Tag: Dodd-Frank Wall Street Reform and Consumer Protection Act

The SEC’s Busy Rule-Making Agenda

In many instances, the Dodd-Frank Wall Street Reform and Consumer Protection Act merely set a framework for financial reform and left much of the heavy lifting to the financial regulatory agencies. The SEC published their agenda for the implementation of Dodd-Frank.

It is a long list. Compliance leaders are going to very busy keeping track of the new regulations. The hard part is then figuring out how to implement them and get in compliance by the July 21, 2011 deadline set by the law.

Here is what the SEC wants to address in the next three months:

October – December 2010 (planned)

Diversity

  • §342: Establish new Office of Women and Minority Inclusion

Oversight of Investment Advisers

  • §§404 and 406: Propose (jointly with the CFTC for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk
  • §§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds
  • §409: Propose rules defining “family office”
  • §410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act
  • §418: Propose rules to adjust the threshold for “qualified client”

Exempt Offerings

  • §413: Propose rules to revise the “accredited investor” standard
  • §926: Propose rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated

Derivatives

  • §712: Propose rules, jointly with the CFTC, regarding “mixed swaps”
  • §712: Propose rules, jointly with the CFTC, further defining key terms used in the Act
  • §712: Propose rules, jointly with the CFTC, concerning record-keeping by swap data repositories with respect to security-based swap agreements
  • §712: Propose rules, jointly with the CFTC, concerning record-keeping by swap dealers and major swap participants with respect to security-based swap agreements
  • §763: Propose anti-fraud rules for security-based swaps
  • §§763 and 766: Propose rules on trade reporting, data elements, and real-time public reporting for security-based swaps
  • §763: Propose rules regarding the registration and regulation of security-based swap data repositories
  • §763: Propose rules regarding mandatory clearing of security-based swaps
  • §763: Propose rules regarding the end-user exception to mandatory clearing of security-based swaps
  • §763: Propose rules for clearing agencies for security-based swaps
  • §763: Propose rules regarding the registration and regulation of security-based swap execution facilities
  • §764: Propose rules regarding the registration and regulation of security-based swap dealers and major security-based swap participants
  • §765: Propose rules regarding conflicts of interest for clearing agencies, execution facilities, and exchanges involved in security-based swaps
  • §766: Adopt interim final rule for reporting of security-based swaps entered into before the enactment of the Act

Clearing & Settlement

  • §805: Propose rules regarding standards for clearing agencies designated as systemically important
  • §806: Propose rules regarding the process to be used by designated clearing agencies to provide the SEC notice of certain proposed changes

Investor Advocate

  • §915: Establish new Office of the Investor Advocate; appoint Investor Advocate

Market Oversight

  • §916: Adopt streamlined procedural rules regarding filings by self-regulatory organizations
  • §929W: Propose revisions to rules regarding due diligence for the delivery of dividends, interest and other valuable property to missing securities holders
  • §956: Propose rules (jointly with other regulators) regarding disclosure of, and prohibitions of certain, executive compensation structures and arrangements

Enforcement

  • §922: Propose rules to implement a Whistleblower Incentives & Protection Program
  • §922: Report to Congress on Whistleblower Program
  • §924: Establish Whistleblower Office

Credit Ratings

  • §932: Establish new Office of Credit Ratings
  • §939B: Revise Regulation FD to remove exemption for entities whose primary business is the issuance of credit ratings

Asset-Backed Securities

  • §621: Propose rules prohibiting material conflicts of interests between certain parties involved in asset-backed securities and investors in the transaction
  • §941(c)(1): Report by the Federal Reserve Board, after consulting with the SEC and others, regarding the impact on each class of asset-backed securities on risk retention requirements
  • §941: Propose rules (jointly with others) regarding risk retention by securitizers of asset-backed securities, and implementing the exemption of qualified residential mortgages from this prohibition
  • §943: Propose rules regarding the use of representations and warranties in the asset-backed securities market
  • §945: Propose rules regarding asset-backed securities’ issuers’ responsibilities to conduct and disclose a review of the assets

Corporate Governance & Disclosure

  • §951: Propose rules regarding shareholder votes on executive compensation, golden parachutes
  • §951: Propose rules regarding disclosure by investment advisers of votes on executive compensation
  • §952: Propose exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; propose disclosure rules regarding compensation consultant conflicts
  • §1502: Propose rules regarding disclosure related to “conflict minerals”
  • §1503: Propose rules regarding disclosure of mine safety information
  • §1504: Propose rules regarding disclosure by resource extraction issuers

Administrative/Internal

  • §961: Report and certification to Congress regarding internal supervisory controls
  • §963: Public report on management’s assessment of the effectiveness of the agency’s internal controls over financial reporting
  • §967: Award Independent Consultant Contract

Municipal Securities

  • §975: Propose permanent rules for the registration of municipal advisors
  • §979: Establish new Office of Municipal Securities

Auditing

  • §989G: Request for public comment related to study regarding reducing the costs to smaller issuers (with market capitalization between $75 million and $250 million) for complying with §404(b) of the Sarbanes-Oxley Act of 2002, while maintaining investor protections for such companies

Hopefully there won’t be a sacrifice of quality giving that they need to deal with such a large quantity of new regulations.

