DoddFrankAct Summary

8/3/2019 DoddFrankAct Summary

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The Dodd-Frank Act:a cheat sheet


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THE DODD - FRANKWALL STREET REFORMAND CONSUMER PROTECTION ACT ,

OR DODD - FRANKACT , REPRESENTSTHE MOSTCOMPREHENSIVEFINANCIALREGULATORY REFORMMEASURES TAKEN

SINCE THE GREATDEPRESSION .


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The Dodd-Frank Act implements changes that, among other

things, affect the oversight and supervision of nancialinstitutions, provide for a new resolution procedure for largenancial companies, create a new agency responsible forimplementing and enforcing compliance with consumer nanciallaws, introduce more stringent regulatory capital requirements,effect signicant changes in the regulation of over the counterderivatives, reform the regulation of credit rating agencies,implement changes to corporate governance and executivecompensation practices, incorporate the Volcker Rule, requireregistration of advisers to certain private funds, and effectsignicant changes in the securitization market. Although thelegislation calls for a number of studies to be conducted andrequires signicant rule-making, we all will be required to be

intimately acquainted with the Dodd-Frank Act.In the pages that follow, we summarize the principal aspects of the Dodd-Frank Act. As lawyers, we would reexively say thatthis is a summary, and only a very brief summary at that, andthat all of this is qualied in its entirety by reference to our morecomplete (and far longer) descriptions and analyses.As peoplewho receive lots of summaries, we would say short is usuallybetter. We hope youll nd these short summaries useful.



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Numerous government agencies areresponsible for regulating nancial institutions.

Commentators have noted that without agoverning body to oversee the various agencies,

we remain vulnerable to regulatory gaps andoversight failures. The Dodd-Frank Act createsthe Financial Stability Oversight Council

(Council) to oversee nancial institutions.

Creation of the CouncilChaired by Secretary of Treasury

Voting members consist of heads of the Treasury, Federal Reserve, OCC,SEC, CFTC, FDIC, FHFA, NCUA, andthe Bureau of Consumer FinancialProtection (Bureau), as well as anindependent member with insuranceexpertise appointed by the President andcon rmed by the SenateNon-voting members include the director of the Of ce of Financial

Research, the director of the FederalInsurance Of ce, a state insurancecommissioner, a state bankingsupervisor, and a state securitiescommissioner

Purpose of the CouncilIdentifying risks to U.S. nancial stability that may arise from ongoingactivities of large, interconnected

nancial companies as well as

from outside the nancial servicesmarketplacePromoting market discipline by eliminating expectations of governmentbailoutsResponding to emerging threats to

nancial stability

Duties of the CouncilCollect information necessary to assess

risks to the U.S. nancial systemProvide direction to the Of ce of Financial Research to support the workof the CouncilMonitor the nancial services market place and identify potential threatsto U.S. nancial stability, as well asregulatory proposals affecting integrity,ef ciency, competitiveness, and stabilityof the U.S. nancial markets

Facilitate information sharing and coordination among member agenciesand other federal and state agenciesRecommend to the member agencies general supervisory priorities andprinciples re ecting the outcome of discussions among the member agenciesIdentify gaps in regulation that could pose risks to the nancial stability of theU.S.

Require Federal Reserve supervision for nonbank nancial companies thatmay pose risks to U.S. nancial stabilityin the event of their material nancialdistress or failureReview and submit comments to the SEC and any standard-setting body


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with respect to an existing or proposedaccounting principle, standard, orprocedureProvide a forum for discussion and analysis of emerging marketdevelopments and nancial regulatoryissues, and to resolve jurisdictional

disputes among members of the CouncilProvide an annual report and testimony before Congress regarding nancialstabilityRecommend heightened prudential standards for nonbank nancialcompanies and large, interconnectedbank holding companies supervised bythe Federal ReserveRecommend to primary nancial

regulatory agencies new or heightenedstandards and safeguards for activitiesthat increase risks of signi cant liquidity,credit, or other problems spreadingamong bank holding companies,nonbank nancial companies, and U.S.

nancial marketsIdentify systemically important nancial market utilities and payment, clearing,and settlement activities, and require

such utilities and activities to be subject

to standards established by the FederalReserve

OtherCreates the Of ce of Financial Research, which will support the Council throughdata collection and research

