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Fordham Law School:

The Dodd-Frank Act

July 17, 2012

Presented by Anna Pinedo

Confidential/Subject to Attorney Client Privilege 2

Rulemaking Progress

This is MoFo. 3

• Many of the most important issues have not been addressed,

including, for example:

• Designation of entities that are systemically important

• Resolution of Volcker Rule

• Derivatives provisions

• Securitization and mortgage related provisions

DFA – Open Issues

This is MoFo. 4

Overview

This is MoFo. 5

Key Provisions Capital Rules for Banks

More stringent capital rules

Limits on leverage

Elimination of trust preferred securities

Contingent capital?

Volcker Rule

Limits proprietary trading

Regulates investments in hedge funds and private equity funds – 3% limit (3% of bank Tier 1 capital cap / 3% of fund capital cap)

Banks may engage in “permitted” activities

New Agencies

Consumer Financial Protection Bureau

Financial Stability Oversight Council

Federal Insurance Office (Treasury)

New Office of Minority and Women Inclusion

Investor Advisory Committee

Office of Investor Advocate (SEC)

Office of Credit Ratings (SEC)

Credit Rating Agency Board (SEC)

Office of Financial Literacy

Office of Financial Research (Treasury)

Office of Housing Counseling (HUD)

Office of Fair Lending and Equal Opportunity (Fed)

Office of Financial Protection for Older Americans (Fed)

Derivatives

Central clearing and exchange trading Swaps push-out provision Capital and margin requirements

Rules to Protect Consumers & Investors

Consumer Agency Deposit insurance permanently

increased to $250,000 Mortgage regulations Investment advice standards of care Requires hedge fund and private

equity fund advisors to register with SEC

Securitization “Skin in the Game” Rules

Regulations affecting Credit Rating Agencies

Corporate governance and executive compensation restrictions

Insurance Office

Enhanced Prudential Standards

Discourages excessive growth and complexity

Council can impose 15:1 debt-to-equity ratio

Concentration limits for non-affiliates

Living wills

Risk committees

This is MoFo. 6

Notes:

1 Assumes Federal Reserve promulgates rule prohibiting inclusion in Tier 1 Capital.

2 No phase-out of trust preferred securities for Bank Holding Company subsidiaries of foreign banking organizations. Instead, they will receive full credit for inclusion in Tier 1 Capital for a 5

year period, after which they will be excluded.

$15 BN

(Small Banks)

¨ No phase - out of trust preferred securities: effectively grandfathered permanently

¨ Primary federal regulator is OCC (National Banks/Thrifts) or FDIC (State Banks/Thrifts)

¨ No requirement for “risk committees” if size is less than $10BN

$15 - 50BN

(Medium Sized Banks)

¨ Trust preferred securities will be phased - out 1 beginning January 1, 2013

¨ Primary federal regulator is OCC (National Banks/Thrifts) or FDIC (State Banks/Thrifts)

>$50BN

(Large Banks)

¨ Trust preferred securities will be phased-out2 (similar to medium sized banks)

¨ Costs of unwinding failing firms will be borne by large banks

¨ Required to submit resolution plans (living wills)

¨ Regulated by Federal Reserve (holding companies) and OCC

Systemically

Importa nt Institutions

(> … BN)

¨ Financial Stability Oversight Council can impose 15:1 debt-to-equity ratio

¨ Requires stress testing

¨ Subject to new Orderly Liquidation Authority provisions

¨ Systemically Important Financial Institutions to be defined

Impact Relative to Bank Size

This is MoFo. 7

Key Impacts for Banks The legislative changes will have a substantial impact on banking institutions

Capital Requirements

¨ Higher capital requirements for systemically important banks (>$50bn) – Council can impose a 15:1 debt-to-equity

limit

¨ No specific guideline on minimum capital levels or capital ratios (i.e. , Tier 1 Common vs. Tier 1)

¨ Higher capit al requirements for activities such as derivatives trading and securitization

Mix of Capital

¨ G reater emphasis on common equity given desired focus on s impler, more transparent , loss absorbing capital

¨ E limination or phasing out of some non - common equi ty components of Tier 1 capital ; uncertainty about REIT

Preferreds and some convertible structures

Business Mix

¨ Creation of the Consumer Financial Protection Bureau and the associated administrative burden / costs likely to result

in increased emphas is of commercial banking business going forward

¨ Transition away from higher risk activities such as prop rietary trading and derivatives trading

Returns

¨ Increased capital requirements, de - emphasis on risk - taking, and higher administrative costs ( Consu mer Financial

Protection Bureau , elevated FDIC assessments, etc.) will dilute shareholder returns

¨ Impact on debit card interchange fee along with Reg E impact on overdraft fees will further impair profits

Valuation ¨ Lower shareholder return s and growt h profile will result in banks trading at lower price/book multiple s

M&A

¨ Will see increased divestitures of business es

/

investments that may ultimately receive unfavorable capital treatment

– Minority interests, financial firm investments, PE/he dge fund investments

¨ Large cap M&A less prominent given heightened scrutiny on systemically important institutions; more likely to see

more regional / bolt - on acquisitions

Regulatory Oversight

¨ Increased oversight given creation of Financial Sta bility Oversight Council, Consumer Financial Protection Bureau ,

Office of Credit Ratings, Office of Housing Counseling , etc.

¨ Federal Reserve to have heightened regulatory power/authority

¨ Legislation does not, however, address FNMA and FHLMC

This is MoFo. 8

Specific Provisions in Detail Provision / Area Details

Federal Reserve Board

(“Fed”)

In addition to current authority, the Fed would oversee large, systemically-important nonbank institutions, be responsible for setting

and enforcing stricter standards for disclosure, capital, and liquidity, and be authorized to break up large companies with Council

approval

Covered BHCs and nonbank financial companies designated as Covered Nonbank Companies1 shall be subject to the Fed’s

heightened prudential standards

The Senate agreed to the House provision authorizing the GAO to conduct a one-time audit of the Fed’s 2008 emergency lending

program and to provide ongoing audits of discount window and open market operations with a two-year lag

The President will not have authority to appoint the president of the New York Federal Reserve Board

Financial Stability

Oversight Council

(“Council”)

Led by the Treasury Department, the ten-member Council shall include regulators from the Fed, Securities and Exchange

Commission (“SEC”), Federal Housing Finance Agency, Commodity Futures Trading Commission and other agencies. State

securities, insurance and banking regulators and credit unions lobbied for and won non-voting seats.

The Council shall determine whether a nonbank financial company be subject to stricter prudential standards for financial stability

standards depending on a number of factors.

With a 2/3 vote, the Council can impose higher capital requirements on lenders or place broker-dealers and hedge funds under the

authority of the Fed

The Council shall have authority to force companies to divest holdings if their structure poses a “grave threat” to U.S. financial stability

The Council would be able to overrule the Consumer Financial Protection Bureau

Consumer Financial

Protection Bureau

(“Bureau”)

The Bureau, which serves as a consumer “watchdog,” shall be located within the Fed as an autonomous entity with an independent

budget led by a presidentially appointed director

The Bureau shall write consumer-protection rules for firms that offer financial services or products and enforce those rules for banks

and credit unions with more than $10 billion in assets. Bank regulators will continue to examine consumer practices at smaller

financial institutions

The Bureau is authorized to regulate credit cards and mortgages, but not auto dealers who make auto loans

1 Covered BHCs are BHCs with $50 billion or more in total consolidated assets. Covered Nonbank Companies are nonbank financial companies whose failure would pose a

grave threat to U.S. financial stability

This is MoFo. 9

Specific Provisions in Detail (cont’d) Provision / Area Details

Too Big to Fail:

Orderly Resolution

Process and Funding

The Act grants the FDIC, which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms

whose collapse would threaten U.S. financial stability

The House agreed to Senate language that grants the FDIC a line of credit with the Treasury Department to pay for the up-front costs

of breaking up troubled firms, but the government would have to establish a “repayment plan”

The House dropped its bid to create a $150 billion resolution fund. Instead, conferees agreed to follow the Senate measure where

the costs of unwinding failing firms will be borne by financial firms with more than $50 billion in assets through fees imposed after a

collapse.

The Act explicitly bars the use of taxpayer funds to rescue failing financial companies

Thrift Charter

The Office of Thrift Supervision shall be abolished with its authority relating to Federal savings associations, State savings

associations, and savings and loan holding companies will be transferred to the Office of the Comptroller of the Currency, the FDIC,

and the Fed, respectively

The Thrift Charter has been preserved, thereby preventing insurance companies that own thrifts from being transformed into bank

holding companies and subject to the Volcker Rule

Capital Standards:

Leverage The Council will impose a 15-to-1 maximum leverage ratio on firms that pose a “grave threat” to the national economy where

imposition of such a leverage limit would mitigate risk

Risk Retention

Requirements for

Securitized Debt

Banks that package loans will be subject to a 5% risk retention requirement, thus affecting credit card debt, auto loans, mortgages,

and other securitized debt

Loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture, and the U.S. Department of Veterans

Affairs will be exempt from this requirement

Regulators will have flexibility to tailor risk-retention rules to specific products (e.g., setting underwriting standards as a form of risk

retention)

Broker-Dealer’s and

Investment Advisor's

Standard of Care

The SEC will conduct a six-month study and then issue rulemaking under its existing authority

The SEC will implement rules within the parameters laid out in the House bill, which allows brokers to offer clients services associated

with principal trading

“Pay It Back” To fund the cost of the Act, (1) the TARP Program shall end one year early to raise $10 billion, and (2) the FDIC premium ratio shall

be increased to 1.35 from 1.15 to raise $9 billion

This is MoFo. 10

Shift to “Systemic” Regulation and

Oversight

This is MoFo. 11

The New Regulatory Environment

• How we arrived here

• Nature and tenor of historic bank regulation: prudentially-oriented

but disaggregated

• Perceived failings of the existing regulatory structure: no effective

means to “see the whole picture”

• The Dodd-Frank approach to bank and financial services

supervision: reconfigure bank regulatory structure to —

• create a scheme of systemic regulation

• create the tools to regulate “connectivities” in the financial markets

• reduce “moral hazard”

• increase the level and scope of regulation in key areas

• impose activities limitations in perceived “high-risk” areas

This is MoFo. 12

The New Regulatory Environment (cont’d)

• What has and has not changed in financial services

regulation?

• What has changed:

• SIFI regulatory scheme for BHCs

• Systemic (“connectivity”) regulatory authorities

• An expanded and enterprise-level resolution scheme for important financial

services firms

• A regulatory scheme for “risky” activities across classes of financial

institutions

• Consolidated and focused consumer regulatory regime

• A new class of nonbank financial institutions (nonbank SIFIs) that is subject to

Federal, bank-focused financial supervision (FRB)

This is MoFo. 13

The New Regulatory Environment cont’d)

• What has and has not changed in financial services

regulation?

• What has not changed:

• Historic prudential focus of financial supervision remains in place

• With one exception (OTS), the same regulatory agencies remain responsible

for financial supervision

• Historic legal and supervisory tools of the financial regulatory agencies are all

still in place

• Historic regulatory attitudes, and institutional differences among regulators; in

fact, there may be a trend back to historic attitudes

This is MoFo. 14


• The elements of the SIFI regulatory regime

• Enhanced supervisory and prudential standards (sections 115

and 165)

• Comprehensive early action, enforcement and resolution authority

(sections 121, 165(d), 162, 166 and 172; Title II)

• More intrusive reporting requirements (section 116 and 161)

• Activities standards and limitations (sections 120, 163, 164 and

173)

• Nonbank SIFI organization and regulation (section 167)

• Regulation of systemically important payments clearance and

settlement facilities (Title VIII)

This is MoFo. 15


• The challenges of the SIFI regime

•The SIFI regulatory regime is nominally directed at an identified

class of important financial services firms. It could, however, apply

to a potentially large universe of organizationally and financially

diverse financial services firms with very different business lines

and risk postures.

•The SIFI regime must be tailored to take into account the different

business operations, geographic locations, market/counterparty

exposures and risk management systems of affected SIFIs.

• In addition, SIFI activities and risk profiles will be dynamic resulting in increases

and decreases in SIFI risk profiles.

• In short, the SIFI regime is unlikely to be a “one size fits all” regime.

This is MoFo. 16



• The regulators optimally will create gradations of SIFI regulation

that are tailored to individual firms or subclasses of similarly-

situated firms.

• Bank SIFIs are already operating in a FRB-regulated environment

and are accustomed to FRB regulation and supervision.

Nonbank SIFIs are not familiar with this environment and will

need to “come up to speed” quickly on its material features.

• The specifics of the new regulatory scheme are not known at this

time, which impedes the ability of known and likely SIFIs to be

proactive in responding to the developing regulatory regime.

This is MoFo. 17



•Even when the regulatory framework begins to take shape, it is

likely to be a highly dynamic framework that will be subject to

continuing change.

•The SIFI regulatory regime also will have to take into account

developments at the international level.

•Living will requirements will materially increase FDIC involvement

in the regulation and supervision of SIFIs; how this will play out in

the implementation is a big unknown.

•While the regulators will have to “learn” how to supervise in the

new SIFI environment, they will rely on established regulatory and

supervisory practices, policies and procedures to the maximum

extent that they can do so.

This is MoFo. 18


• The implications of the SIFI regime for non-SIFI

institutions

• The regulatory agencies will be compelled to develop and apply

prudential and regulatory gradations in their oversight of a diverse

SIFI population, which is likely to lead to material “trickle-down”

effects in the regulated financial services world.

• Supervisory policies and practices developed for SIFIs are likely to become

de facto “gold standard” practices across the board.

• The trickle-down impact will be accentuated by key requirements

of Dodd-Frank (Collins/capital, Volcker, Lincoln) that apply not

only to SIFIs but to banking organizations in general.

• It will be difficult for the regulatory authorities to draw SIFI/non-SIFI

distinctions in these and probably many other regulatory subject areas.

This is MoFo. 19


• The implications of the SIFI regime for non-SIFI

institutions

• The more stringent prudential standards that may be developed

for “risky” activities (Section 120) at the SIFI level may also

“trickle down” to a broader range of banking organizations.

