On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"), which will have far-reaching effects on the regulation and supervision of the US financial system. This alert focuses specifically on the provisions of the Reform Act that may affect non-U.S. bank holding companies, non-U.S. banks and non-U.S. nonbank financial companies.

A. Non-U.S. Bank Holding Companies and Non-U.S. Nonbank Financial Companies

Under Section 102 of the Reform Act, the term "bank holding company" is given the same meaning as in Section 2 of the U.S. Bank Holding Company Act of 1956 (the "BHC Act") and includes a non-U.S. bank or company that is treated as a bank holding company for purposes of the BHC Act.

Many provisions of the Reform Act are applicable to "nonbank financial companies," which includes both U.S. nonbank financial companies and foreign nonbank financial companies.

A "foreign nonbank financial company" is defined as a company (other than a company that is treated as a bank holding company) that:

  • is incorporated or organized in a country other than the United States; and
  • is predominantly engaged in, including through a branch in the United States, financial activities.

The term "predominantly engaged in" means the annual gross revenues derived by the company and all of its subsidiaries from activities that are financial in nature (as defined in the BHC Act) and, if applicable, from the ownership or control of one or more insured depository institutions, represent 85% or more of the consolidated annual gross revenues of the company, or the consolidated assets of the company and all of its subsidiaries related to activities that are financial in nature and, if applicable, related to the ownership or control of one or more insured depository institutions, represent 85% or more of the consolidated assets of the company. References to "company" or "subsidiary" generally include only the U.S. activities and subsidiaries of such foreign company.

B. Systemic Risk Regulation

The Reform Act sets forth systemic risk provisions applicable to "systemically important" bank holding companies and nonbank financial companies. Bank holding companies (both U.S. and non-U.S.) with $50 billion or more in consolidated assets are automatically designated as systemically important ("Large Bank Holding Companies"). The process by which a nonbank financial company becomes designated as "systemically important" is set forth below.

(i) Identification of Systemically Important Nonbank Financial Companies

Section 111 of the Reform Act establishes the Financial Stability Oversight Council (the "Council") to identify risks in market activities and to enhance oversight of the financial system. The Council is empowered to, among other things, identify nonbank financial companies (both U.S. and non-U.S.) that may pose risks to the financial stability of the United States in the event of their material financial distress (a "Systemically Important Nonbank Financial Company"). Specifically, the Council, on a non-delegable basis and by a vote of not fewer than two-thirds of the voting members then serving, may determine that material financial distress at the nonbank financial company or the nature, scope, scale, concentration, interconnectedness, or mix of activities of the nonbank financial company, could pose a threat to the financial stability of the United States and, therefore, subject a nonbank financial company to supervision by the Board of Governors of the Federal Reserve System (the "Board").

In making this determination with regard to foreign nonbank financial companies, the Council will consider the following:

  • the extent of the leverage of the company;
  • the extent and nature of the U.S. related off-balance-sheet exposures of the company;
  • the extent and nature of the transactions and relationships of the company with other Systemically Important Nonbank Financial Companies and Large Bank Holding Companies;
  • the importance of the company as a source of credit for U.S. households, businesses, and State and local governments and as a source of liquidity for the U.S. financial system;
  • the importance of the company as a source of credit for low-income, minority, or underserved communities in the United States, and the impact that the failure of such company would have on the availability of credit in such communities;
  • the extent to which assets are managed rather than owned by the company and the extent to which ownership of assets under management is diffuse;
  • the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company;
  • the extent to which the company is subject to prudential standards on a consolidated basis in its home country that are administered and enforced by a comparable foreign supervisory authority;
  • the amount and nature of the U.S. financial assets of the company;
  • the amount and nature of the liabilities of the company used to fund activities and operations in the United States, including the degree of reliance on short-term funding; and
  • any other risk-related factors that the Council deems appropriate.

The Council will provide the Systemically Important Nonbank Financial Company written notice of the proposed determination including an explanation of the basis of the determination that the company shall be supervised by the Board and be subject to heightened prudential standards. Such a company must then register with the Board within 180 days after the date of the final Council determination.

