While much of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) is focused on issues pertaining to large “systemically-critical” institutions and publicly-traded institutions, there are many aspects of the Act that are or will become applicable to a much broader range of institutions directly or through the “trickle-down” effects of “regulatory creep”. Imposition of many of the provisions of the Act not otherwise directly applicable also may well become “best practices” for institutions not otherwise directly covered, as the requirements of the Act and related regulations are implemented.  

As with most legislation, the “devil is in the details” and much of the impact of the Act is dependent upon yet-to-be-issued agency regulations. The delay caused by the regulatory process will unfortunately only add to the uncertainty regarding the actual impact of the Act and the ability of institutions to undertake strategic planning initiatives to address its requirements. If recent history is a guide, expect the regulations to expand the potential impact of the Act rather than limit it, and expect more regulation than less.  

In addition, many of the provisions which relate to public companies under the Act may well find themselves creeping into requirements for all banking institutions (or at least those with assets exceeding a defined threshold) through the regulatory rulemaking process and “best practices”.  

As a result, bankers should be alert as proposed regulations are promulgated and issued by the federal agencies, and as state agencies review and assess the impact on state banking institutions. Until those proposed regulations are published and finalized, it is difficult to try to speculate as to the impact of certain provisions of the Act on community banks and the “law of unintended circumstances” may well apply.  

The following are highlights of certain aspects of the Act which appear to be most relevant to a broad array of banking institutions at the present time. Many of the provisions of the Act applicable most directly to large “systemically important” money-center and related organizations are not addressed here.  

1. Federal Reserve Authority

Among other things, the Federal Reserve will have expanded authority to oversee and examine non-bank financial companies and affiliates with a directive to intervene early when necessary to mitigate the likelihood of expanded problems through early remediation. Holding company capital “source of strength” requirements will be enhanced, and bank capital requirements (with more limited use of “hybrid securities” such as trust preferred securities; see below re “Capital”) will be required.  

The Fed is instructed to promulgate enhanced “source of strength” regulations within one year. Even smaller holding companies should expect more Fed scrutiny and oversight of holding company capital and liquidity to reinforce the policy expectations of the holding company as a source of capital for troubled bank affiliates.  

The Act also requires that the Fed undertake a study and related moratorium with regard to what constitutes a “bank” for bank holding company act purposes.  

2. Office of Thrift Supervision

The OTS is to be abolished and its supervisory authority assumed by the Office of the Comptroller of the Currency (“OCC”). Detailed transitional rules will apply as will new and expanded ongoing regulation of former-OTS institutions under the OCC and the Federal Reserve for former OTS-regulated holding companies.  


The Act grants the FDIC back-up examination authority for all depository institution holding companies if it determines that conduct of the holding company could threaten the deposit fund. That means that, particularly in “troubled” settings, the holding company could be subject to FDIC as well as Fed examination.  

The Act further provides that the FDIC must base its deposit insurance premium calculations on the institution’s average consolidated total assets minus its average tangible equity, as opposed to its deposit base. Further, the Act creates a “floor” for minimum reserve ratios but no cap.  

4. Capital

The Act focuses on “systemic risk” and “quality” capital, and provides that the standards for leverage and risk-based capital at the holding company level will track those for depository institutions.  

“Hybrid securities”, such as Trust Preferred securities, may be included only in Tier 2 capital (a change for holding companies) after certain transition periods.  

