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Dodd-Frank Distilled

dis·till - extract the essential meaning or most important aspects of:

- Oxford Dictionaries

Dodd-Frank was a key piece of Obama-era legislation that has come back into focus, as our newly elected President opposes much of the regulation that it involves. Born from the idea that the 2008 financial meltdown might have been prevented had sufficient regulations been put in place for large financial institutions, Dodd-Frank touches on every aspect of modern finance and has far-reaching implications for both large companies and individuals alike.

There is one major obstacle to understanding this Act – In its original form, this piece of

legislation is a staggering 2,300 pages!

Have no fear! The analysts at PHI Analytic Solutions have read this magnum opus of an Act

and have broken it down into just 11 pages!

Have a look at the summaries of each title below and use the emboldened statements to determine which titles are most applicable to you. Let this serve as an index with which to follow along as President Trump delivers on his promise to, “do a number” on Dodd-Frank.

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Title I – Financial Stability

Key takeaway points from Title I –This portion of the legislation deals with oversight and research, and brings forth two new agencies to that end, the Financial Stability Oversight Council (FSOC), and the Office of Financial Research, an office within the Treasury. Research side provides data and has powers to obtain necessary information (regulation and subpoena). Oversight interprets said data and can act in conjunction with the Board of Governors (Board of Governors of the Federal Reserve) to intervene, by a 2/3 majority vote, if it finds a company to be acting in such a way that might threaten the financial stability of the US economy at large. Understanding this portion of Dodd-Frank would be most useful to large bank and nonbank financial institutions.

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Title II - Orderly Liquidation authority

Key takeaways from Title II - This title presents a third alternative to Chapter 7 liquidation and Chapter 11 reorganization by granting the federal authorities the right to place a struggling financial institution into receivership, for the sake of preserving US financial stability. This title is divided into 14 sections. While this portion is also most relevant to large corporations, the final section does contain pertinent information for the US taxpayer - Taxpayers shall bear no losses from the exercise of any authority under this title. The final section alludes to ‘bailouts’, stating that taxpayer funds should not be used to prevent a company from being deemed “struggling” and therefore entering into a receivership arrangement. Further, money owed by the struggling company should be obtained through the liquidation of company assets, or assessments applied by regulators to the financial sector as a whole. While still most relevant for big financial institutions, this title bears some relevant information for the individual as well.

Title III - Transfer of powers to the Comptroller of the Currency, the Corporation, and the Board of Governors

Key takeaways from Title III – The Office of Thrift Supervision will be dissolved and its duties of regulating financial entities and the Federal Savings Association will be absorbed by the Office of the Comptroller of the Currency, the Board of Governors, and the Federal Deposit Insurance Corporation. Understanding this portion of Dodd-Frank would be most useful to large bank and nonbank financial institutions. It is worthwhile to note that the transfer of responsibilities itself and the enhanced responsibilities of each absorbing entity will be funded through the assessment of fees on regulated entities, and NOT through added taxes on individuals.

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Title IV - Regulation of advisors to hedge funds and others

Key takeaways from Title IV - This title deals specifically with entities that would be considered investment companies, per the Investment Company Act of 1940, but are exempted due to their private status – for instance, private equity, hedge funds and capital venture firms. This title sets forth new regulation for these entities and now makes mandatory that hedge funds register with the SEC. Hedge funds had been hitherto exempted from much regulation due to their status of private and were therefore difficult to monitor with relation to the stability of the economy during the economic crisis of 2008. The title outlines state guidelines for regulating these private entities. The title also defines ‘accredited investor’ and gives authority to the SEC to redefine this definition to account for inflation. This title is divided into sixteen sections. Understanding this portion of Dodd-Frank would be most useful to investment advisers of private funds.

Title V - Insurance

Key takeaways from Title V - This title deals with the oversight of insurance agencies. It establishes the Office of National Insurance which is tasked with monitoring insurance agencies and making recommendations to the Financial Stability and Oversight committee (Committee established in the very first title). It also reinforces states’ rights to continue to supervise insurance and draws distinctions in the regulatory framework of admitted versus non-admitted insurance. This title would be most useful for insurance companies.