(ii) Heightened Prudential Standards Applicable to Large Bank Holding Companies and Systemically Important Nonbank Financial Companies

In accordance with Section 165 of the Reform Act, in order to mitigate risks to the financial stability of the United States, the Board will on its own or by recommendation by the Council, establish heightened prudential standards and disclosure requirements applicable to Systemically Important Nonbank Financial Companies and Large Bank Holding Companies (both U.S. and non-U.S.). Such standards may be more stringent than those applied to bank holding companies and nonbank financial companies that do not pose similar risks to the financial stability of the United States. Such heightened prudential standards will include standards for:

  • risk-based capital requirements and leverage limits;
  • liquidity requirements;
  • overall risk management requirements;
  • resolution plans and credit exposure report requirements; and
  • concentration limits.

In addition, the Board may establish additional prudential standards for Systemically Important Nonbank Financial Companies and Large Bank Holding Companies (U.S. and non-U.S.) that include:

  • a contingent capital requirement;
  • enhanced public disclosures;
  • short-term debt limits; and
  • such other prudential standards as the Board determines are appropriate.

In applying the standards and other requirements set forth in the Reform Act to non-U.S. Systemically Important Nonbank Financial Companies or non-U.S. Large Bank Holding Companies, the Reform Act requires the Board to give due regard to the principle of national treatment and equality of competitive opportunity and take into account the extent to which the non-U.S. company is subject on a consolidated basis to home country standards that are comparable to those applied to financial companies in the United States. The Reform Act does not state how comparability will be determined and to what extent the home country standard must be equivalent to the U.S. standard, and, therefore, questions remain as to the applicability of this provision to non-U.S companies. We expect that the implementing regulations will, among other things, address these issues.

(a) "Funeral" Plans and Credit Exposure Reports

Section 165 of the Reform Act requires Systemically Important Nonbank Financial Companies and Large Bank Holding Companies (both U.S. and non-U.S.) to prepare orderly resolution plans ("Resolution Plans"), which must be approved by the Board and the Federal Deposit Insurance Corporation (the "FDIC").

These Resolution Plans must include:

  • information regarding the extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any nonbank subsidiaries of the company;
  • descriptions of the company's ownership structure, assets, liabilities and contractual obligations;
  • identification of the cross-guarantees tied to different securities, major counterparties and a process for determining to whom the collateral of the company is pledged; and
  • any other information that the Board and the FDIC jointly require.

For purposes of these provisions, references to "company" or "subsidiary" generally include only the U.S. activities and subsidiaries of such non-U.S. company.

The FDIC and the Board will review a company's Resolution Plan to determine whether it would facilitate an orderly resolution under the U.S. Bankruptcy Code. If the Resolution Plan is found to be deficient, the company must resubmit its Resolution Plan. If a company fails to adopt an acceptable Resolution Plan, the FDIC and the Board may impose more stringent capital, leverage or liquidity requirements, or restrictions on the company's growth, activities or operations until such time as the company resubmits a Resolution Plan that remedies the deficiencies. After the foregoing requirements and restrictions are imposed on a company, the FDIC and Board may require a company to divest its assets if the company's Resolution Plan is deficient and a suitable Resolution Plan is not resubmitted within two years.

Systemically Important Nonbank Financial Companies and Large Bank Holding Companies (both U.S. and non-U.S.) will also be required to prepare periodic credit exposure reports. Such reports must report on the nature and extent to which:

  • the company has credit exposure to other Systemically Important Nonbank Financial Companies and Large Bank Holding Companies; and
  • other Systemically Important Nonbank Financial Companies and Large Bank Holding Companies have credit exposure to that company.

The Resolution Plan and credit exposure report subsections of the Reform Act will become effective no later than January 21, 2012.

(b) Mitigation of Risks to Financial Stability

Pursuant to Section 121 of the Reform Act, if the Board determines that a Systemically Important Nonbank Financial Company or Large Bank Holding Company (both U.S. and non-U.S.) poses a grave threat to the financial stability of the U.S., the Board, upon an affirmative vote of not fewer than two-thirds of the voting members of the Council then serving, must:

  • limit the ability of the company to merge with, acquire, consolidate with, or otherwise become affiliated with another company;
  • restrict the ability of the company to offer a financial product or products;
  • require the company to terminate one or more activities;
  • impose conditions on the manner in which the company conducts one or more activities; or
  • if such actions are inadequate to mitigate the threat to the financial stability of the United States, require the company to sell or otherwise transfer assets or off-balance sheet items to unaffiliated entities.

