On July 21, 2010, President Obama signed the final version of the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. This sweeping legislation will have a tremendous impact on institutions of all sizes and industries, but not all companies will be impacted equally. It is important for those who may be affected to understand what portions of the Act will apply to them, and which will not; in particular, not all small banks, holding companies, insurers, and issuers will be subject to all of the new regulations. As these companies prepare for the regulatory changes that will follow the implementation of the Act, close attention should be paid to provisions which directly impact smaller institutions.

The Act affects small companies differently from their larger counterparts in at least three distinct ways. First, it specifically exempts some groups of companies from certain requirements of the Act. Second, it directs federal regulatory agencies to consider how new rulemaking will affect smaller institutions, and provides greater discretion in the choice to exempt small institutions from their requirements. Finally, it mandates that studies be conducted to identify the unique burdens imposed on these institutions by new regulation.

Specific Exemptions

The Wall Street Reform Bill will create new regulations that impact all financial institutions. Fortunately, small institutions are specifically exempted from some of these new requirements. Some relevant exemptions that small institutions should be aware of:

  • Debt or equity instruments issued before May 19, 2010 by depository institution holding companies with less than $15 billion in assets are exempt from the new risk-based capital requirements. Instruments issued by companies subject to the Small Bank Holding Company Policy Statement of the Board of Governors are also exempt. (Title I, Subtitle C, Sec. 171)
  • Small insurance companies (as defined by guidelines not yet created) are exempt from the new Federal Insurance Office’s information reporting requirements. (Title V, Subtitle A, Sec. 502)
  • Issuers that are not classified as “large accelerated” or “accelerated” filers will now be exempt from section 404(b) of the Sarbanes-Oxley Act. This section requires that a registered public accounting firm review and attest to the internal control assessments required by Sarbanes-Oxley. (Title IX, Subtitle I, Sec. 989G)
  • Smaller banks, thrifts and credit unions with assets of $10 billion or less will be regularly examined by their respective prudential regulators with respect to consumer protection whereas larger depository institutions will be subject to consumer protection examinations by the new Consumer Financial Protection Bureau (Title X, Subtitle B, Sec. 1025 & 1026),
  • Issuers with total assets that are less than $10 billion are exempt from the new SEC regulations covering reasonableness of fees charged for electronic debit transactions. (Title X, Subtitle G, Sec. 1075).

Increased Agency Discretion

While many of the new requirements created by the Act will directly exempt small institutions, others simply admonish the SEC and other agencies to take into account the size of an institution when granting individual exemptions. This increase in agency discretion granted by the Act will provide guidelines for new federal rulemaking with respect to small institutions. Some examples include:

  • The SEC will consider whether to exempt small banks, savings institutions, farm credit system institutions, and credit unions with less than $10 billion in total assets from the new derivative clearing requirements. (Title VII, Subtitle A, Part II, Sec. 723)
  • The SEC will consider whether to exempt small issuers from the new requirement for independent compensation committees. (Title IV, Subtitle E, Sec. 952)
  • The SEC will consider whether to exempt small issuers from using proxy solicitations to gather nominations for the Board of Directors. (Title IX, Subtitle G, Sec. 971)
  • National securities exchanges and associations will have the discretion to exempt smaller issuers from new compensation voting requirements. (Title IV, Subtitle E, Sec. 951)

Future Studies

 In addition to direct exemptions and increased agency discretion, the Act also requires that studies be conducted to determine the best long-term strategy for regulating smaller institutions. These studies will present an opportunity for small institutions to highlight the unique challenges they face from increased regulation. These studies include:

  • A study by the Comptroller General that will identify ways to increase access to capital by smaller insured depository institutions with less than $5 billion in total assets. (Title I, Subtitle C, Sec. 171)
  • A study by the Government Accountability Office to determine how issuers with less than $10 billion in total assets are impacted by an exemption from Section 404(b) of the Sarbanes-Oxley Act. (Title IX, Subtitle I, Sec. 989G)

The new requirements of the Wall Street Reform and Consumer Protection Act likely will impose additional regulatory burdens on all companies, both large and small. Smaller companies should be mindful of the provisions of the Act that are uniquely addressed to them, including direct exemptions, increased regulatory discretion, and long-term studies that will influence their regulatory landscape for years to come.