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Title VI - Improvements to regulation of bank and savings association holding companies and depository institutions

Key Takeaways from Title VI – This title deals with the regulation and reporting of bank holding companies, savings and loan holding companies, and depository institutions to ensure that these companies are not mismanaged to an extent that might threaten the United States’ financial stability. In this title, we see the phasing out of the credit card bank, industrial bank, and trust bank (as defined in the Bank Holding Company Act of 1956). Additionally, bank holding companies are to be audited and examined by the appropriate Federal banking agency and are to make available to the Federal banking agency any records or audit materials required of it by any other federal or state regulatory agency. This title reflects heightened concern around mergers and acquisitions, capitalization and management, lending, and proprietary trading and goes into great detail establishing rules – and possible exceptions to aforementioned rules – with regard to each.

This title would be most useful for bank holding companies, savings and loan holding companies and depository institutions.

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Title VII - Wall Street Transparency and Accountability

Key takeaways from Title VII – This title focuses on the regulation of swaps, which were deemed to be a significant factor in the 2008 meltdown. (In the simplest of terms, a swap is a formal bet – officially called a contract - between two financial institutions. For example, two companies with opposing views of whether or not interest rates will rise or fall over the course of the next five years might enter into a swap arrangement with each other.) This title splits regulatory authority between the Commodity Futures Trading Commission and the Security Exchange Commission, when swaps involve securities. While the title grants the CFTC and SEC broad regulatory authority, certain measures are expressly spelled out in this title, such as registration requirements, trading requirements, margin and capital requirements,

and business conduct standards. As swaps are over-the-counter contracts between two financial entities, this does not affect the retail investor (although regulations concerning these contracts do have broad implications for the economy overall). This title would be most useful for businesses and financial institutions that engage in swaps.

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Title VIII - Payment, clearing, and settlement supervision

Key takeaways from Title VIII – This title analyzes the systemic risk posed by inconsistencies throughout financial utilities and financial institutions when the payment, clearing and settlement provisions are not uniform and standardized. The crisis of 2008 revealed certain inefficiencies in the payment, clearing and settlement of financial transactions that created systemic risks capable of threatening the US economy at large. This title seeks to resolve these issues by granting certain rulemaking, regulatory and information collecting authorities to the Board of Governors, the Securities and Exchange Commission, The Commodities Futures Trading Commission, and the Federal Deposit Insurance Company. Understanding this title would be most useful to institutions involved in any payment, clearing and settlement activities.

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Title IX - Investor protections and improvements to the regulation of securities

Key takeaways from Title IX – Understanding this title would be very helpful to the individual, as it dives deeply into the regulation surrounding how brokers, dealers and investment advisors treat their customers. Within this title, we see the forming of two new committees (Investor Advisory Committee and an Office of the Investor Advocate) within the already-existing Security and Exchange Commission. The Investor Advisory Committee is put in place to conduct research and create initiatives pertaining to the retail investment space. They are to research the practices surrounding the sales of certain products and the fee structures used to charge retail investors for services. Still more useful to the everyday investor is the creation of the Office of

the Investor Advocate. Individual investors are able to reach out to this committee and the committee shall assist retail investors with financial services problems that they may face. This title runs the gamut in terms of issues covered (stay tuned for a thorough breakdown of Title IX In the subsequent publications). The most important subjects covered pertaining to individuals would be the aforementioned protections, as well as literacy tests that the SEC is now required to conduct (surveying the public to gain an understanding of their understanding of certain financial concepts) to better direct initiatives geared toward protecting individual investors, shareholders now voting on the compensation of executives’ salaries and enhanced protection of senior investors.

