iii. banking reforms a. enhancing financial institution ... reforms.pdf · 343 also provides...

-59- House of Representatives Approves Historic Revision of Financial Services Regulation July 2, 2010

III. BANKING REFORMS

A. ENHANCING FINANCIAL INSTITUTION SAFETY AND SOUNDNESS ACT OF 2010

Title III of Dodd-Frank abolishes the OTS, reassigning its responsibility for the supervision and regulation

of federal savings associations to the OCC, state savings associations to the FDIC and SLHCs to the

FRB. The FRB will continue to supervise state member banks and all BHCs.

Transfer date. Section 311 provides that the transfer of the OTS‘s supervisory responsibility must be

completed one year after the enactment of Dodd-Frank (the ―transfer date‖). The Treasury Secretary may

extend the transfer date for up to six additional months upon finding that an orderly implementation

process is not feasible within the one-year period. The Secretary‘s finding must detail the steps to be

taken to initiate the implementation process within the extended date.

1. Transfer of Supervisory and Other Responsibilities and Functions

Supervision of savings associations and SLHCs. The functions and authorities of the OTS for savings

associations and SLHCs will be transferred as follows:

The supervision of federal savings associations will be transferred to the OCC.

The supervision of state savings associations will be transferred to the FDIC.

The supervision of SLHCs will be transferred to the FRB.

The rulemaking authority of the OTS for savings associations will be transferred to the OCC.

The rulemaking and other authorities of the OTS for SLHCs will be transferred to the FRB.

The rulemaking authority of the OTS under the Home Owners‘ Loan Act with respect to transactions with affiliates and insiders and anti-tying prohibitions will be transferred to the FRB.

A deputy comptroller will be designated to supervise and examine federal savings associations.

Appropriate federal banking agency. Section 312(c) amends the definition of ―appropriate federal

banking agency‖ in the FDI Act to reflect the transfers of supervisory authority for depository institutions

and their holding companies required under the statute. This change provides the appropriate federal

banking agency with, among other regulatory authorities, the prompt corrective action powers over

insured depository institutions and the cease and desist, removal, civil money penalty and other

enforcement authorities provided under the FDI Act for insured depository institutions, BHCs, SLHCs,

nondepository institution subsidiaries of BHCs or SLHCs, and their institution-affiliated parties.


2. Elimination of OTS

Section 313 provides that within 90 days after the transfer date for supervisory responsibilities, the OTS

will be abolished, and all authorities vested in the OTS or its director on the day before the transfer date

with respect to functions transferred to the OCC will be vested in the OCC or the Comptroller of the

Currency, as appropriate.

Redesignation of references in federal law to federal banking agencies. Section 317 provides that

any reference in federal law to the OTS or its director with respect to a transferred function will be

deemed to be a reference to the OCC, FRB, FDIC or their agency heads, as appropriate.

Agency plan to implement transfer of OTS responsibilities. Section 327 requires that, within 180

days after the enactment of Dodd-Frank, the FRB, OTS, OCC and FDIC must jointly submit a plan to the

Congressional Banking Committees and the agency inspectors general to implement the provisions of

Title III that pertain to the transfer of OTS responsibility, personnel and property. Within 60 days after

receiving those reports, each agency inspector general must submit a report to its agency and to the

Congressional Banking Committees as to the adequacy of the plan, including whether it sufficiently takes

into account the orderly transfer of personnel, property, funds and responsibilities. The inspectors

general must report every six months thereafter to their agencies and the Congressional Banking

Committees on the status of the plan.

3. Savings Provisions

Section 316 contains a series of savings provisions to:

ensure that the transfer of supervisory authority required by Title III does not affect the continued validity of rights, duties or obligations of the United States, the OTS or other persons that existed on the day before the transfer date;

ensure the continued validity of all orders, resolutions, determinations, agreements, regulations, interpretations, guidelines or other advisory materials relating to functions transferred from the OTS under Title III; and

ensure the continuation of lawsuits or other actions or proceedings commenced by or against the OTS before the transfer date with provisions substituting for the OTS the agency to which the function involved in the action was transferred.

The FRB, FDIC or OCC, as appropriate, will be substituted for the OTS as the agency proposing or

promulgating any regulations that the OTS proposed or adopted but that are not effective on the transfer

date.

Identification of regulations to be enforced. Section 316 provides that, no later than the transfer date,

the OCC, FDIC and FRB will each be required to publish in the Federal Register a list of regulations

transferred under Title III from the OTS and FRB that will be enforced by the agencies. In developing

these lists, the OCC and FDIC must consult with each other.


4. Collection of Supervision Fees

OCC supervision fees. Section 318 authorizes the OCC to collect an assessment, fee or other charge

from any entity for which it is the appropriate federal banking agency to carry out its supervisory

responsibilities. Section 318 specifies certain factors that the OCC may consider in making an

assessment, fee or charge.

FDIC supervision fees. The FDIC is authorized to assess the cost of any regular or special examination

it conducts of a depository institution or other entity against the institution or entity examined. The FDIC

does not currently assess fees for its examination function.

FRB supervision fees. Section 318 requires the FRB, effective as of the transfer date, to assess fees

against BHCs, SLHCs and non-U.S. banks with branches or agencies in the United States with over $50

billion in assets, and Covered Nonbank Companies, to cover the costs of supervising such entities. The

FRB does not currently assess fees for its examination or supervisory functions.

5. Modifications to Federal Deposit Insurance

Deposit insurance assessments. Section 331 requires that the FDIC amend its regulations regarding

the assessment for federal deposit insurance to base such assessments on the average total

consolidated assets of insured depository institutions during the assessment period, less the average

tangible equity of the institution during the assessment period. This provision significantly shifts the

burden of FDIC assessments to larger banks—for example, banks, such as those with substantial non-

U.S. operations, that are less reliant on U.S. deposits for funding. Under the current deposit-based

assessment regime, only deposits payable in the United States are included in determining the premium

paid by an institution for federal deposit insurance.

For an insured depository institution that is a ―custodial bank‖ (to be defined by the FDIC) or a banker‘s

bank (as that term is used in 12 U.S.C. § 24), the average total consolidated assets for the assessment

base will be further reduced by an amount the FDIC determines necessary to establish assessments

consistent with the FDIC‘s definitions for these banks. The FDIC must define ―custodial bank‖ based on

factors including the percentage of total revenues generated by custodial businesses and the level of

assets under custody.

Section 331 also eliminates Section 7(b)(2)(D) of the FDI Act, which provided that no insured depository

institution may be barred from the lowest-risk category in the FDIC‘s deposit insurance assessment

system solely because of size.

Elimination of procyclical FDIC assessments. Section 332 authorizes the FDIC to suspend or limit

any required dividends from the Deposit Insurance Fund of balances in the fund in excess of 1.5 percent

of estimated insured deposits, and repeals existing provisions in the FDI Act governing the payment of

dividends from the Fund in excess of 1.35 percent of estimated insured deposits. The FDIC is required to


adopt regulations, after notice and opportunity for comment, prescribing the method for the declaration,

calculation, distribution and payment of dividends.

Elimination of ceiling and adjustment of floor on Deposit Insurance Fund. Section 334 eliminates

the ceiling on the size of the Deposit Insurance Fund (currently 1.5 percent of estimated insured

deposits). Section 334 also raises the statutorily required floor for the Deposit Insurance Fund from 1.15

percent of estimated insured deposits to 1.35 percent of estimated insured deposits, or a comparable

percentage of the revised assessment base required by Dodd-Frank, which is based on average total

assets less average tangible equity. Section 334 requires the FDIC to take the steps necessary for the

Deposit Insurance Fund to meet this revised reserve ratio by September 30, 2020. In doing so, the FDIC

must offset the effect (i.e., the increased cost) this increase in the minimum reserve ratio will have on

insured depository institutions with total consolidated assets of less than $10 billion. This provision,

added by reopening the House-Senate conference at the end of the legislative process, increases the

costs to larger insured depository institutions. For five years after the enactment of Dodd-Frank, the FDIC

must make public the reserve ratio and the designated reserve ratio for the Deposit Insurance Fund,

using both estimated insured deposits and the revised assessment base.

FDIC access to information for insurance purposes. Section 333 eliminates the current requirement

in the FDI Act that the FDIC obtain the agreement of the appropriate federal banking agency before

requiring additional reports from any insured depository institution for insurance purposes.

Permanent increase in federal deposit insurance. Section 335 makes permanent the increase to

$250,000 of the standard maximum federal deposit insurance amount for both insured depository

institutions and credit unions. It makes this increase retroactive to January 1, 2008, for insured

depository institutions for which the FDIC was appointed receiver or conservator after that date.

Unlimited federal deposit insurance on funds in demand accounts. Section 343 provides federal

deposit insurance on the net amount that a depositor maintains in a non–interest bearing, demand

transaction account at an insured depository institution until January 1, 2013. These accounts are those

for which the insured depository institution does not reserve the right to require advance notice of an

intended withdrawal and from which the depositor is permitted to make withdrawals by negotiable or

transferable instruments, payment orders of withdrawal, telephone or other electronic media transfers, or

similar items for the purpose of making payments on transfers to third parties or others. This provision

will be effective as of December 31, 2010, when the temporary FDIC program is set to expire. Section

343 also provides insurance for such demand accounts at insured credit unions from the enactment of

Dodd-Frank until January 1, 2013.

Amendment to definition of material loss to the Deposit Insurance Fund. Section 38(k) of the FDI

Act requires the inspector general of the appropriate federal banking agency to conduct a review

whenever the Deposit Insurance Fund incurs a ―material loss‖ with respect to an insured depository


institution. Section 987 increases the threshold from the current $25 million to $100 million if the loss

occurs between September 30, 2009, and December 31, 2010, to $75 million if the loss occurs between

January 1, 2011, and December 31, 2011, and $50 million if the loss occurs on or after January 1, 2012.

Dodd-Frank also establishes a process for review by the inspector general of losses below these

thresholds to determine if an in-depth review of the failure is required and for the conduct of such a

review.

Realignment of the board of directors of the FDIC. Section 336 adds the director of the Bureau of

Consumer Financial Protection established in Title X to the board of directors of the FDIC and removes

the director of the OTS, effective on the transfer date.

Study on revised deposit definitions. Section 1506 requires the FDIC to evaluate and report to the

Congressional Banking Committees within one year after the enactment of Dodd-Frank with legislative

recommendations, if any, on the potential impact on the Deposit Insurance Fund and deposit insurance

premiums of revising the definitions to better distinguish between core deposits and brokered deposits, an

assessment of their differences in the economy and banking sector, and the potential stimulative effect on

local economies and competitive parity between large institutions and community of redefining core

deposits.

