Financial Reform Act of 2010 – Greater Cost and Compliance
Posted August 30, 2010
Download the White Paper: The Financial Reform Act of 2010: A First Look at the Known and the Unknown
The Financial Reform Act of 2010 is intended to contain risk in the financial services sector through tightened regulation, increased consumer safety and stricter oversight of public companies. For the financial services industry, it will mean a greater compliance burden and higher costs.
Since final regulations have not yet been written, the roadmap for how this will be accomplished has not been drawn. However, the law does provide a rough outline of what to expect.
Impact on the Financial Services Sector
Two new government agencies have been created:
Financial Stability Oversight Council - Monitors systemic financial risks in financial institutions, non-bank financial services entities and insurance firms.
Bureau of Consumer Financial Protection - Sweeping authority to create and issue rules that directly affect the financial services sector with respect to "unfair, deceptive or abusive" practices.
Additional regulations impact virtually every corner of the financial services sector:
Derivatives Trading and Mortgage Lending - Will now operate under stricter reporting and compliance requirements, increasing costs for financial institutions.
Investment Trading and the Volcker Rule - Meant to diminish proprietary trading in hedge funds and private equity funds by financial institutions.
Interchange Fees - Fees associated with transactions between institutions will now be developed by the Federal Reserve to ensure that fees are "reasonable and proportionate" to the cost of processing the transaction.
Permanent Increase in Deposit Insurance - Deposit insurance for banks, thrifts and credit unions is now permanently fixed at $250,000.
Elimination of the Office of Thrift Supervision - The OTS will shut down and transfer powers mainly to the Office of the Comptroller of the Currency.
Impact on Public Companies
Most of the changes for public companies concern executive compensation.
Compensation Committees - Committees must now be independent, and must select legal counsel, advisors and consultants that are independent.
Compensation Disclosure - There are expanded compensation disclosure requirements for the annual proxy statement, including:
- Median of annual total compensation of all employees other than the CEO
- Annual total compensation of the CEO
- The ratio between these two categories
"Claw back" Policy -Aims to recover incentive compensation that was paid to executives based on misstated financial statements.
Shareholder "Say on Pay" - Gives shareholders the ability to vote on executive compensation and golden parachute clauses.
Proxy - Provides the SEC with power to issue proxy access rules, allowing shareholders to nominate directors.
Broker Voting - Prohibits a broker who is considered the non-beneficial owner of a company's shares, from voting on the above issues unless specifically instructed by the beneficial owner.
Sarbanes-Oxley 404(b) - Companies with less than $75 million in market capitalization are permanently exempted from auditor attestation regarding internal controls over financial reporting.
For more on the far-reaching implications of the Financial Reform Act:
Download the White Paper: The Financial Reform Act of 2010: A First Look at the Known and the Unknown
