Dodd-Frank-Act

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Dodd-Frank Act Key points for companies beyond the financial services sector Spring 2012 update

Key points

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lmost two years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act1 (Dodd-Frank or the Act) was enacted.2 Though the full scope of the Act’s regulatory requirements has yet to be that public companies engage with regulators and help shape potential rules by sharing insight into unintended consequences, costs or implementation ! " points on the current status of Dodd-Frank.

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The pace of Dodd-Frank implementation is unlikely to quicken and deadlines will continue to be missed

Many proposals to modify or eliminate Dodd-Frank have gained traction in the Republican-controlled House of Representatives, but have not become law. Such legislative pressures, coupled with Congressional oversight, are expected to continue in the months preceding the 2012 elections. Moreover, agencies, including the Securities and Exchange Commission (SEC), will spend additional time supporting cost

Appeals’ decision on the SEC’s proxy access rule, where the court held that the SEC had failed to adequately assess the rule’s economic effects. Congressional scrutiny, analyses and the volume and complexity of rules to be implemented in areas such reporting, the Volcker Rule and executive compensation disclosures suggest that the pace of implementation is unlikely to quicken and deadlines will continue to be pushed forward.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act ! " # $%&& $ & &$' &"*+/ 333$ 456& . 2 7 8 9 : ;

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Some view Dodd-Frank reform goals as being at odds with economic recovery

Dodd-Frank placed new regulatory requirements on all public companies, not Dodd-Frank, policy-maker attention has become increasingly focused on the need to support the economic recovery. The Dodd-Frank agenda, which requires substantial reform and investment in some areas, appears to some lawmakers to be at odds with promoting economic recovery. Others observe that the law and associated

The enhanced SEC whistleblower incentive program and the future $ U $ that merit the attention of corporate boards and may require a reexamination of certain internal policies and procedures.

regulations are creating a broader, stronger and more transparent regulatory framework that could help prevent the G + I 7 ' continue to be issued, some in Congress have undertaken efforts to roll back regulations perceived as burdening the ; * such as the Jumpstart Our Business Startups Act, or JOBS Act (which, in part, provides a temporary exemption from certain requirements for “emerging growth companies�) and requests for regulators to simplify or delay Dodd-Frank’s Volcker = pressures. As regulators struggle to create rules to balance the competing goals, the business community will likely continue to face an extended period of regulatory uncertainty.

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Dodd-Frank has ushered in new demands for engagement with stakeholders

Developing and strengthening board practices for communicating with investors has become a priority for many companies, driven largely by regulatory reforms and enhanced disclosure rules, particularly $ > #"B L communication strategies include more direct dialogue between companies and their shareholders, as well as improved and more focused disclosures in the proxy statement around topics of investor interest. Increasingly, public companies are enhancing their proxy statement disclosures and engaging with investors in

order to foster communications that are effective and responsive to shareholder concerns — a measure of performance upon which boards are increasingly likely to be evaluated.

evaluating their procedures for tracking where relevant minerals are sourced, countries.

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Dodd-Frank places enhanced emphasis on internal evaluations of companies’ governance processes

The enhanced SEC whistleblower incentive $ reporting requirements are among the provisions that merit the attention of corporate boards and may require a reexamination of certain internal policies and procedures. In response to the SEC whistleblower program, companies should, where appropriate, amend their internal reporting systems to send a signal to employees that the company values the internal reporting of potentially fraudulent activity. The evaluation should review, assess and refresh, where necessary, internal compliance systems, escalation and investigation procedures, reporting policies and employee communications. L $ $ rules could affect public companies in industries ranging from aerospace and automobiles to producers of canned food. # P $ ' required to create internal tracking and reporting mechanisms related to their $$ $ minerals reporting requirements. Q $ they are not already doing so, affected companies should begin the process of

! regulatory reform remains an aspiration

Following the commitments made by the !45 $ !45 nations are facing increased challenges in

Driven by differing national agendas, the pace and substance of reform initiatives are !45 L

!45 reform, leaving the ultimate level of global P G For multinational companies, this lack of P challenges, including when certain national laws, such as components of Dodd-Frank, apply to global operations. For in-depth technical details " " " provisions, additional Ernst & Young thought leadership materials are referenced throughout this piece. Ernst & Young can assist your company in responding to new regulations and postimplementation issues regarding the Dodd-Frank provisions.