• Notwithstanding some of the new legal authorities given by Dodd-

Frank, the basic framework of the financial regulatory system and

its operation has not changed (other than to become more

intense and more prescriptive).

This is MoFo. 20

Perceived Problem/Proposed

Solution

This is MoFo. 21

Perceived Problem/Proposed Solution

• Focusing on a number of specific areas, we are going

to look at how Dodd-Frank addresses certain

perceived problems that were “root causes” of the

financial crisis, specifically

• Regulatory Capital

• Securitization

• Derivatives

This is MoFo. 22

Regulatory Capital • The premise was that our financial institutions did not hold

sufficiently high levels of capital to weather stressful conditions

and that many of the instruments that were used for regulatory

capital purposes were overly “engineered” and not sufficiently

“loss absorbent”

• True? or False?

This is MoFo. 23

Proposed Answer • Requirement to maintain higher capital levels

• Dodd-Frank

• Basel III

• Limiting the types of instruments that “count” for these purposes

• Imposing higher charges for certain activities that are perceived

as “risky” or “speculative” (like securitization and derivatives)

This is MoFo. 24

Evolution – Dodd-Frank Act • The Dodd-Frank Act confirms and elaborates on the Basel III

reforms.

• Enhanced capital ratios generally

• Composition of capital – the Collins Amendment (Section 171)

• Leverage ratio

• Countercyclicality requirement

• Liquidity

• Contingent capital

• Dodd-Frank also includes qualitative reforms, such as risk

committees and stress test requirements.

This is MoFo. 25

Consequences

• Banks will be limited in their funding options

• Cost of capital will be higher

• Banks will move away from certain business activities that have

higher capital costs and get smaller (leaving non-banks to perform

these activities)

• Affects bank ROE, availability of credit

This is MoFo. 26

Securitization

• The premise was that there was a misalignment of incentives.

Mortgage originators didn’t have “skin in the game” and as a result

permitted mortgage origination standards to become lax

• True? or False?

This is MoFo. 27

• Dodd-Frank imposes new rules on mortgage originators, on

mortgage servicers, and on securitization transactions

Proposed Answer

This is MoFo. 28

Mortgage Originations • Title XIV of DFA addresses mortgage originations. Many of the rules

are still pending, and the final outcome is uncertain; however, we can say that the DFA changes will have a significant impact

• New duty of care imposed on mortgage originations

• Prohibition on yield spread premiums or other steering incentives

• Prohibit compensation to a loan originator based on the terms or conditions of a loan

• Prohibit receipt of compensation by a loan originator from the creditor or any other person if the originator is receiving compensation directly from the consumer

• Prohibit creditor from paying compensation to a loan originator if it knows or has reason to know that the originator is receiving compensation directly from the consumer

• Prohibits loan originator from steering a consumer to a particular loan on the basis that it will receive more compensation from the creditor in that transaction than would be received in other transactions that the originator offered or could offer to the consumer

This is MoFo. 29

• Extends civil liability provisions of TILA to mortgage originators

• Ability to repay standard for residential mortgage loans

• “Reasonable and good faith determination” that a consumer has a reasonable

ability to repay a residential mortgage loan based on verified docs

• “Safe harbor” or rebuttable presumption for qualified mortgages

• Many other burdensome provisions affecting hybrid ARMs, high cost

mortgages, appraisals, etc.

Mortgage Originations (cont’d)

This is MoFo. 30

Securitization • Outside of the DFA, there are quite a number of significant

developments impacting securitization, including accounting changes (FASB 166/167), the FDIC safe harbor, Basel 2.5 and Basel III

• In connection with the DFA, a number of final rules have been adopted, including final rules related to:

• Disclosure of repurchase requests (Sec 943)

• NRSRO Reports on Reps, Warranties and Enforcement Mechanisms (Sec. 943)

• Issuer Reviews of Assets Underlying ABS (Sec 945)

• Thresholds for Suspension of the Duty to File Periodic Reports Under the Exchange Act (Sec 943)

• However, the most important rules have not been finalized: • Risk retention (and QRM definition)

• Conflicts of interest provision (Sec 621)

• Volcker (Sec 619)

• Reg AB II

This is MoFo. 31

Consequences

• Banks will become far less dependent on securitization

and, in the absence of other financing alternatives, will

scale back their mortgage originations

• Banks will wait for a broader solution to the housing

finance question

• Non-banks, like mortgage REITs, will become more

significant

This is MoFo. 32

Derivatives • The premise was that OTC derivatives were not sufficiently well

understood, there was a lack of “transparency” into derivatives exposures and OTC derivatives needed to be more closely regulated.

• True? or False?

This is MoFo. 33

Derivatives (cont’d)

• The proposed solution was to create a regulatory framework for

OTC derivatives and require most OTC derivatives to be centrally

cleared.

This is MoFo. 34

Derivatives (cont’d)

• DFA is sweeping in scope

• Title VII directly regulates OTC derivatives for the first time

• Core Title VII Themes

• Reduce systemic risk, increase transparency, and promote market

integrity

• Accomplishes this through-- • Providing for registration and comprehensive regulation of major market participants,

including margin and capital requirements and business conduct standards

• Imposing clearing and trade execution requirements on standardized derivative products

• Imposing margin and capital requirements on non-standardized, non-cleared derivative

products

• Creating robust recordkeeping and real-time reporting regimes

• Enhancing regulators’ rulemaking and enforcement authorities

This is MoFo. 35

Jurisdiction

• Title VII creates roughly parallel regimes for the CFTC (for swaps)

and the SEC (for security-based swaps).

• Banking regulators retain jurisdiction over banks’ prudential

requirements and capital and margin requirements

• Title VII only provides a general outline of the new regulatory regime

• Vast majority of the new requirements must be established by

rulemaking

This is MoFo. 36

New Entities, Expanded Roles

• Title VII creates new categories of registrants, each with its own

registration requirement and regulatory regime

• Swap dealer

• Major swap participant

• Swap data repository

• Swap execution facility

• Also expands roles of existing registrants

• Clearinghouses

• Exchanges

• Futures commission merchants and broker-dealers

This is MoFo. 37

Mandatory Clearing

• A basic concept of Title VII is that a swap must be cleared if:

• The applicable regulator (CFTC or SEC) determines that clearing is required;

AND

• A clearinghouse accepts the swap for clearing

• Note--If no clearinghouse accepts the swap for clearing, the applicable

regulator, after investigation, is authorized to take any action it determines to

be necessary and in the public interest, including imposing margin and

capital requirements on the parties

• Determination process can be for any single swap, or any group,

category, type, or class of swaps

• Determination process may be initiated by the CFTC/SEC or by a clearinghouse

• Regulations will provide for periods of public review and comment before a

determination is made

This is MoFo. 38

Capital Requirements

• Swap dealers and MSPs will be subject to minimum capital

requirements

• Banking regulators to adopt rules for bank swap dealers and bank MSPs

• CFTC or SEC to adopt rules for non-bank swap dealers and non-bank MSPs

• To date, the prudential regulators and the CFTC (but not the SEC)

have issued proposed rules covering capital requirements relating to

uncleared swaps

This is MoFo. 39

Conclusions

This is MoFo. 40

Conclusions

• Many institutions are overwhelmed by regulatory

uncertainty and by the collective burdens of addressing

multiple new regulations (Basel III, as well as Dodd-

Frank)

• There have been few solutions (or even alternatives)

proposed to address some of the most important matters,

such as:

• housing finance and the future of the GSEs

• the designation of SIFIs

• capital issues

This is MoFo. 41

Conclusions (cont’d)

• Many foreign dealers will decide to exit the US market

• Smaller market participants also will choose to exit the

business

• This will result in a more concentrated market

• The overall cost of derivatives will increase and their

utility will be reduced

• Central clearinghouses may become too-important-to-fail

© 2

011 M

orr

ison &

Foers

ter

LLP

| A

ll R

ights

Reserv

ed | m

ofo

.com

SEC’s New Dodd-Frank

Fund Oversight Rules

July 17, 2012

Presented By:

Jay G. Baris

Anna T. Pinedo

This is MoFo. 2

Caveats

This outline is for informational purposes only and does not constitute

legal advice or create an attorney-client relationship

Consult your own attorney for legal advice on the issues discussed in

this outline

IRS Circular 230 Disclosure

To ensure compliance with the requirements imposed by the IRS, we inform you

that any tax advice contained in this communication was not intended or written to

be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties

under the Internal Revenue Code or (ii) promoting, marketing, or recommending to

another party any matters addressed herein

This outline may constitute attorney advertising

This is MoFo. 3

SEC Releases

June 22, 2011: SEC publishes three releases adopting new rules

under the Advisers Act to implement provisions of Dodd-Frank:

Release IA-3220: Family Offices

Release IA-3221: Rules Implementing Amendments to the Advisers Act

Release IA-3222: Exemptions for Certain Advisers

October 31, 2011: SEC publishes a release implementing Form PF

Release IA-3308

December 21, 2011: SEC publishes a release amending net worth

standards for accredited investors

Release 33-9287

This is MoFo. 4

Implementing Release

The Implementing Release relates to:

registration requirements for investment advisers; and

reporting requirements for (1) registered investment advisers, and (2) exempt

reporting advisers

This is MoFo. 5

Mid-sized Advisers

Advisers Act Section 203A generally prohibits an investment adviser

regulated by the state in which it maintains its principal office and

place of business from registering with the SEC unless it has at least

$25 million AUM

Dodd-Frank created a new category of covered mid-sized advisers:

with $25 million – $100 million AUM, and

subject to registration and examinations as investment advisers with the state

of their principal office and place of business

Wyoming, New York and Minnesota are states that do not meet both requirements

This is MoFo. 6

Mid-sized Advisers

New Advisers Act Section 203A(a)(2) provides that no covered mid-

sized adviser shall register with the SEC unless the adviser:

advises a registered investment company;

advises a “business development company”; or

is required to register with 15 or more states

This is MoFo. 7

Mid-sized Advisers

By raising the SEC registration threshold to $100 million AUM, Dodd-

Frank generally bars smaller and mid-sized investment advisers from

choosing SEC registration over state registration

According to the SEC, approximately 3,200 advisers will be required

to withdraw their SEC registrations and register on a state level

This is MoFo. 8

Transition to State Registration

Mid-sized advisers registered with the SEC as of July 21, 2011, must

remain registered with the SEC until January 1, 2012, unless an

exemption applies.

Deadlines for mid-sized advisers no longer eligible to register with

the SEC:

Those registered with the SEC on January 1, 2012, must file an amendment to

Form ADV no later than March 30, 2012, to indicate that they are no longer eligible

to remain registered with the SEC

Advisers required to withdraw must withdraw registration with the SEC by filing

Form ADV-W no later than June 28, 2012

This is MoFo. 9

Assets Under Management

The SEC revised the instructions to Form ADV Part 1A to create a

uniform standard for advisers to calculate their AUM for determining

eligibility for registration or exemptions, and other regulatory

purposes

Advisers Act Section 203A(A)(2) defines AUM as the “securities

portfolios” with respect to which an adviser provides “continuous and

regular supervisory or management services”

New term, “regulatory assets under management” (RAUM), replaces

“assets under management” in Form ADV Part 1

This is MoFo. 10

Assets Under Management

RAUM:

to be calculated on a gross basis (without deduction of “any outstanding

indebtedness or other accrued but unpaid liabilities”)

to be valued at market value of private fund assets, or fair value if market value is

unavailable

must include:

the value of any securities portfolios for which the adviser provides continuous

and regular supervisory or management services, regardless of the nature of

the assets held by the private fund (e.g., proprietary assets, assets managed

for which no compensation is received, and assets of foreign clients)

the amount of any uncalled capital commitments made to a private fund

This is MoFo. 11

Registration Prohibition Exemptions

The SEC amended three exemptions from the prohibition on

registration with the SEC:

Eliminated exemption in Rule 203A-2(a) from the prohibition on SEC registration

for NRSROs

Amended the exemption available to pension consultants under Rule 203A-2(b)

to increase the minimum value of plan assets required to rely on the exemption

from $50 million to $200 million

Adopted amendments to the multi state adviser exemption under Rule 203A-2(d)

so that all investment advisers who are required to register as an investment

adviser with 15 or more states (versus 30 states currently) are permitted to

register with the SEC

This is MoFo. 12

Exempt Reporting Advisers

New Advisers Act Rule 204-4 requires advisers relying on the

exemptions for

1. advisers solely to venture capital funds and

2. advisers solely to private funds with less than $150 million AUM, to submit to the

SEC, and periodically update, reports that consist of a limited subset of items on

Form ADV

Reports will be publicly available

This is MoFo. 13

Form ADV Amendments

Among other amendments to Form ADV, the SEC requires advisers to

provide additional information about three areas of their operations:

private funds advised

advisory business, including data about:

types of clients, employees and advisory activities

business practices that may present significant conflicts of interest

e.g., use of affiliated brokers, soft dollar arrangements, and compensation for client

referrals

non-advisory activities and financial industry affiliations

This is MoFo. 14

Exemptions for Certain Advisers

Prior to Dodd-Frank, IAA section 203(b)(3) exempted advisers with

14 or fewer clients during the preceding 12 months that

Did not hold themselves out as investment advisers

Did not advise registered investment companies or BDCs.

Private funds generally counted as a single client for purposes of

qualifying for this “private adviser” exemption

Left a big gap in SEC oversight

Although it eliminated the private adviser exemption, Dodd-Frank

created three new exemptions:

Advisers solely to venture capital funds (IAA Section 203(l))

Advisers solely to private funds with less than $150 million under management

(IAA Section 203(m))

Advisers that are foreign private advisers (IAA Section 203(b)(3))

This is MoFo. 15

Venture Capital Fund Exemption

What is a venture capital fund? A private fund that

Generally holds equity securities of “qualifying portfolio companies” (excluding

short-term holdings and non-qualifying investments)

Holds no more than 20 percent of the fund’s capital commitments in non-qualifying

investments (other than short-term holdings)

Does not borrow or otherwise incur leverage, other than limited short-term

borrowing

Excluding certain guarantees of qualifying portfolio company obligations by the

fund

Does not offer investors redemption or other similar liquidity rights, except in

extraordinary circumstances

Represents itself as pursuing a venture capital strategy to investors and potential

investors

Is not registered under the ICA and has not elected to be treated as a BDC

This is MoFo. 16


What is a qualifying investment?

