As reported in our July 23, 2008 Client Alert and our July 28, 2010 Alert, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) provides that, effective July 21, 2010, the “net worth” threshold for a natural person to qualify as an “accredited investor” pursuant to regulations under the Securities Act of 1933 is $1 million, excluding the value of the person’s primary residence.  As the SEC has pointed out: “[T]he Act does not define the term ‘value,’ nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of [this] net worth calculation.”

The SEC issued the following initial guidance on July 23, 2010: “When determining net worth for purposes of [1933 Act] Rules 215 and [Regulation D], the value of the person’s primary residence must be excluded. Pending implementation of the changes to the [SEC]’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.”

Documentation soliciting accredited investor representations (e.g., private fund subscription agreements, transfer agreements and similar documentation) should be updated to reflect the Act’s revisions to the net worth threshold.  In addition, individuals making (and those receiving) such representations may take into account this recent SEC guidance when determining such individuals’ liabilities for purposes of meeting that threshold.

Goodwin Procter’s Financial Services Group has published a special edition of the Financial Services Alert summarizing the Wall Street Transparency and Accountability Act of 2010:  Regulation of Derivatives Markets.  A copy of the Alert can be found by clicking here.

Goodwin Procter’s Banking and Hedge Funds Practices has published a Client Alert summarizing Dodd-Frank and Other Developments Affecting the Securities Lending Industry.  A copy of the Alert can be found by clicking here.

Goodwin Procter’s Financial Services Group has published a special edition of the Financial Services Alert summarizing the Dodd-Frank Wall Street Reform and Consumer Protection Act legislation. A copy of the Alert can be found by clicking here.

The SEC published a request for public comment to assist it in preparing a study examining the legal and regulatory standards of care for broker-dealers, investment advisers and their personnel when providing personalized investment advice and recommendations about securities to retail investors.  The study is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).  The SEC must submit a report on the study to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services no later than January 21, 2011.  The Dodd-Frank Act also gives the SEC express authority to address the foregoing standards of care, but does not mandate rulemaking based on the study.  Comments must be submitted no later than 30 days after publication of the SEC request for comment in the Federal Register.

President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Two titles in particular, Title X, which creates the Bureau of Consumer Financial Protection, and Title XIV, which implements the Mortgage Reform and Anti-Predatory Lending Act, will have the most impact on consumer financial services providers. You will receive a summary of the new law later tonight in a special Financial Services Alert.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently increases to $250,000 the standard maximum deposit insurance amount insured by the FDIC per depositor, per insured depository institution for each account ownership category. Click here for a copy of the related Financial Institution Letter.

Below is a link to a Client Advisory (“Dodd-Frank Wall Street Reform and Consumer Protection Act – Public Company Impact”) prepared by Goodwin Procter’s Securities & Corporate Finance and ERISA & Executive Compensation Practices.

Dodd-Frank Wall Street Reform and Consumer Protection Act - Public Company Impact

Below is a link to a Client Alert (“Private Fund Investment Advisers Registration Act of 2010 Signed Into Law”) prepared by Goodwin Procter’s Private Investment Funds and Hedge Funds Practice.

Private Fund Investment Advisers Registration Act of 2010 Signed Into Law

President Obama is expected to sign the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) tomorrow.  The Alert expects to publish a summary of the Act shortly and to provide in-depth coverage throughout the coming months of issues raised by, and subsequent regulations adopted under, the Dodd-Frank Act.

The Dodd-Frank Act, includes a change to the definition of an individual “accredited investor” in Regulation D under the Securities Act of 1933.  This provision would have an apparently immediate effect on companies of all types, including those outside the financial services industry, and on private funds.  Specifically, Section 413 of the Dodd Frank Act provides that the SEC must adjust the definition of “accredited investor” under Regulation D to exclude the value of a natural person’s primary residence when calculating that person’s net worth.  However, because Section 413 contemplates both that the SEC must act to give it effect and that the new standard takes effect on the date of enactment of the law (as show below, with emphasis added), there may be some ambiguity as to when this change actually takes effect.

“The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.”

Also, it is not clear when or how the SEC will act on this provision (and whether it might address the potential problem resulting from this uncertainty regarding timing).  Issuers in the process of preparing, distributing and accepting subscriptions in connection with a pending private placement relying on Regulation D may wish to consider obtaining appropriate representations from individual investors addressing the Dodd-Frank Act’s accredited investor standard even before the legislation is formally enacted.