Financial companies and nonbank nancial companies can appeal Councilrequirement to implement stricterstandardsCouncil must conduct a study on feasibility, bene ts, costs, and structureof a contingent capital requirement fornonbank nancial companiesCouncil must make recommendations to the Federal Reserve and other federal

regulators regarding concentrationlimits, public disclosures, creditexposure, maintenance of long-termhybrid debt convertible to equity andgeneral nancial information reportsIf the applicable agency chooses not to implement any recommendationprovided by the Council, it must providea report explaining its rationale


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The SEC will require registration of municipal nancial advisers, swapadvisers and investment brokers;Municipal Securities Rulemaking Boardrules to be enforced by the SEC

OtherRegulators will be required to implement regulations that prohibit banks,bank holding companies and certainnonbank nancial institutions fromproprietary trading and investments andsponsorships of hedge funds and privateequity fundsFederal Reserve will have rulemaking authority (and will act uponrecommendations of the Council)with respect to rules prohibitingproprietary trading and investments andsponsorships of hedge funds and privateequity fundsLarge complex companies will be

required to periodically submit livingwills to regulators in the event of

nancial distressFederal Reserve will be subject to a one- time GAO audit of the Federal Reserveslending facilities



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The nal shape of securitization reform isbeginning to gel. In addition to the changes

effected by the Dodd-Frank Act, the SEC recentlyreleased a 667-page proposed rule amending

Regulation ABs registration, disclosure, andreporting requirements for asset-backed securitiesand other structured nance products. And

the FDIC released a proposed rule amendingits securitization rule safe harbor to require

nancial institutions to retain more of the creditrisk from securitizations and re ect recent

accounting changes. This was preceded by theFASBs revisions to accounting rules relatingto sales of nancial assets and consolidation of

certain off-balance sheet entities, revisions to bankcapital rules to re ect FASBs accounting changes

and the enactment of the Hiring Incentives toRestore Employment Act, which imposes a 30%withholding tax on foreign nancial institutions,including certain offshore securitization vehicles



Credit Risk Retention5% to be retained by the securitizer;

however, if originator retains someamount of risk, only the remaining risk(up to 5% total) will be allocated tosecuritizerRisk retention also to apply to CDOs, securities collateralized by CDOs andsimilar instrumentsRisk retention types, forms and amounts for commercial mortgages tobe determined by regulators, including

permitting a third party that purchasesa rst-loss position at issuance andwho holds adequate nancial resourcesto back losses substituting for the riskretention requirement of the securitizerPercentage retained can be lowered based on underwriting standards usedAn exemption for quali ed residential mortgagesOther exemptions will be available at

regulators discretionNo hedging or transfer of risk

Creation of different asset classes, which may be subject to different regulations

Required DisclosuresAsset-level or data-level detail, including data with unique identi ers relating to

loan brokers or originators, the natureand extent of the compensation of the broker or originator of the assetsbacking the security, and the amountof risk retention of the originator orsecuritizer of such assetsFul lled and unful lled repurchase requests across all trusts will beaggregated by the originator, so investorsmay identify originators with clearunderwriting de cienciesDue diligence analysis must be performed by securitizer and provided toinvestors

Representations and WarrantiesCredit rating agencies must explain, in reports accompanying credit ratings,representations, warranties, andenforcement mechanisms availableto investors and how they differfrom representations, warranties andenforcement mechanisms in similar

issuancesOther

Regulations relating to credit risk retention requirements will becomeeffective one year from enactmentfor residential mortgage assets, andwill become effective two years fromenactment for all other asset classes

The major elements of securitization reform are:



Title VII of the Dodd-Frank Act, to be known asthe Wall Street Transparency and Accountability

Act of 2010, will impose a comprehensive andfar-reaching regulatory regime on derivatives

and market participants. Major elements of TitleVII are summarized below.1 However, manysections of Title VII require various studies to be

undertaken and mandate or permit signi cantrulemaking by the Commodity Futures Trading

Commission (CFTC), the Securities andExchange Commission (SEC), and various

Federal banking regulators. As a result, a fullassessment of the impact of Title VII will only bepossible once that rulemaking advances.

