Summary of the The Dodd-Frank Act

8/6/2019 Summary of the The Dodd-Frank Act

1/28Morrison1FoersterMorrison & Foerster

The Dodd-Frank Act:a cheat sheet


2/28

Morrison2Foerster

THE DODD-FRANK

WALL STREET REFORMAND CONSUMERPROTECTION ACT,

OR DODD-FRANKACT, REPRESENTSTHE MOSTCOMPREHENSIVE

FINANCIALREGULATORY REFORMMEASURES TAKEN

SINCE THE GREATDEPRESSION.


3/28

The Dodd-Frank Act implements changes that, among other

things, affect the oversight and supervision of nancialinstitutions, provide for a new resolution procedure for large

nancial companies, create a new agency responsible for

implementing and enforcing compliance with consumer nancial

laws, introduce more stringent regulatory capital requirements,

effect signicant changes in the regulation of over the counter

derivatives, reform the regulation of credit rating agencies,

implement changes to corporate governance and executive

compensation practices, incorporate the Volcker Rule, require

registration of advisers to certain private funds, and effect

signicant changes in the securitization market. Although the

legislation calls for a number of studies to be conducted and

requires signicant rule-making, we all will be required to be

intimately acquainted with the Dodd-Frank Act.

In the pages that follow, we summarize the principal aspects of

the Dodd-Frank Act. As lawyers, we would reexively say that

this is a summary, and only a very brief summary at that, and

that all of this is qualied in its entirety by reference to our more

complete (and far longer) descriptions and analyses.As people

who receive lots of summaries, we would say short is usually

better. We hope youll nd these short summaries useful.


4/28

Morrison4Foerster

FinancialSta

bilityReform

Numerous government agencies areresponsible or regulating nancial institutions.

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

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

(Council) to oversee nancial institutions.

Creation o the Council

Chaired by Secretary o Treasury

Voting members consist o heads o the Treasury, Federal Reserve, OCC,

SEC, CFTC, FDIC, FHFA, NCUA, andthe Bureau o Consumer FinancialProtection (Bureau), as well as anindependent member with insuranceexpertise appointed by the President andconrmed by the Senate

Non-voting members include thedirector o the Oce o Financial

Research, the director o the FederalInsurance Oce, a state insurancecommissioner, a state bankingsupervisor, and a state securitiescommissioner

Purpose o the Council

Identiying risks to U.S. nancialstability that may arise rom ongoingactivities o large, interconnectednancial companies as well as

rom outside the nancial servicesmarketplace

Promoting market discipline byeliminating expectations o governmentbailouts

Responding to emerging threats tonancial stability

Duties o the Council

Collect inormation necessary to assess

risks to the U.S. nancial systemProvide direction to the Oce oFinancial Research to support the worko the Council

Monitor the nancial services marketplace and identiy potential threatsto U.S. nancial stability, as well asregulatory proposals aecting integrity,eciency, competitiveness, and stabilityo the U.S. nancial markets

Facilitate inormation sharing and coordination among member agencies

and other ederal and state agencies

Recommend to the member agenciesgeneral supervisory priorities andprinciples refecting the outcome odiscussions among the member agencies

Identiy gaps in regulation that couldpose risks to the nancial stability o theU.S.

Require Federal Reserve supervision

or nonbank nancial companies thatmay pose risks to U.S. nancial stabilityin the event o their material nancialdistress or ailure

Review and submit comments to theSEC and any standard-setting body


5/28Morrison5Foerster

with respect to an existing or proposedaccounting principle, standard, orprocedure

Provide a orum or discussionand analysis o emerging marketdevelopments and nancial regulatoryissues, and to resolve jurisdictional

disputes among members o the CouncilProvide an annual report and testimonybeore Congress regarding nancialstability

Recommend heightened prudentialstandards or nonbank nancialcompanies and large, interconnectedbank holding companies supervised bythe Federal Reserve

Recommend to primary nancial

regulatory agencies new or heightenedstandards and saeguards or activitiesthat increase risks o signicant liquidity,credit, or other problems spreadingamong bank holding companies,nonbank nancial companies, and U.S.nancial markets

Identiy systemically important nancialmarket utilities and payment, clearing,and settlement activities, and require

such utilities and activities to be subject

to standards established by the FederalReserve

Other

Creates the Oce o Financial Research,which will support the Council throughdata collection and research

Financial companies and nonbank nancial companies can appeal Council

requirement to implement stricterstandards

Council must conduct a study oneasibility, benets, costs, and structureo a contingent capital requirement ornonbank nancial companies

