The DoddThe Dodd-Frank Act:Frank Act: New Curbs on The Street? · 8/6/2010 · The Dodd‐Frank Act provides a profound increase in the regulation of the financial services industry

The Dodd-Frank Act:The Dodd Frank Act: New Curbs on The Street?

© 2010 Winston & Strawn LLP

The Dodd-Frank Act:The Dodd Frank Act: New Curbs on The Street?

Dodd‐Frank Act Session III: New Enforcement Environment; International Regulatory Perspectives

Brought to you by Winston & Strawn’s Corporate and Litigation Practice Groups

© 2010 Winston & Strawn LLP

Today’s HostsToday s Hosts

Christine EdwardsCorporateChicago

CEdwards@winston com

Marvin MillerCorporateNew York

MMiller@winston [email protected] [email protected]

© 2010 Winston & Strawn LLP 3

The Winston & Strawn Dodd‐Frank Webinars July 9 – General Overview, Financial Stability, Orderly July 9 General Overview, Financial Stability, Orderly Liquidation Authority, “Improvements” to Bank Regulation, and Bureau of Consumer Financial Protection

July 21 – Regulation of Markets and Market Participants: Derivatives, Securities, Hedge Funds, Investment Advisers, and Broker‐Dealers

h f August 6 – The New Enforcement Environment; International Regulatory Perspectives

A t 20 E ti C ti d C t


August 20 – Executive Compensation and Corporate Governance

Today’s PresentersToday s Presenters

Stephen D'AmoreLitigationChicago

Tim RivelliLitigationChicago

Marvin MillerCorporateNew Yorkg

[email protected]

g

[email protected] [email protected]


New Enforcement EnvironmentNew Enforcement Environment

The Dodd‐Frank Act provides a profound increase in the p pregulation of the financial services industry.

The Act is hundreds of pages long, requires over 200 rulemaking proceedings and demands over 60 studiesproceedings, and demands over 60 studies.

The Act imposes new regulations on banking and nonbanking financial institutions at the federal level and fosters extensive activities at the state level.

Dodd‐Frank creates substantial organizations and regulatory structures designed to protect investors and consumersstructures designed to protect investors and consumers.

Under the Act, the SEC has emerged with new and enhanced enforcement and regulatory authority.


New Enforcement EnvironmentNew Enforcement Environment

The Dodd‐Frank Act establishes the Office of Financial Research (“OFR”), which is part of the Financial Stability Oversight Council (“FSOC”).

The OFR has been granted broad investigative and subpoena powers The OFR has been granted broad investigative and subpoena powers to support the work of the FSOC.

h dd k l f d l The Dodd‐Frank Act creates an entirely new federal Consumer Financial Protection Bureau, which will have an initial budget substantially over $500 million and a mission to g yregulate consumer financial products and services.


Today’s TopicsToday s Topics

SEC Enforcement Authorityy Increased Whistleblower Rewards & Protections

Enhanced SEC Powers to Impose Civil Penalties

Expansion of Secondary Liability in Securities Actions Expansion of Secondary Liability in Securities Actions

Extraterritorial Application of U.S. Securities Laws

Financial Regulations Financial Stability Oversight Council and Office of Research

Consumer Financial Protection Bureau

Other Issues Other Issues Mandatory Pre‐Dispute Arbitration

Credit Rating Agencies


International Aspects

Enhanced Whistleblower Protections and Rewards Prior to Dodd‐Frank, whistleblower awards were rather limited.

Only available in insider trading cases

Limited to a maximum award payment of 10% of the penalty assessed by the SEC

Until recently, only 5 individuals had received whistleblower payments from the SEC – the biggest payment was only $55,000

Earlier this year, however, an individual was paid a $1 million bounty for providing a crucial email document from the family computer which helped establish ana crucial email document from the family computer which helped establish an insider trading case against her ex‐husband and a hedge fund

Dodd‐Frank dramatically expands the scope of the whistleblower protection and the amount of award available to the whistleblowerprotection and the amount of award available to the whistleblower [Section 922].

Available in all judicial and administrative enforcement actions resulting in any monetary relief


Award payment now falls in a range of 10% to 30% of the penalty assessed by the SEC

Whistleblower (continued)Whistleblower (continued)

The Dodd‐Frank Act establishes a fund in the The Dodd Frank Act establishes a fund in the Treasury of the United States known as the “Securities and Exchange Commission Investor Protection Fund” [Section 922]. The fund will be available to the SEC for the paying of awards to whistleblowersawards to whistleblowers.

