Please join us for a webinar to discuss the new financial regulations and how they may affect your business.

ABOUT THIS EVENT
This program covers portions of the Act of interest to a wide range of banks and other financial companies, including Regulatory Restructuring and Reforms, Orderly Liquidation Authority, Mortgage Lending Reforms and Consumer Financial Protection, Corporate Governance and Executive Compensation Reforms, and Derivatives and Related Securities Matters.                                              

AGENDA/PRESENTERS

Welcome (Jake Lutz)

Banking and Financial Companies (Jake Lutz, Jerome Walker, Tom Powell and Hollace Cohen)

Click here for Hollace Cohen’s presentation slides.
Click here for Jake Lutz’s presentation slides.
Click here for Tom Powell’s presentation slides.

• Regulatory Restructuring
• FDIC Orderly Liquidation Authority
• Capital Requirements
• Deposit Insurance Reform

Mortgage Lending Reform (Fred Palmore)
Click here for presentation slides.

• Residential loan origination standards
• Mortgage servicing and escrow accounts
• Real estate appraisal requirements
• Regulatory authority of Bureau of Consumer Financial Protection and Federal Reserve

Consumer Protection (William Hurd, Ashley Taylor and Fred Palmore)

• Creation and Authority of Bureau of Consumer Financial Protection
• Relationship of the Dodd-Frank Act’s consumer financial protections to state consumer financial protection law
• Act’s new preemption provisions will make national bank preemption of state consumer laws more difficult giving State Attorneys General greater authority to enforce state consumer protection laws against national banks.
• Act confers authority to State Attorneys General and to State Regulators to enforce the Act and its regulations against state chartered entities and national banks.  

Corporate Governance and Executive Compensation (Dave Meyers and Susan Ancarrow)
Click here for presentation slides.

• Corporate Governance reforms: proxy access, broker discretionary voting, and proxy disclosures regarding governance structure and employee and director hedging
• Executive Compensation reforms: say-on-pay, golden parachutes, compensation committee independence, clawback policies and proxy disclosures
• Implementation timelines
• SEC management improvements

Over-the-Counter Derivatives (John Leonti)
Click here for presentation slides.

• Review of Title VII and how it intends to increase the transparency and reduce the perceived systematic risk of the over-the-counter derivatives market with the introduction of central clearing, exchange trading and data repositories
• Overview of the CFTC’s and the SEC’s regulation of swaps and security-based swaps, as well as market participants

Q&A and Closing Remarks (Jake Lutz)

CLE Approval Pending. To apply for CLE credit, contact events@troutmansanders.com.

Regulation D is a safe harbor from the registration requirements under the federal Securities Act of 1933.  And since 1996, federal law has made it clear that private placements under Rule 506 of Regulation D are also exempt from regulation under state blue sky laws.  By complying with the relatively simple requirements of Rule 506, an issuer may sell securities to up to 35 non-accredited investors and an unlimited number of accredited investors.  Corporations, limited partnerships and other entities, as well as trusts and natural persons, may qualify as accredited investors.  Before the change effected by the financial reform bill, the definition of “accredited investor” applicable to a natural person required that he or she:

• has, at the time of purchase, net worth, either alone or jointly with his or her spouse, of more than $1,000,000, or

• had, in each of the two most recent years, income of more than $200,000 alone or more than $300,000 jointly with his or her spouse, and a reasonable expectation of reaching the same income level in the current year.

The accredited investor test is considered by the SEC as a way to determine if a person is likely to have the ability to bear the economic risk from an investment in a private investment vehicle.  The definition of a natural person “accredited investor” had been unchanged since its adoption by the Securities and Exchange Commission in 1982.  Since then, rising home values and higher salary levels caused a significant increase in the number of individuals qualifying as accredited investors.

