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Financial Services Update – Issue 19

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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Email This Content Email This Content Posted in Financial Services Update. Tagged with , , , , , . By Matt Jessee - Friday, May 21, 2010

Financial Services Update – Issue 18

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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Email This Content Email This Content Posted in Financial Services Update. Tagged with , , , , , . By Matt Jessee - Monday, May 17, 2010

Financial Services Update – Issue 17

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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Email This Content Email This Content Posted in Financial Services Update. Tagged with , , , , , , . By Matt Jessee - Friday, May 7, 2010

Financial Services Update – Issue 16

Financial Regulatory Reform Bill

Last Wednesday, Republicans agreed to drop objections to a unanimous consent agreement to allow debate to begin after Senator Richard Shelby (R-AL), the ranking Republican on the Banking Committee, announced that his negotiations with Banking Chairman Chris Dodd (D-CT) had reached an impasse over disagreements in the bill. However, Republicans believe the standoff brought them concessions, including the removal of a $50 billion industry-financed resolution authority fund.

Last Tuesday, Republicans offered their own financial services reform plan that would have tightened regulation of Fannie Mae and Freddie Mac, and created a liquidation process of a troubled financial company, paid for by the company’s creditors and its shareholders. The Republican plan would have established a limited consumer protection agency to deal with financial companies, but the agency’s powers would regulate only smaller banks and nonfinancial companies.

Moving forward, Senate Democrats still need to resolve several internal differences, including a section of the bill regulating derivatives. The Senate bill goes farther than the Obama Administration and the Federal Reserve would like in requiring financial firms to spin off their derivatives trading operations. On Friday, FDIC Chairman Sheila Bair urged the Senate to remove the controversial provision saying it could destabilize banks and drive risk into unregulated parts of the financial sector.

The Senate will resume debate on Tuesday, and Senate Majority Leader Harry Reid (D-NV) has promised an open amendment process. Both Democrats and Republicans are preparing hundreds of amendments, including Sen. Ben Nelson (D-NE) who voted with Republicans to block debate on the bill. Nelson has expressed concern about a provision that would require companies such as his home-state’s Berkshire Hathaway to put forward billions of dollars as collateral on existing derivatives contracts. Republicans will need either a majority of Senators or sixty votes to pass amendments to the underlying bill. Senate leaders expect debate to last through the end of next week.

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Email This Content Email This Content Posted in Financial Services Update. Tagged with , , , , , . By Matt Jessee - Tuesday, May 4, 2010

Federal Reserve Board Issues Final Gift Card Rules

On March 23, 2010, the Federal Reserve Board issued its final rule, a summary and analysis of the final rule, and the official staff interpretation of the final rule in connection with Title IV of the CARD Act (the “Final Rules” or “Rules”).  The Final Rules are comparable to the proposed rules that were issued in November 2009, and follow the gift card related provisions set forth in the CARD Act addressing fees, expiration, disclosures, and various exemptions.  Set forth in this Bryan Cave Client Alert is a brief summary of key provisions of the Rules.

The Rules set forth various restrictions and guidelines with respect to gift card fees, expiration dates, and disclosures.  The Final Rules apply to any gift certificate, store gift card, or general-use gift card (including any reward/promotional card or any virtual/online gift card) that is sold or distributed to a consumer on or after August 22, 2010.

The Rules may affect any retailer, restaurant, consumer product supplier, hotel or travel provider that offers gift or reward cards – including loyalty programs – to consumers.  The Rules apply to retailers, processors and financial institutions involved in the issuance, distribution and sale of various types of gift certificate and gift card products.

Email This Content Email This Content Posted in Bank Regulations, Client Alerts. Tagged with , , , . By Margo Hirsch Strahlberg - Monday, March 29, 2010

