Repeal of Dodd-Frank?

Most compliance professionals have trepidation about parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act. I would bet that most of the Representatives and Senators who voted for it (and against it) did not read the whole law and do not understand the changes being made.

But should it be repealed in it’s entirety?

Since the Republicans have taken over the House of Representatives there is growing backlash against the law. Take a look at the new Republican-authored House Committee on Financial Services website. Here are the headline topics:

  • Collateral Damage – the real impact of the Democrat’s bailout bid
  • Financial Regulatory Reform
  • Fannie and Freddie Reform
  • What’s NOT in the Dod-Frank?
  • What’s Really in Dodd-Frank?

Along with the changes to the website comes a H.R. 87: To repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act from Representative Bachman:

“I’m pleased to offer a full repeal of the job-killing Dodd-Frank financial regulatory bill. Dodd-Frank grossly expanded the federal government beyond its jurisdictional boundaries. It gave Washington bureaucrats the power to interpret and enforce the legislation with little oversight.

“Dodd-Frank also failed to address the taxpayer-funded liabilities of Fannie Mae and Freddie Mac. Real financial regulatory reform must deal with these lenders who were a leading cause of our economic recession.”

Speaking personally, I don’t like Dodd-Frank. But repealing it would be worse. I think needs the SEC needs more funding and a longer time frame to promulgate the new regulations. The SEC normal produces just a handful of new rules each year. Dodd-Frank tasks them with dozens that need to be in place in the next few months.

As for Fannie Fae and Freddie Mac being the cause of the crisis, I think Representative Bachman should take the time to read All the Devils Are Here by Bethany McLean and Joe Nocera. (I’m halfway through it.) Fannie and Freddie played a role, but lots of things went wrong to get us into the trouble of 2008.

Putting companies into a limbo of whether they need to change or not is bad. I may not like the law, but uncertainty is worse.

On the other hand, I think the repeal is unlikely. It’s merely a political football to throw around.

Sources:

Compliance and Foreclosures in Massachusetts

Why is the foreclosure machinery of our nation’s largest banks grinding to a halt? Failure to follow the legal rules. In other words: Compliance Failure.

The latest comes from my home state of Massachusetts. The state’s highest court rulet that two foreclosures were invalid because they were not properly assigned to the foreclosing party.

The theory of simply trading mortgage notes ran into the reality of real estate law. The foreclosure process and laws are different in every state. There are 23 states that require approval of a court to get a foreclosure order. These have been labeled the “judicial states.” The remaining states do not require court action. In non-judicial states, banks aren’t required to submit anything to the court until they are sued by a homeowner seeking to stop a foreclosure.

These homeowners sued because the assignments to the foreclosing lender were missing at the time of foreclosure. The financial institutions finally sorted out the mess and executed the assignments after the foreclosure sale.

We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure. As a result, they did not demonstrate that the foreclosure sales were valid to convey title to the subject properties, and their requests for a declaration of clear title were properly denied.

The decision does not seem to extinguish the mortgage debt, it merely invalidates the foreclosure process. There is some doctrine that the mortgage follows the note. That seems to be brushed aside when it comes to the foreclosure process.

I don’t think it’s the lenders who are the ultimately the losers in this case. Now that the assignments are in order, they can go back and re-start the foreclosure process. For sure they are losing money. But it’s not the nuclear effect of having to walk with empty hands.

The group with the problem are the people who bought foreclosed property from lenders. If an assignment is missing, the foreclosure is improper and the lender never obtained good title to the property. That means there was no transfer to the purchaser. If that person did not purchase an owner’s policy of title insurance, they are in trouble. At best, they will have trouble refinancing the home and selling at home. At worst, the original property owner is going to come back for the property.

Sources:

Image: Sign Of The Times – Foreclosure by Jeff Turner

Compliance Bits and Pieces for January 7

Here are some recent compliance-related stories that I found interesting:

Dodd-Frank: Too Many Regulations Too Fast? by Thomas Gorman in SEC Actions

The average annual rate of rulemaking per year prior to Dodd-Frank for the SEC was 9.5, the CFTC 5.5, the FDIC 8 and the Federal Reserve 4.5 Post Dodd-Frank the average for the SEC is 59, the CFTC 37, the FDIC 6, and the Federal Reserve 17.

U.S Claims Some of Scott Rothstein’s Choicest Trinkets; Creditors Moan

Federal forfeiture laws allowed the government to seize the proceeds of Rothstein’s $1.2 billion Ponzi scheme, and the government can do what it likes with the proceeds, keeping some—or a lot—for itself, according to WSJ, which notes that the law does not require that one cent of seized assets be set aside for Rothstein’s legitimate business creditors.

