Changes in US Financial Regulation Drive Firms to Rethink Divestment – Ernst & Young

Lucas Gilmore, “Big 4″ observer
November 09, 2010 /

Financial institutions began to reconsider planning for and executing divestiture after the July reform has warned against a more complex transaction, promising for a time-consuming regulatory reporting, capital leverage and liquidity requirements, the Ernst & Young LLP’s Transaction Advisory Services reported.

The recent shake-up in the landscape of US financial regulatory regime compels the financial sector to reassess divestments with financial services companies, causing those that abide by specific deadlines in divestiture to spend more time and resources ahead to do so.

The new changes in the US financial regulatory regime will need to set a way for a smooth transition to save the entire financial system from sustaining a shock that may arise from any unwanted disorderly resolution plan. Hypothetical divestiture contingency plans may help firms in examining various possible results, in addition to laws that allow for an orderly liquidation process of non-bank financial firms nearing the verge of collapse. The law mandates FDIC under the supervision of the Treasury Secretary to do the liquidating of these financial firms.

This suggests that planning for divestiture calls for these financial firms to redirect their focus on legal entity-level and operating concerns.

The Volcker Rule requires all bank investments in hedge funds and private equity funds to be less than 3% of their Tier 1 capital, and no more than 3% of any one fund’s total ownership interest. Merger and Acquisition activity is likely to be affected by regulatory instability if financial firms do not strike a balance between reassessment and refocusing of business and establishment of capital position, Nadine Mirchandani, Partner at Ernst & Young LLP Transaction Advisory Services, pointed out.

Ernst & Young pointed out a challenge in the redistribution of assets, liabilities, and operations of one company between distinct and stand-alone entities. The transaction is especially designed such that both the company and the shareholders would be free of tax liabilities, offering divestiture advantages.

 

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