President Obama has announced that he will propose a Financial Crisis Responsibility Fee (the “Fee”) in his fiscal 2011 budget proposal, which will be released in February 2010.  The Fee is designed to repay taxpayers for the “extraordinary assistance” provided to financial and other companies under the Troubled Asset Relief Program (the “TARP”) by instituting a levy on the liabilities of the largest financial firms.  The President asserted that many of the largest financial firms contributed to the causes of the financial crisis and benefited from the extraordinary governmental actions taken to stabilize the financial system.  “We need our money back, and we’re going to get it,” President Obama said at a White House press conference.

The Fee would only apply to financial firms with more than $50 billion in consolidated assets.  Covered firms would include insured depository institutions, bank holding companies, thrift holding companies, insurance or other companies that own depository institutions or securities broker-dealers as of January 14, 2010 or firms that become one of those types of firms after January 14, 2010.  The Fee would cover the liabilities of such financial firms organized in the United States, including U.S. subsidiaries of foreign firms.  The operations of U.S. subsidiaries of foreign firms in such covered areas would be consolidated for purposes of the $50 billion threshold and the administration of the Fee.  For U.S. firms, the Fee would apply to all liabilities globally.  The Administration expects that approximately 50 firms would be subject to the Fee, including 35 U.S. firms and 10-15 foreign firms.  The Administration hopes to work through the G-20 and the Financial Stability Board to encourage other major financial centers to adopt comparable approaches, though no other country has yet signaled a desire to do so. [Read more →]

The SEC issued the adopting release for changes to the proxy rules that require a company that has received financial assistance under the Troubled Asset Relief Program (“TARP”) to include a separate shareholder vote to approve the compensation of the company’s executives disclosed in the company’s proxy materials.  The rules apply to proxy materials for an annual (or special meeting in lieu of an annual) meeting for which proxies are solicited regarding an election of directors.  The SEC adopted the new requirement pursuant to Section 111(e) of the Emergency Economic Stabilization Act of 2008, as amended by Section 7001 of the American Recovery and Reinvestment Act of 2009.  This requirement, which becomes effective February 18, 2010, will apply to a company for as long as its obligation for TARP assistance remains outstanding.  The required shareholder vote (a) is not binding on the board of directors of a TARP recipient, (b) will not be construed as overruling a board decision or as creating or implying any additional fiduciary duty by a TARP recipient’s board and (c) will not be construed to restrict or limit the ability of shareholders to submit proposals related to executive compensation for inclusion in proxy materials.  A TARP recipient will not have to file a preliminary proxy statement solely because its proxy statement complies with the new shareholder advisory vote requirement.

Treasury Secretary Timothy Geithner has submitted to Congress a letter, pursuant to Section 120(b) of the Emergency Economic Stabilization Act of 2009, announcing that the Troubled Asset Relief Program (“TARP”) will be extended until October 3, 2010.  Notwithstanding the extension, Secretary Geithner stated that the Treasury does not expect to deploy more than $550 billion of the $700 billion of funds allocated to the TARP and expects up to $175 billion in TARP repayments by the end of 2010, and substantial additional repayments thereafter.

Secretary Geithner’s letter also set forth an exit strategy for the TARP.  The strategy is composed of four broad elements: (i) terminating and winding down the programs that have supported large financial institutions; (ii) limiting new TARP investments to housing, small business, and securitization markets that facilitate consumer and small business loans; (iii) maintaining the capacity to respond to potential financial threats; and (iv) continuing to manage equity investments acquired through the TARP in a commercial manner, while protecting taxpayers and unwinding those investments as soon as practicable.  With respect to the second element, limited new TARP investments, Secretary Geithner outlined three TARP initiatives for 2010: (i) continued efforts to mitigate mortgage foreclosures in order to stabilize the U.S. housing market; (ii) the recently launched initiatives to provide capital to community banks to stimulate small business lending, as to which further details are expected to be released soon, and a reservation of funds for additional efforts to facilitate small business lending; and (iii) the possibility of an increased commitment to the Term Asset-Backed Securities Loan Facility that would not result in additional cost to taxpayers.

The Obama Administration announced an initiative to encourage small business lending by providing capital support to community banks.  Under the plan, community banks with less than $1 billion in assets will be given access to lower-cost capital, provided that they submit a plan explaining how the capital will allow them to increase lending to small businesses.  Participants would also be required to submit quarterly reports detailing their small business lending activities.  Banks will be eligible to receive capital totaling up to 2% of risk weighted assets.  The capital would be available at an initial dividend rate of 3%, compared to the Capital Purchase Program’s (the “CPP”) 5%, with the dividend rate increasing to 9% after five years to encourage timely repayment.  A bank’s participation will be subject to approval by its primary federal banking regulator.  Final details on the terms of the program — including the amount of capital available and how current CPP participants could replace existing capital with investments under this program — will be developed in the coming weeks by the Treasury in consultation with community banks and small businesses.

The Financial Crimes Enforcement Network (“FinCEN”) issued an advisory (the “Advisory”) to assist financial institutions in identifying and reporting activities related to the U.S. government’s Troubled Asset Relief Program (“TARP”) that could trigger an obligation to file a suspicious activity report (“SAR”).  In the Advisory, FinCEN explains that TARP-related programs provide substantial funds to a range of financial institutions and their customers, and, therefore, are susceptible to various forms of fraud, money laundering and other financial crimes.