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2012: two years later W

hile regulatory agencies have adopted a number of required rules, after almost two years, many provisions of Dodd-Frank have yet to be implemented. Agencies continue to delay rulemaking deadlines in the face of substantial public comments, limited resources and the sheer complexity of preparing rules in areas such as derivatives and executive compensation.

The following update highlights recent more noteworthy sections of the Act affecting the corporate community, including: Corporate governance

Public companies have now gone through a complete proxy season under some of the new regulations, been subject to enhanced SEC enforcement authority, including the new SEC whistleblower program, and started preparing for new disclosure requirements that are likely to be released in the next 6 to 12 months. As these efforts continue and new rules are implemented, public companies should remain vigilant about the rulemaking process and the potential consequences for their operations and governance.

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Executive compensation SOX ยง404(b) Consumer Financial Protection Bureau SEC enforcement Derivatives

Final rules issued under the Act SEC whistleblower program The SEC’s whistleblower program mandated by Dodd-Frank became effective 12 August 2011. This program provides monetary awards to people who voluntarily provide original information of misconduct which leads to a successful SEC enforcement action

7 $ 65X SEC enforcement actions that result in sanctions of more than $1 million. L 8 $ # / I 8 Q launched a website6 for whistleblowers to report possible securities $$ Q 8 ; + = $ I 7 ' / " ? 4533 8

66@ + $ 4533 3Z 4X ' $ 3[ 6X $ 3[ ZX

@ Director 8 = \ P received by the SEC through the whistleblower program has been of higher quality than that previously provided. Observations: In response to the program and the ability of $ 8 $ $ $ their existing internal whistleblower systems and overall programs to prevent, detect and promptly respond to reports

Executive compensation/say on pay " G 4533 ' directly cast advisory votes on company pay practices and the

U $ > #"B $ Investors gave high marks to executive compensation programs $ $ ]5X $$ Q $$ #" ^5X $ 5

Q 4534 $ G $ required to address in their Compensation Discussion and Analysis #" affected compensation policies and decisions, and if so, how. Some investors are now factoring this disclosure into their decisions on #" $ 4533 #" relatively low level of support. Smaller reporting companies, those $ _`[ G $ #" #" U U 4534 $ L j#z + " # +$ 4534 created a new category of issuer called an emerging growth $ >8! B $ $

>Q"#B 6 $ j#z + 8! G $ $ #" U > U B $ 8! + 8! _3 Observations: Early 2012 voting results show that average $$ #" ]5X ` ? investor scrutiny has increased and many investors have indicated #" $ $ this year.8 Most companies that are securing high support for their pay programs are sharpening company messaging in the proxy statement around executive pay and increasing direct engagement with shareholders. Constructive engagement – ranging from $ P outreach programs – generally involves direct, ongoing dialogue through which investors are able to share their perspectives and concerns, the company is able to explain the rationale driving its $ $ insights that may inform their views. Targeted pay reforms based on shareholder feedback and the communication of those changes and engagement efforts in the proxy statement can have an impact. $ `5X $$ 4533 #" $ $ 4534 generally saw support levels improve by an average of about 20 percentage points.9

6 The SEC’s whistleblower website is available at http://www.sec.gov/whistleblower.

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@ http://www.sec.gov/news/studies/2010/whistleblower_report_to_congress.pdf.

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5 8 9 : ; $ 8 4534 $ $ 65 +$ 4534 4533 6 For additional details on the JOBS Act, please see Ernst & Young’s To the Point, “JOB Act to $ $ ƒ > #=8 ? 56@[B ` $ 4534 #" U this year, since the rule was not in place for their 2011 annual meeting. Management vote recommendations on frequency proposals indicate that companies are increasingly favoring $ >^5X 4534