(c) Reports and Examinations

Under Section 161 of the Reform Act, the Board may require each Systemically Important Nonbank Financial Company (both U.S. and non-U.S.) and any subsidiary thereof, to submit reports under oath to keep the Board informed of:

  • the financial condition of the company or subsidiary;
  • the systems of the company or subsidiary for monitoring and controlling financial operating and other risks; and
  • the extent to which the activities and operations of the company or subsidiary pose a threat to the financial stability of the United States.

With respect to a "foreign nonbank financial company," references to "subsidiary" include only the U.S. subsidiaries of such non-U.S. company.

In addition, the Board may examine any Systemically Important Nonbank Financial Company (both U.S. and non-U.S.) and any subsidiary thereof to inform the Board of:

  • the nature of the operations and financial condition of the company and any subsidiary;
  • the financial, operational, and other risks of the company or subsidiary that may pose a threat to the safety and soundness of such company or subsidiary or to the financial stability of the United States;
  • the systems for monitoring and controlling such risks; and
  • compliance with the systemic risk requirements of the Reform Act.

(d) Limitation on Credit Exposure

Section 165 of the Reform Act provides that the Board, by regulation, may prohibit each Systemically Important Nonbank Financial Company and Large Holding Company (both U.S. and non-U.S.) from having credit exposure to any unaffiliated company that exceeds 25% of the capital stock and surplus of the company.

The regulations implementing these provisions of the Reform Act will not be effective until July 21, 2013.

(e) Risk Committee

Section 165 of the Reform Act also requires each publicly traded Systemically Important Nonbank Financial Company and publicly traded bank holding company (both U.S. and non-U.S.) with total consolidated assets of $10 billion or more to establish a risk committee ("Risk Committee"). The Board may also impose this requirement on publicly traded bank holding companies with fewer assets if it deems it necessary to promote sound risk-management practices.

Risk Committees must:

  • be responsible for the oversight of the enterprise-wide risk management practices of the company;
  • include such number of independent directors as the Board may determine appropriate; and
  • include at least one risk management expert with experience in identifying, assessing, and managing risk exposures of large, complex firms.

The Board must issue final rules to carry out the Risk Committee provisions on or before July 21, 2012, and such rules must take effect no later than October 21, 2012 (subject to a six month extension by the Secretary of the Treasury). We expect that these rules will, among other things, address more specifically how such provisions will apply to non-U.S. banks and foreign nonbank financial companies.

(iii) Permanent Self Funding

Under Section 155 of the Reform Act, the Secretary of the Treasury will establish, by regulation, and with the approval of the Council, an assessment schedule, including the assessment base and rates, applicable to Large Bank Holding Companies and Systemically Important Nonbank Financial Companies (both U.S. and non-U.S.), that will take into account differences among such companies, based on the considerations set forth above for establishing the prudential standards applicable to such companies, in order to collect assessments equal to the total expenses of the Office of Financial Research within the Department of the Treasury, which is responsible for supporting the Council in fulfilling its duties and purposes under the Reform Act.

The regulations under this subsection of the Reform Act will not be effective until July 21, 2012.

View a detailed analysis of the Reform Act's systemic risk provisions.

C. Capital Requirements

(i) The Collins Amendment

In order to protect the financial stability of the U.S. financial markets and to prevent financial companies from growing too large, Section 171 of the Reform Act directs federal banking regulators to establish minimum leverage and risk-based capital requirements on a consolidated basis for insured depository institutions, depository institution holding companies and Systemically Important Nonbank Financial Companies (both U.S. and non-U.S.). The term "depository institution holding company" means a bank holding company or a savings and loan holding company that is organized in the United States, including any bank or savings and loan holding company that is owned or controlled by a non-U.S. organization, but does not include non-U.S. organizations. Such minimum leverage and risk-based capital requirements must be not less than the requirements that currently apply to insured depository institutions under the prompt corrective action regulations implementing Section 38 of the Federal Deposit Insurance Act, regardless of total consolidated asset size or foreign financial exposure, and not quantitatively lower than the requirements that were in effect for insured depository institutions as of July 21, 2010. Thus, under the Reform Act, bank regulators are required to apply to bank holding companies (including U.S intermediate bank holding company subsidiaries of foreign banking organizations) and Systemically Important Nonbank Financial Companies (both U.S. and non-U.S.) at a minimum, the current leverage and risk-based capital standards applicable to insured depository institutions. With regard to non-U.S. companies, while the capital requirement will be applicable to the U.S. intermediate bank holding company, these capital requirements are not applicable to the non-U.S. parent of the U.S. bank holding company.