CONTACT INFORMATION: Office of Investor Education and Advocacy U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 www.Investor.gov www.SEC.gov Toll free number: (800) 732-0330

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Title X – Bureau of Consumer Financial Protection

Key takeaways from Title X – This portion is also incredibly poignant for the individual as it creates the Consumer Financial Protection Bureau that has as its purpose the following - “The Bureau shall seek to implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that markets for consumer financial products and services are fair, transparent, and competitive.” The Consumer Financial Protection Bureau, CFPB, championed by Elizabeth Warren, was established to protect consumers from predatory financial practices, which include confusing mortgage agreements (agreements which contributed to the 2008 meltdown) and poor investments choices by consumers’ financial advisors. This multifaceted

organization achieves its objectives through creating a subcommittee dedicated to researching consumer financial products or services, establishing a toll-free number that consumers can call to lodge formal complaints, and conducting financial education programs. Tucked away toward the end of the title is a provision that gives the Bureau the authority to investigate forms that require individuals to settle complaints with advisors or institutions through arbitration, rather than through the court systems. This title also appoints an ombudsman to investigate the issuance of private education loans and amends the Truth in Lending Act to prohibit prepayment penalties on certain types of mortgages. At the heart of this title is the hope that the financial product landscape that is purposefully and unnecessarily complicated by predatory companies can be demystified for the average consumer so that consumers are better able to weigh their options when making financial choices.

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Title XI – Federal Reserve System provisions

Key takeaways from Title XI – This title strengthens the controls and audits of the Federal Reserve System. As the Federal Reserve’s actions have weighty implications for the US economy, it was deemed that shoring up their processes might also help prevent a repeat of 2008. The title allows the Comptroller General of the United States to audit the Federal Reserve. This title also gives the Federal Reserve the ability to make emergency loans to solvent, but struggling financial institutions when their struggle is deemed to have far-reaching implications for the economy. This title also makes amendments to the selection process and the duties of the Federal Reserve Bank presidents. Understanding this title would be most helpful to the Federal Reserve and large financial institutions.

Title XII - Improving access to mainstream financial institutions

Key takeaways from Title XII – This title institutes policies that make certain financial services and products more accessible to low- and moderate income individuals. The title also implements a government sponsored program that will make available alternatives to payday loans through participating institutions. These government-backed initiatives seek to alleviate the financial burdens imposed on low- and moderate income individuals who previously had few financial products available for emergency loan situations. Understanding this title would be most helpful for individuals seeking improved alternatives to payday loans and other forms of predatory lending.

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Title XIII - Pay It Back Act

Key takeaways from Title XIII - This title seeks to implement guardrails around the deployment of relief funds (bailouts) for large institutions whose failures might adversely affect the US economy. It was generally opined that relief funds had been deployed too haphazardly, and the use of these funds by the recipients were not regulated enough. In many cases, it was even believed that relief funds had been used irresponsibly. In this title, the amount of relief funds available is reduced and any runoff (funds that are not accepted by the companies or by the states offered the funds) is to be deposited into the Treasury’s general fund for the sole purpose of reducing the deficit. Understanding the changes introduced in this title would be most beneficial for large financial institutions.

Title XIV – Miscellaneous

Key takeaways from Title XIV - This brief title places restrictions on the use of Federal funds to finance bailouts of foreign countries. Per this title, the President shall direct the US Executive Director of the International Monetary Fund to evaluate whether a loan by a foreign country is needed and the probability that the country will be able to pay it back. If a loan is needed, but upon further evaluation, it’s decided that the country will most likely be unable to repay the loan, the US Executive Director should vote in opposition of the loan. Understanding the changes introduced through this title would be most beneficial to foreign countries and their governing officials.

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Title XV – Congo Conflict Minerals

Key takeaways from Title XV - In this title, the Securities and Exchange Commission is given the responsibility of ensuring that Americans aren’t trading in conflict minerals from the Democratic Republic of the Congo. 180 days following the enactment of this Act, the Securities and Exchange Commission must promulgate rules to adequately monitor the origins of columbite-tantalite, cassiterite, gold, and wolframite to ensure that the US is not indirectly aiding in the funding of sexual and gender-based violence. Provisions of this title will be phased out after five years or after it can be shown that profits of these minerals are no longer funding aforementioned violent acts in the Democratic Republic of the Congo.

