Dodd-Frank News Center

American Securitization Forum Urges SEC Not to Take Broad Reading of Material Conflict of Interest When Crafting Dodd-Frank Volcker Regulations

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

With regard to the conflict of interest provision in Dodd-Frank co-authored by Senators Carl Levin and Jeff Merkley, the American Securitization Forum urged the SEC to, consistent with legislative intent, adopt regulations specifically tailored to prohibit transactions that create a material incentive for firms to intentionally design asset-backed securities to fail or default. Section 621, one of the Volcker provisions of Dodd-Frank, prohibits firms from packaging and selling asset-backed securities to their clients and then engaging in transactions that create conflicts of interest between them and their clients. In the Forum’s view, a broad reading of Section 621 could effectively lead to a contraction of available credit for consumer finance and small business, where securitization has provided a significant source of funding, including mortgage loans and auto loans.

General Motors to Repurchase Treasury Preferred Stock

This story appeared in Bank Digest.

The Treasury Department has announced that it has accepted an offer by General Motors to repurchase its $2.1 billion of Series A preferred stock issued under the Trouble Asset Relief Program, conditioned on the closing of the proposed initial public offering of GM’s common stock. With this repurchase, taxpayers will have received a total of $9.5 billion from GM through repayments, interest and dividends, since the company emerged from bankruptcy in July 2009. After this repurchase, the Treasury’s investment in GM will be limited to 60.8 percent of the company’s primary common equity, before giving effect to any sale of its shares in the initial public offering. Under the agreement, GM will purchase the Treasury’s 83,898,305 Series A shares at a price per share of $25.50, which is equal to 102 percent of the liquidation preference. GM will consummate its purchase of the Treasury’s Series A preferred stock on the first dividend payment date that occurs after the initial public offering.

Minnesota Bank Files Lawsuit Against Dodd-Frank Provision

By John Filar Atwood. This story will appear in the November 4, 2010 edition of SEC Filings Insight.

In one of the first challenges to the newly minted Dodd-Frank Wall Street Reform and Consumer Financial Protection Act, TCF National Bank has filed a lawsuit that challenges the constitutionality of a provision of the law dealing with bank interchange fees.  The provision, commonly referred to as the Durbin Amendment, directs the Federal Reserve Board to enact regulations that limit the amount of interchange fees certain banks can charge retailers on debit card transactions.  TCF’s chairman said that the Durbin Amendment violates the bank’s Constitutional rights by taking its property without just compensation and due process of law, and without providing equal protection under the law.

Treasury Sees No Systemic Risk from Foreclosure Crisis

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

Widespread problems surrounding the processing of mortgage foreclosure documents do not appear to be creating a systemic risk to the broader financial system at this time, a Treasury Department official told the Congressional Oversight Panel Oct. 27, 2010.

Phyllis Caldwell, who leads the Treasury’s Homeownership Preservation Office, said that while the Treasury is watching events closely, “at this point in time, there is no evidence that there is a systemic risk to the financial system.”

Asked if the Treasury had made any sort of estimate for potential costs to large financial institutions if they are forced to buy back mortgage-backed securities, Caldwell noted that “the news continues to have a wide range of projections and numbers, so I’m not prepared to say that there is a particular scenario.”

However, Caldwell added that the Treasury is working closely with all of the federal agencies involved, “to make sure that the risks are appropriately disclosed and measured and that we have a better understanding of what the potential risks could be.”

Panel member Damon Silvers, Director of Policy and Special Counsel at the AFL-CIO, expressed concern with Caldwell’s assessment regarding systemic risk. He noted that if Bank of America were forced to repurchase $47 billion of mortgage-backed securities at par, it would subsequently take a $23 billion loss. Silvers added that Bank of America has $2 trillion in mortgage-backed securities, and five similar requests to buy back the securities would amount to more than Bank of America’s current capitalization. “It is not a plausible position that there is no systemic risk here,” Silvers said.

