While the Dodd Frank Wall Street and Consumer Protection Act of 2010 (Dodd-Frank) increases regulation for banking and financial institutions, the average lawyer should be aware that Dodd-Frank empowers the Federal Reserve Board (Board), the Bureau of Consumer Protection (Bureau) and other federal agencies to impose rules on nonbanking and nonfinancial entities. Below are a few of the key changes that all lawyers should know.
Reorganization, New Players, New Powers
Dodd-Frank made many changes to the regulations, including the following:
Created the Bureau in which it consolidated federal power and authority to monitor and enforce 17 consumer finance and related banking laws, discussed below;
Transferred to the Board supervisory and rule-making authority for savings and loans, their holding companies, federal and state thrifts for their transactions with affiliates, loans to insiders and anti-tying prohibitions;
Enhanced SEC regulatory authority over credit-rating agencies, advisers to investment companies and municipalities, asset securitizations, swaps and other matters; and
Eliminated the office of Thrift Supervision and transferred authority for both federal and state thrifts to the Office of the Comptroller of the Currency and the Board.
The chief mandate of the newly created Financial Stability Oversight Council (Council) is to identify and respond to emerging threats to U.S. financial stability from actual or potential default, systemic risk, financial activity or practice. If the Council determines that an entity poses risk, the Council will provide notice to the affected entity and conduct a hearing regarding the entity’s affect on U.S. financial stability. The Council may waive notice and hearing if the situation is urgent. The Council’s designation of a financial or nonfinancial firm as “systemically important” enables the Board to exert stronger regulatory supervision of the firm. Previously, the Board had very limited authority over nonbanking activities.
In its watchdog role over the U.S. financial system, the Council also has the power to address those activities or practices by financial and nonfinancial entities that pose risk to the economy. Following its determination that such practices or activities pose risk, the Council may recommend that the responsible federal financial agency (“prudential regulator”) enact and impose new or heightened standards and safeguards with respect to the activity or practice subject to the prudential regulator’s jurisdiction. Following its determination, the Council will make recommendations to the FDIC, the Secretary of the Treasury and other regulators. The applicable federal financial regulator should act on the Council’s recommendations by initiating rule-making or explain in writing to the Council why it has determined not to act.
Dodd-Frank also eliminates existing provisions in the Graham-Leach-Bliley Act of 1999 (GLB), which restricted the Board’s examination and enforcement action against the functionally regulated subsidiaries of banking organizations, such as the insurance companies, broker-dealers and investment advisers. The Board is now empowered to examine, regulate and enforce safety and soundness standards for an entire banking organization.
In a significant response to the role played by mortgage-backed securities in the current financial crisis, Dodd-Frank provides a role for the SEC in regulating asset-backed securities and certain kinds of security-based swaps. New regulations require an issuer of an asset-backed security to retain at least 5 percent of the credit risk in the assets it sells into a securitization to ensure that the issuer has some skin in the game.
The Bureau of Consumer Financial Protection
Dodd-Frank consolidated power and authority within the Bureau to modify and enforce enumerated laws that include the following (all formerly enforceable by the Federal Trade Commission (FTC)):
Equal Credit Opportunity Act (also formerly enforceable by banking regulators);
Consumer Protection Act (the FTC continues to handle antitrust and franchise matters);
Fair Debt Collection Practices Act;
Fair Credit Reporting Act; and
Fair Credit Billing Act.
The Bureau has not wasted time in affecting regulation. Recently the Bureau published an interim rule (Regulation F) under the Fair Debt Collection Practices Act (FDCPA) that establishes procedures and criteria for a state to apply for exemption from the FDCPA for certain debt collection practices within such state. To insulate creditors from civil liability under the Equal Credit Opportunity Act (ECOA) for good-faith compliance with a regulatory interpretation, the Bureau has already issued its official interpretation of regulation B of ECOA. Demonstrating its intention to take an active role with respect to statutes under its jurisdiction, the Bureau recently filed an amicus brief in the case of in the case of Rosenfield v. HSBC Bank, USA, in the United States Court of Appeals for the Tenth Circuit, which involves interpretation of the Truth in Lending Act’s requirement to notify the lender of rescission of a loan.