Three provisions of the financial reform bill, set forth in section 413, have significant consequences for the accredited investor test for natural persons:

• The SEC is directed to adjust the standard for determining the net worth of a natural person by excluding the value of the person’s primary residence.
• The SEC may review the accredited investor definition as it applies to natural persons to determine if any adjustments are appropriate “for the protection of investors, in the public interest, and in light of the economy.”  No adjustment to the net worth test would be made, however, for four years, other than the exclusion of primary residence value. 

• The SEC is directed to review the entire accredited investor definition, as it applies to natural persons, not earlier than four years after enactment and at least once every four years thereafter.  In these reviews, the SEC would apply the same criteria, namely, to consider whether changes are appropriate “for the protection of investors, in the public interest, and in light of the economy.”

Because section 413 directs the SEC to revise the natural person accredited investor definition, we expect that the SEC will act quickly to comply with the statue. The exclusion of the value of a primary residence from the net worth test will reduce the number of natural persons eligible to invest in private placements as accredited investors. It is unclear at this time what the SEC’s intention will be in any review of the accredited investor definition.

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In addition to the change in the accredited investor test, the financial reform bill, in section 926, requires the SEC to issue rules for the disqualification of Rule 506 offerings by companies involving individuals who are subject to “bad boy” orders barring them from certain financial or securities activities or who have been “convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the [SEC].”  These new rules are required to be issued within one year of enactment of the bill and are to be substantially similar to the disqualification provisions under Rule 262 of Regulation A.  It is unclear what level of involvement by these “bad actors” will disqualify an offering; clarification of this question will await the final SEC rules.

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We will provide updates on significant future developments in these areas.

CONTACT:

Timothy I. Kahler
212.704.6169

Thomas M. Rose
757.687.7715

According to the Panel, $1.4 trillion in commercial real estate loans will mature between 2010 and 2014. Due to market decreases in commercial property values borrowers currently owe more than their property is worth on nearly half of these commercial real estate loans. The Panel noted that the impact of this decrease in value is particularly troubling with respect to small and midsize banks, which are expected to bear an estimated $200 to $300 billion in losses.

The Panel recognized that proactive steps in regulatory enforcement, accounting practices, capital enhancement and removal of risky assets from bank balance sheets should be coordinated to lessen the potential impact that the commercial real estate crisis might have on local communities, small businesses and individuals.  The Panel noted that one potential means to address this issue is to speed the availability of TARP funds to these small and mid-size financial institutions or to legislatively make other sources of funds available to such entities. Whether such action would be approved by Congress, however, is unclear. The text of the report is at http://cop.senate.gov/reports/library/report-021110-cop.cfm.

Troutman Sanders partner Mark Elliott provided testimony at the Atlanta Field Hearings on Commercial Real Estate on January 27, 2010, and our firm regularly represents commercial lenders and financial institutions involving TARP and commercial real estate issues.

CONTACT

John C. Lynch
Financial Services Litigation Team Leader
757.687.7765

David N. Anthony
Financial Services Litigation Team Leader
804.697.5410

Jake Lutz
Financial Institutions Group Leader
804.697.1490

Under the Proposal, a community bank would need approval from its primary federal regulator before it could participate in the SBLF.  Once it obtains regulatory approval, the community bank would be eligible to receive capital investment either (1) up to 5% of its risk-weighted assets, if the bank has less than $1 billion in assets, or (2) up to 3% of its risk-weighted assets, if the bank has between $1 billion and $10 billion in assets.  Community banks that participated in the Capital Purchase Program (CPP) would be eligible to convert their CPP capital to SBLF capital.

Capital investments made through the SBLF as proposed would incentivize small business lending through lower dividend rates and no TARP restrictions.  Community banks could decrease the dividend rate they pay on SBLF capital by increasing small business lending over a baseline set using 2009 lending data.  According to the Proposal, SBLF capital would carry an initial dividend rate of 5%, which would decrease by 1% for every 2.5% increase in “incremental business lending” achieved by the community bank over a two year period.  The minimum dividend rate on SBLF capital would be 1%.  However, after five years the dividend rate on SBLF capital would increase to encourage “timely repayment.”  Importantly, the SBLF as proposed would not involve any TARP restrictions such as restrictions on executive compensation.