6. De Novo Branching

Section 341 provides that a savings association that becomes or converts to a bank may continue to

operate any branch or agency that the savings association operated immediately before it became a

bank. It may also establish, acquire and operate additional branches or agencies at any location in any

state where the savings association operated immediately before the conversion if a branch could be

established at that location by a bank chartered in that state. This provision overrides any provision of

federal or state law that would prevent such branching.

7. Office of Minority and Women Inclusion

Section 342 provides that, within six months after enactment of Dodd-Frank, the Treasury Department,

FRB, FDIC, OCC, Federal Housing Finance Agency, Federal Reserve Banks, National Credit Union

Administration (the ―NCUA‖) and SEC must each establish an Office of Minority and Women Inclusion

(―Office‖) responsible for all matters in the agency relating to diversity in management, employment and

business activities. The Bureau of Consumer Financial Protection must establish an Office within six

months of the transfer date. The head of each agency must appoint a director of the Office, who must be

a member of the senior executive service (or hold a comparable position at agencies that do not have

senior executive service positions).

The director of each Office must develop standards for equal employment opportunity and for the racial,

gender and ethnic diversity of the agency and its management, increased participation of minority-owned


and women-owned businesses in the programs and controls of the agency, including the coordination of

technical assistance to such businesses, and for assessing the diversity policies and practices of entities

regulated by the agency. The Office may not impose any requirements on, or otherwise affect the lending

policies or practices of, any regulated entity or require any specific action based on the director‘s

assessment. The director must develop and implement standards and procedures to ensure fair inclusion

and utilization of women, minorities and minority-owned and woman-owned businesses in all business

and activities of the agency, including procurement and all types of contracts.

Each agency‘s procedures for evaluation of its contracts must include consideration of the diversity of the

applicant. These procedures must include a written statement that ensures, to the maximum extent

possible, the fair inclusion of women and minorities in the workforce of the contractor and subcontractors.

The term ―contract‖ is broadly defined and includes the issuance or guarantee of any debt, equity or

security, the sale or management of agency assets, the making of equity investments by the agency, and

the implementation of agency programs for economic recovery. The director of each Office must also

establish procedures to determine whether an agency contractor has failed to make a good faith effort to

include minorities and women. Upon such a finding by the director, the head of the agency may

terminate the contract or take other appropriate action.

Each agency is required to take affirmative steps to seek diversity in its workforce at all levels consistent

with the demographic diversity of the United States and the federal government, including through

specified outreach programs. Each Office is required to submit an annual report to Congress, which must

include certain specified information.


B. BANK AND SAVINGS AND LOAN HOLDING COMPANIES AND DEPOSITORY INSTITUTION REGULATORY IMPROVEMENTS ACT OF 2010

1. Moratorium and Study of Exemption from BHC Act for Certain Depository Institutions

Moratorium on applications. Section 603 establishes a three-year moratorium, beginning with the

enactment of Dodd-Frank, prohibiting the FDIC from granting applications for federal deposit insurance

for certain depository institutions that are exempt from the definition of ―bank‖ in the BHC Act, if the

depository institution would be controlled, directly or indirectly, by a commercial firm. The moratorium

applies to applications received by the FDIC after November 23, 2009. The moratorium does not apply to

applications for deposit insurance for any such institution controlled by a firm that does not qualify as a

―commercial firm.‖

A ―commercial firm‖ is defined as any entity that derives less than 15 percent of its consolidated annual gross revenues, including revenues from all of its affiliates (including any insured depository institutions), from activities that are financial in nature or incidental thereto under Section 4(k) of the BHC Act.

This moratorium applies to so-called credit card banks, industrial banks and trust companies, each of which is not treated as a ―bank‖ under the BHC Act under certain circumstances, and, therefore, may be owned by a company that is not a BHC.

In addition, each appropriate federal banking agency must, during the three-year moratorium, disapprove

any notice for a change in control if it would result in a commercial firm controlling, directly or indirectly,

one of these exempt institutions. There are exceptions to this portion of the moratorium where the

change in control involves an institution in danger of default or results from a bona fide merger of a

commercial firm that controls the exempt institution with, or the acquisition of such a company by, another

commercial firm. In both cases, the appropriate federal banking agency must determine whether the

exception is applicable. In addition, there is an exception if the change in control results from the

acquisition of voting shares of a publicly traded company that controls the exempt institution if the

acquiring shareholder (or group of shareholders acting in concert) holds less than 25 percent of the voting

shares of the company. None of the exceptions are applicable unless all regulatory approvals required by

state and federal law for the change in control have been obtained.

Study of appropriateness of exemptions. Section 603 also requires the Comptroller General to

conduct a study to determine whether the exemptions for these institutions, as well as for savings

associations and certain other depository institutions, from the definition of ―bank‖ in the BHC Act are

necessary to strengthen the safety and soundness of depository institutions or the stability of the financial

system. The study must be submitted within 18 months after the enactment of Dodd-Frank to the

Congressional Banking Committees. The study must identify the type and number of these institutions

(other than savings associations), their size and location, the extent to which they are held by or affiliated

with commercial firms, the adequacy of the federal supervisory framework for these institutions, and the


consequences of removing their exemptions, including the consequences to the stability of the financial

system and economy. The study must also determine the adequacy of the framework for federal

regulation of savings associations and the consequences of removing their current exemption from the

definition of ―bank‖ in the BHC Act, including on the availability and allocation of credit and the stability of

the financial system.

2. Enhanced FRB Examination and Supervisory Authorities

Removal of restrictions on reporting, examination and enforcement authority. Section 604 removes

many of the restrictions imposed under the Gramm-Leach-Bliley Act on the authority of the FRB to require

reports from, examine, adopt prudential rules for, impose restraints on or take enforcement and other

actions against functionally regulated subsidiaries of BHCs. Functionally regulated subsidiaries include

brokers and dealers regulated under the Exchange Act, registered investment advisers and investment

companies, state-regulated insurance companies and entities regulated by the CFTC. These changes

are effective on the transfer date.

Examination authority. The BHC Act currently requires the FRB to make certain findings before

conducting an examination of a functionally regulated subsidiary and limits the scope of the examination.

As revised by Dodd-Frank, the FRB is authorized to examine any BHC and any subsidiary of a BHC,

including a depository institution or a functionally regulated subsidiary, to inform the FRB of (1) the nature

of the operations and financial condition of the BHC or subsidiary, (2) the financial, operational and other

risks within the BHC system that may pose a threat to its safety and soundness or that of any depository

institution subsidiary or the stability of the U.S. financial system, (3) its systems for monitoring and

controlling these risks, and (4) its compliance with the BHC Act, federal laws the FRB has specific

authority to enforce against the BHC or subsidiary and, other than a functionally regulated subsidiary or a

depository institution, any other applicable provisions of federal law. However, the FRB‘s examination

authority is limited by the exclusive jurisdiction of the Bureau on consumer compliance matters. The FRB

must, to the fullest extent possible, rely on examination reports by other federal or state regulatory

agencies relating to the BHC or subsidiary and the reports and other information required by the FRB

from the BHC or subsidiary.

Report authority. Under the BHC Act, the FRB may require a BHC and any subsidiary to provide reports

regarding its financial condition, systems for monitoring and controlling financial and operating risks,

transactions with depository institution subsidiaries, and compliance with the BHC Act and any other

federal law that the FRB has specific jurisdiction to enforce against the BHC or subsidiary. Section 603

repeals provisions in the BHC Act requiring the FRB to request the appropriate federal or state regulator

of a functionally regulated subsidiary to obtain the report from the subsidiary before the FRB requires the

report from the subsidiary. As currently required, the FRB must continue, to the fullest extent possible, to

use reports and other supervisory information that the BHC or subsidiary has provided to other federal or


state regulatory agencies, externally audited financial statements, and information otherwise available

from federal or state regulatory agencies or reported publicly.

Enforcement and prudential rulemaking authority. Dodd-Frank repeals the provisions of Section 10A

of the BHC Act, added by the Gramm-Leach-Bliley Act. These provisions limited the FRB enforcement

authority with respect to unsafe and unsound banking practices of functionally regulated subsidiaries and

the FRB‘s prudential rulemaking authority with respect to these subsidiaries. There is no requirement that

the FRB consult with the federal or state regulator of such a subsidiary before taking enforcement action

or adopting a prudential regulation, guideline or standard, except as required under Title I.

FRB authority for SLHCs. Section 606 also amends the Home Owners‘ Loan Act to provide the FRB

with the same examination and report authority over SLHCs and their subsidiaries, including functionally

regulated subsidiaries, as contained in the BHC Act for BHCs. It also directs the FRB to coordinate its

supervisory activities and to limit its information and reporting requests in the same manner as specified

for BHCs in order to avoid duplication in these activities, including providing reasonable notice to, and

consulting with, the appropriate federal banking agency or state regulatory agency of a subsidiary

depository institution or a functionally regulated subsidiary of an SLHC before commencing an

examination of such an entity.

Countercyclical capital rules for BHCs. Section 616 amends the BHC Act specifically to authorize the

FRB to issue orders and regulations relating to the capital requirements of BHCs. In establishing capital

rules, the FRB must seek to make the requirements countercyclical, so that the amount of capital a

company is required to maintain increases in times of economic expansion and decreases in times of

economic contraction, consistent with the safety and soundness of the company. The FRB does not

currently have explicit authority under the BHC Act to establish capital adequacy rules. Section 616 also

provides the FRB with the same authority with respect to SLHCs under the Home Owners‘ Loan Act,

including seeking to make capital requirements countercyclical.

Authority to impose capital requirements. Dodd-Frank retains the existing provisions in the BHC Act

restricting the FRB‘s authority to impose capital requirements or guidelines on functionally regulated

subsidiaries that are investment advisors registered under the Advisers Act and insurance agents

licensed with the appropriate state authority.

Countercyclical capital requirements for insured depository institutions. The appropriate federal

banking agency for insured depository institutions must also seek to make any required capital standards

countercyclical, as required for BHCs and SLHCs.

Source of strength. Importantly, Section 616 amends the FDI Act to obligate the FRB to require BHCs

and SLHCs to serve as a source of financial strength for any subsidiary depository institution. This

source-of-strength requirement also applies to companies that control insured depository institutions and


that are not BHCs or SLHCs. The appropriate federal banking agency for such a depository institution

may require reports from companies that own the insured depository institution to assess their ability to

serve as a source of strength and to enforce compliance with the source-of-strength requirements. The

term ―source of financial strength‖ is defined as the ability of a company to provide financial assistance to

its insured depository institution subsidiaries in the event of financial distress at such subsidiaries.

