Don’t Count Me In: Firms Scramble to Avoid Making the “Systemically Important” List

By Peter Benesch, J.D. Class of 2013 | Posted on

As reported in a previous post on this forum (see Fed Proposes Definitions for Systemically Important Nonbank Financial Institutions) the Fed proposed a rule on February 8th regarding when a company would be considered “systemically important.” This rule is significant because the designation would be accompanied by a large number of regulatory requirements (which would be accompanied by increased compliance costs), including the ominous authority/responsibility the FDIC will have to “wind down” the company in the event it nears failure.

Financial institutions are now engaged in a major lobbying effort to shape the definition of systemically important institutions in order to avoid the accompanying regulatory requirements. The decision is left up to the Financial Stability Oversight Council, which is scheduled to discuss this issue at its next meeting in May. Large bank holding companies, such as Bank of America, are clearly set to come under the umbrella of the regulation, due to the size of the assets they control (greater than $50 billion). However, insurance companies that fall under this threshold are looking to avoid the list, arguing that they do not present the same systemic risks that banks do because they are not susceptible to a run on their assets.

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Let the Delegation Continue: Supreme Court Reaffirms Deference to Administrative Agencies in Regulatory “Interpretation” of Statutes

By Peter Benesch, J.D. Class of 2013 | Posted on

On January 11th the Supreme Court handed down its decision in Mayo v. U.S. The decision reaffirmed the Court’s use of the Chevron standard, under which government agencies are given broad authority to make any “reasonable interpretations” of statutes so long as Congress does not specifically and clearly address the issue in the relevant legislation. The decision is significant because lower courts had previously spliton whether the Treasury Department, in implementing the Internal Revenue Code (IRC), was subject to the more exacting standard found in National Muffler. Under the National Muffler standard, government agencies’ only had the latitude to make interpretations that “harmonize with the plain language of a statute, its origin, and its purpose.”

In Mayo v. U.S. the plaintiff, Mayo Foundation for Medical Education and Research, was challenging a Treasury Department regulation that would classify medical residents (individuals that have recently graduated from medical school and seek additional instruction in a specialization) as employees. The Treasury Department implemented this regulation pursuant to a statutepassed by Congress, which exempted from consideration as employees individuals whose “services performed in the employ of… a school, college, or university… if such service is performed by a student that is enrolled and regularly attending classes at [the school].” Dating back to 1951 the Treasury Department had exempted students (including medical residents) from being classified as employees of schools, colleges, and universities, if their work was “incident to and for the purpose of pursuing a course of study.” However in 2004 the Treasury Department passed a regulationthat eliminated this exemption for “students” that worked 40 hours per week or more. Utilizing the Chevron standard, the Court in Mayo concluded that it was reasonable for the Treasury Department to change course and consider individuals working 40 hours or more per week as not “regularly attending classes.”

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What’s at Stake in the Ongoing Mortgage Servicing Settlement Negotiations?

By James Nguyen, J.D. Class of 2013 | Posted on

Potentially $135 billion or the political demise of the CFPB.

Ahead of the first face-to-face negotiations between major banks and government agencies over a proposed mortgage servicing settlement, additional information is surfacing over the potential scope and scale of the settlement.  An internal presentation by the CFPB to the 50-state Attorneys Generals estimates that mortgage servicers avoided $20 billion in servicing costs by failing to adequately process loan modifications of troubled homeowners, and suggests that a proposed settlement, in addition to or as an alternative to a regulator-imposed penalty, would focus on mandates for principal reduction and short sales for underwater homeowners.

The CFPB estimates that a regulator-proposed $20 billion penalty would have limited effect on the bank’s capital ratios, suggesting that a penalty that size would not adversely affect bank solvency.   However, depending on the extent of borrower eligibility for principal reductions (i.e., how much principal is forgiven) and the number of mandated loan modifications, these mandates could cost servicers and banks anywhere between $7 billion to $135 billion.  It is unclear whether the major servicer banks could absorb a settlement costing $135 billion, although some have already speculated that the true costs could go beyond these estimates.

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And the Winner Is: Annual Voting on Executive Compensation

By Mike Perez, J.D. Candidate Class of 2012 | Posted on

As reported in February, the Securities and Exchange Commission (SEC) issued final rules regarding the Dodd-Frank’s so-called say-on-pay provision in January. The new rule requires SEC filing companies to allow shareholders to have an advisory vote on executive compensation as well as an advisory vote on how frequently shareholders will vote on executive compensation. Shareholders now have the choice to vote on executive compensation in one, two, or three-year intervals. Now, two months later, Form 8-K filing statistics show that more companies are endorsing annual voting than earlier in the seasons, and shareholders are showing a clear preference for the annual voting schedule.

To date, 105 of the 173 large-cap S&P 500 firms have filed proxy materials endorsing annual say-on-pay voting, while only 56 have filed materials endorsing the triennial schedule. A mere seven firms have endorsed biennial voting, and five firms have made no recommendation. In addition, of the 417 Russell 3000 firms that have filed, 210 have supported annual voting – a marked increase from earlier Russell 3000 company filings – 182 advocated triennial voting, 13 recommended biennial voting, and 12 made no recommendation.