Council must make recommendationsto the Federal Reserve and other ederal

regulators regarding concentrationlimits, public disclosures, creditexposure, maintenance o long-termhybrid debt convertible to equity andgeneral nancial inormation reports

I the applicable agency chooses notto implement any recommendationprovided by the Council, it must providea report explaining its rationale


6/28

Morrison6Foerster

AgenciesandAgencyOve

rsightReform

The various government agencies regulatingthe nancial industry with their varying rulesand standards led to certain entities not being

regulated at all, with others subject to less

oversight than their peer nancial rms organizedunder dierent charters. The Dodd-Frank Actoverhauls the existing agency oversight system as

described below

Major Agency Changes

Creation o the Financial Stability

Oversight Council (Council)Creation o the Oce o FinancialResearch within the Treasury to supportthe Council

Creation o an independent Bureau oConsumer Financial Protection (Bureau)within Federal Reserve

Creation o the Oce o NationalInsurance within the Treasury

Creation o the Oce o Credit Rating

Agencies within the SEC

Major Changes in Agency Oversight

Federal Reserve will regulate thritholding companies and subsidiaries othrit holding companies, and will haveall rulemaking authority relating to thrit

holding companies; Federal Reserve willcontinue to regulate State member banks

The OCC will regulate national banks

and ederal thrits o all sizes, and willhave all rulemaking authority relating tothrits

The FDIC will regulate state thrits o allsizes

The OTS will be eliminated, all OTSunctions, powers, authorities, rights andduties will be transerred to the FederalReserve, the OCC, or the FDIC

The SEC will require registration o hedge unds that manage over $100

million as investment advisers; thresholdor investment advisers subject to ederalregulation to be raised rom $25 millionto $100 million



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

Other

Regulators will be required to implementregulations that prohibit banks,bank holding companies and certainnonbank nancial institutions romproprietary trading and investments andsponsorships o hedge unds and privateequity unds

Federal Reserve will have rule-making authority (and will act uponrecommendations o the Council)with respect to rules prohibiting

proprietary trading and investments andsponsorships o hedge unds and privateequity unds

Large complex companies will be

required to periodically submit livingwills to regulators in the event onancial distress

Federal Reserve will be subject to a one-time GAO audit o the Federal Reserveslending acilities


8/28

Morrison8Foerster

SecuritizationReform

The nal shape o securitization reorm isbeginning to gel. In addition to the changes

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

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

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

nancial institutions to retain more o the creditrisk rom securitizations and refect recent

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

certain o-balance sheet entities, revisions to bankcapital rules to refect FASBs accounting changes

and the enactment o the Hiring Incentives toRestore Employment Act, which imposes a 30%

withholding tax on oreign nancial institutionsincluding certain oshore securitization vehicles



Credit Risk Retention

5% to be retained by the securitizer;

however, i originator retains someamount o risk, only the remaining risk(up to 5% total) will be allocated tosecuritizer

Risk retention also to apply to CDOs,securities collateralized by CDOs andsimilar instruments

Risk retention types, orms andamounts or commercial mortgages tobe determined by regulators, including

permitting a third party that purchasesa rst-loss position at issuance andwho holds adequate nancial resourcesto back losses substituting or the riskretention requirement o the securitizer

Percentage retained can be loweredbased on underwriting standards used

An exemption or qualied residentialmortgages

Other exemptions will be available at

regulators discretionNo hedging or transer o risk

Creation o dierent asset classes, whichmay be subject to dierent regulations

Required Disclosures

Asset-level or data-level detail, includingdata with unique identiers relating to

loan brokers or originators, the natureand extent o the compensation othe broker or originator o the assetsbacking the security, and the amounto risk retention o the originator orsecuritizer o such assets

Fullled and unullled repurchaserequests across all trusts will beaggregated by the originator, so investorsmay identiy originators with clearunderwriting deciencies

Due diligence analysis must beperormed by securitizer and provided toinvestors

Representations and Warranties

Credit rating agencies must explain, inreports accompanying credit ratings,representations, warranties, andenorcement mechanisms availableto investors and how they dierrom representations, warranties andenorcement mechanisms in similar

issuancesOther

Regulations relating to credit riskretention requirements will becomeeective one year rom enactmentor residential mortgage assets, andwill become eective two years romenactment or all other asset classes

The major elements o securitization reorm are:


10/28

Morrison10Foerster

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

Act o 2010, will impose a comprehensive andar-reaching regulatory regime on derivatives

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

undertaken and mandate or permit signicantrulemaking by the Commodity Futures Trading

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

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

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

DerivativesRegu

lation


11/28


12/28

Morrison12Foerster

The Act requires the CFTC and SEC toprescribe a de minimis exception to beingdesignated as a swap dealer.

