What the Financial Reform Bill Means for Banking, Structured Finance, Private Equity and Class-Action Litigation

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law today by President Obama, is expected to touch nearly every aspect of the U.S. financial system, from Wall Street to Main Street. The regulatory impact of the bill and other sweeping industry reforms will dramatically alter business as usual for many sectors, including banking, securities and private equity.

Perspectives:

a.    [07/21/2010]  Banking Industry

Bill will increase need for additional legal and compliance personnel at banks, financial institutions.

“This bill will change the way banks and the investment community do business in fundamental ways,” said Frank E. Emory, Jr., co-head of the Litigation, Intellectual Property, Competition, and Labor Group at Hunton & Williams LLP.  “Yet it will also have subtle impacts which will not be apparent until the regulations are adopted, and class-action lawsuits are filed, which is why banks will need to hire additional counsel and compliance personnel to navigate and follow those rules,” noted Emory, who represents several large national financial institutions in internal investigations and class-action defense. 

b.    Banking Service Offerings

As a start, new regulations will help level the playing field in some service offerings.

“Some of the changes we will see in the banking world will help level the playing field between the too-big-to-fail banks, smaller regional banks and others across the country,” said Peter G. Weinstock, partner in the Financial Institutions, Corporate and Regulatory Practice at Hunton & Williams. “Changes to deposit insurance coverage and the ability to pay interest on corporate accounts may help main street banks compete with their money center brethren."  

c.     Asset-Backed Securities (ABS)

SEC regulatory reform may quash innovation with unnecessary regulation.

“The sweeping reforms of the U.S. financial industry include, in addition to the reform bill which was signed into law today by President Obama, proposed revisions from the SEC to Regulation AB governing asset-backed securities.  The proposed regulation, still in its comment period, presents a too-broad definition of 'structured finance products' that could quash innovation with unnecessary regulation,” said Thomas Y. Hiner, partner in the Business Practice Group at Hunton & Williams, who represents many issuers and lenders with respect to non-traditional asset-backed securities, including mortgage loan servicers and banks who provide their financing. These ABS market participants would be adversely affected by the new regulation as proposed.

"Since the new regulation, as proposed, would expand public disclosure requirements into the private securities markets, many types of innovative structured finance products, including ones that have never been offered through the public markets and never experienced the type of losses that contributed to the financial meltdown, could be subject to those rules,” noted Hiner.

“For example, servicer advance facility transactions (SAFs), which fund advance obligations in mortgage loan securitizations and provides critical liquidity to mortgage loan servicers, will be subject to these rules even though they are typically structured less like securities offerings and more like structured, bankruptcy-remote credit facilities. Also, SAFs already provide tailored disclosure to their investors and operate strictly in the private markets. Additional disclosure requirements would be neither helpful nor necessary, and could potentially could kill innovation in this market,” said Hiner.

d.    Private Equity

The Volcker Rule will lead to more spin-outs and divestitures of fund businesses by banking entities.

Like the Sarbanes-Oxley Act of 2002 impacted public company governance, the Dodd-Frank Act could have real and lasting impacts on the private investment fund industry," said James S. Seevers, Jr., head of the Private Equity practice group at Hunton & Williams, where he advises private investment funds and alternative asset investors.

"The Volcker Rule seems likely to restore a segregation of traditional banking activity on one hand, and proprietary trading, hedge fund and private equity fund management and investment on the other, but not until after a study period, a full regulatory process by several agencies and a divestiture period.  In the meantime, we are likely to see more fund management spin-outs from banks and secondary sales of fund interests, both of which have picked up already,” noted Seevers.

 e.     Private Equity/Investment Management

The Investment Advisor Registration provisions will increase the SEC's transparency into fund management.

”The Private Fund Investment Advisor Registration provisions of the Act will require many additional fund managers and other asset managers to register with the SEC for the first time.,” said James S. Seevers, Jr., “Traditionally, investment advisor registration and the policies and procedures it requires have not been burdensome, but the Act also directs the SEC to issue new rules strengthening the record keeping, disclosure and reporting provisions, giving the SEC more transparency into the way these managers run their funds.  It will be interesting to see how far-reaching the SEC tries to get in this rulemaking,” added Seevers.