The Proposal, which would require approval by Congress, has drawn open support from some Democratic Congressmen, Senators on both sides of the aisle have voiced criticisms ranging from concerns regarding the cost of the SBLF to calls for the President to create the SBLF under the TARP program to more expeditiously provide capital to community banks.  No specific terms or conditions of the SBLF will be available until the Proposal is enacted by Congress and implemented by the Obama Administration.

We will monitor the Proposal’s progress through Congress.  The Administration has published a fact sheet discussing the SBLF, which may be found at http://www.whitehouse.gov/sites/default/files/FACT-SHEET-Small-Business-Lending-Fund.pdf.

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The foregoing is only a summary of one of the many significant issues affecting financial institutions.  If you have any questions about the foregoing or about other financial institution issues, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.

CONTACTS

Jake Lutz
Practice Group Leader
804.697.1490

Tom Powell
404.885.3294

Jerome Walker
212.704.6286

CONTRIBUTOR

Seth Winter
804.697.2329

An Overview of Regulation of Investment in Banking Institutions

The Bank Holding Company Act imposes significant regulation and oversight by the Federal Reserve Board upon companies that control banks.  Companies that control banks are Bank Holding Companies and are subject to capital requirements, limitations on non-banking activities, restrictions on transactions with affiliate entities and other regulatory requirements.  For regulatory purposes, a company “controls” an entity if either (a) the company, directly or indirectly, owns or controls the power to vote 25 percent or more of any class of the entity’s voting stock; (b) the company has the ability to appoint a majority of the entity’s directors; or (c) the company has the ability to exercise a “controlling influence” over the management or policies of the entity.  Under the Bank Holding Company Act, the Federal Reserve retains significant discretion to determine what constitutes a “controlling influence” over a banking institution.

Recent Regulatory Policy Changes by the Federal Reserve Encourage Minority Investments by Private Equity Funds

In September 2008, the Federal Reserve relaxed many of its discretionary policy guidelines that it uses to determine what ownership thresholds, board representation levels and active conduct in a bank’s management constitute a “controlling interest.”  The new Federal Reserve policies encourage minority investment by private equity firms and principally include the following guidelines:

• A minority shareholder may own up to 33 percent of a bank’s or bank holding company’s total equity before the Federal Reserve presumes that the shareholder possesses a “controlling interest,” provided that the investor does not own or control the power to vote more than 15 percent of any class of voting securities.  The “25 percent ownership of any class of voting securities” threshold, as established by the Bank Holding Company Act, remains a bright-line test for control of a bank and bank holding company status.

• A minority shareholder may have at least one seat on the bank’s board of directors.  If the investor’s board representation is proportionate to its ownership interest in the bank, another shareholder is a bank holding company and a second board seat would not give the investor control of 25 percent or more of the board, the minority shareholder may have two seats on the bank’s board of directors.

• A minority shareholder may enter into business relationships or transactions with a bank or bank holding company on a case-by-case basis.  The Federal Reserve will focus on the size of the relationship or transaction, and whether the relationship is on market terms, is non-exclusive and may be terminated without penalty.

• A minority shareholder may communicate and consult with the board of the banking institution to influence the corporate policies of the bank or bank holding company in the same manner as any other shareholder.

• A minority shareholder may enter into a shareholders’ agreement that contains covenants prohibiting the issuance of senior securities or borrowings, consultation rights and information rights.  More extensive covenants (i.e. limitations on hiring practices, increases in compensation, additional capital raising or engaging in new business) may still be deemed to represent a controlling influence.

