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Financial Services Law Insights and Observations


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  • OCC reports on key risks facing the federal banking system

    On June 23, the OCC released its Semiannual Risk Perspective for Spring 2022, which reports on key risks threatening the safety and soundness of national banks, federal savings associations, and federal branches and agencies. The OCC reported that as “banks continue to navigate the operational- and market-related impacts of the pandemic along with substantial government stimulus, current geopolitics have tightened financial conditions and increased downside risk to economic growth.” However, the OCC noted that banks’ financial conditions remain strong and that banks are well-positioned to “deal with the economic headwinds arising from geopolitical events, higher interest rates and increased inflation.”

    The OCC highlighted operational, compliance, interest rate, and credit risks as key risk themes in the report. Observations include: (i) operational risk, including evolving cyber risk, is elevated, with an observed increase in attacks on the financial services industry given current geopolitical tensions; (ii) compliance risk remains heightened as banks navigate the current operational environment, regulatory changes, and policy initiatives; and (iii) credit risk remains moderate, with banks facing certain areas of weakness and potential longer-term implications resulting from the Covid-19 pandemic, inflation, and direct and indirect effects of the war in Ukraine. Staffing challenges among banks also present risks, with challenges posed by “strong competition” in the labor market.

    The report also discussed the importance of appropriate due diligence of new digital asset products and services. The OCC said that it “continues to engage on an interagency basis to analyze various crypto-asset use cases,” and is looking to “provide further clarity on legal permissibility, as well as safety and soundness and compliance considerations related to crypto-assets” in the banking industry. 

    The OCC further stated it “will continue to monitor the development of climate-related financial risk management frameworks at large banks,” and reported that “OCC large-bank examination teams will integrate the examination of climate-related financial risk into supervision strategies and continue to engage with bank management to better understand the challenges banks face in this effort, including identifying and collecting appropriate data and developing scenario analysis capabilities and techniques.”

    Bank Regulatory Federal Issues OCC Risk Management Third-Party Risk Management Compliance Privacy/Cyber Risk & Data Security Operational Risk Climate-Related Financial Risks Digital Assets Nonbank

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  • CFTC requests feedback on climate-related financial risk

    Agency Rule-Making & Guidance

    On June 8, the CFTC published a request for information (RFI) in the Federal Register seeking public responses on climate-related financial risks related to the derivatives markets and underlying commodities markets. Among other things, the Commission is seeking input on the types of data that could help the CFTC evaluate climate-related financial risk exposures, scenario analysis and stress testing, risk management, disclosures, product innovation, digital assets, financially vulnerable communities, mechanisms for public-private partnerships/engagement, and coordination with other regulatory bodies. The CFTC emphasized that the responses “will help to inform the Commission’s next steps in furtherance of its purpose to, among other things, promote responsible innovation, ensure the financial integrity of all transactions subject to the Commodity Exchange Act, and avoid systemic risk.” Additionally, the Commission noted that it “may use this information to inform potential future actions including, but not limited to, issuing new or amended guidance, interpretations, policy statements, regulations or other potential commission action within its authority under the Commodity Exchange Act, as well as its participation in any domestic or international fora.”

    Comments on the RFI are due August 8.

    Agency Rule-Making & Guidance CFTC Climate-Related Financial Risks Federal Register Fintech Digital Assets

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  • FDIC highlights operational risks in 2022 Risk Review

    On May 20, the FDIC released its 2022 Risk Review, summarizing emerging risks in the U.S. banking system observed during 2021 in four broad categories: credit risk, market risk, operational risk, and climate-related financial risk. According to the FDIC, the current risk review expands upon coverage in prior reports by examining operational risks to banks resulting from cyber threats, illicit finance, and climate-related financial risks. Monitoring these risks is among the agency’s top priorities, the FDIC said, explaining that the number of ransomware attacks in the banking industry increased in 2021, and that the “number and sophistication of cyber attacks also increased with remote work and greater use of digital banking tools.” Additionally, “threats from illicit activities continue to pose risk management challenges to banks.” The FDIC noted that the banking environment improved in 2021 as the economy recovered but stated that recovery was uneven across industries and regions. While “[f]inancial market conditions were generally supportive of the economy and banking industry in 2021,” they began to deteriorate in early 2022 with the onset of the Russian invasion of Ukraine, the FDIC said.