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This year remains a testing ground for the various proxy access shareholder proposals. The relative success or lack of success of the 2012 proposals that go to a vote – will shape how future proxy access proposals are drafted. Structure of board leadership There has been no post-Dodd-Frank rulemaking regarding the structure of board leadership, as the SEC adopted rules prior to Dodd-Frank requiring companies to disclose in their annual proxy statements the reasons why they chose the same person, or different people, to serve as Chairman and CEO. Observations: Some investors continue to push for independent board chairs, and the number of companies with this leadership 3X 9" [55 $ 4555 44X in 2011.10 Shareholder proposals calling for independent board $$ 66X 4533ˆ $ among the top 10 shareholder proposals in terms of voting support – and are anticipated to draw strong support again this year. More 65 $ $ G$ 4534

SEC enforcement provisions / 8 $ 11 became effective upon I 7 ' + P ' at whether Congress should take legislative action to overturn the $ ; ‰ ? + z ' which the Supreme Court held that persons who purchase or sell $

# 34 +$ 4534 8 the report12 detailing the various pros and cons of legislative action that Congress could consider, but without recommending lawmakers act on legislation to overturn Morrison. Instead, the $ $ consider if it chooses to explore legislation regarding the crossborder scope of securities fraud private actions. Observations: L $ legislative action suggests that the Morrison study is unlikely to be the source of successful legislative proposals within the immediate future. It is relevant to note, though, that while the SEC voted to send the study to Congress, it did so stating that the study expressed the views of the staff, rather than the SEC. Commissioner + study failed to satisfy the original Congressional request and failed $

10 : 4555 Q = $ = ; z " &z " 4554% L $ z I 9" $ 3[55 $ L $ 3[55 $ 6 > 9" [55 $ $B ˆ 3X 9" [55

Separately, the SEC’s Division of Enforcement (the Division) saw a 4533Š I 7 ' Q 65 $ 4533 I `6[ enforcement actions resulting in $2.8 billion in penalties as compared to 681 actions with almost $2.8 billion in penalties 4535

Proxy access SEC Chairman Mary Schapiro announced in September 2011 that 8 +$$ for the District of Columbia Circuit (Court) vacating an SEC rule >8G + = 3@ 33B U $ include director nominees submitted by eligible shareholders in its proxy materials (i.e., proxy access). In its decision on a petition by the Business Roundtable and the 8 † $$ failed adequately to quantify certain costs or to explain why those U $$ $ judgments, contradicted itself, and failed to respond to substantial problems raised by commentators.� On 25 April 2012, in testimony before the House Financial Services Subcommittee on Capital ‰ ' ! $ 8 $ Schapiro said the SEC would not soon be issuing a new proposed proxy access rule because of a lack of staff resources. At an earlier date however, the Chairman said she remained “committed ' candidates to corporate boards� and that she would consider the Court’s decision in doing so. Throughout the legal proceedings, the SEC had stayed the

8G + = 3@ 33 L 8 + 4535 = 3@ ^ U $ under certain circumstances, to include in its proxy materials shareholder proposals that would amend the company’s governing documents regarding shareholder director nominations. The = 3@ ^ the Court and became effective on 20 September 2011, permitting investors to submit proposals for inclusion in proxy statements that would amend the bylaws to provide shareholders with proxy access.

11 The Act expanded the SEC’s enforcement authority while also requiring additional studies be issued on matters of expanding private litigation for securities violations. Dodd-Frank P 8 $ † ' ƒ Š $ U †' ƒ 12 http://www.sec.gov/news/studies/2012/929y-study-cross-border-private-rights.pdf.

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Observations: Starting with the 2012 proxy season, some companies received shareholder proposals to amend their bylaws to establish proxy access procedures. The proposals differ on ownership requirements and other procedural terms, with most proposing nominating requirements that are more attainable than $ U 8 ; Q unlike most shareholder proposals that are advisory in nature, some of the proxy access shareholder proposals would be binding on the company, if approved. Some companies have asked the SEC staff whether they can exclude these shareholder proposals from their $ G 8G + = 3@ ^ L 8

reviewed these no-action requests on a case-by-case basis and has reached mixed conclusions based upon the individual facts and circumstances.36 It is expected that approximately 10 proxy access shareholder proposals will go to a vote in the 2012 proxy season. This year remains a testing ground for the various proxy access shareholder proposals. The relative success or lack of success of the 2012 proposals that go to a vote3@ will shape how future proxy access proposals are drafted. Although investors generally support the concept of proxy access, no consensus has emerged over how best to implement it.

