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SEC adopts HFCAA rules
On December 2, the SEC adopted a final rule regarding the submission and disclosure requirements in the Holding Foreign Companies Accountable Act (HFCAA). The final rule applies “to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board (PCAOB) is unable to inspect or investigate (Commission-Identified Issuers).” Among other things, the final rule requires: (i) Commission-Identified Issuers to submit documentation to the SEC establishing that they are not owned or controlled by a governmental entity in the public accounting firm’s foreign jurisdiction, if indeed true; and (ii) disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence” on those who register. According to the final rule, the SEC will identify Commission-Identified Issuers for fiscal years starting after December 18, 2020. Additionally, if a registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the registrant will be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022.
The same day, SEC Chair Gary Gensler released a statement noting that, “[t]he finalized rules will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the [Public Company Accounting Oversight Board] cannot completely inspect.” The rule is effective on 30 days after publication in the Federal Register.
Fed approves establishment of federally-licensed branch of Dutch payment company
On May 24, the Federal Reserve Board announced its approval of the application of a Dutch- based payment company to establish a federally-licensed branch in San Francisco. According to the order, since the company currently does not have a U.S. banking presence, its U.S. payment processing business will rely on third-party banks. Upon establishment of the San Francisco branch, the company’s operations would be transferred to the branch, and it would be eligible to engage in a wide range of payments processing and related banking activities in the U.S., thus reducing its dependence on third-party banks. Through the establishment of the branch, “the company proposes to bring its U.S. activities and operations in line with those conducted under its European Central Bank (ECB) license,” the Fed noted. The order also pointed out that “managerial and other financial resources of the company are considered consistent with approval, and the company appears to have the experience and capacity to support the proposed branch.” In addition, the company has initiated controls and procedures for its proposed branch to guarantee compliance with U.S. law and for its operations in general.
Federal Reserve Board delays changes to provision of intraday credit to foreign banks
On March 24, the Federal Reserve Board announced that it will delay planned revisions to their procedures that govern providing intraday credit to U.S. branches of foreign banking organizations. The amendments were originally approved on April 1, 2019, and were scheduled to become effective on April 1, 2020. The FRB is delaying implementation for six months, until October 1, 2020, to provide foreign banking organizations and the Federal Reserve Banks allow additional time to allow both the with additional time to focus on “heightened priorities” instead of establishing new arrangements to comply with the proposed amendments.
FDIC and Fed issue proposed living will guidance for FBOs
On March 6, the FDIC and the Federal Reserve Board issued a joint notice and request for comment on their proposal for updates to resolution plan guidance for certain large foreign banking organizations (FBOs). Pursuant to the Dodd-Frank Act, FBOs must submit resolution plans—also known as “living wills”—which detail the strategic plans for their U.S. operations and subsidiaries for rapid and orderly resolution in bankruptcy in the event that the banks fail or fall under material financial distress. Updates in the proposal focus on the FBO’s derivatives and trading activities and payment, clearing, and settlement activities and are informed by responses from FBOs to the prior 2018 FBO guidance and 2019 domestic guidance. In addition, the proposal contains an appendix of frequently asked questions with answers provided by agency staff. The agencies also seek comments “on objective, quantitative criteria to determine its applicability.” Comments must be received by May 5.
Federal Reserve vice chairman discusses supervision
On January 17, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke before the American Bar Association Banking Law Committee meeting in Washington, D.C. on bank supervision and ways to improve transparency, efficiency, and effectiveness. With respect to supervision, Quarles said that the Fed’s communication with supervised banks could be improved and made several specific proposals in the areas of large bank supervision, transparency improvements, and overall supervisory process improvements. In terms of large bank supervision, Quarles discussed how banks are added to the list of complex institutions overseen by the Large Institution Supervision Coordinating Committee (LISCC), particularly with respect to decreases in foreign banking organizations’ (FBOs) size and risk profiles. According to Quarles, over the past decade, four foreign banks have significantly shrunk their presence in the U.S. and reduced risk within their U.S. operations. As a result, these banks’ “estimated systemic impact” is now much smaller than that of the U.S. global systemically important banks. Moving these FBOs to a lower category, he noted, would allow the firms to be supervised alongside other foreign and domestic firms with similar risk profiles. However Quarles emphasized that any changes in these four FBOs’ supervisory portfolios “would have no effect on the regulatory capital or liquidity requirements that currently apply.” Quarles also discussed the Fed’s stress capital buffer proposal—which “will give banks significantly more time to review their stress test results and understand their capital requirements before we demand their final capital plan”—noting that the Fed continues to research ways to “reduce the volatility of stress-test requirements from year to year.”
Concerning transparency, Quarles stated, among other things, that he supports submitting significant supervisory guidance documents with Congress for the purposes of the Congressional Review Act, as it already does with new rules. Quarles also proposed the creation of a database of all significant agency rules and interpretations and seeking public comments on significant supervisory guidance before it is issued. Finally, Quarles said the Fed hopes to maintain “firm and fair supervision” by (i) increasing the ability of supervised firms to share confidential supervisory information; (ii) adopting a rule on the use of guidance in the supervisory process; (iii) restoring the “‘supervisory observation’ category for lesser safety and soundness issues”; and (iv) limiting the use of future Matters Requiring Attention to violations of law, violations of regulation, and material safety and soundness issues.
New Fed exam guidelines issued for FBOs
On December 12, the Federal Reserve Board (Fed) issued SR 19-15, “Revised Examination Guidelines for Representative Offices of Foreign Banks,” which is applicable to foreign banking organizations (FBOs) with U.S. representative offices (offices) subject to supervision by the Fed. According to the letter, Reserve Banks should examine offices of FBOs at least every 24 months, and ideally, at the same time as any examination of related U.S. branches or agencies. An office can be examined more often (i) based on state law examination requirements; (ii) if “supervisory concerns” exist regarding the foreign bank’s condition; and (iii) if the activities of the office are central to the FBO’s entire U.S. operations or if the office has a large number of employees. The letter provides guidelines for documentation of exam findings and for assignment of various ratings including compliance, risk management and operational controls. The Fed notes that “the type of documentation and rating should vary depending on the representative office’s activities and the significance of supervisory concerns.”
Joint Final Rules on Expanded Examination Cycle for Certain Small Insured Depository Institutions and U.S. Branches and Agencies of Foreign Banks
On January 4, 2017, the FDIC and the other federal financial institution regulatory agencies announced that they had adopted final rules permitting Insured Depository Institutions (“IDIs”) with up to $1 billion in total assets (and that meet certain other criteria) to qualify for an 18-month on-site examination cycle. The rule modification is aimed at allowing banking regulators to better focus supervisory resources on IDIs that present capital, managerial, or other issues of supervisory concern while reducing regulatory burden on small, well-capitalized and well-managed institutions.