Any equity security issued by a qualifying portfolio company (QPC) acquired

directly by the fund (directly acquired equity)

Any equity security issued by a QPC in exchange for directly acquired equity

issued by the same QPC

Any equity security issued by a company of which a QPC is a majority-owned

subsidiary, or predecessor, and that is acquired by the fund in exchange for directly

acquired equity

What is a qualifying portfolio company? Any company that

Is not a reporting or foreign-traded company and does not have a control

relationship with a reporting or foreign-traded company

Does not incur leverage in connection with investments and distribute the proceeds

of borrowings to the private fund in exchange for the private fund investment

Is not itself a fund (i.e., is an operating company)

This is MoFo. 17


How does the 20% bucket work?

Immediately after the acquisition of any asset (other than qualifying investments or

short-term holdings) no more than 20% of the VCF’s capital commitments can be

in non-qualifying investments (other than short-term holdings)

VCF calculates the 20% limit immediately after acquiring a non-qualifying

investment (other than short-term holdings)

VCF cannot purchase additional non-qualifying investments until the value of its

then-existing non-qualifying investments falls below 20% of the fund’s committed

capital.

Possible that a VCM invests all initial capital in non-qualifying assets as long as

they do not exceed 20% of bona fide committed capital

If so, beware of anti-fraud violations!

VCM may use either historical cost or fair value, if method is consistently applied

This is MoFo. 18


What are short-term holdings?

Includes:

Cash and cash equivalents

U.S. Treasuries with a remaining maturity of 60 days or less

Shares of registered money market funds

VCF does not count investments in short-term holdings when measuring

compliance with 20 percent test

Management involvement with QPCs

SEC did not adopt managerial assistance requirement as proposed

This is MoFo. 19


What are the limitations on leverage?

VCF cannot borrow, issue debt obligations, provide guarantees or otherwise incur

leverage in excess of 15 percent of the fund’s capital contributions and uncalled

committed capital

Any such borrowing, indebtedness, guarantee, or leverage is limited to a non-

renewable term of no more than 120 calendar days

A guarantee by the VCM of a qualifying portfolio company’s obligations up to

the value of the VCF’s investment in the QPC is not subject to the 120-day limit

No redemption rights

Except in “extraordinary circumstances”

Includes “foreseeable but unexpected circumstances” or due to regulatory or other

legal requirements

Quarterly or periodic withdrawals amount to redemption rights

This is MoFo. 20


Application to non-U.S. advisers

Non-U.S. advisers, as well as U.S. advisers, may rely on this exemption provided

the adviser satisfies:

All the elements of the rule, or

The grandfathering provisions

To rely on the exemption, all of the non-U.S. adviser’s clients, whether U.S. or non-

U.S., are VCFs

That is, non-U.S. adviser cannot disregard its non-U.S. activities when

evaluating whether it qualifies for VCF exemption

This is MoFo. 21


Grandfathering provisions VCF includes a private fund that

Represented to investors and potential investors, at the time the fund offered its securities that it pursues a venture capital strategy

Has sold securities, to one or more investors prior to December 31, 2010, and

Does not sell any securities to, including accepting any capital commitments from, any person after July 21, 2011

Includes any fund that has accepted all capital commitments by July 21, 2011 (capital commitment calls after July 21, 2011 would be consistent as long as investors became obligated by July 21, 2011 to make capital commitments)

Exempt Reporting Adviser Advisers relying on the VCF adviser exemption are Exempt Reporting Advisers that

are subject to

Reporting requirements

Supervisory requirements

Generally subject to anti-fraud provisions

This is MoFo. 22

Private Fund Adviser Exemption

What is a private fund adviser? Must be an adviser:

Solely to private funds

With less than $150 million AUM in the U.S.

Advisers with any clients that are not private funds do not qualify

Can a non-U.S. adviser rely on this exemption?

Yes, if all of the non-U.S. adviser’s clients that are in the U.S. are qualifying private

funds

Non-U.S. advisers may rely on this exemption without regard to the type or number

of its non-U.S. clients or the amount of assets it manages outside of the U.S.

Reflects SEC’s view that non-U.S. activities of non-U.S. advisers are less likely

to implicate U.S. regulatory interests

Non-U.S. advisers that manage U.S. private funds from a location outside the U.S.

may be required to register unless they qualify for another exemption

If a non-U.S. adviser has a place of business in the U.S., all clients managed at

that place of business must be private funds in order to rely on this exemption

This is MoFo. 23


Single-investor funds may qualify as private funds under certain

circumstances

Calculation of assets for determining eligibility for exemption

Adviser must aggregate all assets of private funds it manages

Form ADV provides uniform method of calculating RAUM, also used for

determining eligibility for SEC registration and other regulatory purposes

Must include:

Proprietary assets

Assets managed without compensation

Uncalled capital commitments

Also, advisers must calculate:

Using market value (or fair value when market value is not available)

On gross basis (without deducting liabilities, accrued fees or expenses, or

amounts of borrowing)

This is MoFo. 24


Frequency of calculation and transition period

Advisers relying on private fund adviser exemption must annually calculate amount

of private fund assets and report in annual amendments to Form ADV

Changes in AUM between annual updating amendments will not affect ability of

advisers to rely on private fund adviser exemption

Advisers who no longer qualify for private fund adviser exemption may apply to

register with SEC up to 90 days after filing annual update

May rely on private fund adviser exemption during that 90 day period

Assets managed in the U.S.

All private fund assets of an adviser with principal office and principal place of

business in the U.S. are “assets under management in the U.S.”

This is true even if the adviser has offices outside the U.S.

Non-U.S. advisers count only private fund assets managed at a place of

business in the U.S. toward the $150 million AUM limit

This is MoFo. 25


Who is a “United States person”? U.S. person incorporates Regulation S definition

Regulation S generally looks to residence of an individual

Also addresses when a trust, partnership, or corporation is a United States person

A client will not be considered a United States person if the client was not one at the time of becoming a client of the adviser

A discretionary or other fiduciary account is a United States person if the account is held for the benefit of a United States person by a non-U.S. fiduciary who is a “related person” of the adviser

Exempt Reporting Adviser Advisers relying on the private fund adviser exemption are Exempt Reporting

Advisers that are subject to:

Reporting requirements

Supervisory requirements

Generally subject to anti-fraud provisions

This is MoFo. 26

Foreign Private Adviser Exemption

What is a foreign private adviser?

An adviser that

Has no place of business in the U.S.

Has, in total, fewer than 15 clients in the U.S and investors in the U.S. in

private funds advised by the adviser

Has aggregate AUM attributable to clients in the U.S. and investors in the U.S.

in private funds advised by the adviser of less than $25 million, and

Does not hold itself out generally to the public in the U.S. as an investment

adviser

Advisers to investment companies and BDCs may not rely on this exemption

This is MoFo. 27


Who is a client? An adviser may treat as a single client a natural person and:

The person’s minor children (whether or not they live with the person)

Relatives, spouses, spousal equivalents, or their relatives with the same principal residence

All accounts of which the natural person or the person’s minor child or enumerated relatives who have the same principal residence are the only primary beneficiaries

All trusts of which the natural person or the enumerated relatives who have the same principal residence are the only primary beneficiaries

An adviser may treat as a single client:

Corporations, general partnerships, LLCs, trusts, or other legal organizations to which the adviser provides investment advice based on client’s objectives

Two or more entities that have identical shareholders, partners, limited partners, members, or beneficiaries

This is MoFo. 28


Who is a client? Double counting

Don’t count a private fund as a client if the adviser counts any investor in that fund as an investor for purposes of determining availability of the exemption

Don’t count a person as an investor if the adviser otherwise counts the person as a client of the adviser

Private fund investor Foreign private adviser cannot have more than 14 clients “or investors in the

United States in private funds” advised by the adviser

“Investor” defined as any person that would be included in determining the number of beneficial owners of 3(c)(1) or 3(c)(7) fund

Investor also includes owner of short-term paper issued by the private fund, even though investor is not counted for purposes of 3(c)(1) or 3(c)(7)

Adviser may count an investor in two or more funds managed by the adviser as a single investor

This is MoFo. 29


Look-throughs

May have to look through to ultimate beneficial owners

Adviser to master fund must look through to investors of any feeder fund when

counting the number of investors

Adviser must count holder of a total return swap on the private fund

Other situations depend on facts and circumstances

Knowledgeable employees excluded from definition of “investor”

“In the United States”

Foreign private adviser exemption uses this term in three contexts:

Limiting number of—and AUM attributable to—adviser’s clients “in the United

States” and “investors in the United States in private funds advised by adviser”

Exempting only advisers without a place of business “in the United States”

Exempting advisers that do not hold themselves out as an an adviser “in the

United States”

This is MoFo. 30


Definition generally tracks Regulation S definition of “U.S. Person” and “United

States,” but:

SEC treats as persons “in the United States” for purposes of the foreign private

adviser exemption certain persons that would not be considered U.S. persons

under Regulation S

For example, discretionary accounts owned by a U.S. person and managed by a non-

U.S. affiliate of the adviser will be treated as a person “in the United States”

When is a person who is in the U.S. not in the U.S.?

A person who is “in the United States” may be treated as not being “in the

United States” if the person was not “in the United States” at the time of

becoming a client or, in the case of a private fund, each time the investor

acquires securities issued by the fund

This is MoFo. 31


Place of business

Means any office where the adviser regularly provides advisory services, solicits,

meets with, or otherwise communicates with clients, and any location held out to

the public as a place where the adviser conducts these activities

Advisers must determine whether they have a place of business in the U.S. “in light

of all the relevant facts and circumstances”

An office where the adviser regularly communicates with its clients (whether or

not the clients are located in the U.S.) would be a place of business

An office where the adviser regularly conducts research would be a place of

business

An office where the adviser solely performs administrative services or back-

office activities would not be a place of business

This is MoFo. 32


Subadvisory relationships with advisory affiliates

SEC reaffirmed its staff’s position in the Unibanco no action letters and its progeny

The SEC staff took the position that it would not recommend enforcement

action, subject to relatively heavy conditions, against non-U.S. unregistered

advisers that are affiliated with SEC-registered advisers, despite sharing

personnel and resources

This is MoFo. 33

Form PF

Adopted October 31, 2011 by the Commodities Futures Trading

Commission and the SEC

Form PF must be filed at least annually within 120 days of fiscal year

end by advisers that:

Are registered or required to be registered under the Advisers Act;

Advise one or more private funds;

Manage at least $150 million of RAUM attributable to private funds as of the end of

the most recently completed fiscal year.

CPOs and CTAs that satisfy the above conditions may, in addition, file Form PF

with respect to any non-private fund commodity pools they manage.

Information identifiable to a particular adviser or fund is generally not publicly

available

This is MoFo. 34

Form PF

The amount of information and frequency of reporting varies

depending upon whether an adviser is classified as a large adviser

or a smaller adviser

“Large private fund advisers” are

Advisers with at least $1.5 billion in RAUM attributable to hedge funds

Liquidity fund advisers with at least $1 billion in combined RAUM attributable to

liquidity funds and registered money market funds

Advisers with at least $2 billion in RAUM attributable to private equity funds

Filings must be made with a certain number of days after fiscal quarter end:

Large hedge fund advisers - 60 days

Large liquidity fund advisers - 15 days

Large private equity fund advisers – 120 days

This is MoFo. 35

Form PF

Examples of additional data required for Large private fund advisers:

Large hedge fund advisers: exposures by asset class, geographical concentration,

turnover by asset class. Certain disclosures at fund level for each managed hedge

fund with an NAV of at least $500 million

Large liquidity fund advisers: types of assets, risk profile information, extent of

policy of complying with Rule 2a-7

Large private equity fund advisers: extent of leverage incurred by their funds’

portfolio companies, use of bridge financing, and their funds’ investments in

financial institutions

This is MoFo. 36

Form PF

Compliance dates --- Two-stage phase–in period

Most private fund advisers must begin filing after their first fiscal year or quarter to

end on or after December 15, 2012. For instance, a smaller private fund adviser

would file no later than April 30, 2013.

However, the following advisers must begin filing following their first fiscal year or

quarter to end after June 15, 2012:

Advisers with at least $5 billion in RAUM attributable to hedge funds

Liquidity fund advisers with at least $5 billion in combined RAUM attributable to

liquidity funds and registered money market funds

Advisers with at least $5 billion in RAUM attributable to private equity funds

This is MoFo. 37

Accredited Investors

SEC amended accredited investor standards to implement

requirements of Section 413(a) of the Dodd-Frank Act

Regulation D amended to adjust the accredited neet worth standard that applies to

natural persons or spouses to $1 million, excluding the value of the primary

residence

Previously, investors could count primary residence in net worth

Mortgage indebtedness in excess of value of primary residence is considered a

liability for purposes of determining accredited investor status

Incremental debt secured by the primary residence that is incurred within 60

days of the sale of the security also counts as a liability

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The Territorial Impact

Of the Volcker Rule

July 17, 2012

Presented By:

David Kaufman

Dwight Smith

This is MoFo. 2

Intro

Who is covered?

What is prohibited?

What trading or fund activity is permitted?

What may an FBO do?

What other limits apply?

What should concern an FBO?

What are the deadlines?

What should an FBO do now?

This is MoFo. 3

Who Is Covered?

“Bank entities”

U.S. insured depository institutions

U.S. bank holding companies

Foreign companies treated as bank holding companies under the

International Banking Act – foreign banking organizations

Any subsidiaries of the above

This is MoFo. 4

What is Prohibited?

Proprietary trading

Covered financial position

Trading account

In or sponsoring hedge funds or private equity funds

Section 3(c)(1) of Investment Company Act

Section 3(c)(7)

This is MoFo. 5

What Trading is Permitted?

Underwriting

Market-making

Risk-mitigating hedging transactions

Trading in U.S. government and U.S. government agency

securities

Trading outside the United States

This is MoFo. 6

What Trading is Permitted?

