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OCC publishes bank guidance on shortening the standard settlement cycle following SEC final rule
On January 17, the OCC issued its OCC Bulletin 2024-3 which highlighted the actions banks should take to prepare for the upcoming changes to the standard settlement cycle. These new changes are designed to “reduce the credit, market, and liquidity risks” in securities transactions. According to the OCC Bulletin, these banking rules follow the SEC’s final rule that shortened the standard settlement cycle from the second business day after the trade (T+2) to the first business day after the trade (T+1). As previously covered in InfoBytes, the settlement cycle was last shortened from (T+3) days to (T+2) days in 2018. The OCC encouraged banks to prepare for the T+1 change since it will affect many banking activities; accordingly, the OCC listed many factors that a bank’s management should consider when identifying systems and changes to enhance.
This Bulletin replaces and rescinds OCC Bulletin 2017-22 and OCC Bulletin 2018-05, both related to the shortening of the settlement cycle. The rules will go into effect on May 28, 2024, and the OCC expects banks to be prepared by then.
NYDFS pens guidance for vetting key senior officials within financial institutions
On January 22, NYDFS issued an industry letter titled “Guidance on Assessment of the Character and Fitness of Directors, Senior Officers, and Managers” for banks and other financial institutions (Covered Institutions) to notify them of NYDFS’s expectations. The final guidance came after a review process conducted over the past year where twenty comments indicated the need for Covered Institutions to build “robust character and fitness” policies. NYDFS asked that these Covered Institutions develop and maintain a framework to vet senior officials’ character and fitness during onboarding and on a regular basis.
According to the guidance, each Covered Institution is expected to “define sensitive issues, warning signs, and other indicators” that would be cause for concern. The depth and nature of each Covered Institution’s assessment is tailored to each institution, and the guidance does not demand a defined period for the review, but NYDFS supplied a list of suggested questions for Covered Institutions to use as best practices for vetting key individuals. (These questions are not mandated, however.) NYDFS noted that Covered Institutions are expected to review materials related to the character and fitness assessment of key persons. The guidance’s appendix lists suggested questions, including whether the key person has reviewed and understood pertinent policies and whether the interviewee has ever been charged or convicted of a crime or has previously been sanctioned or censured by a securities regulator.
OCC releases January enforcement actions
On January 17, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included is a notice of charges seeking cease and desist orders against three subsidiary banks of the same bank holding company (see here, here, and here), which alleged that each bank engaged in unsafe or unsound practices relating to an investment strategy concentrated in long-term securities. The unsafe practices, the OCC explained, exposed each bank to excessive interest rate risk without adequate sources of contingency funding and contingency capital. The OCC further alleged that each bank failed to mitigate such risk in a timely manner.
Fed Governor Bowman highlights her 2024 “New Year’s resolutions” for banking policymakers
On January 8, member of the Federal Reserve Board of Governors Michelle W. Bowman delivered a speech at a community bankers conference on the banking regulatory highlights of 2023, as well as three “New Year’s resolutions” that she would like to see policy makers implement in 2024. The speech first covered highlights of this past year’s banking regulatory environment, including the changes in the federal funds rate, the risk of inflation among food and energy markets, the Basel III Endgame requirements, and new guidance on third-party risk management practices.
Governor Bowman also highlighted her list of three New Years Resolutions, including (i) prioritizing banking safety and soundness; (ii) a renewed commitment to tailoring the prudential regulatory framework to the size of the institution; and (iii) increasing transparency in supervisory expectations. Bowman also focused on the new climate guidance, as covered by InfoBytes here, which she posits a lost focus by the federal banking agencies. Bowman closed by commenting on the lasting impact of changes to the banking system and bank regulatory framework, requesting that bankers and other interested stakeholders to share their views and concerns broadly, including to regulators, and expressing her hope that policymakers have the humility and courage to acknowledge consequences and change course as needed.
OCC issues State Small Business Credit Initiative 2.0 FAQs
On January 8, the OCC issued Bulletin 2024-1, which provides responses to frequently asked questions regarding the state small business credit initiative (SSBCI). The SSBCI, run by the U.S. Department of the Treasury, facilitates access to capital for small businesses, supports credit and investment programs, and offers technical assistance for applying to SSBCI funding and other government programs. The FAQs address a variety of topics, including the types of credit and investment programs states may set up, including collateral support programs, capital access programs, and loan guarantee programs, among others; criteria to qualify as “underserved” for access to the credit; treatment of certain funds; program descriptions; and whether loans made through the program could be considered for Community Reinvestment Act purposes.
Fed’s Barr speaks at fireside chat, underscores the importance of public comment
On January 9, Fed Vice Chair of Supervision Michael S. Barr delivered remarks at an event held by Women in Housing and Finance, during which he discussed consumer credit, bank supervision, DEI issues, capital issues, bank regulation and more. Barr began by addressing current risks that the Fed is focused on mitigating, which included efforts surrounding the Community Reinvestment Act final rule and the Basel III Endgame proposal. The Fed, he said, has been receiving many comments on the proposal, which will help ensure the “balance” is right on the final capital rule. There is one more week before the comment period closes, he added.
