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OCC, Federal Reserve Solicit Public Comments on Volcker Rule
On August 2, the OCC announced it is seeking public comments on ways to improve regulations implementing the Volcker Rule, however the agency stressed it is not seeking comment on changes to the underlying statute. The draft notice outlines issues with the rule, which bans banks from engaging in proprietary trading and restricts their ownership of certain funds, explaining that there is “broad recognition that the final rule [implementing the Volcker Rule] should be improved both in design and in application.” Referring to the Treasury Department’s June 2017 report, which identified problems with the design of the final rule and offered recommendations for revision, the OCC’s notice asked for suggestions on how to improve implementation with the understanding that any revisions would require a joint undertaking by the OCC, Board of Governors of the Federal Reserve System, the FDIC, and consultation with the SEC and the CFTC. Specifically, the notice seeks comments in the following four areas: (i) scope of entities subject to the final rule; (ii) proprietary trading prohibitions; (iii) covered fund prohibitions; and (iv) requirements for compliance program and metrics reporting.
Comments must be received within 45 days from publication in the Federal Register.
Separately, on August 2, the Board of Governors of the Federal Reserve System (Fed) issued a notice seeking comment on whether to extend for three years the Reporting, Recordkeeping, and Disclosure Requirements Associated with Proprietary Trading and Certain Interests in and Relationships with Covered Funds (Regulation VV). Regulation VV imposes information reporting requirements on certain banks engaged in significant trading activities, to ensure compliance with the Volcker Rule. Among other things, the Fed invited comment on whether the proposed collection of information is necessary and has practical utility, and ways to enhance the quality, utility, and clarity of the collected information, while minimizing the burden on respondents. In its notice, the Fed stated that the information collection “is required in order for covered entities to obtain the benefit of engaging in certain types of proprietary trading or investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund, under the restrictions set forth in [the Volcker Rule].”
Comments must be received by October 2, 2017.
Treasury Secretary Mnuchin Testifies Before House Financial Services Committee, Provides Overview of Tailored Regulatory Approach
On July 27, the House Financial Services Committee held a hearing entitled “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.” Committee Chairman Jeb Hensarling (R-Tx.) opened the full committee hearing asserting that “the unaccountable Washington bureaucracy must finally be held accountable, [and we] must address the regulatory cost of doing business in the U.S. under Dodd-Frank.” Rep. Hensarling commended President Trump’s Executive Order establishing the core principles for regulating the U.S. financial system and called it “vitally important to us all.”
Treasury Secretary Steven T. Mnuchin was the only witness at the June 27 hearing, offering testimony and answering questions concerning, among other things, (i) praise for the Committee’s passage of the Financial CHOICE act; (ii) tailoring capital requirements for small, mid-sized, and region banks; (iii) identifying a “single, lead regulator” to reduce regulatory overlap; (iv) remedying the Volcker Rule; (v) making the CFPB more accountable through statutory changes; (vi) reforming housing finance, noting that the current system, “in which the GSEs remain in perpetual Federal Housing Finance Agency conservatorship . . . is not sustainable and leaves taxpayers at risk”; and (vii) addressing tax reform.
Regulators Coordinate Review of Volcker Rule Application to Foreign Funds
On July 21, five U.S. financial regulators announced that they would not take action against foreign banks for qualifying foreign excluded funds, subject to certain conditions, under the Volcker Rule for a period of one year as they review the treatment of these types of funds under current implementing regulations. The regulators, which include the Federal Reserve Board, FDIC, OCC, SEC, and Commodity Futures Trading Commission, issued a joint statement to address concerns raised as to whether certain foreign excluded funds may fall within the definition of “banking entity” under the Bank Holding Company Act and therefore be subject to the Volcker Rule.
“A number of foreign banking entities, foreign government officials, and other market participants have expressed concern about the possible unintended consequences and extraterritorial impact of the Volcker Rule and implementing regulations for certain foreign funds,” according to the joint statement. The regulators noted that the review will allow time to consider the appropriate course of action to address these concerns, including whether congressional action may be necessary.In addition, the regulators stressed that the joint statement “does not otherwise modify the rules implementing section 619 [of the Dodd-Frank Act] and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities.”