FinCEN generally observes that the trends and indicators of potential suspicious activity involving TARP funding are similar to the trends and patterns that financial institutions encounter in monitoring non TARP-related transactions.  Accordingly, FinCEN states that financial institutions should be able to use their existing customer identification and anti-money laundering programs in (1) identifying customers who qualify for TARP-related funding, (2) anticipating the types of TARP-related transactions that such customers may conduct, and (3) identifying suspicious activity by such customers.  Financial institutions also are instructed to take advantage of public information in identifying transactions that might involve a TARP-related entity, such as wire instructions involving Capital Purchase Program (“CPP”)-funded banks or Public Private Investment Program (“PPIP”) fund managers. [Read more →]

The Congressional Oversight Panel (“COP”) issued a report entitled “The Continued Risk of Troubled Assets” (the “Report”).  The Report states that because the Treasury determined to use Troubled Asset Relief Program (“TARP”) funds to provide capital directly to banks rather than to purchase the banks’ troubled loans, substantial troubled assets remain on the banks’ balance sheets today.  The Report states that “[i]f the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value.” [Read more →]

The Treasury has released an interim final rule on compensation and corporate governance standards for Troubled Asset Relief Program (“TARP”) recipients (the “Interim Final Rule”).  The Interim Final Rule implements the executive compensation and corporate governance provisions applicable to TARP recipients (collectively, the “Compensation and Governance Rules”) under the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.  The Interim Final Rule revises and replaces in its entirety the previous Treasury guidance implementing the Compensation and Governance Rules, consolidates all of the Compensation and Governance Rules into a single rule, and adopts a few additional standards that will also be applicable to TARP recipients.

Determination of SEOs and Highly Compensated Employees.  The Compensation and Governance Rules generally apply to a TARP recipient’s senior executive officers (“SEOs”) and/or its most highly compensated employees.  To fall within either category, an individual must be an employee (e.g., not exclusively a partner of a partnership) of the TARP recipient (or any entity that is part of the same controlled group with the TARP recipient, determined using a 50% ownership test). [Read more →]

The Wall Street Journal reports that the Obama Administration is planning to drop the salary cap at firms receiving government bailout money announced in February, leaving them subject to congressionally imposed limits on bonuses under ARRA:  http://online.wsj.com/article/SB124460111423500951.html#mod=djemalertNEWS.  Please note that unlike the ARRA restrictions, the administration’s pay caps were not retroactive.  In addition to standing behind the restrictions passed by Congress in February, the administration plans to push for broad changes in compensation practices across the financial-services industry, according to the Wall Street Journal and the New York Times: http://www.nytimes.com/2009/06/08/business/08bank.html?_r=1&scp=8&sq=TARP%20&st=cse

President Obama plans appoint a “pay czar” to monitor the firms receiving the most government aid. Treasury Secretary Geithner is expected to push all firms — not just those receiving funds from the government’s Troubled Asset Relief Program — to more closely tie incentive compensation to long-term performance by paying employees in restricted stock rather than cash.

Below please find  a link to the Treasury release on the Interim Final Rule for the TARP standards for compensation and corporate governance under the ARRA.   The full regulations may be found in the Code of Federal Regulations at 31 CFR 30.

Interim Final Rule on TARP Standards for Compensation and Corporate Governance

The FRB outlined the criteria it will use to evaluate applications to redeem preferred shares issued to the Treasury under the Capital Purchase Program or the Targeted Investment Program (“Treasury Capital”) from the 19 bank holding companies (“BHCs”) that participated in the Supervisory Capital Assessment Program (“SCAP”). Please see the April 28, 2009 Alert and the February 25, 2009 Alert Special Edition for a further discussion of the SCAP. [Read more →]

Final Rule on Capital Treatment of TARP Senior Preferred Stock. The FRB adopted a final rule (the “Rule”) on the treatment of senior perpetual preferred shares (“Senior Preferred Shares”) issued to the Treasury pursuant to the Troubled Asset Relief Program’s (“TARP”) Capital Purchase Program as well as under the TARP’s Targeted Investment Program, Capital Assistance Program and Asset Guarantee Program (collectively, the “TARP Programs”). The Rule permits bank holding companies to include without limit all Senior Preferred Shares issued under the TARP Programs in Tier 1 capital for purposes of the FRB’s risk-based and leverage capital rules and guidelines for bank holding companies. The Rule leaves largely unchanged and makes final the interim final rule (the “IF Rule”) discussed in the October 21, 2008 Alert. [Read more →]

The Internal Revenue Service (the “IRS”) on April 13, 2009 issued Notice 2009-38 (the “Notice”) to provide guidance to corporations whose instruments are acquired by the Treasury Department under the Capital Purchase Program of the Emergency Economic Stabilization Act (“EESA”) and the Troubled Asset Relief Program (“TARP”). The Notice clarifies the interplay of many of the bailout programs with Section 382 of the Internal Revenue Code of 1986 (the “Code”), which addresses losses following an ownership change. [Read more →]

This is an updated version of the summary of financial crisis related programs first compiled on March 8. In the past month the Treasury produced further guidance on the programs through which it will purchase toxic assets in partnership with private investors. The following are the programs discussed in this summary. For more information click here.

The Treasury is expected to expand the TARP within the next few days to include life insurance companies. Only life insurance companies that own banks will qualify, and the assistance will be provided through the Capital Purchase Program. It is unclear how much money will be made available for life insurers, the Treasury reports that $130 billion in TARP funds remain. Any life insurance company participating in this program will be subject to the executive compensation restrictions that apply to all TARP recipients.

Goodwin Procter’s Real Estate, REITs & RE Capital Markets Group issued a Client Advisory on opportunities for real estate funds in the federal Public-Private Investment Program. The Client Advisory is available on the Goodwin Procter website at http://www.goodwinprocter.com/~/media/EEA83A3624EF49548FD5BE86240DBBD7.ashx.