1 Unless otherwise speci ed, for convenience we refer to swaps and security-based swaps as swaps, swap dealers and security-based swap dealers as swapdealers, and major swap participants and major security-based swap participants as major swap participants or MSPs. We also use the term applicableregulator to refer to the CFTC, in the case of swaps, and the SEC, in the case of security-based swaps. For a description of the Acts prohibition on proprietarytrading, please see our separate summary of the Volcker Rule.

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Lincoln Provision (the Swaps PushoutRule)

No Federal assistance ( e.g., advancesfrom any Federal Reserve credit facilityor discount window that is not part of abroad-based eligibility program, FDICinsurance, or guarantees) may be provided

to any swaps entity ( i.e., swap dealersand non-bank major swap participants, orMSPs).The prohibition does not apply to insured depository institutions that limit theirswap activities to (i) hedging and othersimilar risk mitigating activities directlyrelated to their activities and (ii) engagingin swaps involving rates or referenceassets that are permissible for investment

by national banks. For purposes of theexception in clause (ii), CDS is permissibleonly if cleared.The prohibition only applies to swaps entered into after the end of the transitionperiod, which could be up to ve yearsafter enactment.

Regulatory Framework and KeyDe nitions

The Act creates parallel regulatory regimes

for the CFTC and SEC and dividesjurisdiction between the two regulatorsbased on whether a swap or a security-based swap is involved. The CFTC willhave jurisdiction over swaps and certainswap market participants, and the SECwill have jurisdiction over security-basedswaps and certain security-based swapmarket participants. Banking regulatorswill retain jurisdiction over certain

aspects of banks derivatives activities(e.g., capital and margin requirements,prudential requirements).

Swap. This term is broadly de nedto include many types of derivativesacross various asset classes, but excludes,among other things, non nancial orsecurity forwards that are intended to

be physically settled, futures contracts,listed FX options, debt securities,securities options and forwards thatare subject to the Securities Act of 1933 (33 Act) and the SecuritiesExchange Act of 1934 (34 Act), andsecurity-based swaps. FX swaps and

FX forwards qualify as swaps, unlessthe Secretary of the Treasury determinesotherwise; however, notwithstanding anysuch determination, all FX swaps andFX forwards must be reported to a swapdata repository or, in the absence of one,to the applicable regulator, and swapdealer and MSP counterparties to FXswaps and FX forwards must conform tobusiness conduct standards applicable toswap dealers and MSPs.

A security-based swap is a swap on a singlesecurity or loan or a narrow-basedsecurity index (generally, an index with9 or fewer component securities). Thede nition also includes credit defaultswaps relating to a single issuer or theissuers in a narrow-based security index.

The Act creates two new categories of signi cant market participants: swapdealers and major swap participants.

A swap dealer isany person who holds itself out as adealer in swaps, makes a market inswaps, regularly enters into swaps withcounterparties as an ordinary course of business for its own account, or engagesin any activity causing the person tobe commonly known in the trade as adealer or market maker in swaps. The

term excludes persons that enter intoswaps for their own account, eitherindividually or in a duciary capacity,but not as a part of a regular business. Italso does not include insured depositoryinstitutions that offer to enter into swapswith their customers in connection withoriginating loans with those customers.



The Act requires the CFTC and SEC toprescribe a de minimis exception to beingdesignated as a swap dealer. A majorswap participant (MSP) is any personwho is not a swap dealer and:

Maintains a substantial position(to be de ned by the applicableregulators) in swaps for any majorswap category, excluding positionsheld for hedging or mitigatingcommercial risk and positionsmaintained by any employee bene tplan for the primary purpose of hedging or mitigating any riskdirectly associated with the operationof the plan;

Whose outstanding swaps createsubstantial counterparty exposurethat could have serious adverse effectson the nancial stability of the U.S.banking system or nancial markets;orIs a nancial entity that is highlyleveraged relative to the amount of capital that it holds, is not subjectto any Federal banking agencys

capital requirements, and maintains asubstantial position in outstandingswaps in any major swap category.

Certain captive nance af liates of manufacturers that use swaps to hedgecommercial risks relating to interest rateand FX exposures are excluded from thede nition of major swap participant.

Clearing and Trading Requirements A swap mustbe cleared if the applicable regulatordetermines that it is required to be clearedand a clearing organization accepts theswap for clearing.