MajorSwapParticipant. A majorswap participant (MSP) is any personwho is not a swap dealer and:

Maintains a substantial position

(to be dened by the applicableregulators) in swaps or any majorswap category, excluding positionsheld or hedging or mitigatingcommercial risk and positionsmaintained by any employee benetplan or the primary purpose ohedging or mitigating any riskdirectly associated with the operationo the plan;

Whose outstanding swaps create

substantial counterparty exposurethat could have serious adverse eectson the nancial stability o the U.S.banking system or nancial markets;or

Is a nancial entity that is highlyleveraged relative to the amount ocapital that it holds, is not subjectto any Federal banking agencys

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

Certain captive nance aliates omanuacturers that use swaps to hedgecommercial risks relating to interest rateand FX exposures are excluded rom thedenition o major swap participant.

Clearing and Trading Requirements

MandatoryClearing. A swap must

be cleared i the applicable regulatordetermines that it is required to be clearedand a clearing organization accepts theswap or clearing.

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

category, type, or class o swaps.

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

CommercialEndUserException.

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

user.The term nancial entity includesswap dealers, MSPs, commoditypools, private unds (as dened in theInvestment Advisers Act o 1940),employee benet plans, and personspredominantly engaged in activitiesthat are in the business o bankingor in activities that are nancial innature, but excludes certain captivenance aliates. The Act directs

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

MandatoryTradeExecution. To theextent that a swap must be cleared, itmust be executed on an exchange or swapexecution acility, unless no exchange orswap execution makes the swap availableor trading.

Non-ECPs.

Persons who are not eligiblecontract participants (ECPs) mustalways enter into swaps via an exchange.

For swaps, the illegality applies to thenon-ECP.

For security-based swaps, the illegalityapplies to any person eecting thetransaction with or or the non-ECP.

Derivative

sRegula

tion(continued)



Regulation o Swap Dealers and MajorSwap Participants

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

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

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

To oset the greater risk o non-

cleared swaps, the capital and marginrequirements must help ensure thesaety and soundness o the swapdealers and MSPs and be appropriateor the risk associated with the non-cleared swaps held by those entities.

The Act permits the use o noncashcollateral and, or non-cleared swaps,requires swap dealers and MSPsto hold their counterparties initialmargin, upon request, in a segregated

account at an independent third partycustodian.

The Act does not provide anexemption to the margin requirementsor commercial end users, althoughSenators Dodd and Lincoln stated ina June 30, 2010 letter to ChairmenFrank and Peterson their view that theAct does not authorize the regulatorsto impose margin requirements on

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

BusinessConductStandards. Swapdealers and MSPs must conorm withbusiness conduct standards, including:

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

or conficts o interest that the swapdealer or MSP may have in connectionwith the swaps; and

Additional responsibilities with respectto special entities (i.e., States,municipalities, State and Federalagencies, pension plans, governmentalplans, and endowments):

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

duty to act in the best interests othe special entity; and

A swap dealer or an MSP thatoers or enters into a swap witha special entity must complywith any duty established bythe applicable regulator thatrequires the swap dealer or MSPto have a reasonable basis tobelieve that the special entity is

advised by a qualied independentrepresentative.

Miscellaneous

The Act increases eligibility requirementsor ECPs

The applicable regulators are authorized toestablish aggregate position limits and largetrader reporting requirements or swaps.

Swaps shall not be considered to beinsurance and may not be regulated as

insurance contracts under State law.The SEC is authorized to expand thebenecial ownership rules in sections 13 and16 o the 34 Act to security-based swaps.

Oers and sales o security-based swaps tonon-ECPs must be registered, notwithstandingsections 3 and 4 o the 33 Act.