The Basel Committee on Banking Supervision (the “BCBS”) issued a consultative document regarding its proposal for a countercyclical capital buffer (the “Proposal”).  The Proposal provides that a buffer would be “deployed when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses.”  Accordingly, such countercyclical capital buffers are expected to be deployed in a given jurisdiction only on an infrequent basis, “perhaps as infrequently as once every 10 to 20 years.”  In general, national bank regulators would inform banks 12 months in advance of their judgment of any necessary “buffer add-on” in order to give banks time to meet the additional capital requirements, while reductions in a buffer would take effect immediately to help reduce the risk that the supply of credit would be constrained by regulatory capital requirements. 

Under the Proposal, internationally active banks would look at the geographic location of their credit exposures and calculate their buffer add-on for each exposure on the basis of the buffer in effect in the jurisdiction in which the exposure is located.  (In other words, an internationally active bank’s buffer would effectively be equal to a weighted average of the buffer add-ons applied in jurisdictions to which it has exposures.)  Accordingly, internationally active banks “will likely find themselves carrying a small buffer on a more frequent basis, since credit cycles are not always highly correlated across the jurisdictions to which they have credit exposures.”  The Proposal also notes that the BCBS is continuing to consider the home-host aspects of the Proposal.  [Read more →]

The SEC’s Division of Corporation Finance is creating three specialized offices that will focus on (a) enhancing the Division’s existing program for reviewing periodic reports filed by large financial institutions, (b) disclosure review and interpretive and rulemaking activities for asset-backed securities and other structured products, and (c) evaluation of securities offering trends.

Formed in April 2009 in response to a request from the Director of the SEC’s Division of Investment Management, the Task Force on Investment Company Use of Derivatives and Leverage of the American Bar Association (“ABA”) submitted a report to the Division that evaluates regulation and practice relating to the use of derivatives and leverage by registered investment companies (“funds”) and makes recommendations on how the SEC and its staff can improve the regulatory framework in these areas.  The report provides an overview of different kinds of derivatives used by funds and how the SEC has historically regulated funds’ use of derivatives.  The report identifies a number of issues that funds have had to address in the absence of SEC guidance and describes common industry practices that have arisen to address these issues.  In addition to a general recommendation that regulation of derivative use by funds be principles-based, the report makes a number of specific recommendations, summarized as follows:

DIVERSIFICATION

For purposes of Section 5(b) of the Investment Company Act of 1940 (the “1940 Act”), which divides management investment companies (generally consisting of mutual funds and closed-end funds) into diversified and non-diversified funds, the report recommends that a fund classify a derivative based on its reference asset, i.e., the asset to which the derivative provides exposure, unless the reference asset is a broad-based index, or a commodity or currency. [Read more →]

The FDIC Board of Directors approved, by a vote of 5 to 0, revisions to its backup supervision and information sharing Memorandum of Understanding (the “Revised MOU”) with the other primary federal banking regulatory agencies, the FRB, OCC and OTS (the “Banking Agencies”).  The Revised MOU would enhance the FDIC’s backup authorities over insured depository institutions (“IDIs”) that the FDIC does not directly supervise.  The FDIC stated that the Revised MOU will “improve the FDIC’s ability to access information necessary to understand, evaluate and mitigate its exposure to [IDIs], especially the largest and most complex firms.”  The Revised MOU updates a 2002 accord among the Banking Agencies and clarifies and confirms the FDIC’s authority and ability to assess risk at weakening IDIs and to prepare and implement effective strategies to resolve IDIs after they fail.

The Revised MOU broadens the list of covered IDIs to include: (1) Problem IDIs with a composite rating of “3,” “4” or “5” or which are undercapitalized; (2) Heightened Insurance Risk IDIs where the FDIC’s insurance pricing system suggests higher risk; (3) Large IDIs (including mandatory Basel II “Advanced Approach” financial institutions and IDI subsidiaries of a non-bank financial company or large interconnected bank holding company recommended by the Financial Stability Oversight Council for heightened prudential standards; and (4) IDIs that are affiliated with entities that have had greater than $5 billion of borrowings under the FDIC’s Temporary Liquidity Guarantee Program.

The Revised MOU also covers: (a) the scope of special examinations and FDIC on-site presence; (b) how the FDIC and the other Banking Agencies will coordinate activities, including, among other things, targeted reviews and sharing of information) and (c) how the Banking Agencies will address differences in CAMELS ratings.