    Bank Regulatory Federal Issues FDIC Risk Management Illicit Finance Financial Crimes Privacy/Cyber Risk & Data Security Climate-Related Financial Risks

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  • FHFA joins global green initiative

    Federal Issues

    On May 11, FHFA announced its membership in the Network of Central Banks and Supervisors for Greening the Financial System, affirming its “commitment to making tangible progress toward addressing the impact of climate change on the nation's housing finance system.” Recognizing the increased risks to property presented from climate change, FHFA acting Director Sandra L. Thompson advised FHFA-regulated entities last year to designate climate change as a priority concern and actively consider its effects in decision-making processes. NGFS is an international group comprised of central banks and financial supervisors working to enhance the role of the financial system in managing risks and mobilizing capital for green and low-carbon investments in the context of environmentally sustainable development. The Federal Reserve Board, OCC, and FDIC, and the U.S. Treasury Department’s Federal Insurance Office have already joined NGFS.

    Federal Issues FHFA Climate-Related Financial Risks Risk Management

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  • SEC 2022 examination priorities include information security, emerging technologies, and crypto-assets


    On March 30, the SEC’s Division of Examinations announced that its 2022 examination priorities will focus on key risk factors related to private funds, environmental, social and governance investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets. SEC registrants, including investment advisers, broker-dealers, self-regulatory organizations, clearing firms, and other registrants, are reminded of their obligations to address, manage, and mitigate these key risk areas. The SEC stated that examiners will continue to review whether firms are taking appropriate measures to safeguard customer accounts to prevent intrusions. Firms are expected to implement procedures to respond to incidents, identify and detect red flags for identity theft, and manage operational risk, including oversight of vendors and service providers. With respect to emerging technologies and crypto-assets, the SEC announced it will review whether firms are considering emerging financial technologies when designing their regulatory compliance programs. The SEC will also focus on firms that offer new products and services or employ new practices “to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.” Additionally, examinations of market participants engaged in crypto-assets will continue to focus on custody arrangements for such assets, as well as “the offer, sale, recommendation, advice, and trading of crypto-assets” offered by these participants. The SEC also warned that it will be investigating whether registered investment advisors are “overstating or misrepresenting” environmental, social, and governance factors in their portfolios or disclosures.

    Securities Examination Digital Assets Fintech Climate-Related Financial Risks Compliance Privacy/Cyber Risk & Data Security

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  • FDIC issues draft principles on climate risk management

    On March 30, the FDIC announced a request for comment on draft principles, which provide a high-level framework for the safe and sound management of exposures to climate-related financial risks. The principles are intended for the largest financial institutions (those with over $100 billion in total consolidated assets), though the announcement notes that all financial institutions, regardless of size, can have material exposures to climate-related financial risks. The topics covered by the principles include: (i) governance; (ii) policies, procedures, and limits; (iii) strategic planning; (iv) risk management; (v) data, risk measurement, and reporting; and (vi) scenario analysis. The draft principles also highlight management of risk areas. Comments close 60 days after publication in the Federal Register. In a statement, acting FDIC Chairman Martin Gruenberg said the key principles are “an initial step toward the promotion of a consistent understanding of the effective management of climate-related financial risks.”

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance FDIC Climate-Related Financial Risks Federal Register

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  • SEC proposes climate risk disclosures


    On March 21, the SEC announced a proposed rule to require registrants to disclose certain climate-related information in their registration statements and periodic reports. According to the proposed rule, a registrant must disclose, among other things, information regarding its direct and certain indirect emissions of greenhouse gas (GHG). The GHG emissions disclosure proposals “would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks.”

    The proposed rule also establishes that accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering certain emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors. The proposed rule further noted additional disclosure requirements for registrants that have made a so-called net-zero commitment or adopted a plan to reduce their GHG footprint or exposures.

    The same day, the SEC released a Fact Sheet on the proposed rule, which summarized the content of the proposed disclosure and presentation and attestation requirements, among other things. According to a statement released by SEC Chair Gary Gensler, the proposed rule will “provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.” However, a statement released by SEC Commissioner Hester M. Peirce took a different view, stating that the proposed amendments would “turn[] the disclosure regime on its head” and noting that some elements are “missing,” such as “[a] credible rationale for such a prescriptive framework when our existing disclosure requirements already capture material risks relating to climate change;[a] materiality limitation; [and] [a] compelling explanation of how the proposal will generate comparable, consistent, and reliable disclosures.” Treasury Secretary Janet L. Yellen also released a statement commending the proposal and the SEC, calling the effort “an important step to protect investors and strengthen the overall resilience of the financial system.”

    Comments on the proposal are due 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on, whichever period is longer.