14/28

Morrison14Foerster

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

did not understand how the secondary market

or such securities unctioned. Ponzi schemeswere exposed at a rapid pace and clients lost aithin those with custody o their securities and/or

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

Advisers Act to address certain custody issues.Congress also aims to increase investor protection

as a means o bolstering investor condence andbringing investors back to the capital markets

InvestorProt

ectionReform


15/28


16/28

Morrison16Foerster

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

to register with the SEC and submit reportsRecently proposed amendments to SEC rules

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

Liability

Eliminates the exemption provided by

Rule 436(g) under the 33 Act rom theconsent ling requirement or registrationstatements and potentially subjects CRAsto liability under Section 11 o the 33 Act

Duty to report violations o law toappropriate authorities

Enorcement and penalty provisions o the34 Act apply to CRA statements to sameextent as to registered public accountingrms or securities analysts

Modication to state o mindrequirement or private securities raud

actions against CRAs or money damages

Required Disclosures

Qualitative and quantitativemethodologies and assumptions used

Historical rating perormance datarequired over multiple years, including orratings that were withdrawn

SEC to issue rules requiring CRAs todisclose inormation on initial ratings and

subsequent changes; disclosures to becomparable across CRAs

SEC must require each CRA toaccompany publication o each ratingwith a prescribed orm that details,among other things, ratings methodologies

Prohibited Activities

SEC to promulgate rules separating

rating activities rom sales and marketingactivities

SEC may impose nes, including nes orailure to supervise

Each CRA must establish, maintain,enorce, and document an eectiveinternal control structure

CRAs must submit an annual report to theSEC, including a CRA internal controlsreport along with a CEO attestation

Governance

At least hal o the CRA board o directorsmust comprised o independent directors(no ewer than 2), with a portion o thedirectors to include users o ratings

Independence is based on the presence noconsulting, advisory or compensatory eeor status as an associated person o theCRA, and on not being disqualied rom

any deliberation involving a particularrating

Independent directors to serve or a xed,non-renewable term not to exceed 5 yearswith compensation not linked to thebusiness perormance o the CRA

The board o directors has specicallymandated oversight responsibilities

Credit

RatingA

gencyReform



with respect to policies and procedures ordetermining ratings, conficts o interest,internal controls and hiring and promotion

Confict o Interest

Compliance ocers cannot participate indetermining ratings or methodologies, or insales activities or setting o compensationlevels or certain employees

Compliance oce compensation must not belinked to nancial perormance o a CRA andmust be arranged to ensure independence othe compliance ocer

Compliance report required to be ledannually with the SEC

A one-year look-back requirement is imposedon any involvement o specied persons in the

ratings process, as well as required reportingo employment transitions or specied CRApersonnel

Procedures required or the receipt, retentionand treatment o complaints

SEC to promulgate additional regulations toprevent sales and marketing rom infuencingratings; SEC may suspend or revoke a CRAsregistration or violations

Oversight

Establishes SEC Oce o Credit Ratings;director o Oce reports to SECChairman

Establishes nes, penalties or CRAs;administers SEC rules applicable toCRAs

SEC will conduct annual exam o eachCRA; SEC to report on CRA exams

Other

Due diligence reports prepared by thirdparties or asset-backed securities mustbe disclosed and certied

SEC will issue rules regarding requisitetraining, experience and competence or

CRA analysts

SEC will issue rules regarding ratingsprocedures and methodologies

SEC rules will require that CRAsestablish, maintain and enorce policiesand procedures that dene and disclosethe meaning o any ratings symbol

Statutory reerences to ratings are

removed rom ederal statutes, andederal agencies will review reliance onreerences to ratings

SEC will conduct a study regardingindependence o CRAs

Additional studies will be required to beconducted, including studies regardingalternative business models, the creationo an independent proessional analystorganization, and the ratings process or

structured nance products


18/28



Prohibition on Proprietary Trading

There are important distinctions made

between the activities that may beconducted by banking entities and thosethat may be conducted by nonbanknancial companies supervised by theFederal Reserve.

Except or certain permitted activities,a banking entity cannot (1) engagein proprietary trading, or (2) acquire orretain any equity, partnership or otherownership interest in or sponsor a hedgeund or private equity und (collectivelyund activities).

A nonbank nancial company thatengages in proprietary trading or undactivities will be subject to additionalcapital requirements and quantitativelimits, to be established by rule. However,i a nonbank nancial company engagesin any permitted activities (i.e., anyo the activities that a banking entityis permitted to engage in), the capital

requirements or quantitative limits appliedto the nonbank nancial company orthose activities will be the same as thoseapplied to banking entities engaging insuch permitted activities.

Proprietary trading is dened as engagingas principal or the trading account othe banking entity or nonbank nancialcompany in any transaction to purchaseor sell, or otherwise acquire or dispose o,

any security, any derivative, any contract osale o a commodity or uture delivery, anyoption on any such security, derivative, orcontract, or any other security or nancialinstrument that the appropriate ederalagencies may determine.

