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Dodd-Frank Act Reports and Rulemakings

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  • Baker, John
    A number of reports and rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act were announced today. Some of these were in response
    Message 1 of 1 , Jan 18, 2011
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      A number of reports and rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act were announced today. Some of these were in response to statutory deadlines: Friday, January 21, is six months after the date of enactment, a date that figures into a number of statutory mandates.

      SEC Rules

      The Securities and Exchange Commission announced that it will hold an open meeting on January 25 to consider adopting rules on shareholder advisory votes and to consider proposing rules on the definition of "accredited investor" and the reporting requirements for private fund advisers. From the SEC's open meeting notice:

      Item 1: The Commission will consider whether to adopt rules to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires shareholder advisory votes to approve the compensation of executives, or say-on-pay votes, and the frequency of shareholder say-on-pay votes. Section 951 also requires shareholder advisory votes to approve certain agreements and understandings concerning executive compensation that is based on or otherwise relates to the acquisition, merger, consolidation, sale or other disposition of all or substantially all of the assets of an issuer, and requires enhanced disclosure of these golden parachute arrangements.

      Item 2: The Commission will consider whether to propose rule amendments that would implement Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the definition of "accredited investor."

      Item 3: The Commission will consider whether to propose a rule under the Advisers Act establishing reporting obligations for advisers to private funds to implement the requirements of Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

      The meeting notice is at


      The SEC previously announced that it will hold an open meeting on January 20 to consider adopting rules governing asset-backed securities:

      Item 1: The Commission will consider whether to adopt new rules to implement Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the use of representations and warranties in the market for asset-backed securities.

      Item 2: The Commission will consider whether to adopt rules to implement Section 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires an issuer of asset-backed securities (ABS) to perform a review of the assets underlying the ABS and disclose information relating to the review.

      The meeting notice is at


      Systemically Important Nonbank Financial Companies

      The Financial Stability Oversight Council today issued a notice of proposed rulemaking concerning its authority to require that a nonbank financial company be supervised by the Federal Reserve Board due to the systemic risk it poses. The proposed rule describes the criteria that will inform its designation and the processes and procedures therefor. The proposed framework for assessing systemic important is organized around six broad categories:

      1. Size;
      2. Lack of substitutes for the financial services and products the company provides;
      3. Interconnectedness with other financial firms;
      4. Leverage;
      5. Liquidity risk and maturity mismatch; and
      6. Existing regulatory scrutiny

      The FSOC said it expects to begin assessing the systemic importance of nonbank financial companies under the proposed framework shortly after adopting a final rule. Subsequently, and on a regular basis, the FSOC expects to screen nonbank financial companies using the six categories to identify companies whose material financial distress, or the nature, scope, size, scale, concentration, interconnectedness, or mix of activities, could pose a threat to the financial stability of the United States. Comments on the rule proposal will be due 30 days after publication in the Federal Register.

      The notice of proposed rulemaking originally was posted on the FSOC website, but it has been removed and replaced by a note that it will be posted upon publication by the Federal Register. Possibly further revisions to the notice are intended. I have posted the original version of the notice on the FundLaw website (registration with Yahoo Groups may be required), and it is available at


      Volcker Rule Study

      Section 619 of the Dodd-Frank Act, generally referred to as the Volcker Rule, prohibits banking entities from engaging in proprietary trading and from investing in or sponsoring hedge funds and private equity funds, subject to certain exceptions. Although the implementing rules are to be adopted by the SEC, the Commodity Futures Trading Commission, and the federal banking agencies, the statute requires the various agencies to consider the findings of a study by the FSOC. That study was released today. Study & Recommendations on Prohibitions on Proprietary Trading & Certain Relationships with Hedge Funds & Private Equity Funds (Jan. 2011). From the summary:

      <<In this study, the Council sets forth recommendations that seek to identify and eliminate prohibited proprietary trading activities and investments in or sponsorships of hedge funds and private equity funds by banking entities. The proprietary trading section of the study outlines criteria for defining prohibited activities, rigorous tests to identify permitted activities, and grounds to prohibit activities that would involve or result in a material conflict of interest, result in a material exposure to a high-risk asset or high-risk trading strategies, pose a threat to the safety and soundness of such banking entity, or pose a threat to the financial stability of the United States.

      The private funds section of the study focuses on key issues raised in the implementation of the Volcker Rule's hedge fund and private equity funds provisions, and recommends certain substantive criteria that Agencies should use to guide legal interpretations in the rulemaking. It also recommends a compliance and supervisory framework.>>

      Much of the study's attention is focused on robust implementation of the Volcker Rule. One issue on which the study expresses sympathy with commenters, however, is the broad definition of "banking entity," which includes any affiliate or subsidiary of an insured depository institution or banking holding company. For example, SEC-registered investment companies that are controlled by a banking entity would be subject to the Volcker Rule. The FSOC recommends that the term be implemented in a way that avoids results that Congress clearly did not intend.

      The study is linked from the FSOC's webpage at


      Concentration Limits Study

      A second study released by the FSOC is on the Dodd-Frank Act's concentration limit. Study & Recommendations Regarding Concentration Limits on Large Financial Companies (Jan. 2011). The Act establishes a financial sector concentration limit that generally prohibits a financial company from merging or consolidating with, or acquiring, another company if the resulting company's consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies. This study is also linked from the FSOC's webpage.

      GAO Study on Regulatory Coverage for Financial Planners

      The Government Accountability Office released a study on the oversight and regulation of financial planners. The study concludes that the regulatory structure applicable to financial planners covers the great majority of their services, but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain. The GAO concludes that an additional layer of regulation specific to financial planners does not appear to be warranted at this time. It recommends that

      (1) the National Association of Insurance Commissioners, in concert with state insurance regulators, take steps to assess consumers' understanding of the standards of care associated with the sale of insurance products,
      (2) the SEC assess investors' understanding of financial planners' titles and designations, and
      (3) the SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers.

      The GAO study is available online at


      SEC Studies Not Yet Available

      The SEC is required to submit a study reviewing and analyzing the need for enhanced examination and enforcement resources for investment advisers, including the extent to which having Congress authorize one or more self-regulatory organizations to augment the SEC's efforts in overseeing investment advisers would improve the frequency of examinations of investment advisers. The study was due 180 days after the date of enactment, which was Monday, January 17. It is possible, of course, that the study was submitted to Congress but has not yet been made public.

      The SEC is also required to submit a study on the effectiveness of existing legal or regulatory standards of care for broker-dealers and investment advisers and whether there are legal or regulatory gaps, shortcomings, or overlaps that should be addressed by rule or statute. The study then can be used in a rulemaking proceeding to adjust the standard of care (e.g., to impose a fiduciary duty on broker-dealers). This study, one of the highest-profile provisions of the entire statute, is due on Friday, January 21.

      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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