The Dodd-Frank Act:
As it Applies to You!
Robert D. Klingler
Bryan Cave LLP
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Topics
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Trust Preferred Securities
Capital Ratio Requirements
Deposit Insurance Reforms
Limited Purpose Banks
Federal Reserve Supervision
Holding Company
Regulations
• Affiliate Transactions
• Lending Limit Changes
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Troubled Bank Conversions
De Novo Branching
Interest Business Checking
Regulation D Reforms
Executive Compensation
Material Loss Reviews
SOX 404(b) Relief
Small Business Lending
Fund
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Sec. 171 Capital Requirements
• “Collins Amendment”
• General Rule
Requires holding companies and nonbank financial companies
supervised by the Federal Reserve to comply with the leverage
and risk-based capital requirements imposed on depository
institutions.
• No Tier 1 Treatment for Trust Preferred Securities
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Effective Dates/Exceptions
• Securities issued on or after May 19, 2010 –
Effective upon Signing of Act
• Securities issued before May 19, 2010
– Large Institutions (>$15 Billion as of December 31, 2009)
– 3 Year Incremental Phase-In starting January 1, 2013
– Other Institutions ($15 Billion or Less and Mutuals)
– Permanent Tier 1 Treatment
• Section does not apply to any BHC subject to the
Small Bank Holding Company Policy Statement
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Small Bank Holding Company
Policy Statement
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(Found at Appendix C to 12 CFR Part 225)
Consolidated assets of less than $500 million;
Not engaged in significant nonbanking activities;
Does not conduct significant off-balance sheet activities
(including securitization and asset management or
administration);
Does not have a material amount of securities registered with
the SEC; and
Not excluded by the Federal Reserve Board for supervisory
purposes.
Benefits of Small Bank Holding
Company Treatment
• Consolidated Leverage and Risk-Based Capital
Requirements do not apply
• Subsidiary Bank(s) Capital Measured on Stand-alone
Basis
• Non-Tier 1 funding sources can be Downstreamed
into Bank(s) as Tier 1 Capital
• Debt to Equity Ratio of up to 1:1 acceptable; Expect
plan to reduce to 0.3:1 within 12 years of issuance.
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Other Capital Provisions
• Sec. 171(b)(6) – Study smaller institution’s access to capital
• Sec. 171(b)(7) – Risks related to institutions’ activities to affect
required capital ratios
• Sec. 174(a) – Study regarding hybrid capital instruments
• Sec. 616(a), (b) & (c) – Counter-cyclical capital requirements
• Sec. 616(d) – Source of strength
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Deposit Insurance Reforms
• Sec. 331
– Eliminates separate risk-based assessment systems for
large and small members of the Deposit Insurance Fund
– Requires FDIC to amend regulations to define assessment
base as an amount equal to:
Average Consolidated Assets – Average Tangible Equity
(with adjustments as appropriate for
custodial and banker’s banks)
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Deposit Insurance Reforms
• Sec. 334
– Increases Minimum Reserve Ratio from 1.15% of estimated
insured deposits to 1.35%
– FDIC required to reach 1.35% by September 30, 2020
– FDIC required to offset the increase in assessments required
to reach 1.35% for banks with consolidated assets of less
than $10 billion
• Sec. 332
– Grants FDIC greater authority to build up reserves in excess
of 1.35%
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Deposit Insurance Reforms
• Sec. 335
– Permanent Increase in FDIC Insurance from $100,000 to
$250,000 (Currently set to expire on December 31, 2013.)
– Retroactive to January 1, 2008
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Deposit Insurance Reforms
• Sec. 343
– Unlimited Insurance for Noninterest Bearing Transaction
Accounts from December 31, 2010 through January 1, 2013
– Comparable to TLGP’s Transaction Account Guarantee (set
to expire December 31, 2010)
• Non-voluntary
• No additional specific assessments
• No coverage for IOLTA accounts or NOW accounts paying de
minimis interest
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Sec. 603 Limited Purpose Banks
• Three Year Moratorium
– FDIC may not approve application for insurance
– Federal banking agencies may not approve a change in
control resulting in control by a commercial firm
• A “commercial firm” is one which generates less than
15% of its gross revenues from activities that are
“financial in nature”
• Potential elimination of Bank Holding Company Act
exemptions for savings associations, credit card
banks, trust companies and industrial banks
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FRB Supervision
• Sec. 604 grants the Federal Reserve greater
authority to require reports from and examine all
holding company subsidiaries, including functionally
regulated subsidiaries
• Sec. 605 requires the Federal Reserve to examine
non-bank subsidiaries (and non-functionally regulated
subsidiaries) at least as frequently as if they were
being conducted by lead bank
– Lead bank’s primary federal regulator has backup authority
to examine if Federal Reserve does not examine
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Bank Holding Company Regulations
• Sec. 606 – Financial Holding Companies must be
well-capitalized and well-managed
• Sec. 607 – Must be well-capitalized and wellmanaged to complete an interstate bank acquisition
Adequate ≠ Adequate
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Affiliate Transactions
• Sec. 608 – Expansion of “covered transaction”
definition
• Sec. 609 – Eliminates 23A exception for financial
subsidiaries
• Sec. 615 – Implements statutory requirements for
asset transactions with insiders
– Market terms
– Prior approval by non-interested directors, if transaction
represents more than 10% of capital stock and surplus
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Inclusion of Derivative
Transactions in Lending Limits
• Sec. 610 – Expands “extension of credit” to include
credit exposure arising from derivative transactions
and repurchase agreements
• Sec. 611 – Requires states to include credit exposure
in derivative transactions in lending limits
• Sec. 614 – Includes derivative transactions and
repurchase agreements for Reg O purposes
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Sec. 612 Troubled Bank Conversions
• Prohibits troubled bank charter conversions
• Based on enforcement actions
• Limited exception if accompanied by (and
conditioned on) plan of corrective action approved by
all appropriate banking regulators
• Notice of pending enforcement actions
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Sec. 613 De Novo Branching
• Permits national and insured state banks to branch
across state lines if, under the laws of the state
where the branch is to be located, a state bank
chartered in that state would have been permitted to
establish a bank.