SOX 404(b) $ I 7 ' G $

@5@> B #G + 4554 (i.e., the auditor’s attestation as to the effectiveness of a company’s $ B U @5@> B 8 ! + # >!+#B Q 15 the SEC staff recommended maintaining the auditor attestation requirement of @5@> B > ' $ P _`[ _4[5 B

$ $ G $

$ to investors.

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$ @5@> B G $ @5@> B $ j#z + $ G $ @5@> B $ $ Q"# ' $ P Observations: The passage of time will provide insights on the degree to which Dodd-Frank and JOBS Act provisions encourage $

$ $ L of future studies also will help inform any future Congressional @5@> B $

Consumer Financial Protection Bureau (CFPB) The Act created this new independent bureau, which has authority over all credit, savings and payment products provided to consumers, with the exception of products already subject / 7"z G $ $ 7"z; $ $ $ $ $ $ $$ 7"z; / 7"z ' over a host of entities, its enforcement and examination reach will generally be limited to banks, thrifts and credit unions with more than $10 billion in assets.

36 The no-action letters are available at $%&& & & $ & &4534‡3@ ^ . 3@ The shareholder proposals provide for varying ownership thresholds and holding periods for shares and also vary as to whether the proposal is binding. 15 & & &4533&@5@ $ .

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# [ j 4534 # + ! = $$ " # 7"z $ $$ 7"z full enforcement and rulemaking authority, including examination ' $ I $ L ' $ for the average consumer and incorporate consumer complaints into the bank examination process. The other priority is helping to improve federal supervision of non-bank entities, including debt collectors, payday loan operations and mortgage lenders. " $ 7 4534 P + rules regarding non-banks will be tailored to address industry $ Observations: + 7"z G to create new rules and broaden existing ones, the potential $ +

' P and strengthen their compliance management programs, as most had not previously been heavily regulated and those companies may not be familiar with the examination process. Consistent with 7"z 16 entities should consider performing risk assessments to understand what consumer compliance laws and regulations might apply to them, create appropriate policies and procedures for higher risk regulations and make sure a strong consumer complaints process is in place. It should be noted that because of the manner and timing of I ; $$ " # appointment and certain rulemaking initiatives may be subject to legal challenges in the future. Members of the Republican party in both the House and Senate continue to express disappointment and 7"z a commission and continue to suggest legislative changes to the leadership structure.

Proposed and pending rules Independent compensation committee and compensation advisers L 8 G$ $ of a company’s compensation committee members and the use of compensation advisers during the second quarter of 2012. The rules will require the national securities exchanges to adopt listing conditions to put requirements in place. The SEC initially proposed these rules in March 2011.

# $ L $ $ $ in December 2010, have yet to be issued, although the Act established an April 2011 deadline. The SEC staff held a roundtable in October 2011 to allow investors, affected issuers and human P $ $ $ $ whether the audit requirement should apply to the issuer’s supply chain due diligence process or the conclusions reached in a required $ 8

P $ U $ (e.g., allowing a performance audit instead of an attest audit).3` = $ rules are expected in the middle of 2012 and should include a phase-in period. Observations: + many in the corporate community continue to have concerns about the potential burden of compliance. As the uncertainty continues U $ '

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Over-the-counter (OTC) swap requirements18 Regulatory agencies continue to delay meeting OTC derivative rulemaking deadlines. The Commodities Futures Trading > 7L B G$ 4534Š 8 $ $ ' 4534 z $ $ rules though, and the pace of implementation has increased. L 7L † $ ƒ “major swap participants�. For 5 years after the rule’s effective date, entities that execute swaps for less than $8 billion in aggregate notional annually will not have to register as swap dealers. Absent CFTC action to the contrary, this amount will $ _6 $ ‘ acts as a dealer in executing more than $25 million in aggregate over the prior 12 months with a special entity will be required to register as a swap dealer. The CFTC may alter both the timing and level of these constraints based on its analysis of impacts to the markets. The monetary thresholds are likely to exempt a number trading entities, from required registration. The SEC proposed $10 billion (small banks, savings associations, farm credit system institutions and credit unions) might qualify for the end-user exemption for hedging business risk. In proposed rules, the CFTC has determined that end-users exempt from mandatory clearing of their swaps would be exempt from the requirement to post margin.