The fund will consist of the monetary sanctions collected by the SEC in any judicial or administrativecollected by the SEC in any judicial or administrative action brought by the SEC under the securities laws. The fund will not include, however, any payments


y p ydistributed to victims of the violation of the securities laws.


Qualifications for a “whistleblower”: Qualifications for a whistleblower : Must provide SEC with “original information,” which:

(a) is derived from the independent knowledge or analysis of a whistleblower;

(b) is not known to the SEC from any other source unless the whistleblower is the (b) is not known to the SEC from any other source, unless the whistleblower is the original source of the information;

(c) is not exclusively derived from an allegation made in a judicial or administrative hearing, unless the whistleblower is the original source of the information.

Information must lead to a “successful” SEC (or related) enforcement action

“Related actions” include any judicial or administrative action brought by: Related actions include any judicial or administrative action brought by: the Attorney General of the United States

an appropriate regulatory authority or self‐regulatory organization

a state attorney general


“Successful resolution” includes any settlement of an action


Qualifications (continued) Qualifications (continued) Only a limited number of persons are excluded from eligibility for Whistleblower awards:

employees of regulatory agencies and the various SROs

felons convicted of a crime related to the subject matter of the whistleblower disclosure

auditors who learn of the information in the conduct of an audit



The payout amount is determined by the SEC and reflects:p y y the significance of the information provided by the whistleblower to the

success of the covered judicial or administrative action

the degree of assistance provided by the whistleblower and any legal representative of the whistleblower

the pragmatic interest of the SEC in deterring violations of the securities laws by making awards to whistleblowers who provide information that leads to

f l f tsuccessful enforcements

such additional relevant factors as the SEC may establish by rule or regulation

Appealspp All determinations, except the amount of award, may be appealed to

the appropriate court of appeals in the United States within 30 days after the determination is issued [Section 922(a)].


[ ( )]


Whistleblowers also receive various statutory protections against emplo er retaliation [Section 922]employer retaliation [Section 922].

Individuals who allege that they were discharged or discriminated against for blowing the whistle have a private cause of action for i t t t t ti b k d liti tireinstatement, two‐times back pay, and litigation expenses.

Whistleblowers may file an initial complaint directly in a federal district court.

There is no preliminary administrative requirement.

Whistleblower claims must be filed no more than: Six years after the violation; or

Three years after facts material to the right of action are known or reasonably should have been known by the employee.

The non‐retaliation provisions apply to all companies, even those


p pp y p ,that are not otherwise subject to SEC oversight [Section 922].


The expansion in Whistleblower rewards and protection is p plikely to lead to an increase in Whistleblower enforcement actions by the SEC.

Plaintiffs’ attorneys may enter the field attracted by contingency fees Plaintiffs attorneys may enter the field, attracted by contingency fees on potentially large economic rewards.

E.g., a 30% Whistleblower award on a $100 million SEC penalty is $30 million

As the number of SEC enforcement actions increase parallel As the number of SEC enforcement actions increase, parallel shareholder derivative actions will likely follow.

Companies may face problems maintaining effective compliance programs, as potential whistleblowers may be lured by large rewards into alerting the SEC instead of internal controls.


SEC’s Enhanced Ability to Impose Civil Penalties under the Dodd‐Frank Act Section 929P of the Dodd‐Frank Act amends: Section 929P of the Dodd Frank Act amends:

Section 8A of the Securities Act of 1933

Section 21B(a) of the Securities Exchange Act of 1934

Section 9(d)(1) of the Investment Company Act of 1940

Section 203(i)(1) of the Investment Advisers Act of 1940

As a result of these amendments, the SEC’s ability to impose civil penalties has been greatly expandedimpose civil penalties has been greatly expanded.


Civil Penalties (continued)Civil Penalties (continued)

The Act provides the SEC with new authority to The Act provides the SEC with new authority to impose monetary penalties in administrative cease‐and‐desist proceedings against “any person” for violations of the securities laws. [Section 929P(a)] Formerly, this remedy was available administratively only against registered persons; the SEC could only obtain civilagainst registered persons; the SEC could only obtain civil monetary penalties against non‐registered persons in enforcement actions filed in federal court.

Now, the SEC can seek civil monetary penalties in both administrative and judicial proceedings.