  • Large Bank Holding Companies: Large bank holding companies (more than $15B in assets as of 12/31/09) will need to comply with general risk-based capital and leverage capital requirements effective upon implementing regulations within 18 months of the date of the Act and exclude hybrid debt or equity instruments issued before May 19, 2010, incrementally from January 1, 2013, to January 1, 2016.  
  • Medium Bank Holding Companies (between $15B and $500M in assets) will need to comply with general risk-based capital and leverage capital requirements effective upon implementing regulations required within 18 months of the date of the Act and hybrid debt or equity instruments issued before May 19, 2010, are permanently grandfathered.  
  • Small Bank Holding Companies (less than $500M in assets) are exempt from the changes with regard to the new general risk-based capital and leverage requirements as well as the exclusion from Tier 1 capital for hybrid debt or securities issued before May 19, 2010.  
  • Large Thrift Holding Companies (more than $15B in assets as of 12/31/09) will need to comply with the general risk-based capital and leverage capital requirements 5 years after enactment and the exclusion of hybrid debt or equity instruments from Tier 1 capital will be phased in incrementally from January 1, 2013, to January 1, 2016.  
  • Medium to Small Thrift Holding Companies will likewise need to comply with the general risk-based capital and leverage requirements 5 after enactment, and hybrid debt or equity instruments issued before May 19, 2010, are permanently grandfathered.  

All of the foregoing result in the need to carefully review current and anticipated capital needs in light of the changed and changing rules.  

In addition, the definition of “accredited investor” for limited offerings has been changed to exclude primary residence from inclusion in the investor net worth test, further limiting the pool of potential investors for private offerings.  

On the “good news” side, there is an exemption for non-accelerated SEC filers from Sarbanes-Oxley section 404(b) which should result in cost-savings for some institutions, and there are efforts (outside of the Act but originally proposed for the Act) to increase the number of shareholders that trigger SEC registration from the current 500 to 2000 which should help in capital raising activities as well as in mitigating the likelihood that normal “shareholder creep” through estates and other distributions may inadvertently result in a non-public company suddenly and unintentionally becoming an SEC registrant overnight.  

Also, the banking agencies have been instructed to issue capital rules that are “counter-cyclical”; requiring additional capital in times of growth but less in times of economic distress. This provision in particular will be interesting to watch as rules are proposed.  

5. Branching

The Riegle-Neal Act provided states with the ability to limit activities of out-of-state banks in entering and doing business. Under the Act, if a state permits intrastate state-wide branching, out-of-state banks will be permitted to branch de novo into the state in preemption of state law and have the same branching rights as state-chartered banks within the target state. This could make a difference for banks that operate near state lines in terms of their strategic planning process and market expansion plans.

6. Other Federal Regulations

Sections 23A/B and Reg W (transactions with affiliates) will be modified to expand the types of transactions that constitute “covered transactions” and will include expanded collateral requirements.

Further, Regulation O (transactions with insiders) will be expanded to include the types of transactions that are subject to the regulation to include credit exposure from derivatives, repos and securities loans. Ordinary bank lending limits will likewise be extended to include special transactions not previously covered.  

Interchange fees must be “reasonable and proportional to the cost” for processing transactions under the Act, and Fed regulations establishing standards for determining what fees are deemed “reasonable and proportional” (to be issued within 9 months) will provide further guidance as to the likely business impact of this provision of the Act. Card issuers with consolidated assets (including affiliates) of less than $10B are exempt from the interchange transaction fee limitation.  

7. Boards, Corporate Governance and Executive Compensation  

While many of the following are applicable only to public company issuers, like other areas of the Act many of these provisions (and ensuing regulations) are likely to be subject to “trickle-down” regulation and “best practices” pressures as they are adopted and implemented.  

Compensation committees of all institutions would do well to pay attention to the following items in their deliberations and carefully document their compensation proceedings, considerations, and decisions in light of company performance as well as the impact (particularly of incentive programs) on risk management and institutional safety and soundness.

