A reorganization of the federal banking agencies and numerous new limitations and requirements designed to strengthen the banking system are an integral part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Highlights of the final legislation include the following:

  • Various institutional changes are to take place on or after the "transfer date," which is one year after the date of enactment, subject to a possible extension of the transfer date until up to 18 months after the date of enactment. Notice of an extension of the transfer date must be published in the Federal Register by the Secretary of the Treasury not later than 270 days after the date of enactment.

        • The Office of Thrift Supervision (OTS) is abolished effective 90 days after the transfer date. The thrift charter is preserved.
        • Supervision of thrift holding companies and their nondepository subsidiaries is transferred to the Federal Reserve Board (FRB). Also transferred to the FRB is rulemaking authority relating to thrift affiliate transactions, loans to insiders, and tying arrangements.
        • OTS functions relating to federal thrifts and rulemaking authority for all thrifts are transferred to the Office of the Comptroller of the Currency (OCC).
        • OTS functions relating to state thrifts other than rulemaking are transferred to the Federal Deposit Insurance Corporation (FDIC).
        • The Director of the Consumer Financial Protection Bureau takes over the position of the OTS Director on the FDIC Board.

    • The base used for FDIC assessments is changed to use a depository institution’s average total assets minus its average tangible equity during the assessment period instead of its deposits.

    • The maximum deposit insurance amount is permanently increased to $250,000 retroactive to January 1, 2008. Full insurance of noninterest-bearing transaction accounts is also extended for an additional two years.

    • The FDIC cannot approve an application for deposit insurance that was received after November 23, 2009, for an industrial bank, credit card bank, or trust bank that is directly or indirectly owned or controlled by a commercial firm. Subject to certain exceptions, the FRB cannot approve a change of control of an industrial bank, credit card bank, or trust bank if the change in control would result in such bank being directly or indirectly controlled by a commercial firm. These restrictions expire three years after the date of enactment.

    • The FRB must, on its own or pursuant to recommendations by the Financial Oversight Stability Council created by the Dodd-Frank Act, establish more stringent prudential standards, including risk-based capital requirements and leverage limits, for certain larger bank holding companies. The standards can differentiate among companies on an individual basis or by category. The enhanced standards apply only to bank holding companies with at least $50 billion in assets, and the FRB can set a higher asset threshold for the application of certain standards.

    • Depository institution holding companies must serve as a "source of strength" for the insured depository institution.

    • The well-capitalized and well-managed standard that a financial holding company must satisfy to qualify for such status will also apply to the holding company itself, rather than only to a depository institution subsidiary.

    • The federal banking agencies must establish new minimum leverage and risk-based capital requirements on a consolidated basis for various entities, including insured depository institutions and depository institution holding companies. These capital requirements must address risks that the activities of such entities pose not only to the institution but also to the financial system. Trust preferred securities can no longer be used as an element of Tier 1 capital. An exception for depository institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009, provides that such a company is not required to make any deductions from Tier 1 capital for trust preferred securities issued by such a company before May 19, 2010.

    • The FRB must examine the activities of each nondepository institution subsidiary of a depository institution holding company (other than a functionally regulated subsidiary or subsidiary of a depository institution) that are permissible for deposit institution subsidiaries using the same standards and with the same frequency as would be required if such activities were conducted in the holding company’s lead depository institution. The federal banking regulator for the lead depository institution has backup authority to examine the nondepository institution subsidiary. Such regulator, based on a backup examination, can recommend to the FRB that it take enforcement action against the nondepository institution subsidiary and may take such action itself if the FRB does not act within 60 days of receiving the recommendation.

    • New limits on acquisitions in the Bank Holding Company Act (BHCA) include a requirement for the FRB to consider the extent to which a proposed acquisition of a bank or nonbank company by a bank holding company would result in greater risk to U.S. financial stability, capital and management requirements for interstate bank acquisitions, and a liability cap that prohibits depository institutions, bank and savings and loan holding companies, and other types of entities from acquiring all or substantially all of the assets or control of another company if the total consolidated liabilities of the acquiring company exceed such cap.

    • Amendments to Sections 23A and 23B of the Federal Reserve Act include an expansion of the coverage of those provisions, tightening of collateral requirements, and changes to the authority of the FDIC, OCC, and FRB to grant exemptions.

    • Subject to certain limited exceptions, the "Volcker Rule" bans insured depository institutions, their holding companies or companies treated as bank holding companies under the BHCA, and any subsidiaries of such institutions or companies from engaging in proprietary trading or sponsoring or investing in hedge funds and private equity funds. The Financial Stability Oversight Council created by the Dodd-Frank Act is charged with completing a study within six months of the date of enactment that makes recommendations for implementing the Volcker Rule. The appropriate federal banking agencies, the U.S. Securities and Exchange Commission, and the Commodity Futures Trading Commission are required to issue final regulations implementing the Volcker Rule not later than nine months after the Council completes its study.

    • Effective one year after the date of enactment, the prohibition on payment of interest on demand deposits is repealed.

    • Credit card banks can issue credit cards to small businesses that meet the Small Business Administration’s eligibility criteria for business loans.

    • Orderly liquidation authority is given to the Secretary of the Treasury, which is intended to avoid taxpayer bailouts of distressed financial companies that present systemic risks, including bank holding companies. In an orderly liquidation, the FDIC is appointed receiver and operates the company so as to maximize its sale value. The FDIC can impose assessments on large financial companies to recover the costs of an orderly liquidation.

    • Each agency identified by the Dodd-Frank Act must establish its own "Office of Minority and Women Inclusion." The identified agencies are the Department of the Treasury, the FDIC, the Federal Housing Finance Agency, each of the Federal Reserve Banks, the FRB, the National Credit Union Administration, the OCC, the Securities and Exchange Commission, and the new Consumer Financial Protection Bureau. Each such Office will be headed by a Director who must develop and implement standards and procedures to ensure "the fair inclusion and utilization of minorities, women, and minority-owned and women-owned businesses in all business and activities of the agency at all levels, including in procurement, insurance, and all types of contracts." The contracts to which the "fair inclusion and utilization" standard applies include "all contracts of an agency for services of any kind, including the services of financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants, and providers of legal services." Contractors must ensure the fair inclusion of women and minorities in their workforce, and a contract is subject to termination based on a determination that the contractor failed to make a good faith effort to achieve such inclusion.

    Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr. , 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.

    Ballard Spahr's Financial Institutions Reform Task Force will continue to monitor these and other portions of the Dodd-Frank Act, and its members are available to assist clients as they prepare to address the new requirements.

    Return to the Dodd-Frank Act Brings Sweeping Regulatory Changes alert.

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