For cease‐and‐desist proceedings instituted under the 1933 p gAct, the Dodd‐Frank Act adopts the three‐tiered penalty grid from the Securities Exchange Act of 1934, and raises the maximum penalty amounts by 50% [Section 929P]maximum penalty amounts by 50% [Section 929P].

The maximum amount of the penalty will vary: First Tier: $7,500 for a natural person or $75,000 for any other person

Second Tier: $75 000 for a natural person or $375 000 for any other person if the Second Tier: $75,000 for a natural person or $375,000 for any other person, if the act or omission at issue involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement

Third Tier: $150,000 for a natural person or $725,000 for any other person, if the act or omission at issue:

Involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and

directly or indirectly resulted in (1) substantial losses or created a significant risk of b t ti l l t th (2) b t ti l i i t th h


substantial losses to other persons; or (2) substantial pecuniary gain to the person who committed the act or omission


Dodd‐Frank gives the SEC the ability to impose Dodd Frank gives the SEC the ability to impose industry‐wide “collateral bars” [Section 925]. A “collateral bar” prohibits securities professionals found to have violated any aspect of the securities laws from associating with any regulated entity

Includes broker‐dealers, investment advisers, municipal securities , , pdealers, municipal advisers, transfer agents, and statistical rating organizations

Prior to Dodd‐Frank, the SEC could only bar an , yindividual from that industry in which the violation was committed.



Dodd‐Frank also permits nationwide service of SEC psubpoenas in civil actions filed in Federal court [Section 929E].

SEC subpoenas issued to compel the attendance of a witness or the SEC subpoenas issued to compel the attendance of a witness or the production of documents or tangible things at a hearing or trial may now be served at any place within the United States.

This amends the Securities Act of 1933, the Securities Exchange Act of 1934, , g ,the Investment Company Act of 1940, and the Investment Advisers Act of 1940.

Furthermore, the private fund information received by the , p ySEC under the Investment Advisers Act is exempted from the Freedom of Information Act [Section 404].


Expansion of Secondary LiabilityExpansion of Secondary Liability

Dodd‐Frank expands the SEC’s enforcement power against p p gaiders and abettors of securities fraud and related claims.

An aider or abettor participates—in some manner—in a securities fraud but is not the primary violatorfraud, but is not the primary violator

Examples often include bankers, accountants, trustees, and attorneys

Under the Act, the SEC may seek civil monetary penalties in f d l di i f i f idi dfederal district court enforcement actions for aiding and abetting violations of the Investment Advisers Act of 1940 [Section 929N].

Previously, the SEC lacked the authority to seek civil monetary penalties against aiders and abettors under the Advisers Act.

See, e.g., SEC v. Bolla, 550 F. Supp. 2d 54 (D.D.C. 2008).


, g , , pp ( )

Secondary Liability (continued)Secondary Liability (continued)

Monetary Penalties (continued) Monetary Penalties (continued) Additionally, the SEC may now seek civil monetary penalties

and injunctions against aiders and abettors under the Securities Act of 1933 and the Investment Company Act of 1940 [SectionAct of 1933 and the Investment Company Act of 1940 [Section 929M].

Previously, neither act contained any language authorizing suits against aiders and abettorsaiders and abettors.



Dodd‐Frank expands themens rea requirement of Dodd Frank expands the mens rea requirement of aiders and abettors [Sections 929M, 929N, & 929O]. Prior to the Act, an aider and abettor was required to act “knowingly” in the violation.

Now, an aider and abettor need act either “k i l ” “ kl l ”“knowingly” or “recklessly.” Recklessness occurs, for example, where an alleged aider and abettor encountered “red flags” or suspicious behaviorand abettor encountered red flags or suspicious behavior that should have alerted him to the improper conduct of the primary violator.



Dodd‐Frank does not provide a private right of action against p p g gaiders and abettors, but it does charge the Government Accountability Office (“GAO”) to conduct a study on the effects of granting this private righteffects of granting this private right.