Financial Services Update – Issue 10

 
Senate Financial Regulatory Reform Bill
On Monday, Senate Banking Committee Chairman Chris Dodd (D-CT) introduced his latest draft financial regulatory reform bill. The bill creates a new consumer protection agency, which will be located within the Federal Reserve, with regulatory authority over financial products such as mortgages and credit cards. The legislation also creates a resolution authority framework to liquidate failed financial firms, imposes stricter capital and leverage requirements on banks, creates a systemic risk council, requires shareholders be allowed a non-binding vote on executive compensation, and imposes new rules and standards for credit rating agencies. The bill also alters the banking regulatory structure by giving the FDIC regulatory oversight of state banks with assets below $50 billion, giving the OCC authority over national banks and federal thrifts with assets below $50 billion, eliminates the Office of Thrift Savings, and gives the Federal Reserve authority over national banks and thrift holding companies with assets of over $50 billion. Finally, the bill contains language regarding the regulation of over-the-counter ”OTC” derivatives that is identical to Dodd’s November draft bill, but Dodd has indicated his desire to replace those provisions with language currently being negotiated between Senator Jack Reed (D-RI) and Senator Judd Gregg (R-NH). Sources indicate Reed and Gregg may be unable to reach an agreement on such language, and with the markup scheduled to begin next Monday and hundreds of amendments expected to be filed, it remains to be seen how Dodd will handle these provisions.
 

Dodd and Bernanke Exchange Criticism Over Proposed New Fed Role
On Wednesday, Federal Reserve Bank Chairman Ben Bernanke and former Fed Chairman Paul Volcker testified before the House Financial Services Committee at a hearing examining the central bank’s regulatory duties. During his testimony and under questioning by Committee members, Bernanke criticized Senate Banking Chairman Dodd’s draft regulatory reform bill for its provisions which remove the Fed’s supervisory role over small banks, saying it will deprive the central bank of key information it uses to execute monetary policy. On Thursday, Dodd’s staff countered Bernanke’s criticism by citing former Fed Vice Chair Alice Rivlin’s statement from a July 2009 Senate Banking Committee hearing in which she stated, “I don’t think that supervising individual banks is important to making monetary policy. I know that was said around the table when I was at the Fed, but I didn’t really experience that we learned a lot from supervising particular banking institutions that was useful to monetary policy.”

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Email This Content Email This Content Posted in Financial Services Update. Tagged with , , , , , . By Matt Jessee - Monday, March 22, 2010

Financial Services Update – Issue 8

 
Senate Financial Regulatory Reform Bill
 
On Friday, Senate Banking Committee Chairman Christopher Dodd (D-CT) said his Committee has not reached an agreement on the pending financial services regulatory reform bill, but he hopes one will be reached within days. Dodd also indicated that the independence of the proposed “Consumer Financial Products Agency” continues to be the major point of contention between Republicans and Democrats. Senate Banking Committee Republicans oppose making the watchdog an independent agency, but have said they could support it as a unit within an existing banking regulatory agency. Dodd has suggested putting the consumer protection division in the Federal Reserve as a possible compromise. However, Dodd has drawn the line at Republican demands that a banking regulator have veto power over the consumer entity’s rule-making authority. Meanwhile, the third ranking Senate Banking Committee Democrat, Jack Reed of Rhode Island, said he would still introduce an amendment at the Committee’s markup that will insert language into the bill that would establish the consumer protection watchdog as an independent agency.
 
February Jobs Numbers Announced
 
On Friday, the Bureau of Labor Statistics announced that the nonfarm payroll employment declined by 36,000 jobs, fewer than the 50,000 that analysts predicted. February’s statistics place the total number of people out of work at 14.9 million or roughly 9.7%. While the Bureau of Labor Statistics, White House Economic Advisors Larry Summers and Christina Romer all cited the impact of February’s bad weather as a possible contributing factor to the continued job losses, Republicans cited the Administration’s yearlong battle to pass a health care bill as a distraction from job creation.
 
House Ways and Mean Committee Shakeup

On Thursday, after now-former Ways and Means Chairman Charles Rangel (D-NY) indicated he would step aside temporarily, Rep. Pete Stark (D-CA), who was next in line behind Rangel, indicated that he would not pursue the Chairmanship. House Democrats installed Rep. Sander Levin (D-MI) as acting chairman of the powerful tax writing panel for the remainder of the year, or until Rangel is sufficiently cleared by the Ethics Committee. If Democrats retain their majority in the House, however, the Chairmanship of the Committee would reopen and sources indicate Massachusetts Rep. Richard Neal, Washington Rep. Jim McDermott, and Georgia Rep. John Lewis may challenge Levin for the top spot.