  • “Say on Pay”: public companies will be required to provide in their proxy materials a non-binding shareholder vote at least each 3 years with regard to executive compensation. Rules are to be promulgated, but it is likely that the requirement will be applicable to 2011 annual meeting proxy materials.  
  • “Say on Golden Parachutes”: public companies will be required to provide in their proxy materials for sale transactions detail with regard to total executive compensation related to a “golden parachute,” including a non-binding vote on “golden parachute” agreements.  
  • Pay vs. Performance Disclosures: the Act will require enhanced proxy disclosure of the comparison of executive compensation with company performance as well as comparison of CEO compensation to the average compensation of non-executive personnel. The performance comparison may impact the ability of compensation committees to rely solely on institutional size comparisons in making compensation determinations.  
  • Compensation Committee Independence: all compensation committee members in public companies will need to be “independent” with new and heightened independence standards. Proxy disclosures regarding independence will be enhanced as will disclosures with regard to use of “independent” compensation committee advisors. This will be applicable for annual meetings after July 21, 2011.  
  • Clawbacks: the Act includes a mandatory recovery of incentive compensation (3 years) following accounting restatements. No effective date has been set for this requirement.  
  • Executive Compensation; compensation committees are especially targeted by the Act and recent unrelated regulatory “guidance” with regard to incentive compensation programs. The Act requires that agencies issue regulations within 9 months requiring institutions in excess of $1B to report structures of all incentive-based compensation arrangements and to prohibit such programs if they “encourage inappropriate risk” which could “lead to a material loss” for the institution. Regardless of institutional size or condition, compensation committees are urged to carefully review their committee charters and procedures, to undertake careful risk-based analysis of compensation programs (particularly those related to incentive compensation), and document their consideration with regard to the size, risk, and appropriateness of compensation programs for executive officers as well as all employees. Banking regulators are already scrutinizing these programs in current examination proceedings and that scrutiny is likely to increase.  
  • Proxy Access; the Act provides that the SEC may, but is not required to, promulgate rules that would require that company proxy materials include shareholder board nominees. Given the high profile and popularity of this issue with the current administration, rules are likely and will probably be in place for the 2011 proxy season.  
  • Mandatory “Risk Committee”: the Act requires that financial institutions in excess of $10B in assets name a specific board “risk committee” charged with analysis and oversight of enterprise risk.  
  • Chairman and CEO Bifurcation Disclosure: the Act requires the SEC to issue rules requiring public companies to disclose in their proxy statements why they have separated, or combined, the positions of Chairman and CEO.  
  • Whistleblower: the Act provides significantly enhanced SEC “whistleblower” incentives through an increased reward or “bounty” structure.  

8. The Bureau of Consumer Financial Protection and Federal Preemption

In one of the most contentious and potentially problematic parts of the legislation, the Act mandates establishment of an entirely new federal agency known as the Bureau of Consumer Financial Protection (“BCFP”) which, among other things, will assume most of the consumer protection functions presently exercised by regulators under existing federal consumer protection laws. The BCFP will have exclusive rule-making and examination authority for banking organizations in excess of $10B in assets. Smaller banks will still be subject to the BCFP rulemaking authority, and possibly examination in participation with the institutions primary regulators. It has no enforcement authority in that regard, however, for smaller institutions.

The Act reduces the preemptive authority of federal banking regulators and makes banks more subject to state-by-state consumer law and regulation and enforcement by state attorneys general. Subsidiaries are also included. The result is likely significantly higher compliance cost and liability exposure for multi-state institutions as well as institutions within a given state that will be subject to greater state attorney general involvement and enforcement.


While Congress “punted” to the various agencies with regard to many of the actual details relating to implementation and applicability of the Act, it is certain that the Act and the regulations to follow will have a significant impact on the operations of most institutions either directly or through a “trickle-down” or “best practices” analysis. The net result of theat action, however, is to increase the period of uncertainty as to how the Act will actually impact institutions in a time when certainty is critical.

Given the focus on compensation issues, compensation committees should be reviewing their governance documents, processes, procedures, and analyses and carefully documenting their thought process and analytics in promulgating compensation programs, and especially incentive compensation programs. Shareholder activism is given a boost by the Act, as are potential union organizing efforts that will focus on the comparative compensation disclosures required by the Act. Compliance costs will likely go up, as will pressures on boards in an increasingly compliance-focused board and operating environment.

Bankers and board members should watch closely as proposed regulations are issued to determine the impact on their own institutions and react accordingly. Changes in governance documents and procedures may be appropriate, as may changes in affiliate structures and compensation plans and programs.