Treasury Announces FSOC Executive Session on July 28
On July 21, the Treasury Department announced that on Friday, July 28, Secretary Steven T. Mnuchin will preside over an executive session of the Financial Stability Oversight Council (FSOC). According to a Treasury press release, the preliminary agenda includes:
- a discussion about Volcker Rule recommendations presented in the Treasury’s June 2017 report, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions”;
- an update on annual reevaluation requirements for designating nonbank financial companies; and
- a discussion regarding pending litigation brought against FSOC.
Consistent with FSOC’s transparency policy, the meeting may be made available via live webcast and can be viewed after it occurs. Meeting minutes for the most recent FSOC meetings are generally approved at the next meeting and posted online soon afterwards.
Meeting minutes for past meetings are available here.
Readouts for past meetings are available here.
Senate Banking Committee Seeks Perspectives of Midsized, Regional, and Large Institutions, Regulators on Economic Growth
On June 15, the Senate Committee on Banking, Housing, and Urban Affairs (Committee) held a hearing entitled, “Fostering Economic Growth: Midsized, Regional and Large Institution Perspective”. This is the third in a series of hearings to address economic growth. Frequent topics of discussion in the hearing included stress testing and capital planning—specifically the Federal Reserve’s Comprehensive Capital Analysis and Review stress test. Also discussed was the Systemically Important Financial Institution designation and costs incurred as a result, as well as the Volcker Rule.
Sen. Mike Crapo (R-Idaho), Chairman of the Committee, remarked in his opening statement that the current regulatory framework is “insufficiently tailored for many of the firms subject to it.”
Sen. Sherrod Brown (D-Ohio) – ranking member of the Committee—released an opening statement in which he stated “Let me be clear: proposals to weaken oversight of the biggest banks have no place in this committee’s process. . . Having said that, I am optimistic that there is room for agreement on a modified regime for overseeing regional banks.”
The June 15 hearing—a video of which can be accessed here—included testimony from the following witnesses:
- Mr. Harris Simmons, Chief Executive Officer and Chairman of Zions Bancorporation, on behalf of the Regional Bank Coalition (prepared statement)
- Mr. Greg Baer, President of The Clearing House Association (prepared statement)
- Mr. Robert Hill, Chief Executive Officer of South State Corporation, on behalf of the Midsize Bank Coalition of America (prepared statement)
- Ms. Saule Omarova, Professor of Law at Cornell University Law School (prepared statement)
On June 22, the Senate Banking Committee held another hearing entitled “Fostering Economic Growth: Regulator Perspective, the fourth in its series of hearings focusing on economic growth. The hearing is available via webcast here.
Financial CHOICE Act of 2017 Approved by House Financial Services Committee
On May 4, GOP efforts to overhaul existing financial regulations took a step forward as the House Financial Services Committee approved H.R. 10, a revised version of the “Financial CHOICE Act of 2017” in a party-line vote, 34-26. The vote concluded a two week period that included both a three-day markup, of the GOP-backed legislation—during which several Democrat committee members sought, unsuccessfully, to remove various provisions of the bill—and, a two-day hearing that included testimony from 18 different witnesses.
Originally introduced by Committee Chairman Jeb Hensarling (R-TX) in September 2016, the main focus of the CHOICE Act was to give financial institutions the option of avoiding many of the rules set up by the 2010 Dodd-Frank law if they maintain a high level of capital and are “well-managed” as defined in the bill. The legislation, if enacted, would also end the Dodd-Frank Act’s taxpayer-funded bailouts of large financial institutions and would impose greater penalties on those who commit fraud and insider trading, while also demanding greater accountability from banking regulators. A summary of changes incorporated in the latest iteration of the proposed legislation—recently referred to as “CHOICE Act 2.0”—was released by the Committee last week and included, among other things:
- the elimination of the CFPB supervisory and examination authority;
- a restructuring of the CFPB, FHFA, OCC, and FDIC into bipartisan commissions appointed by the President;
- an opt-out of many regulatory requirements for banks and other financial institutions if they maintain a 10% leverage ratio (among other conditions);
- subjecting the federal banking regulators to greater congressional oversight and tighter budgetary control;
- reforms in bank stress tests;
- materially reducing the authority of the Financial Stability Oversight Council (FSOC) and the establishment of a new process of identifying financial institutions as "systemically important";
- a repeal of the Orderly Liquidation Authority and the creation of a new bankruptcy process for banks;
- a repeal of the Volcker Rule; and
- facilitated capital raising by small companies, including through crowd-funding.
