Thursday, January 20, 2011

In Letter to President, Banking Industry Seeks Increase in SEC 500-Shareholder Test and Repeal of Dodd-Frank Interchange Fee

In a letter to President Obama praising his Executive Order on repealing burdensome federal regulations, the American Bankers Association also asked that the SEC 500-shareholder threshold be raised and that the Dodd-Frank interchange fee provision be repealed. Codified as Section 1075 of Dodd-Frank, the interchange fee has been the subject of concern of leading Senators on the Banking Committee, but is strongly defended by its author, Senator Dick Durbin.

Under current SEC regulations, whenever a bank has 500 or more shareholders it must register with the SEC and become subject to a hefty and expensive SEC oversight regime on top of the oversight conducted by federal bank regulators. The ABA noted that many community banks that are approaching that threshold are intentionally refraining from seeking new investors in order to avoid the new burdens that come with SEC registration.

The 500-shareholder threshold has not been updated since 1964, noted the ABA, despite the fact that in the intervening years the stock market and the number of investors has expanded dramatically. The ABA urged that the SEC registration threshold needs to be updated to between 1500 and 3000 shareholders, in turn freeing up community banks to seek new investors without also inviting major new SEC regulatory burdens.

Regarding the interchange fee provision of Dodd-Frank, the ABA observed that this was not part of the Administration’s proposed financial regulatory reform package. It was added by an amendment sponsored by Senator Durbin, requiring the Fed to issue three final rules on interchange fees regarding a reasonable and proportional debit fee structure, fees for fraud prevention on debit transactions, and debit transaction network fees. There is a statutory exemption for small issuers under $10 billion in assets from the new debit fee rules.

While Section 1075 ostensible exempts community banks, said the ABA, it is clear that the markets will not long tolerate paying higher interchange fees to community banks than the levels set by the Fed. This rule must be stopped, emphasized the ABA, so that markets can continue to set interchange fees, especially before the price controls cut into the earnings of community banks and undermine the viability of their financial services. In the meantime, the ABA urged the Fed to include in its price control calculations the cost of all the elements that operate to make debit interchange services available to customers.

In a recent letter to the Fed, thirteen US Senators expressed concern with the consequences of replacing a market-based system for debit card acceptances with a government-controlled system pursuant to Section 1075 of the Dodd-Frank Act. The senators said that having the government fix prices in any venue is a bad idea. As the Fed implements Section 1075, the senators want to ensure that all costs to the issuers and economic value to the merchants are considered in the regulations. The senators urged the Fed to take the time to consider all the implications of implementing Section 1075 and exercise the discretion granted by Dodd-Frank to minimize negative consequences. The letter was signed by Senator Richard Shelby (R-AL), the Banking Committee’s Ranking Member, and two influential members of the committee, Senators Mark Warner (D-VA) and Bob Corker (R-TN).

But on the last day of the 111th Congress, Senator Dick Durbin (D-Il) strongly defended the interchange fee reform provisions against a growing chorus of concern and some criticism. Describing the current interchange system as a price-fixing scheme, the senator, who authored Section 1075, said that he is ``hunkered down and ready for the fight that is coming.’’ (Cong. Record, Dec. 22, 2010, S10995-10997).

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