Some thoughts on proprietary trading

Note that scope of Volcker prohibition differs from the scope of the

Lincoln provision, requiring separate compliance with each

provision. For example,

Lincoln focuses only on “swaps” as defined Title VII, while Volcker

focuses on a broader range of trading transactions.

Volcker, however, looks at trading only in a “proprietary account,”

while Lincoln looks at all swaps (subject to safe harbored activities).

This is MoFo. 7

What May an FBO Do?

“Outside the United States” FBO must be a “qualifying” FBO: a majority of its business and

banking activities outside the United States and must not be

controlled by a banking entity organized under U.S. law.

No party to the trade is a U.S. resident.

No personnel directly involved in the trade are located in the U.S.

(other than back office and mere administrative personnel).

Transaction must be executed “wholly outside” the U.S.

This is MoFo. 8

What Other Limits Apply?

Prudential Backstops

No material conflicts of interest

No material exposure to high-risk assets or trading strategies

No safety and soundness threat to banking entity

No threat to U.S. financial stability

This is MoFo. 9

What Should Concern an FBO?

Prohibition does apply to U.S. branches/agencies, U.S.

bank subsidiaries and U.S. affiliates of FBO

Use of U.S. execution facilities may possibly take the

exemption away (U.S. exchange)

FBO’s U.S. offices or affiliates cannot be involved as

broker/intermediary to facilitate the trade

Extra-territorial effect of prudential backstops

Definition of trading account is broad. FBO should check

All positions reported as trading assets in U.S. filings

All positions risk-weighted by market risk capital rules

This is MoFo. 10

What Funds are Covered?

Sections 3(c)(1) and 3(c)(7)

For FBOs, “covered funds” may include:

UCITS or other mutual fund-type vehicles

Some UK covered bond programs

Non-U.S. funds of funds—even though U.S. funds of

funds are not covered

This is MoFo. 11

What Fund Activity is Permitted?

“Customer funds”

3% investment limit

Investments for risk-mitigating hedging purposes

Investment/sponsorship of funds “outside the United

States”

This is MoFo. 12

What May an FBO Do?

FBO may invest in or sponsor non-U.S. fund if: The FBO is a QFBO

The banking entity that sponsors/offers/controls the fund may not

be organized under U.S. law

No affiliate/employee involved in the offer/sale of an interest in the

fund may be incorporated or physically located in the U.S.

No interest in the fund may be offered/sold to U.S. residents: in

other words, no co-investment with U.S. investors

This is MoFo. 13


Prudential Backstops

Super 23A

No loans by any entity in FBO structure to fund—even if fund is

permissibly outside the United States

Exemption for prime brokerage activities

Super 23B

All transactions between and entity in FBO structure and

“affiliated” fund must be on market terms

No prime brokerage exemption

This is MoFo. 14


Special concerns, in addition to Volcker:

If FBO controls a fund, the fund’s investments are attributed to the

FBO for U.S. bank regulatory purposes. This is true even with a

fund that is exempt as a non-U.S. fund.

Under these circumstances, existing prohibitions (that pre-date

the Volcker Rule) on FBOs on investments in U.S. companies

continue to apply. For example, FBOs can’t own 5% or more of

company engaged in business in the U.S. except pursuant to an

available exemption. See, e.g., Regulation K, 211.23(f).

This is MoFo. 15

What are the Deadlines?

Volcker Rule in Dodd-Frank takes effect July 21, 2012

No final rule yet

Two-year conformance period by statute

However, during this “conformance period,” banking entities must

develop “conformance plan” to that reflects “good faith” efforts

Banking entities must develop compliance plan

Regulators could direct that recordkeeping and reporting

requirements take effect before July 21, 2014

This is MoFo. 16

What Should an FBO Do Now?

Review risk management and ability to avoid “high-risk” trades or assets

Analyze and monitor all proprietary trading to determine whether non-U.S. trading exemption applies

Determine whether non-U.S. exemption applies

Establish “conformance plan”: how bank will implement Volcker Rule and be in compliance by July 21, 2014

Establish compliance program to meet Volcker Rule requirements

Consider including “regulatory opt-out” provisions in hedge fund and private equity fund subscription agreements

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Capital American and

International Styles:

the Dodd-Frank Act and

Basel III

July 17, 2012

Presented By:

Charles M. Horn

Oliver Ireland

This is MoFo. 2

Today’s Presentation

Overview and current status of the Basel capital requirements

Basel in the U.S.A: The U.S. regulatory agencies’ capital proposals

Basel III Proposal – the components of capital

Standardized Approach Proposal – risk-weightings of on-balance and off-

balance sheets assets, commitments and contingencies.

Advanced Approaches proposal – regulatory capital proposals affecting

large, internationally active banking organizations

Impact of the Dodd-Frank Act on U.S. regulatory capital requirements

Impact of the U.S. regulatory capital proposals

Nature and composition of capital (“numerator” impact)

Composition and costs of on- and off-balance sheet activities

(“denominator” impact)

Impact on banking organization behaviors

This is MoFo. 3

Basel III – A Brief History

BCBS consultative document – December 2009

BIS announcement and annex – July 2010

August 2010 consultation on “gone concern” capital

requirements

BCBS agree calibration of capital standards – September

2010

BCBS proposals endorsed in November 2010

Final Basel III rules published in December 2010

Basel III revised and republished in June 2011

This is MoFo. 4

Basel III Capital Requirements

Common equity minimum requirement raised gradually to

4.5% of risk weighted assets, phased in in 2013 and

2014

Overall tier 1 capital requirement raised gradually to 6%,

phased in during 2013 and 2014

Minimum total capital requirement remains at 8%

New capital conservation buffer of 2.5%, phased in

during 2016, 2017and 2018

New countercyclical buffer in the range of 0% to 2.5%

Leverage ratio – 3% of total on-balance sheet assets

This is MoFo. 5


Tier 1 capital components and qualification:

Common equity

non-common equity instruments meeting specific criteria

Tier 2 capital: Qualifying subordinated equity and debt

instruments

Regulatory adjustments and deductions from capital

Mostly made to/from common equity Tier 1 capital

Write-off/conversion of capital instruments

Going-concern

Gone-concern

This is MoFo. 6


Other Basel III elements

Liquidity ratios

Liquidity coverage ratio

Net stable funding ratio

Changes to counterparty credit risk framework

Stressed inputs

Deteriorations in counterparty creditworthiness

Higher capital charges for bilateral OTC exposures

External ratings de-emphasis

Related actions: capital charges for G-SIFs

This is MoFo. 7


Phase-in requirements

Minimum capital requirements fully phased in by 2015

Regulatory adjustments and deductions beginning in 2013 and

2014

Grandfathering of certain instruments

Applicability

Internationally active banks subject to the Basel II Accord (2004-

2006)

Will be made applicable to all EU banking organizations and

investment firms under the EU Commission Capital Directive

(CRD 4)

This is MoFo. 8

U.S. Basel III Proposal

Applicability

All U.S. banks that are subject to minimum capital requirements,

including Federal and state savings banks.

Bank and savings and loan holding companies other than “small

bank holding companies” (generally bank holding companies with

consolidated assets of less than $500 million).

Top-tier domestic bank and savings and loan holding companies

of foreign banking organizations.

Does not apply to foreign banking organizations, but does

apply (with a few exceptions) to U.S. bank subsidiaries,

and top-tier U.S. bank holding company subsidiaries, of

foreign banking organizations.

This is MoFo. 9


Minimum Capital Requirements (fully phased-in): Common equity Tier 1 capital ratio to standardized total risk-weighted assets (“TRWA”) of 4.5 percent

Tier 1 capital ratio to standardized TRWA of 6 percent

Total capital ratio to standardized TRWA of 8 percent

Tier 1 leverage ratio to average consolidated assets of 4 percent

Advanced approach banking organizations must use lower of standardized TRWA or advanced approaches TRWA

For advanced approaches banking organizations, a supplemental leverage ratio of Tier 1 capital to total “leverage exposure” of 3 percent.

Common equity Tier 1 capital ratio is a new minimum requirement.

This is MoFo. 10


Components of Capital:

Tier 1 Capital -- common equity Tier 1 capital and additional Tier 1

capital

Total Tier 1 capital, plus Tier 2 capital, would constitute total risk-

based capital.

Proposed criteria for common equity and additional tier 1

capital instruments, and Tier 2 capital instruments, are

broadly consistent with the Basel III criteria.

This is MoFo. 11


Significant Exclusions from Tier 1 Capital

Non-cumulative perpetual preferred stock, which presently

qualifies as simple Tier 1 capital, would not qualify as common

equity Tier 1 capital, but would qualify as additional Tier 1 capital.

Cumulative preferred stock would no longer qualify as Tier 1

capital of any kind.

Certain hybrid capital instruments, including trust preferred

securities, no longer will qualify as Tier 1 capital of any kind.

Some of these results are mandated more by the Dodd-

Frank Act (section 171, or the “Collins Amendment”) than

by Basel III itself.

This is MoFo. 12


Regulatory Capital Adjustments – Common Equity Tier 1

Deductions from Tier 1 common equity capital

Deductions from Tier 1/Tier 2 capital

Treatment of minority interests

This is MoFo. 13


Leverage Requirement:

Ratio of Tier 1 capital (minus required deductions) to average on-

balance sheet assets for all U.S. banking organizations

Supplementary Leverage Requirement:

Applies only to advanced approaches banking organizations

Ratio of Tier 1 capital (minus required deductions) to average on-

balance sheet assets, plus certain off-balance sheet assets and

exposures

This is MoFo. 14


Capital Conservation Buffer:

A ratio to TRWA of 2.5% common equity Tier 1 capital

Unrestricted payouts of capital distributions and discretionary

bonus payments to executives and their functional equivalents

would require full satisfaction of capital conservation buffer

requirement.

Maximum amount of restricted payouts would be the banking

organization’s eligible retained income times a specified payout

ratio. These ratios would be established as a function of the

amount of the banking organization’s capital conversation buffer

capital.

This is MoFo. 15


Countercyclical Capital Buffer:

A macro-economic countercyclical capital buffer of up to 2.5% of

common equity Tier 1 capital to TRWA applicable only to

advanced approaches banking organizations.

Countercyclical capital buffer, applied upon a joint determination

by federal banking agencies, would augment the capital

conservation buffer.

Unrestricted payouts of capital and discretionary bonuses would

require full satisfaction of countercyclical capital buffer as well as

capital conservation buffer.

This is MoFo. 16

Basel III Proposal

Supervisory Assessment of Capital Adequacy

Banking organizations must maintain capital “commensurate with

the level and nature of all risks” to which the banking organization

is exposed

General authority for regulatory approval, on a joint

consultation basis, of other Tier 1 or Tier 2 instruments

on a temporary or permanent basis

The regulators also can invalidate/modify capital

instruments and risk-weighting charges on a case-by –

case basis.

This is MoFo. 17


Changes to Prompt Corrective Action (“PCA”) Rules: PCA regulations changed to assure consistency with the new regulatory capital requirements.

PCA capital categories would include a separate requirement for minimum common equity Tier 1 capital for top 4 PCA categories (6.5%/4.5%/<4.5%/<3%).

“Well-capitalized” DIs would have to have at least 8% Tier 1 capital (up from current 6%), and “adequately capitalized” DIs 6% Tier 1 capital (up from current 4%).

“Adequately capitalized” PCA category for advanced approaches banks would include a minimum 3% supplementary leverage ratio requirement.

Revisions to the definition of “tangible equity” for critically undercapitalized DIs, and HOLA/savings institutions.

This is MoFo. 18


Effective Dates/Transitional Periods: Minimum Tier 1 capital ratios -- 2013-2015

Minimum total capital: no change and therefore no phase-in

Regulatory capital adjustments and deductions -- 2013 -2018; goodwill deduction is fully effective in 2013

Non-qualifying capital instruments

BHCs of $15 BB+ in assets -- 2013-2016

BHCs under $15BB and all DIs -- 2013-2022

Capital conservation and countercyclical capital buffers, and related payout ratios -- 2016-2019

Supplemental leverage ratio for advanced approaches banks – 2018; calculation and reporting required in 2015

PCA changes – 2015 (2018 for supplemental leverage ratio)

This is MoFo. 19

Capital Numerator Comparisons

The U.S. Basel III proposal is consistent with its BIS and

European counterparts (EU CRD IV). “Consistent,”

however, does not mean identical.

U.S. proposal applies to all banks and their holding

companies except “small bank holding companies.”

Common Equity Tier 1 --- U.S. Treatment

U.S.: GAAP treatment of qualifying instruments must be non-

liability

Common equity instruments do not expressly have to be “shares”

Unrealized AFS losses and gains flow through to common equity

Tier 1 capital

Cash dividends paid only out of net income and retained earnings

This is MoFo. 20


Additional Equity Tier 1 --- U.S. Treatment

GAAP treatment of qualifying instruments must be non-liability

No specific going-concern loss requirements specified

Cash dividends paid only out of net income and retained earnings

Permanent grandfathering of U.S. government capital investments

such as TARP and Small Business Jobs Act securities

Subordination disclosure requirements for advanced approaches

banks

Leverage ratio

U.S. banks are already subject to leverage ratio

Supplemental leverage ratio applies to advanced approaches

banks.