The study is to be conducted within 1 year of enactment and shall include:

i f th l f d t i i ’ i f iti a review of the role of secondary actors in companies’ issuance of securities;

the courts’ interpretations of the scope of liability for secondary actors under Federal securities laws after January 14, 2008; and

the types of lawsuits decided under the Private Securities Litigation Reform the types of lawsuits decided under the Private Securities Litigation Reform Act of 1995 (“PSLRA”)

[Section 929Z]



Current Case Law on Private Rights of Action against Aiders g gand Abettors:

Stoneridge Inv. Partners, LLC v. Scientific‐Atlanta, Inc., 552 U.S. 148 (2008)(2008)

Affirmed that there is no private right of action for aiding and abetting liability under § 10(b) of the Exchange Act

However it should be noted that the Supreme Court recently granted However, it should be noted that the Supreme Court recently granted certiorari to review a Fourth Circuit decision which upheld a complaint seeking to hold a service provider primarily liable for “help[ing]” and “participating in” another company’s misstatements.p p g p y

Janus Capital Group v. First Derivative Traders, 566 F.3d 111 (4th Cir. 2009), cert. granted, (U.S. June 28, 2010) (No. 09‐525)



Case Law (continued)( ) In Janus, plaintiff shareholders brought suit seeking to hold the

defendant investment advisors liable for misstatements contained within the prospectuses for Janus mutual funds.p p

Even though the defendants had not authored the misstatements themselves (i.e. defendants were traditional secondary actors), the Fourth Circuit found the misstatements within the prospectuses to be “sufficiently attributable” to the defendant investment advisors.

In other words, the public would likely attribute the prospectuses to the defendants, regardless of who actually authored them.

The Supreme Court will now decide whether a defendant The Supreme Court will now decide whether a defendant who merely helped in the preparation of a misstatement can be held liable based on public attribution, even though the


defendant’s name does not appear on the face of the misstatement.

Private Rights of Action in Dodd‐FrankPrivate Rights of Action in Dodd Frank

Sec. 922(d)(1)(G): requires the Inspector General of the SEC to conduct a study on a private right of action for a whistleblower that has already attempted to pursue the case through the SEC.

Sec. 929Z: requires the GAO to study “the impact of authorizing a private right of action against any person who aids or abets another person in violation of the securities laws.”

Sec. 929Y: requires the SEC to solicit public comment and conduct a study to determine whether the Securities and Exchange Act of 1934 should be extended to cover (1) “conduct within the United States that constitutes a significant step in the furtherance of the violation, even if h i i i id h U i d S d i lthe securities transaction occurs outside the United States and involves only foreign investors,” and (2) “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”


Office of the Investor AdvocateOffice of the Investor Advocate

Dodd‐Frank establishes an Office of the Investor Advocate, which will be appointed by and report to the Chairmen of the SEC [Section 915].

Following consultation with the Chairmen, the Investor Advocate will have g ,authority to hire independent counsel, as well as his own research and service staff.

The Investor Advocate will be tasked with: identifying areas where investors would benefit from regulatory changes;

identifying challenges that investors face in their interactions with financial firms and investment products; and

analyzing the impact on investors of proposed SEC regulations and SRO rules

The Investor Advocate may propose to the SEC that changes be made to regulations or orders, and to Congress that changes be


made to relevant laws, or that particular agency personnel be replaced.

Investor Advocate (continued)Investor Advocate (continued)

The Investor Advocate will submit annual reports to The Investor Advocate will submit annual reports to the Senate Banking and House Financial Services Committees. The reports will include summaries of the most serious problems encountered by investors and will be submitted directly to Congress without prior review or comment by thedirectly to Congress without prior review or comment by the SEC, the President’s budget overseer, or the Office of Management and Budget.

h ll b d f ll d h The SEC will be required to formally respond to the Investor Advocate’s reports.


Extraterritorial Application of U.S. Securities Laws–The Law Before Dodd‐Frank Morrison v. National Australia Bank, Ltd., 130 S. Ct. 2869 (June 24, 2010)

(S li J )(Scalia, J.) Foreign investors brought putative class action against Australian banking

corporation, alleging securities fraud in connection with securities traded on foreign exchangesexchanges

Held: “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the U it d St t ”United States.”

Rejected “conduct” and “effect” tests in favor of territorial transaction test

Reasoned that no textual evidence in statute existed to overcome presumption that, unless a contrary intent is expressed, Congress ordinarily legislates domestic, not y p , g y g ,foreign matters

“While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become the Shangri La of class action litigation for lawyers representing those


has become the Shangri‐La of class‐action litigation for lawyers representing those allegedly cheated in foreign securities markets.”

