Iowa Banking Law Blog

Turf Battles May Impede Financial Regulatory Reform

The global credit crisis, the global recession, the decline in real estate values and the negative effects of these events on the banking industry have stimulated interest in regulatory reform of the financial sector.  The existence of complex interactions among participants and products in the global financial markets has become more apparent.  Unprecedented measures have been taken to address frozen credit markets, the collapse of massive financial firms and the spreading contagion associated with “toxic” assets.   Questions have been raised about the adequacy and effectiveness of many existing regulatory structures and about whether regulation should be extended to activities that currently are unregulated.  There are perceived advantages and risks associated with concentrating regulatory authority in a single regulator.  There has been discussion of the possibility of having a panel of regulators deal with systemic risk issues. Such an approach would be similar to the proposed European Systemic Risk Council, which would include the president of the European Central Bank and central bank governors from the European Union’s 27 member countries. 

 

Although there is general recognition that disruptions in financial markets cannot be eliminated, the need for more effective safeguards against systemic risk is clear.  Despite statements that something must be done, there is considerable disagreement about the exact nature of the changes that should be made.  Reform will be politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives. Any financial industry regulatory reform raises questions about who should be performing particular kinds of regulation and how that regulation should be performed. Set forth below are some of the more contentious issues:

• Should there be one or more than one systemic risk regulators?

• Should hedge funds be regulated?

• Should currently unregulated derivatives be regulated?

• Should there be increased regulation of the mortgage industry?

• Should there be regulation of the sale of securitized assets?

• Should there be federal regulation of the insurance industry?

• Should some or all federal bank regulatory agencies be consolidated?

• Should failing non-bank financial companies be placed into receivership?

• Should there be a reallocation of jurisdiction between the SEC and the CFTC?

• Should there be a clearinghouse for over-the-counter derivatives?

• Should credit default swaps be regulated?

• Should short selling be more tightly regulated?

• Should there be more countercyclical capital requirements?

• Should the use of leverage be more tightly regulated?

• Should there be more regulation of money market funds?

• Should the role of state banking regulation be diminished?

• Should there be more robust enforcement of consumer protection laws?

• Should there be more disclosure of positions of larger market participants?

• Should regulatory changes extend to compensation and corporate governance?

Whether or not all of these issues are resolved in the near future, it seems clear that substantial changes in the operation of financial market regulation lie ahead. What is also clear is that the outcome of turf battles will have a major role in determining the future of the financial regulatory structure.

 

Recent news reports highlight some of the problems that can arise in the context of turf disputes.  According to a recent article in The Economist, “The stiffest resistance to change is coming not from Wall Street but from Washington, DC, where government officials, regulators and congressional leaders are locked in turf wars and ideological battles.”  Bloomberg reports that because of “resistance on Capitol Hill” and “pushback from entrenched interests,” a merger of the SEC and the CFTC may not be pursued.   An article in The Wall Street Journal comments on the FDIC’s “increasingly tough position” toward the management of Citigroup Inc. leading to “a bitter clash between regulators” about the speed and adequacy of efforts to improve the firm’s capital position.  In an earlier article The Wall Street Journal reported on Congressional committee disputes over jurisdiction of the regulation of over-the counter derivatives.  As the most traumatic aspects of the financial crisis pass into memory, it seems increasingly likely that bureaucratic infighting will play a major role in limiting the scope of any reform of the financial sector.  

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC Forms Advisory Committee to Study Community Banks

The FDIC Board of Directors today approved establishing the FDIC Advisory Committee on Community Banking.  The Committee will provide the FDIC with advice and guidance on a broad range of important policy issues impacting small community banks throughout the country, as well as the local communities they serve, with a focus on rural areas.

"Community banks are the lifeblood of our nation's financial system, supplying much-needed credit to countless individuals, small businesses, nonprofit organizations and other entities in large and small towns around the country," said FDIC Chairman Sheila C. Bair. "Our committee will get direct and frequent input on many issues from a cross-section of community bankers nationwide, which is critically important."

The Advisory Committee is expected to study examination policies and procedures, credit and lending practices, deposit insurance assessments, insurance coverage issues, regulatory compliance matters, and obstacles to the continued growth and ability of community banks to extend financial services in their local markets in the current environment.