Structural Alternatives for Private Equity Investments in Banking Institutions

Several alternative transactions may permit a private equity fund to capitalize on the banking industry’s improved investment environment.  Assuming that no other investors are acting in concert, a private equity fund now may seek a minority investment position of up to 33 percent of a bank or bank holding company’s total equity.  If investors wish to act in concert to acquire up to 100 percent of the stock of a bank or bank holding company, these individuals may invest on a side-by-side basis with the private equity fund–so long as the investors do not vote in concert with the private equity fund and avoid exercising concerted control.  A private equity fund may always accept bank holding company status if it wishes to take a clearly controlling investment position in a bank, though the fund should avoid common control structures or economic linkages with any sister funds to prevent the Federal Reserve from considering the sister funds as bank holding companies.

A private equity fund syndicate comprised of WL Ross & Co, Carlyle Group and Blackstone Group LP recently completed a large equity investment in First Southern Bancorp ($450 million) under the Federal Reserve’s relaxed policy guidelines.  This investment indicates that regulatory authorities will work with private equity funds and their legal counsel on investment structures that are consistent with the funds’ investment intent.

The Office of Thrift Supervision (“OTS”) and its Relaxed Approach to Private Equity Investment in Savings and Loan Institutions

The OTS, as the primary regulator of federal saving associations (which includes both federal savings banks and federal savings and loans) has signaled that it will more liberally approve private equity investment in federal savings associations to maintain these instutions’ solvency.  For example, in January 2009, the OTS approved private equity firm MatlinPatterson Global Advisors’ $350 million investment in Flagstar Bancorp, the holding company of Flagstar Bank, a federally chartered stock savings bank.  Through its investment, MatlinPatterson purchased a 70 percent ownership of Flagstar Bancorp; however, the OTS did not require MatlinPatterson to register as a bank or a bank holding company.  Until the OTS modifies its approach as shown in the Flagstar Bancorp transaction, private equity funds may receive more favorable investment terms from the OTS than from the Federal Reserve.

FDIC Guidance on Investment in Failed Banks

Although the Federal Reserve’s relaxed policy guidelines encourage private equity investments in banks, and the OTS has taken a more lenient approach to private equity investments in banks, a recent release by the FDIC reveals that the FDIC intends to restrict private equity investment in failed banks.  Issued on July 2, 2009, the FDIC’s release proposes regulatory guidelines that would apply to private equity investments in failed depository institutions, including banks and bank holding companies, that are in receivership, conservatorship or similar proceedings.  If finalized as issued, the FDIC’s proposal would impose strict requirements on private equity investors in failed banks, is not likely to encourage future transactions and (if finalized and effective) would have governed and possibly hindered the large private equity investments in Washington Mutual ($5 billion) and BankUnited, FSB ($900 million) that occurred under the Federal Reserve’s relaxed policy guidelines.  For example, the FDIC would require private equity funds that invest in failed banks to:

• Provide detailed disclosures about the private equity fund, the fund’s investors and all entities in the fund’s ownership chain, including the size of the fund, its diversification, return profile, business plan and management;

• Meet raised bank capitalization requirements and be a “source of strength” for the bank;

• Prohibit all extensions of credit by the bank to the private equity fund, the fund’s affiliates, and any of the fund’s portfolio companies; and

• Agree to not sell or otherwise transfer the bank’s securities for three years following the private equity fund’s investment.

Private equity firms should approach investments in banking institutions aware of control issues and with the assistance of skilled and effective regulatory counsel.  Attorneys in Troutman Sanders’ Financial Institutions practice group and Private Equity and Venture Capital team have advised clients on control issues relating to minority investments in banking institutions and on structural issues relating to sophisticated private equity fund structures.  These attorneys are also tracking the FDIC’s proposal on investments in failed banks and will be well positioned to advise private clients on investment opportunities in both healthy and failed banks.  Please contact your Troutman Sanders representative for further information.