Banking entities are bank holdingcompanies (BHCs), non-U.S. entities treatedas BHCs, insured depository institutions,

and aliates or subsidiaries o theoregoing.

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

De Minimis Investment

A banking entity may make and retain an

investment in a und that the banking entityorganizes and oers; provided, that, it seeksunaliated investors or the und; withinone year o a unds start date, the bankingentitys investments shall not exceed morethan 3% o the total ownership interests insuch und; and the aggregate o investmentsin all such unds does not exceed 3% o thebanking entitys Tier 1 capital.

Permitted Activities

The ollowing activities are permittedactivities:

transactions in U.S. government securities(including securities o the GSEs);

transactions in connection withunderwriting or market-making activities,to the extent designed not to exceed thereasonably expected near term demands oclients, customers or counterparties;

risk-mitigating hedging activities in

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

customer transactions;

SBIC investments;

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


20/28

Morrison20Foerster

the purchase or sale o securities andderivatives by a regulated insurancecompany engaged in the insurancebusiness, subject to state insuranceregulation and ederal saety andsoundness review;

organizing and oering a private equity or

hedge und, i the banking entity:provides bona de trust, duciary, orinvestment advisory services;

provides trust or related servicesand oers interests in the und onlyin connection with providing suchservices only to bank customers;

does not acquire or retain anequity interest, partnership interest,or other ownership interest in

the unds except or de minimisinvestments (see above);

observes the restrictions on aliatetransactions;

does not, directly or indirectly,guarantee or assume, or otherwiseinsure, the obligations orperormance o the und;

does not share a name orderivation o a name or othermarketing with the und;

does not permit any director oremployee o the banking entity totake or retain an equity interest,partnership or other ownershipinterest in the und, except orany director or employee whois directly engaged in providinginvestment advisory services to theund; and

discloses to prospective and actualund investors that losses sustainedby the und are not borne by thebanking entity;

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

the acquisition or retention o anownership interest or the sponsorship oa und by a banking entity solely outsideo the U.S. i interests in the und are notoered or sold to a U.S. resident and thebanking entity is not directly or indirectlycontrolled by a banking entity organized

in the U.S.; andall other activities deemed appropriateby the applicable oversight agencies thatwould promote the saety and soundnesso the banking entity.

No activity may be deemed a permittedactivity i it would (1) result in a materialconfict o interest or the banking entity;(2) result in a material exposure or thebanking entity to high-risk assets or high-

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

Permitted Services

A banking entity or a nonbank nancialcompany may provide prime brokerageservices to a sponsored und i the provisiono such services complies with otherapplicable restrictions o the regulationsand the CEO (or equivalent ocer) o the

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

Capital Requirements

Oversight agencies will adopt additionalcapital requirements and quantitative limits

Restrictions on Aliate Transactions

A banking entity that serves as aninvestment adviser or sponsor to a und or

that organizes and oers interests in a undmay not enter into covered transactions(as dened under Section 23A o theFederal Reserve Act) with the und and thatbanking entity also shall be subject to therestrictions o Section 23B o the FederalReserve Act in respect o transactions withthe und.T

heVo

lckerRu

leProvis

ions(con

tinued)



Required Study

Within six months o enactment, theCouncil will conduct a study and makerecommendations regarding implementationo these measures. Within nine months ocompletion o the study, the appropriateagencies will consider the ndings and

adopt rules to implement these measures.Phase-In Period

Generally, these provisions shall take eecton the earlier o: 12 months ater the dateo the issuance o the nal rules, or twoyears ater the date o enactment o theDodd-Frank Act.

Bank entities and nonbank nancialcompanies will have two years ater theeective date (or two years ater the dateon which the entity becomes subject toFederal Reserve supervision as a bankentity or a nonbank nancial company) tobring their activities into compliance. Thisphase-in period may be extended by theFederal Reserve or one year at a time, withextensions not to exceed an aggregate othree years. However, the Federal Reservemay extend the period in order to permitcompliance with a contractual obligation

that was in eect on May 1, 2010.Confict o Interest Provisions (MerkleyProvisions)

An underwriter, placement agent, initialpurchaser, sponsor (or any aliate) oan asset-backed security (as denedunder Section 3 o the 34 Act, but, or

these purposes, including synthetic asset-backed securities) shall not engage in anytransaction that would involve or result inany material confict o interest with respectto any investor in a transaction arising outo such aliate. This prohibition will applyor a one-year period that begins on the

oering date.Within 270 days o enactment o the Dodd-Frank Act, the SEC shall promulgate rulesto implement this prohibition.