Dodd-Frank does not purport to regulate merchants, retailers or other sellers of nonfinancial goods and services to the extent that such sellers extend credit for the purpose of enabling a “consumer” to acquire nonfinancial goods and services. However, the Bureau can enforce Dodd-Frank and the enumerated laws against a seller of nonfinancial goods or services who sells consumer debt in certain circumstances, including:
The credit extended by the seller significantly exceeds the value of the nonfinancial good or service provided;
The Bureau determines that the sale of the nonfinancial good or service is a subterfuge for avoiding the application of Dodd-Frank; and
The seller of nonfinancial goods or services regularly extends credit and the credit is subject to a finance charge.
For example, under Dodd-Frank, the Bureau does not have jurisdiction over state-licensed certified public accountants in their performance of usual and customary accounting activities. However, the Bureau does have jurisdiction if the accountant extends credit to a consumer, charges a finance charge, or the amount owed is payable in more than four installments under a written agreement. Attorneys are not ordinarily regulated by Dodd-Frank, but the Bureau has jurisdiction over an attorney’s offer or provision of a consumer financial product that is not part of or incidental to the practice of law or is offered to a consumer who is not receiving legal advice or services in connection with such financial product.
Dodd-Frank permits states to enforce any state statute, regulation, order or interpretation in effect that is not inconsistent with Dodd-Frank if such state regulation affords greater protection than Dodd-Frank to consumers. Dodd-Frank pre-empts state law only if (a) a federal statute other than Dodd-Frank requires it, (b) the state law’s application would have a discriminatory effect on national banks in comparison with state-chartered banks, or (c) it significantly interferes with a national bank’s exercise of its powers. Under certain circumstances, the Controller of the Currency, in consultation with the Bureau, can make a case-by-case determination of pre-emption that is judicially reviewable.
The enforceability of stricter state banking regulations imposes additional costs on state-chartered or licensed banks. While national banks may assert that their charters insulate them from the stricter state laws or regulations, they may opt to comply with applicable state law in order to avoid state interference with their operations or costly litigation over pre-emption.
Dodd-Frank allows both agencies and the attorneys general of the states to enforce certain of its provisions. Attorneys general can bring civil actions against banks that are state-chartered, incorporated, licensed or otherwise authorized to do business under state law by filing an action to enforce Dodd-Frank in the United States District Court in such state, with notice to the Bureau. Although the Bureau has authority to enforce the FDCPA and ECOA, Dodd-Frank does not limit the existing supervisory or enforcement authority of the FTC or any other agency (except the Bureau) with respect to credit extended, or the collection of debt arising from such credit extension. The Bureau’s ability to intervene and become the moving party in such actions may create controversy between the Bureau and other federal agencies or state attorneys general.
Corporate and Securities Law Modifications
While Dodd-Frank now imposes additional demands on public corporations and their boards of directors, changes to public company governance and disclosure requirements are likely to continue. Such changes could trickle down to private companies whose business or shareholder constituency demands that they apply the best practices to governance. Included in the numerous releases by the SEC are regulations that:
Change corporate governance for public companies regarding “say on pay rules,” meaning that shareholders can expect to have an advisory vote on executive compensation at least once every three years;
Require public companies to disclose information regarding golden parachutes;
Regulate municipal investment advisers and advisers to private investment funds, who have been exempt from SEC regulation;
Limit the SEC’s supervisory role of investment advisers to investor advisers managing funds of $150 million or more, and shift advisers managing less than $150 million to state regulators;
Exclude the value of the investor’s primary residence from an accredited investor’s net worth of $1 million dollars in all private placements, and permit the SEC to adjust the accredited investor standard every four years;
Require “qualified investors” to have at least $1 million of assets under management with the adviser, or a net worth of at least $2 million;
Establish and implement a $300 million whistleblower incentive and protection program that permits payment of incentives to voluntary whistleblowers and prohibits employer retaliation; and
Regulate asset securitizations and swaps.
As this short summary reveals, the broad effects of Dodd-Frank transcend the financial sector and spill over into many other fields.