The First Amendment, the securities laws and hedge funds by Larry Ribstein in Truth on the Market

I have been writing for some time about the First Amendment and the securities laws. In a nutshell, the formerly inviolate notion that the securities laws are a First-Amendment-free zone has always been constitutionally questionable. The questions multiply with the expansion of the securities laws. The Supreme Court’s recent broad endorsement of the application of the First Amendment to corporate speech in Citizens United signals that we may finally get some answers. The bottom line is that securities regulation that burdens the publication of truthful speech is subject to the First Amendment.

Massachusetts Attorney General Reviews 2010 Data Breach and Data Security Regulations Compliance in Littler’s Workplace Privacy Counsel

With the first anniversary of the Massachusetts Data Security Regulations, 201 CMR 17 (pdf)(“Regulations”), coming in March, the International Association of Privacy Professionals (IAPP) recently hosted a panel discussion providing direct access to the Massachusetts Attorney General’s Office and the Office of Consumer Affairs and Business Regulation to discuss their investigations to date and their current approach to enforcement. Panelists included Scott Shafer, Chief of the Consumer Protection Division, Massachusetts Attorney General’s Office; Shannon Choy-Seymour, Assistant Attorney General, Consumer Protection Division, Massachusetts Attorney General’s Office; Jason Egan, Deputy General Counsel, Massachusetts Office of Consumer Affairs and Business Regulation; and Lam Nguyen, Director (Digital Forensics), Stroz Friedberg LLP.

Should Workplaces Ban Lotteries? by Chris MacDonald in The Business Ethics Blog

Lots of offices feature “pools” of various kinds, with groups of employees joining together collaboratively or competitively to speculate on, e.g., the outcome of the NFL playoffs. Very likely lots of managers regard it all as harmless fun, boosting morale by giving employees a break from the tedium of their cubicle farms. But a lottery pool is unlike, say, a hockey or football pool. In a hockey or football pool, there are winners and losers, but typically the dollar amounts are pretty small. But when employees band together to buy lottery tickets, the possibility is there for all hell to break loose.

Facebook, Capital and Liquidity

There have been many stories written about the Goldman Sachs investment in Facebook. On one hand, there is the chatter about the investment placing the valuation at $50 billion. On the other, there hand there is the talk about how this affects a possible IPO by Facebook.

There are two main reasons for an public offering of stock: liquidity and capital.

If you need capital, a public offering of common stock is merely one of many ways to raise capital. The benefit of this option is that the capital does not need to be repaid. A bank loan, a bond offering, venture capital or private capital will generally need to be repaid at some point. Each source of capital has a price and repayment terms that you need to align with the company’s needs and business plan.

It sounds like Facebook has ready access to capital in many forms. So an initial public offering may not be the best or the cheapest source of capital.

The liquidity of public stock is useful for rewarding employees and cashing out earlier sources of capital. Employee stock is great, but in a private company is very illiquid. It does you very little good to be a millionaire on paper if you can’t access the wealth. Early round investors, like venture capital funds, want to be cashed out at some point. They need to return capital to their investors. It sounds like some of the private trading of Facebook stock is being done by employees and early investors.

The third reason for a public offering stock was the reason faced by Google. Once you have more than 499 investors, you need to start making reports public. So you may as well get the benefits of liquidity in the stock.

The cash from a public offering does not need to repaid, but there are costs to the capital. That means complying with Sarbanes-Oxley. The CEO and CFO has potential criminal liability for false reporting. The board of directors will now need to include independent directors. The company will be subject to shareholder lawsuits. There are lots of costs.

To me it sounds like Facebook and Goldman have come up with an ingenious solution to the address the capital needs for Facebook and to avoid a public offering of stock. I assume the Goldman investment and its new fund will be used to provide some capital for expansion and growth. I also suspect that some of it will be used to cash out early investors, purchase employee stock, and repurchase stock that has been privately traded. Gobbling up the stock would be an opportunity to keep the number of investors well below the 499 trigger point. Early investors may take their money and run.

Assuming Goldman can provide $2 billion and charge its investors a 4% fee for investing, they have already made $80 million on their $450 million investment.

Sources:

The SEC, Funding, and Rulemaking

There is turmoil in Congress as Republicans take control of the House of Representatives. One of their targets seems to be implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

It’s probably too late to repeal it and too early to start amending it. Too much corporate machinery has been put in place to start changing the statute at this point. It looks like Congress is going to use its control of spending to impede implementation and enforcement.

The SEC has asked for more funding and submitted a budget request of $1.258 billion for fiscal 2011. That was up from the previous year’s $1.118 billion budget. SEC Chairman Mary Schapiro said the agency would need to hire an additional 800 people to meet its expanded duties under Dodd-Frank.

Clearly, SEC will be stretched thin to deal with rule-making, enforcement, and examination if they are starved for budget dollars. More dollars means more staff and more technology to deal with the workload.