SEC Seeks Comments in Aid of Dodd-Frank Mandated Study on Extraterritorial Reach of Federal Securities Laws

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

The SEC has requested, Release No. 34-63174, public comments to help it conduct a Dodd-Frank Act mandated study to determine the extent to which private rights of action under the antifraud provisions of the Securities Exchange Act should be extended to cover transnational securities fraud. Congress ordered the study in the wake of this year’s US Supreme Court ruling that Rule 10b-5 does not provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.

SIGTARP Announces Audit of Treasury’s GM Investment

This story appeared in Bank Digest.

The Special Inspector General of the Troubled Asset Relief Program (SIGTARP) Neil M. Barofsky has announced the initiation of an audit of the Treasury Department's decision-making process relating to its investment in General Motors Company (GM). The audit will review the Treasury's process and plans, and its supporting analyses, for its actual and planned disposal of its investments in GM, and the role the Treasury played in reviewing, approving or otherwise participating in GM's decision to acquire AmeriCredit.

EU Reaches Compromise on Legislation Regulating Hedge Funds, Final Vote in Parliament Set for Early November

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

EU authorities reached a final compromise on draft legislation regulating hedge funds and alternative investment funds. The European Parliament is expected to vote on the legislation in early November. Commissioner for the Internal Market Michel Barnier hailed the breakthrough agreement as a victory for transparency and risk management in the alternative investment fund area. He said that the legislation will require regulators to authorize hedge fund managers and give regulators the tools to control risk-taking, including the level of leverage. Information on leverage and other systemically important information must be shared with the new European Systemic Risk Board. On the very sensitive question of access of US and other non-EU funds to the EU market, the issue of an EU passport, the draft foresees a passport for US and other third-country funds and managers. According to Commissioner Barnier, it will be a passport on merit, founded on a solid basis and providing strong controls in terms of risk management. It will also reinforce the internal market.

Grassley, Issa Respond to Quarterly SIGTARP Report

This story appeared in Bank Digest.

The Special Inspector General for the Troubled Asset Relief Program's Quarterly Report to Congress, dated Oct. 26, 2010, discusses, among other things, the estimated losses associated with assistance to American International Group Inc. (AIG). Senate Finance Committee Ranking Member Chuck Grassley, R-Iowa, said the quarterly report “raises the question of whether Administration officials are trying so hard to put a positive spin on program losses that they played fast and loose with the numbers. You can't change the way you calculate losses to come up with a rosy scenario in October and then go back to the real numbers in November without seriously damaging your credibility with the American people.” House Committee on Oversight and Government Reform Ranking Member Darrell Issa, R-Calif., said that the report, which suggests that taxpayers might profit from the taxpayer-funded bailout of AIG is “nothing short of a betrayal of public trust for the Treasury Department to deliberately manipulate data in a transparent attempt to mislead the American people.”

Wolin Discusses FSOC Roadmap

This story appeared in Bank Digest.

In remarks at the Georgetown University McDonough School of Business, on Oct. 25, 2010, Deputy Secretary Neal S. Wolin discussed steps the Financial Stability Oversight Council (FSOC) has taken in implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. Wolin noted that FSOC members have released an “integrated roadmap“ for implementing the Dodd-Frank Act that reflects the priorities of the various regulatory agencies. Wolin said the FSOC's second meeting is scheduled for Nov. 23, 2010, and that he expects it to “continue its work on systemic risk and discuss the criteria for designating systemic non-bank financial institutions and financial market utilities.”

Comments on SEC Proxy Voting Concept Release Explore Regulation of Proxy Advisory Firms, New Dodd-Frank Mandates Heighten Concern

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

Comments received by the SEC on its proxy voting concept release, 34-62495, reveal a growing consensus in the corporate community that proxy advisory firms should be subject to federal regulation requiring greater transparency and accountability with respect to the formulation of voting recommendations and potential conflicts of interest. For example, in its comment letter to the SEC, General Mills said that proxy advisory firms should be subject to proxy rules and regulated as investment advisers, including mandated disclosure of specific conflicts of interest, and duties to adopt procedures ensuring the accuracy of their reports and voting recommendations. But Nell Minow of the Corporate Library objected in the strongest possible terms to the federal regulation of proxy advisory services, noting the absence of evidence that the proxy advisory firms have been anything but transparent about their approaches and the way they deal with conflicts of interest.