    Securities Agency Rule-Making & Guidance SEC Climate-Related Financial Risks Department of Treasury Federal Register Risk Management Disclosures

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  • OCC’s Hsu discusses climate financial risk management, diversity and inclusion

    On March 7, acting Comptroller of the Currency Michael J. Hsu spoke before the Institute of International Bankers Annual Washington Conference to discuss climate-related financial risk and diversity and inclusion in the banking industry. In his remarks, Hsu described the agency as “laser-focused on the safety and soundness aspects of climate change risks.” Specifically, he noted that the OCC is concentrating on “large banks’ climate risk management capabilities: identifying, measuring, monitoring and mitigating climate-related exposures and risks.” He stated that “[w]eaknesses in risk management could adversely affect a bank’s safety and soundness, as well as the overall financial system.” Hsu also stressed the importance of cyber defense, saying “[h]eightened vigilance is clearly warranted.”

    Hsu further discussed draft principles, which were released in December 2021, and are intended to support the identification and management of climate-related financial risks at OCC-regulated institutions with over $100 billion in total consolidated assets. (Covered by InfoBytes here). He noted that the principles will be finalized later this year when more detailed guidance will be developed in collaboration with the Federal Reserve Board and FDIC. After “an appropriate transition period,” Hsu noted that an assessment of large banks’ climate risk management capabilities would begin. He also noted that for midsize and community banks, it will be a number of years before OCC examiners conduct climate risk management examinations and suggested to bankers to use time “wisely.”

    At the end of his remarks, Hsu compared “diversity and inclusion” to “safety and soundness,” in that it should be treated as a single idea, and without it, “diversity over time becomes a box to be checked, not a state to strive for or a value to be upheld.”

    Bank Regulatory Federal Issues OCC Climate-Related Financial Risks Risk Management Diversity

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  • U.S.-EU release statement on Joint Financial Regulatory Forum

    Financial Crimes

    On March 1 and 2, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S. – EU Joint Financial Regulatory Forum to continue their ongoing financial regulatory dialogue. Matters discussed focused on six themes: “(1) market developments and current assessment of financial stability risks, (2) operational resilience and digital finance, (3) sustainable finance and climate-related financial risks, (4) regulatory and supervisory cooperation in capital markets, (5) multilateral and bilateral engagement in banking and insurance, and (6) anti-money laundering and countering the financing of terrorism (AML/CFT).”

    While acknowledging that both the U.S. and EU are “experiencing robust economic recoveries,” participants warned that significant uncertainty and risks are created by the current geopolitical situation, as well as challenges stemming from the ongoing Covid-19 pandemic, high energy prices, and supply-chain bottlenecks. “[C]ooperative international engagement to mitigate financial stability risks remains essential,” participants stressed. During the meeting, participants also discussed recent developments related to crypto-assets, digital finance, and so-called stablecoins, as well as the potential for a central bank digital currency, and “acknowledged the importance of ongoing international work on digital finance and recognized the benefits of greater international supervisory cooperation with a view to promote responsible innovation globally.”

    In addition, participants discussed various topics, including those related to third-party providers; climate-related financial risks and challenges, including sustainability reporting standards; the transition from LIBOR; and progress made in strengthening their respective AML/CFT frameworks.

    Financial Crimes Digital Assets Of Interest to Non-US Persons Department of Treasury EU Central Bank Digital Currency Stablecoins Anti-Money Laundering Combating the Financing of Terrorism Fintech Covid-19 Climate-Related Financial Risks LIBOR

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  • Treasury highlights climate transition efforts

    Federal Issues

    On March 3, the U.S. Treasury Department released a Fact Sheet covering topics discussed during “The Climate Transition: Federal Policy and State and Local Government Best Practices” roundtable, including efforts to support states, localities, and communities impacted by climate change. Topics discussed included, among others: (i) promoting an equitable and sustainable recovery and driving green investments; (ii) disseminating analysis and recommendations to advance shared climate priorities; (iii) monitoring climate-related issues in municipal markets and identifying best practices; and (iv) promoting resilience to extreme weather events. Specifically, Treasury pointed out its Federal Insurance Office is advancing a set of priorities on climate-related issues by developing a report “focused on climate-related insurance supervision and regulation, with an assessment of climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on U.S. financial stability.” (Covered by InfoBytes here). Additionally, Treasury noted that it is “coordinating with interagency partners and state and local governments on a national mitigation framework,” and is “promoting energy efficiency and sustainability through tax incentives for homes and buildings.”

    Federal Issues Department of Treasury Climate-Related Financial Risks

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