This is MoFo. 21


Countercyclical capital buffer – U.S. Treatment

Applies only to advanced approaches banking organizations

U.S. rules do not address:

Basel III liquidity requirements (yet)

This is MoFo. 22

Basel II – A Refresher

A comprehensive reconfiguration of regulatory capital

requirements and related supervisory oversight and

market discipline to better capture credit and other risks

on the banking book and improve oversight of bank

capital

Basel II – the three pillars

Pillar 1 – capital requirements

Pillar ii – supervisory oversight

Pillar III – market discipline

This is MoFo. 23

Basel II – A Refresher

Basel II capital requirements – credit risk

Standardized approach

IRB approach

Foundation

Advanced

Securitization exposure framework

Basel II capital requirements – operational risk

Basic indicator approach

Advanced measurement approach

This is MoFo. 24

Basics of the U.S. Standardized Approach Proposal

Applicability

Generally, the same banks that would be subject to the Basel III

Proposal

Calculation of risk weights

Treatment of credit risk mitigants

Proposed Effective Date: Jan. 1, 2015

Banks may opt in earlier

Differences from Basel II treatment

Impact of changes

U.S. Standardized Approach

This is MoFo. 25


Themes of the Standardized Approach

Improved sensitivity to credit risk

Elimination of reliance on credit ratings

Behavior modification

Not addressed: Operational risk

This is MoFo. 26

Standardized Approach Proposal

Risk weights – 11 broad asset classes

Residential mortgages

Commercial lending – “high volatility” CRE loans

Off-balance sheet exposures

Corporate exposures

OTC Derivatives

Cleared transactions

Unsettled transactions

Securitization exposures

Equity exposures

Sovereign and foreign bank exposures

Other assets/exposures

This is MoFo. 27


Credit risk mitigants

Government guarantees of residential mortgages

Guarantees and credit derivatives

Issuers

Terms

Collateral

Mitigants in securitizations

This is MoFo. 28


Disclosures

Banks with more than $50 billion in consolidated assets

but not subject to advanced approaches

Disclosure policy

Quarterly disclosures

Templates

This is MoFo. 29

Denominator Comparisons

U.S. proposal would apply to all banks and their holding

companies other than “small bank holding companies.”

Basel II applies to internationally active banks.

EU/CRD IV would apply to all EU banks

Unlike Basel II, U.S. proposal does not allow reliance on

credit rating references (Dodd-Frank Act section 939A).

U.S. standard is “investment grade”:

“adequate capacity” to meet financial commitments for the

projected life of the asset or exposure.

“adequate capacity” means risk of default is low and the full and

timely repayment of principal and interest is expected.

This is MoFo. 30


Denominator impact of section 939A requirement is

broad.

Basel II ratings-based approach and internal assessment

approaches for securitization exposures are removed

Sovereign, residential mortgage and debt exposures affected

Impact on eligible guarantees and guarantors, credit derivatives

and credit risk mitigants

Affects potential future exposure of OTC derivatives for purposes

of on-balance sheet credit conversion

This is MoFo. 31


Other U.S. denominator variances: the U.S. “lessons

learned”

Risk-weightings of residential mortgage exposures is significantly

more granular than under Basel II.

Treatment of high-volatility commercial real estate exposures

Exposures to securities firms are treated as corporate exposures,

not DI exposures.

Basel II allows national application of risk-weighting

requirements, which affords the U.S. some latitude in

Basel II’s implementation (particularly where it is being

applied to non-Basel II banks!).

This is MoFo. 32

Advanced Approaches Proposal

Applicability and Coverage:

Applicability: Basel II “advanced approaches” banks, including

qualifying Federal/state savings associations and their holding

companies

Coverage:

Counterparty credit risk

Removal of credit rating references

Securitization exposures

Treatment of certain exposures previously subject to deduction

Conforming technical changes

Proposed Effective Date: None specified

This is MoFo. 33

Advanced Approaches Proposal

Departure from Basel II (redux): Credit Ratings:

Consistent with section 939A of the Dodd-Frank Act, the

Advanced Approaches Proposal would remove references to

credit ratings that currently exist in the advanced approaches

capital rules and replace these references with alternative

standards of creditworthiness.

Affects, among other things, treatment of guarantors, OTC

derivatives exposures, money market fund exposures, operational

risk mitigants and securitization exposures

This action is also consistent with removal of credit rating

references in the Standardized Approach Proposal.

This is MoFo. 34

Impact of Capital Proposals

The overall impact of the regulatory capital proposals on

the banking sector will vary depending on the size and

characteristics of the banking organization.

Most U.S. banks are liquid and have excess capital

positions, even factoring in the possible impact of the

Basel III and Standardized Approach Proposals.

Changes in capital structure and planning will be needed.

Banks already are selectively redeeming or repurchasing TruPS.

Full impact on creative variations of Tier 1 capital (mostly

additional Tier 1 capital) remain to be seen.

Capital-raising may be more of a challenge for community banks.

This is MoFo. 35


The overall impact of the regulatory capital proposals on

the banking sector will vary depending on the size and

characteristics of the banking organization.

Most U.S. banks are liquid and have excess capital

positions, even factoring in the possible impact of the

Basel III and Standardized Approach Proposals.

Changes in capital structure and planning will be needed.

Banks already are selectively redeeming or repurchasing TruPS.

Full impact on creative variations of Tier 1 capital (mostly

additional Tier 1 capital) remain to be seen.

Capital-raising may be more of a challenge for community banks.

This is MoFo. 36


There also will be operational challenges for many banking organizations, especially smaller banks in the implementation of the these proposals

Risk-weightings under the Standardized Approach Proposal are materially more dynamic: For many risk-weightings, there is no “set it and forget it.”

Nonaccrual status, loan restructurings, failed settlements and sovereign downgrades are just some of the events that may trigger risk-weighting recalculations.

Banking organizations therefore will need to actively manage their balance sheets for regulatory capital purposes.

The development and implementation of data processing and information systems could prove to be a substantial and expensive challenge.

This is MoFo. 37


What about the regulatory compliance risks?

First of all, what are they?

Under the Standardized Approach Proposal, there would be a

significantly increased risk of getting the risk-based calculations

wrong.

If that happens, overstatements of regulatory capital, call report

(and maybe SEC report) misstatements, and possible

enforcement action or PCA downgrades are a possibility.

Another question – does a failure to have in place an adequate

capital calculation and compliance infrastructure become an

internal controls or a safety-and-soundness issue?

This is MoFo. 38

Concluding Remarks

Questions and Answers

© 2

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Capital Raising in the

United States:

Alternatives for

Foreign Issuers

July 17, 2012

Presented By:

Ze’ev Eiger

Nilene R. Evans

Jerry Marlatt

This is MoFo. 2

Agenda

Benefits of the U.S. Market

Regulatory and other concerns

Private Offerings – Debt and Equity

Section 4(a)(2)

Regulation D

Rule 144A

Regulation S

Section 3(a)(2)

Rule 12g3-2(b)

MTN Programs

Public Offerings – The new JOBS Act “on ramp”

Exchange Act Registration Thresholds

Covered Bonds

This is MoFo. 3

Introduction

This is MoFo. 4

Benefits of the U.S. Market

Large investor base for both public and private offerings

Benefits of being public in the United States

increased visibility and prestige;

ready access to the U.S. capital markets, which are still the largest and most

liquid in the world;

enhanced ability to attract and retain key employees by offering them a share in

the company’s growth and success through equity-based compensation

structures; and

ability to send credible signals to the market that the company will protect

minority shareholder interests.

This is MoFo. 5

Regulatory and Other Concerns

Continuing weak and uncertain public market

Becoming and remaining a U.S. public company:

expensive,

time-consuming,

could require reorganizing operations, and

Results in extensive corporate governance and accounting obligations that may

not be customary or desired absent U.S. requirements – Sarbanes-Oxley Act of

2002 and Dodd-Frank Act of 2010.

Litigation exposure

Impact of the JOBS Act – enacted April 2012

This is MoFo. 6

What is a “foreign private issuer”?

A “foreign private issuer” (“FPI”) is any foreign issuer (other than a

foreign government), unless:

more than 50% of the issuer’s outstanding voting securities are held directly or

indirectly of record by residents of the United States; and

any of the following applies:

− the majority of the issuer’s executive officers or directors are U.S. citizens

or residents;

− more than 50% of the issuer’s assets are located in the United States; or

− the issuer’s business is administered principally in the United States.

A foreign company that obtains FPI status can avail itself of the

benefits of FPI status immediately.

FPIs receive many accommodations under Federal securities laws.

Obligation to monitor status.

This is MoFo. 7

Alternative Capital Raising Strategies

Three common strategies a foreign issuer can use to generate

capital and not subject itself to reporting requirements:

Private Placements:

− Section 4(a)(2) of the Securities Act or

− Regulation D of the Securities Act;

Rule 144A Offerings and Regulation S; and

Reliance on Rule 12g3-2(b) of the Exchange Act

Foreign banks may also consider accessing the market by issuing

securities in reliance on Section 3(a)(2) of the Securities Act

This is MoFo. 8

Private Offerings

This is MoFo. 9

Private Offerings

Basic premise – all offerings subject to U.S. Federal securities laws

unless there is an exemption.

Section 4(a)(2) of the Securities Act

Prior to the Jobs Act, Section 4(2)

“Transactions by an issuer not involving any public offering”

Exempts issuer offerings from the registration and prospectus delivery

requirements of the Securities Act

Still subject to anti-fraud provisions of the Securities Act

Potentially subject to the registration requirements of the Securities Exchange

Act of 1934, broker-dealer registration requirements, investment company and

investment adviser requirements, and applicable state laws

Shaped by judicial and administrative interpretations

This is MoFo. 10

Basics of a Private Placement

A limited number of

Financially sophisticated offerees,

Given access to information relevant to their potential investment,

That have some relationship to each other and to the issuer, and

That are offered securities in a manner not involving any general

advertising or general solicitation.

These “Basics” are evolving.

This is MoFo. 11

Regulation D

This is MoFo. 12

Regulation D

Adopted by the SEC in 1982 to provide more certainty for private

placements

Comprised of eight rules – Rules 501 through 508—and provides

three safe harbors from registration under two statutory provisions:

Rules 504, under Section 3(b) of the Securities Act – offerings of up to $1 million by non-reporting issuers

Rule 505, under Section 3(b) of the Securities Act – offerings of up to $5 million

Rule 506, under Section 4(a)(2) of the Securities Act – exemption for limited offerings and sales without regard to the dollar amount

− Unlimited number of “accredited investors” (as defined under Rule 501)

− Up to 35 non-accredited investor “purchasers”

Certain issuers are disqualified from participating in Regulation D

offerings (Rule 507)

Rules also govern information requirements, manner of offering,

participants, notices of sales

This is MoFo. 13

End of General Solicitation Prohibition

Since the 1930s, the essence of a private placement was no general solicitation of investors.

Prior to the JOBS Act, issuers utilizing Regulation D were prohibited from engaging in general solicitation or advertising of the offering.

The JOBS Act abolishes the prohibition against general solicitations and advertisements for offerings under Rule 506, provided securities offered under Rule 506 are sold only to accredited investors.

Issuer is required to taken “reasonable steps” to verify that all purchasers are accredited investors in connection with an offering pursuant to Rule 506.

SEC is required to revise Rule 506 of Regulation D to comply with these changes. The SEC announced that it would consider the rules relating to general solicitation in its late August 2012 meeting; it is possible that it will adopt an “interim final rule,” which would be effective quickly rather than issue a proposal and seek comments.

This is MoFo. 14

Accredited Investor

Rule 501 defines an “accredited investor” as any person who comes within any of the following categories, or whom the issuer reasonably believes comes within any of the following categories, at the time of the sale:

Any bank (as defined) or any savings and loan association or other institution (as defined), whether such bank, savings and loan association, or other institution is acting in its individual or fiduciary capacity;

Any broker or dealer registered under the Exchange Act and purchasing for its own account; Any insurance company (as defined); Any registered investment company or business development company; Any licensed small business investment company; Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state

or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5 million; Any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 (“ERISA”) if

(1) the investment decision is made by a plan fiduciary, which is either a bank, savings and loan association, insurance company, or registered investment adviser; (2) the employee benefit plan has total assets in excess of $5 million; or (3) if a self-directed plan, with investment decisions made solely by persons who are accredited investors;

Any private business development company (as defined); Any organization, corporation, limited liability company, Massachusetts or similar business trust, or partnership

exempt under Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Internal Revenue Code”), with total assets in excess of $5 million and not formed for the specific purpose of acquiring the securities offered;

Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

Any natural person whose (1) individual net worth, or joint net worth with that person’s spouse, at the time of the purchase exceeds $1 million, or (2) income or joint income with that person’s spouse exceeds $200,000 or $300,000, respectively, in each of the two most recent years, and who has a reasonable expectation of reaching that same income level in the current year;

Any trust with total assets exceeding $5 million not formed for the specific purpose of acquiring the securities offered, and whose purchases are directed by a sophisticated person; and

Any entity in which all equity owners are accredited investors.

The SEC has also provided interpretive guidance regarding the types of investors that qualify as accredited investors.

This is MoFo. 15

Rule 144A

This is MoFo. 16

Why Are Rule 144A Offerings Attractive to Non-U.S. Issuers?

Rule 144A provides a clear safe harbor for offerings to institutional

investors.

Does not require extensive ongoing registration or disclosure

requirements.

Issuances may have liquidity in the Rule 144A market.

General solicitation and general advertising will not be prohibited in

secondary sales under Rule 144A so long as only QIBs are

purchasers in the offering, subject to SEC rulemaking, currently

expected in late August 2012.

In the debt private placement world, transactions generally are

structured as Rule 144A/Section 4(a)(2) placements

This is MoFo. 17

A non-exclusive safe harbor from the registration requirements of

Section 5 of the Securities Act for resales of restricted securities to

“qualified institutional buyers” (QIBs).

Not all investors are in need of the protections of the prospectus

requirements of the Securities Act.

The rule applies to

Offers made by persons other than the issuer of the securities – i.e., “resales”

Securities that are not listed on a U.S. securities exchange or quoted on an

automated inter-dealer quotation system.

A reseller may rely on any applicable exemption from the registration

requirements of the Securities Act in connection with the resale of

restricted securities (such as Regulation S or Rule 144).

Rule 144A – Overview

This is MoFo. 18

Typical Rule 144A Offering Structure

The issuer initially sells restricted securities to investment bank(s)

(the “initial purchasers”) in a Section 4(a)(2) or Regulation D

private placement.

The investment bank reoffers and immediately resells the

securities to QIBs under Rule 144A.

Often combined with a Regulation S offering.

This is MoFo. 19

What is a QIB?

An entity that is an “accredited investor” acting for its own account

or the accounts of other QIBs, that in the aggregate owns and

invests at least $100 million in securities of unaffiliated issuers ($10

million for a broker-dealer).

Banks and savings and loan associations with a net worth of at

least $25 million.

A broker-dealer acting as a riskless principal for an identified QIB.

