Dodd-Frank Implementation: Navigating the Road Ahead

Dwight C. Smith is a partner at Morrison & Foerster LLP focusing on bank regulatory matters. This post is based on the introduction of a Morrison & Foerster booklet edited by Mr. Smith, Charles Horn, and Anna Pinedo; the full publication is available here.

In 2013, banking organizations, securities firms, insurance companies, and other participants in the financial services industry should stop to consider how the implementation of the Dodd-Frank Act has unfolded and to plan for new compliance duties that will or are likely to take effect. Regulators likewise would be advised to take a step back themselves and consider how implementation has proceeded. The incoming 113th Congress will certainly debate possible changes to Dodd-Frank, although the prospects for substantive follow-up legislation, corrective or otherwise, are uncertain at best.

This booklet broadly reviews the critical developments under Dodd-Frank that occurred during the second half of 2012 and considers how and what events may occur, as well as what trends may emerge in 2013. This is not an exhaustive review of all of the Dodd-Frank issues, but we have tried to identify those issues with important consequences for the financial services industry.

One set of developments we can be sure about is the finalization of at least some of the major pending regulations. Attached as an appendix is a series of charts that show the degree of progress that the federal financial regulators have made in issuing the hundreds of regulations required by Dodd-Frank. The results are mixed. In quantitative terms, the regulators have finalized a considerable number of regulations, and, although the regulators are behind schedule, they have been productive, considering their resource limitations.

At the more important qualitative level, however, the regulators have yet to complete most of the critical—albeit many of the most complicated—rules, which, when finalized, could require industry restructurings and other significant changes in the way various industry participants do business. Several such proposals are pending and may well be completed in the first half of 2013.

Outlined briefly below are the areas in which we expect significant action by the federal financial regulatory agencies. Readers should keep in mind, however, that economic and political developments outside the confines of Dodd-Frank will affect implementation. Residential mortgage lending is a case in point. Three different pending rulemakings— capital requirements, “qualified residential mortgages,” and “qualified mortgages”—are likely to result in onerous limitations on, and additional costs to, the residential mortgage origination business; at the same time, broader issues—the recovery of the housing market, the nature of housing finance, and the roles of Fannie Mae and Freddie Mac— will influence the content of the final rules.

Regulatory activity on Dodd-Frank in 2013 is likely to include the following:

  • Financial Stability Reform. Fundamental elements of systemic risk regulation should be completed in 2013. The Federal Reserve Board (the “Board”) should finish the enhanced prudential standards that it proposed in December 2011 for U.S. banks with assets of $50 billion or more and nonbank financial institutions that have been designated as systemically important (“nonbank SIFIs”). Comparable standards for foreign banking organizations (“FBOs”) were proposed on December 14, 2012; completion of this proposal is likely some months away but should occur before the end of 2013. Additionally, the Financial Stability Oversight Council (the “Council”) should designate the first nonbank institutions as systemically important.
  • Resolution Planning. Resolution planning, including “living will” submissions, is now well underway. The first wave of living will filings, involving bank holding companies and FBOs with $250 billion or more in assets began in July 2012. Banking organizations with less than $250 billion but $100 billion or more must file on July 1, 2013, and all other banking institutions with assets of more than $50 billion must file by December 31, 2013. In addition, the Federal Deposit Insurance Corporation (“FDIC”) has announced its preferred “top-down” strategy for the liquidation of financial institutions whose failure could harm financial stability. Separately, on an international level, the crisis management groups for each of the 29 G-SIBs are expected to complete their own resolution strategies for these institutions in the first half of 2013 and then to assess these plans in the second half of 2013.
  • Agencies and Agency Oversight Reform. Leadership changes at the Treasury Department and the Securities and Exchange Commission (“SEC”) may affect Dodd-Frank implementation, but in what manner is difficult to predict. If the Administration and Congress take up housing finance reform—by no means a foregone conclusion—then changes to Federal Housing Finance Agency (“FHFA”) may follow. Otherwise, all agency changes required by Dodd-Frank, both the creation of new agencies and the abolition of another, have been completed.
  • Securitization Reform. The securitization market in the United States continues to suffer as market participants await clarity regarding risk retention requirements, and some insight into the future of the U.S. housing finance system. Although we may have to continue to wait a bit longer for any clarity on the future of the government-sponsored enterprises (“GSEs”), it is likely that the SEC and banking agencies will move toward finalizing risk retention requirements in the early part of 2013. In addition, the SEC remains committed to releasing a Regulation AB II reproposal early in 2013.
  • Derivatives Regulation. For 2013, there are several major issues that are likely to garner significant attention as further implementation of Title VII proceeds. Such issues include the finalization of the rules and principles governing Swap Execution Facilities, the progress toward resolving the complex question of how to regulate the cross-border and international swaps market, the expansion of swaps clearing or alternatively the migration of swaps to the futures markets, and the real world efforts of the new regulated swaps entities to implement that vast new Title VII regime given the numerous technological, operational, cost and personnel challenges confronting these entities. An overriding issue that remains is, given the extensive compliance and liquidity burdens of the new regulatory regime, what type of swaps market will emerge and become the new norm?
  • Investor Protection Reform. In 2013, we expect the SEC to continue its aggressive enforcement actions through examinations, proactive disclosure efforts and rulemaking focused on investor protection, particularly concerning investment advisers, broker-dealers and investment companies. We expect the SEC to move forward with recommendations from a staff report to consider a uniform fiduciary standard of conduct for investment advisers and broker-dealers when providing investment advice to retail investors about securities.
  • Credit Rating Agency Reform. Rating agencies have become subject to numerous regulatory and compliance obligations since the passage of the Dodd-Frank Act; however, questions regarding the issuer-pay business model remain unaddressed. The SEC will be required to finalize a number of the proposed rulemakings related to reliance on ratings in existing regulations.
  • Volcker Rule. The federal regulators should complete the Volcker Rule early in 2013—at least according to Federal Reserve Chairman Ben Bernanke. The timing is difficult to handicap, however, particularly given the change in leadership at the SEC, which is said to have had substantive differences with the federal banking agencies over the nature and requirements of the rule.
  • Compensation, Corporate Governance, and Disclosure. SEC rulemaking actions on Dodd-Frank’s “say-on-pay”, compensation committee and adviser independence, and proxy access have been completed, and are now at the implementation stage for affected corporate issuers and self-regulatory organizations. Further regulatory action by the SEC and the banking agencies on executive compensation substance and disclosure requirements, as well as other related corporate governance requirements, is needed but may not be completed in 2013.
  • Capital Requirements. We anticipate that, in the first half of 2013, the federal bank regulatory agencies will finalize the three capital proposals that were released in June 2012. Although the agencies had contemplated final capital rules would be in place by January 1, 2013, the delay should not affect compliance efforts dramatically, since the new requirements generally phase in over several years.
  • Foreign Bank Regulation. The federal regulators will give the treatment of FBOs under Dodd-Frank increased attention in 2013. The recently proposed enhanced prudential standards for FBOs will be the centerpiece of regulatory action. In addition, the Federal Reserve Board and the FDIC are beginning discussions with the scores of FBOs subject to the resolution planning requirements, which will have to file plans in 2013. Extraterritoriality is a theme that runs throughout Dodd-Frank; finalization of the Volcker Rule, and further guidance from the Commodity Futures Trading Commission (“CFTC”), will be the first test of how far the regulators intend to push Dodd-Frank.
  • Consumer Protection Reform. The Consumer Financial Protection Bureau (the “Bureau”) will likely issue several final rules dealing with mortgage transactions in early 2013. In addition, in 2013, we anticipate the Bureau will focus on several additional matters, including gift cards and the reporting of mortgage data under the Home Mortgage Disclosure Act. The Bureau may also explore actions dealing with credit reporting and debt collection issues during the coming year.
  • Mortgage Origination and Servicing. The Bureau will, we expect, complete at least five of six wide-ranging rulemakings that were proposed in the last half of 2012 and that would give effect to many of the major mortgage reforms in Title XIV of the Dodd-Frank Act. The sixth, which may or may not be finished, involves the integration of Regulation X and Regulatory Y disclosures. Additionally and perhaps most importantly, we expect that, before the end of January 2013, the rule defining “qualified mortgage” will be finalized.
  • Specialized Corporate Disclosures. All SEC rulemakings in this area that are required by Dodd-Frank — conflict minerals, mine operators and resource extraction issues – have been completed. The tasks of implementing these new requirements, however, will present significant challenges for corporate issuers. Mine operator reporting requirements already are effective, whereas initial disclosures for conflict minerals will not be required until May 2014; the resource extraction disclosure requirements become effective for fiscal years ending after September 30, 2013.

The full publication is available here.

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