Financial Regulatory Reform: What Directors & Senior Managers Should Know
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Financial Regulatory Reform: What Directors & Senior Managers Should Know Governance, Compensation, Capital & Management Issues August 26, 2010 Jeffrey D. Quayle, Senior Vice President & General Counsel Ohio Bankers League Jeffery E. Smith, Bricker & Eckler.

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Financial Regulatory Reform: What Directors & Senior Managers Should KnowGovernance, Compensation, Capital & Management IssuesAugust 26, 2010Jeffrey D. Quayle, Senior Vice President & General CounselOhio Bankers LeagueJeffery E. Smith, Bricker & Eckler


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What the Dodd-Frank Legislation is. Managers Should Know…And what it isn’t

Devil is in the details and the agency rulemaking process.

The Second Game of the Double Header.


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What the Dodd-Frank Legislation is. Managers Should Know…And what it isn’t

Trickle-down regulation - Is bifurcated regulation feasible or even possible?

Best Practices or Agency Guidance

Changes in Exam Manuals

Deposit Insurance Requirements

Court Decisions

Other Related Legislation


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Boards and Executive Compensation Managers Should Know

Say on Pay

  • Public companies.

  • Non-binding shareholder vote at least once each 3 years.

  • Frequency to be determined by shareholders once every 6 years.

  • Most banks will be required to address in 2011 annual meeting proxy.


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Boards and Executive Compensation Managers Should Know

Say on Golden Parachutes

  • In connection with sale transactions.

  • Give shareholders non-binding vote on such agreements and total compensation for the transaction.

  • Same effective date.


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Boards and Executive Compensation Managers Should Know

Pay Vs. Performance Disclosures

  • Trend.

  • Make size-based comparables irrelevant?

  • Enhanced proxy item disclosure re relationship between executive compensation and financial.

  • Performance of company

  • Comparative ratio of CEO to other employees.


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Boards and Executive Compensation Managers Should Know

Compensation Committee Independence

  • All members.

  • Heightened minimum standards for independence included.

  • To be established by SEC and forced down through exchanges.

  • N/A to “controlled” companies.

  • Effective July 16, 2011.

  • Advisors.

  • Independence standards.

  • Proxy disclosure item.

  • Effective for annual meetings on or after July 21, 2011.


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Boards and Executive Compensation Managers Should Know

Clawbacks

  • Mandatory recovery of incentive compensation after accounting restatement.

  • Incentive compensation paid during 3 year period preceding restatement.

  • Including value of options.

  • No effective date established.


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Boards and Executive Compensation Managers Should Know

How this works in Conjunction with other Federal Provisions

Federal banking agency “guidance” re incentive compensation practices

  • Analysis and implementation of incentive compensation plans.

  • Safety and soundness issue.

  • Document due diligence, analysis, and decision.

  • Regular examination issue.


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Boards and Executive Compensation Managers Should Know

Federal regulators must, within nine

months of enactment, issue regs:

  • Report structure of all incentive based comp arrangements.

  • Prohibit if encourage “inappropriate risk.”

  • And could lead to a material loss.

  • Not applicable if less that $1B in assets.


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Boards and Corporate Governance Managers Should Know

Director Elections

Does not mandate majority

voting in uncontested director

elections, declassified boards, or

independent chairman position.


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Boards and Corporate Governance Managers Should Know

Proxy Access

  • SEC may, but is not required to, promulgate rules that would require that proxy materials include nominee for board submitted by shareholders.

  • Rules likely to be in place by 2011 proxy season.


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Boards and Corporate Governance Managers Should Know

  • Mandatory “Risk Committee”

  • Proxy explanation of why Chairman and CEO positions are separate, or combined.


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Strategic Planning Opportunity Managers Should Know

  • Importance of Governance Tune Up


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Capital Issues Managers Should Know

  • Preparing for Enhanced Capital Requirements

  • Focus on “Systemic Risk”



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Capital Issues: Minimum capital requirements Managers Should Know

  • Bank Holding Companies:

  • Risk-based and leverage capital requirements (including exclusion of certain hybrid instruments from Tier 1 capital:


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Capital Issues- Managers Should KnowCollins Amendment

Impose capital requirements on holding companies that are as strict as those for depository institutions.


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Capital Issues: Collins Amendment Managers Should Know

Exemptions granted during conference committee:

  • Securities sold by Holding Companies < $15 billion before May 19, 2010 are grandfathered for their duration;

  • It will be a matter of availability as well as cost;

  • Larger holding companies have a 3 year phase in, beginning on January 1,2013;

  • Impact on BHC/banks < $500 million.


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Capital-Other Issues Managers Should Know

  • Change in “accredited investor” definition.

  • Exemption for Non-Accelerated Filers from SOX Section 404(b).

  • Increasing Shareholder threshold for exemption from SEC registration.


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Capital-Other Issues Managers Should Know

Capital Requirements are to be Counter Cyclical

  • Consistent with safe & sound banking practices, additional capital will be required in times of growth, but less with be required in time of economic distress.

  • This is going to be required in an environment where all financial institutions are going to be facing higher capital expectations.


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Capital Issues-Strategic Point Managers Should Know

Maximize corporate flexibility for quick and easy access to capital.


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Regulation and Supervision Managers Should Know

Expanded FRB ability to examine

functionally-regulated affiliates of

BHC’s:

  • Provision is made for coordination with other federal & state regulators.

  • The FRB is required to rely “to the fullest extent possible” on reports, exams and other information from other federal regulators.


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Regulation and Supervision Managers Should Know

  • Note also that the FDIC gained back up exam authority for all depository institution holding companies, if it determines that conduct of the HC could threaten the deposit insurance fund.

  • So much for Simplification!


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Regulation and Supervision Managers Should Know

Enhanced source of strength

regulations within one year.


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Regulation and Supervision Managers Should Know

Tweaks to Financial Holding

Company Status

To maintain FHC status;

  • A BHC or SLHC will have to be considered well-managed and well-capitalized.

  • The subsidiary insured depositories will also have to be well-managed and well-capitalized, and also will have to maintain a satisfactory CRA rating.

  • This will be ongoing requirement.


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Regulation and Supervision Managers Should KnowEnhanced de novo branching

  • Local law rules on interstate branching no longer plays a role. If a state permits intra state branching, an out of state bank will be allowed to open a de novo branch.

  • Banks interstate branching will now be the same as it has been for thrifts

  • In a conversion thrifts keep their already approved branches, and henceforth have branching rights the same as a national bank.


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Regulation and Supervision Managers Should Know

  • Expanded 23A limitation coverage including definition of “covered transactions,” expanded collateral requirements, etc.


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Regulation and Supervision Managers Should Know

Strengthens “loans to insiders”

(Reg O) restrictions by expanding the

Types of transactions subject to the

rules and including insider asset sales.

  • Includes credit exposure from derivatives, repos, and securities loans as “loan or extension of credit.”

  • Similarly strengthens ordinary bank lending limits.


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Meet Your New Regulator Managers Should Know

  • A State Attorney General may bring an action in Federal District Court or State court to enforce the consumer protection provisions including regulations issued by the CFPB.

  • In addition, a State Attorney General may also bring an action to enforce any other applicable state or federal law against a national bank or federal savings association.


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Questions? Managers Should Know


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