We have already seen that the SEC has missed its proposed deadlines in its rulemaking agenda and others have been explicitly delayed because of budget uncertainty.The most high-profile stalled effort is the proposed new Whistleblower office. Dodd-Frank imposed a heavy rule-making agenda on the SEC. They are likely to continue missing deadlines without the manpower and budget.

For corporate compliance, that means uncertainty about how Dodd-Frank will be implemented. If you are in a venture capital firm, you are wondering if you will have to register with the SEC as an investment adviser. There is proposed rule with the definition. There is a proposed rule with what reporting the venture capital firm will need to make. But you don’t know exactly where the definitions and rules will end up.

If you are a private fund adviser, you know you will need to file a Form ADV. The SEC has proposed a new form. It’s too early to start filling it out, because it may change. They will still need to change the online registration system to address whatever the final form will be.

We are now in 2011. That July 21, 2011 compliance deadline is getting closer and closer, but the SEC is falling further and further behind.

Sources:

Private Equity Portfolio Companies and Bribery Charges

The U.S. is investigating Allianz SE, for possible bribery by a German printing press company in which it holds a majority stake according to a story by Joe Palazzolo in WSJ.com’s Corruption Currents.

The Foreign Corrupt Practices Act bars US companies from paying bribes to foreign officials to keep or obtain business. The SEC claims jurisdiction over Allianz under the FCPA because it was listed on the New York Stock Exchange until October 2009.

FCPA investigations are a dime a dozen, so I didn’t pay much attention to this one a first. But then I noticed something different about this one. The company accused of bribery is Manroland AG a private equity portfolio company of Allianz.

This raises the specter that federal regulators are looking at the private equity industry as the next area for increased enforcement under the FCPA. At least, Tom Fox raises that possibility.

The additional FCPA challenge in the private equity industry is what level of control and ownership will be required to pass the liability up to the parent. Past actions have shown that when you purchase a company, you purchase the FCPA liabilities. Will other forms of acquisitions continue FCPA liability and pass it up the ownership chain? What if a transaction is structured as a purchase of a company’s assets instead of the ownership of the company? That traditionally severs most liabilities. What if ownership is just a minority interest? How much of a say over management will trigger FCPA liability being passed to a minority owner? One board seat? A majority of board seats?

Sources:

God Says No More Money Laundering

I expect that we will see a see standard in anti-money laundering programs.

Pope Benedict XVI committed the Vatican to the fight against money laundering, counterfeiting and the financing of terrorism. The headquarters of the Roman Catholic Church will now meet international standards of financial transparency. He has established a set of internal regulations which will ensure that the Vatican’s bank, the Institute for Religious Works, will adhere to regulations and cooperate with foreign authorities. The decree creates an independent Vatican watchdog – the Financial Information Authority – which will be tasked with ensuring that all financial transactions comply with internationally accepted norms of the Financial Action Task Force.

In September, Italy’s financial police seized 23 million euros from the Institute for Religious Works after the financial intelligence office at the Bank of Italy noticed two operations by the bank that it deemed suspicious. The move followed claims that it failed to disclose either the sender or recipient involved in a huge transfer of funds.

If a little bit of the papal infallibility rubs off on the Vatican’s anti-money laundering, you would expect it to work.

Sources:

Happy New Year

New Year’s Eve is generally a time to reflect on the past and look forward to the future. For many it also involves an excessive amount of alcohol, an expensive dinner in a crowded restaurant, or a long wait for Chinese food delivery.

I’m sure there is a compliance story in there somewhere. But I’m just going to enjoy taking some time off. Enjoy the end of your year and the start of the next.

“Free” and the Black Swan

I’ve talked in the past about the Black Swan by Taleb and at other times about Free by Chris Anderson. I think I missed a connection between the two.

Taleb points out that the Black Swan event is only a surprise to one side. The turkey thinks life is great living on the farm. Until Thanksgiving comes around. Thanksgiving may be a surprise to the turkey, but it’s not a surprise to the farmer.

In looking at the Free model, is there a Black Swan connection? I think this cartoon puts it nicely.

The “Free” Model from Geek and Poke

Hedge Fund Hotels and Compliance

The Massachusetts Secretary of the Commonwealth has been investigating hedge fund hotels. Start-up hedge fund managers receive reduced-rent office space in return for send their trading business to the landlord.

UBS AG has agreed to pay $100,000 to settle charges that it failed to disclose the relationship. Galvin charged there was a conflict that harmed investors who did not know the hedge funds were receiving beneficial treatment in return for sending the bulk of their business to UBS.

To me it seems more like a disclosure problem with the hedge funds, receiving reduced rent in exchange for the sending business to UBS. The Massachusetts regulator found fault with UBS for failing to enforce a requirement that its hedge fund hotel clients disclose the arrangements to their investors.

That’s a tough one to swallow from a compliance perspective.

Sources: