Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Municipal Securities Rulemaking Board, or MSRB, urged expansion of the exemption for governmental obligations in the proposed Volcker Rule because the MSRB is concerned that a significant class of municipal securities would be excluded from the exemption, resulting in a “bifurcation” of the municipal securities market without benefiting the soundness of the banking system.

The MSRB urged the federal agencies proposing the Volcker Rule to broaden the “governmental obligations” exemption from the proposed rule’s restriction on proprietary trading to include all “municipal securities” as defined in the Securities Exchange Act of 1934.  The MSRB feels strongly that this change is needed to avoid a bifurcation of the municipal securities market that will, in the MSRB’s view, achieve no meaningful additional benefit to the safety and soundness of the banking system. 

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

In June 2011, the SEC Office of Inspector General released a Phase I report on the results of its initial assessment of the cost-benefit analyses conducted for six rulemakings. The OIG concluded that the SEC had conducted a systematic cost-benefit analysis for each of six rules studied, but found that the level of involvement of the Division of Risk, Strategy, and Financial Innovation (RiskFin) varied considerably from rulemaking to rulemaking. In addition, the Phase I review found a lack of macro-level analysis and a lack of quantitative analysis on the impact of the rules. In the report on Phase I, the SEC OIG stated our intention to further analyze these areas.

The SEC OIG has issued its follow-up Phase II analysis.  Based on the results of the review, the OIG made the following recommendations:

  • SEC rulewriting divisions and RiskFin should consider ways for economists to provide additional input into cost-benefit analyses of SEC rulemakings to assist in including both quantitative and qualitative information to the extent possible.
  • The Office of the General Counsel, in consultation with RiskFin, should reconsider its guidance that the SEC should perform economic analyses for rulemaking activities to the extent that the SEC exercises discretion and should consider whether a pre-statute baseline should be used whenever possible.
  • SEC rulemaking teams should generally use a single, consistent baseline in the cost-benefit analyses of their rulemakings related to a particular topic. The baseline being used should be specified at the beginning of the cost-benefit analysis section. If multiple baselines are appropriate, such as for evaluating alternative approaches or explaining the SEC’s use of discretion, they should also be explained and justified.
  • SEC rulewriting divisions should consider discontinuing the practice of drafting separate cost-benefit analysis and efficiency, competition, and capital formation sections and instead provide a more integrated discussion of these issues in rule releases.
  • The Commission should consider directing rulemaking teams to (a) explicitly discuss market failure as a justification for regulatory action in the cost-benefit analysis of each rule that is based in whole or in part on perceived market failure or (b) in the absence of market failure, demonstrate a compelling social purpose that justifies regulatory action.
  • SEC rulemaking teams should consider including internal costs and benefits in the cost-benefit analyses of rulemakings.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

On January 25, 2012, Institutional Shareholder Services Inc. (ISS) released a set of frequently asked questions relating to its analysis of compensation policy issues for 2012 (more on the details of the ISS methodology and policies here and here). The FAQs address the ways in which ISS will evaluate executive pay-for-performance, management say-on pay responsiveness, and equity plans.   While much of the content relates to the technical aspects of the quantitative methodology used by ISS in evaluating whether there is an executive pay-for-performance misalignment, there are more practical points, as well.  For example, the FAQs address circumstances in which an adverse pay-for-performance recommendation from ISS could lead to an ISS recommendation for an AGAINST vote on an equity plan.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Western Union received a shareholder proposal under Rule 14a-8 from Norges Bank.  The proposal includes a resolution, the adoption of which by Western Union’s stockholders would amend Western Union’s By-laws to implement a form of “proxy access”. Pursuant to the proposed amendment a holder of 1% of Western Union’s common stock (or group of stockholders collectively owning such amount) who has held such stock continuously for one year would have the right, subject to certain other requirements, to include a limited number of its nominees for election to Western Union’s Board of Directors, and information relating to such nominees, in any proxy statement of Western Union relating to any meeting of stockholders of Western Union at which any director is to be elected.

Western Union has submitted a no-action letter to the SEC seeking exclusion of Norges Bank’s proposal pursuant to Rule 14a-8(i)(9) because the proposal directly conflicts with a proposal to be submitted by Western Union at the annual meeting.  The management proposal would amend Western Union’s Bylaws to implement a form of “proxy access”. Pursuant to such amendment, a holder of 5% of Western Union’s common stock (or group of stockholders collectively owning such amount) who has held such stock continuously for three years would have the right, subject to certain other requirements, to include a limited number of its nominees for election to the Board, and information relating to such nominees, in any proxy statement of Western Union relating to any meeting of stockholders of Western Union at which any director is to be elected. Because the Proposal requests that the stockholders of Western Union adopt a By-law amendment which also provides such “proxy access”, but on different terms, Western Union believes that the Proposal would be in direct conflict with the management proposal. Thus, if included in the 2012 Proxy Materials, an affirmative vote on both Western Union’s management proposal and the Proposal could lead to an inconsistent, alternative, ambiguous and conflicting mandate from stockholders.

It is difficult to tell whether Western Union approach will be adopted by other companies.   Whether or not the SEC permits exclusion, it is a viable counter force to overly broad proposals submitted by shareholder activists in current and future years.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Under New York Stock Exchange Rule 452, certain matters to be voted on at board meetings of NYSE member organizations were designated as “Broker May Vote” by the NYSE in its weekly bulletin, meaning that brokers could vote customer shares on the proposals, provided that they had not received customer instruction regarding the vote.  Examples of proposals that were previously ruled “Broker May Vote” include:

  • de-staggering the board of directors;
  • majority voting for director elections;
  • elimination of supermajority voting requirements;
  • providing for the use of consents;
  • providing rights to call a special meeting; and
  • some anti-takeover provision overrides.

On January 25, 2012, the NYSE announced that, going forward, matters which would have previously be designated “Broker May Vote” will instead be designated “Broker May Not Vote.”  The NYSE cites “recent congressional and public policy trends disfavoring broker voting of uninstructed shares” as a cause for the change.  The NYSE also notes that in 2010 Rule 452 was amended to prohibit most broker votes for the election of directors.  The Dodd-Frank Act went further, prohibiting broker voting in the election of directors and on matters relating to executive compensation.

Check back frequently at dodd-frank.com for continuing coverage of the Dodd-Frank Act and its impacts.

As we noted, the International Swaps and Derivatives Association, Inc., or ISDA, and the Securities Industry and Financial Markets Association, or SIFMA, filed a legal challenge to the CFTC’s final rules that limit the positions that investors may own in certain commodities. The Associations believe that the position limits rule may adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility. In addition, the Associations contend that the CFTC’s decision-making process in enacting the rule was procedurally flawed.

Unlike the US Chamber of Commerce’s success in challenging the SEC’s proxy access rules, it appears the plaintiffs in the position limits litigation will not have a quick, striking success.  The United States Court of Appeals for the District of Columbia Circuit dismissed the petition for review.

The court in the order granting the motion to dismiss noted: “Under the law of this circuit, the ‘normal default rule’ is that ‘persons seeking review of agency action go first to district court rather than to a court of appeals. . . Initial review occurs at the appellate level only when a direct-review statute specifically gives the court of appeals subject-matter jurisdiction to directly review agency action.  There is no express congressional authorization of direct appellate review applicable to the petition for review in this case. Both the Commodity Exchange Act, 7 U.S.C. §§ 1-26, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010), are silent with regard to judicial review of Commission actions like the Rule at issue in that petition, while providing direct appellate review only for different, specified Commission actions.”

The court also ordered that the emergency motion to stay the rule be dismissed for lack of subject matter jurisdiction.

It’s certainly hard to square with the court’s action in the proxy access litigation, but as we noted the claims are substantially different.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Dodd-Frank Act required the Government Accountability Office (GAO) to study the implications of removing existing exemptions from the definition of “bank” under the Bank Holding Company Act of 1956 (BHC Act).  On January 19, 2012, the GAO released its report.  Before getting into what the report means, a little background is necessary.

Under the BHC Act, bank holding companies are subject to regulations that include restrictions on the types of activities they can engage in – bank holding companies are only allowed to own and manage banks and engage in related activities.  The restrictions are designed to keep the banking and commerce functions separate in the U.S. economy. Existing exemptions provide that certain types of entities are not “banks” for purposes of the BHC Act, and thus the companies that own them are not bank holding companies subject to regulation under the BHC Act.  However, the non-“bank” institutions themselves are eligible for FDIC insurance.

In 2009 the Department of the Treasury proposed amending the BHC Act to remove the exemptions so that all holding companies owning institutions insured by the FDIC would be subject to regulation of commercial activities by the Federal Reserve.  When the Dodd-Frank Act was passed in 2010, in commissioned this study of the issue by the GAO and also imposed a three year moratorium on approvals for federal deposit insurance for exempt institutions.

The GAO study is focused on determining the number and characteristics of exempt institutions, describing the existing system of federal regulation (if any) of these exempt institutions, and analyzing the likely effects of removing the exemptions that prevent the holding companies of exempt institutions from being regulated as bank holding companies.