(ii) Application to Bank Holding Company Subsidiaries of Non-U.S. Banking Organizations

Previously, U.S. bank holding companies controlled by non-U.S. banks relied on the exemption from the Board's capital adequacy guidelines as set forth in Supervision and Regulation Letter SR-01-1, dated January 5, 2001, that set forth a presumption that non-U.S. banks operating in the United States that are well-capitalized and well-managed under standards that are comparable to those of U.S. banks controlled by financial holding companies, have sufficient financial strength and resources to support their banking activities in the United States. Thus, bank holding company subsidiaries of non-U.S. banking organizations determined to be well-capitalized and well-managed were not required to comply with the Board's capital adequacy guidelines.

The Reform Act eliminates this exemption and requires that all bank holding companies, including bank holding company subsidiaries of non-U.S. banking organizations, be subject to the Board's capital adequacy guidelines. However, for bank holding company subsidiaries of non-U.S. banking organizations that have relied on this exemption, this requirement will take effect on July 21, 2015 — that is, 5 years after enactment of the Reform Act.

The Reform Act also requires the Comptroller General of the United States in consultation with the Secretary of the Treasury, the Board, the Office of the Comptroller of the Currency and the FDIC to conduct a study of capital requirements applicable to U.S. intermediate holding companies of non-U.S. banks that are bank holding companies or savings and loan holding companies. The study will consider:

  • current Board policy regarding the treatment of intermediate holding companies;
  • the principle of national treatment and equality of competitive opportunity for non-U.S. banks operating in the United States;
  • the extent to which non-U.S. banks are subject on a consolidated basis to home country capital standards comparable to U.S. capital standards;
  • potential effects on U.S. banking organizations operating abroad of changes to U.S. policy regarding intermediate holding companies;
  • the impact on the cost and availability of credit in the U.S. from a change in U.S. policy regarding intermediate holding companies; and
  • any other relevant factors relating to safety and soundness of our financial system and potential economic impact of such a prohibition.

Accordingly, it is possible that the results of the study will impact the implementation of the Reform Act's elimination of the exemption for bank holding company subsidiaries of non-U.S. banking organizations.

D. U.S. Branches of Non-U.S. Banks and Non-U.S. Broker-Dealers

Pursuant to the International Banking Act of 1978, no non-U.S. bank may establish a branch or an agency, or acquire ownership or control of a commercial lending company, without the prior approval of the Board. Section 173 of the Reform Act amends the International Banking Act of 1978 to include an additional factor that the Board may consider when determining whether to approve an application submitted by a non-U.S. bank. Specifically, the Reform Act states that the Board may consider, for a non-U.S. bank that presents a systemic risk to the U.S. financial system, whether the home country has adopted, or is making demonstrable progress towards adopting, an appropriate system of financial regulation for the financial system of such home country to mitigate such systemic risk.

The Reform Act also amends the International Banking Act of 1978 to allow the Board to take into consideration this same criterion in determining whether to terminate the activities of the U.S. branch, agency or commercial lending subsidiary of a non-U.S. institution that presents a systemic risk to the United States.

The Reform Act contains similar provisions applicable to the application to establish, or to terminate the activities of, a U.S. branch of a non-U.S. broker-dealer.

E. The Volcker Rule

The Volcker Rule, codified in Section 619 of the Reform Act, is intended to help prevent the occurrence of another financial crisis by, among other things, restricting banks from making certain kinds of speculative investments. The Reform Act specifically prohibits a banking entity from engaging in proprietary trading, or, with certain specific exceptions, from owning or investing in a hedge fund or private equity fund, and it limits the liabilities that the largest banks may hold.