The determination process may beinitiated by the applicable regulator orby a clearing organization, and mayrelate to any single swap or any group,

category, type, or class of swaps.Mandatory clearing requirement willnot apply to existing swaps if they arereported to a swap data repository or,if none, to the applicable regulator in atimely manner.

The Act provides an exception to themandatory clearing requirement if one of the counterparties to the swap (i) is nota nancial entity, (ii) is using swaps tohedge or mitigate commercial risk, and(iii) noti es the applicable regulator howit generally meets its nancial obligationsassociated with entering into non-clearedswaps. Application of the exception is atthe sole discretion of the commercial end

user.The term nancial entity includesswap dealers, MSPs, commoditypools, private funds (as de ned in theInvestment Advisers Act of 1940),employee bene t plans, and personspredominantly engaged in activitiesthat are in the business of bankingor in activities that are nancial innature, but excludes certain captivenance af liates. The Act directs

the applicable regulators to considerwhether to exempt small banks,savings associations, farm credit systeminstitutions, and credit unions.

To theextent that a swap must be cleared, itmust be executed on an exchange or swapexecution facility, unless no exchange orswap execution makes the swap availablefor trading. Persons who are not eligiblecontract participants (ECPs) mustalways enter into swaps via an exchange.

For swaps, the illegality applies to thenon-ECP.For security-based swaps, the illegalityapplies to any person effecting thetransaction with or for the non-ECP.

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Regulation of Swap Dealers and MajorSwap Participants

Swap dealers and MSPsmust register as such and will be subjectto a regulatory regime that will be de ned,to a very large extent, by rulemaking.Registration is required with an applicable

regulator regardless of whether the entityis registered with the other applicableregulator or is a depository institution.

The applicableregulators (for non-banks) and theFederal banking regulators (for banks)will set minimum capital requirementsand initial and variation marginrequirements for swap dealers and MSPs.

To offset the greater risk of non-

cleared swaps, the capital and marginrequirements must help ensure thesafety and soundness of the swapdealers and MSPs and be appropriatefor the risk associated with the non-cleared swaps held by those entities.The Act permits the use of noncashcollateral and, for non-cleared swaps,requires swap dealers and MSPsto hold their counterparties initialmargin, upon request, in a segregatedaccount at an independent third partycustodian.The Act does not provide anexemption to the margin requirementsfor commercial end users, althoughSenators Dodd and Lincoln stated ina June 30, 2010 letter to ChairmenFrank and Peterson their view that theAct does not authorize the regulatorsto impose margin requirements on

commercial end users. Note, however,that imposing margin requirementson swap dealers and MSPs for non-cleared swaps could, in effect, bepassed on to end users through swappricing and/or margin requirementsimposed by swap dealers and MSPs.

Swapdealers and MSPs must conform withbusiness conduct standards, including:

Disclosure to non-swap dealer andnon-MSP counterparties of thematerial risks and characteristics of the swaps and any material incentives

or con icts of interest that the swapdealer or MSP may have in connectionwith the swaps; andAdditional responsibilities with respectto special entities ( i.e., States,municipalities, State and Federalagencies, pension plans, governmentalplans, and endowments):

A swap dealer that acts as anadvisor to a special entity has a

duty to act in the best interests ofthe special entity; andA swap dealer or an MSP thatoffers or enters into a swap witha special entity must complywith any duty established bythe applicable regulator thatrequires the swap dealer or MSPto have a reasonable basis tobelieve that the special entity is

advised by a quali ed independentrepresentative.Miscellaneous

The Act increases eligibility requirements for ECPsThe applicable regulators are authorized to establish aggregate position limits and largetrader reporting requirements for swaps.Swaps shall not be considered to be insurance and may not be regulated as

insurance contracts under State law.The SEC is authorized to expand the bene cial ownership rules in sections 13 and16 of the 34 Act to security-based swaps.Offers and sales of security-based swaps to non-ECPs must be registered, notwithstandingsections 3 and 4 of the 33 Act.



The nancial crisis took many investors bysurprise. It became clear that investors in certainnancial products, such as auction rate securities,

did not understand how the secondary market

for such securities functioned. Ponzi schemeswere exposed at a rapid pace and clients lost faithin those with custody of their securities and/or

funds. On December 30, 2009, the SEC adoptedamended Rule 206(4) under the Investment

Advisers Act to address certain custody issuesCongress also aims to increase investor protection

as a means of bolstering investor con dence andbringing investors back to the capital markets.