Observations 7 market participants have begun to make strides in terms of P $ $ $ / debate during the legislative process, the Act ultimately did not exempt end-users from the new mandatory margin requirements. Though the proposed CFTC rules provide this exemption, the banking regulators might not, and an SEC rule has yet to be proposed. This lack of clarity continues to cause concern for non L $ $ affected parties.

The CFTC and SEC indicated that they are likely to again defer implementing many of the Act’s requirements that would have become effective automatically. However, some aspects of the rules are likely to become effective in the third quarter 4534 7 7L $ ? requirements dealing with fraud nor anti-manipulation, which became effective 16 July 2011.

18 L † $ ƒ G $ $ Act (including, for example, credit default swaps, interest rate swaps, total return swaps, on Š $ U G † $ ƒ regulatory statuses are generally not affected by the Act). 19 Swap dealers and major swap participants are governed by the CFTC. Security-based swap $ $ $ 8 7 institutions already governed by prudential regulators (e.g., Federal Deposit, Insurance

$ # $ z ! 7 = Federal Housing Finance Agency, Form Credit Administration, etc.) there is deferral to the $ 20 L z = ' ‰ " P + > B

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! $ ? I 7 ' unlikely. As a result, public companies should continue to focus on regulatory implementation.

Dodd-Frank provisions where rules have yet to be proposed Enhanced compensation disclosures and clawbacks L 8 ; $ $ compensation disclosures21 and clawbacks22 will be completed by the end of 2012. Congress continues to monitor the disclosure provision as evidenced by the 8 March 2012 letter 20 Democratic members of the House of Representatives sent to Chairman $ 8 $ P ' †$ ƒ

P $ Observations: In contrast to the Congressional letter, many companies have expressed grave reservations regarding the complexity in calculating the median annual compensation for all employees. In anticipation of the rulemaking, a number of companies are seeking to provide investors with enhanced descriptions of how pay aligns with performance (e.g., including in their proxy statements various supplemental compensation † P ƒ $ disclose actual delivered pay as opposed to pay estimations based on grant date value).

* ' 8 9 : ; updates regarding the Dodd-Frank Act: key points for all public companies and references to additional Ernst & Young material on these topics.

21 The Act requires a clear description in the annual proxy statement of the relationship G $ $ ; $ L G compensation disclosures in registration statements, annual reports and proxy statements will be required to include a “pay disparity ratio� comparing the CEO’s annual total compensation to the median of all other employees.

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Regarding compensation clawback, some investors have found it expedient to submit their own proposals rather than wait for SEC action. In 2012, a new shareholder proposal was submitted to a limited number of companies, seeking to revise existing clawback provisions by extending the conditions for recoupment beyond those that result in a material loss, creating up-the-ladder accountability for supervisors and increasing transparency around $ $ ? $ $ will go to a vote, since the proponents withdrew the proposals after reaching agreements with the targeted companies. However, similar proposals could surface to supplement the SEC’s ultimate clawback rule.

What comes next for Dodd-Frank implementation? ! $ ? I 7 ' year are unlikely. As a result, public companies should continue to focus on regulatory implementation. As rules continue to be $ $ challenges similar to the one made to the proxy access rule. Companies should expect to see agencies seek to perform more robust economic analyses in order to avoid similar legal challenges in the future. Based on the regulatory calendars produced by agencies such as 8 7L 7"z L G$ regulatory activity over the next six to eight months.

22 The Act requires the SEC to direct national securities exchanges and associations to put in place listing requirements for issuers to adopt and implement a clawback policy to recover incentive based compensation from current or former executives during a three year look back period.

Contacts " " * z ............................ Â’3 454 64` []Z^ ! z ? ........................... Â’3 454 64` Z4]` + " " Christopher Holmes ................ Â’3 454 64` ^^]5

Financial Services Donald Vangel ........................ Â’3 434 ``6 434] + 7 # $ ! ! $ Allie Monaco Rutherford ......... Â’3 `56 `@` 3`4]

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