To qualify, the QIB must commit to the broker dealer that the QIB will

simultaneously purchase the securities from the broker-dealer.

A QIB can be formed solely for purpose of conducting a Rule 144A

transaction.

This is MoFo. 20

Rule 144A Offering Memorandum

May contain similar information to a full “S-1/F-1” prospectus, or may be much shorter.

If the issuer is a public company, it may incorporate by reference the issuer’s filings from its home country.

Scope of disclosure (whether included or incorporated by reference) may be comparable to a public offering, as the underwriters expect “10b-5-level” representations from the issuer, and legal opinions from counsel.

Due diligence by counsel will often be similar to that performed in a public offering.

For a non-U.S. offering, with a Rule 144A “tranche,” there may be a U.S. “Rule 144A wrapper” attached to the non-U.S. offering document.

This is MoFo. 21

Rule 144A Offerings – Disclosure

Disclosure requirements under Rule 144A

Foreign issuers relying on Rule 144A are obligated to disclose a “very brief

statement of the nature of the business of the issuer and the products and

services it offers; and the issuers most recent balance sheet and profit and loss

and retained earning statement, and similar financial statements for …the two

preceding years”

This is MoFo. 22

Rule 144A Offerings – Resale

Securities issued under Section 4(2), Regulation D, Regulation S, or Rule 144A are all deemed “restricted securities”

Rule 144A safe harbor exemption allows the resale of securities acquired in a private offering:

to other QIBs; or

in private transactions; or

in reliance on Rule 144 (subject to holding period)

Resale is based on applicable holding periods and on the identity of the holder (affiliate and non-affiliate) and the issuer (reporting and non-reporting)

For an issuer that is not an Exchange Act reporting company or exempt from reporting pursuant to Rule 12g3-2(b), the holder and a prospective buyer designated by the holder must have the right to obtain from the issuer, upon the holder’s request, certain reasonably current information.

This is MoFo. 23

Liquidity – The PORTAL Alliance

The PORTAL Alliance is operated by Nasdaq. Founding members include BofA Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley, The NASDAQ OMX Group, Inc., UBS and Wells Fargo Securities.

The PORTAL Alliance has functionality for trade negotiation, investor qualification, shareholder tracking, transaction settlement and dissemination of issuer information and historical trade data.

The PORTAL Alliance only lists equity securities that were originally issued in a Rule 144A-compliant transaction.

Only QIBs have access to the platform – eligible entity must register and demonstrate its qualifications.

The security to be traded must be deposited by the issuer or a PORTAL participant in a negotiable form or eligible for deposit with a securities depository, and must not be subject to any restriction that would impose an unreasonable burden on any PORTAL participant. Thus, issuer restrictions on transfer would not be permitted.

Transfer agents track record holders to ensure registration threshold not exceeded.

This is MoFo. 24

Equity Rule 144A offerings

In certain industry sectors, equity Rule 144A offerings are an

attractive stepping stone to an IPO

Post-JOBS Act, there may be more flexibility in conducting an equity Rule 144A

offering (relaxation of prohibition on general solicitation)

Also, an issuer contemplating an equity Rule 144A may not be as concerned about

the number of holders of record

Not clear, whether, given the emergence of the JOBS Act IPO “on ramp” an equity

Rule 144A will be a compelling alternative to an IPO

This is MoFo. 25

Regulation S

This is MoFo. 26

Regulation S of the Securities Act

Under Regulation S, securities offered or sold outside the United States are not subject to the registration requirements under Section 5 of the Securities Act if the following conditions are met:

− Any offer, sale, or result must be made in an “offshore transaction”

− No directed selling efforts are made in the United States in connection with an offer, sale, or result under the safe harbor – note that the JOBS Act is silent on Regulation S

Two important safe harbors under Regulation S:

Rule 903 - issuer safe harbor

Rule 904 - resale safe harbor

Regulation S safe harbors are often used side-by-side with Rule 144A offerings

There are also specific additional conditions that are based on the nature of the security offered and whether the issuer already has securities that are publicly registered in the United States.

This is MoFo. 27

Regulation S – Rule 903

Rule 903 of Regulation S: Issuer Safe Harbor

Rule 903 of Regulation S is available to all issuers, distributors and their affiliates

The rule contains three categories of permissible issuer offerings, each with

specific safeguards to prevent securities from flowing back into the United States

Imposes compliance periods during which offering participants are subject to

stringent transfer restrictions on the securities

− Such periods vary depending on the type of security offered

This is MoFo. 28

Regulation S – Rule 904

Rule 904 of Regulation S: Resale Safe Harbor

Under Rule 904 of Regulation S, resales by

− any person other than the issuer, a distributor or their respective affiliates, and

− any officer or director of the issuer or a distributor who is an affiliate solely by virtue of holding such position,

are deemed to have occurred outside the United States if the two general conditions (offshore transactions and no directed selling efforts), plus any applicable additional resale requirements, are met

Rule 904 has additional restrictions on resale depending on the whether the resale is conducted by dealers and persons receiving selling commissions or by certain affiliates

Available for all securities

This is MoFo. 29

Rule 144A/Regulation S offerings

Often cross border deals are structured as Rule 144A/Regulation S

offerings

As noted earlier, the JOBS Act is silent as to the “directed selling

effort” provision in Regulation S, and the JOBS Act generally was not

focused on offerings outside of the United States or offerings by

foreign issuers

A general solicitation may create some uncertainty with respect to

the Regulation S prohibition against directed selling efforts

For offerings that are structured as Rule 144A/Regulation S/4(a)(2)

offerings, similar concerns are raised for the Section 4(a)(2) piece

This is MoFo. 30

Section 3(a)(2)

This is MoFo. 31

Background on Section 3(a)(2)

Section 3(a)(2) exempts from registration under the Securities Act

any security issued or guaranteed by a bank.

A “bank” means “any national bank, or any banking institution

organized under the law of any state, territory, or the District of

Columbia, the business of which is substantially related to banking,

and is supervised by the state or territorial banking commission.”

A “bank” is not a bank holding company, a foreign bank, or a

nonbank financial institution of any kind.

This is MoFo. 32

Section 3(a)(2) Requirements

The Section 3(a)(2) exemption is available to the U.S.

branches/agencies of foreign banks.

The SEC has long treated a foreign branch/agency as a “national

bank” or a “banking institution organized under the laws of any state”

if the nature and extent of Federal and/or state regulation and

supervision of a branch/agency is “substantially equivalent to that

applicable to Federal or state chartered domestic banks doing

business in the same jurisdiction.”

As a result, U.S. branches/agencies of foreign banks are frequent

issuers of debt securities in the U.S.

Most issuances occur through the NY branches of these banks.

This is MoFo. 33

Section 3(a)(2) Requirements (cont’d)

The Section 3(a)(2) exemption is also available for securities that are

guaranteed by a bank, including arrangements in which the bank

agrees to ensure the payment of a security.

The guaranty or assurance of payment, however, has to cover the entire

obligation; it cannot be a partial guarantee or promise of payment.

Guarantees by foreign banks (other than those of an eligible U.S. branch or

agency) would not qualify for this exemption.

Alternative approaches to Section 3(a)(2) issuances:

Direct issuance through U.S. branch/agency.

Issuance through other “group” entity where the bonds are guaranteed by U.S.

branch/agency.

This is MoFo. 34

Other Regulatory Requirements

A U.S. branch/agency is either licensed and regulated by a state

banking authority (often New York)(state branch/agency), or if

Federally licensed, licensed and regulated by the Office of the

Comptroller of the Currency (OCC)(Federal branch/agency).

The nature and substance of Federal or state banking regulation of

debt offerings in the U.S. may vary depending on whether the issuing

entity is a Federal or state bank or branch/agency.

This is MoFo. 35

OCC Requirements

If subject to OCC supervision, then a bank/Federal branch or agency must either comply with OCC securities offering disclosure requirements or rely on an exemption from these requirements.

These regulations do not apply to state banks, branches or agencies.

Part 16 of the OCC regulations outline requirements and the exemptions.

Sec 16.5 provides exemptions for: Regulation D offerings to accredited investors;

Rule 144A offerings to QIBs; and

Reg S offerings.

Sec 16.6 also provides a separate exemption for offerings of “non-convertible debt” to accredited investors in denominations of $250,000 or more. National banks with foreign parents that have shares traded in the United States may be able to

rely upon this exemption by furnishing the foreign private issuer reports (Forms 20-F, 6-K) filed by foreign issuers.

Alternatively, Federal branches/agencies may rely on this exemption by furnishing to the OCC parent bank information which is required under Exchange Act Rule 12g3-2(b), and to purchasers the information required under Securities Act Rule 144A(d)(4)(i).

This is MoFo. 36

Federal and State Requirements Neither the Federal Reserve Board nor the FDIC has specific offering/disclosure rules

for debt issuances by non-U.S. banks or their U.S. branches/agencies.

Issuance of debt in the United States by foreign banking organizations is not covered by FDIC insurance, and therefore the FDIC has no regulatory jurisdiction over these activities unless they are conducted by an insured U.S. branch.

However, for state banks that are FDIC-insured, the FDIC has issued disclosure guidance. In general: Disclosure must be substantially comparable to a prospectus, or

Offering must be limited to accredited investors.

U.S. branch/agency issuances or guarantees of “novel” or unusual debt instruments might require advance OCC, Federal Reserve or FDIC consultation, approval or non-objection.

Under section 4(g) of the International Banking Act and OCC rules, Federal branches/agencies of foreign banks are subject to capital equivalency deposit requirements that generally are calculated and imposed as a percentage of branch/agency designated liabilities.

States generally do not have substantive securities offering requirements applicable to debt issuances or guarantees by non-U.S. banks or their U.S. branches/agencies.

This is MoFo. 37

Considerations

Depending on applicable requirements, by relying on Section 3(a)(2), an entity can reach a broader array of investors

Resales will not be limited to QIBs

Section 3(a)(2) securities are not subject to blue sky (state securities law) requirements

Section 3(a)(2) securities are not considered “restricted securities,” which means that: Bloomberg and other quotation systems would not identify the securities as restricted

securities, and

Section 3(a)(2) securities may be included in the major bond indices.

Securities offerings by a bank or guaranteed by a bank under Section 3(a)(2) are not subject to the civil liability provisions under Section 11 and Section 12(a)(2) of the Securities Act.

These securities, however, are still subject to the anti-fraud provisions of the Federal securities laws, which can be enforced either by: plaintiffs in private rights of action;

the SEC in civil judicial proceedings; or

the Federal banking agencies in administrative proceedings under Section 8 of the Federal Deposit Insurance Act.

This is MoFo. 38

Rule 12g3-2(b)

This is MoFo. 39

Rule 12g3-2(b) of the Exchange Act

Rule 12g3-2(b) of the Exchange Act

Provides an alternative for foreign private issuers that wish to market to a limited

number of U.S. investors without implicating registration and disclosure

obligations pursuant to 12(g) of the Securities Act

A foreign private issuer can claim the Rule 12g3-2(b) exemption if it:

Is not required to file or furnish reports under Section 13(a) or Section 15(d) of the Exchange Act;

Currently maintains a listing of the relevant securities on at least one non-U.S. securities exchange that constitutes the primary trading market for those securities;

“Primary trading market” means (a) at least 55% of the trading of the subject class of securities on a worldwide basis took place in no more than two foreign securities markets during the issuer’s most recently completed fiscal year, and (b) if a FPI aggregates the trading of its subject class of securities in two foreign jurisdictions, the trading for the issuer’s securities in at least one of the two foreign jurisdictions is greater than the trading in the U.S. for the same class of the issuer’s securities

and

Has published specified non-U.S. disclosure documents in English on its website or through an electronic information delivery system

This is MoFo. 40

Rule 12g3-2(b) – Maintaining Exemption

To maintain the Rule 12g3-2(b) exemption, a foreign private issuer

is required to publish the following information on an ongoing basis

and for each subsequent fiscal year in English on its website:

Information made public or that is required to be made public pursuant to the

laws of its country of incorporation, organization, or domicile;

Information filed or required to have been filed with the issuer’s primary trading

market and which has been made public by that exchange; and

Information that the issuer has distributed or been required to distribute to its

securities holders

This is MoFo. 41

Rule 12g3-2(b) – Issuer Disclosures

The information published electronically under this exemption is information

material to an investment decision, including:

Results of operations or financial conditions;

Change in business;

Acquisitions or dispositions of assets;

Issuance, redemption or acquisition of securities;

Changes in management or control;

Granting of options or payment of other compensation to directors and officers; and

Transactions with directors, officers, or principal security holders

Documents required to be electronically published:

Annual report, including annual financial statements;

Interim reports, including financial statements;

Press releases; and

All other communications and documents distributed directly to security holders of each class of securities to which the exemption relates

This is MoFo. 42

Rule 12g3-2(b) – Exemption Unavailable

The Rule 12g3-2(b) exemption is not available for a foreign private

issuer that:

Has, or has had during the prior 18 months, any securities registered under

Section 12 of the Exchange Act or a reporting obligation under Section 15(d) of

the Exchange Act;

Issued securities in a transaction to acquire by merger, consolidation, exchange

of securities or acquisition of assets, another issuer that had securities

registered under Section 12 of the Exchange Act or a reporting obligation under

Section 15(d) of the Exchange Act; or

Has securities quoted in an “automated inter-dealer quotation system” or

securities represented by American Depositary Receipts (with certain

exceptions)

This is MoFo. 43

Rule 12g3-2(b) and ADRs

An American depositary receipt (“ADRs”) is a negotiable instrument

issued by a U.S. bank that represents an ownership interest in a

specified number of securities that have been deposited with a

custodian, typically in the issuer’s country of origin

Two types of ADRs:

Unsponsored ADRs; and

Sponsored ADRs

This is MoFo. 44

Rule 12g3-2(b) – ADR Programs

Unsponsored ADR

“Unsponsored ADRs” are ADRs in which the foreign issuer of the underlying

security is not involved

A depositary bank may establish an unsponsored ADR facility based on a

“reasonable, good faith belief after exercising reasonable diligence” that the

disclosures on a FPI’s website is in compliance with Rule 12g3-2(b) of the

Exchange Act

Depositary bank must file a registration statement on Form F-6 with the SEC in

order to establish unsponsored ADR program

ADRs are only permitted to trade in the U.S. in the “over-the-counter” markets

This is MoFo. 45

Rule 12g3-2(b) – ADR Programs

Sponsored ADRs

“Sponsored ADRs” are ADRs that are issued in cooperation with the foreign

issuer whose equity shares underlie the ADR shares

A foreign private issuer can rely on a sponsored Level I ADR program to gain

access to U.S. investors without triggering Federal securities reporting obligations

Level I ADR programs:

Depositary bank files a Form F-6 with the SEC in order to establish program

Rely on the Rule 12g3-2(b) exemption

Facilitate trading of the ADRs on the OTC Bulletin Board or the Pink Sheets

Allow an issuer to establish regular communications with ADR holders

Additional requirements are set forth in an agreement between the foreign private

issuer and the depositary bank

A foreign private issuer with a Level I ADR program can still access the private

placement and Rule 144A markets

This is MoFo. 46

MTN Programs

This is MoFo. 47

MTN Programs

In addition to individual offerings, an issuer may have a “Rule

144A/Reg S program” (also may be referred to as an EMTN or

GMTN program) or a “3(a)(2) program.”

Used for repeat offerings, often by financial institution and insurance

company issuers, to institutional investors.

Often used for structured products sold to QIBs.

Advantages over a public MTN program:

No need to publicly disclose innovative structures or sensitive information such as

underwriter compensation.

Limits FINRA filing requirements.

For financial institution issuers, greater flexibility as to timing of programs when

the stock of an underlying security is on a “watch list.”

This is MoFo. 48

Program Documentation

The documentation used for MTN programs is very similar to the documentation used for stand-alone Rule 144A/Reg S and Section 3(a)(2) offerings.

In place of a purchase agreement, there is a “distribution” or “program” agreement, which has representations, warranties and covenants similar to a purchase agreement and provides for issuances from time to time on a principal or agency basis.

The distribution or program agreement also: describes the steps to be followed if the offering circular or offering memorandum is amended, or the size of

the program is increased;

describes the steps to be followed, and the approvals required, if any free writing prospectuses are to be used;

describes conditions precedent documents and deliverables for establishing the program and/or conducting takedowns;

requires subsequent deliverables from the issuer to the selling agents, such as periodic comfort opinions, legal opinions and officer certificates;

includes provisions allocating program expenses among the issuer and the selling agents;

provides for indemnification of the selling agents for liabilities under the securities laws;

includes provisions relating to the determination of the selling agents’ compensation, or a schedule of commissions; and

Includes provisions for adding additional selling agents, whether for the duration of the program, or for a specific offering.

This is MoFo. 49

Program Documentation (cont’d)

There is also an indenture or fiscal and paying agency agreement,

as well as an administrative procedures memorandum (describing

settlement procedures).

For structured products, there often are calculation agency and

exchange rate agency agreements (describing procedures for

calculating interest rates and determining exchange rates).

Legal opinions, officer’s certificates and comfort letters are issued on

the program signing and often are delivered periodically as part of

ongoing due diligence.

This is MoFo. 50

Offering Documentation

The principal offering document is an “offering memorandum” or “offering circular” which contains: a detailed description of the securities to be offered;

a description of the issuer’s business;

the issuer’s financial statements (unless incorporated by reference from the issuer’s publicly-available documents in its home jurisdiction); and

a plan of distribution section.

The terms of each takedown off of an MTN program will be reflected in a set of final terms or a pricing supplement, which typically are fairly short.

For structured products, product supplements are often used to include more detailed disclosure for complex securities.

In addition, the issuer and the selling agents may use final term sheets to offer these securities (which together with the offering memorandum or offering circular, any product supplement and any preliminary pricing supplement, will comprise the disclosure package for liability purposes).

Legal opinions, officer’s certificates and comfort letters are typically issued for principal takedowns (in contrast to agented takedowns).

This is MoFo. 51

JOBS Act IPO “On Ramp”

This is MoFo. 52

JOBS ACT IPO “On Ramp”

To encourage smaller companies to go public through a process where public company obligations would be phased in over time, the JOBS Act created the “emerging growth company” (“EGC”).

An EGC is an issuer with total annual gross revenue of less than $1 billion (with such threshold indexed to inflation every five years).

An EGC would retain that status until:

The last day of the fiscal year in which the issuer had $1 billion or more in annual revenues;

The last day of the fiscal year following the fifth anniversary of the issuer’s IPO;

The date on which the issuer has, during the previous rolling 3-year period, issued more than $1 billion in non-convertible debt:

− debt issued in a public or an exempt offering (not outstanding);

− rolling three-year period from the time the issuer establishes its EGC status; or

The date when the issuer is deemed to be a “large accelerated filer” (as defined by the SEC).

This is MoFo. 53

Emerging Growth Company – Benefits

EGCs may file a registration statement with the SEC on a confidential basis.

EGCs may engage in oral or written communications with QIBs and institutional accredited investors in order to gauge their interest in a proposed IPO (i.e. “test-the-waters”) either prior to or following the first filing of the IPO registration statement.

EGCs may file only two years of audited financial statements with the SEC (rather than three years), and may delay the auditor attestation on internal controls requirement.

EGCs are exempt from: The mandatory Say-on-Pay vote requirement;

The Dodd-Frank Act-required CEO pay ratio rules (not yet proposed by the SEC), and may use certain smaller reporting company scaled disclosure;

Any new or revised financial accounting standard until the date that such accounting standard becomes broadly applicable to private companies; and

Any rule requiring mandatory audit firm rotation or a supplement to the auditor’s report that would provide additional information regarding the audit of the company’s financial statements (no such requirements currently exist).

This is MoFo. 54

Timing of EGC Status

An issuer will not be able to qualify as an EGC if it first sold its

common stock in an IPO prior to December 8, 2011. This test is not

limited to a company’s initial primary offering of common equity

securities for cash. It could also include offering common equity

pursuant to an employee benefit plan on a Form S-8 as well as a

selling stockholder’s secondary offering on a resale registration

statement.

If the issuer that would otherwise qualify as an EGC had a

registration statement declared effective on or before December 8,

2011, but no sales took place before that date, the issuer would still

qualify as an EGC.

This is MoFo. 55

Losing EGC Status

EGC status is tested at the timing of the first public filing of the issuer’s

registration statement.

If an issuer confidentially submits a draft registration statement and while

the issuer’s draft registration statement is pending with the SEC, the issuer

crosses the $1 billion revenue threshold (or one of the other tests for EGC

status), it will lose its EGC status and must file the registration statement

promptly.

If however, an issuer publicly files its registration statement at a time when it

qualifies as an EGC, the disclosure provisions for EGCs would continue to

apply through effectiveness of the registration statement even if it loses its

EGC status during registration.

For other purposes, the SEC has advised that an issuer would need to

assess EGC status at the time it undertook certain permitted activities.

This is MoFo. 56

EGC Opt-In

An EGC may forego reliance on any exemption available to it.

However, if it chooses to comply with financial reporting

requirements applicable to non-EGCs, it must comply with all such

standards and cannot selectively opt in or opt out of requirements.

Any election to be treated as an EGC must be made at the time the

EGC files its first registration statement or Exchange Act report.

This is MoFo. 57

Reduced Disclosure

The SEC has advised issuers that EGCs may amend pending

registration statements – in a pre- or post-effective amendment– to

provide the scaled disclosure available to EGCs if the registration

statement was initially filed prior to April 5, 2012.

A foreign private issuers that is an EGC will continue to be entitled to

all of the other disclosure benefits available to it as a foreign private

issuer (such as, for example, reduced compensation disclosure

requirements, if permitted by home country practice).

This is MoFo. 58

Disclosure Requirements

PRIOR TO JOBS ACT UNDER THE JOBS ACT

Financial

Information in

SEC Filings

3 years of audited financial statements

2 years of audited financial statements for

smaller reporting companies

Selected financial data for each of 5 years

(or for life of issuer, if shorter) and any

interim period included in the financial

statements

2 years of audited financial statements

Not required to present selected financial

data for any period prior to the earliest

audited period presented in connection with

an IPO

Within 1 year of IPO, EGC would report 3

years of audited financial statements

Confidential

Submissions of

Draft IPO

Registration

Statement

No confidential filing for U.S. issuers

Confidential filing for FPIs only in specified

circumstances

EGCs (including FPIs that are EGCs) may

submit a draft IPO registration statement for

confidential review prior to public filing,

provided that such submission and any

amendments are publicly filed with the SEC

not later than 21 days before the EGC

conducts a “road show.” Note: the procedure

for FPIs is somewhat different.

This is MoFo. 59

Disclosure Requirements (cont’d)


Communications

Before and During

The Offering

Process

Limited ability to “test-the-waters” EGCs, either prior to or after filing a

registration statement, may “test-the-waters”

by engaging in oral or written communications

with QIBs and institutional accredited

investors to determine interest in an offering

Auditor

Attestation on

Internal Controls

Auditor attestation on effectiveness of

internal controls over financial reporting

required in second annual report after IPO

Non-accelerated filers not required to

comply

Transition period for compliance of up to 5

years

Accounting

Standards

Must comply with applicable new or revised

financial accounting standards

Not required to comply with any new or

revised financial accounting standard until

such standard applies to companies that

are not subject to Exchange Act public

company reporting

EGCs may choose to comply with non-EGC

accounting standards but may not

selectively comply

This is MoFo. 60


Executive

Compensation

Disclosure

Must comply with executive compensation

disclosure requirements, unless a smaller

reporting company (which is subject to

reduced disclosure requirements)

Upon adoption of SEC rules under Dodd-

Frank will be required to calculate and

disclose the median compensation of all

employees compared to the CEO

May comply with executive compensation

disclosure requirements by complying with

the reduced disclosure requirements

generally available to smaller reporting

companies

Exempt from requirement to calculate and

disclose the median compensation of all

employees compared to the CEO

FPIs entitled to rely on other executive

compensation disclosure requirements

Say on Pay Must hold non-binding advisory

stockholder votes on executive

compensation arrangements

Smaller reporting companies are currently

exempt from say on pay until 2013

Exempt from requirement to hold non-binding

advisory stockholder votes on executive

compensation arrangements for 1 to 3 years

after no longer an EGC

Disclosure Requirements (cont’d)

This is MoFo. 61

Confidential submissions – non-EGCs

Effective December 2011, the SEC revised its confidential filing policy afforded to foreign private issuers, and will review initial registration statements of a foreign issuer on a confidential basis only if such issuer is:

a foreign government registering its debt securities;

a FPI that is listed or is concurrently listing its securities on a non-U.S. securities exchange;

a FPI that is being privatized by a foreign government; or

a FPI that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.

Foreign issuers that are shell companies, blank-check companies and issuers with no, or substantially no, business operations are not permitted to confidentially submit their initial registration statements.

The SEC Staff has also stated that there may be circumstances in which the Staff will request that a foreign issuer publicly file its registration statement even though it comes within the general parameters of the policy. Examples of these circumstances include a competing bid in an acquisition transaction or publicity about a proposed offering or listing.

Not subject to 21 day prior to road show filing requirement but required to file all previous confidential submissions.

This is MoFo. 62

Exchange Act Registration

Thresholds

This is MoFo. 63

Exchange Act Thresholds

JOBS Act amends Section 12(g)(1)(A) of the Exchange Act and

provides that an issuer will become subject to Exchange Act

requirements within 120 days after the last day of its first fiscal year

ended on which the issuer has

total assets in excess of $10 million and

a class of equity security (other than an exempted security) held of

record by either:

− 2,000 persons or

− 500 persons who are not accredited investors.

This is MoFo. 64

Exchange Act Thresholds (cont’d)

The JOBS Act adds a new Section 12(g)(1)(B) that provides that, in

the case of an issuer that is a bank or a bank holding company, the

issuer will become subject to Exchange Act requirements, not later

than 120 days after the last day of its first fiscal year ended after the

effective date of this amended section, on which the issuer has

total assets exceeding $10 billion and

a class of equity security (other than an exempted security) held of record by

2,000 or more persons.

In the case of a bank or a bank holding company, the issuer will no

longer be subject to reporting if the number of holders drops below

1,200 persons.

The SEC must issue final regulations to implement these

amendments within a year of the enactment.

This is MoFo. 65


The “held of record” definition in Section 12(g)(5) is amended and

shall not include securities held by persons who received the

securities pursuant to an employee compensation plan in

transactions exempt from the Section 5 registration requirements.

The SEC is required to implement this amendment by revising the

“held of record” definition.

The SEC also must adopt certain safe harbor provisions that issuers

can follow to determine whether holders received securities pursuant

to an employee compensation plan in exempt transactions.

Securities sold in exempt crowdfunding offerings under Title III of the

JOBS Act (not available to foreign issuers) would also be excluded

from the determination of record holders pursuant to rules to be

adopted by the SEC within 270 days from enactment.

This is MoFo. 66


As a general matter, the changes to the threshold will permit private

companies to conduct more private rounds, without becoming

subject to reporting obligations

And, of course, there will be additional flexibility in the context of

Rule 506 offerings and Rule 144A offerings

Note that the SEC (not Congress) must make any change to the

ownership threshold in Rule 12g3-2(b), and there is no evidence any

change is being planned currently.

This is MoFo. 67

Covered Bonds

This is MoFo. 68

What Are Covered Bonds?

Senior debt of a regulated financial entity.

Secured by a pool of financial assets.

Mortgage loans – residential and commercial

Public sector obligations

Ship loans

Protected from acceleration in the event of issuer insolvency.

By statute or legal structure.

Collateral is isolated from insolvency estate of the issuer.

Collateral pays bonds as scheduled through maturity.

A dynamic collateral pool – refreshed every month.

Typically bullet maturity, fixed rate bonds.

Repayment liabilities remain on the balance sheet of the originator.

Most countries have statutes enabling covered bonds.

Very strong implicit government support in many jurisdictions.

Covered Bond Characteristics

This is MoFo. 69

Benefits to Issuing Banks

Lower funding cost than senior bank debt.