Currently, there is no explicit authority in the BHC Act for the source of strength provision in the FRB‘s

Regulation Y. Within one year, the appropriate federal banking agencies must jointly adopt implementing

regulations. The source of strength amendments in Section 616 take effect on the transfer date.

Required examination of nondepository institution subsidiaries. Section 605 amends the FDI Act to

require the FRB to conduct examinations of the activities of nondepository institution subsidiaries of BHCs

and SLHCs (other than functionally regulated subsidiaries or subsidiaries of a depository institution) that

are permissible for the depository institution subsidiaries of the holding company (such as mortgage

banking or consumer finance activities). The examination must be conducted in the same manner,

subject to the same standards and with the same frequency as if the activities were conducted in the lead

insured depository institution21

of the holding company. In conducting the examination, the FRB must

consult and coordinate with any state regulator of the subsidiary and may conduct joint or alternating

examinations with the state regulator if the FRB determines the state examinations carry out the purposes

of this section.

If the FRB does not conduct the examination in the manner required by this section, the appropriate

federal banking agency for the lead insured depository institution may recommend in writing that the FRB

conduct the examination. If the FRB does not begin the examination within 60 days of receipt of the

request or provide a written explanation or plan responding to the concerns raised by the appropriate

federal banking agency, the agency may examine the activities itself, subject to the exclusive jurisdiction

of the Bureau for consumer compliance matters. The purpose of the examination would be to determine

whether the activities of the subsidiary pose a material threat to the safety and soundness of any affiliated

insured depository institution, are conducted in accordance with law, and are subject to appropriate

systems for monitoring and controlling the financial, operating and other material risks of the activities that

may pose a material threat to the safety and soundness of affiliated insured depository institutions.

An appropriate federal banking agency that conducts an examination under this section must coordinate

the examination with the FRB to avoid duplication, to share information relevant to the supervision of the

holding company, to achieve the objectives of this section and to ensure that the holding company and its

21

The ―lead insured depository institution‖ means the largest insured depository institution controlled by the holding company at any time, based on a comparison of the average total risk-weighted assets controlled by each insured depository institution during the previous 12-month period. See 12 U.S.C. § 1841(o)(8).


subsidiaries are not subject to conflicting supervisory demands. The appropriate federal banking agency

may assess the subsidiary examined for the cost of any examination or related enforcement action.

The appropriate federal banking agency may recommend that the FRB take enforcement action based on

its examination or other relevant information. The request must be in writing, explain the concerns

underlying the recommended action, and be based on a determination by the agency (by a vote of its

members, if applicable) that the activities of the nondepository institution pose a material threat to the

safety and soundness of affiliated insured depository institutions. If, within 60 days, the FRB fails to take

the action or to provide the agency with an acceptable plan for supervisory or enforcement action, the

agency may itself take the enforcement action against the subsidiary.

Prior to exercising its backup examination or enforcement authority, the appropriate federal banking

agency must notify and consult with the federal and state regulatory authority for the subsidiary to be or

being examined and the FRB. The agency must also, to the fullest extent possible, rely on examinations

and reports of the FRB, avoid duplication of examination activities, reporting requirements and requests

for information, and ensure that the depository institution subsidiaries and the holding company are not

subject to conflicting supervisory demands.

BHC “excessive compensation.” As described below on page 133, Section 956 requires the FRB to

issue rules prohibiting any compensation plan of a BHC that provides an executive officer, employee,

director or principal shareholder with ―excessive compensation, fees, or benefits‖ or that could lead to a

material loss to the BHC.

GAO study of prompt corrective action. Section 202(g) requires a study by the Comptroller General of

the implementation of the prompt corrective action provisions by the federal banking agencies and

recommendations to make them a more effective tool. The Comptroller General must submit the report to

the Council, which must report to the Congressional Banking Committees on responses by these

agencies to the report and its recommendations.

3. Heightened Standards and Requirements for Expansion Proposals

Well-capitalized and well-managed requirements. Section 606 requires that a BHC that is a financial

holding company and therefore may engage in the expanded financial activities authorized by the

Gramm-Leach-Bliley Act for financial holding companies be and remain well-capitalized and well-

managed. Currently, these requirements do not apply to the BHC, but only to the BHC‘s subsidiary

depository institutions. Section 607 also amends the BHC Act to require a BHC seeking approval to

acquire shares of a bank located outside of the holding company‘s home state to be well-capitalized and

well-managed. Similarly, the Bank Merger Act is amended to require that the surviving bank in an

interstate merger transaction be well-capitalized and well-managed. These requirements become

effective on the transfer date.


New required application for large acquisitions. Section 604 also adds, effective on the transfer date,

a new application requirement to Section 4(k) of the BHC Act before a financial holding company may

acquire a nonbank company with $10 billion or more in total consolidated assets. Currently, financial

holding companies are not required to apply or provide prior notice to the FRB to acquire shares or assets

of any nondepository institution engaged only in permissible financial activities. The placement of this

requirement in Section 4(k) of the BHC Act indicates that a financial holding company may not need FRB

approval if the acquisition is permitted under another provision of the BHC Act. For example, a BHC may

acquire a company engaged in activities permissible under Section 4(c)(8) of the BHC Act, such as a

consumer finance company, without FRB approval if the BHC is well-capitalized and certain other

conditions are met. A similar issue arises in the case of applications by Covered BHCs to acquire

nonbank companies with assets over $10 billion, as discussed on page 32 above.

Requirements for SLHCs. Section 606 also amends the SLHC Act to require SLHCs (other than

grandfathered unitary SLHCs) engaging or seeking to engage in the expanded financial activities

permissible for financial holding companies under Section 4(k) of the BHC Act to meet the same well-

capitalized and well-managed and other standards required for financial holding companies to conduct

these activities, including maintaining at its subsidiary depository institution a satisfactory rating under the

Community Reinvestment Act of 1977 with respect to its record of meeting community credit needs. The

SLHC must also conduct the activity in accordance with the same terms, conditions and requirements

that apply to the conduct of the activity by a financial holding company under the BHC Act and FRB

regulations and interpretations. As a result, an SLHC seeking to acquire a company (other than an

insured depository institution) with consolidated assets exceeding $10 billion would need to obtain the

prior approval of the FRB (as discussed above).

Consideration of financial stability in applications. Sections 604(d) and (f), effective on the transfer

date, require the appropriate federal banking agency to consider ―the risk to the stability of the U.S.

banking or financial system‖ in any application under the BHC Act to acquire shares of a bank or under

the Bank Merger Act to merge with or acquire the assets of a bank. This requirement also applies to any

notice or application to engage in, or acquire shares of a nondepository institution engaged in, a financial

activity under Section 4 of the BHC Act.

Concentration limit on expansion by large financial firms. Section 622 adds a new Section 14 to the

BHC Act that prohibits a financial company from engaging in a transaction involving a merger with or an

acquisition of the shares, or substantially all of the assets, of another company, if as a result of the

transaction the total consolidated liabilities of the financial company would exceed 10 percent of the

aggregate consolidated liabilities of all financial companies (calculated as of the end of the preceding

calendar year).


―Liabilities‖ is generally defined using the risk-based capital rules for BHCs as risk-weighted assets (adjusted to reflect exposures deducted from regulatory capital) less regulatory capital.

Liabilities for non-U.S. based companies will be determined based on their U.S. operations.

The FRB is authorized to adopt rules defining ―liabilities‖ in the context of insurance companies and other nonbank financial companies it supervises.

―Financial company‖ is defined as an insured depository institution, a company that controls an insured depository institution (including BHCs and SLHCs), a nonbank financial company supervised by the FRB and non-U.S. banks or companies treated as BHCs.

The prohibition on excessive concentration of liabilities is subject to recommendations by the Council, as

discussed below, and to exceptions, with FRB approval, for:

acquisitions of banks in default or danger of default;

transactions involving FDIC assistance; and

de minimis increases in liabilities.

Section 622 requires the Council, within six months after the enactment of Dodd-Frank, to complete a

study of the extent to which this concentration limit affects financial stability, moral hazard in the financial

system, the efficiency and effectiveness of U.S. financial firms and markets, and the cost and availability

of credit and other financial services in the United States. The Council must make recommendations

regarding modifications to the concentration limit that will more effectively implement Section 622.

Within nine months of the study‘s completion, the FRB must issue final rules reflecting the Council‘s

recommendations even if they modify the application of the statutory prohibitions or any guidance

previously issued by the FRB.

Concentration limit on interstate mergers and acquisitions. Section 623, which will be effective one

day after the enactment of Dodd-Frank, prohibits the appropriate federal banking agency from approving

an application for an interstate merger by an insured depository institution if the resulting institution,

together with all of its insured depository institution affiliates, would control more than 10 percent of the

deposits in insured depository institutions in the United States. There is an exception in the case of an

insured depository institution in default, in danger of default, or with respect to which the FDIC has

provided assistance.

An interstate merger transaction is one between depository institutions with different home states. An

institution‘s home state is:

for a state institution, the state in which it is chartered;

for a national bank, the state in which its main office is located; or

for a federal savings association, the state of its home office in accordance with OTS or OCC rules.


The FRB is also prohibited from approving an application under Section 4 of the BHC Act to acquire an

insured savings association or other insured depository institution (such as an industrial loan company)

outside of the holding company‘s home state if, as a result of the transaction, the holding company would

control more than 10 percent of deposits in insured depository institutions in the United States. There is

an exception for failing institutions, as discussed above.

The interstate acquisition of a savings association by an SLHC that would result in the SLHC‘s control of

10 percent or more of deposits in insured depository institutions in the United States is also prohibited.

Charter conversions by troubled banks and savings associations. Section 612 prohibits a national

bank from converting to a state bank or a state savings association during any period in which it is subject

to a cease-and-desist order or other formal enforcement order issued by, or memorandum of

understanding entered into with, the OCC with respect to a ―significant supervisory matter.‖ The OCC is

also prohibited from approving the conversion of a state bank or state savings association to a national

bank or a federal savings association if the institution is subject to such an enforcement action with its

state supervisor or its appropriate federal banking agency or a final enforcement action by a state

attorney general with respect to a significant supervisory matter. These restrictions also apply to the

conversion of a federal savings association to a national bank or state savings association if the federal

savings association is subject to such an enforcement order from the OCC or OTS.

