Final rule to implement section 622 of the Dodd-Frank Wall Street Reform and Consumer Protection Act

10% RULE

The Federal Reserve Board (FRB) on November 5, 2014 issued a final rule to implement section 622 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Action for most banks will be limited to updating policy and including one (1) new calculation into a Board Packet; the most logical packet is the Asset Liability Committee (ALCO) package. Banks designated as systemically important financial institutions (SIFIs), in addition to the above, may have to slightly modify procedures and reporting to the M&A function.

The rule generally prohibits a financial company from combining with another company if the ratio of the resulting company’s liabilities exceeds 10 percent of the aggregate consolidated liabilities of all financial companies.1

Effective January 1, 2015, the rule states that if a financial company has reached the 10 percent concentration limit, the company could not acquire control of another company under merchant banking authority. The final rule also adds an exemption to clarify that a financial company may continue to engage in securitization activities if it has reached the limit.

BACKGROUND

Section 622 of the Dodd-Frank Act directs the Council to complete a study of the extent to which the statutory concentration limit would affect financial stability, moral hazard in the financial system, the efficiency and competitiveness of U.S. financial firms and financial markets, and the cost and availability of credit and other financial services to households and businesses in the United States.2 In the Council study, the Council expressed the view that the concentration limit would have a positive impact on U.S. financial stability by reducing the systemic risks created by increased financial sector concentration arising from covered acquisitions involving the largest U.S. financial companies.3 It concluded that the concentration limit was likely to have little or no effect on moral hazard.

Financial Sector Concentration Limit

The bulk of the new regulation methodologies and requirements are listed below; please note that exceptions, other provisions and administrative matters have not been included in this summary.

      • Calculating a Financial Company’s Liabilities
        • U.S. financial companies
          • Section 622 measures “liabilities” of a financial company as total risk-weighted assets determined under the risk-based capital rules applicable to bank holding companies minus regulatory capital as calculated under the same rules.4
        • Foreign financial companies
          • Section 622 provides that the liabilities of a “foreign financial company” equal the risk-weighted assets and regulatory capital attributable to the company’s “U.S. operations.” A “foreign financial company” includes a foreign banking organization that is a bank holding company (i.e., owns a U.S. bank) or is treated as a bank holding company (i.e., operates a U.S. branch or agency), a foreign savings and loan holding company, a foreign company that controls a U.S. insured depository institutions but is not treated as a bank holding company (such as a company that controls an industrial loan company or limited-purpose credit card bank), and a foreign nonbank financial company designated by the Council for supervision by the Board.5
      • Measuring Aggregate Financial Sector Liabilities
        • Methodology and Data
          • Section 622 measures the total liabilities of each covered financial company against the aggregate liabilities of all financial companies in applying the 10 percent concentration limit. The aggregate consolidated liabilities of all financial companies are equal to the sum of individual financial company liabilities as calculated for each financial company using the applicable methodology.5
      • Applying the Concentration Limit

Section 622 prohibits a financial company from consummating a covered acquisition if the liabilities of the resulting financial company upon consummation of the covered acquisition would exceed 10 percent of aggregate financial sector liabilities.

      • Measuring liabilities upon consummation of a covered acquisition
        • A covered acquisition would involve a foreign acquirer and a foreign target, the final rule provides that liabilities immediately upon consummation of the covered acquisition would equal the total consolidated liabilities of the U.S. operations of the resulting foreign financial company, but would not include liabilities of the foreign operations of either the acquiring foreign bank or the target foreign firm, except to the extent these foreign assets are controlled by a U.S. subsidiary or branch of either foreign entity.5
      • Transactions for which a notice or application is not otherwise required
        • If a company consummates a covered acquisition in violation of the limit, the company may be required to divest any company or assets acquired in violation of the limit. In order to ensure compliance with the concentration limit, a financial company should have policies and procedures in place to monitor its compliance with section 622.5
      • Acquisitions by Nonfinancial Companies
        • A covered acquisition between a financial company and a company that is not a financial company under section 622, including those in which the nonfinancial company is the acquirer, and becomes a financial company as a result of the transaction, would be covered by the limit.

Conclusion

This final rule codifies another section of the Dodd-Frank legislation and could affect all financial institutions due to the required disclosure rule, whereby the numerator or total U.S. financial liabilities should be calculated from the aggregation of all participants. Fortunately, current regulatory forms provide this information so that for the vast majority of clients the process should be straight forward, easily accomplished with minimal cost. In our view a best practice would suggest that the Board of Directors be presented with a concentration percentage as part of the Board ALCO package.

A good practice would be for the risk committee to recommend to the board that all policies and procedures for M&A should be updated to reflect the need for the required calculation. If not currently in place the policy and procedures for annually verifying that the firm is in compliance (less than 10%) should be performed.

There is a small universe of firms/clients who due to their current size may need to develop a more robust mechanism and internal process to monitor their internal growth and proposed business expansion. Accenture is well suited to assist in such a project as our bespoke solution seek to make the utmost use of the customers’ current data aggregation and risk management systems coupled with our experience and M&A platform to derive a cost efficient result.

References

  • Board of Governors of the Federal Reserve System, Press Release, November 5, 2014. Access here
  • “Concentration Limits on Large Financial Companies,” Federal Reserve System, Final rule, 12 CFR Part 251, Regulation XX; Docket No. R-1489, RIN 7100-AE 18. Access here
  • “Study and Recommendations Regarding Concentration Limits on Large Financial Companies,” Financial Stability Oversight Council, January 2011. Access here
  • “Concentration Limits on Large Financial Companies,” Federal Reserve System, Final rule, 12 CFR Part 251, Regulation XX; Docket No. R-1489, RIN 7100-AE 18. Access here
  • Ibid

Newsletter Author: Steven Zunic

Newsletter Contact Person: Hamish Wynn, Janki A.Shah

DISCLAIMER: This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

About Accenture

Accenture is a global management consulting, technology services and outsourcing company, with approximately 319,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

Copyright © 2015 Accenture. All rights reserved.
Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
If you require advice or further details on any matters referred to, please contact your Accenture representative.

Submit a Comment

Your email address will not be published. Required fields are marked *