Email This Content Email This Content Posted in Financial Services Update. Tagged with , , , . By Matt Jessee - Saturday, March 6, 2010

Financial Services Update – Issue 2

Obama Unveils New Regulations on Investment Banks

On Thursday, President Barack Obama unveiled a new set of proposals aimed at cutting the size and risk-taking behavior of the nation’s largest banks. The proposed restrictions includes size and complexity limits specifically on proprietary trading. The restrictions have been long advocated by former Federal Reserve Chairman Paul Volcker who chairs the President’s outside economic advisory board and met with the President before the announcement Thursday. The proposal could have the biggest effect on Bank of America Corp., Wells Fargo & Co., and J.P. Morgan Chase & Co., Goldman Sachs, Morgan Stanley, and Citigroup Inc.

Democratic Congressional Leadership Responds

In response to the President’s proposed new regulations, House Financial Services Committee Chairman Barney Frank (D-MA) said Senate Banking Committee Chairman Christopher Dodd (D-CT) would incorporate the restrictions into the Senate’s financial regulatory reform bill and that he (Frank) would push for the measures in conference committee. Frank also said the new restrictions would have to be phased in over 3-5 years to avoid ‘fire sales’ of bank divisions.

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Email This Content Email This Content Posted in Financial Services Update. Tagged with , , , . By Matt Jessee - Friday, January 22, 2010

Summary of Federal Reserve Proposed Compensation Guidance

On October 22, 2009, the Federal Register published proposed guidance from the Federal Reserve for structuring incentive compensation arrangements at banking organizations.

There are several notable aspects of the proposed guidance. First, the Federal Reserve expects all banking organizations, not just entities participating in the Troubled Asset Relief Program, to review their incentive compensation arrangements in light of the guidance. Second, the guidance sets forth principles that banking organizations should follow and implement as part of their incentive compensation arrangements, but does not establish pay caps or other specific formulas for calculating incentive compensation. Third, the principles in the guidance apply to incentive compensation arrangements for executives, employees, and groups of employees who may expose the organization to material amounts of risk. They are not limited to compensation arrangements for executive officers or other highly compensated employees.

Principles of a Sound Incentive Compensation System

The Federal Reserve guidance is centered on three (3) main principles that should be followed when designing a sound incentive compensation system.

Principle #1: Balanced Risk-Taking Incentives

  • Incentive compensation arrangements should account for risks associated with employee’s activities when developing incentive compensation arrangements.

An incentive compensation arrangement should balance the risk and the reward associated with activities undertaken by the employee. This balance is achieved when incentive compensation paid to an employee accounts for the risks and the financial benefits associated with the employee’s activities. This may require banking organizations to reduce the amount of incentive compensation payable to an employee to account for the risks.

Example: Two employees generate the same amount of short-term profit, but the activities of one employee result in greater risk to the banking organization. Under a balanced incentive compensation arrangement, the employee whose activities result in a greater risk to the banking organization should receive less than the employee whose activities did not result in a greater risk to the banking organization.

  • Employees should understand how risk and risk outcomes are accounted for in their incentive compensation arrangements.

Banking organizations should communicate clearly to employees how an incentive compensation arrangement will account for risk and risk outcomes. The communication should include examples and should be tailored to the employees.
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Email This Content Email This Content Posted in BHC Regulations, Bank Regulations. Tagged with , . By Jennifer Faucett - Monday, December 14, 2009

News Roundup — August 17, 2009 to August 21, 2009

Heartland Payments Systems

The Department of Justice indicted three individuals on Monday, August 17, 2009, in what it has called the largest case of cybercrime and identity theft ever prosecuted. The three suspects, one American and two unnamed Russian co-conspirators, are allegedly responsible for the data security breach suffered by Heartland Payments Systems in January 2009. The DOJ’s press release is here, the indictment is here and an article from August 2008 (with reference to a similar data breach suffered by the parent company of T.J. Maxx) can be viewed here.

U.S. Supreme Court

The Court has released its calendar of cases for November 2009. Of note is Bilski v. Doll (08-964), a case that could have a broad impact on the prepaid card industry.

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Email This Content Email This Content Posted in News Roundup. Tagged with , , , , , , , , , , , , . By Stan Santos - Tuesday, August 25, 2009