Dodd-Frank At One Year: An Updated Overview - Dodd-Frank, Consumer Protection Act

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") into law. On Dodd-Frank's first anniversary, the Bureau of Consumer Financial Protection ("CFPB") commenced operations without a permanent Director in place. As many had expected, the process of promulgating and implementing rules for Dodd-Frank has bogged down significantly, given the huge number of rules that must be written and the many studies and reports that must be prepared as part of the implementation process. A number of those delayed rules were supposed to have been issued and become effective on or before July 21, 2011.

Dodd-Frank makes fundamental changes to the oversight and supervision of financial institutions, a new resolution procedure is created for large financial institutions, authorities are transferred to a new Bureau of Consumer Financial Protection, regulatory capital requirements are strengthened, and a new regime is created for the regulation of over-the-counter derivatives. Advisers to certain private funds are required to register, and there are huge changes made to the securitization market, including a general requirement that parties retain a portion of the risk from mortgages that they originate.

Dodd-Frank is already having a pervasive impact on the operations of banks, non-bank financial institutions including insurers, credit rating agencies, mortgage originators and servicers, investment advisers, hedge funds, securitizers, and virtually every financial services industry participant. Given the large number of rules and studies that were to have been written by July 21, 2011, now is an opportune time to provide a brief and user-friendly update on the status of Dodd-Frank implementation and on some of the key issues still to be resolved.

This memo will provide a "30,000 foot" overview of the status of the major elements of the Act organized by each title of the bill, and discuss the many delays in producing and finalizing implementation regulations. (Please note that only 13 of the Act's 16 titles have prompted regulations that require commentary in this memo.)

The memo will also describe the legislative landscape surrounding Dodd-Frank, including Republican efforts to pare back the Act, limit the powers of the CFPB, and use the appropriations process to limit or eliminate funding for Dodd-Frank implementation.

The memo does not purport to be comprehensive. Given the vast scope of the Act, there are scores of issues that are not addressed in this piece, but which have been or can be addressed in greater detail and with far more rigorous focus upon client request. The memo is designed to lay out an overall framework for consideration of Dodd-Frank and is not a substitute for particularized legal advice that takes account of the facts, circumstances, and priorities of a given client. We now turn to the sixteen Titles of Dodd-Frank and consider some of what's been completed, what's been delayed, and what remains to be done to implement these titles.

Title I - Financial Stability

Financial Stability Oversight Council ("FSOC") and Office of Financial Research ("OFR") are each established and now fully operational.

On February 11, 2011, pursuant to Sections 102(a)(7) and (102)(B) of Dodd-Frank, the Federal Reserve ("Fed") issued a Notice of Proposed Rulemaking (NPR) on the definitions of "predominately engaged in financial activities" and on what constitutes a "significant" nonbank financial company and bank holding company.

On October 6, 2010, pursuant to Section 113 of Dodd-Frank, the FSOC issued an Advanced Notice of Proposed Rulemaking and on January 26, 2011, it issued an NPR regarding its authority to supervise and regulate US and foreign nonbank financial companies.

On April 22, 2011, pursuant to Section 165(d) of Dodd-Frank, the Federal Reserve and the FDIC jointly issued a proposed rule on so-called "living wills", that is, the resolution plans and credit exposure reports that must be periodically prepared, beginning on January 21, 2012, by covered bank holding companies (those with assets in excess of $50 billion) and by those nonbank companies that are designated by the FSOC as a systemically important financial institution (a SIFI). These "living wills" are comprehensive documents that will have to be updated regularly by the covered companies which identify the steps that a company will take to wind up its affairs in the event of insolvency. These reports are intended to allow regulators to ensure that the activities of a covered company will not threaten the financial stability of the United States in the event of that company's insolvency.

Under Section 121 of Dodd-Frank, the Federal Reserve Board is authorized to establish regulations regarding the application of measures to non-U.S. covered nonbank companies and non-U.S. bank holding companies that the Fed and the FSOC may impose on covered nonbank companies and bank holding companies with $50 billion in assets that pose a grave threat to the financial stability of the United States. The Federal Reserve has not yet exercised this authority, but is expected to do so once the FSOC has designated as SIFIs those companies whose failure it believes might threaten the financial stability of the United States.

