Understanding the New Financial Reform Legislation: The Dodd-Frank Wall Street Reform and Consumer Protection Act July 2010 THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT For more information about the matters raised in this Legal Update, please contact your regular Mayer Brown contact or one of the following: Scott A. Anenberg Charles M. Horn +1 202 263 3303 +1 202 263 3219 [email protected] [email protected] Michael R. Butowsky Jerome J. Roche +1 212 506 2512 +1 202 263 3773 [email protected] [email protected] Joshua Cohn David R. Sahr +1 212 506 2539 +1 212 506 2540 [email protected] [email protected] Thomas J. Delaney Jeffrey P. Taft +1 202 263 3216 +1 202 263 3293 [email protected] [email protected] Table of Contents Index of Acronyms / Abbreviations .................................................................................................xv The Dodd-Frank Wall Street Reform and Consumer Protection Act ................................................ 1 A. Summary ................................................................................................................... 1 B. A Very Brief History of the Legislation ...................................................................... 1 C. Overview of the Legislation ...................................................................................... 2 1. Framework for Financial Stability ................................................................. 2 2. Orderly Liquidation Regimen ........................................................................ 3 3. Other Changes to the Bank Regulatory Structure ........................................ 3 4. Increasing Consumer Protection .................................................................. 4 5. Derivatives Regulation .................................................................................. 5 6. Capital Markets and Investor Protection ...................................................... 5 7. Registration of Advisers to Hedge Funds, Private Equity Funds, and Others ........................................................................................................... 6 8. Insurance Oversight and Regulatory Reform................................................ 6 9. Federal Reserve System Changes ................................................................. 6 10. Other Provisions ............................................................................................ 6 D. Effective Dates and Implementation ........................................................................ 7 TITLE I – FINANCIAL STABILITY .......................................................................................................... 8 A. Summary ................................................................................................................... 8 B. Establishment of the Financial Stability Oversight Council ...................................... 8 1. Organization / Structure ............................................................................... 8 2. Purpose and Duties of the FSOC ................................................................... 9 3. Office of Financial Research ........................................................................ 10 © 2010 Mayer Brown LLP Understanding the New Financial Reform Legislation _______________________________________________________________________________ C. Registration of Nonbank Financial Companies with the FRB and Identification of Systemic BHCs .............................................................................. 11 1. US Nonbank Financial Companies .............................................................. 11 2. Foreign Nonbank Financial Companies ...................................................... 13 3. US Systemic BHCs ........................................................................................ 15 4. Foreign Systemic BHCs ................................................................................ 15 5. Additional Considerations for Foreign Companies ..................................... 15 D. Prudential Standards to be Developed for Systemically Significant Institutions .............................................................................................................. 16 1. Risk-Based Capital and Leverage Limits ...................................................... 17 2. Liquidity Requirements ............................................................................... 22 3. Overall Risk Management/Risk Committees .............................................. 22 4. Resolution Plans .......................................................................................... 23 5. Concentration Limits, Credit Exposure and Application of Attribution Rule .......................................................................................... 24 6. Enhanced Public Disclosures ....................................................................... 25 7. Short-Term Debt Limits ............................................................................... 25 E. Other Requirements Intended to Protect the Financial System ............................ 25 1. Heightened Requirements Applicable to Activities .................................... 25 2. Mitigation of a Grave Threat to Financial Stability ..................................... 25 3. Stress Testing .............................................................................................. 26 4. Limitations on Acquisitions ......................................................................... 27 5. Early Remediation Requirements ............................................................... 27 6. Depository Institutions Management Interlocks Act .................................. 28 7. Ceasing to be a BHC .................................................................................... 28 F. Supervision and Reporting ...................................................................................... 28 1. FRB Supervision of Systemic Nonbanks ...................................................... 28 2. Expanded FDIC Supervisory Authority ........................................................ 29 Mayer Brown | ii Understanding the New Financial Reform Legislation _______________________________________________________________________________ G. Efforts to Encourage Development of Similar Restrictions and Requirements Outside of the United States ........................................................... 30 1. US Offices of Foreign Banks ........................................................................ 30 2. Broker-Dealer Registration ......................................................................... 31 TITLE II – ORDERLY LIQUIDATION AUTHORITY ............................................................................... 32 A. Summary ................................................................................................................. 32 B. Covered Financial Companies ................................................................................. 32 C. Excluded Entities ..................................................................................................... 33 D. Process for Determining That a Financial Company Is Subject to the New Orderly Liquidation Regime .................................................................................... 33 1. Written Recommendation to Appoint Receiver ......................................... 33 2. Systemic Risk Determination by Treasury .................................................. 34 3. Judicial Review of Determination ............................................................... 35 E. FDIC Appointment; Receivership Duties and Powers ............................................. 35 1. Subsidiaries of a Covered Financial Company ............................................ 36 2. Orderly Liquidation Modeled on FDIA ........................................................ 36 3. Differences from FDIA Provisions ............................................................... 37 4. Purposes of Orderly Liquidation ................................................................. 37 F. Orderly Liquidation of Covered Brokers and Dealers ............................................. 37 1. FDIC Appointment of SIPC as Trustee ......................................................... 37 2. FDIC Creation of Broker-Dealer Bridge Company ....................................... 38 G. Orderly Liquidation of Insurance Companies ......................................................... 38 H. Orderly Liquidation and Repayment Plans ............................................................. 38 1. Orderly Liquidation Fund ............................................................................ 38 2. Repayment Plan .......................................................................................... 39 3. Risk-Based Assessments to Recover Costs ................................................. 39 Mayer Brown | iii Understanding the New Financial Reform Legislation _______________________________________________________________________________ I. Studies ..................................................................................................................... 40 1. Study on Secured Creditor Haircuts ............................................................ 40 2. Study on Bankruptcy Processes for Financial and Nonbank Financial Institutions ..................................................................................