False Claims Act Liability and the Economic Stimulus Package

The Federal Deposit Insurance Corporation (the “FDIC”) has received over 400 comment letters on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  A review of several of these comments letters reveals the complexity of the issues that will be involved in the implementation of the Legacy Loans Program.  The comments address a large number of issues, including the role that would be played by the FDIC in making the Legacy Loans Program work. 

 

Some basic terms of the Legacy Loans Program are already rather clear. Under the Legacy Loans Program, the Department of the Treasury (“Treasury”) and private investors would contribute equity capital on a 1-for-1 basis to form Public-Private Investment Funds (“PPIFs”).  A PPIFs would purchase loan pools.  Such purchases would be funded using the PPIF’s equity capital and the proceeds of debt issued by the PPIF.  The PPIF could have a debt to equity leverage ratio of up to 6-to-1 with FDIC approval.  The FDIC would provide various managerial oversight services, including conducting auctions of the loan pools, and would guarantee the debt financing issued by the PPIF.  As currently proposed, the FDIC guarantee would be made on a non-recourse basis (secured only by the PPIF’s assets).  In connection with each completed transaction under the Legacy Loans Program, Treasury would receive warrants and the FDIC would receive an annual guarantee fee.  

 

Encouraging Participation.  A number of suggestions were made concerning the manner in which the FDIC could encourage participation in the Legacy Loans Program.  Some of these suggestions emphasized the importance of (1) promoting clarity and consistency with respect to the manner in which the Legacy Loans Program would operate and avoiding retroactive changes, (2) establishing reserve prices that would both encourage seller participation in auctions and assure potential buyers that if the reserve price were met there would be a commitment to complete the sale, (3) giving private investors as much flexibility as possible in deciding how to operate the PPIFs, (4) avoiding the imposition of executive compensation restrictions on private parties who participate in the Legacy Loans Program,  (5) minimizing certain regulatory issues relating to ERISA and the Investment Company Act of 1940, (6) the resolution of certain tax issues that may arise depending on the structure of each PPIF, and (7) using standardized documents to make participation more attractive to smaller financial institutions.

 

The Auction Process.   Suggestions were made concerning the manner in which the FDIC should conduct auctions for loan pools.  Among these suggestions were (1) requiring assurance that transactions (as opposed to mere pricing exercises) would result from the auctions by use of reserve prices or other means, (2) allowing bidding on separate sub-pools within a loan pool, (3) using an initial round of preliminary indication of interest bidding, (4) using sealed bidding, and (5) considering use of privately negotiated transactions in some situations. 

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Ideas About the FDIC's Role in the Legacy Loans Program

The Federal Deposit Insurance Corporation (the “FDIC”) has received over 400 comment letters on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  A review of several of these comments letters reveals the complexity of the issues that will be involved in the implementation of the Legacy Loans Program.  The comments address a large number of issues, including the role that would be played by the FDIC in making the Legacy Loans Program work. 

 

Some basic terms of the Legacy Loans Program are already rather clear. Under the Legacy Loans Program, the Department of the Treasury (“Treasury”) and private investors would contribute equity capital on a 1-for-1 basis to form Public-Private Investment Funds (“PPIFs”).  A PPIFs would purchase loan pools.  Such purchases would be funded using the PPIF’s equity capital and the proceeds of debt issued by the PPIF.  The PPIF could have a debt to equity leverage ratio of up to 6-to-1 with FDIC approval.  The FDIC would provide various managerial oversight services, including conducting auctions of the loan pools, and would guarantee the debt financing issued by the PPIF.  As currently proposed, the FDIC guarantee would be made on a non-recourse basis (secured only by the PPIF’s assets).  In connection with each completed transaction under the Legacy Loans Program, Treasury would receive warrants and the FDIC would receive an annual guarantee fee.  