Sources:

Criminal Provisions under Dodd-Frank

handcuffs

When thinking designing compliance programs, I pay extra attention to the issues that can result in jail time. It’s one thing to pay a fine, it’s a much bigger problem when you take someone’s freedom away.

The Dodd-Frank Wall Street Reform & Consumer Protection Act has added several new federal criminal offenses. The National Association of Criminal Defense Lawyers has compiled the two dozen provisions in a handy guide: Criminal Provisions in HR 4173 (list of the criminal provisions in Dodd-Frank Wall Street Reform & Consumer Protection Act).

Most of these new opportunities to earn a shiny pair of bracelets are related to the new regulatory regime of swaps.

The First Attack on the Accredited Investor Standard

Many of the provisions in the merely provide for future regulatory framework. That it is in part true for the changing definition of “accredited investor” under the Securities Act. The other part is that the definition changed once President Obama signed the bill into law ten days ago.

The definition of accredited investor now excludes the value of the primary residence from the calculation of net worth. Angel investors who poured too much of their wealth into a new swimming pool and cabana may get excluded from future private placements.

The SEC has also shown that it intends to be aggressive in setting the new accredited investor definition through the rule-making called for in Section 413 of Dodd-Frank. Last week, as part of their regular Compliance and Disclosure Interpretations the SEC gave an opinion on valuing the primary residence.

Question 179.01

Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act. However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. When determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth. [July 23, 2010]

So you get no benefit to your net worth calculation for your home. Even worse, if you are underwater on your home then that excess debt is eating into your net worth calculation.

I think it’s easy to argue with this interpretation. By excluding “value” you can argue that it should exclude positive value as well as negative value. You could also argue that in some states (and some loan documents) the mortgage is non-recourse so the excess of debt over the value of the home should be excluded.

You can make those arguments when the SEC begins its rule-making to create a new definition for “accredited investor.” For now, you need to live by this interpretation while you are privately raising capital.

I expect the SEC is going to continue to be aggressive in establishing the new standards. As I said early this month:

Looking into my crystal ball, I expect the SEC to adjust the income standards based on inflation. That would put them at around $459,000 if single and $688,000 if married. I would also expect the standard to include some sort investment expertise and knowledge standard. Having a big pile of cash or a big paycheck will likely no longer be the only standard.  At least that’s my guess.

Now you will need a bigger pile of cash if your home mortgage is underwater.

Sources:

Now It’s the Law

President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act at the Ronald Reagan Building today. The clock starts ticking on the compliance and rule-making deadlines.

“The fact is, the financial industry is central to our nation’s ability to grow, prosper, compete, and innovate. There are a lot of banks that understand and fulfill this vital role, and a lot of bankers who want to do right by their customers. Well, this reform will help foster innovation, not hamper it. It is designed to make sure that everyone follows the same set of rules, so that firms compete on price and quality, not tricks and traps. It demands accountability and responsibility from everyone. It provides certainty to everybody from bankers to farmers to business owners. And unless your business model depends on cutting corners or bilking your customers, you have nothing to fear from this reform.” – excerpt from the president’s speech

The President was joined on the stage by two non-politicians:

Andrew Giordano is a retired Vietnam veteran from Locust Point, Maryland who the President met last year when he participated in a roundtable to discuss the outdated rules regulating the financial sector. Mr. Giordano was saddled with hundreds of dollars in overdraft fees on his veteran’s account because his bank had automatically enrolled him in “overdraft” protection that he never asked for. The new Consumer Protection Bureau will enforce new rules on overdraft programs to make sure that consumers like Mr. Giordano get a real choice and are not unknowingly charged unnecessary fees.

Robin Fox is a 7th grade science teacher from Rome, Georgia who sent an letter to the President in early August because her credit card company retroactively increased the rate on her existing credit card balance from 10.90% to 17.90%, even though she paid her account on time. The increase has been a burden on her family at an already difficult time, after her husband’s landscaping business dried up due to the financial crisis. The new Consumer Protection Bureau will enforce the Credit CARD Act of 2009, which bans arbitrary rate hikes on existing balances and other unfair practices by credit card companies.

