Securities Regulation Daily Wrap Up, DODD-FRANK ACT—Davis Polk Paper Warns of Brown-Vitter TBTF Bill’s Impact, (May 1, 2013)

By Mark S. Nelson, J.D.

Law firm Davis Polk & Wardell LLP has published a white paper detailing what its authors’ deem to be faults in the recently introduced Brown-Vitter bill, which purports to end too-big-too-fail. The bill, introduced by Sen. Sherrod Brown (D-Ohio) and Sen. David Vitter (R-La), would dramatically restructure U.S. banking regulations with some possible impacts on firms subject to SEC regulation. The Davis Polk paper warns that enactment of the Brown-Vitter bill could jeopardize the availability of credit in U.S. markets.

Big banks’ effects disputed. Davis Polk’s paper observed that the Brown-Vitter bill appeared to ignore portions of the Dodd-Frank Act that aim to reduce too-big-too-fail concerns, including Title II, which provides for the orderly liquidation of troubled financial institutions. The paper also took issue with Sens. Brown’s and Vitter’s recent New York Times editorial claiming that the banking industry now enjoys an $83 billion annual implicit subsidy because markets still believe the largest banks can be bailed out. Here, the authors said that economists disagree about big banks’ funding advantages, and they disputed the alleged link between these advantages and government bailouts.

Global capital standards at risk. With respect to Basel III, the Davis Polk authors said that the Brown-Vitter bill would ban implementation of these bank capital provisions. However, according to the authors, the global Basel capital regime would cease to exist if the U.S. refused to adopt any Basel III standards.

SEC-CFTC-registered subsidiaries. The Davis Polk paper noted that the Brown-Vitter bill would omit many SEC- and/or CFTC-registered firms from the definition of “functionally regulated subsidiary.” Under this provision, many firms would no longer be exempt from direct Fed capital standards. Broker-dealers and futures commission merchants are among the firms that Brown-Vitter would omit from the term. However, registered investment companies and advisers still would avoid direct Fed capital rules.

IndustryNews: DoddFrankAct