The White Paper was accompanied by fact sheets covering each of the five separate initiatives, as follows:

1. Requiring Strong Supervision and Regulation of All Financial Firms – creates a financial oversight council of the heads of the eight principal federal financial regulators, charges the Federal Reserve with authority and accountability for the largest bank holding companies, sets higher standards for all financial holding companies (including executive compensation standards and enhanced firewalls), creates a new national bank supervisor resulting from the merger of the OCC and OTS into a single agency, and requires advisors to hedge funds and other private pools of capital to register with the SEC. The link to this fact sheet is here.

2. Strengthening Regulation of Core Markets and Infrastructure – strengthens supervision of securitization markets, brings comprehensive regulation to markets for all over-the-counter derivatives (including credit default swaps), retains the SEC and CFTC as separate agencies with enhanced powers and responsibilities, and strengthens oversight of systemically important payment, clearing, and settlement systems by giving stronger powers to the Federal Reserve. The link to this fact sheet is here.

3. Strengthening Consumer Protection – creates a new independent agency with full authority to protect consumers across bank and non-bank firms with authority to supervise and examine institutions and enforce compliance, establishes new disclosure requirements for consumer transactions, reforms mortgage laws (including a single integrated federal mortgage disclosure) and requires enhanced accountability of banks, non-banks, and independent mortgage brokers. The link to this fact sheet is found here.

4. Providing the Government with Tools to Effectively Manage Failing Institutions – imposes more stringent capital, activity, and liquidity requirements on large interconnected firms, requires prompt corrective action of these firms should their capital decline, requires rapid resolution plans for all large interconnected firms, and provides a regulatory regime that can adequately respond to a financial crisis. The link to this fact sheet is here.

5. Improving International Regulatory Standards and Cooperation – seeks to level the playing field to subject foreign financial firms operating within the US to the same standards as US firms, promotes higher international standards, reforms crisis prevention and management authorities and procedures, and enhances supervision of internationally active financial firms. The link to this fact sheet is here.

The proposal now heads to Capitol Hill where legislation is expected to be introduced promptly. Troutman Sanders will be monitoring the legislation as it works its way through Congress and is pleased to assist clients regarding all aspects of this plan for regulatory reform of the financial services industry.

CONTACT

Jake Lutz
Practice Group Leader
804.697.1490

Tom Powell
404.885.3294

Jerome Walker
212.704.6286

On May 20, 2009, the President signed The Helping Families Save Their Homes Act of 2009. The new law contains a number of provisions, including amendments to the HOPE for Homeowners Program, protections for servicers of mortgage loans who modify mortgage loans, and extensions of the credit facilities from the U.S. Treasury to the Federal Deposit Insurance Corporation. However, Section 404 of the Act amends the Truth in Lending Act (TILA) to require that a new notice be given to consumers within 30 days after the sale, transfer or assignment of the consumer’s mortgage loan.

Notice Requirement Effective on May 20, 2009

The new notice requirement became effective on May 20, 2009 and applies to any sale, assignment or transfer of a mortgage loan occurring on or after May 20, 2009.

Civil Liability and Attorneys’ Fees for Failure to Comply

The new requirement has real teeth because Section 404 also amends Section 130(a) of TILA to provide that the failure to give the notice can result in liability for actual and up to $2,000 statutory damages per violation, plus plaintiff’s reasonable attorneys’ fees. Class action lawsuits can also be brought for systematic violations, subject to a $500,000 cap.

Section 404 Requirements

Section 404 of the Act amends Section 131 of TILA to add a new subsection (g) which provides that, in addition to other disclosures required by the TILA, not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of the transfer. The notice must include the identity, address and telephone number of the new creditor; the date of the transfer; how to reach an agent or party having authority to act on behalf of the new creditor; the location of the place where transfer of ownership of the debt is recorded; and any other relevant information regarding the new creditor.