On June 28, 2011, pursuant to Section 171 of Dodd-Frank, the Fed, the FDIC and OCC jointly issued a final rule on risk-based capital standards, an advanced capital adequacy framework and establishment of a risk-based capital floor to address risks posed by the activities of depository institutions, depository institution holding companies and SIFIs.

Title II - Orderly Liquidation Authority

On July 6, 2011, pursuant to Section 209 of Dodd-Frank, the FDIC issued a final rule to implement certain orderly liquidation provisions of the Act.
On April 29, 2011, pursuant to Sections 216 and 217 of Dodd-Frank, the Federal Reserve and the Administrative Office of the U.S. Courts issued requests for information regarding studies that they must conduct regarding whether the bankruptcy process can be improved for resolving systemically important financial companies and regarding the nature and extent of international coordination relating to the resolution of systemically important financial companies under the Bankruptcy Code and applicable non-U.S. law. On July 21, 2011, the Federal Reserve released its study on the resolution of financial companies under the Bankruptcy Code and a separate study on international coordination relating to the bankruptcy process for nonbank financial institutions.
Under Section 205(h) of Dodd-Frank, after consultation with the Securities Investor Protection Corporation (SIPC), the SEC and the FDIC must jointly issue rules to implement Section 205 relating to the orderly liquidation of broker-dealers. This has not yet occurred.
Section 210(s) of Dodd-Frank also directs the FDIC to issue regulations to recover compensation for the prior 2 years (or in case of fraud, for an unlimited prior period) from senior executives and directors substantially responsible for failure of a covered financial company.

Title III - Transfer of Powers to the Comptroller, the FDIC, and the Fed

On July 21, 2011, the OCC, FDIC and the Fed respectively assume the supervisory responsibilities of the OTS and, 90 days thereafter, the OTS is abolished.
On July 6, 2011, pursuant to Section 316 of Dodd-Frank, OCC and the FDIC jointly published a list of those OTS rules that each will continue to enforce as of the July 21, 2011 transfer date.
Pursuant to Sections 331 and 332 of Dodd-Frank, on February 25, 2011, the FDIC adopted a final rule on large bank assessments and pricing. On October 27, 2010, the FDIC adopted a Restoration Plan changing the way that dividends are calculated and rates assessed, and proposed several other changes to protect the Insurance Fund.

Title IV - Regulation of Advisers to Hedge Funds and Others

On July 6, 2011, pursuant to Section 403 of Dodd-Frank, the SEC published in the Federal Register final rules granting exemptions from registration for advisers to venture capital funds, some private fund advisers (those with assets under management of less than $150 million), and foreign private advisers. These rules are effective on July 21, 2011. Advisers that formerly relied on the "private adviser exemption" repealed by Dodd-Frank and that are otherwise ineligible for an exemption from registration under the new rules must register under the Investment Advisers Act by March 30, 2012 - not July 21, 2011 as originally contemplated by Dodd-Frank.
On June 22, 2011, pursuant to Section 404 of Dodd-Frank, the SEC issued a final rule to require investment advisers: (i) solely to venture capital funds or (ii) to private funds with assets under management of less than $150 million ("exempt reporting advisers") to file reports with the SEC containing certain general information about the funds' strategies, assets/investments and service providers. This rule is also effective on July 21, 2011, but exempt reporting advisers will have until March 30, 2012 to complete their and file their initial reports.
On June 29, 2011, pursuant to Section 409 of Dodd-Frank, the SEC published in the Federal Register Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 defining the scope of the "family office" exclusion from the definition of investment adviser. Under the Rule, a "family office" is defined as any company that: (i) has no clients other than "family clients," (ii) is wholly owned by family clients and controlled, directly or indirectly, by "family members" and/or "family entities" and (iii) does not hold itself out to the public as an investment adviser. Family offices currently exempt from registration because of the "private adviser" exemption from registration that the Dodd-Frank Act repealed that do not fall within the new family office exclusion or an exemption from registration have until March 30, 2012 to register under the Advisers Act. Since the SEC may take up to 45 days to process an application for registration, family offices that are not excluded from the Rule will need to file a complete application, including both Part 1 and Part 2A of Form ADV, by February 14, 2012 to meet the new deadline.

