Dodd-Frank Wall Street Reform Act

Last week, Congress finally finished tinkering with the legislation undertaken to prevent future financial crises caused by what some members of Congress characterize as Wall Street greed and to create new protections for consumers in financial transactions. The Act is massive; it is over 2,000 pages long.

It will be fully implemented only after even more massive regulations have been written. Due to the breadth of topics covered by the Act, over the next several weeks contributors to the Frost Brown Todd Financial Services website will be posting summaries of those portions of the Act that we think are likely to be of the greatest interest to you. We may touch on provisions likely to affect only some “Wall Street Giants” but we will emphasize the impact to be felt on Main Street.

Today, we will present a very broad overview. In later posts, we’ll discuss specific areas of the legislation.
Congress has created the Financial Stability Oversight Council, made up of 10 voting members and five non-voting members. Voters include the Treasury Secretary (he will be chairman); heads of the FDIC, the Federal Reserve, the SEC, the CTFC, the OCC, the FHFA, the NCUA, a representative having “insurance expertise” and, finally, the head of the newly created Bureau of Consumer Financial Protection. It is the job of the Council to identify risks to the country’s financial stability. Now, that sounds simple!

The Council is supposed to gather information to identify potential threats. It can order any financial company (either a bank holding company or a non-bank financial company – one with 85% income or assets which are “financial in nature”) to provide information and reports. For a bank holding company to be classified as “systemically important,” it must have at least $50 billion in assets; there is no threshold size for non-bank financial companies. The Act has already spawned a few new terms. One of my personal favorites is “the Hotel California” rule. It provides that any bank holding company which took TARP money cannot become a non-covered bank by shrinking its assets to less than $50 billion. How did it get its short-hand name? To paraphrase the Eagles’ recording “Hotel California,” these companies may “check out any time they like but they can never leave” without approval of the Council.

The Council can designate companies it deems to be systemically important and those companies will be given special scrutiny. Those companies can be charged a special fee for the attention they receive. The Council will also monitor insurance and accounting issues. Of course, it will appoint committees to do its monitoring.

The Council must adopt regulations in the next 18 months dealing with capital requirements, reporting and so-called “resolution planning.” Resolution planning has also been referred to by some commentators as creation of a “living will” for systemically important companies. In other words, the companies themselves must provide a plan for dealing with their possible demise.

The Council must also conduct what we all know today as “stress tests” on these systemically important companies. If the Federal Reserve finds that a systemically important company is a grave threat to the stability of the system and if the Council agrees, then the Federal Reserve is charged with reducing the risk. It holds the power of life or death over systemically important companies. It can order one to cease doing business; stop a merger or consolidation by the company let it continue in business, with limits.

Lastly, a few final high level changes should be mentioned. The Office of Thrift Supervision is dissolved and its functions are spread among other agencies like the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Some new agencies are established: the Federal Insurance Office – to “monitor” insurance companies (not health or crop insurance) and the Bureau of Consumer Financial Protection.

These are just a few of the highlights. Expect to see more detailed discussion of individual areas of change in the coming weeks. Look for the next installment to highlight Executive Compensation.

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Categories: Bankruptcy & Banking Law, Dodd-Frank Act