Extraterritoriality: Dodd‐Frank Effectively Reverses Morrison for SEC /DOJ Actions

Explicit expression of extraterritorial jurisdiction under p p jantifraud provisions of Securities Act (1933), Securities Exchange Act (1934), and Investment Advisors Act (1940). [Section 929P(b)][Section 929P(b)]

Restores “conduct” and “effects” tests: U.S. courts will have jurisdiction over SEC/DOJ claims if alleged violations involve:

conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States, or the violation is committed by a foreign advisor and involves only foreign investors; or

conduct occurring outside the United States that has a foreseeable substantial effect within the United States


Extraterritoriality: SEC to Solicit Public Comment and Study Private Actions

The Act does not explicitly extend extraterritoriality to private actions In this regard, Morrison remains at least partially intact.

Act requires SEC to solicit public comment and study extent to which private rights of action under antifraud provisions of the Exchange Act should be extended extraterritorially under “conduct” and “effects” tests. [Section 929Y]

Public comments through SEC website, www.sec.gov/spotlight/regreformcomments.shtml

Study to be completed within 18 months after enactment with analysis of: scope of private right of action, including whether it should be limited to

institutional investors or otherwise;;

implications of private right of action on international comity;

economic costs and benefits of extending private right of action for transnational securities frauds; and


;

whether a narrower extraterritorial standard should be adopted

Financial Stability Oversight CouncilFinancial Stability Oversight Council

The Act establishes a Financial Stability Oversight Council (“FSOC”) [Section 111]y g ( ) [ ] FSOC is an interagency council created to indentify and monitor systemic risks posed by

financial firms and activities.

Voting members of FSOC:g Secretary of Treasury (Chair of FSOC) • Chairman of Board of Governors

Comptroller of the Currency • Chairperson of FDIC

Chairman of SEC

Director of Bureau of Consumer Financial Protection (new agency) Director of Bureau of Consumer Financial Protection (new agency)

Chairperson of Commodity Futures Trading Commission

Director of Federal Housing Finance Agency

Chairman of National Credit Union Administration

I d d t b ith i ti i t d b P id t ith S t d i d t Independent member with insurance expertise appointed by President, with Senate advice and consent

Reports submitted by the Council must be accompanied by a signed statement from each voting member, stating whether the member believes that the Council, the Government, and the private sector are taking all reasonable steps


Council, the Government, and the private sector are taking all reasonable steps to mitigate systemic risk. [Section 112(b)]

FSOC (continued)FSOC (continued)

The FSOC’s purpose is to identify risks to the financial stability of the United States posed by distress, failure, or activities of large, interconnected bank holding companies or nonbank financial companies, promote market discipline, and respond to emerging risks in the U.S. financial system. [Section 112 et seq ]112 et seq.]

The FSOC’s key powers will be: designation of a nonbank financial company for regulation by the Board of

Governors;Governors;

recommendation of heightened prudential standards for designated nonbank financial companies and large, interconnected bank holding companies

After a nonbank company has been designated by the Council the company After a nonbank company has been designated by the Council, the company has 30 days to bring an action in the U.S. district court in which its home office is located or the U.S. District Court for D.C. [Section 113(h)]

The Council’s final designation may be rescinded, but review of the


g y ,designation is limited to whether the final determination was “arbitrary or capricious.”

Office of Financial ResearchOffice of Financial Research

The Act establishes the Office of Financial Research (“OFR”) within the U.S. Department of Treasury.

The purpose of the OFR is to support the FSOC and its member agencies by:

collecting and providing data and information

performing applied and long‐term research

developing risk measurement and monitoring tools

standardizing types and formats of data reported and collected by member agencies

making results available to financial regulatory agencies

OFR must report to Congress its assessment of significant financial market developments and threats to the financial stability of the United States


[Sections 153, 154]

OFR (continued)OFR (continued)

Enforcement powers of the OFR: [Section 153(f)] Power to subpoena financial companies, on written finding of Director that data is

required to carry out functions of OFR

Failure to comply with subpoena, punishable by contempt in U.S. District Court

h d h ll h f d l f d f The FSOC and OFR shall maintain the confidentiality of any data, information, and reports that have been submitted.

