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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

what the dodd frank legislation is and what it isn t

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

Devil is in the details and the agency rulemaking process.

The Second Game of the Double Header.

what the dodd frank legislation is and what it isn t3

What the Dodd-Frank Legislation is.…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

boards and executive compensation
Boards and Executive Compensation

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.
boards and executive compensation5
Boards and Executive Compensation

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.
boards and executive compensation6
Boards and Executive Compensation

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.
boards and executive compensation7
Boards and Executive Compensation

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.
boards and executive compensation8
Boards and Executive Compensation


  • 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.
boards and executive compensation9
Boards and Executive Compensation

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.
boards and executive compensation10
Boards and Executive Compensation

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.
boards and corporate governance
Boards and Corporate Governance

Director Elections

Does not mandate majority

voting in uncontested director

elections, declassified boards, or

independent chairman position.

boards and corporate governance12
Boards and Corporate Governance

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.
boards and corporate governance13
Boards and Corporate Governance
  • Mandatory “Risk Committee”
  • Proxy explanation of why Chairman and CEO positions are separate, or combined.
strategic planning opportunity
Strategic Planning Opportunity
  • Importance of Governance Tune Up
capital issues
Capital Issues
  • Preparing for Enhanced Capital Requirements
  • Focus on “Systemic Risk”
capital issues minimum capital requirements17
Capital Issues: Minimum capital requirements
  • Bank Holding Companies:
  • Risk-based and leverage capital requirements (including exclusion of certain hybrid instruments from Tier 1 capital:
capital issues collins amendment
Capital Issues-Collins Amendment

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

capital issues collins amendment19
Capital Issues: Collins Amendment

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.
capital other issues
Capital-Other Issues
  • Change in “accredited investor” definition.
  • Exemption for Non-Accelerated Filers from SOX Section 404(b).
  • Increasing Shareholder threshold for exemption from SEC registration.
capital other issues21
Capital-Other Issues

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.
capital issues strategic point
Capital Issues-Strategic Point

Maximize corporate flexibility for quick and easy access to capital.

regulation and supervision
Regulation and Supervision

Expanded FRB ability to examine

functionally-regulated affiliates of


  • 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.
regulation and supervision24
Regulation and Supervision
  • 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!
regulation and supervision25
Regulation and Supervision

Enhanced source of strength

regulations within one year.

regulation and supervision26
Regulation and Supervision

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.
regulation and supervision enhanced de novo branching
Regulation and SupervisionEnhanced 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.
regulation and supervision28
Regulation and Supervision
  • Expanded 23A limitation coverage including definition of “covered transactions,” expanded collateral requirements, etc.
regulation and supervision29
Regulation and Supervision

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.
meet your new regulator
Meet Your New Regulator
  • 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.