• Effective one day after enactment.
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Sec. 627 Interest Business Checking
• Prohibition on paying interest on demand transaction
accounts repealed
• Effective one year after enactment
• Not eligible for unlimited insurance
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Regulation D Private Offerings
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Common securities offering exemption
No general solicitation
Unlimited number of “accredited investors”
Up to 35 unaccredited investors
Sec. 413 “Accredited Investor”
• Existing Standard for Natural Persons
– Individual income of $200,000 annually;
– Joint income with spouse of $300,000 annually; or
– Individual or joint net worth of $1 million
• Net worth standard to be calculated exclusive of the
value of the primary residence
• Effective immediately upon enactment
• SEC to review all thresholds at least every four years
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Sec. 926 “Bad Actor” Exclusion
• Within 1 year of enactment, SEC must issue rules
disqualifying “bad actors” from utilizing Regulation D
• Affects Issuers, Directors and Officers
• Generally only for violations of securities laws and
regulations
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Executive Compensation
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Non-binding “Say-on-Pay” for all public companies
Non-binding shareholder vote on “golden parachutes”
SEC authorized to exempt class of issuers
Compensation committee reforms
Expanded clawback requirements
Disclosure of pay vs. performance
Disclosure of CEO vs. average employee compensation
Financial Institution Compensation
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Financial institutions with at least $1 billion in total assets
Regulations 9 months after enactment of Act
Disclose structures of all incentive-based compensation
Regulators to assess whether compensation structure:
– Provides excessive compensation, fees or benefits; or
– Could lead to a material financial loss
• Disclosure of actual individual compensation not required
• Regulators to prohibit any arrangements or features
deemed to cause inappropriate risk
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Possible Regulatory Approach
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Sec. 987 Material Loss Reviews
• Existing Material Loss Standard
– $25 million; or
– 2% of total assets
• New Standard
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$200 million for 2010 and 2011
$150 million for 2012 and 2013
$50 million for 2014 and beyond
$75 million if IG certifies there will be 30 or more failures
• 6 Month Aggregate Review of Non-material Losses
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Sec. 989G SOX 404(b) Exemption
• SOX 404(a) requires management assessment on internal
controls over financial reporting
• SOX 404(b) requires attestation by external auditor
• SEC has repeatedly delayed implementation of SOX
404(b) for non-accelerated filers
• Dodd-Frank permanently exempts non-accelerated filers
from 404(b) requirements
• SEC to conduct study on reducing the burden of
companies with market caps of $75-$200 million
• GAO will conduct study of effect of Dodd-Frank exemption
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Small Business Lending Fund
• Small Business Jobs and Credit Act of 2010
• House passed June 17, 2010
• Senate considering
• $30 billion
• Investments in Preferred Stock
• NOT TARP
Eligibility
• $10 Billion in Asset Size – Up to 3% Investment
• Less than $1 Billion – Up to 5% Investment
– Less any existing TARP Funds
– Existing TARP Funds can be converted
• Banks on FDIC’s Troubled List Not Eligible
Investment Terms
• 5% Dividend Rate
• 10 Year Maturity
• Decreases based on increase in “small business
lending” over first two years
– 2.5% Increase Æ 4%
– 7.5% Increase Æ 2%
5.0% Increase Æ 3%
10.0% Increase Æ 1%
• All commercial, industrial and agricultural loans for
less than $10 million made to businesses with less
than $50 million in revenue
Loss Amortization
• Only in House version of Bill
• Permit amortization of losses on certain OREO and
NPAs secured by real estate on a quarterly straightline basis over 6-10 years
• Loans originated between 2003 and 2008
• Any bank on FDIC’s Troubled Bank List ineligible to
amortize losses
Questions?
Rob Klingler
(404) 572-6810
robert.klingler@
bryancave.com
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