The term "banking entity" means any insured depository institution, any company that controls an insured depository institution, or that is treated as a bank holding company for purposes of the International Banking Act of 1978, and any affiliate or subsidiary of any such entity. Non-U.S. banks and bank holding companies operating in the United States are, therefore, included in the definition of banking entity.

(i) Proprietary Trading

(a) General Rule

The Reform Act requires the appropriate federal banking agencies to enact joint rules to prohibit "proprietary trading" by banking entities. Proprietary trading is defined to include the purchase or sale of any stock, bond, option, commodity, derivative or other financial instrument for one's own trading book and generally includes speculating in stocks, commodities and derivatives.

(b) Exception for Non-U.S. Banks

The Reform Act provides an exception for proprietary trading activities conducted by a non-U.S. banking entity pursuant to existing exceptions under the BHC Act applicable to such entities, provided that the trading occurs solely outside of the United States by an entity that is not controlled or owned by a banking entity that is organized under the laws of the United States or of one or more states. The Reform Act does not provide any guidance as to what "occur solely outside of the United States" means; however, we expect that the implementing regulations will, among other things, address this issue.

(ii) Ownership or Sponsorship of a Hedge Fund

(a) General Rule

The Reform Act also includes general prohibitions on a banking entity's ability to acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund, with certain limited exceptions. The Reform Act provides that a banking entity is considered to be "sponsoring" a hedge fund or private equity fund if it is:

  • serving as a general partner, managing member, or trustee of the fund,
  • in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the fund or
  • sharing with a fund, for corporate, marketing, promotional or other purposes, the same name or variation of the same name.

(b) Exceptions to the General Prohibition

The Reform Act lists certain permitted activities exempt from the general prohibition on organizing and offering of a private equity or hedge fund (including serving as the general partner or managing member). To be eligible for the exemption, the banking entity must meet all of the following conditions:

  • the banking entity must provide bona fide trust, fiduciary or investment advisory services;
  • the fund is organized and offered only in connection with the provision of such services and only to persons that are customers of the banking entity;
  • the banking entity does not acquire or retain an interest in the funds except for a de minimis investment (see description below);
  • no affiliate of the banking entity enters into a transaction with the fund, or with any other hedge fund or private equity fund that is controlled by such fund, that would be a covered transaction, as defined in Section 23A of the Federal Reserve Act (transaction with affiliate limits) as if such banking entity and the affiliate thereof were a member bank and the hedge fund or private equity fund were an affiliate thereof;
  • the banking entity may not guarantee the obligations or performance of any fund;
  • the banking entity does not share the same name with any fund for corporate or marketing purposes;
  • no director or employee of the banking entity retains an interest in the fund (unless directly engaged in providing investment advisory services to the fund); and
  • the banking entity provides full disclosure to investors, including the risk of loss borne by investors.

A "de minimis investment" is an investment in a hedge fund or private equity fund in which:

•the banking entity actively seeks unaffiliated investors to reduce or dilute its investment; •the banking entity's investment is reduced to not more than 3% of the total ownership of the fund within one year of the fund's establishment (with a possible two year extension); and •the investment is immaterial to the banking entity as defined by regulators pursuant to rulemaking, but in no case in excess of 3% of the banking entity's Tier 1 capital. (c) Exception for Non-U.S. Banks The Reform Act provides an exception for the acquisition or retention of any equity, partnership, or other ownership interest in, or the sponsorship of, a hedge fund or a private equity fund, solely outside the United States, by a non-U.S. banking entity pursuant to existing exceptions under the BHC Act applicable to such entities, provided that no ownership interest in such hedge fund or private equity fund is offered for sale or sold to a resident of the United States, and the banking entity is not directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of one or more states.

(iii) Effective Date/Transition Period - Opportunities

The prohibitions and requirements of the Volcker Rule do not become effective until the earlier of (i) twelve months after the issuance of final rules implementing the Volcker Rule; and (ii) two years after the enactment of the Volcker Rule (the "Effective Date"). Therefore, the latest possible Effective Date will be July 21, 2012. The banking entity will then have a transition period of two years after the Effective Date to "bring its activities and investments into compliance" with the Volcker Rule.