The prohibition shall be subject toexceptions or the ollowing:

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

to reduce specic risk to the nancialintermediary associated with positionsarising in connection with the asset-backed security oering; and

P urchases or sales o asset-backedsecurities made pursuant to andconsistent with commitments by thenancial intermediary to provideliquidity or the asset-backed security.


22/28

Morrison22Foerster

Compensationan

dCorporateGover

nance Lingering concerns with executive compensation

and corporate governance practices at publiccompanies (including companies outside o the

nancial services industry) culminated in specic

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

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

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

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



Say-On-Pay

Companies must include a resolution intheir proxy statements asking shareholdersto approve, in a non-binding vote, thecompensation o their named executiveocers

A separate resolution will be required to

determine whether the Say-on-Pay votetakes place every one, two, or three years

To the extent that any goldenparachute-related compensation is notapproved as part o a Say-on-Pay vote, aseparate non-binding vote will be requiredto approve that compensation in theevent o a merger or similar extraordinarytransaction

The proxy statement or a meeting

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

Compensation Committee and AdviserIndependence

Stock exchanges must adopt listingstandards providing that the memberso the compensation committee meetenhanced independence standardscomparable (but not identical) to whatis required or audit committee membersunder the Sarbanes-Oxley Act

New listing standards will prescribe thata compensation committee may onlyselect compensation consultants, legalcounsel, or other advisers ater taking intoconsideration independence standardsestablished by the SEC

Enhanced disclosure is required regardingthe use o compensation consultants andany conficts o interest

Enhanced Compensation Disclosure

Disclosure is required o the relationshipo the compensation actually paid to

executives versus the companys nancialperormance

Companies must disclose the medianannual total compensation o allemployees (except the CEO), theannual total compensation o the CEO,and the ratio o the median employee

total compensation to the CEO totalcompensation

Disclosure is required o whether anyemployee or director (or designee o suchpersons) is permitted to purchase nancialinstruments designed to hedge their equitysecurities

Clawbacks

Stock exchanges must adopt standardsrequiring that listed companies developand implement policies providing or therecoupment o compensation in the evento an accounting restatement

Enhanced disclosure will be required oa companys policy on incentive-basedcompensation that is based on nancialinormation required to be reported underthe securities laws

Other Governance Provisions

The Act authorizes the SEC to promulgate

rules allowing certain shareholdersto include director nominees in thecompanys proxy materials, but does notprescribe specic standards or those rules

Disclosure is required o the reasons whythe company has chosen to have oneperson serve as Chairman and CEO, or tohave dierent individuals serve in thoseroles

Brokers are not permitted to use

discretionary authority to vote proxiesin connection with election o directors,executive compensation, or othersignicant matters as determined by theSEC


24/28



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

Eect on Hybrids

The application o the prompt correctiveaction provisions or insured depositoryinstitutions to bank holding companiesno longer permits the inclusion o trustpreerred securities or other hybridsecurities in the numerator o Tier 1,subject to certain exceptions and phase-inperiods as discussed below

Mutual holding companies andthrit and bank holding companieswith less than $15 billion in totalconsolidated assets are not subject tothis prohibition

Intermediate U.S. holding companieso oreign banks have a ve-yearphase-in period

For newly issued securities (thoseissued ater May 19, 2010), therequirement is retroactively eective

For bank holding companies andsystemically important nonbanknancial companies, hybrids issuedprior to May 19, 2010 will be subjectto a phase in rom January 2013 toJanuary 2016

Required Studies

There are a number o studiesrequired that impact regulatory capitalrequirements

Hybrids: Within 18 months oenactment, the GAO must conducta study on the use o hybrid

capital instruments and makerecommendations or legislative orregulatory actions regarding hybrids

Contingent capital: within two yearso enactment, the Council must presentthe results o a study on contingentcapital that evaluates, among otherthings, the eect on saety andsoundness o a contingent capitalrequirement, the characteristics and

amounts o contingent capital thatshould be required and the standardsor triggering such requirements;ollowing this study, the Council mayrecommend to the Federal Reservecertain minimum contingent capitalrequirements


26/28

Morrison26Foerster

Conclusion

In short

There will be much more to come

once the studies mandated by the

Dodd-Frank Act are completed.

There also is every reason to believe

that the rule-making process will

be a long and winding road. We

will provide regular updates on our

dedicated regulatory reform webpage

http://www.mofo.com/resources/regulatory-reform/.


28/28

Summary of the The Dodd-Frank Act

Documents