 

Encouraging Participation.  A number of suggestions were made concerning the manner in which the FDIC could encourage participation in the Legacy Loans Program.  Some of these suggestions emphasized the importance of (1) promoting clarity and consistency with respect to the manner in which the Legacy Loans Program would operate and avoiding retroactive changes, (2) establishing reserve prices that would both encourage seller participation in auctions and assure potential buyers that if the reserve price were met there would be a commitment to complete the sale, (3) giving private investors as much flexibility as possible in deciding how to operate the PPIFs, (4) avoiding the imposition of executive compensation restrictions on private parties who participate in the Legacy Loans Program,  (5) minimizing certain regulatory issues relating to ERISA and the Investment Company Act of 1940, (6) the resolution of certain tax issues that may arise depending on the structure of each PPIF, and (7) using standardized documents to make participation more attractive to smaller financial institutions.

 

The Auction Process.   Suggestions were made concerning the manner in which the FDIC should conduct auctions for loan pools.  Among these suggestions were (1) requiring assurance that transactions (as opposed to mere pricing exercises) would result from the auctions by use of reserve prices or other means, (2) allowing bidding on separate sub-pools within a loan pool, (3) using an initial round of preliminary indication of interest bidding, (4) using sealed bidding, and (5) considering use of privately negotiated transactions in some situations. 

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Initial Actions Relating to FDIC's Legacy Loans Program

On March 26, 2009, the Federal Deposit Insurance Corporation (the “FDIC”) issued a press release seeking comments on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  The comment period extends until April 10, 2009.  Under the Legacy Loans Program, the Department of the Treasury and private investors would form Private-Public Investment Partnerships (“PPIFs”) that would purchase loan pools using their equity capital combined with debt financing to provide leverage guaranteed by the FDIC.   

 

It is worthwhile to review the questions on which the FDIC is seeking public comment.  Those questions demonstrate the scope of the issues presented and provide some idea about the ways in which the FDIC may implement the Legacy Loans Program.  FDIC Chairman Sheila C. Bair and members of the FDIC staff have been hosting telephone conference calls to discuss the Legacy Loans Program.  These conference calls also provide some preliminary indications of the policy choices that may be made by the FDIC. 

 

The FDIC is seeking public comment on questions relating to eligible asset categories, the extent of government equity participation, ways to encourage participation, issues relating to the permissible structure and operation of the PPIFs and PPIF auctions, servicing requirements, the appropriate role of asset managers and independent valuation consultants, pooling arrangements involving multiple banks, the oversight role of the FDIC and FDIC guarantee fees.  Discussion of some of these issues on telephone conference calls suggests that the FDIC intends to follow certain broad principles but that many details may depend on the FDIC’s evaluation of public comments.  

 

Some of the principles to which the FDIC already seems committed include (1) assuring the ability of all banks not in receivership to participate in the Legacy Loans Program, (2) encouraging participation by many private investors, (3) seeking transparency, arms-length transactions and competitive auctions of pools of loans, (4) placing an initial emphasis on residential and commercial real estate loans, (5) permitting risky loans and loans that do not have a positive cash flow to be included, (6) imposing reasonable limitations on the manner in which purchased loans are handled, (7) determining separately the amount of leverage to be provided for each transaction, and (8) providing a way for bidders to evaluate each pool of loans in advance of the auction.   

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC's Challenging Role in Legacy Loans Program

On March 23, 2009, the Department of the Treasury (“Treasury”), in conjunction with the Federal Deposit Insurance Corporation (the “FDIC”) and the Federal Reserve, announced the Public-Private Investment Program.  The Public-Private Investment Program has two separate aspects, the purchase of legacy loans and the purchase of legacy securities. 

 

FDIC Chairman Sheila C. Bair issued a statement welcoming the purchase of legacy loans (the “Legacy Loans Program”) as “a critical step forward in the process of restoring clarity to the markets.”  She noted the existence of “inherent challenges to implementing a program of this magnitude quickly” but indicated that the FDIC would begin immediately and would move forward “in a methodical and transparent fashion.”  It is no secret that from the inception of the credit crisis FDIC Chairman Bair has advocated addressing problems in the mortgage market, and she may see the Legacy Loans Program as a way of advancing that agenda. 