Title V - Insurance

Michael McRaith, the Director of the Federal Insurance Office (FIO) created under this title of Dodd-Frank, is recently appointed. Ray Woodall, the President's insurance nominee for the FSOC has yet to be confirmed, and no decisions have been made yet as to the members of the Federal Advisory Committee on Insurance, which the Treasury Department established on May 11, 2011.
As a result, none of the many data gathering and reporting responsibilities enumerated in Section 502(a) of Dodd-Frank have yet commenced. Among other things, under Section 502(a), the FIO Director is authorized to develop federal policy on the prudential aspects of international insurance matters, and identify gaps in insurance regulation that could contribute to a systemic crisis in the insurance industry or in the US financial system. The FIO is also authorized to recommend to the FSOC that it designate an insurer as an entity subject to regulation as a nonbank financial company, that is, as a SIFI.
By September 30, 2011, the Director of the FIO must submit an annual report to the President and Congress on the insurance industry and on any steps taken by the FIO to preempt state insurance measures.
By January 21, 2012, the Director of the FIO must conduct a study and submit a report to Congress on how to modernize and improve insurance regulation in the U.S. which must also contain the director's legislative, administrative or regulatory recommendations to carry out the report's findings.

Title VI - Improvements to Regulation

On April 22, 2011, pursuant to Sections 616(a) and (b) of Dodd-Frank, in order to establish capital requirements for holding companies and to make such requirements countercyclical, the Federal Reserve announced its intent to apply certain supervisory guidance to savings and loan holding companies.
On February 14, 2011, pursuant to Sections 619(c) of Dodd-Frank, the Federal Reserve issued a final rule on the permitted conformance period for entities engaged in a type of proprietary trading or private equity fund or hedge fund activities prohibited under the Volcker Rule to bring themselves into compliance with the Act.

Title VII - Wall Street Transparency and Accountability

Attempts to regulative derivatives and derivatives clearing organizations are ongoing and extensive. The SEC and the CFTC have issued or have pending literally scores of rules and studies. Given the complexity of these issues and the need to avoid disrupting the market, the SEC and CFTC have extended the implementation dates for many of the rules contemplated by the Act from July 16, 2011 to the earlier of December 31, 2011 or when a substantive rule is issued.
To that end, on July 1, 2011, the SEC issued an order granting temporary exemptive relief from compliance with certain provisions of the Securities Exchange Act of 1934 ("Exchange Act") in connection with the pending revision of the Exchange Act definition of "security" to encompass security-based swaps. On the same date, the SEC adopted interim final rules providing broad exemptions under the Securities Act of 1933 (the "Securities Act") and the Exchange Act for certain security-based swaps that would be defined as "securities" under the Securities Act and the Exchange Act as of July 16, 2011 as a result of Dodd-Frank. Also on July 1, 2011, the SEC extended final temporary rules exempting certain credit default swaps in order to facilitate operation of central counterparties to clear and settle credit default swaps without market disruption.
Similarly, effective July 14, 2011, the CFTC issued a final exemptive order granting temporary relief from certain provisions of the Commodities Exchange Act ("CEA") added or amended by title VII of Dodd-Frank that reference one or more terms that title VII requires be further defined, such as the terms "swap," "swap dealer," "major swap participant," or "eligible contract participant". The exemptive order also grants temporary relief from certain provisions of the CEA that will or may apply as of July 16, 2011 as a result of the repeal of various CEA exemptions and exclusions.
On December 21, 2010, and May 23, 2011, pursuant to Section 712 of Dodd-Frank, the CFTC and SEC jointly published in the Federal Register proposed rules and interpretations to further define the terms "swap dealer," "security-based swap dealer," "major swap participant," "major-security-based swap participant," "eligible contract participant," and "security-based swap agreement," and "swap," "security-based swap," and certain other product definitions.
On May 5, 2011, pursuant to Section 721 of Dodd-Frank, Treasury issued a notice of proposed determination to exempt foreign exchange swaps and forwards from the definition of swap.
On April 28, 2011, and May 12, 2011, pursuant to Section 731 of Dodd-Frank, the CFTC published in the Federal Register proposed rules addressing margin and capital requirements for swap dealers and major swap participants that are not depositary institutions.
On July 14, 2011, pursuant to Section 753 of Dodd-Frank, the CFTC issued a final rule that becomes effective August 15, 2011 to prohibit the use, or attempted use, of manipulative and deceptive practices and to prohibit price manipulation.
Pursuant to Section 764 of Dodd-Frank, an NPR is currently pending before the OCC, Federal Reserve, FDIC, and the Federal Housing Finance Authority (FHFA), among others, to determine capital and margin requirements on security-based swap dealers and major security-based swap participants that are depository institutions.

