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Financial Services Law Insights and Observations


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  • Senate Banking Committee Seeks Perspectives of Midsized, Regional, and Large Institutions, Regulators on Economic Growth

    Federal Issues

    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 HillChief 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.

    Federal Issues Senate Banking Committee Systemic Risk Bank Regulatory Bank Supervision FDIC OCC NCUA Federal Reserve CCAR Volcker Rule

  • Germany’s Largest Bank Agrees to Fix Foreign Exchange Activities Controls and Volcker Rule Compliance Program, Fined Nearly $157 Million

    Federal Issues

    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.

    Federal Issues Enforcement Bank Compliance Volcker Rule Sanctions Federal Reserve Foreign Exchange Trading

  • Departing Federal Reserve Governor Offers Final Thoughts

    Federal Issues

    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.

    Federal Issues Federal Reserve Dodd-Frank Volcker Rule

  • Fed Outlines How Banks May Seek "Illiquid Funds" Extension Under Volcker Rule

    Federal Issues

    On December 12, the Fed announced additional details addressing the way in which banking entities may seek an extension of the July 21, 2017 deadline by which they are to divest assets that are not permitted by the Volcker Rule. According to the Fed, illiquid legacy investments are expected to generally qualify for deadline extensions of up to five years, as long as the company has made appropriate efforts to deal with those investments, has an adequate compliance program, and the Fed is not concerned that the company is attempting to evade the deadline. The Fed has also made available both a Supervision and Regulation Letter (SR 16-18) and a statement of policy that describe its expectations when an application for an extension is submitted.

    Federal Issues Banking Compliance Volcker Rule

  • OCC Seeks Comments on Volcker Rule Reporting, Recordkeeping, and Disclosure Requirements

    Federal Issues

    On November 18, OCC published a notice seeking comments on various reporting, recordkeeping, and disclosure requirements associated with its regulations that implemented the Volcker Rule. Among other things, the OCC is seeking comments on: (i) whether the information sought is necessary for the OCC to perform its supervisory functions; (ii) the accuracy of the OCC’s estimate of the information collection burden; (iii) ways to enhance the quality, utility, and clarity of the information to be collected while also minimizing the collection burdens on respondents; and (iv) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide the information. Comments must be submitted on or before January 17, 2017.

    Federal Issues Banking Consumer Finance Dodd-Frank OCC Disclosures Volcker Rule

  • Republicans Attempt to Replace the Dodd-Frank Act with the Financial CHOICE Act

    Consumer Finance

    On June 7, House Financial Services Committee Chairman Jeb Hensarling (R-TX) released details of the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act, a Republican proposal to dismantle the Dodd-Frank Act. According to Chairman Hensarling’s remarks delivered to the Economic Club of New York, “Dodd-Frank has failed.” The goals of the proposed plan are: (i) to promote economic growth through competitive, transparent, and innovative capital markets; (ii) to provide the opportunity for every American to achieve financial independence; (iii) to protect consumers from fraud and deception as well as the loss of economic freedom; (iv) to end taxpayer bailouts of financial institutions and too big to fail institutions; (v) to manage systemic risk; (vi) to simplify in order to prevent powerful entities from taking advantage of complexity in the law; and (vii) to hold Wall Street and Washington accountable. Importantly, Section Three (“Empower Americans to achieve financial independence by fundamentally reforming the CFPB and protecting investors”) proposes, among other things, to replace the current single director structure of the CFPB with a five-member, bipartisan commission subject to congressional oversight and appropriations. Section Three further proposes to repeal indirect auto lending guidance. As part of its goal to end “too big to fail” institutions and bank bailouts, Section Two of the Act proposes to retroactively repeal FSOC’s authority to designate firms as systematically important financial institutions. Finally, in an effort to “unleash opportunities for small businesses, innovators, and job creators by facilitating capital formation,” Section Six of the Act proposes to repeal the Volcker Rule, along with other sections and titles of Dodd-Frank that limit capital formation.

