"Who'd you piss off to get this assignment?"
"I don't envy you this task one bit."
"Good luck. Our summary was 300 pages."
That's just a sampling of the reaction InsideCounsel got when we called lawyers to get their advice on tackling a report on the financial reform bill. We knew pulling together the guide was a heavy job when we first decided to do it. But after hearing the whistles, laughs and groans that greeted us nearly across the board--from brilliant, highly esteemed attorneys--we knew just how necessary, if difficult, writing this story would be.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed in July 2010, clocks in at nearly 900 pages. It contains 16 titles covering everything from corporate governance to credit cards to conflict minerals (those that come from mines that fund armed conflict).
"This bill is unique in that it is a banking bill that impacts literally every public company because it also includes major SEC [Securities and Exchange Commission] reforms," says Stuart Stein, global co-head of Hogan Lovells' corporate practice. "It goes well beyond financial institutions."
So where to start? On the following pages, InsideCounsel breaks down the bill, from what to focus on now (a few things) to what's still uncertain (almost everything). And we'll offer advice on how in-house attorneys can help shape the regulations that emerge during the rulemaking process.
1. Who, Me?
The short and snarky answer to "Who needs to pay attention?" is everybody. The congressional response to the major financial meltdown was to enact equally major legislation. The responsibility for economic stability is now on the shoulders of pretty much everyone in corporate America.
Of course, the more nuanced reality is that the Dodd-Frank Act affects different companies in different ways. Some provisions impact wide swaths of industry, and others narrowly target a few specific fields.
"As an in-house counsel, the first thing you have to consider is, 'What are my different touchpoints for how the bill could affect my business?'" says Clint Rockwell, head of BuckleySandler's Los Angeles office. "If I'm a large bank, there's a lot for me to worry about. The mortgage industry has to think about less, but a bigger part of the business is going to be affected."
As Stein points out, the SEC reforms impact every public company. A whistleblower bounty provision, for example, rewards employee tipsters whose insights result in a successful enforcement action with up to 30 percent of any monetary sanctions exceeding $1 million.
In late January, the SEC adopted rules requiring that public companies allow shareholders to cast advisory votes on executive pay and golden parachute arrangements. It gave smaller companies two years to comply with the executive pay provision but did not grant them a reprieve on the votes on severance packages.
The bill also gives the SEC express authority to adopt proxy access rules that make it easier for shareholders to nominate people to corporate boards. Though the agency put a stay on the rules' enactment date, attorneys seem to universally agree the rule will eventually go into effect in a similar form.
Then there are the consumer protection reforms that will alter the way that many in the retail consumer sphere conduct business, says Joe Lynyak, a partner at Venable. Dodd-Frank transfers the authority for nearly every consumer protection law to the newly formed Bureau of Consumer Financial Protection (CFPB), though the CFPB and the Federal Trade Commission will jointly handle some enforcement, he says.
"People are probably going to be presented with a tidal wave of new regulations," Lynyak says. "And they're going to have to evaluate them to see how they're going to impact their particular operations."
For example, Congress gave the CFPB expanded authority to determine that certain acts and practices in consumer financial services are unfair and deceptive, and possibly abusive.
This comes into play "particularly if whatever product and service you are providing is also coupled with a financial product in order to be able to buy it," Lynyak says. For example, auto dealers who also provide financing options for car buyers will now find themselves regulated by the CFPB, as will retailers that issue branded credit cards. It brings the issue of fiduciary duty from the securities market into a sphere where it's never existed before--consumers rely on the retailers to provide a financial product that is appropriate for their needs, and if the retailer fails at that, it could be liable.
In essence, that means for the first time everyone from manufacturers who finance the sale of goods and services to pawn shop and money-transfer business owners will be regulated on a federal level, says Jeff Taft, a partner at Mayer Brown.
2. Immediate Issues
Unless specified otherwise, Dodd-Frank's provisions became law the day President Obama signed the bill. But many elements still need to go through an extensive rulemaking process, followed by a phase-in period that could take years to complete, depending on stipulations in each particular section.
Even seven months after Obama signed the bill, there's still a lot of uncertainty about how many of the final rules will look (more on that later). But even amid the uncertainty, there are things in-house counsel need to watch so as not to be left behind when the final rules come down.
The first thing in-house counsel need to do is pinpoint what parts of the bill will affect their businesses, Rockwell says. Then they need to find out how long they have to make necessary changes.
"Do an analysis internally and externally--what's my process and how does it need to change?" he says.
Title X, for example, raises different standards of pre-emption. So for one national banking client, Rockwell and others from his firm launched a 50-state project where they identified the state laws that differ from the federal standard.
"[We] asked the question, 'If I'm not used to dealing with multiple categories of state laws, what's my worst-case scenario?'" Rockwell says.
Stein also suggests that in-house counsel need to immediately begin prepping for the whistleblower bounty provision. Even though the final rule isn't in place, it's pretty clear how it will look. Though Sarbanes-Oxley put whistleblower issues front and center, it's now time for companies to bulk up their internal reporting procedures even more.
Now whistleblowers will be sending a significant number of complaints to the SEC, Stein says. "The same way your company had to filter what was real and what was not [when employees alleged wrongdoing], now the SEC has to filter what is real and what is not. ... Companies are going to be spending a lot more time responding to SEC inquiries."