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Liability and DisclosuresEmpowers the SEC to promulgate a

duciary standard for broker-dealers thatprovide personalized investment servicesMandates a study by the SEC on imposing a uniform duciary duty on nancialintermediaries who provide similar advisoryservicesMandates a study on whether there are legal or regulatory gaps in standards in theprotection of retail customers relating tothe standards of care for various nancialintermediariesProhibits or limits use of mandatory arbitrationSEC may require disclosures if a broker- dealer sells only proprietary products

Custody and Client RequestsSEC will review rule changes of self- regulatory organizations that affect custodyof customer securities or fundsIndependent veri cation of client assets held in custody of adviser

Con icts of InterestSEC shall facilitate the provision of simple

and clear investor disclosures regarding theterms of relationships with broker-dealersand investment advisers and disclosures of con icts of interestRequires a study on con icts of interest involving analysts

Point-of-Sale DisclosuresSEC may issue rules regarding required point-of-sale disclosures

Short SalesRequires a study on short selling

SEC PowersSEC may share information with federal, foreign and state regulators and lawenforcement without waiving privilegeSEC will be self-funded

SEC may engage in consumer testing

Oversight of private funds managed by investment advisers

Other

Awards to whistleblowers Creation of SEC Investor Advisory Committee to consult on initiatives topromote investor con denceChanges the accredited investor standard by excluding, in the calculation of net worth,the value of an investors primary residenceRequires a study on appropriate criteria for determining accredited investor status andeligibility to invest in private fundsRequires a study of the feasibility of a self- regulatory organization to oversee privatefundsProvides for special protection for senior investors



The Credit Rating Agency Reform Act passedin 2006 requires credit rating agencies (CRAs)

to register with the SEC and submit reports.Recently proposed amendments to SEC rules

attempt to address concerns raised regardingCRAs following the nancial crisis, andthe Dodd-Frank Act goes even further.

LiabilityEliminates the exemption provided by

Rule 436(g) under the 33 Act from theconsent ling requirement for registrationstatements and potentially subjects CRAsto liability under Section 11 of the 33 ActDuty to report violations of law to appropriate authoritiesEnforcement and penalty provisions of the 34 Act apply to CRA statements to sameextent as to registered public accounting

rms or securities analysts

Modi cation to state of mind requirement for private securities fraudactions against CRAs for money damages

Required DisclosuresQualitative and quantitative methodologies and assumptions usedHistorical rating performance data required over multiple years, including forratings that were withdrawn

SEC to issue rules requiring CRAs to disclose information on initial ratings andsubsequent changes; disclosures to becomparable across CRAsSEC must require each CRA to accompany publication of each ratingwith a prescribed form that details,among other things, ratings methodologies

Prohibited ActivitiesSEC to promulgate rules separating

rating activities from sales and marketingactivitiesSEC may impose nes, including nes for failure to superviseEach CRA must establish, maintain, enforce, and document an effectiveinternal control structureCRAs must submit an annual report to the SEC, including a CRA internal controlsreport along with a CEO attestation

GovernanceAt least half of the CRA board of directors must comprised of independent directors(no fewer than 2), with a portion of thedirectors to include users of ratingsIndependence is based on the presence no consulting, advisory or compensatory feeor status as an associated person of theCRA, and on not being disquali ed from

any deliberation involving a particularratingIndependent directors to serve for a xed, non-renewable term not to exceed 5 years,with compensation not linked to thebusiness performance of the CRAThe board of directors has speci cally mandated oversight responsibilities

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The Volcker Rule provisions, named for formerFederal Reserve Chairman Paul Volcker, are

premised on the belief that speculative tradingactivities contributed in part to the nancial crisis.

The original House bill did not contain VolckerRule provisions, although it did contain certainlimitations on permitted activities (for example,

the House bill permitted a ban on proprietarytrading that poses systemic risk). In January

2010, the Obama Administration endorsedthe Volcker Rule. The Senate bill imposed a

prohibition on most proprietary trading by U.S.banks and their af liates, subject to limitedexceptions, and restricted covered institutions

from owning, sponsoring or investing in hedgefunds or private equity funds.

Discussions relating to the Volcker Rule wereamong the most heated.

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Prohibition on Proprietary TradingThere are important distinctions made

between the activities that may beconducted by banking entities and thosethat may be conducted by nonbank

nancial companies supervised by theFederal Reserve.

Except for certain permitted activities, a banking entity cannot (1) engagein proprietary trading, or (2) acquire orretain any equity, partnership or otherownership interest in or sponsor a hedgefund or private equity fund (collectivelyfund activities).A nonbank nancial company that engages in proprietary trading or fundactivities will be subject to additionalcapital requirements and quantitativelimits, to be established by rule. However,if a nonbank nancial company engagesin any permitted activities (i.e., anyof the activities that a banking entityis permitted to engage in), the capitalrequirements or quantitative limits appliedto the nonbank nancial company forthose activities will be the same as thoseapplied to banking entities engaging insuch permitted activities.

Proprietary trading is de ned as engagingas principal for the trading account of the banking entity or nonbank nancialcompany in any transaction to purchaseor sell, or otherwise acquire or dispose of,

any security, any derivative, any contract of sale of a commodity for future delivery, anyoption on any such security, derivative, orcontract, or any other security or nancialinstrument that the appropriate federalagencies may determine.Banking entities are bank holdingcompanies (BHCs), non-U.S. entities treatedas BHCs, insured depository institutions,

and af liates or subsidiaries of theforegoing.

Nonbank nancial companies are certainU.S. or foreign companies that, though notBHCs or insured depository institutions,predominately engage in nancial activities(as de ned in the Bank Holding CompanyAct) and which will become subject to thesupervision of the Federal Reserve based ona determination by the Council.

De Minimis InvestmentA banking entity may make and retain aninvestment in a fund that the banking entityorganizes and offers; provided, that, it seeksunaf liated investors for the fund; withinone year of a funds start date, the bankingentitys investments shall not exceed morethan 3% of the total ownership interests insuch fund; and the aggregate of investmentsin all such funds does not exceed 3% of thebanking entitys Tier 1 capital.

Permitted ActivitiesThe following activities are permittedactivities:

transactions in U.S. government securities (including securities of the GSEs);transactions in connection with underwriting or market-making activities,to the extent designed not to exceed thereasonably expected near term demands of clients, customers or counterparties;

risk-mitigating hedging activities in

connection with a banking entitysindividual or aggregate positions, contractsor holdings that are designed to reducethe banking entitys speci c risks inconnection with such positions, contractsor holdings;customer transactions;

SBIC investments;

The following summarizes the key Volcker Rule provisionscontained in the Dodd-Frank Act (Title VI):



the purchase or sale of securities and derivatives by a regulated insurancecompany engaged in the insurancebusiness, subject to state insuranceregulation and federal safety andsoundness review;organizing and offering a private equity or

hedge fund, if the banking entity:provides bona de trust, duciary, orinvestment advisory services;

provides trust or related servicesand offers interests in the fund onlyin connection with providing suchservices only to bank customers;does not acquire or retain anequity interest, partnership interest,or other ownership interest inthe funds except for de minimisinvestments (see above);observes the restrictions on af liatetransactions;does not, directly or indirectly,guarantee or assume, or otherwiseinsure, the obligations orperformance of the fund;does not share a name orderivation of a name or othermarketing with the fund;does not permit any director oremployee of the banking entity totake or retain an equity interest,partnership or other ownershipinterest in the fund, except forany director or employee whois directly engaged in providinginvestment advisory services to thefund; anddiscloses to prospective and actualfund investors that losses sustainedby the fund are not borne by thebanking entity;

certain proprietary trading that occurs solely outside of the U.S. by a bankingentity that is not directly or indirectlycontrolled by a banking entity organizedunder the laws of the U.S.;

the acquisition or retention of an ownership interest or the sponsorship of a fund by a banking entity solely outsideof the U.S. if interests in the fund are notoffered or sold to a U.S. resident and thebanking entity is not directly or indirectlycontrolled by a banking entity organized

in the U.S.; andall other activities deemed appropriate by the applicable oversight agencies thatwould promote the safety and soundnessof the banking entity.

No activity may be deemed a permittedactivity if it would (1) result in a materialcon ict of interest for the banking entity;(2) result in a material exposure for thebanking entity to high-risk assets or high-

risk trading strategies; or (3) pose a threatto the safety and soundness of the bankingentity.