In addition, the Board may grant up to three one-year extensions of the transition period if "consistent with the purposes of this section" and "not detrimental to the public interest." It is not clear whether the Board will grant such extensions as a matter of course (as federal banking regulators routinely do with respect to impermissible investments acquired in acquisition transactions or after charter conversions) or whether the Board will be reluctant to grant such extension requests. Additional extensions of up to five years are available in connection with commitments to funds considered to be "illiquid." Assuming a July 21, 2012 Effective Date, a banking entity will have between four and twelve years from July 21, 2010 to comply with the Volcker Rule before it will be required to cease its proprietary trading activities or divest its interest in private equity or hedge funds.

Banking entities will be compelled, subject to the transition periods discussed above, to conform their proprietary trading activities and private equity and hedge fund activities to the requirements of the Volcker Rule or to close, divest or spin off these activities. It has been reported that two large investment banks have decided to close their proprietary trading operations. In addition, with respect to private equity or hedge fund activities, despite the extended compliance timeline, many banking entities have already begun the process of taking steps to comply with the Volcker Rule, and several money center banks have announced or completed plans to divest or spin off certain of their private equity or hedge fund investments. Other banks are expected to take full advantage of the transition period and gradually reduce their ownership in private equity funds and hedge funds over time rather than selling or spinning them off at once. These reactions to the Volcker Rule, as well as the exceptions described above for non-U.S. banks may provide an opportunity for non-U.S. entities to increase their participation in off-shore trading and hedge fund activities as U.S. entities continue to reduce their proprietary trading operations and hedge fund activities to conform to the requirements of the Volcker Rule.

(iv) Additional Capital Requirements for Systemically Important Nonbank Financial Companies  

Any Systemically Important Nonbank Financial Company that engages in proprietary trading or takes or retains any equity, partnership, or other ownership interest in or sponsors a hedge fund or a private equity fund will be subject to additional capital requirements for and additional quantitative limits with regard to such proprietary trading and taking or retaining any equity, partnership, or other ownership interest in or sponsorship of a hedge fund or a private equity fund. However, the permitted activities described above shall not be subject to the additional capital and additional quantitative limits unless the appropriate regulatory agency determines that additional capital and quantitative limitations are appropriate to protect the safety and soundness of the entity engaged in such activities.

View more information on the Volcker Rule.

F. Deposit Insurance Reforms

For U.S. branches of non-U.S. banks that accept deposits, it is important to note that the Reform Act sets forth certain revisions to the FDIC's deposit insurance regulations. Pursuant to Section 331 of the Reform Act, the FDIC must base deposit insurance assessments on an insured depository institution's average consolidated total assets minus its average tangible equity, rather than on its deposit base (though the FDIC may reduce the assessment base for custodial banks and banker's banks). This revision to the assessment calculations shifts the distribution of assessments to the larger banks, which tend to fund a greater percentage of their balance sheet through non-deposit liabilities. For non-U.S. banks, it is important to note that the Reform Act does not distinguish between U.S. and foreign-based assets, so, arguably, the deposit assessment levied on a non-U.S. branch will be based on its parent company's worldwide consolidated assets. We would expect that the FDIC's implementing regulations will address this anomaly.

In addition, effective July 21, 2011, the Reform Act eliminates the currently existing federal prohibitions on paying interest on demand deposits, thus allowing banks to offer interest bearing checking accounts.

The Reform Act also permanently raises the maximum deposit insurance amount to $250,000, retroactive to January 1, 2008.

G. Derivatives

The derivatives provisions set forth in Title VII of the Reform Act, generally will not apply to activities outside the United States. However, the rules relating to swaps will apply to activities outside the United States, including activities undertaken by a non-U.S. person, if those activities have a direct and significant connection with activities in, or effect on, commerce of the United States, or contravene certain anti-evasion rules to be promulgated by the Commodity Futures Trading Commission ("CFTC") pursuant to the Reform Act. Similarly, the rules relating to security-based swaps will apply to activities outside the United States that contravene the equivalent anti-evasion rules that the Securities and Exchange Commission ("SEC") is to promulgate.