On the consumer financial front, the CFPB will have similar information-gathering rights as the Federal Reserve. Lynyak says that nonbank companies that offer a consumer financial product or service can expect to spend a lot more time answering regulators' questions. The Financial Stability Oversight Council, designed to identify risk, will boast similar powers.
"Overnight, [Congress] tripled the amount of people asking about your operations," Lynyak says. "Depending on how that's rolled out, it could impact you through letters you open every day, asking what you're doing."
To deal with the increased workload of responding to these inquiries, legal departments may need to restructure or hire more employees.
3. Murky Waters
Far more extensive than what's known about Dodd-Frank is the list of what's still unknown. Many of the rules lack explicit definitions, so it's difficult for in-house counsel even to know where to begin preparing for their eventual implementation.
Though some regulations have a longer timetable, the bulk of the rules will be finalized by July. But with so much to do in preparation, every day of uncertainty makes life a little more difficult for in-house attorneys.
Title II, for example, grants the Federal Deposit Insurance Corp. (FDIC) orderly liquidation authority in the event that, once again, the bottom drops out of major financial institutions. It's designed to limit "too big to fail" bailouts, while also helping to maintain financial stability by dealing with bankruptcy proceedings in a carefully measured way.
Taft says it's designed to deal with situations where a company on the scale of Lehman Brothers or AIG suffers a meltdown that could once again pose a catastrophic danger to the U.S. economy.
But it's still not entirely clear exactly which companies it will impact, nor how much it will be used, Taft says.
"It's taking a model from the banking world and trying to apply it to a wide variety of agencies," he says. "It's unclear if the FDIC is in a position to liquidate [companies that are] not necessarily banking organizations."
Even with so much unknown about Title II, Taft says it's critical for corporate counsel to start thinking about the impact that kind of liquidation would have on the company.
Matteo Daste, a shareholder at Buchalter Nemer, says his private equity venture fund clients are struggling with how Dodd-Frank will define the funds. The bill exempts venture capital funds from many of its provisions, meaning they would not have to register as investment advisers. But because many of the funds are hybrids, the lack of a definition makes preparation difficult. The SEC issued a proposed rule in November 2010 that provided some interpretation, but even that left much up for debate.
"It could be the final regulations are more open and not as constricting, but it's hard to say," Daste says.
The newly created CFPB will handle a wide swath of consumer protection laws not explicitly outlined in the bill. Rockwell says it will also take over implementation of some already existing but not-yet-enacted rules such as the SAFE Act, which requires licenses for mortgage loan originators. Rockwell said there's a lot that's in limbo until the CFPB fully crystallizes. "Basically, the bureau's taking over the alphabet soup of consumer protection laws, except for the Fair Housing Act," he says. "Theoretically, it's not supposed to be a sea change for existing rules and order, but in time the bureau will have its own effect on those things."
4. Midterm Switch
Democrats held the majority in both the House and Senate as Dodd-Frank wound its way through Congress.
But following the midterm election, the House's pendulum swung back in favor of conservatives. That's led some to speculate that the final version of rules generated from Dodd-Frank will look very different from what the last Congress intended.
Taft immediately dismisses any extreme thoughts that the House would repeal the bill completely. "It's just not realistic. The initial hoopla was misplaced," he says. "The House is not just going to wave a magic wand and repeal it." (It's worth noting that Taft said this before the House voted in mid-January to symbolically repeal the health care bill.)
For one thing, the Senate still has a Democratic majority, and Obama still has veto power.
There will likely, however, be some adjustments made during the rulemaking process.
"Everyone agrees that there need to be some technical corrections, whether there were mistakes, things that dropped out or were omitted," Taft says. "They're not necessarily things that people don't like."
Rep. Spencer Bachus, R-Ala., for example, recently suggested turning the CFPB into a committee rather than a bureau with an all-powerful chief. Rockwell says some Republicans are hesitant about the idea of a completely independent CFPB because it could have such a potentially large impact on credit markets.
"This bureau is just kind of getting up and running," Rockwell says. "Right now it's in its infancy and definitely susceptible to political influence in a way that a more established agency wouldn't be."
Lynyak says a conservative Congress will probably take a greater interest in other structural issues, too, such as how the Commodity Future Trading Commission will regulate derivatives.
"The structures put in place by regulators will determine the winners and losers," Lynyak says. "Many marketplaces are going to be created that are central to our economy."
5. Getting a Grip
So what's a weary in-house attorney to do? Across the board, experts say that it's crucial to comment during the rulemaking process, whether through a trade organization or individually on behalf of your company.
"It's absolutely critical that your voices be heard, because that's what's going to shape those rules," Stein says.
Most large companies are already heavily involved in the rulemaking process to address critical portions of the law, says Gordon Bava, chair of the business, finance and tax division at Manatt, Phelps & Phillips. As for companies that haven't started voicing their view, Bava has a blunt warning.
"If they haven't already gotten started, they're probably already too late," he says.
As far as reacting to the rules themselves as they begin to take shape, Lynyak says the starting point for every company should be a legal risk analysis. Such an analysis will help in-house counsel determine what parts of their operations the laws may impact.
Once you know what parts of your business could be affected, you'll have the tools to make comments that can most effectively shape the laws that emerge from the rulemaking process.
In the end, good old hard work is an in-house attorney's best weapon for navigating Dodd-Frank.
"Know enough about the law, know enough about your business, and know how the activities of your customers could impact you under Dodd-Frank and make you subject to something," Taft says. "It's a big task, no question about it."