    CFPB Dodd-Frank SEC U.S. House Volcker Rule

  • U.S. House Approves Volcker CLO Fix


    On April 29, the U.S. House of Representatives passed by voice vote HR 4167, a bill that would exclude certain debt securities of collateralized loan obligations (CLOs) from the so-called Volcker Rule’s prohibition against holding an ownership interest in a hedge fund or private equity fund. Section 619 of the Dodd-Frank Act—the Volcker Rule—generally prohibits insured depository institutions and their 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. As implemented, that prohibition would cover CLOs, which banks and numerous lawmakers assert Congress never intended for the Volcker Rule to cover. Earlier in April, the Federal Reserve Board issued a statement that it intends to exercise its authority to give banking entities two additional one-year extensions, which would extend until July 21, 2017, to conform their ownership interests in, and sponsorship of, covered CLOs. HR 4167 instead would provide a statutory solution by exempting CLOs issued before January 31, 2014 from divestiture before July 21, 2017.

    Dodd-Frank Federal Reserve U.S. House Volcker Rule

  • Federal Reserve Board Announces Volcker CLO Conformance Period Extension

    Consumer Finance

    On April 7, the Federal Reserve Board issued a statement that it intends to exercise its authority to give banking entities two additional one-year extensions to conform their ownership interests in, and sponsorship of, certain collateralized loan obligations (CLOs) covered by federal regulations implementing Section 619 of the Dodd-Frank Act, the so-called Volcker Rule. Section 619 generally prohibits insured depository institutions and their 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 Board previously adopted rules for the conformance period for covered funds—including CLOs—and at that time extended the conformance period for all activities and investments by one year, to July 21, 2015. But to ensure effective compliance, the Board plans to grant banking entities two additional one-year extensions, until July 21, 2017. These extensions only apply to CLOs that were in place as of December 31, 2013 and do not qualify for the exclusion in the final rule for loan securitizations. The Board’s decision was challenged during a House Financial Services Committee hearing the following day, in which several lawmakers argued that Congress never intended for the Volcker Rule to cover securitizations, including CLOs. The lawmakers urged the Federal Reserve to address the issue by amending the rule to exclude or grandfather in CLOs, rather than by extending the conformance period.

    Federal Reserve Volcker Rule

  • Regulators Alter Volcker Rule On TruPS CDOs

    Consumer Finance

    On January 14, the Federal Reserve Board, the CFTC, the SEC, the OCC, and the FDIC issued an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) from the investment prohibitions of section 619 of the Dodd-Frank Act, known as the Volcker rule. The change allows banking entities to retain interest in or sponsorship of covered funds if (i) the TruPS CDO was established, and the interest was issued, before May 19, 2010; (ii) the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral; and (iii) the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies finalized the Volcker Rule. With the interim rule, the Federal Reserve, the OCC, and the FDIC released a non-exclusive list of qualified TruPS CDOs. The rule was issued in response to substantial criticism from banks and their trade groups after the issuance of the final Volcker Rule, and followed the introduction of numerous potential legislative fixes. On January 15, the House Financial Services Committee held a hearing on the impact of the Volcker rule during which bankers raised concerns beyond TruPS CDOs, including about the rule’s potential impact on bank investments in other CDOs, collateralized mortgage obligations, collateralized loan obligations, and venture capital. Committee members from both parties expressed an interest in pursuing further changes to the rule, including changes to address the restrictions on collateralized loan obligations.

    FDIC Federal Reserve OCC SEC CFTC Volcker Rule Agency Rule-Making & Guidance

  • House, Senate Bills Seek To Ease Volcker Rule Impact On TruPS CDOs

    Consumer Finance

    On January 8, House Financial Services Committee chairman Jeb Hensarling (R-TX) and committee member Shelly Moore Capito (R-WV) introduced a bill, H.R. 3819, that would clarify that the Volcker Rule will not require banking institutions to divest their ownership in Trust Preferred Securities (TruPS) collateralized debt obligations (CDOs) that were issued before the date of the final Volcker Rule, December 10, 2013. A group of Republican Senators also announced a bill, the text of which was not immediately available. As recently reported, federal regulators are reviewing whether it is appropriate and consistent with the Dodd-Frank Act to fully exempt TruPS CDOs from the Volcker Rule prohibitions on ownership of covered funds. On January 7, a group of House Democrats sent a letter to the regulators urging them to exempt banks with less than $15 billion in assets from the Volcker TruPS CDO divestiture requirement.

    U.S. Senate U.S. House Community Banks Volcker Rule


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