Understanding provisions of this title would be most beneficial to governing officials of the Democratic Republic of Congo.

About Phi

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Derek A Armour, Sr., Founder After 22 years of providing Wells Fargo with meaningful analytic solutions for their mortgage portfolios, Derek Armour Sr. has retired from his Senior Vice President role and is now branching out with the aim of providing richer and more insightful analytic solutions to the broader financial industry. From his academic beginnings in the sciences (Physics undergrad), to the distinguished financial career spanning thirty years that followed, Derek Armour brings abundant and far-reaching expertise to the analytics landscape. He has worked in securities and whole-loan operations as well as quantitative analytics and forecasting as both an individual contributor and a team builder/manager. In his many years of experience, he has worked for the largest, most well-respected financial institutions of their time - Salomon Brothers, Lehman Brothers, First Union/Wachovia Carolina, and subsequently Wells Fargo. Throughout good times and rocky ones experienced by these corporations, Derek and the teams that he managed were time-and-again deemed too valuable to spare and were heavily leaned upon when analytical insights were needed to navigate the ever-changing mortgage environment. His acuity, work ethic, and passion set him apart and with the help of a carefully selected team, he will work tirelessly to help you meet and exceed your company’s objectives. Cell: (704) 904-0819 Darmour505@gmail.com linkedin.com/in/derek-armour-3889483

Debra Armour, Co-Founder During her time at Duke University, where she graduated with distinction in her fields of International and Comparative Studies and Korean, Debra Armour first discovered her love of research and analysis through her participation in the Mellon Mays Research Fellowship. Debra produced a thesis on the nuanced relationship between African-American soldiers and Korean civilians during the Korean War and presented her findings to audiences at various universities around the world (Duke, Emory, University of Cape

Town,경희 대학교.)

She worked as a Complex Product Supervisor at LPL Financial surveilling the marketing and sales of what are deemed “complex products” per FINRA – for example, non-traded REITs, BDCs, managed futures, hedge funds and private equity. During her financial tenure, she’s procured her Series 7, 63, 24 and 4 licenses.

Debra’s passion and never-satisfied curiosity for finance and the factors that drive trends will translate to customized analytics solutions for you and your firm. She will be working alongside her father, Derek Armour, to bring your company analytic solutions to fit your specified goals and needs.

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What we do…

You have the data…terabytes of it…

You get periodic reports…volumes and volumes of them…

You need an Ad-Hoc report…but can’t get it quickly enough…

You have a brilliant IT team…that doesn’t speak your business language…

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You spend lots of time wading through stale pages of reports seeking nuggets of insights…it is sapping your competitive advantage…

You are a financial institution and of course you have lots of mortgage data…are you prepared for the Current Expected Credit Loss (CECL) requirements for new ALLL calculations just over the horizon?

With PHI as your partner for Analytic Solutions you get…

A 20-year practitioner of what is now being coined by Columbia Business School as “Quantitative Intuition” (link below)

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Will cycle through - Data > Analyses > Conclusions > Business Problem/Solution …and back

Is skilled at digesting large datasets, interpreting and summarizing into meaningful, actionable information.

Will bridge the gap between IT groups and higher management levels through intuitive dashboards that include key performance indicators (KPI), spot trends and make recommendations.

Has particular expertise with mortgage loan product.

Will advise on processes for predictive analytics including infrastructure and best practices.

Has extensive experience with CoreLogic data products and RiskModels (aka LoanPerformance).

http://www8.gsb.columbia.edu/video/videos/quantitative-intuition-making-effective-decisions-world-imperfect-data

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State-of-the-art analytics that drive better business decisions…

…from interactive & intuitive dashboards and ad-hoc reports.

Please call for a demo (704) 904-0819

Darmour505@gmail.com