The politicians on the stage:

  • Vice President Biden
  • Secretary Timothy Geithner
  • Chairman Chris Dodd, D-CT
  • Chairman Barney Frank, D-MA
  • Speaker Nancy Pelosi, D-CA
  • Senator Harry Reid, D-NV
  • Senator Blanche Lincoln, D-AR
  • Representative Collin Peterson, D-MN
  • Representative Steny Hoyer, D-MD
  • Representative Paul Kanjorski, D-PA
  • Representative Maxine Waters, D-CA
  • Representative Mel Watt, D-NC
  • Representative Luis Gutierrez, D-IL
  • Representative Gregory Meeks, D-NY
  • Representative Dennis Moore, D-KS
  • Senator Tim Johnson, D-SD
  • Senator Jack Reed, D-RI

I assume everyone got pens.

Sources:

The Changing Standard for an Accredited Investor

As financial reform has made its way through Congress there have been several proposed changes to the standard of what it takes to be an accredited investor.

In 1982, the SEC prescribed the standard in Rule 501 of Regulation D:

5. Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;

6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

The Senate version of the bill would have increased both amounts. If you use the CPI index, the amounts would more than double.

Although the bill has not passed yet, but it looks like the accredited investor standard is going to change. Section 413 of the bill is Adjusting the Accredited Investor Standard.

The net worth standard will stay at $1 million for at least the next four years, but the value of the primary residence will be excluded from net worth. Otherwise the SEC will be tasked with a review of the definition of “accredited investor” and has a clean slate to develop its own definition. The SEC can revisit the definition every four years. The only standard is that the definition be “appropriate for the protection of investors, in the public interest, and in light of the economy.”

Looking into my crystal ball, I expect the SEC to adjust the income standards based on inflation. That would put them at around $459,000 if single and $688,000 if married. I would also expect the standard to include some sort investment expertise and knowledge standard. Having a big pile of cash or a big paycheck will likely no longer be the only standard.  At least that’s my guess.

Sources:

Updated pdf file with text of the Private Fund Investment Advisers Registration Act of 2010

Image: three horsemen of the apocalypse, greenspan, et al by daveeza

Should Private Funds Have more than $10 Billion?

The current draft of the Dodd-Frank Wall Street Reform and Consumer Protection Act has a surprise in it for big hedge funds. By “surprise” I mean tax.

Title XVI: Financial Crisis Special Assessment has a $19 billion fee ready to be assessed against financial companies institutions with more than $50 billion in assets and hedge funds with more than $10 billion under management. This $19 billion in “fees” is being assessed to support the new government initiatives in the financial reform legislation.

Section 1601(f)(2) leaves up to the new Financial Stability Oversight Council to define a hedge fund (in consultation with the SEC). The amount owed by any particular hedge fund manager will depend on a matrix of contributing factors. Section Section 1601(g) lays out thirteen factors the Council will need to take into account.

Before you start handing money back to limited partners to get under the $10 billion threshold you may want to wait for the legislative process to continue. Senator Brown of Massachusetts is opposed to new taxes and is threatening to withhold his vote. (I didn’t vote for him.) With the death of Senator Byrd, the Democrats need to pull in more Republican votes to get the financial reform bill passed in the Senate.

Update: The Boston Globe is reporting that the $19 billion tax has been removed from the bill: Brown’s Threat Gets Bank Tax Removed.

Sources:

Image of Money series 2 is by Mokra

Final Text of the Private Fund Investment Advisers Registration Act of 2010

There is a lot happening in the Dodd-Frank Wall Street Reform and Consumer Protection Act. (Yes, that appears to be the agreed upon name of the financial reform bill.)

I’m most interested in its Title IV: Private Fund Investment Advisers Registration Act of 2010(.pdf).

The act will remove the current exemption from SEC registration for “small” investment advisers. If you have more than $30 million under management and fewer than 15 clients, you were exempt from registration with SEC under section 203(b)(3).

If the bill is enacted, that exemption will be removed and private fund managers will have to register. If the manager has more than $150 million under management they will register with SEC.

The final text of the Private Fund Investment Advisers Registration Act of 2010has been released.

The Senate-House Conference Committee has released all 2319 pages of the the final text of its conference report: Dodd-Frank Conference Report. I’ll get to the rest of it at some point.

As of this morning, it sounds like the bill is still short of the votes necessary to get it passed in the Senate. One of my Senators, Scott Brown, is unhappy with the new tax imposed by the too-big-to-fail regime. He would be vote 41 and could prevent a filibuster from stopping the bill from a final vote in the Senate.

Sources:

  • Conference Report on Private Fund Investment Advisers Registration Act of 2010.
  • Dodd-Frank Wall Street Reform and Consumer Protection Act conference report and votes from the House Financial Services Committee

Updated pdf file with text of the Private Fund Investment Advisers Registration Act of 2010