Extension of weighted average maturity (“WAM”) for bank funding.

Typical maturities for covered bonds of seven years or more.

Diversification of funding base.

Mortgage modifications to accommodate borrower is easy; no competing interests

Brings mortgage finance out of the ‘shadow banking’ world

Levels the playing field

Foreign banks currently have access to this investor group, including in the United

States, while U.S. banks do not.

This is MoFo. 70

Covered Bond Investors

Covered bond investors buy sovereign and agency debt

Some of these same investors buy FNMA, FHLMC, GNMA debt

Typically they will not buy senior bank debt

They do not buy CMBS or ABS or RMBS

To attract these investors you need statutory covered bonds

Predominantly banks, central banks, funds and insurance companies

A €3 trillion market in Europe

The U.S. investor base is opening up; foreign banks issued almost $30 billion in

covered bonds in the United States in 2010, almost $40 billion in 2011 and almost $29

billion in 2012 to date

This is MoFo. 71

Benefits to Investors

High credit quality – most bonds are triple-A rated.

In Europe, favorable capital treatment for bank investors.

Higher yield than sovereign debt.

Diversification – sovereign or agency debt is viewed as similar risk.

Good liquidity.

Issuance regulated by statute in many European jurisdictions.

More investor friendly than RMBS or CMBS

Not an ‘originate-to-sell’ model

No complex tranching – good transparency

No negative convexity (prepayment) risk

100% ‘skin in the game’

This is MoFo. 72

European Jurisdictions with Legislation

Legislation countries of the EU/EEA/CH

No Legislation

Legislation in other countries

This is MoFo. 73

Covered Bond Architectures

Twenty-nine European jurisdictions have passed covered bond legislation to ordain the insolvency remoteness and segregation of the asset pool on the issuer’s balance sheet; almost all of these frameworks utilize a direct issuance architecture, with the United Kingdom employing a segregated issuance architecture.

Covered bond legislation, be it with direct issuance or the segregated issuance architecture, allows the issuer to issue covered bonds that will survive the potential insolvency via a segregated pool of assets.

Specifically, legislation allows the underlying assets to continue to repay the covered bonds as originally scheduled.

Legislatively Enabled Covered Bonds

Repayment

of Inter-

company

Loan

Inter-

company

Loan

Assets &

Related

Security

Consideration

Covered Bond

Proceeds

Covered

Bonds

Financial Institution

Seller


Issuer

Covered

Bondholders

Interest Rate Swap

Provider

Covered Bond

Guarantor

Cover Pool

Bond Trustee

Covered Bond Swap

Provider

Covered

Bonds

Covered

Bond

Proceeds

Covered

Bondholders


Issuer

Cover Pool

Segregated Issuance Architecture Direct Issuance Architecture

Covered Bond

Guarantee

This is MoFo. 74

U.K. Covered Bond Architecture

In the absence of legislation, structures can be put in place to achieve the same benefits to investors and issuers of legislatively enabled covered bonds.

The first U.K. structured covered bond was issued in 2003 and since then issuers have raised over £100 billion through U.K. structured covered bonds.

In 2008, legislation was passed in the United Kingdom creating a legislative framework which codified the structure that had been previously developed in the absence of legislation.

In the U.K. architecture, the U.K. bank issues covered bonds directly to investors.

A bankruptcy remote, single member, limited liability company (LLC) will hold loan assets purchased from the U.K. bank as Seller and provides a guarantee to the covered bond investors:

The single member owner of the LLC (which need not represent an economic interest) should not be part of the U.K. bank’s corporate group so as to minimize affiliate issues with the bank.

Principal and interest payments on the covered bonds are not directly linked to the cash flow of the underlying cover pool.

Covered Bond

LLC

LLC

Subordinated

Interest in Pool

Intercompany

Loan

Covered

Bond

Proceeds

Covered Bond

Guarantee and

Security

Agreement

U.K. Bank

Basis Swap

Provider Loans and Related

Security

U.K. Bank

Issuer

Covered

Bondholders

/Bond Trustee

Third Party

(A-1+/P-1/F1+)

CB Swap

Provider

Covered

Bonds

Repayment

of Loan

U.K. Bank

Seller Consideration

This is MoFo. 75

Canadian Covered Bond Architecture

The structure first launched by RBC has been established as the market standard for Canadian issuers with CIBC, BMO, BNS, TD and NBC utilizing the same basic structure.

Given the legal similarities between Canada and the United Kingdom, the Canadian covered bond architecture below closely resembles the U.K. covered bond architecture:

Covered bonds are issued to investors with full recourse to the Issuer and the cover pool.

The issuer, as Seller, sells mortgage loan assets to the Guarantor, which uses proceeds from the Intercompany Loan to purchase the mortgage loans from the Issuer and provide a guarantee to the covered bond investors.

Covered Bond

Guarantor

Guarantor

Intercompany

Loan

Covered Bond

Proceeds

Trust Deed (incl Covered

Bond Guarantee) and

Security Agreement

Interest Rate

Swap Provider Mortgage Loans and

Related Security

Canadian Bank

Issuer

Covered

Bondholders

CB Swap

Provider

Covered

Bonds

Repayment of

Intercompany Loan

Canadian Bank

Seller Consideration

Bond Trustee

This is MoFo. 76

Canadian Covered Bond Legislation

On April 26, 2012, the Canadian government introduced legislation to provide the framework for the issuance of covered bonds by Canadian financial institutions.

The legislation has now obtained the Queen’s consent

The covered bond regulator will be the Canadian Mortgage and Housing Corporation, Canada’s national housing agency.

CMHC will issue regulations to provide for the establishment of covered bond programs under the legislation

The legislation will prohibit the use of CMHC insured mortgage loans as assets in the cover pool and, accordingly, the existing Canadian bank programs (other than RBC) will need to be restructured.

This is MoFo. 77

How are Foreign Banks

Structuring their Issuances?

This is MoFo. 78

Foreign Bank Issuances

Foreign banks issuing into the U.S. market have been relying on their domestic

covered bond framework and have been using cover pool assets that are foreign (not

in the United States).

Issuances into the United States have been structured as program issuances (or

syndicated takedowns) conducted on an exempt basis, that means that the foreign

issuer is relying on exemptions from the U.S. securities laws requiring registration of

public offerings of securities.

To date, no issuer has registered a covered bond with the SEC On May 18, 2012 Royal Bank of Canada obtained a no-action letter from the SEC that permits RBC to register

its covered bond program on Form F-3

RBC filed a registration statement with the SEC on May 18, 2012. That filing is still in the review process.

As a result, offerings have been targeted at U.S. institutional investors and generally

conducted in reliance on Rule 144A.

This is MoFo. 79

Considerations Relating to a Rule 144A Offering

Communications during the offering must be closely monitored to

ensure that there is no general solicitation.

The securities that are sold will be “restricted securities” so that the

securities will remain in the hands of QIBs; this means that there will

likely be a limited secondary market for the covered bonds.

Because the securities are “restricted”, the covered bonds will not be

eligible for purchase by all funds (certain fund buyers may be subject

to a cap on the percentage of restricted securities that they can

purchase).

Also, because the securities are restricted, they cannot be included

in the major bond indices, like the Barclays Aggregate Bond Index.

This is MoFo. 80

Possible 40 Act Considerations

Depending upon the structure of the issuing entity, there may be

Investment Company Act (or “40 Act”) issues

Under U.S. law an “investment company” is subject to special and somewhat

oneous registration requirements

The issuing entity will want to avoid being characterized as a 40 Act entity

Under Rule 3a-6 of the 40 Act, foreign banks are not deemed to be investment

companies

“Qualified purchasers” are defined under the 40 Act and are similar but not

identical to QIBs and cannot be formed for the purpose of making the investment.

For non-banks, one exemption that may be relied upon is available if covered

bonds are sold only to qualified purchasers.

This is MoFo. 81

Qualified Purchaser

“Qualified Purchaser” is defined under Section 2(a)(51)(A) of the 40

Act as: (i) any natural person (including any person who holds a joint, community property or other

similar shared ownership interest in an issuer that is excepted under section 3(c)(7) with that

person’s qualified purchaser spouse) who owns not less than $5,000,000 in investments, as

defined by the Commission;

(ii) any company that owns not less than $5,000,000 in investments and that is owned directly

or indirectly by or for 2 or more natural persons who are related as siblings or spouse

(including former spouses), or direct lineal descendants by birth or adoption, spouses of such

persons, the estates of such persons, or foundations, charitable organizations, or trusts

established by or for the benefit of such persons;

(iii) any trust that is not covered by clause (ii) and that was not formed for the specific purpose

of acquiring the securities offered, as to which the trustee or another person authorized to

make decisions with respect to the trust, and each settlor or other person who has contributed

as sets to the trust, is a person described in clause (i), (ii) or (iv); or

(iv) any person, acting for its own account or the accounts of other qualified purchasers, who

in the aggregate owns and invests on a discretionary basis not less than $25,000,000 in

investments.

This is MoFo. 82

Considerations Relating to a 3(a)(2) Offering

• For a bank issuer of covered bonds, the considerations are the same

as discussed previously

• Issuance directly through the branch, or

• Issuance from the home jurisdiction guaranteed by the branch

• The choice will be determined by the covered bond laws of the home

jurisdiction and the regulatory considerations at the branch

• Additionally, cover pool assets should be located outside the United States

• If located within the United States there will be additional considerations

• For a non-bank issuer of covered bonds, or guarantees in the case

of U.K.-type structures, a 3(a)(2) offering can be used if there is a

U.S. branch that can guarantee the covered bonds and the

guarantee in the case of the U.K.-type structures

This is MoFo. 83

Benefits of 3(a)(2)

Depending on applicable requirements, by relying on 3(a)(2), an

entity can reach a broader array of investors

Resales will not be limited to QIBs

Section 3(a)(2) securities are not subject to blue sky (state securities

law) requirements

3(a)(2) securities are not considered “restricted securities” which

means that:

funds would not count 3(a)(2) covered bonds for their restricted

basket

Bloomberg and other quotation systems would not identify the

securities as restricted securities

3(a)(2) securities may be included in the major bond indices

This is MoFo. 84

Bank Regulatory and Other Considerations

The process will entail careful consideration of a number of

regulatory matters that will affect structuring, including, for example:

Where the cover pool is booked

Capital adequacy questions

Repatriation issues

This is MoFo. 85

SEC Registered Covered Bonds

RBC filed its registration statement on Form F-3

A shelf registration statement

There are eligibility requirements, including at least 12 months of SEC reporting

history

The covered bonds are not deemed to be ABS, although disclosure

consistent with Regulation AB is required

Disclosure about the cover pool assets is similar to a credit card or

U.K. RMBS master trust

No loan level disclosure for loans in the cover pool

No financial statements required for the guarantor

This is MoFo. 86

Advantages of Registration

No offering restrictions; no transfer restrictions.

No investment restrictions; the bonds are not restricted securities

Eligible for inclusion in the bond indices, including the Barclays

Aggregate Bond Index

No requirement for the issuing bank to have a U.S. branch or

agency; no capital impact on a U.S. branch or agency

No discussion required with U.S. banking regulators

No private placement restrictions on communications

No limits on repatriation of proceeds

This is MoFo. 87

Ongoing Reporting Requirements

The bank would file annual and interim reports and current reports

Form 40-F (Form 20-F for non-Canadian issuers), Form 6-K and Form 8-K

The guarantor would file annual reports and reports on Form 10-D

related to distributions of proceeds from the cover pool and current

reports

Form 10-K, Form 10-D and Form 8-K

This is MoFo. 88

Comparison of Alternatives

SEC Registered Section 3(a)(2) Rule 144A

Required issuer:

No specific issuer or guarantor is required

Need a U.S. state or Federal licensed bank as issuer or as guarantor

No specific issuer or guarantor is required

Exemption from the Securities Act:

No, registered under the Act Section 3(a)(2) Section 4(2) / Rule 144A

FINRA Filing Requirement:

Subject to filing requirement and payment of filing fee

Subject to filing requirement and payment of filing fee

Not subject to FINRA filing

Blue Sky: Generally exempt from blue sky regulation

Generally exempt from blue sky regulation

Generally exempt from blue sky regulation

Listing on an exchange:

May be listed if desired May be listed if issued in compliance with Part 16.6

No

“Restricted” No No Yes

This is MoFo. 89



Required governmental approvals:

SEC filing and registration fee Banks licensed by the OCC are subject to the Part 16.6 limitations, unless an exemption is available

Generally none

Permitted Offerees:

All investors All investors, however, banks licensed by the OCC are subject to the Part 16.6 limitations, unless an exemption is available. Generally, sales to “accredited investors.”

Only to QIBs, no retail

Resale

restrictions:

None None Only to QIBs, no retail

Investment

Restrictions:

None Generally none Restricted securities; a limited bucket

for some investors

Minimum denominations:

All denominations All denominations, however, banks licensed by the OCC are subject to minimum denomination requirement

No minimum denominations requirement

Role of Manager/ Underwriter:

Either agented or principal basis Either agented or principal basis Must purchase as principal

This is MoFo. 90



40 Act: Banks not considered investment companies; consideration must be given to 40 Act treatment of a guarantor.

Banks not considered investment companies; consideration must be given to 40 Act treatment of a guarantor.

Non-bank issuer should consider whether there is a 40 Act issue; consideration must be given to 40 Act treatment of a guarantor.

Settlement: Through DTC, Euroclear/Clearstream Through DTC, Euroclear/Clearstream. Through DTC, Euroclear/Clearstream

Repatriation of

Proceeds:

No restrictions May be restrictions No restrictions

Eligible for

Bond Index:

Yes Yes No

Contacts Anna Pinedo (212) 468-8179 [email protected]

Jay Baris (212) 468-8053 [email protected]

Dwight C. Smith, III (202) 887-1562 [email protected] Charles M. Horn (202) 887-1555 [email protected] Nilene Evans (212) 468-8088 [email protected] Jerry Marlatt (212) 468-8024 [email protected]

David Kaufman (212) 468-8237 [email protected] Oliver Ireland (202) 778-1614 [email protected] Ze’ev Eiger (212) 468-8222 [email protected]

mailto:[email protected]