There’s a lot to unpack in the report, but here are some highlights:

  • Every institution with insured deposits is subject to some basic federal regulatory safeguards, but removing the exemptions in the BHC Act would subject the holding companies of formerly exempt institutions to “consolidated supervisory authority” of the Federal Reserve which, without getting into too many details, represents a much broader and deeper form of regulation.
  • Exempt institutions consist of industrial loan corporations (ILCs), limited-purpose credit card banks, municipal deposit banks, trust banks with insured deposits, and savings and loan institutions (S&Ls).
  • There are 1,002 exempt institutions, comprising 7% of the overall banking system.
  • Unlike other types of exempt institutions, the activities of S&L holding companies are already restricted by the Federal Reserve System Board of Governors pursuant to the Home Owners’ Loan Act.
  • ILCs are supervised by the Office of the Comptroller of the Currency for general soundness and avoidance of conflicts of interest, but their holding companies are not subject to restrictions on their activities.
  • Excluding S&Ls, there are only 57 exempt institutions (34 of them ILCs), comprising less than 1% of the overall banking system.
  • Only 8 of the non-S&L exempt institutions had assets of more than $5 billion, and more than 50% of them had assets of less than $500 million, which are relatively small numbers.
  • Since 2006 the number of ILCs and the amount of assets they hold has fallen by nearly 50% because some of the large ILCs applied to and have become bank holding companies under the BHC Act and because a moratorium on deposit insurance for new ILCs has caused some large corporations – including Ford Motor Company, Wal-Mart Stores, Inc., and theHome Depot – to abandon their plans to become ILCs.

Not surprisingly, representatives of exempt institutions indicated that subjecting the holding companies to regulation under the BHC Act would have a negative impact on the banking system and would further concentrate market share.  The GAO, by contrast, found that the removing the exemptions would have a “limited impact” on the overall credit market.  Industry representatives also reported that “the current regulatory framework was sufficiently robust,” while the Federal Reserve and Department of the Treasury reported that “the exemptions represent gaps in the current regulatory structure that pose risks to the financial system.”

Check back frequently at dodd-frank.com for the latest news and analysis relating to the implementation of the Dodd-Frank Act.

Pursuant to a Memorandum of Understanding (MOU) dated January 20, 2012, the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) will work together to coordinate their enforcement and oversight of consumer financial products and services.  Since there is some overlap between the regulatory responsibilities of the CFPB, which was formed on July 21, 2011 pursuant to the Dodd-Frank Act, and those of the FTC, the MOU is intended to prevent duplication of efforts.  Here are the highlights of the MOU, taken from the press release:

  • The FTC and the CFPB agree to meet regularly to coordinate upcoming law enforcement, rulemaking, and other activities.
  • Each agency agrees to inform the other, absent exigent circumstances, prior to initiating an investigation or bringing an enforcement action. This notice will prevent duplicative or conflicting enforcement efforts and undue burdens on industry.
  • The two agencies agree to consult each other on rulemaking and guidance initiatives to promote consistency and reflect the experience and expertise of both agencies.
  • They agree to cooperate on consumer education efforts to promote consistency of messages and maximum use of resources.
  • They agree to share consumer complaints with each other.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

During the financial crisis, market participants and regulators did not have the information they needed to assess exposures to risky or failing companies globally. In the United States, the Dodd-Frank Act addressed this gap by creating the Office of Finacial research, or OFR, to improve the information we have about our financial system. One of the OFR’s most important initiatives to date has been advancing the establishment of a legal entity identifier, or LEI, a global standard that will enable regulators and companies around the world to, for the first time, quickly and accurately identify parties to financial transactions. The OFR believes the LEI will improve the ability of both regulators and market participants to mitigate risks posed to the financial system by, for example, providing a better understanding of true exposures and interconnections among and across financial companies.

The Financial Stability Board, or FSB, recently announced progress in making the global financial system more transparent and less vulnerable to excessive risk-taking through the creation of an LEI Expert Group. The formation of the LEI Expert Group will build on the work of Treasury’s OFR and its global counterparts in advancing the LEI initiative. The OFR has played an active role to help build international consensus and facilitate adoption of a global LEI standard and we are excited to support the Expert Group in its efforts.

The FSB’s LEI Expert Group will be comprised of public officials from around the world, including the US, and supported by an industry advisory panel. The FSB has committed the group to deliver concrete proposals by April on the implementation of a global LEI system for review by the FSB and delivery to the G-20 at the June 2012 Summit. Included in this proposal will be recommendations for the appropriate governance framework for implementation of the global LEI initiative, as requested at the G-20 Cannes Summit in November 2011. This aggressive timeline for making progress on the LEI initiative is great news and we stand ready to help make sure the FSB can meet these ambitious and important deadlines.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The United States Sentencing Commission is considering promulgating certain amendments to the sentencing guidelines, policy statements, and commentary.  With respect to the Dodd-Frank Act the action includes:

  • An issue for comment in response to the issue of harm to the public and financial markets, as raised by each of two directives to the Commission in section 1079A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203;
  • a proposed change to § 2B1.4 (Insider Trading) to implement the directive in section 1079A(a)(1) of the Dodd-Frank Act, and related issues for comment on insider trading, securities fraud, and similar offenses;
  • proposed changes to § 2B1.1 (Theft, Property Destruction, and Fraud) regarding  mortgage fraud offenses to implement the directive in section 1079A(a)(2) of the Dodd-Frank Act, and a related issue for comment on mortgage fraud and financial institution fraud.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.