Looking ahead, the House could vote to pass the bill later this month. While a party-line vote would pass the House, the bill will likely need to pick up a minimum of 60 votes—including support from several Democrats—in order for it to pass in the Senate.
Comptroller Curry Shares Departing Thoughts on the Fintech “Wave of Innovation” at Conference
In prepared remarks delivered on April 28 at a fintech conference hosted by Northwestern University, Thomas J. Curry—who on May 5, will be stepping down from his role as Comptroller after completing his five-year term—took the opportunity to “share [his] perspective on where financial innovation is today,” as well as what he believes the OCC “is doing to encourage responsible innovation within the banking system.” In so doing, the departing Comptroller also addressed some of the criticism received by the OCC over its recent efforts to move forward with developing a special purpose national bank charter for fintech companies. (See related InfoBytes coverage here.) Among other things, Curry noted that, for him, “one of the most exciting parts of this [fintech] wave of innovation is the potential for technology to expand access to the unbanked and underserved, in the same way that the Internet helped democratize information.” On this point, he explained further that “[d]ata from the FDIC and others show that minorities and other traditionally underserved populations may embrace fintech at even higher rates than the general population.” The outgoing Comptroller also highlighted several ways the OCC’s Office of Innovation is already working to enhance the delivery of financial products and make banking more efficient, including, for instance, its recently-unveiled “Office Hours” initiative, which was created to provide a new means by which stakeholders can seek regulatory guidance. Curry did, however, caution the audience about the importance of proceeding “cautiously,” so as to avoid “compromis[ing] the integrity of the banking system” and/or “allow[ing] untested products to result in unintended consumer harm.”
According to an OCC press release, Curry will be replaced by Keith Noreika, who is slated to become Acting Comptroller of the Currency on May 5, until President Trump appoints, and the Senate confirms, a new comptroller. Noreika began his career in private practice and has advised banks on Volcker Rule, Bank Secrecy Act, and consumer protection regulation compliance and has worked extensively with all of the federal bank regulatory agencies.
Germany’s Largest Bank Agrees to Fix Foreign Exchange Activities Controls and Volcker Rule Compliance Program, Fined Nearly $157 Million
On April 20, the Federal Reserve issued two separate enforcement actions against a major German global bank and its subsidiaries for allegedly failing to have appropriate controls to ensure that the bank’s foreign exchange activities (Covered FX Activities) were in compliance and also allegedly failing to have an adequate compliance program to ensure its traders abided by the Volcker Rule’s requirements. The combined sanctions total almost $157 million in civil money penalties.
Covered FX Activities. According to the Fed’s cease and desist order, the Board of Governors’ investigation, covering October 2008 through October 2013, found deficiencies in the bank’s governance, risk management, compliance, and audit policies and procedures. Specifically, FX traders communicated through chatrooms with traders at other financial institutions, but due to deficient policies and procedures, the bank failed to detect and address such “unsafe and unsound conduct.” Under the terms of the order, the bank is required to submit the following: (i) a written plan to improve senior management’s oversight of the bank’s compliance with applicable U.S. laws and regulations and applicable internal policies in connection with its foreign exchange activities; (ii) an enhanced written internal control and compliance program designed to monitor and detect potential misconduct; and (iii) a written plan to improve its compliance risk management program with applicable U.S. laws and regulations with respect to foreign exchange activities. In addition, the bank must pay a $136.9 million civil money penalty.