There is an exception to the conversion prohibition if (1) the appropriate federal banking agency of the

resulting institution gives the federal or state agency that issued the order or memorandum written notice

of the proposed conversion, including a plan to address the significant supervisory matter in a manner

that is consistent with the safe and sound operation of the institution, (2) the agency that issued the order

or memorandum does not object to the conversion or plan, and (3) the agency approving the conversion

implements the plan. In the case of a final enforcement action by a state attorney general, approval of

the conversion must be conditioned on compliance by the insured depository institution with the terms of

the action.

Prior to a conversion, the appropriate federal banking agency for the institution proposing to convert must

notify the federal banking agency for the proposed converted institution in writing of any ongoing

supervisory or investigative proceedings that the agency believes may result, in the near term and absent

the proposed conversion, in a cease-and-desist order (or other formal enforcement order) or

memorandum of understanding with respect to a significant supervisory matter and provide access to the

agency of all investigative and supervisory information relating to the proceedings.

4. Additional Restrictions on Transactions with Affiliates and Insiders

Additional restrictions on transactions with affiliates. Section 608 amends Section 23A of the

Federal Reserve Act, which governs banks‘ loans to, purchases of assets from, and other transactions

with, affiliates, in several significant respects:


Any investment fund advised by the bank or an affiliate of the bank is defined as an affiliate. Currently, to qualify as an affiliate, the fund is required to be both sponsored and advised on a contractual basis or the bank or an affiliate of the bank is required to advise the fund and the bank and its affiliates was required to hold five percent of more of the fund‘s voting shares or equity capital, or, in the case of an investment company, the member bank or affiliate advising the company is required to fall within the definition of ―investment adviser‖ in Section 2(a)(20) of the Investment Company Act (and accordingly is required to be registered under the Advisers Act).

A purchase of assets subject to a repurchase agreement is defined as an extension of credit, which subjects the purchases to the collateral requirements of Section 23A. Currently, these transactions are treated as covered transactions under Section 23A but are not subject to its collateral requirements.

The acceptance of ―other debt obligations‖ of an affiliate as collateral for a loan to a third party is treated as a covered transaction. Currently, only securities of an affiliate that are accepted as collateral for a loan to a third party are treated in this manner.

A transaction with an affiliate involving the borrowing or lending of securities is defined as a covered transaction to the extent the transaction causes the bank (or a subsidiary of the bank) to have a credit exposure to the affiliate.

A derivative transaction (as defined in Section 610 of Dodd-Frank, as described below) with an affiliate is a covered transaction to the extent that it causes the bank (or a subsidiary) to have a credit exposure to the affiliate. Currently, only certain credit derivatives that function as a guarantee of an affiliate obligation to a third party are treated as covered transactions subject to Section 23A.

A credit extension or guarantee is required to remain secured in accordance with the collateral requirements of Section 23A so long as it is outstanding. Currently, the collateral requirements only apply at the inception of the transaction, and thereafter an affiliate is generally not required to provide additional collateral to meet the requirements of Section 23A.

The collateral requirements of Section 23A apply to the bank‘s credit exposure on derivative transactions with an affiliate and with respect to the credit exposure on borrowing or lending transactions with an affiliate.

The prohibition on the acceptance of low-quality assets or securities issued by an affiliate as collateral for an extension or credit to, or guarantee on behalf of, an affiliate apply to the credit exposure on derivative transactions as well as securities lending or borrowing transactions with an affiliate.

Debt obligations of an affiliate are not permitted to be used as collateral for an extension of credit or credit exposure on a derivative or securities lending or borrowing transaction with an affiliate. Currently, this limitation applies only in the case of securities of an affiliate.

The term ―credit exposure‖ as used in these amendments is not defined in Dodd-Frank. The FRB, therefore, is authorized to define this term using its existing rulemaking authority. This definition will determine the severity of the impact of these changes to Section 23A on banks‘ ability to conduct derivative and securities borrowing and lending transactions with their affiliates.

Netting agreements under Section 23A. Section 608 authorizes the FRB to take into account, in

determining the amount of a covered transaction between a bank and an affiliate under Section 23A, a

netting agreement. The FRB is also authorized to take into account netting agreements for purposes of

the exemption from Section 23A for certain covered transactions (including credit exposure on derivative


or securities lending or borrowing transactions) that are fully secured by U.S. government securities or a

segregated, earmarked deposit account at the member bank. An interpretation of this provision dealing

with a specific bank or affiliate must be issued jointly by the FRB and the appropriate federal banking

agency for the bank or affiliate.

Exemptive authorities under Section 23A. Section 608 also replaces the FRB‘s authority to grant

exemptions from Section 23A by order with a procedure under which, in the case of national banks, the

OCC may grant the exception. The exception will be granted only if (1) the OCC and the FRB jointly find

the exemption to be in the public interest and consistent with the purposes of Section 23A, and (2) the

chairperson of the FDIC, within 60 days of being notified of the proposed exemption, does not object in

writing to the exemption based on a determination that the exemption presents an unacceptable risk to

the Deposit Insurance Fund. A similar procedure will be established for an exemption by order from

Section 23A in the case of state banks, with the FDIC authorized to grant the exemption for state non-

member banks and the FRB authorized to grant the exemption for state member banks. In addition, the

Home Owners‘ Loan Act is amended to add similar provisions permitting the OCC (in the case of federal

associations) or the FDIC (in the case of state savings associations) to grant exemptions from Section

23A as applied to savings associations.

The FRB may continue to adopt exemptions from Section 23A by regulation, but must provide the

chairperson of the FDIC with 60 days‘ notice of any such proposed exemption. The FRB may not adopt

the exemption if, within the 60-day period, the FDIC chairperson objects in writing to the exemption on the

basis that it presents an unacceptable risk to the Deposit Insurance Fund. Section 609 adds a similar

notice procedure for exemptions to Section 23B of the Federal Reserve Act, which requires that covered

and other transactions with affiliates be on market.

Financial subsidiaries. Section 609 eliminates the provision in Section 23A that permits a bank to

engage in covered transactions with a financial subsidiary of the bank in an amount greater than 10

percent (but less than 20 percent) of the bank‘s capital and surplus.

Effective date. All of the amendments described above to Sections 23A and 23B are effective one year

after the transfer date of the federal supervision and regulation of depository institutions and their holding

companies under Section 311.

Expansion of lending restrictions applicable to insiders. Section 614 treats as an extension of credit

for purposes of Section 22(h) of the Federal Reserve Act (which governs loans to insiders and their

related interests) any credit exposure to a person arising from a derivative transaction, repurchase

agreement, reverse repurchase agreement, securities lending transaction or securities borrowing

transaction between the bank and the person. The definition of ―derivative transaction‖ under Section 610

will apply in this context. This section will take effect one year after the transfer date.


Limits on purchases of assets from or sales to insiders. Section 615 prohibits an insured depository

institution from purchasing an asset from, or selling an asset to, an executive officer, director or principal

shareholder of the institution, or any related interest of that person (as these terms are defined in FRB

Regulation O), unless the transaction is on market terms. If the transaction represents more than 10

percent of the capital stock and surplus of the insured depository institution, the transaction must be

approved in advance by a majority of the members of the board of directors who do not have an interest

in the transaction. The FRB is directed to issue regulations necessary to define the terms and carry out

the purposes of this section, and must consult with the OCC and the FDIC regarding these rules. These

new restrictions will apply on the transfer date.

The existing restriction in Section 22(d) of the Federal Reserve Act on purchases and sales of securities

or other property by member banks to or from its directors and certain related interests of the directors is

repealed.

5. Credit Exposure on Derivatives Under Federal and State Lending Limits

Derivative and other transactions covered under national bank lending limit. Section 610 amends

the national bank lending limit to include any credit exposure to a person arising from a derivative

transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or

securities borrowing transaction between a national bank and the person. ―Derivative transaction‖ is

defined to include any transaction that is a contract, agreement, swap, warrant, note or option that is

based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence

of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices or

other assets. The amendments under Section 610 are effective one year after the transfer date.

Derivative transactions by state banks. Section 611 amends the FDI Act to prohibit an insured state

bank from engaging in a derivative transaction (as defined in the National Bank Act) unless the state law

governing the lending limits of the bank take into consideration credit exposure to derivative transactions.

This amendment takes effect 18 months after the transfer date.

6. Revised Regulatory Frameworks for Securities Holding Companies

Investment bank holding companies. Section 617 eliminates the investment bank holding company

framework adopted under the Exchange Act, effective on the transfer date.

Securities holding companies. Section 618 establishes a framework for ―securities holding companies‖

that are required by a non-U.S. regulator or provision of non-U.S. law to be subject to comprehensive

consolidated supervision to register with, and be supervised by, the FRB. To qualify as a securities

holding company, a company must control one or more brokers or dealers registered with the SEC and

may not otherwise be subject to consolidated supervision by the FRB or a non-U.S. regulator, or control


an insured depository institution (except for an industrial loan company that is exempt from the definition

of ―bank‖ in the BHC Act).

Section 618 also describes the process under which a securities holding company may register with the

FRB to become a ―supervised securities holding company.‖ The section provides for record-keeping and

reporting requirements for these companies and their affiliates (other than subsidiary banks), and details

the scope of examinations to be conducted by the FRB. The FRB is directed, by regulation or order, to

prescribe capital adequacy and risk management standards for supervised securities holding companies

consistent with the safety and soundness of the companies and any risks they pose to financial stability.

In applying these standards, the FRB may differentiate among securities holding companies on an

individual basis or by category depending on the specified factors. The FRB may not apply these capital

and risk management requirements to insured depository institution subsidiaries of the supervised

securities holding company.

Dodd-Frank gives the FRB cease-and-desist and other enforcement authority over supervised securities

holding companies and their subsidiaries to the same extent it has such authority under the FDI Act for

BHCs. Finally, a supervised securities holding company will be subject to the BHC Act as if it were a

BHC, except for the provisions of Section 4 of that Act limiting the nonbanking activities of BHCs. This

provides the FRB with the same report, examination, and rulemaking authority it has over BHCs and their

subsidiaries.

