislation, including changes and additions that are not currently reflected in the house or senate versions.  For example, in 1980, the increase in FDIC insurance to $100,000 was introduced for the first time in the reconciliation process.

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Financial Services Update – Issue 19

By Matt Jessee - Friday, May 21, 2010

Financial Regulatory Reform Bill

On Monday, the Senate resumed its consideration of S. 3217 the Restoring American Financial Stability Act of 2010. The Senate rejected an amendment sponsored by Sen. Mike Crapo (R-ID) which would have limited further bailouts of Fannie Mae and Freddie Mac and passed an amendment sponsored by Sen. John Cornyn (R-TX) that protects United States taxpayers from paying for the bailouts of foreign governments. On Tuesday, the Senate adopted an amendment sponsored by Sen. Tom Carper (D-DE) that limits the powers of state attorneys general to enforce consumer financial regulations, permits state attorneys general to enforce consumer regulations against any state-licensed or chartered bank but limits their powers to enforce regulations on national banks that are prescribed by the new consumer protection office, and removes a requirement that the federal government, prior to preempting states, must find an applicable substantive standard. The Senate rejected an amendment sponsored by Sen. Byron Dorgan (D-ND) that would have banned naked credit default swaps but passed an amendment sponsored by Sens. Charles Grassley (R-IA) and Claire McCaskill (D-MO) that prevents inspectors general at five financial regulatory agencies, namely the Federal Reserve Board of Governors, the Commodity Futures Trading Commission, the National Credit Union Administration, the Securities and Exchange Commission, and the Pension Benefit Guaranty Corporation, from becoming presidential appointments. On Wednesday, the Senate rejected a cloture motion sponsored by Senate Majority Leader Harry Reid (D-NV) to end debate on the bill and also rejected an amendment sponsored by Sen. Sheldon Whitehouse (D-RI) that would have forced lenders to abide by state-mandated caps on interest rates. Current federal regulations allow credit card companies to follow interest rate caps of the states in which they are located, rather than those prescribed by their customers’ home states. On Thursday, the Senate reconsidered and passed a cloture motion sponsored by Senate Majority Leader Harry Reid (D-NV) to end debate on the bill before passing the bill itself by a vote of 59-39.

The bill now proceeds to a House-Senate conference where the two bodies will iron out the substantial differences between their two bills. The key issues on which the House and Senate bills deviate are the new consumer financial protection agency, the regulation of auto dealers, over-the-counter derivatives, and the “Volcker Rule.” Regarding a new Consumer Financial Protection Agency, the Senate bill would move a proposed consumer protection agency into the Federal Reserve and the House bill would create it as a stand-alone agency with more leeway to implement regulations. House Speaker Nancy Pelosi (D-CA) and House Financial Services Committee Chairman Barney Frank (D-MA) have both voiced their strong support for keeping the House-passed language in the final version of the bill.

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Financial Services Update – Issue 18

By Matt Jessee - Monday, May 17, 2010

Financial Regulatory Reform Bill

On Tuesday, the Senate resumed its consideration of S. 3217 the Restoring American Financial Stability Act of 2010. The Senate passed an amendment sponsored by Sen. Bernie Sanders (I-VT) that would require the non-partisan Government Accountability Office to conduct an independent audit of the Board of Governors of the Federal Reserve System as well as an amendment by Sen. Chris Dodd (D-CT) that would require the Secretary of the Treasury to conduct a study on ending the conservatorship of Fannie Mae and Freddie Mac and reforming the housing finance system.

On Wednesday, the Senate passed three amendments to the bill. The first, offered by Senator Jeff Merkley (D-OR), would prohibit certain types of commission payments to loan originators and require greater oversight of lenders. The second, offered by Sen. Kay Bailey Hutchinson (R-TX), would maintain the role of the Federal Reserve Board of Governors as the supervisor of holding companies and state member banks. The final amendment that passed on Wednesday was offered by Sen. Jack Reed (D-RI). It would establish a specific consumer protection liaison for service members and their families.

On Thursday, the Senate adopted three more amendments. The first, sponsored by Sen. Al Franken (D-MN), would instruct the Securities and Exchange Commission to create a new self-regulatory organization that would choose, in a lottery or a rotation, which credit rating agency rated a new security. The second amendment which passed was sponsored by Sen. George Lemieux (R-FL). It would remove all references to credit ratings agencies from the statute effectively requiring federal regulators to develop their own standards for credit rather than relying on assessments from credit rating agencies. The third and most controversial amendment that passed was sponsored by Senator Dick Durbin (D-IL). Durbin’s amendment would empower the Federal Reserve to curb debit-card interchange, or “swipe” fees, charged to merchants for every card transaction.

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Health Care Reform – What Every Employer Needs to Know

By Chadd Bartlett - Tuesday, May 11, 2010

Also available in:

  • Los Angeles on Thursday, May 13, 2010 from 9:30-11:00 am PDT, 120 Broadway Suite 300, Santa Monica, CA  90401
  • St. Louis on Tuesday, May 18, 2010 from 7:30-10:30 am CDT, One Metropolitan Square, 211 North Broadway, Suite 3600, St. Louis, MO  63102

Webinar option available for all dates.  (For individuals participating via webinar, CLE may not be available.)