Title VIII - Payment, Clearing and Settlement Supervision

On July 18, 2011, pursuant to Section 804(a)(1) of Dodd-Frank, the FSOC issued a final rule setting out the standards to be used in determining whether to designate as systemically important a financial market utility (FMU). An FMU is any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and that person. An FMU will be designated as systemically important if the FSOC determines that the failure, or a disruption to the functioning, of that FMU could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the financial system of the United States.
On April 4, 2011, pursuant to Section 805(a) of Dodd-Frank, the Federal Reserve also issued an NPR regarding advanced notice of rule changes and risk management standards governing the activities of designated FMUs.

Title IX - Investor Protection and Improvement to the Regulation of Securities

On February 16, 2011, due to budgetary uncertainty and resource limitations, the SEC deferred the creation of six separate offices and initiatives that Dodd-Frank required, including an Investor Advisory Committee, a new Office of Investor Advocate, an ombudsman, an office within the SEC to implement a whistleblower protection program, an Office of Credit Ratings and a Diversity Office.
On June 8, 2011, pursuant to Section 932 of Dodd-Frank, the SEC published rules in the Federal Register with respect to procedures and methodologies to be used by Nationally Recognized Statistical Rating Organizations (NSROs).
Throughout the winter and spring of 2011, various agencies issued proposed rules, pursuant to Section 939(A) of Dodd-Frank, to remove references to credit ratings from their rules.
On June 6, 2011, pursuant to Section 941 of Dodd-Frank, no doubt in part to account for the many concerns expressed about the narrowness of the qualified residential mortgage (QRM) exemption to the credit risk retention rule, the FHFA, HUD, SEC, FDIC, OCC, and Federal Reserve jointly extended to August 1, 2011 the comment period for their proposed rule on credit risk retention.
On July 12, 2011, pursuant to Section 982 of Dodd-Frank, the SEC published the temporary rule proposal of the Public Company Accounting Oversight Board (PCAOB) for an interim inspection program related to broker-dealer audits.

Title X - Bureau of Consumer Financial Protection

On June 29, 2011, pursuant to Section 1024(b)(7) of Dodd-Frank, the CFPB issued a notice and request for comment on its definition of "larger participant" in certain financial markets. While the CFPB may supervise covered persons in the residential mortgage, private education lending, and payday lending markets, in other markets for consumer financial products or services, the Bureau's supervision program generally will apply only to a ''larger participant'' in these markets, as defined by rule.
On June 29, 2011, pursuant to Section 1075 of Dodd-Frank, the Federal Reserve issued its final rule, effective on October 1, 2011, on debit card interchange fees and routing. The rule establishes standards for assessing whether the amount of an interchange fee charged by a payment card issuer or network is reasonable and proportional to the actual cost incurred by the issuer or network with respect to an electronic debit transaction, for making adjustments to such fees to take into account the costs of fraud prevention, and includes rules regarding payment card network fees.
On July12, 2011, pursuant to Section 1075 of Dodd-Frank, the Federal Reserve issued a list of those financial institutions that are subject to, and exempt from, the Fed's debit card interchange fee standards.