Permitted ServicesA banking entity or a nonbank nancialcompany may provide prime brokerageservices to a sponsored fund if the provisionof such services complies with otherapplicable restrictions of the regulationsand the CEO (or equivalent of cer) of the

banking entity certi es annually to suchcompliance. Prime brokerage transactionswill be subject to Section 23B.

Capital RequirementsOversight agencies will adopt additionalcapital requirements and quantitative limits.

Restrictions on Af liate TransactionsA banking entity that serves as aninvestment adviser or sponsor to a fund orthat organizes and offers interests in a fundmay not enter into covered transactions(as de ned under Section 23A of theFederal Reserve Act) with the fund and thatbanking entity also shall be subject to therestrictions of Section 23B of the FederalReserve Act in respect of transactions withthe fund.

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Required StudyWithin six months of enactment, theCouncil will conduct a study and makerecommendations regarding implementationof these measures. Within nine months of completion of the study, the appropriateagencies will consider the ndings and

adopt rules to implement these measures.Phase-In PeriodGenerally, these provisions shall take effecton the earlier of: 12 months after the dateof the issuance of the nal rules, or twoyears after the date of enactment of theDodd-Frank Act.Bank entities and nonbank nancialcompanies will have two years after theeffective date (or two years after the dateon which the entity becomes subject toFederal Reserve supervision as a bankentity or a nonbank nancial company) tobring their activities into compliance. Thisphase-in period may be extended by theFederal Reserve for one year at a time, withextensions not to exceed an aggregate of three years. However, the Federal Reservemay extend the period in order to permitcompliance with a contractual obligation

that was in effect on May 1, 2010.Con ict of Interest Provisions (MerkleyProvisions)An underwriter, placement agent, initialpurchaser, sponsor (or any af liate) of an asset-backed security (as de nedunder Section 3 of the 34 Act, but, for

these purposes, including synthetic asset-backed securities) shall not engage in anytransaction that would involve or result inany material con ict of interest with respectto any investor in a transaction arising outof such af liate. This prohibition will applyfor a one-year period that begins on the

offering date.Within 270 days of enactment of the Dodd-Frank Act, the SEC shall promulgate rulesto implement this prohibition.The prohibition shall be subject toexceptions for the following:

Risk-mitigating hedging activitiesin connection with underwriting oroffering the asset-backed security;provided such activities are designed

to reduce speci c risk to the nancialintermediary associated with positionsarising in connection with the asset-backed security offering; andPurchases or sales of asset-backedsecurities made pursuant to andconsistent with commitments by the

nancial intermediary to provideliquidity for the asset-backed security.



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t e G o v e r n a n c e Lingering concerns with executive compensationand corporate governance practices at public

companies (including companies outside of thenancial services industry) culminated in speci c

provisions of the Dodd-Frank Act that requirenew stock exchange listing standards, mandatedresolutions for public company proxy statements,

and expanded disclosures for all public companiessoliciting proxies or consents. As a result of these

provisions, companies will potentially have tochange the composition and operation of their

compensation committees, adopt new governanceand compensation policies, and prepare for anadvisory vote on executive compensation



Say-On-PayCompanies must include a resolution in their proxy statements asking shareholdersto approve, in a non-binding vote, thecompensation of their named executiveof cersA separate resolution will be required to

determine whether the Say-on-Pay votetakes place every one, two, or three yearsTo the extent that any golden parachute-related compensation is notapproved as part of a Say-on-Pay vote, aseparate non-binding vote will be requiredto approve that compensation in theevent of a merger or similar extraordinarytransactionThe proxy statement for a meeting

involving a Say-on-Golden Parachutevote would need to include clear andsimple disclosure of the golden parachutearrangements or understandings and theamounts payable

Compensation Committee and AdviserIndependence

Stock exchanges must adopt listing standards providing that the membersof the compensation committee meetenhanced independence standardscomparable (but not identical) to whatis required for audit committee membersunder the Sarbanes-Oxley ActNew listing standards will prescribe that a compensation committee may onlyselect compensation consultants, legalcounsel, or other advisers after taking intoconsideration independence standardsestablished by the SECEnhanced disclosure is required regarding the use of compensation consultants andany con icts of interest