The submission of any nonpublicly available data or information shall notconstitute a waiver of or otherwise affect any privilege arising under Federal orconstitute a waiver of, or otherwise affect, any privilege arising under Federal or State law (including rules of court) to which the data or information is otherwise subject. [Section 112(d)(5)(B)]

The OFR may share data and information with the Council, member agencies, and the Bureau of Economic Analysis, but that information may not be shared with any individual or entity without permission of the Council. [Section 153(b)(1)]

Submissions received under Section 112 are not necessarily exempt from FOIA—usual rules and exceptions apply [Section 112(d)(5)(C)]


usual rules and exceptions apply [Section 112(d)(5)(C)]

Consumer Financial Protection BureauConsumer Financial Protection Bureau

Title X (Consumer Financial Protection Act) of Dodd‐Frank ( )establishes a new Bureau of Consumer Financial Protection (“Bureau”), charged with the task of regulating consumer financial products and servicesfinancial products and services

Director appointed by the President, with advice and consent of the Senate, for a five‐year term

Bureau given extensive rulemaking, enforcement, and supervisory authority transferred from other agencies (except FTC) under existing Federal consumer financial laws(except FTC) under existing Federal consumer financial laws

Initial budget expected substantially to exceed $500 million


Consumer Financial Protection Bureau (continued) The Act transfers rulemaking, investigation, and enforcement g, g ,

authority with respect to a number of enumerated federal consumer financial protection statutes to the Bureau [Sections 1002 & 1022]1002 & 1022].

Bureau has broad authority to administer “Federal consumer financial laws,” which include Dodd‐Frank Act itself, any rule or order of the Bureau and most federal laws relating to consumer protectionBureau, and most federal laws relating to consumer protection (except the FTC Act and Consumer Reinvestment Act)

Except for the FTC, the Bureau has “exclusive authority” to prescribe rules pursuant to Federal consumer financial lawrules pursuant to Federal consumer financial law

Transfer date between 6‐18 months after enactment [Section 1062]


Consumer Financial Protection Bureau (continued) Bureau’s supervisory power covers any person engaged in offering

or providing a “consumer financial product or service” and any affiliate of such person that acts as a service provider to such person [Section 1002].p [ ]

“Financial product or service” defined to include generally: extending credit and servicing loans

extending or brokering leases that are the functional equivalent of credit extending or brokering leases that are the functional equivalent of credit

providing real estate settlement services or performing appraisals

engaging in deposit‐taking activity or transmitting funds

providing check cashing, check collection, or check guaranty services

providing financial advisory services

collecting, analyzing, maintaining, or providing consumer report info

debt collection


Consumer Financial Protection Bureau (continued) The Act exempts some individuals and institutions from the Bureau’s

authority, including: [Section 1027] Attorneys

Real estate brokersea es a e b o e s

Insurance companies

Accountants

Tax preparers

Merchants not significantly engaged in the consumer financial services

Motor vehicle dealers, but with limitations. . . [Section 1029]


Consumer Financial Protection Bureau (continued) Bureau has authority to prevent covered institutions from y p

engaging in unfair, deceptive, or abusive acts or practices in the provision of consumer financial products and services [Section 1031]1031].

The Act contains guidelines on what acts and practices may be considered “unfair” or “abusive.”

B ib l di di l i d f Bureau may prescribe rules regarding disclosures required for consumer financial products and services, including optional model forms that provide “safe harbor” protection for disclosures.

Bureau may prohibit use of agreements that include mandatory arbitration clauses, although the Bureau cannot prevent consumers


from entering into arbitration once a dispute has arisen.

Consumer Financial Protection Bureau (continued) The Act makes it unlawful for any covered person or The Act makes it unlawful for any covered person or service provider to:

Offer or provide to a consumer any financial product or service not in f h d l f l l hconformity with Federal consumer financial law, or otherwise commit

any act or omission in violation of such laws

Engage in any unfair, deceptive, or abusive act or practice

Fail or refuse to permit access to or copying of records, to establish or maintain records, or to make reports or provide information to the Bureau

Knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions described above [Section 1036]


Consumer Financial Protection Bureau (continued) Bureau has authority to investigate potential violations of y g p

federal consumer financial laws and to conduct hearings, subpoena testimony and records, and issue civil investigative demands [Sections 1052 1056]demands. [Sections 1052–1056]

If Bureau determines that a person has violated a federal consumer financial law, it may issue a notice to the person to appear and contest the issuance of a cease‐and‐desist order.

Bureau may also pursue civil actions for violations of federal consumer financial laws.

Bureau has no criminal prosecutorial authority, but may refer potential criminal matters to DOJ.