7. The Volcker Rule

a. Volcker Rule Prohibitions

Section 619 adds a new Section 13 to the BHC Act to implement the recommendations of former Federal

Reserve chairman Paul A. Volcker, prohibiting proprietary trading by banking organizations. The Volcker

Rule prohibits a ―banking entity‖ from engaging in ―proprietary trading‖ or acquiring or retaining any equity,

partnership or other ownership interest in or sponsoring a ―hedge fund or a private equity fund.‖ There

are exceptions to the Volcker Rule for ―permitted activities,‖ as described below. The Volcker Rule

expressly states that it is not to be construed to limit or restrict the ability of a banking entity or a Covered

Nonbank Company from selling or securitizing loans in a manner otherwise permitted by law.

Definitions. For purposes of the Volcker Rule:

A ―banking‖ entity is (1) any insured depository institution,22

(2) any company that controls an insured depository institution, (3) any company that is treated as a BHC under the International Banking Act (that is, a company that is or controls a non-U.S. bank with

22

An insured depository institution does not include an institution that functions solely in a trust or fiduciary capacity and complies with the other requirements for exemption of trust companies from the definition of ―bank‖ listed in Section 2(c)(2)(D) of the BHC Act.


branches or agencies in the United States), or (4) any affiliate or subsidiary of any such depository institution or company.

―Proprietary trading‖ means engaging as principal for its own ―trading account‖ in any transaction to purchase, sell or otherwise acquire or dispose of any security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative or contract, or any other security or financial instrument that the appropriate federal banking agencies, the SEC and the CFTC may determine by rule.

A ―trading account‖ is any account used for acquiring or taking positions principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements), and any such other accounts as the appropriate federal banking agencies, the SEC and the CFTC may determine by rule.

A ―hedge fund‖ or a ―private equity fund‖ is a company or other entity exempt from registration as an investment company pursuant to Section 3(c)(1) or 3(c)(7) of the Investment Company Act or any similar fund as determined by the appropriate federal banking agencies, the SEC and CFTC. The Volcker Rule does not apply if the fund is not an investment company under the Investment Company Act, is exempt under some other provision of that Act, or is a registered investment company under that Act. Although the definition of ―hedge fund‖ and ―private equity fund‖ in the Volcker Rule is linked to the very broad definition in the Investment Company Act, Chairman Barney Frank of the House Committee on Financial Services confirmed in a colloquy during the House floor debate that the intent of the Volcker Rule was to ―prohibit firms from investing in traditional private equity funds and hedge funds,‖ and was not intended to prohibit ownership or control of ―subsidiaries or joint ventures [of banking entities] that are used to hold other investments‖ besides hedge and private equity funds.

An entity ―sponsors‖ a hedge fund or private equity fund if it serves as the general partner, managing partner or trustee, selects or controls (or has employees, officers or directors or agents who constitute) a majority of the directors, trustees or management of the fund, or shares with the fund for marketing, promotion or other purposes the same name or a variation on the same name.

Capital and quantitative limits for Covered Nonbank Companies. The FRB or other appropriate

federal regulatory authority is required to adopt by rule additional capital requirements and additional

quantitative limits governing proprietary trading by Covered Nonbank Companies and the sponsorship or

investment in hedge funds or private equity funds by such companies. Any additional capital or

quantitative limits adopted by the FRB for ―permitted activities‖ conducted by banking entities, as

discussed below, will apply to Covered Nonbank Companies.

Transactions with hedge and private equity funds. The Volcker Rule prohibits a banking entity, and

any of its affiliates, from engaging in a covered transaction (as defined in Section 23A of the Federal

Reserve Act23

) with a hedge fund or private equity fund (or any fund controlled by that fund) if the banking

entity:

23

Covered transactions include a loan or extension of credit (broadly defined) to an affiliate; a purchase of assets from, or an investment in securities issued by, an affiliate; the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company; or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. It also includes transactions with third parties, to the extent that the proceeds of the transaction are transferred to, or used for the benefit of, an affiliate.


serves, directly or indirectly, as the investment manager or investment adviser of the fund;

sponsors the fund; or

organizes and offers the fund as a permitted activity in connection with bona fide trust, fiduciary or investment advisory services (described below).

The rule does not prohibit transactions with companies in which the hedge or private equity fund is

invested.

The Volcker Rule also subjects transactions between a hedge fund or private equity fund and a banking

entity that serves as the investment manager, investment advisor or sponsor to the fund, or that

organizes and offers the fund, to the market terms and other requirements of Section 23B of the Federal

Reserve Act. Unlike the Section 23A restriction described above, this provision of the Volcker Rule does

not expressly apply to affiliates of the banking entity.

The FRB may, however, permit a banking entity to enter into a ―prime brokerage‖ transaction with a

hedge fund or private equity fund in which a hedge fund or private equity fund managed, sponsored or

advised by the banking entity has an equity, partnership or ownership interest. The FRB may grant

permission for such transactions if the banking entity is in compliance with the Volcker Rule provisions on

organizing and offering hedge funds and private equity funds discussed above; the chief executive officer

(or equivalent officer) of the banking entity certifies in writing annually (with a duty to update the

certification for material changes) that the banking entity has not guaranteed, assumed or otherwise

insured the obligations or performance of the hedge fund or private equity fund or any other private equity

or hedge fund in which it is invested; and the FRB determines that the transaction is consistent with the

safe and sound operation and condition of the banking entity. The prime brokerage transaction must

comply with the market terms requirements of Section 23B of the Federal Reserve Act as if the

counterparty were an affiliate of the banking entity. The appropriate federal banking agencies, the SEC

and the CFTC must adopt rules imposing additional capital charges or other restrictions for Covered

Nonbank Companies to address the risks in covered transactions by them with hedge funds and private

equity funds they sponsor, manage or advise or organize and offer.

b. Exceptions to Volcker Rule Prohibitions

Permitted activities. The following ―permitted activities‖ are exempt from the Volcker Rule prohibitions,

subject to any restrictions or limitations on such activities the FRB, FDIC, OCC, SEC and CFTC may

apply:

investments in obligations of the United States or any agency thereof;

investments in obligations, participations or other instruments of or issued by the Government National Mortgage Association, Fannie Mae, Freddie Mac, a Federal Home Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm Credit System institution chartered under and subject to the provisions of the Farm Credit Act of 1971;

investments in obligations of any state or of any political subdivision thereof;


underwriting or market-making related activities to the extent that such activities are designed not to exceed the reasonably expected near-term demands of clients, customers or counterparties;

risk-mitigating hedging activities in connection with and related to individual or aggregated positions, contracts or other holdings of the banking entity designed to reduce specific risks to the banking entity in connection with and related to such positions, contracts or other holdings;

the purchase, sale, acquisition or other disposition of securities or other financial instruments on behalf of customers;

investments in small business investment companies and investments designed primarily to promote the public welfare that are permissible for national banks;

transactions by a regulated insurance company directly engaged in the business of insurance for the general account of the company and by any affiliate of such regulated insurance company if solely for the general account of the regulated insurance company; the transactions must be conducted in compliance with applicable state insurance company investment laws (including regulations and guidance) of the state or other jurisdiction in which the company is domiciled, and the applicable state law must not have been determined by the appropriate federal banking agencies, after consultation with the Council and the relevant state and territorial insurance commissioners and after notice and comment, to be insufficient to protect the safety and soundness of the banking entity or the financial stability of the United States;

organizing and offering a hedge fund or private equity fund, including acting as a general partner, managing member or trustee and selecting or controlling a majority of its directors, trustees or management,

24 if:

the banking entity provides bona fide trust, fiduciary or investment advisory services;

the fund is organized and offered only in connection with the provision of such services and only to customers of such services of the banking entity;

the banking entity does not acquire or retain an equity or other ownership interest in the fund, except for a de minimis investment (discussed below);

the banking entity complies with the Volcker Rule restrictions on transactions with hedge and private equity funds that the entity sponsors, manages, advises or organizes and offers (discussed above);

the obligations or performance of the fund (including any other private equity or hedge fund in which the fund invests) are not guaranteed, assumed or otherwise insured, directly or indirectly, by the banking entity;

the banking entity does not share, for corporate, marketing or other purposes, the same name or a variation of the same name with the fund;

no director or employee of the banking entity takes or retains an equity interest in the fund, except for a director or employee directly engaged in providing investment advisory or other services to the fund;

the banking entity discloses to prospective and actual investors in the fund in writing that any losses in the fund are borne solely by the investors and not by the banking entity; and

24

This includes having directors, officers, employees or agents who constitute such a majority.


the banking entity complies with any rules of the appropriate federal banking agencies, the SEC or the CFTC designed to ensure that losses in the fund are borne solely by investors;

proprietary trading conducted ―solely‖ outside of the United States by a non-U.S. banking entity pursuant to Section 4(c)(9) or (13) of the BHC Act;

the acquisition or retention of any equity, partnership or other ownership interest in or the sponsorship of a hedge fund or a private equity fund ―solely‖ outside of the United States by a non-U.S. banking entity pursuant to Section 4(c)(9) or (13) of the BHC Act, so long as no ownership interest in the hedge fund or private equity fund is offered for sale or sold to a resident of the United States; and

any other activity that the appropriate federal banking agencies, the SEC and CFTC determine by regulation would promote and protect the safety and soundness of the banking entity and the financial stability of the United States.

Limitations on permitted activities. A transaction or activity will not qualify as a ―permitted activity‖ if it:

would involve or result in a ―material conflict of interest‖ (as defined by the agencies‘ rules) between the banking entity and its clients, customers or counterparties;

would result, directly or indirectly, in a material exposure by the banking entity to ―high-risk assets‖ or ―high-risk trading strategies‖ (as such terms are defined by the agencies‘ rules);

would pose a threat to the safety and soundness of the banking entity; or

would pose a threat to the financial stability of the United States.

The appropriate federal banking agencies, the SEC and the CFTC are required to issue rules to

implement these limitations on permitted activities, as discussed below.

De minimis investment. A banking entity may make and retain an investment in a hedge fund or private

equity fund that it organizes and offers in order to establish the fund and provide it with sufficient initial

equity for the fund to attract unaffiliated investors or to make a de minimis investment in the fund. The

banking entity must actively seek unaffiliated investors to reduce or dilute its initial investment in the fund

to the de minimis level permitted under the Volcker Rule, and must do so within one year after the date of

establishment of the fund. The FRB may extend the one-year period of time for two additional years, if

the FRB finds the extension would be consistent with safety and soundness and in the public interest.

The de minimis level permitted under the Volcker Rule is three percent or less of the total ownership

interests of the fund. In addition, the Volcker Rule requires that the aggregate investments by the

banking entity in all organized and offered funds must be ―immaterial‖ to the banking entity (as defined by

the agencies) and may not exceed three percent of its Tier 1 capital. The banking entity must deduct the

aggregate amount of these investments from its assets and tangible equity for purposes of compliance

with any additional capital requirements applicable to permitted investments.

