Fifth Third Bank 2013 Annual Report Download - page 179

177 Fifth Third Bancorp
Corporate Governance
The Dodd-Frank Act clarifies that the SEC may, but is not
required to promulgate rules that would require that a company’ s
proxy materials include a nominee for the board of directors
submitted by a shareholder. Although the SEC promulgated rules
to accomplish this, these rules were invalidated by a federal
appeals court decision. The SEC has said that they will not
challenge the ruling, but has not ruled out the possibility that new
rules could be proposed.
The Dodd-Frank Act requires stock exchanges to have rules
prohibiting their members from voting securities that they do not
beneficially own (unless they have received voting instructions
from the beneficial owner) with respect to the election of a
member of the board of directors (other than an uncontested
election of directors of an investment company registered under
the Investment Company Act of 1940), executive compensation
or any other significant matter, as determined by the SEC by rule.
Credit Ratings
The Dodd-Frank Act includes a number of provisions that are
targeted at improving the reliability of credit ratings. The SEC has
been charged with adopting various rules in this regard.
Consumer Issues
The Dodd-Frank Act created a new bureau, the CFPB, which has
the authority to implement regulations pursuant to numerous
consumer protection laws and has supervisory authority,
including the power to conduct examination and take enforcement
actions, with respect to depository institutions with more than $10
billion in consolidated assets. The CFPB also has authority, with
respect to consumer financial services to, among other things,
restrict unfair, deceptive or abusive acts or practices, enforce laws
that prohibit discrimination and unfair treatment and to require
certain consumer disclosures.
Debit Card Interchange Fees
The Dodd-Frank Act provides for a set of new rules requiring that
interchange transaction fees for electric debit transactions be
“reasonable” and proportional to certain costs associated with
processing the transactions. The FRB was given authority to,
among other things, establish standards for assessing whether
interchange fees are reasonable and proportional. In June 2011,
the FRB issued a final rule establishing certain standards and
prohibitions pursuant to the Dodd-Frank Act, including
establishing standards for debit card interchange fees and
allowing for an upward adjustment if the issuer develops and
implements policies and procedures reasonably designed to
prevent fraud. The provisions regarding debit card interchange
fees and the fraud adjustment became effective October 1, 2011.
The rules impose requirements on the Bancorp and its banking
subsidiary and may negatively impact our revenues and results of
operations. On July 31, 2013 a United States District Court found
that portions of the final interchange rules were contrary to the
language of the Dodd-Frank Act. The Court held that, in adopting
the final rules, the FRB violated the Durbin Amendment’ s
provisions concerning which costs are allowed to be taken into
account for purposes of setting fees that are reasonable and
proportional to the costs incurred by the issuer and therefore the
rule’ s maximum permissible fees were too high. In addition, the
Court held that the final rules’ network non-exclusivity provisions
concerning unaffiliated payment networks for debit cards also
violated the Durbin Amendment. The Court vacated the final rule,
but stayed its ruling to provide the FRB an opportunity to replace
the invalidated portions. The FRB has appealed this decision. If
this decision is ultimately upheld and/or the FRB re-issues rules
for purposes of implementing the Durbin Amendment in a
manner consistent with this decision, the amount of debit card
interchange fees the Bancorp would be permitted to charge likely
would be reduced.
FDIC Matters and Resolution Planning
Title II of the Dodd-Frank Act creates an orderly liquidation
process that the FDIC can employ for failing systemically
important financial companies. Additionally, the Dodd-Frank Act
also codifies many of the temporary changes that had already
been implemented, such as permanently increasing the amount of
deposit insurance to $250,000.
In January 2012, the FDIC issued a final rule that requires an
insured depository institution with $50 billion or more in total
assets to submit periodic contingency plans to the FDIC for
resolution in the event of the institution’ s failure. The rule
became effective in January 2012, however, submission of plans
will be staggered over a period of time. The Bancorp’ s banking
subsidiary is subject to this rule and submitted its first resolution
plan pursuant to this rule as of December 31, 2013.
In October 2011, the FRB and FDIC issued a final rule
implementing the resolution planning requirements of
Section165(d) of the Dodd-Frank Act. The final rule requires
bank holding companies with assets of $50 billion or more and
nonbank financial firms designated by FSOC for supervision by
the FRB to annually submit resolution plans to the FDIC and
FRB. Each plan shall describe the company’ s strategy for rapid
and orderly resolution in bankruptcy during times of financial
distress. Under the final rule, companies will submit their initial
resolution plans on a staggered basis. The Bancorp submitted its
first resolution plan pursuant to this rule as of December 31,
2013.
Proprietary Trading and Investing in Certain Funds
The Dodd-Frank Act sets forth new restrictions on banking
organizations’ ability to engage in proprietary trading and
sponsors of or invest in private equity and hedge funds (the
“Volcker Rule”). The final regulations implementing the Volcker
Rule (“Final Rules”) were adopted on December 10, 2013. The
Volcker Rule generally prohibits any banking entity from (i)
engaging in short-term proprietary trading for its own account and
(ii) sponsoring or acquiring any ownership interest in a private
equity or hedge fund. The Volcker Rule and Final Rules contain a
number of exceptions. The Volcker Rule permits transactions in
the securities of the U.S. government and its agencies, certain
government-sponsored enterprises and states and their political
subdivisions, as well as certain investments in small business
investment companies. Transactions on behalf of customers and
in connection with certain underwriting and market making
activities, as well as risk-mitigating hedging activities and certain
foreign banking activities are also permitted. The Final Rules
exclude certain funds from the prohibition on fund ownership and
sponsorship including wholly-owned subsidiaries, joint ventures,
and acquisitions vehicles, as well as SEC registered investment
companies. De minimis ownership of private equity or hedge
funds is also permitted under the Final Rules. In addition to the
general prohibition on sponsorship and investment, the Volcker
rule contains additional requirements applicable to any private
equity or hedge fund that is sponsored by the banking entity or for
which it serves as investment manager or investment advisor.
The Bancorp will be required under the Final Rules to
demonstrate that it has a Volcker Rule compliance program. In
connection with the issuance of the Final Rules, the Federal
Reserve extended the conformance period generally until July 21,
2015. The Final Rules become effective April 2014, but because