Title XI - Federal Reserve System Improvements

On March 15, 2011, pursuant to Section 1100F of Dodd-Frank, the Federal Reserve issued an NPR relating to the disclosure of additional information on Fair Credit Reporting Act adverse action notices, and also proposed to update its risk-based pricing regulations to include references to credit scores, where appropriate.

Title XIV -Mortgage Reform and Anti-Predatory Lending Act

Many of the regulations required by this title either do not have deadlines or the regulations are not yet due, as is the case for the many regulations authorized or required with respect to appraisers and appraisal independence. Likewise, pursuant to Section 1403 of Dodd-Frank, the Fed must establish regulations prohibiting mortgage originators from (1) steering consumers to residential mortgage loans that they lack a reasonable ability to repay; (2) providing predatory loans; (3) steering consumers from residential mortgage loans that are qualified mortgages to non-qualified mortgages; (4) engaging in abusive or unfair lending practices that promote disparities among consumers of different race, ethnicity, gender or age; (5) mischaracterizing a consumer's credit history or the loans available to them; and (6) mischaracterizing the appraised value of property. Yet these regulations are not due until January 21, 2013.
Pursuant to Section 1405 of Dodd-Frank, the Fed must also establish regulations prohibiting acts or practices relating to residential mortgage loans that it finds to be abusive, unfair, deceptive, predatory, necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers. No deadline was specified in the Act for when these regulations are due.
While these regulations are not due until January 21, 2013, on May 11, 2011, pursuant to Section 1411 of Dodd-Frank, the Fed proposed rules with respect to a borrower's ability to repay and related mortgage underwriting standards, including methods for third partied to quickly verify the income of borrowers applying for mortgages.
Pursuant to Section 1431(a) of Dodd-Frank, on July 21, 2011, the Fed issued a final rule establishing the dollar amounts required to trigger the "high cost' mortgage provisions of the Act.
On March 2, 2011, pursuant to Section 1462 of Dodd-Frank, the Fed proposed a rule to establish escrow accounts for higher-priced mortgage loans.

Title XV - Miscellaneous Provisions

This "catch-all" portion of the Act has produced three different sets of rules of some interest. On December 23, 2010, pursuant to Section 1502(b) of Dodd-Frank, the SEC published in the Federal Register a proposed rule on disclosure with respect to "conflict minerals." That day, the SEC also proposed a rule on disclosure of payments by resource extractor issuers.
Similarly, on December 22, 2010, pursuant to Section 1503 of Dodd-Frank, the SEC published in the Federal Register a proposed rule on mine safety disclosure.

Delays In Dodd-Frank Implementation Rules

As noted above, Dodd-Frank requires the adoption of what many commentators believe to be well over 350 rules. The Act also requires the preparation of scores of labor-intensive and complex studies. The regulatory agencies, particularly the CFTC and the SEC with respect to derivatives, and the various banking regulators, have been tasked with responsibilities that have stretched their resources—in many cases to or past the breaking point.

Given the hostility of many Republican Members of Congress and many Republican Senators to the Dodd-Frank Act, these regulators have been required to perform their work with very limited resources and with an almost unprecedented level of scrutiny. They also have been charged with reviewing a blizzard of comments about many of these proposed rules.

The inevitable and often unavoidable response to these pressures has been delay in the regulators' production and completion of many of these rules. As explained in the final section that follows concerning the political landscape surrounding Dodd-Frank, there is no reason to think that these pressures will abate in the near term. If anything, they are likely to get worse.

The Gridlocked Political Landscape: Republican Efforts to "Defang" and Defund Dodd-Frank

Given their deep-seated hostility to the Dodd-Frank Act, most Republican Members and Senators have sought to employ every vehicle at their disposal to limit Dodd-Frank's impact. Having recognized the political reality that an outright repeal of the Act is not feasible given a Democratic President and a Democratic Senate, Republicans appear to have settled on a three pronged strategy to attack Dodd-Frank.

First, they seek to whittle down the Act by offering numerous bills that go through the House Financial Services Committee seeking to eliminate or modify particular Dodd-Frank provisions.

Second, they employ an appropriations strategy before the various relevant appropriations subcommittees to eliminate or ratchet back funding for agency and regulatory staff, particularly those at the SEC, CFTC, and the new CFPB, who are charged with Dodd-Frank implementation efforts.