Consumer Financial Protection Bureau

State laws are not affected, unless they are inconsistent with the CFPA, in

(continued)

which case only the inconsistent part is affected. [Section 1041(a)(1)]

If a state law provides for greater consumer protection than the CFPA, the greater protection is allowed to stand. [Section 1041(a)(2)]

State Attorneys General may bring civil actions to enforce the CFPA and regulations issued by the Bureau. [Section 1042(a)]

However, the state AG may only bring actions against national banks and f ffederal savings associations to enforce Bureau regulations, and not the CFPAitself. [Section 1042(a)(2)]

The CFPA contains various provisions on how preemption determinations are to be made and the deference to be given to the Office of theare to be made and the deference to be given to the Office of the Comptroller of the Currency (“OCC”). [See Sections 1044 & 1046]


Other Issues: Mandatory Pre‐Dispute Arbitration The Dodd‐Frank Act provides the SEC with authority to restrict or

prohibit the use of mandatory arbitration clauses. The SEC may use its authority to invalidate such clauses in contracts between

broker‐dealers or investment advisers and their customers [Section 921].

The Act also requires the Bureau of Consumer of Financial Protection to study and report to Congress on the use of mandatory pre‐dispute arbitration agreements in consumermandatory pre dispute arbitration agreements in consumer financial services contracts.

The Bureau may also impose limitations on the use of such agreements or prohibit them if it is in the “public interest and for the protection of p p pconsumers” [Section 1028].

Historically, mandatory pre‐dispute arbitrations and other mechanisms have provided an important alternative means to dispute resolution, so the impact f h d b f d


of this study may be profound.

Other Issues: Credit Rating Agencies and Increased Liability Dodd‐Frank eliminates the prior exemption from liability for credit rating

agencies under Section 11 of the Securities Act [Section 939G]agencies under Section 11 of the Securities Act [Section 939G]. Credit rating agencies are thus exposed to liability if they consent to the inclusion

of a rating in a registration statement.

In order to defend against a Section 11 claim, a rating agency would be required to g , g g y qshow that it had reasonable grounds to believe, and did in fact believe, that the included credit rating was accurate.

This reform could have major effects on the securities‐offering process for rated securities, but it remains unclear how rating agencies will react to this change.

Rating agencies have successfully challenged claims on constitutional grounds in the past arguing that ratings are protected by the First Amendment See e gthe past, arguing that ratings are protected by the First Amendment. See, e.g., Compuware Corp. v. Moody’s Investors Services, Inc., 499 F.3d 520 (6th Cir. 2007).

It is also possible that credit agencies will refuse to consent to the inclusion of a credit rating in an issuer’s registration statement.


Leading ratings firms have, in fact, begun refusing to consent to the inclusion of their ratings in bond registration statements.

Credit Rating Agencies (continued)Credit Rating Agencies (continued)

Dodd‐Frank confirms that civil remedies are available against gcredit rating agencies under the Securities Exchange Act of 1934 [Section 933(a)].

The Act does so by specifically making the enforcement and penalty The Act does so by specifically making the enforcement and penalty provisions of the Exchange Act applicable to “statements made by a credit rating agency in the same manner and to the same extent as such provisions apply to statements made by a registered publicsuch provisions apply to statements made by a registered public accounting firm or a securities analyst.”

The Act also excludes credit ratings from the protection of h f h b i i f f d l kithe safe harbor provisions for forward‐looking statements under the Private Securities Litigation Reform Act of 1995 [Section 933(a)].


[ ( )]


Dodd‐Frank alters the pleading standards that were implemented by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) as applied to actions for money damages against rating agencies [Section 933(b)(2)].[ ( )( )]

Under previous standards, to survive a motion to dismiss a claim based on Rule 10b‐5, a plaintiff had to allege facts giving rise to a “strong inference” that the defendant knowingly or recklessly made a material misstatement or omission.

In the context of credit ratings, courts required plaintiffs to plead that the rating agency did not genuinely believe its opinions regarding credit quality or that the opinion lacked basis in fact.

This was often a difficult standard for a plaintiff to meet.


p


Pleading Standards (continued)g ( ) Under Dodd‐Frank, a pleading against a rating agency satisfies the

state‐of‐mind requirement if it alleges facts giving rise to a strong inference that the rating agency knowingly or recklessly “failed to g g y g y yconduct a reasonable investigation” of the factual elements relied upon in evaluating the credit risk of the rated security.

Determination of what constitutes a “reasonable investigation” will be based on a court’s consideration of the particular facts and circumstances.