 

The operation of the Legacy Loans Program will depend to a great extent on actions to be taken by the FDIC.  Among other things, the FDIC’s ability to guarantee the debt of the Private-Public Investment Partnerships (“PPIFs”) that would purchase loan pools would be used to add leverage to the Legacy Loan Program.  Important practical issues include uncertainties about the details of the FDIC’s responsibilities and the difficulties the FDIC may encounter in attempting to carry out its responsibilities on a timely basis.  The challenges of implementation to be addressed by the FDIC include following actions:

 

·         Establish loan pool purchase criteria

·         Oversee formation, funding and operation of PPIFs

·         Agree with Treasury about allocation of costs and responsibilities

·         Evaluate whether particular loan pools meet criteria

·         Oversee initial due diligence and preparation of required marketing materials

·         Select third party evaluation firms to advise the FDIC

·         Determine appropriate leverage level for each sale

·         Pre-qualify private investors to bid at auction of loan pools

·         Establish criteria for information banks provide to the FDIC and to bidders

·         Conduct auctions of loan pools and select winning bid

·         Determine timeframes for banks to accept or reject winning bids

·         Issue guarantees of PPIF debt

·         Issue a “Guaranteed Secured Debt for PPIFs Term Sheet”

·         Establish and collect administrative fees and guarantee fees

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC Amends Regulation Governing Securities Transactions by Bank Officers

The FDIC's amendment to Section 344.9(a)(3) of its regulations extends the deadline for providing quarterly reports of personal secruities transactions from 10 business days to 30 calendar days after the end of the calendar quarter.  Under the rule officers and employees who, in connection with their duties, obtain information concerning securities in which they have an interest must report all of his or her securities transactions to the bank.  See FDIC Release.

The rule became effective on Monday, November 26, 2007. 

FDIC ISSUES FINAL RULE FOR OPTING OUT OF MARKETING

On July 15, 2004, the Agencies published a joint notice of proposed rulemaking regarding the issuance of opt out notices by institutions that share information with affiliates.  The proposed rulemaking would prohibit affiliates from using that information for marketing purposes, unless the affected consumer has been provided the opportunity to opt out but have elected not to do so.

The FDIC received 29 comments from financial institutions or holding companies, trade associations, businesses, community groups, the National Association of Attorneys General, and various individuals.  Among the highlights of the final rule are as follows:

-          Three conditions must be met before an affiliate may use eligibility information for marketing purposes: 1) an affected consumer must receive clear written notice that the affiliate may use shared eligibility information to make solicitations to that consumer; 2) the consumer must be provided with reasonable opportunity to opt out; 3) the consumer must not have exercised the opportunity to opt out.

-          An opt out must be valid for at least five years.  Thereafter, consumers must be given a renewal notice and a reasonable opportunity to opt out.

-          The opt out notice must be provided by an affiliate that has or has previously had a pre-existing business relationship with the consumer.

-          Service providers may receive eligibility information from an affiliate and market to the affiliate’s customers without a notice and opt out.  This ensures that the affiliate with the pre-existing relationship controls the service provider’s receipt and use of the information.

-          An affiliate marketing notice may be coordinated and consolidated with other notices or disclosures that are required to be issued.

There are certain exceptions to the notice and opt out requirements, such as instances where there is a pre-existing business relationship, responding to a communication initiated by the consumer, and complying with state laws.

A copy of the final rule can be found here.

Reform of Financial Services Regulation, Long Rumored, Now Questioned

The U.S. Treasury today has begun the long anticipated review of the regulation of financial services in the United States. The U.S. Treasury will be seeking comment and pose a series of questions to determine whether the current system of regulation is working. The agency apparently intends to conduct an in depth inquiry as to whether the federal oversight can be streamlined with the obvious implication that the number of regulatory agencies needs to be reduced. For example, should the Office of Thrift Supervision and the Office of the Comptroller of Currency be combined? What role should the Federal Reserve have in the bank regulation? Should the FDIC serve as both insurer and regulator? No industry is immune from revisiting its regulation. Banking, insurance, securities and commodities are all at issue. These questions should ignite a spirited and vested debate.  A monumental proposal for a changing of the guard may be on the horizon.

The formal notice and request for public comment from the Department of Treasury is available here: Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions.

FDIC to Host Free Seminars for Bank Employees

The FDIC will conduct two series of 4 telephone seminars on deposit insurance coverage for bankers.  The first series begins on October 16 and ends on October 25.  The second, identical series will be from November 6 through November 15.  The series is designed to provide bankers with a comprehensive understanding of FDIC deposit insurance coverage. 

For more information, see this release from the FDIC.