Financial Overhaul Bill Clears Senate With Provisions Affecting Commercial Real Estate; Bicameral Negotiations to Begin Soon
Sweeping financial reform legislation approved by the Senate last night includes securitization, derivatives, and other provisions affecting commercial real estate. The Senate is expected to vote Monday on instructions for Senate conferees, who will negotiate with House lawmakers to reconcile differences between the two versions. House Financial Services Committee Chairman Barney Frank (D-MA) said he hopes for completion of a final compromise bill by June 30.
Commercial real estate-related provisions in the Senate bill include:
• Securitization /“Skin in the Game” reforms:
In a victory for our industry, the Senate last week voted to amend proposed new “skin-in-the-game” / risk-retention requirements for entities involved in securitization — and this language was approved as part of the final bill last night. The amendment, offered by Sen. Mike Crapo (R-ID), allows regulators to choose the most appropriate form of credit risk retention for commercial real estate, essentially “customizing” the retention requirement for the commercial mortgage market and granting regulators flexibility to structure the skin-in-the-game mandate in several ways. This includes a percent retention, adherence to underwriting standards and controls, or improved reps and warranties.
Most importantly, the final, amended version of the Senate bill allows “third-party” investors (B-piece buyers, in the case of CMBS) to satisfy the new risk retention requirement. With this amendment, the Senate risk retention language is closer to that proposed by the House, and has a better chance of being retained during upcoming House-Senate conference negotiations.
• OTC Derivatives Reform
The Senate-passed overhaul also includes dramatic changes to the regulation of over-the-counter (OTC) derivatives. While the House bill would require some derivatives to be cleared to reduce the risk of nonpayment, the Senate version could force Wall Street firms and banks to keep derivatives separate from their bank units—or even spin them off entirely. The Fed, FDIC, Treasury as well as the banking industry have argued against this measure to spin off their swap-trading units into affiliates.
Although the Senate bill was amended in recent weeks to include some exemptions for certain end-users from costly margin and clearing requirements, the definition of “commercial end-user” does not include financial entities and does not provide a sufficiently clear exemption for real estate companies. The Roundtable continues to work with its partners in the Coalition for Derivatives End-Users to encourage a final agreement that protects legitimate hedging activities from these new requirements.
• “Proprietary Trading”/Volcker Rule Defeated for Now; Could Affect Banks’ Ability to Aggregate Loans Before Packaging into CMBS
The Senate bill would require regulators to issue rules to prohibit banks, bank holding companies and their subsidiaries from engaging in proprietary trading or from acquiring or retaining an equity, partnership or other ownership interest in or sponsoring a hedge fund or private equity fund— the so-called Volcker rule. Limited exemptions would apply for customer-related activities and trading in government obligations. Covered entities would have 2 years after final rules are issued to conform to the new rules.
Proposals by Sen. Merkley (D-OR) and Sen. Levin (D-MI) to further tighten the proprietary trading restrictions by banks and bank holding companies were widely debated, but did not pass. Under the Volker rule, nonbank financial companies supervised by the Federal Reserve that engage in proprietary trading or acquire ownership in or sponsor a hedge fund or private equity fund would be subject to additional capital requirements and quantitative limits as determined by the Fed, in consultation with the SEC and CFTC. The provision could impact private equity fund sponsorship and the securitized credit markets — particularly the ability to hedge risk and warehouse/aggregate loans.
• Registration of Investment Advisers
The House version would require almost all advisors to private pools of capital — including hedge funds and other large private investment funds — to register with the Securities and Exchange Commission (SEC) if they have assets under management of at least $150 million. This would subject such advisors to significant disclosure and other requirements, as well as systemic risk regulation by the Financial Stability regulator. Current law generally does not require private fund advisers to register with any federal financial regulator.
The Senate bill would exempt investment advisers with less than $100 million of assets under management across all funds. It would also exempt from registration advisers to “private equity funds” (a term to be defined by the SEC). Additionally, the SEC would have to issue final rules requiring private equity fund advisers to maintain such records and reports as the SEC determines are necessary and appropriate.
Source: Real Estate Rountable