Volcker Rule. That same day the Fed also issued a consent order to the bank for allegedly failing to establish a compliance program reasonably designed to ensure and monitor compliance with Volcker Rule requirements. The Volker Rule prohibits insured depository institutions and affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The consent order’s findings were based on a Volcker Rule CEO attestation, “which identified the existence of weaknesses in the [bank’s] Volcker Rule compliance program, including, among other things, certain governance, design, and operational deficiencies across key compliance pillars and the design of reporting mechanisms.” Moreover, the Board of Governors’ determination was based on, among other things, (i) “significant” gaps in the bank’s compliance program which resulted in deficiencies in the scope of independent testing efforts; (ii) “significant” weaknesses in the bank’s demonstrable analyses “showing that its proprietary trading is not to exceed the reasonably expected near term demands of clients, customers, or counterparties—[referred to as “RENT-D”]—required for permitted market-making activities,”; and (iii) weakness in the bank’s metrics reporting and monitoring process which, when combined with the aforementioned, “limited the [b]ank’s ability to adequately monitor trading activity.” Under the terms of the consent order, the bank is required to submit a written plan to improve senior management’s oversight of the firm’s compliance with Volcker Rule requirements. It must also submit enhanced written internal controls and compliance risk management program measures. These submissions are in addition to paying a $19.71 million civil money penalty.
House Financial Services Committee to Discuss the “Financial CHOICE Act” at April 26 Hearing
On April 19, House Financial Services Committee Chairman Jeb Hensarling (R-TX) announced that the Committee will hold a hearing to discuss the Financial CHOICE Act next Wednesday, April 26. Touted as a potential replacement for the Dodd-Frank Act, the proposed new law—which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs—was unveiled last June by Chairman Hensarling in a speech to the Economic Club of New York and was subsequently approved by the Committee last September. The hearing will focus on an updated discussion draft of the bill at next Wednesday’s hearing.
If enacted, the Financial CHOICE Act would, among other things, tailor a bank’s supervision to its risk profile/business model and provide for an independent exam appeals process, while also providing for and imposing more stringent penalties in cases of fraud or deception. Other provisions of the bill would repeal the Volcker Rule, strip the CFPB of its examination powers, and “UDAAP” enforcement authority and also discontinue small business loan data collection. And, finally, the Act would bring the CFPB, FDIC, OCC, FHFA, NCUA, and the Fed’s supervisory functions under the congressional appropriations process, thereby mandating a cost-benefit analysis and, in some cases, congressional approval prior to the release of any new regulations.
According to a press release from GOP Committee members, the proposed new law is based upon two central principles: (i) “all banks need to be well-capitalized” but (ii) “Dodd-Frank’s one-size-fits-all regulations . . . make[] no sense and hurt[] smaller, hometown banks and credit unions that did nothing to cause the last financial crisis.” To this end, the Financial CHOICE Act seeks to ease capital standards for community banks and credit unions that “elect to maintain enough capital to ensure that if they get in trouble, taxpayers won’t be forced to bail them out.” Meanwhile, offering a very different response to the release of an updated draft of the bill, Maxine Waters (D-CA), the Ranking Member of the Financial Services Committee, released a statement reiterating numerous objections to what she terms “the Wrong Choice Act.” Among other things, Rep. Waters argues that the proposed law “prioritize[s] the needs of Wall Street over the needs of hard-working Americans,” and “would take away much needed protections and put our economic security at risk.”
Departing Federal Reserve Governor Offers Final Thoughts
On April 4, outgoing Federal Reserve Governor Daniel K. Tarullo presented his departing thoughts on the Fed’s response to the “worst recession since the Great Depression.” In his speech, Tarullo discussed the Fed’s initial post-crisis regulatory response and how it addressed the “too-big-to-fail” concept—positing that the “quick action in assessing the firms, recapitalizing them where needed, and sharing the results of the stress tests with the public stands as one of the turning points in the crisis.” On the subject of the Dodd-Frank Act, Tarullo noted that “partisan divisions” have prevented necessary substantive enhancements from being made, such as changing various thresholds to narrow the scope of strict prudential requirements and relieve the burdens placed on small community banks, and changing the Volcker Rule to make it less complicated. Tarullo summarized his position by stating that “[e]ight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system” and that furthermore, “it is crucial that the strong capital regime be maintained, especially as it applies to the most systemically important banks. Neither regulators nor legislators should agree to changes that would effectively weaken that regime, whether directly or indirectly.” Tarullo’s last day at the Fed was April 5.