Non-U.S. persons should note that the Reform Act does not explicitly exempt such persons from the regulatory regimes applicable to swap dealers and major swap participants, which are the two major categories of entities to which Title VII applies. The CFTC and the SEC likely will address this threshold jurisdictional issue in the regulatory process. It is quite possible that the CFTC and SEC will institute rules applying to non-U.S. persons that transact with U.S. persons or that otherwise trade or clear swaps in the United States.

Finally, the CFTC or SEC, in consultation with the Secretary of the Treasury, may prohibit an entity domiciled outside the United States from participating in the United States in any swap or security-based swap activities if such agency determines that the regulation of swaps or security-based swaps markets in that country undermines the stability of the U.S. financial system.

H. Consumer Financial Protection Bureau

Section 1011 of the Reform Act establishes the Consumer Financial Protection Bureau ("CFPB") as an independent entity housed within the Federal Reserve System. The CFPB will have the authority to write consumer protection rules for banks and nonbank financial companies (both U.S. and non-U.S.) offering consumer financial services or products. The CFPB will also have authority to examine and enforce regulations for banks and credit unions with greater than $10 billion in assets, all mortgage-related businesses (such as lenders, servicers, and mortgage brokers), and large nonbank financial companies (such as large payday lenders, debt collectors, and consumer reporting agencies).

View more information on the Consumer Financial Protection Bureau.

I. Mortgage Reform and Anti-Predatory Lending

The Reform Act includes various mortgage reform and anti-predatory lending provisions. Mortgage originators may issue mortgages only to those with an ability to repay the loan, and may only propose modifications to a mortgage that provide a net tangible benefit to the borrower. The Reform Act also restricts mortgage originator compensation and yield spread premiums by clarifying that mortgage compensation can only be financed if all originator compensation is paid by the borrower (not third parties) and the borrower pays the entire fee by financing it. The Reform Act also allows borrowers in a foreclosure action to offset from the outstanding balance due on their mortgage any damages incurred for violation of the ability to repay and yield spread premium standards. These provisions will apply to both U.S. and non-U.S. lenders who make loans to U.S. consumers.

View more information on the mortgage reform and anti-predatory lending provisions of the Reform Act.

J. Investment Advisers

Section 403 of the Reform Act provides an exemption from the registration requirements for non-U.S. advisers that qualify as "foreign private advisers."

View more information on the Reform Act's impact on investment advisers.

K. Preemption

Section 1044 of the Reform Act rolls back the preemption protection currently enjoyed by national banks and federal branches of non-U.S. banks located in the United States by, among other things:

  • requiring that a state consumer financial law prevent or significantly interfere with the exercise of a national bank's powers before it can be preempted;
  • mandating that any preemption determination be made on a case-by-case basis, rather than by a blanket rule; and
  • ending the applicability of preemption to subsidiaries and affiliates of national banks, which could force banks to reevaluate the activities they conduct through subsidiaries or risk their becoming subject to state lending and licensing laws.

View more information on preemption under the Reform Act.

L. Opportunities

The coming months and years will reveal whether the Reform Act will open up opportunities for non-U.S. banks in the United States to compete for business against highly regulated U.S. financial institutions and whether the Reform Act's provisions, most importantly the systemic risk provisions, will cause U.S. financial institutions to contract their growth in certain areas of business allowing foreign competitors to fill this void.

M. Timeline

Now that the Reform Act has become law, the regulatory implementation phase will begin. While a few of the Reform Act's provisions became effective immediately, many provisions of the Reform Act will become effective in stages over the next 6 to 24 months as the U.S regulatory agencies issue the implementing regulations required under the Reform Act. For more information, please view our interactive timeline of the Reform Act's effective dates and regulatory deadlines. This timeline was designed to help our clients quickly and effectively navigate the regulatory implementation process.

N. Next Steps

The Reform Act was signed into law on July 21, 2010, however, lawmakers left many of the key details of financial reform to regulation. Industry experts have estimated that the new law will require U.S. banking regulators to enact over 200 new regulations. As a result, U.S. regulatory agencies will be compelled to enact numerous regulations implementing the Reform Act and, in doing so, will have the opportunity to shape the ultimate effect of financial reform in many critical areas, many of which will have a profound impact bank holding companies and nonbank financial companies and how they are regulated in the United States.