Finally, the Republicans have embarked on what looks to be a scorched earth nominations strategy that seeks to prevent confirmation of the President's key economic and financial nominees, including not only the Director of the CFPB, but also a well-credentialed North Carolina Banking Superintendent to head the FHFA, and even a Nobel Laureate in Economics to serve as a Federal Reserve Board Governor.

The July 18 announcement from the President that he will nominate Richard Cordray to be the first CFPB Director does nothing to lessen these tensions. If anything, Cordray's nomination exacerbates the problem. Cordray, who was one of Elizabeth Warren's first senior hires at the CFPB, is a liberal Democrat who built a very aggressive litigation enforcement record, especially in connection with the "robo-signing" dispute and related mortgage servicing and foreclosure prevention litigation, while serving as Ohio's Attorney General.

Cordray's nomination is currently likely to go nowhere and the Senate Republicans are also likely to prevent the President from making a recess appointment of a CFPB Director. Moreover, given a quirk in the way the Dodd-Frank Act was drafted, the Treasury Secretary may operate the Bureau as of the July 21 transfer date if no confirmed Director is in place. However, according to the Treasury and Federal Reserve Inspectors General, the Secretary is not permitted to perform newly-established Bureau authorities created by the Dodd-Frank Act if there is no confirmed Director by the designated transfer date.

Simply put, existing authorities can be exercised by the CFPB before a confirmed Director is in place. Newly-created authorities can not be exercised until a confirmed Director is in place. For the forseeable future, the CFPB will only be able to exercise those pre-existing powers of other regulators that are transferred to it by the Dodd-Frank Act.

Dodd-Frank Rollback Efforts

On May 3 and 4, beginning their efforts to roll back various Dodd-Frank provisions, the Republican Members of the Capital Markets Subcommittee of Financial Services marked up and favorably reported several bills to peel back Dodd-Frank. H.R. 1070 would raise the offering threshold for securities exempt from '33 Act registration from $5 million to $50 million. H.R. 1062 would repeal the Dodd-Frank requirement that public companies disclose the annual total income of their CEO and the ratio between the CEO's pay and that of the median annual total income for all other employees of the company. H.R. 1082 would repeal the Dodd-Frank requirement that private equity funds register with the SEC. H.R. 1610 would exempt from Dodd-Frank derivatives regulations certain "legitimate" end-users of derivatives. H.R. 1539 would restore credit rating agencies' exemption from expert liability under the '33 Act.

Similarly, on May 12-13, the Republican Members of the Financial Services Committee favorably reported several additional bills to roll back Dodd-Frank. H.R. 1121 would replace the CFPB Director with a five-member commission. H.R. 1315 would reduce from 2/3 to a majority the vote required for the Financial Stability Oversight Council to overrule a CFPB determination. H.R. 1667 would postpone the July 21, 2011 date for the transfer of functions to the CFPB until the CFPB has a Director confirmed by the Senate.

This strategy looks to be the least effective of the Republicans' three strategies as there is no reason to think that the Senate would pass, or the President would sign, most of these bills. While some of the bills make technical changes that may not be objectionable, most of them seek to cut at the heart of Dodd-Frank. Slowly, some of these "message" bills will be passed by the Republican House and then make their way to the Senate where they will not likely even be taken up by the Democratic Leadership.

Restricting Appropriations Funding for the Regulators.

Particularly in this challenging budgetary climate, an appropriations strategy by Republicans looks to be a more effective approach than just passing "message" bills. House and Senate Republicans have each proposed appropriations funding for the various financial regulators that make tremendous cuts in the amounts sought by the President. The SEC, the CFTC and the CFPB all have borne the brunt of these proposed cuts.

On July 13, the Office of Management and Budget ("OMB") released a Statement of Administration Policy stating that the President's senior advisors would recommend he veto H.R. 2434, the FY 2012 Financial Services and General Government Appropriations Act, if it is passed by the Senate in its current form and presented to the President. OMB said that the bill would undermine the President's signature health care reform law, as well as Dodd-Frank. Among the strong objections that OMB noted are the substantial cuts and other adjustments the bill would make to the funding of the CFPB (including removing its independent funding through the Fed and making it subject to the annual appropriations process).