Definition of Mortgage Loan

For purpose of the new notice, the term “mortgage loan” is defined to include any consumer credit transaction that is secured by the principal dwelling of the consumer. Therefore, it applies to first mortgage loans, subordinate mortgage loans, home equity loans and any other credit transaction that is secured by the principal dwelling of the consumer.

Obligation on Purchaser, Assignee or Transferee

The obligation to give the notice is on the purchaser, assignee or transferee of the mortgage loan and not the seller of the mortgage loan. However, the giving of the notice could become complicated in securitizations and may fall by default on the servicer of the mortgage loans backing the securities issued in the securitization.

To be eligible as collateral for TALF loans, legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages, must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint, or Standard Poor’s and meet certain other criteria designed to protect the Federal Reserve and the Treasury from credit risk, as outlined in the terms and conditions which can be found here: http://newyorkfed.org/markets/talf_cmbs_terms.html.

Key Terms:

• As of the TALF loan subscription date, at least 95 percent of the underlying properties on which mortgages are held, by related loan principal balance, must be located in the United States or one of its territories.
• The New York Fed will engage a collateral monitor to assess the risk of proposed CMBS collateral.
• In determining whether a particular pool of loans is TALF-eligible, the collateral monitor will give heavy consideration to the following mortgage pool characteristics:
  o historical losses,
  o concentrations of loans that are delinquent,
  o have special servicing or on servicer watch lists or concentrations of subordinate-priority mortgage loans,
  o lack of diversification with respect to loan size, geography, property type, and borrower sponsorship.
• Borrower may elect a three-year or five-year maturity. A three-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 3-year Libor swap rate. A five-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 5-year Libor swap rate.
• The New York Fed may limit the volume of TALF loans secured by legacy CMBS, and is considering whether to allocate such volume via an auction or other procedure.

 It should be noted the New York Fed is in the process of establishing additional requirements for legacy CMBS, which Troutman Sanders will continue to monitor and report.

The New York Fed released details of the next TALF subscription date, which will be June 2, with loan settlement dates on June 9. As always, interested borrowers may obtain a pre-certification review by the New York Fed in advance of the next subscription date by having their primary dealer submit their name and details of the loan desired.

Collateral haircuts applicable to the June operation are as follows:

The first subscription date for newly issued CMBS (issued on or after January 1, 2009) will be June 16, with subsequent dates pre-announced in advance thereafter. Both types of CMBS collateral are expected to have the same subscription date going forward, usually in the middle of the month, while all other TALF-eligible collateral will continue operations in the first part of each month.

CONTACTS

Michael Leichtling
212.704.625

Jake Lutz
804.697.1490

Miles A. Borden
212.704.6161

Robert A. Friedman
212.704.6048

Rory S. Clark
212.704.6056

First, capital management and balance sheet restructuring are of critical importance in surviving a stress test. Although options for new capital are limited, there are strategies available for enhancing capital, including private equity, and government programs that could make the difference between survival and government intervention. Further, balance sheet restructuring, including a model for shrinking the institution’s balance sheet while maintaining consistent capital levels, results in enhanced capital ratios. This is an important strategy for achieving targeted capital levels.

In addition, effective and timely regulatory communications and negotiations are essential for the survival of many institutions. Institutions should focus on accurate and timely reporting of facts balanced against advocacy of the institution’s position on key management and business issues. Management needs to focus on the common ground it can find with regulatory agencies for purposes of improving the institution’s prospects of remaining viable.

A third area of significant importance is an active engaged senior management team and board of directors. Management focus on business and strategic plan implementation is closely observed by regulators. In addition, involvement of the institution’s board of directors through supervision of management and implementation of strategic plan is also closely observed. Institutions that demonstrate the ability to manage through the crisis stand a greater chance of survival.

Finally, documentation of the bank’s good faith efforts to comply, including transparent and robust regulatory communications and active involvement of management and the board of directors, will be key in demonstrating that management and the board of directors have met their duties in managing the institution through the crisis. This is of importance when defending claims by third parties, including shareholders, other stakeholders or regulatory agencies that may in the future maintain that management or the board breached its duties.