Enhanced Compensation DisclosureDisclosure is required of the relationship of the compensation actually paid to

executives versus the companys nancialperformanceCompanies must disclose the median annual total compensation of allemployees (except the CEO), theannual total compensation of the CEO,and the ratio of the median employee

total compensation to the CEO totalcompensationDisclosure is required of whether any employee or director (or designee of suchpersons) is permitted to purchase nancialinstruments designed to hedge their equitysecurities

ClawbacksStock exchanges must adopt standards requiring that listed companies developand implement policies providing for therecoupment of compensation in the eventof an accounting restatementEnhanced disclosure will be required of a companys policy on incentive-basedcompensation that is based on nancialinformation required to be reported underthe securities laws

Other Governance Provisions

The Act authorizes the SEC to promulgate rules allowing certain shareholdersto include director nominees in thecompanys proxy materials, but does notprescribe speci c standards for those rulesDisclosure is required of the reasons why the company has chosen to have oneperson serve as Chairman and CEO, or tohave different individuals serve in thoseroles

Brokers are not permitted to use discretionary authority to vote proxiesin connection with election of directors,executive compensation, or othersigni cant matters as determined by theSEC



C a p

i t a l R e q u

i r e m e n

t s Generally, the Dodd-Frank Act imposes morestringent regulatory capital requirements onnancial institutions. The Act requires that the

Council make recommendations to the Federal

Reserve regarding the establishment of heightenedprudential standards for risk-based capital,leverage, liquidity and contingent capital.

Supervised Nonbanks and Bank HoldingCompanies with Total Consolidated AssetsEqual to or Greater than $50 Billion

The Federal Reserve must establish prudential standards for these institutions,which include:

Risk-based capital requirements;Leverage limits;Liquidity requirements;Requirements for a resolution plan;and

Concentration limitsThese standards also should include a contingent capital requirement,requirements for enhanced publicdisclosures, short-term debt limits, arisk committee requirement, a stress testrequirement, and maximum leverage ratioThese institutions will be subject to a maximum debt-to-equity ratio of 15-to-1

Collins Amendment ProvisionsRequire the establishment of minimum

leverage and risk-based capitalrequirementsSet the risk-based capital requirementsand the Tier 1 to total assets standardapplicable to insured depositoryinstitutions under the promptcorrective action provisions of theFederal Deposit Insurance ActSet these current rates as a oorLimit regulatory discretion in

establishing Basel III requirementsRaise the specter of additional capital requirements for activities that aredetermined to be risky, including, butnot limited to, derivatives, securitizedproducts, nancial guarantees, securitiesborrowing and lending and reposAll of these requirements become effective upon the adoption of implementing



regulations, which are required to bepassed within 18 months of the Actsenactment

Effect on HybridsThe application of the prompt corrective action provisions for insured depositoryinstitutions to bank holding companiesno longer permits the inclusion of trustpreferred securities or other hybridsecurities in the numerator of Tier 1,subject to certain exceptions and phase-inperiods as discussed below

Mutual holding companies andthrift and bank holding companieswith less than $15 billion in totalconsolidated assets are not subject tothis prohibitionIntermediate U.S. holding companiesof foreign banks have a ve-yearphase-in periodFor newly issued securities (thoseissued after May 19, 2010), therequirement is retroactively effectiveFor bank holding companies andsystemically important nonbank

nancial companies, hybrids issuedprior to May 19, 2010 will be subjectto a phase in from January 2013 toJanuary 2016

Required StudiesThere are a number of studies required that impact regulatory capitalrequirements

Hybrids: Within 18 months of enactment, the GAO must conducta study on the use of hybridcapital instruments and makerecommendations for legislative orregulatory actions regarding hybridsContingent capital: within two yearsof enactment, the Council must presentthe results of a study on contingentcapital that evaluates, among otherthings, the effect on safety andsoundness of a contingent capitalrequirement, the characteristics and

amounts of contingent capital thatshould be required and the standardsfor triggering such requirements;following this study, the Council mayrecommend to the Federal Reservecertain minimum contingent capitalrequirements



C o n c

l u s i o n

In short

There will be much more to comeonce the studies mandated by theDodd-Frank Act are completed.There also is every reason to believethat the rule-making process willbe a long and winding road. Wewill provide regular updates on ourdedicated regulatory reform webpagehttp://www.mofo.com/resources/regulatory-reform/ .


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Documents

DoddFrankAct Summary