Th d d h ld b i f l i iff i The new standard should be easier for a plaintiff to meet, since a plaintiff need no longer show that a credit rating agency lacked a genuine belief in its opinions or that the opinion lacked any basis in fact


fact.


The Act requires the SEC and the Comptroller General to q pundertake studies related to rating agencies and the credit rating process to facilitate future rulemaking [Sections 939D& 939E]& 939E].

The SEC is required to conduct studies on conflicts of interest and standardizing credit rating terminology and the market stress conditions under which credit ratings are evaluatedconditions under which credit ratings are evaluated.

The Comptroller General will study alternative means for compensating rating agencies and the creation of an independent professional organization for credit rating analystsprofessional organization for credit rating analysts.


INTERNATIONAL ASPECTS

Marvin J. Miller Jr.


INTERNATIONAL ASPECTSINTERNATIONAL ASPECTS

ChinaChina

Hong Kong

EU EU

U.K.

U S International Coordination U.S. International Coordination

September Webinar



EU Stress tests

Germany derivative rules



HMT – “A New Approach to Financial Regulation:HMT A New Approach to Financial Regulation: Judgement, Focus and Stability” (7/10) Bank of England Role

Financial Service Authority – out

Financial Policy Committee – in Focus on financial stabilityFocus on financial stability

Prudential Regulatory Authority Focus on prudential regulation of financial service firms

Regulation and supervision of settlement systems and central Regulation and supervision of settlement systems and central counterparty clearing houses

Consumer Protection and Markets Authority


International Coordination


U.S. Coordination with Foreign RegulationsU.S. Coordination with Foreign Regulations Increase stability by adopting strong, common regulatory standards for large financial institutions

Prevent major competitive imbalances, reduce regulator arbitrage

Clear allocation of regulatory responsibility for international Clear allocation of regulatory responsibility for international financial firms

Information exchange and analysis

Global agreed‐upon standards

Rules and supervisory practices tailored to local conditions and preferences


and preferences


G20G20

Financial Stability Board (“FSB”)

International Organization of Securities CommissionsInternational Organization of Securities Commissions(“IOSCO”)

Basel Committee on Banking Supervision (“BaselBasel Committee on Banking Supervision ( Basel Committee”)

Financial Accounting Standards Board (“FASB”)g ( )

International Accounting Standards Board (“IASB”)



G20G20

Strong regulatory framework

Effective supervisionEffective supervision

Resolution authority

Systemic institutionsSystemic institutions

Transparency



FSBFSB Discussion Group

November G20 Meeting Common principles and key attributes for effective national resolution authorities

Contingent debtg



Basel CommitteeBasel Committee New minimum bank capital and liquidity levels – Basel III

“Enable banks to withstand – without extraordinary government support – stresses of a magnitude associated with the recent financial crisis” – G20 (6/10)

July 26 2010 Amendments July 26, 2010 Amendments

Seoul G20 Meeting in November 2010



IOSCOIOSCO

Principles

Cross‐Border Supervisory CooperationCross Border Supervisory Cooperation

Hedge Funds

OTC DerivativesOTC Derivatives

Credit Ratings Agencies



Convergence in Accounting StandardsConvergence in Accounting Standards FASB/IASB Convergence Project

Quarterly Updates

June 2011 Target Date



Bilateral ArrangementsBilateral Arrangements Sharing privileged information with other authorities (§929K)

Authority to share certain information with foreign authorities (§ 981)



Dodd‐FrankDodd Frank International support for provisions relating to

Systemic regulation of all financial firms

Resolution regime for financial firms

OTC clearing and transparency

Regulation of banks and nonbank derivatives dealersg



Little support forLittle support for Proprietary trading restrictions

Hedge fund investments

Limitation of bank offerings of derivative products

10% acquisition cap

U i l b ki d l i i i i d l Universal banking model vs. activity restriction model


Questions?


Thank You.


Contact InformationContact Information

Christine EdwardsMarvin MillerCorporateChicago(312) 558‐[email protected]

CorporateNew York(212) 294‐[email protected]


Contact InformationContact Information

Stephen D’Amore Tim RivellipLitigationChicago(312) 558‐[email protected]

LitigationChicago(312) 558‐[email protected]


Documents

The DoddThe Dodd-Frank Act:Frank Act: New Curbs on The Street? · 8/6/2010 · The Dodd‐Frank Act provides a profound increase in the regulation of the financial services industry