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Refund Opportunity for Sub S Banks

By Frank Crisafi - Monday, May 10, 2010

7th Circuit Reverses Tax Court in Vainisi –

Subchapter S and Q Sub Banks Following Notice 97-5 with Respect to Expenses Relating to Tax Exempt Income
Should Consider Filing Refund Claims

On March 17, 2010, the U.S. Court of Appeals, Seventh Circuit, reversed the U.S. Tax Court’s decision in Vainisi v. Commissioner, 132 T.C. No. 1 (2009), which held that a sub-S corporation that is a bank (or in this case a bank holding company that owned a bank that had made a qualified S subsidiary or “Q-sub” election) is required, under the provisions of Section 291 of the Internal Revenue Code of 1986, as amended, (the “Code”), to increase the amount of its taxable income by 20-percent of the amount of the bank’s interest expense that is considered attributable to certain qualified tax exempt-obligations that are owned by the sub-S bank, despite the plain language of Code Section 1363(b)(4), which provides that “section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.” The bank in the Vainisi case had been a Q-sub for longer than 3 years.

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More Insider Lending Pitfalls

By John ReVeal - Friday, May 7, 2010

This is Part Two of our two part article on common insider lending problems that we have identified in the industry.  (Read Part One here.) This installment focuses on the appropriate treatment and handling of lines of credit to insiders.

There are a number of types of line of credit, and the type can make a significant difference to the Regulation O requirements. “Extensions of credit” to insiders are subject to Regulation O and therefore are subject to dollar limits, board approval for larger loans, arms’ length requirements and, if made to executive officers, additional limitations. However, two types of line of credit are not “extensions of credit” for Regulation O purposes and therefore are not subject to these limitations. Lines of credit that are not extensions of credit are:

a) Open-end credit plans of $15,000 or less so long as:

(i) The debt does not involve prior individual approval by the bank other than for the purposes of determining authority to participate in the arrangement and compliance with any dollar limit under the line; and

(ii) The terms are not more favorable than those offered to the general public.

b) Indebtedness of $5,000 or less arising by reason of an interest-bearing overdraft credit plan of the type specified in 12 C.F.R. § 215.4(e), which requires a written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment.

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Gift Cards and the Credit Card Act

By Jeannie Osborne - Friday, May 7, 2010

On April 28, 2010, the Bryan Cave Payments Practice Team presented a webinar on “Gift Cards and Cards that are Not Gift Cards.”  The presentation provides practical guidance on navigating compliance with the gift card provisions of the Credit CARD Act.

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Financial Services Update – Issue 17

By Matt Jessee - Friday, May 7, 2010

Financial Regulatory Reform Bill

On Wednesday, the Senate began its formal debate of amendments to the Restoring American Financial Stability Act of 2010 with nearly unanimous support for an amendment by Senator Barbara Boxer (D-CA) clarifying that taxpayers would not bear any losses from the liquidation of bankrupt firms. The Senate moved to consider a bipartisan proposal by Senators Dodd (D-CT) and Shelby (R-AL) to strip the bill of a $50 billion fund which would be filled upfront by the financial industry, that would cover the cost of closing down failing firms. Under the Dodd-Shelby deal, the Federal Deposit Insurance Corporation would liquidate faltering firms by borrowing money from Treasury to cover initial costs. The government would recover the costs by selling off the firm’s assets, with creditors and shareholders incurring losses. Other large banks could be assessed to pay for additional costs as a last resort. Also, creditors of a failing firm would be forced to pay back the government any money they received above what they would have gotten under a bankruptcy proceeding. Any seizure of a large, failing firm would require court approval to ensure that the government not shut down a company inappropriately. In addition, Congress would have to approve the use of federal debt guarantees, and regulators also would be able to ban management and directors of failed firms from working in the financial sector for a minimum of two years.

After voting on the Dodd-Shelby changes, lawmakers quickly approved two amendments put forward by Senator Olympia Snowe (R-ME), aimed at preserving the ability of small-business owners to use their homes as collateral and lightening regulatory burdens on small banks. The Senate then passed an amendment from Senator Jon Tester (D-MT) and Senator Kay Bailey Hutchison (R-TX.) that instructs the FDIC to set the premiums that banks pay based on an assessment of their overall risk.

After approval of these bipartisan measures, the Senate moved to consider more contentious amendments. Senator Shelby (R-AL) offered an amendment to curb the reach of the new consumer protection agency. The amendment was defeated along party lines. Under the Shelby plan, the FDIC would have had to sign off on the consumer rules, and funding for the division would come from fees assessed on nonbanks. And unlike the underlying bill, Republicans would maintain federal pre-emption of state consumer protection laws, which would prevent the financial industry from having to beat back proposals in 50 different states.

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