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From Banking and Finance Law Daily, January 14, 2015

House votes to delay implementation of Volcker Rule

By J. Preston Carter, J.D., LL.M. and John M. Pachkowski, J.D.

The House voted to approve H.R. 37—the Promoting Job Creation and Reducing Small Business Burdens Act—a package of 11 bills that contains controversial changes to provisions relating to derivatives and the Volcker rule under the Dodd-Frank Act. The vote was 271 to 154, with 29 Democrats voting in favor of the bill.

The measure now goes to the Senate. President Obama has vowed to veto it. The House recently defeated H.R. 37 by a vote of 276-146, in which a two-thirds majority was required for passage under a suspension of the rules (see Banking and Finance Law DailyJan. 8, 2015). Overturning that veto also would require a two-thirds majority vote.

Prior to the vote, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) took to the House floor in support of H.R. 37 stating that the bill is intended “to ease the burdens on small businesses.” Following the vote, bill sponsor Michael Fitzpatrick (R-Pa) said, “Dodd-Frank’s target may have been Wall Street, but its regulatory burden falls most heavily on Main Street. That’s what this bill seeks to fix.”

The House Financial Services Committee released a statement summarizing the 11 bills in the package.

  • The Business Risk Mitigation and Price Stabilization Act (formerly H.R. 634) clarifies that Congress did not intend for manufacturers, ranchers, and small companies that buy and sell derivatives to hedge against business risk to be impacted by Dodd-Frank’s margin and capital requirements.

  • A bill that was H.R. 5471 in the last Congress clarifies Dodd-Frank’s treatment of affiliates of non-financial firms that use a central treasury unit as a risk-reducing, best practice to centralize and net the hedging needs of affiliates.

  • The Holding Company Registration Threshold Equalization Act (formerly H.R. 801) extends to savings and loan holding companies the flexibility accorded banks and bank holding companies to deploy capital throughout the communities they serve.

  • Another measure (formerly H.R. 2274) amends regulations to allow small business owners to more easily sell their businesses when they retire.

  • The Swap Data Repository and Clearinghouse Indemnification Act of 2013 (formerly H.R. 742) removes an indemnification requirement imposed on foreign regulators by the Dodd-Frank Act as a condition of obtaining access to data repositories.

  • The Improving Access to Capital for Emerging Growth Companies Act (formerly H.R. 3623) reduces Securities and Exchange Act registration and disclosure requirements and streamlines the Initial Public Offering process.

  • The Small Company Disclosure Simplification Act (formerly H.R. 4164) provides a voluntary exemption for all emerging growth companies and other issuers with annual gross revenues under $250 million from the Securities and Exchange Commission’s requirements to file financial statements in an interactive data format knows as eXtensible Business Reporting Language.

  • The Restoring Proven Financing for American Employers Act (formerly H.R. 4167) amends the Bank Holding Company Act to provide banks with investments in Collateralized Loan Obligations (CLOs) issued before Jan. 31, 2014, until July 21, 2019, to be in compliance with the Volcker Rule.

  • The Small Business Investment Companies (SBICs) Advisers Relief Act (formerly H.R. 4200) amends the Investment Advisers Act of 1940 to reduce regulatory costs and eliminate duplicative regulation of advisers to SBICs.

  • The Disclosure Modernization and Simplification Act (formerly H.R. 4569) directs the SEC to simplify its disclosure regime for issuers and help investors more easily navigate public company disclosures.

  • The Encouraging Employee Ownership Act of 2014 (formerly H.R. 4571) amends SEC Rule 701 to give private companies more flexibility to reward employees with a company’s securities and thereby retain valuable employees without having to use other methods to compensate them, such as borrowing money or selling securities.

Safety and soundness considerations. Following the House vote, Joseph Lynyak III, a partner at the law firm of Dorsey and Whitney, commented on the extension of the Volcker Rule conformance period. He noted, "An extension of time to sell or restructure investments that violate the Volcker Rule supports safety and soundness by avoiding ‘fire sales’ of assets.” He added, “strong consideration should be given to expanding the limited scope of permissible ‘covered fund’ investments by banking entities in a manner similar to the old ‘Section 20 subsidiaries’ permitted under the Glass-Steagall Act. Clearly, several of the current Volcker Rule limits are counterproductive to our economy and reasonable bank investment activity.”

Lynyak’s comments on “fire sales” reinforced a position taken by the consulting firm Hamilton Place Strategies. In a recent analytical piece, the firm noted that H.R. 37 was “designed to avoid fire sales caused via phased-in compliance for legacy CLOs has been supported by Members of both parties, the broader business community, and banks of all sizes.” The analysis also noted that smaller bank holding companies are disproportionately impacted relative to their CLO investments and overall capital base; and CLOs have a cumulative 20-year default rate of 0.41 percent (see Banking and Finance Law DailyJan. 13, 2015).

In addition, Lynyak’s call for expanding the limited scope of permissible “covered fund” investments was also advocated by another financial services practitioner. In a September 2014 Strategic Perspective, Keith R. Fisher at Ballard Spahr LLP noted that after the regulators have acquired some experience in regulating in this area, a banking entity could go to them to seek relief. He cited the section 20 subsidiary issue from the 1980s and 1990s as an example of how experience working under a given regulatory structure gave the Fed confidence that it could gradually raise the revenue limit for underwriting and dealing in securities from 5 percent to 10 percent and ultimately to 25 percent, the level that the banking industry had originally sought (see Banking and Finance Law DailySept. 25, 2014).

Industry views. Prior to the vote, industry reaction was mixed, with banking groups in support and consumer groups opposed. The American Bankers Association voiced support because the measure would provide for an orderly liquidation of bank collateralized Loan Obligations holdings “without significant and unnecessary market disruption.”

Camden R. Fine, President & CEO of the Independent Community Bankers of America, said H.R. 37 would protect community banks from an “arbitrary and damaging” provision of the Volcker Rule and correct an oversight in the JOBS Act that excludes savings and loan holding companies.

Dennis Kelleher, President and CEO of Better Markets, called H.R. 37 a “compilation of big bank handouts” that would provide an additional two-year delay in the Volcker Rule so that big banks can continue their proprietary trading in CLOs.

Public Citizen release also targeted the provision on CLOs: “Most damaging, the bill would delay until 2019 the requirement that banks sell hedge-fund investments that are part of packages called collateralized loan obligations.”

Finally, a letter from Americans for Financial Freedom noted that, while some elements of the legislation can be called bipartisan technical corrections, others “would significantly delay implementation of key parts of the Dodd-Frank Act such as the Volcker Rule, and could also dangerously limit regulatory authority to police financial markets and protect investors.”

Companies: American Bankers Association; Americans for Financial Freedom; Better Markets; Hamilton Place Strategies; Independent Community Bankers of America; Public Citizen

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