OMB also raised strong concerns with the funding level for the SEC, which would remain stagnant at $1.2 billion and not include an additional $222 million requested by the Administration, largely for Dodd-Frank implementation efforts. OMB said that the bill would compromise the ability of the CFPB and SEC to carry out their missions, including their new Dodd-Frank responsibilities, with severely negative impacts on consumers and the market.

Blocking the President's Nominees

This strategy looks to be the Republicans' most powerful option, especially given the quirk in the way that Dodd-Frank is drafted that limits the CFPB's ability to exercise its newly-established Dodd-Frank authorities until a confirmed CFPB Director is in place. Some background on this issue is instructive.

In early May, many Democrats were urging the President to nominate Elizabeth Warren, the person that the President selected to stand up the CFPB, to be the Bureau's first Director. Warren is not well-regarded by many Republicans and they went out of their way to make it clear that they did not want her to serve as the CFPB's Director.

Warren faced heated questions and allegations from Republicans, especially those on the House Oversight and Government Reform Committee's TARP, Financial Services and Bailouts of Public and Private Programs Subcommittee. Chairman Patrick McHenry (R-NC) accused Warren of lying, and several Subcommittee Republicans argued that Warren had improperly involved herself and the CFPB in ongoing settlement talks among the state attorneys general, banking regulators, and mortgage servicers. In a very heated session, Warren and Committee Democrats denied that Warren had lied about anything and vigorously defended both the CFPB and the propriety of Warren's conduct.

With press reports suggesting that Warren might be nominated to be the CFPB Director, on May 5, Senate Banking Committee Ranking Member Richard Shelby (R-AL) and 43 of his Republican colleagues sent a letter to the White House advising that they would filibuster the nomination of any CFPB director unless three major changes were made to the Bureaus' operation: (1) replacing the Director with a five-person commission; (2) requiring that the CFPB be funded via the appropriations process, and not through the special Fed set-aside; and (3) allowing the prudential regulators to exercise a safety and soundness check on the CFPB's rulemakings. Because the Obama Administration clearly would not accept any of these changes, many observers speculated that the President would need to make a recess appointment of a CFPB Director.

In anticipation of the risk that the President might try to make a recess appointment to install Elizabeth Warren as Director of the CFPB, Senate Republicans persuaded House Speaker John Boehner (R-OH) not to take up a concurrent resolution for a Memorial day recess, and they also objected to a unanimous consent request that would have allowed the Senate to adjourn for the Memorial Day recess. As a result, while no legislative business occurred, the Senate remained in "pro forma" session - not in recess - so the President could not make any recess appointments to positions requiring Senate confirmation, such as the CFPB Director.

Under Article 1, Section 5 of the US Constitution, neither the House or the Senate can adjourn for more than three days without the consent of the other. The House and Senate must agree to a concurrent resolution in order for either body to adjourn for more than three days. (The question of how long a body must be in recess in order for the President to have the power to make a recess appointment has never been definitively answered, but all commentators seem to agree that the recess must be longer than three days.)

If Cordray's nomination stalls as is likely, we believe that he would receive a recess appointment if the Senate were to go into recess, but the Senate and the House must each pass a concurrent resolution for either or both bodies to go into recess for more than three days. As happened in late May of this year, we would expect the House to refuse to take up a concurrent resolution passed by the Senate providing for a recess of more than three days in order to prevent the President from making any recess appointments. In this circumstance, instead of a recess, the Senate once again would end up holding a series of pro forma sessions at least every three days.

Assuming that Senate Republicans hold firm in their often-expressed objections to the structure of the CFPB and what they consider to be a lack of oversight over its operations, they can be expected to prevent a confirmation vote on the merits of Cordray's nomination or that of any other candidate to be the CFPB Director. They also are likely to do whatever is required to prevent the President from being able to make a recess appointment. This stalemate will also have the collateral effect of limiting the powers that the CFPB may exercise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

United States: Dodd-Frank At One Year: An Updated Overview