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Live Blogging at the Dodd-Frank Symposium: Understanding the Structure and Role of the Consumer Financial Protection Bureau

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

Gail Hillebrand of the Consumer Union just delivered a clear and concise explanation of the statutory structure of the newly created Consumer Financial Protection Bureau. Ms. Hillebrand discussed the types of products, services, and providers within the purview of CFPB jurisdiction. She also explained the new powers and obligations of the agency, its role in supervision of certain financial institutions, and how its existence will affect the distribution of power among existing federal agencies. Of particular interest in this new statutory structure, is the ability of states to have a much greater role in consumer protection regulation.

View Ms. Hillebrand’s slide show here.

Live Blogging at the Dodd-Frank Symposium: The Power of Disclosure

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

Thomas Brown of O’Melveny & Meyers just spoke about the interest of consumers and financial institutions on the new Consumer Financial Protection Bureau’s ability to regulate the disclosure of financial products to customers. Mr. Brown argues that such power would allow the CFPB to reshape the landscape of the industry. Mr. Brown spoke on the new “fully, accurately, and effectively disclosed” standard, a standard that is quite different than “not false and misleading.” Mr. Brown also brought to the fore three pertinent questions regarding this new disclosure standard:

1) Who must be permitted to understand?
2) What defines the universe of things that must be understood?
3) What does “permit to understand” mean?

To view Mr. Brown’s working paper click here.

Live Blogging at the Dodd-Frank Symposium: Dodd-Frank’s New Ability to Pay Provision

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

Professor John Pottow of the University of Michigan School of Law, just addressed Dodd-Frank’s newly created duty of lenders to assess and assure a borrowers ability to pay.  As Professor Pottow pointed out, such a concept is not wholly new to legal thought; however, Dodd-Frank’s wholesale import of the standard is a radical change to U.S. consumer law. Professor Pottow reviewed the geneology of the law as well as comparing it to similar concepts in other areas of domestic law and similar foreign laws. In addition, Professor Pottow also parsed the language of the new ability to pay statute and discussed worries regarding how this new duty will be interpreted.

To view Professor Pottow’s full working paper click here.

Live Blogging at the Dodd-Frank Symposium: The Uncertain Future of of Bank Regulation Under Dodd-Frank’s “Abusive” Standard

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

John D. Wright, of Wells Fargo & Company, just finished giving his thoughts about the Dodd-Frank Act’s new “abusive” standard. Section 1031 of the Dodd-Frank Act vests the newly created Bureau of Consumer Financial Protection with the authority to take enforcement action against banks and other covered entities from engaging in unfair, deceptive or abusive practices. Mr. Wright highlighted § 1031(d), which defines the abusive standard, claiming that the standard introduces “radically new concepts regarding the customer’s understanding of banking products, the customer’s suitability for a banking product, and the bank’s duty to act in the interests of the consumer.”

Mr. Wright pointed out that a lack of clarity in the statute’s language and guidance from regulators makes for muddy waters for large banks future interactions with customers. First, the wording of § 1031(d)(2)(A) seems to require banks to determine each customer’s “financial literacy” to a previously unknown degree. Furthermore, banks will require further clarification as to whether the standard the Bureau will apply is that of a reasonable consumer or a particular consumer. Second, § 1031(d)(2)(B) may require that a bank determine whether a particular customer is suitable for a financial product, regardless of whether there was clear and conspicuous disclosure of product terms, even if the customer understands it. Finally, § 1031(d)(2)(C) may create a legal duty to act in their customers best interest, beyond their normal trust or investment advisory settings.

For more, please view Mr. Wright’s paper here.

Live Blogging at the Dodd-Frank Symposium: Recognizing the Costs of New Regulations on VC Funds

By Peter Benesch, J.D. Class of 2013 | Posted on

(click here to see the full abstract of Mr. Eric Finseth’s presentation at the Symposium) While Silicon Valley tech companies and VC firms did not have any clear hand in contributing to the recent financial crisis, several new regulations may nonetheless present new burdens on their industry. While exemptions were written throughout most of the Dodd Frank act to prevent VC firms from the obligations imposed on other financial institutions, some “collateral damage” has unfortunately manifested itself (in preventing relatively small companies from financing themselves through the “friends and family” channel).

Live Blogging at the Dodd-Frank Symposium: the Inhibitory Effect on Important Capital Flows of Regulations such as Dodd-Frank

By Peter Benesch, J.D. Class of 2013 | Posted on

(click here to see the full abstract of Mrs. Mary Dent’s presentation at the Symposium) Many individuals in D.C. focus on the importance of growth and innovation to fuel the continued growth of the national economy. Despite this rhetoric, legal regulation have historically (inadvertently) hampered the flow of capital into high growth industries through legislation that fails to recognize its effects on these industries. Regulations implemented in response to dramatic events in the economy have been a source of these inhibitory regulations, and Dodd-Frank is no exception. Mrs. Dent presents three policy recommendations that would correct these regulatory inefficiencies and facilitate the flow of capital necessary to fuel the high growth industries that underlie the future of the U.S. economy.