Troutman Sanders works with financial institutions of all sizes in addressing these challenges and implementing solutions. Our team is ready to assist with regulatory negotiations, capital and strategic planning, strategic plan implementation, documentation of efforts, and other challenges facing financial institutions.

Contact:

Jake Lutz
Practice Group Leader
804.697.1490

Tom Powell
404.885.3294

Jerome Walker
212.704.6286

 There is a natural tension between the SIGTARP and Treasury.  SIGTARP is concentrating on fraud risk and prevention; Treasury is focusing on use of federal funds, agencies and guarantees to thaw the credit markets.  As SIGTARP investigates recipients’ use of TARP funds and executive compensation limitations imposed by the provision added for TARP in the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”), Treasury is designing new programs to attract private investors and money managers into its mission. 

 TARP Rescue Morphs into Public-Private Programs

 Initial Troubled Asset Recovery Program (“TARP”) funding to assist financial institutions (Capital Purchase Program (“CPP”), Capital Assistance Program (“CAP”), Targeted Investment Program (“TIP”), Asset Guarantee Program (“AGP”)), to AIG (Systemically Significant Failing Institutions (“SSFI”)) and to the auto industry (Automobile Industry Financing Program (“AIFP”), Auto Supplier Support Program (“ASSP”) and Auto Warranty Support Program (“AWSP”)) are all direct-infusion rescue plans designed to avoid failure of important domestic sectors and businesses.  For the Treasury Department, how TARP funds were specifically used has been less important than prospective success of its rescue efforts and their presumed beneficial effect on the revival of credit markets for businesses and consumers.  Concerned that TARP funds have only been applied to proper uses, SIGTARP has asked thes 364 TARP recipients to provide a narrative on how they used their federal assistance.  The recipients’ responses have given a wide range of uses from adding to capital, to reducing debt, to purchasing mortgage-backed debt, and increasing loans. 
 Pursuing its mission of moving toxic loans and securities off the books of financial institutions and hopefully into a market, the Treasury Department has solicited the private sector to participate in the process by expanding the Term Asset-Backed Loan Program (“TALF”) to include a Public-Private Investment Program (“PPIP”), whereunder private investors would provide one element of the equity funding for a special purpose vehicle (“SPV”) to purchase toxic assets, the Federal Reserve would provide funding for a substantially larger equity element, and additional federal lending would be available.  Because there is no direct Treasury payment of TARP funds in this structure, the issue arose whether the executive compensation limitations added to TARP funding in the Recovery Act apply to the private investors or money managers of the SPV.  Treasury has formally concluded that they do not.  SIGTARP has recommended, however, that Treasury should issue regulations for executive compensation limitations under TALF.

Some Preliminary Guidance

 Because SIGTARP acts as an independent entity with three constituencies – the Treasury Department, the Congress and the American public – its mission is broader than Treasury’s alone, and its requests for information have reflected that.  How one responds to SIGTARP inquiries, however, depends on the context.  Where SIGTARP is seeking generic information for which there is no specific reporting or record requirement – as his inquiry about the use of TARP funds – recipients can fashion a response that is as explicit or general as their particular situation indicates.  As with all such responses, care should be taken for accuracy, as SIGTARP will usually require certification of the response.  In circumstances where the Treasury and SIGTARP appear to have different views on applicable law – as with the application of executive compensation limitations to PPIP programs – participants in programs designed by Treasury may be faced with SIGTARP inquiries that presume a different rule than Treasury.  Before submitting a response, prudence counsels ascertaining how firm and explicit the positions of each agency are.  The recipient can then decide how best to craft its response.  Where SIGTARP requests documents or information that must or should be maintained by the recipient, care should be taken to be thorough, accurate and timely in the response.

Contact:

Stu Pierson