Additional capital and quantitative limits on permitted activities. The appropriate federal banking

agencies, the SEC and the CFTC are required to adopt, by rule, additional capital requirements and

quantitative limits, including diversification requirements, for permitted activities if the agencies determine


such additional requirements are appropriate to protect the safety and soundness of banking entities

engaged in such activities.

c. Required Study and Rulemakings

Council study and recommendations. Section 619 requires the Council, within six months after the

enactment of Dodd-Frank, to complete a study and make recommendations on implementing the Volcker

Rule that will promote and enhance the safety and soundness of banking entities, protect taxpayers, and

enhance financial stability by minimizing the risk that insured depository institutions and their affiliates will

engage in unsafe and unsound activities, limit the inappropriate transfer of federal subsidies from deposit

insurance and liquidity facilities to unregulated entities, reduce conflicts of interest between the self-

interest of banking entities and Covered Nonbank Companies and the interests of their customers, limit

activities that have caused undue risk or loss in banking entities and Covered Nonbank Companies or

that might normally be expected to do so, appropriately accommodate the business of insurance within an

insurance company regulated in accordance with the relevant state insurance company investment laws

while protecting the safety and soundness of any affiliated banking entity and of the U.S. financial system,

and appropriately time the divestiture of illiquid assets that are affected by the Volcker Rule‘s

implementation. The provision of the Senate Bill that authorized the Council to recommend the

substitution of additional capital requirements and quantitative limits for the prohibitions of the Volcker

Rule was not expressly included in Dodd-Frank.

Required rules. Within nine months after the completion of the Council‘s study, the appropriate federal

banking agencies, the SEC and the CFTC are required to consider the findings of the Council‘s study and

issue rules to implement the Volcker Rule. To insure compliance with the Volcker Rule provisions, the

appropriate federal banking agencies, the SEC and the CFTC are also required to issue regulations

regarding internal controls and record-keeping for the entities each regulates.

These and other rules required by the Volcker Rule will be issued by:

the appropriate federal banking agencies jointly with respect to insured depository institutions;

the FRB for a company that controls an insured depository institution, a non-U.S. banking organization treated as a BHC and any company that controls it, any Covered Nonbank Company, and any subsidiary of any of the foregoing companies (other than an insured depository institution or entity for which the SEC or the CFTC is the primary financial regulatory agency);

the SEC for an entity for which it is the primary financial regulatory agency; and

the CFTC for an entity for which it is the primary financial regulatory agency.

In developing regulations to implement the Volcker Rule, the appropriate federal banking agencies, the

SEC and the CFTC are required to consult and coordinate with each other, as appropriate, to ensure, to

the extent possible, comparable regulations and consistent application and implementation to avoid


advantaging or disadvantaging affected companies and to protect the safety and soundness of banking

entities and Covered Nonbank Companies. The Treasury Secretary, as chairperson of the Council, is

responsible for coordination of the regulations.

The FRB is also required to issue rules to implement the divestiture provisions for non-conforming

investments and activities (described below) within six months after the enactment of Dodd-Frank.

d. Compliance Period

Effective date. The Volcker Rule prohibitions are effective on the earlier of (1) 12 months after adoption

of the required final agency rules and (2) two years after the enactment of Dodd-Frank.

Period for divestiture of non-conforming investments and activities. A banking entity or Covered

Nonbank Company must, within two years after the Volcker Rule becomes effective (or the date on which

a company becomes a Covered Nonbank Company), bring its activities and investments into compliance

with the Volcker Rule, subject to certain FRB extensions.

Extensions generally. The FRB may grant three one-year extensions of this compliance period if the

extension would be consistent with the purposes of the Volcker Rule and not detrimental to the public

interest.

Extensions for certain illiquid funds. In the case of an illiquid fund, the FRB may, upon application by

a banking entity, extend for up to five years the period during which a banking entity may take or retain its

equity, partnership or other interest in, or otherwise provide additional capital to, such a fund to the extent

necessary to fulfill a contractual obligation that was in effect on May 1, 2010. An illiquid fund is a hedge

fund25

or private equity fund that (1) as of May 1, 2010, was principally invested in or was invested and

contractually committed to principally invest in illiquid assets, such as portfolio companies, real estate

investments and venture capital investments, and (2) makes all investments pursuant to and consistent

with an investment strategy to principally invest in illiquid assets. In its rules, the FRB must take into

consideration the terms of the investment for the fund, including contractual obligations, the ability of the

fund to divest assets and other appropriate factors.

A provision of the Volcker Rule dealing with divestiture for illiquid funds conflicts with the timeframes for

compliance described above. The new Section 13(c)(4) of the BHC Act added by the Volcker Rule

provides that a banking entity must cease any activity with respect to an illiquid hedge or private equity

fund before the earlier of (1) ―the date on which the contractual obligation to invest in the illiquid fund

terminates‖ and (2) any extension granted by the FRB to retain the illiquid fund discussed in the previous

paragraph. This provision could be read to mean that, upon the effective date of the Volcker Rule, a

25

For this purpose, a hedge fund does not include a private equity fund as defined in Section 203(m) of the Investment Advisers Act.


banking entity must divest any interest it has in such a fund unless it still has a contractual obligation to

invest in the fund, even though the transition provisions discussed above permit such an investment to be

held for an additional two years, with the possibility of a further extension from the FRB. This provision

was originally contained in a proposed amendment to the Senate Bill that was modified during the House-

Senate conference negotiations, and this provision was apparently retained inadvertently in the final text

of Dodd-Frank. The FRB, which must issue rules on the transition periods within six months after the

enactment of Dodd-Frank, may resolve this conflict. Further, although only one of the Volcker Rule‘s

exemptions for permitted activities is explicitly referenced in this provision (the exemption for funds that

are organized and offered by a banking entity that provides bona fide trust, fiduciary or investment

advisory services), this provision should not be read to require divestiture of an illiquid fund that is

permissible under one of the Volcker Rule‘s other exemptions.

Additional capital requirements during transition period. The appropriate federal banking agencies,

the SEC and the CFTC must issue rules imposing additional capital requirements and other restrictions,

as appropriate, on any equity, partnership or ownership interest in, or sponsorship of, a hedge fund or

private equity fund by a banking entity. The rules will apply to investments and activities permitted to be

retained during the transition period.

e. Additional Provisions

Anti-evasion provision. The appropriate banking agency, the SEC or the CFTC may, after notice and

opportunity for hearing, require a bank or company subject to its jurisdiction to terminate an activity or

dispose of an investment if the agency believes the activity is conducted or the investment was made in a

manner that is intended to evade the requirements of the Volcker Rule and implementing regulations

(including through abuse of a permitted activity).

Preeminence of Volcker Rule. Section 619(g) provides that the prohibitions and restrictions of the

Volcker Rule will apply even if the activity is authorized for a banking entity or a Covered Nonbank

Company under any other provision of law. Thus, for example, a BHC may not make an investment in

the shares of a hedge or private equity fund not permitted by the Volcker Rule even though the

investment is permitted under Section 4(c)(6) of the BHC Act, which permits a BHC to invest for its own

account in up to five percent of any class of voting shares of any company, or under any of the other

authorizations in the BHC Act.

Study of bank activities and their risks. Section 620 requires the FRB, FDIC and OCC, within

18 months after the enactment of Dodd-Frank, jointly to prepare a report on activities that are permitted

for banking entities under federal or state law, including those authorized by order, interpretation or

guidance. The report must consider the type of activities or investments authorized, any associated

financial, operational, managerial or reputational risks and any risk mitigation activities undertaken. The

report must be submitted to the Council and the Congressional Banking Committees within two months


after its completion. The report must include recommendations regarding any negative effect of the

activity or investment on the safety and soundness of the banking entity or the U.S. financial system, the

appropriateness of the activity or investment for banking entities, and additional restrictions that may be

necessary to address risks to safety and soundness.

GAO study on proprietary trading. Section 989 of Dodd-Frank authorizes the GAO to conduct a study

regarding the risks and conflicts associated with proprietary trading (broadly defined26

) by and within

insured depository institutions and their affiliates, BHCs and financial holding companies and their

subsidiaries, and any other person the Comptroller General may determine (―covered entities‖). This

study includes an evaluation of (1) whether proprietary trading presents a material systemic risk to the

stability of the U.S. financial system, (2) whether proprietary trading presents material risks to the safety

and soundness of these entities, (3) whether proprietary trading presents material conflicts of interest

between these entities and their clients who use the firm to execute trades or who rely on the firm to

manage assets, (4) whether adequate disclosure regarding the risks and conflicts of proprietary trading is

provided to customers, clients and investors of these entities, and (5) whether the banking, securities and

commodities regulators of institutions that engage in proprietary trading have in place adequate systems

and controls to monitor and contain any risks and conflicts of interest related to proprietary trading. In

conducting the study, the Comptroller General must consider with respect to proprietary trading the

advisability of a complete ban or additional capital requirements, limitations on the scope of the activities

that may be conducted by covered entities, enhanced restrictions on transactions between affiliates,

enhanced accounting and public disclosure, and any other options the Comptroller General deems

appropriate.

To conduct the study, the Comptroller General must be granted access to (1) any information, including

any records, data, files, electronic communications or property of a covered entity that engages in

proprietary trading, and (2) the covered entity‘s officers, employees, directors, independent public

accountants, financial advisors, staff and other agents and representatives. The Comptroller General will

generally be required to keep this information confidential but may release it at a level of generality that

does not disclose identifying details or investment or trading positions or strategies. However, the

Comptroller General may provide this information to another federal government agency or official for

official use, to a committee of Congress upon request, or to a court. The GAO must submit a report

regarding its findings from the study to Congress within 15 months after the enactment of Dodd-Frank.

26

For purposes of the study, ―proprietary trading‖ means investing as principal in securities, commodities, derivatives, hedge funds, private equity firms or such other financial products or entities as the Comptroller General determines.


8. SLHC Act Amendments

Requirement for SLHCs to form intermediate holding companies. Section 626 amends the Savings

and Loan Holding Company Act (the ―SLHC Act‖) to authorize the FRB to require a grandfathered unitary

SLHC that conducts non-financial activities to establish an ―intermediate holding company‖ to conduct all

or a portion of the SLHC‘s financial activities. The FRB may require this action within 90 days of the

transfer date (or such longer period as the FRB deems appropriate). The FRB is required to order a

grandfathered unitary SLHC to establish an intermediate holding company if the FRB determines that

action is necessary to supervise the financial activities of the SLHC or to ensure that FRB supervision

does not extend to the commercial activities of the SLHC.