Barr also discussed the second quantitative impact study the Fed is conducting to ensure accuracy and help shape the final version of the Basel III proposal. He noted that the Fed conducted the first study a “few years ago” to inform the first proposal. He mentioned that the Fed is collecting information and will be publishing their aggregated analysis for public comment. Barr also discussed comments considering whether the Fed should adjust for historical losses based on particular firms, or if there should be standardized accountability for all risk.
In response to questions from the moderator, Barr opined that the capital rules in the Basel III proposal would have a modest impact on the affordability and accessibility of mortgage credit and consumer credit. He conceded that the proposal’s impact would create higher costs, but that the impacts on consumers would be “very very small.” Barr also invited commenters to inform the Fed about the impacts. On international competition, Barr also noted that the higher capital standards would not detrimentally impact the U.S. banking system.
When asked about the Fed’s Bank Term Funding Program, made available by the Fed, FDIC, and Treasury last spring, Barr said banks and credit unions are still leveraging the program today. He explained that the “program was really designed in that emergency situation … to make sure that banks[,] and creditors of banks[,] and depositors [in] banks understand that banks have the liquidity they need.”
Agencies adjust civil money penalties for 2024
Recently, the CFPB, NCUA, FDIC, FTC, and OCC provided notice in the Federal Register of adjustments to the maximum civil money penalties due to inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996 and further amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Each notice or final rule (see CFPB here, FDIC here, OCC here, FTC here, and NCUA here) adjusts the maximum civil money penalties available and documents the inflation-adjusted maximum amounts associated with the penalty tiers for each type of violation within a regulator’s jurisdiction. For violations occurring on or after November 2, 2015, the OCC’s adjusted maximum penalties go into effect as of January 8; the CFPB and FDIC’s adjustments go into effect January 15; and the FTC and NCUA’s adjustments go into effect January 10.
FDIC releases November enforcement actions
On December 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in November. The FDIC made 12 orders public including, “five consent orders, three prohibition orders, two orders terminating consent orders, one order to pay a civil money penalty (CMP), and one order dismissing both a notice of assessment of CMPs and an order to pay.” Included is a stipulated order and written agreement with a Tennessee-based bank (the Bank) to resolve alleged violations of the Bank Secrecy Act (BSA) and weaknesses in board and management oversight of its information technology function. The Bank agreed to the conditions of the consent order which requires the Bank to, among other things (i) establish an action plan to correct the bank’s Anti-Money Laundering/Countering the Financing for Terrorism (AML/CFT) program deficiencies and alleged violations; (ii) retain qualified IT management; (iii) perform a cybersecurity assessment; and (iv) designate someone responsible for coordinating and monitoring day-to-day compliance with the BSA.
Agencies update the Uniform Rules of Practice and Procedure
On December 28, 2023, the Fed, OCC, FDIC, and NCUA published a final rule amending the Uniform Rules of Practice and Procedure to recognize the use of electronic communications and enhance the efficiency and equity of administrative hearings. The agencies have implemented measures recognizing the role of electronic communications across all facets of administrative proceedings. Among other things, the final rule (i) defines “electronic signature” in the Uniform Rules; (ii) codifies permitting electronic service and filings for administrative actions; (iii) allows for remote depositions; (iv) includes Equal Access to Justice Act procedures based on the 2019 Administrative Conference of the United States Model Rule; (v) adds provisions on when parties must pay civil money penalties; (vi) adds specific provisions pertaining to the forfeiture of a national bank, federal savings association, or federal branch or agency charter or franchise due to certain money laundering or cash transaction violations; (vii) modifies the discovery rules to recognize electronic documents and allow for electronic production; (viii) establishes new rules for expert and hybrid fact-expert witnesses; and (ix) consolidates the Uniform Rules and Local Rules for national banks and federal savings associations.
Additionally, the OCC has revised its specific administrative practice and procedure regulations to harmonize rules for national banks and federal savings associations. Furthermore, adjustments were made to the OCC’s regulations on organization and operations to encompass service of process considerations.
The rule is effective April 1, 2024.
OCC announces CRA bank asset-size threshold adjustments for 2024
On December 26, 2023, the OCC announced revisions to the asset-size thresholds used to define small and intermediate small banks and savings associations under the Community Reinvestment Act (CRA). Effective January 1, 2024, a small bank or savings association will mean an institution that, as of December 31 of either of the past two years, had assets of less than $1.564 billion. An intermediate small bank or savings association will mean an institution with assets of at least $391 million as of December 31 of both of the prior two years, and less than $1.564 billion as of December 31 of either of the prior two years. As previously covered by InfoBytes, the Fed and the FDIC also announced joint annual adjustments to the CRA asset-size thresholds used to define “small bank” and “intermediate small bank.”