Financial Services Alert - September 21, 2010

Elizabeth Warren has been appointed Assistant to the President and Special Advisor to the Secretary of the Treasury for the Bureau of Consumer Financial Protection (“CFPB”).  In this role, Ms. Warren will be charged with establishing the CFPB, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) to regulate consumer financial products and services under the federal consumer financial laws.  Ms. Warren is a Harvard Law School professor and is widely credited with originally proposing the creation of a consumer protection agency.  Until the announcement of her appointment as special advisor, Ms. Warren chaired the Congressional Oversight Panel that oversees the Troubled Asset Relief Program.

Ms. Warren has long been rumored to be the top candidate for nomination as CFPB Director; however, concerns had been raised regarding the likelihood that she would be confirmed by the Senate.  As an Assistant to the President and Special Advisor to the Secretary of the Treasury, however, Ms. Warren will not be formally confirmed by the Senate unless she is subsequently nominated to be the CFPB Director by the President.  This is notable because Congress expressly determined that the CFPB should be isolated from political oversight as an autonomous bureau of the FRB headed by an independent Director.  Ms. Warren will be directly accountable to both the President and the Treasury Secretary. 

In the role of special advisor, Ms. Warren will not have all of the powers and responsibilities of the CFPB Director, including the rulemaking powers granted to the CFPB Director pursuant to Section 1022(b)(1) of the Act and the requirement to appear before Congress pursuant to Section 1016 of the Act.  Ms. Warren will also be unable to assume the CFPB Director’s position as a member of the Financial Stability Oversight Council.  Pursuant to section 1066 of the Act, the Treasury Secretary acts as the CFPB Director until a Director has been confirmed by the Senate.  On the Act’s transfer date, July 21, 2011, the seat on the FDIC’s Board of Directors currently held by the Director of the OTS will be transferred to the CFPB Director pursuant to Section 336 of the Act; if a CFPB Director has not been confirmed by the Senate by that time the Treasury Secretary will assume that seat on the FDIC Board of Directors.

The Treasury also has set the “designated transfer date” to transfer functions to the CFPB as July 21, 2011.  On this date, certain authorities will transfer from other federal agencies to the CFPB, and the CFPB will be able to exercise certain additional, new authorities under the Act and other laws.  The Act’s new preemption standards for federally-chartered institutions also will take effect on the designated transfer date.  The determination of the designated transfer date sets other deadlines, including setting the target date for publishing final rules that implement the Act’s mortgage reform provisions as January 21, 2013.

The SEC website includes a page devoted to the SEC’s efforts in implementing applicable portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (as discussed in the July 28, 2010 Alert).  The Dodd-Frank webpage includes information on the timing of upcoming rulemaking and SEC action to date.  The webpage also includes overviews of rulemaking required under the Act in the following areas:

• Derivatives
• Clearing and settlement
• Asset-backed securities
• Advisers to hedge funds and other private funds
• Whistleblower program
• Corporate governance issues, including executive compensation disclosure and related SRO rules
• Municipal securities
• Credit rating agencies
• Specialized corporate disclosure

The SEC announced that it has approved rule proposals submitted by the national securities exchanges and FINRA that expand a recently-adopted circuit breaker program (discussed in the June 15, 2010 Alert) to include all stocks in the Russell 1000 Index and certain exchange-traded funds.  The SEC anticipates that the national securities exchanges and FINRA will begin implementing the expanded circuit breaker program this week.  The SEC also approved new rules proposed by the stock exchanges and FINRA designed to clarify the process for reviewing trades in exchange-traded securities to determine whether they are clearly erroneous and should be cancelled (as discussed in the June 22, 2010 Alert).   As with the circuit breaker program, the final erroneous trade rules will be in effect on a pilot basis through December 10, 2010.

The FDIC issued guidance (FIL-56-2010, the “Guidance“) concerning the risk posed by sensitive information stored on photocopiers, fax machines and printers (the “Electronic Devices” and each an “Electronic Device”) and how depository institutions (“DIs”, and each a “DI”) should mitigate that risk.  The Electronic Devices, noted the FDIC, may contain a hard drive or flash memory that stores digital images of documents that are copied, transmitted or printed by the Electronic Device.  The documents copied, transmitted or printed will often contain confidential information concerning the DI or its customers.  The Guidance states that DIs should adopt and implement “written policies and procedures to identify devices that store digital images of business documents and ensure their hard drive or flash memory is erased, encrypted or destroyed prior to being returned to the licensing company, sold to a third party or otherwise disposed of.”

On September 13, 2010, The FDIC appealed a recent bankruptcy ruling, discussed in the September 14, 2010 Alert, that barred the agency from submitting a claim for more than $900 million in a Chapter 11 bank holding company liquidation (In re The Colonial Bancgroup, Inc., Bankr. M.D. Ala., No. 09-32303-DHW).  The FDIC appeals to the Middle District of Alabama on several issues, most notably the bankruptcy court’s refusal to require the bankrupt bank holding company The Colonial Bancgroup, Inc. (“Colonial”) to contribute capital to its bank subsidiary pursuant to several purported capital commitment agreements between Colonial and its regulators.

In his keynote address for the ISDA Regional Conference in New York City, CFTC Chairman Gary Gensler discussed the CFTC’s efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) with regard to regulation of the swaps marketplace.  Chairman Gensler estimated that more than 200 entities will register as swap dealers and 20 to 30 new entities will register as swap execution facilities or designated contract markets as a result of the Dodd-Frank Act and the rules being promulgated by the CFTC and SEC.  Gensler noted that the CFTC is actively working with international regulators to harmonize swaps market oversight.  Citing to the European Commission’s proposed legislation on over-the counter derivatives released on September 15 2010, Chairman Gensler stated his confidence in “strong and consistent regulation of the U.S. and European swaps market.”  For further discussion of swaps marketplace regulation under Title VII of the Dodd-Frank Act, see the August 2, 2010 Special Edition of the Alert).

Following the publication of two Commission Communications in July and October 2009, the European Commission issued its “Proposal for Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories” on September 15, 2010.  (The text of the proposed legislation is available at http://ec.europa.eu/commission_2010-2014/barnier/headlines/news/2010/09/20100915_en.htm.)  Like Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the proposed legislation is intended to promote transparency in the OTC derivatives market, reduce counterparty credit risk and reduce operational risk.  Specifically, the proposed legislation would, among other things, mandate clearing for standardized OTC derivatives through central counterparties (“CCPs”).  To avoid CCPs becoming a source of risk to the financial system, the new regime would impose stringent conduct of business and prudential requirements on CCPs.  It would also increase transparency by requiring heightened reporting on OTC derivatives to trade repositories and that such information be accessible to supervisory authorities.  The European Council and the European Parliament must approve the proposal before it becomes law.