A grandfathered unitary SLHC is generally a company that was an SLHC on May 4, 1999, and continues to meet the requirements of the SLHC Act to retain non-financial activities.

Financial activities are those that are permissible for a financial holding company under Section 4(k) of the BHC Act or for a multiple SLHC under the SLHC Act.

Under Section 604(i), if the FRB directs the SLHC to establish an intermediate holding company, the

parent holding company would no longer be an SLHC solely because it controls such an intermediate

holding company. It would, however, be required to serve as a source of strength to the intermediate

holding company. The FRB could also examine and require reports under oath from the holding

company and from the appropriate officers or directors of the company, solely to ensure compliance with

the provisions of this section, including assessing the ability of the holding company to serve as a source

of strength to a subsidiary intermediate holding company and to enforce compliance. The FRB has

enforcement authority under the FDI Act with respect to the holding company solely to enforce

compliance with this section.

The FRB must issue rules to establish the criteria for determining whether to require a grandfathered

unitary SLHC to establish an intermediate holding company. It may also issue rules to establish

restrictions or limitations on transactions between an intermediate holding company (or its subsidiaries)

and the parent of the intermediate holding company (or its affiliates that are not subsidiaries of the

intermediate holding company), as necessary to prevent unsafe and unsound practices in connection with

transactions between these companies. These regulations may not restrict or limit any transaction in

connection with the bona fide acquisition or lease by an unaffiliated person of assets, goods or services.

During the House consideration of Dodd-Frank, Chairman Barney Frank indicated that this amendment to

the SLHC Act was to be interpreted and applied in harmony with a similar provision in Title I dealing with

intermediate holding companies of Covered Nonbank Companies so that a Covered Nonbank Company

would have a single intermediate holding company that would be both an SLHC and the intermediate

holding company for implementing the heightened supervision of systemic financial activities required

under Title I.


SLHC exclusions for certain trust companies. Section 604(i) amends the SLHC Act to exempt from

the definition of SLHC a company that controls a savings association that functions solely in a trust or

fiduciary capacity, as described in the trust company exemption from the definition of ―bank‖ in Section

2(c)(2)(D) of the BHC Act.

Qualified thrift lender. Section 624 modifies the restrictions applicable to savings associations that do

not meet the definition of ―qualified thrift lender‖ in the Home Owners‘ Loan Act. Such an institution is no

longer required to convert to a bank, but is subject to activity and branching restrictions applicable to

national banks. In addition, the institution may not pay a dividend unless the dividend would be

permissible for a national bank, is necessary to meet the obligations of a parent holding company and is

approved by the OCC and the FRB.

Dividends by mutual holding companies. Section 625 requires any savings association subsidiary of a

mutual holding company to provide the appropriate federal banking agency and the FRB with 30 days‘

prior notice of a proposed declaration of any dividend, and invalidates any dividend declared without such

notice. Section 625 also provides that a mutual holding company may waive the right to receive any

dividend from a subsidiary in certain circumstances if it provides 30 days‘ prior notice to the FRB of the

proposed waiver. The FRB may not object to the waiver if the waiver would not be detrimental to the safe

and sound operation of the subsidiary savings association, the board of directors of the holding company

expressly determines that the waiver is consistent with their fiduciary duties to the mutual members of the

holding company, and the mutual holding company meets certain qualifications. The appropriate federal

banking agency is required to consider waived dividends in determining an appropriate exchange ratio in

the event of a full conversion of an association to stock form, except in a specified limited circumstances.

9. Elimination of Federal Restrictions on Depository Institution Activities

Payment of interest on demand deposits and transaction accounts. Section 627 repeals federal

prohibitions on the payment by insured depository institutions of interest on demand deposits. Section

627 is effective one year after the enactment of Dodd-Frank.

Small business lending for exempt credit card banks. Section 628 amends the credit card bank

exclusion from the definition of ―bank‖ in the BHC Act to permit credit card banks to make credit card

loans to small businesses that meet the criteria for a small business concern to be eligible for business

loans under the rules of the Small Business Administration. Section 628 is effective one day after the

enactment of Dodd-Frank.

De novo branching into states. Section 613 authorizes national banks and state banks to establish

branches in any state if that state would permit the establishment of the branch by a state bank chartered

in that state. This section is effective one day after the enactment of Dodd-Frank.


C. FEDERAL RESERVE SYSTEM REFORMS AND EMERGENCY FINANCIAL STABILIZATION

Federal Reserve emergency lending. Section 1101 amends Section 13(3) of the Federal Reserve Act,

which governs the FRB‘s ability to provide emergency credit to individuals, partnerships or corporations in

unusual or exigent circumstances. As amended, Section 13(3) eliminates the FRB‘s authority to provide

emergency credit to any person other than through ―any program or facility with broad-based eligibility‖

and requires the prior approval of the Treasury Secretary for the FRB to provide such credit. A program

or facility is not ―broad-based‖ if it is structured to remove assets from the balance sheet of a single,

specific company or if it is established to assist a single, specific company to avoid bankruptcy, resolution

under Title II of Dodd-Frank or any other federal or state insolvency proceeding.

The FRB is required as soon as practicable to issue regulations to implement these changes, in

consultation with the Treasury Secretary. The regulations must establish policies and procedures

designed to ensure that the purpose of any emergency lending program or facility is to provide liquidity to

the financial system and not to aid a failing financial company, that the security for emergency loans is

sufficient to protect taxpayers from losses, and that the program or facility is terminated in an orderly and

timely fashion.

The policies and procedures established by the regulation must require a Federal Reserve Bank,

consistent with sound risk management policies, to assign a ―lendable value‖ to all collateral securing an

advance in order to determine whether the advance is satisfactorily secured. Any realized net loss

sustained by a Federal Reserve Bank to a company for which a systemic risk determination has been

made under the resolution authority of Title II will have priority in resolution under Title II, and unsecured

claims related to loans under Section 13(3) of the Federal Reserve Act will have a priority in a bankruptcy

proceeding.

The FRB is also required to establish procedures to prohibit borrowing by insolvent borrowers. These

must include a certification from the borrower‘s CEO (or other authorized officer) that the borrower is

solvent at the time of the borrowing. The certification must be updated if information in it materially

changes. A borrower will be deemed to be insolvent if it is in bankruptcy, resolution under Title II, or any

other federal or state insolvency proceeding.

Reports to Congress. Within seven days of authorizing emergency credit, the FRB must report to the

Congressional Banking Committees. The report must provide the justification for the financial assistance

and other specified information, including the date and amount of the assistance and the form provided,

the material terms of the assistance (including its duration, the collateral pledged, its value, interest, fees

and revenues received), expected costs to taxpayers and any restrictions placed on the recipient

(including employee compensation and distribution of dividends). The FRB must report every 30 days

thereafter on the value of the collateral, the interest, fees and other revenues received and the expected

or final costs to the taxpayer.


At the request of the chairman of the FRB, the information required to be submitted to Congress relating

to the identity of the participants in the program or facility, the amounts borrowed by each participant, and

identifying details concerning the assets or collateral held in connection with the facility or program will be

kept confidential. This information will be submitted to the chairpersons and ranking members of the

Congressional Banking Committees.

GAO review of FRB credit facilities, discount window advances and open-market transactions.

Section 1102 authorizes the GAO to conduct reviews of any credit facility program authorized by the FRB

under Section 13(3) of the Federal Reserve Act, including on-site examinations of the FRB, any Federal

Reserve Bank or credit facility, special purpose vehicle or other entity established by the FRB or a

Federal Reserve Bank and authorized under Section 13(3), as well as any ―covered transaction.‖ A

―covered transaction‖ in this context is any Federal Reserve Bank open-market transaction (such as the

purchase by the Federal Reserve Bank of New York of obligations of the United States or any agency

thereof) or any discount window advance under Section 10B of the Federal Reserve Act. The GAO‘s

review will be restricted to assessing (1) the operational integrity, accounting, financial reporting and

internal controls of the facility, (2) the effectiveness of security and collateral policies, (3) whether the

facility or conduct of a covered transaction favors one or more specific participants over others eligible to

participate, and (4) the policies governing third-party contractors for the facility or for the conduct of any

covered transaction.

The GAO must submit a report to Congress with respect to any such review within 90 days of its

completion. Among other elements, the report must describe the matters reviewed and any

recommendations for administrative or legislative action.

The GAO is prohibited from disclosing to Congress or to any person the names or identifying details of

participants in any credit facility or covered transaction reviewed, amounts borrowed by or transferred to

the participants, or assets or collateral held by or transferred to or in connection with the facility or

covered transaction. This non-disclosure requirement in the case of a credit facility will expire upon the

public release of the information by the FRB or a Federal Reserve Bank and will not apply to the Maiden

Lane special purpose vehicles previously established by the Federal Reserve Bank of New York. To the

extent reviews of credit facilities are redacted to comply with these disclosure limitations, the GAO must

release the full text of the review on the earlier of one year after the facility is terminated by the FRB and

two years after the credit facility ceases to make extensions of credit. The Comptroller General must

release a non-redacted version of any report regarding covered transactions when the information

concerning the borrower or counterparty is made public by the FRB as required under Section 1103,

discussed below.

GAO audit of Federal Reserve System emergency credit programs. Section 1109 requires the GAO

to conduct an audit of all loans and financial assistance provided by the FRB or a Federal Reserve Bank


to deal with the financial crisis from December 1, 2007, through the date of enactment of Dodd-Frank

under certain programs or facilities. These are programs, facilities27

and Maiden Lane special purpose

vehicles established using the FRB‘s emergency lending authority under Section 13(3) of the Federal

Reserve Act, as well as the Term Auction Facility, the FRB‘s currency swap lines with non-U.S. central

banks and the FRB‘s direct purchases under the agency Mortgage-Backed Securities program. The audit

report must be completed within 12 months after enactment of Dodd-Frank and must be provided to the

Speaker of the House, the majority and minority leaders of the House and Senate, the chairpersons and

ranking members of the Congressional Banking Committees and any member of Congress who requests

the report.

The GAO audit will assess the operational integrity, accounting, reporting and financial controls of the

facility; the effectiveness of collateral policies to mitigate risk; whether the facility favors specific

participants over other eligible institutions; the policies governing the use, selection and payment of third-

party contractors for the facility; and any conflicts of interest in the establishment or operation of the

facility.

GAO audit of Federal Reserve Bank governance. The GAO is also required, within one year after

enactment of Dodd-Frank, to complete an audit of the governance of the Federal Reserve Banks. The

audit will examine (1) whether the system for the appointment of Class B and C directors of the Federal

Reserve Banks effectively carries out the public interest representation requirements of the Federal

Reserve Act; (2) whether there are actual or potential conflicts of interest when the Federal Reserve Bank

directors are elected by the member banks; and (3) the establishment and operation of the facilities listed

above and each Federal Reserve Bank‘s involvement in them. The audit will also identify changes to the

Federal Reserve Bank director selection procedures or other aspects of Federal Reserve Bank

governance that will improve the representation of the public, eliminate actual or potential conflicts of

interest in bank supervision, increase the availability of information useful in monetary policy, or increase

the effectiveness or efficiency of the Federal Reserve Banks. The report must be submitted to the

members of Congress listed above.

With respect to the programs and facilities subject to the GAO audit described above, Section 1109 also

requires the FRB to publish on its website, no later than December 1, 2010:

the identity of each institution provided assistance, including non-U.S. central banks; and

the type, amount, value and date of the assistance provided; the specific terms of repayment expected, including the term, interest charges, collateral, any limits on executive compensation or dividends and other material terms; and the specific rationale of the program or facility.

27

These are the Primary Dealer Facility, the Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility and the Term Securities Lending Facility.


Public access to FRB information. Section 1103 requires the FRB to place on its website a link

(entitled ―Audit‖) to a web page that must contain (1) the information made available to the public

regarding the Comptroller General‘s reports relating to the FRB or the Federal Reserve Banks or credit

facilities established by them, (2) the audited financial statements of the FRB and Federal Reserve

Banks, (3) reports to the Congressional Banking Committees on emergency credit facilities established

under Section 13(3) of the Federal Reserve Act, and (4) other information the FRB believes is necessary

or helpful for the public to understand the accounting, financial reporting and internal controls of the FRB

and Federal Reserve Banks. The material must remain on the website for a reasonable period of time (at

least six months from its public release).

FRB release of information regarding credit facilities, advances and open-market operations.

Section 1103 also amends the Federal Reserve Act to require the FRB to disclose detailed information

concerning any credit facility established under the emergency lending authority of Section 13(3) or any

covered transaction that occurs after the enactment of Dodd-Frank. The FRB must disclose the names

and identifying details of each borrower, participant or counterparty in the credit facility or covered

transaction, the amount borrowed by or transferred by or to the party, the interest rate or discount paid by

the party, and information identifying the types and amounts of collateral pledged or assets transferred in

connection with participation in the facility or covered transaction. The FRB must disclose this information

with respect to a credit facility one year after the effective date of its termination28

and, with respect to a

covered transaction, two years after the calendar quarter in which the transaction was conducted. The

chairman of the FRB may release the information earlier. The confidentiality of the information required

to be disclosed by the FRB is protected from disclosure under FOIA until the mandatory release date,

unless the FRB determines that earlier disclosure would be in the public interest. The disclosure

requirements of this section do not apply to non-public personal information of individuals (within the

meaning of the Privacy Act) that may be referenced in any collateral pledged or assets transferred, unless

the person is a borrower, participant or counterparty under the credit facility or covered transaction.

Section 1103 provides that it is not meant to affect any pending lawsuit filed under FOIA prior to the

enactment of Dodd-Frank. This would apply to litigation such as Bloomberg L.P. v. Board of Governors of

the Federal Reserve System, 601 F.3d 143 (2nd Cir. 2010).

Emergency financial stabilization program. Section 1105 requires, upon a written determination by

the FDIC and the FRB, that the FDIC create a widely available emergency financial stabilization program

to guarantee the obligations of solvent insured depository institutions or solvent depository institution

28

A credit facility is deemed terminated two years after the facility ceases to make extensions of credit, unless earlier terminated by the FRB.


holding companies (as defined in the FDI Act)29

(including any affiliates thereof) during times of severe

economic stress. These guarantees may not include the provision of equity in any form.

The FDIC must establish the program upon a written determination by the FDIC and the FRB pursuant to

Section 1104 that a liquidity event exists that warrants use of the guarantee program. A liquidity event is

defined as:

an exceptional and broad reduction in the general ability of financial market participants to sell financial assets without an unusual and significant discount or to borrow using financial assets as collateral without an unusual and significant increase in margin; or

an unusual and significant reduction in the ability of financial market participants to obtain unsecured credit.

Section 1104 provides that such a determination by the FDIC and the FRB may be initiated at the request

of the Treasury Secretary. The determination by the FDIC and the FRB will be made upon a vote of two-

thirds of the board members of each agency. The written determination must contain an evaluation of the

evidence that a liquidity event exists and that the failure to take action would have serious adverse effects

on financial stability or economic conditions in the United States. The determination must also contain an

evaluation of evidence that the actions authorized under the FDIC guarantee program are needed to

mitigate these potential adverse effects.

The Secretary must maintain written documentation of the determination, and the Comptroller General is

directed to review and report to Congress on the determination, including the basis for the determination

and the likely effect of the actions taken. The Secretary must provide notice of the determination by the

FDIC and the FRB to the Congressional Banking Committees, including a description of the basis for the

determination. The notification is due upon the earlier to occur of 30 days from the date the determination

is made and the date the amount to be guaranteed is communicated to Congress by the President as

discussed below.

Section 1105 requires the FDIC to adopt regulations, in consultation with the Treasury Secretary,

governing the policies and procedures for the issuance of guarantees under the emergency financial

stabilization program. The terms and conditions of any guarantee program established by the FDIC and

its creation must be approved by the Treasury Secretary. The Treasury Secretary, in consultation with

the President, must determine the maximum amount of debt that the FDIC may guarantee under any

stabilization program.

29

For this purpose, a depository institution holding company is a BHC or an SLHC. It does not include a company that only owned an insured bank that is exempt from the definition of ―bank‖ in the BHC Act, such as an industrial bank.


Section 1105 establishes a procedure under which the President will provide a written report to Congress

describing the FDIC‘s proposed program to issue guarantees, specifying the maximum amount to be

guaranteed and requesting approval of the program. The FDIC may not issue guarantees under the

program unless there is a joint resolution of Congress approving the program. A similar procedure will be

established in the event that the maximum guarantee amount under a program is proposed to be raised.

Dodd-Frank provides a mechanism to ensure consideration of the President‘s report on the guarantee

program by Congress under expedited procedures.

The FDIC must charge fees and other assessments to participants in the program to offset the projected

losses and the administrative expenses. Any excess funds remaining after the termination of the program

must be paid to the Treasury. The FDIC is authorized to borrow funds from the Treasury Department, but

not from the Deposit Insurance Fund, to fund and administer the program. If the fees and other

assessments levied by the FDIC are insufficient to cover the cost of the program, the FDIC must impose a

special assessment on participants in the program to address the deficiency.

FDIC emergency assistance authority. Section 1106 eliminates the FDIC‘s ability under its systemic

risk authority to provide assistance to solvent depository institutions or their solvent holding companies (or

affiliates) through the establishment of a widely available debt guarantee program other than under the

emergency stabilization program discussed above. The FDIC‘s systemic authority in other cases is

subject to the requirement that the insured depository institution subsidiary must be in receivership. This

eliminates the FDIC‘s ability to use the systemic exemption to provide open bank assistance. Any action

taken by the FDIC under the systemic authority must be for the purpose of winding down a depository

institution for which the FDIC has been appointed receiver.

The FDIC is granted the authority to appoint itself as receiver for any depository institution that defaults

on a guarantee provided to it under the emergency stabilization program or under the emergency

systemic assistance provisions of the FDI Act. In the event a depository institution holding company or

other company that is not an insured depository defaults on such an obligation, the FDIC could require

consideration whether a determination should be made to resolve the company under the resolution

authority in Title II of Dodd-Frank. If the FDIC is not appointed receiver under Title II within 30 days after

default, the FDIC could require the company to file a petition for bankruptcy or could file a petition for

involuntary bankruptcy on behalf of the company.

Federal Reserve System governance. Section 1107 provides that the presidents of Federal Reserve

Banks will be appointed by the Class B and Class C directors of the bank. The Class B and Class C

directors represent the public. The Class A directors, who represent the member bank stockholders of

the Federal Reserve Bank, will not vote for the president. The final legislation did not amend the Federal

Reserve Act to require the president of the Federal Reserve Bank of New York to be appointed by the

President of the United States and confirmed by the Senate.


Section 1108 amends the Federal Reserve Act to provide for a second vice chairman of the FRB to be

appointed, who will be designated as the ―vice chairman for supervision.‖ The vice chairman for

supervision will be responsible for developing policy recommendations regarding the supervision and

regulation of depository institution holding companies and other financial firms supervised by the FRB and

must oversee the supervision and regulation of these firms.

The vice chairman for supervision must report to the Congressional Banking Committees semiannually

regarding the conduct of the FRB‘s supervisory responsibilities for depository institution holding

companies and other financial firms supervised by the FRB.

The FRB is prohibited from delegating to a Federal Reserve Bank its functions for the establishment of

policies for the supervision and regulation of depository institution holding companies and other financial

firms supervised by the FRB. The FRB is also prohibited from delegating any voting decision the FRB is

authorized or required to make under Title I of Dodd-Frank. Section 1108 also provides that the

presidents of the Federal Reserve Banks shall have no decision-making authority under Title I.

The Federal Reserve Act is also amended to add as one of the functions of the FRB the identification,

measurement, monitoring and mitigation of risks to the financial stability of the United States.


D. NATIONAL CREDIT UNION SHARE INSURANCE FUND

Section 988 requires the inspector general of the NCUA Board to submit a written report whenever the

Share Insurance Fund of the NCUA incurs a ―material loss‖ with respect to an insured credit union. This

report, which will be structured as a review of the supervision of the credit union by the NCUA, must

describe the reasons for the material loss and recommendations for preventing such losses in the future.

A ―material loss‖ means a loss exceeding the sum of (1) $25 million and (2) 10 percent of the total assets

of the credit union on the date on which the NCUA Board initiates assistance or is appointed liquidating

agent. In addition, the inspector general of the NCUA Board must submit a semiannual report to

Congress identifying losses incurred by the Share Insurance Fund during the preceding six-month period

and providing information regarding the Share Insurance Fund‘s non-material losses.

iii. banking reforms a. enhancing financial institution ... reforms.pdf · 343 also provides...

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