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Federal Agencies Finalize Volcker Rule
On December 10, the Federal Reserve Board, the OCC, the FDIC, the SEC, and the CFTC issued a final rule to implement Section 619 of the Dodd-Frank Act, the so-called Volcker Rule. Section 619 was a central component of the Dodd-Frank Act reforms, and the final rule and its preamble are lengthy and complex. The Federal Reserve Board released a fact sheet, as well as a guide for community banks. Generally, the final rule implements statutory requirements prohibiting certain banking entities from (i) engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity's own account, (ii) owning, sponsoring, or having certain relationships with a hedge fund or private equity fund, (iii) engaging in an exempted transaction or activity if it would involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties, or that would result in a material exposure to high-risk assets or trading strategies, and (iv) engaging in an exempted transaction or activity if it would pose a threat to the safety and soundness of the banking entity or to the financial stability of the U.S. Exempted activities include: (i) market making; (ii) underwriting; (iii) risk-mitigating hedging; (iv) trading in certain government obligations; (v) certain trading activities of foreign banking entities; and (vi) certain other permitted activities. The compliance requirements under the final rules vary based on the size of the institution and the scope of activities conducted. Those with significant trading operations will be required to establish a detailed compliance program, which will be subject to independent testing and analysis, and their CEOs will be required to attest that the program is reasonably designed to achieve compliance with the final rule. The regulators state that the final rules reduce the burden on smaller, less-complex, institutions by limiting their compliance and reporting requirements. The rule takes effect on April 1 2014; however, the Federal Reserve Board announced that banking organizations covered by section 619 will not be required to fully conform their activities and investments until July 21, 2015.
Federal Regulators Release Tailored Resolution Plan Template
On September 3, the Federal Reserve Board and the FDIC released an optional model template for firms to use when preparing the tailored resolution plans required from some bank and nonbank entities under Dodd-Frank. Entities impacted by these requirements include (i) bank holding companies with total consolidated assets of $50 billion or more and (ii) nonbank financial companies designated for enhanced prudential supervision by the Financial Stability Oversight Counsel.
Banking, Housing Regulators Release Revised Credit Risk Retention/QRM Rule
On August 28, the FDIC, OCC, Federal Reserve Board, FHFA, SEC, and HUD released a revised rule to implement the credit risk retention requirements of the Dodd-Frank Act, including provisions defining “qualified residential mortgages” (QRMs). A memorandum prepared by FDIC staff in connection with the re-proposal highlights certain substantial changes from the rule as originally proposed, including, among others: (i) generally defining a QRM as a mortgage meeting the requirements for a “qualified mortgage” as defined by the CFPB; (ii) calculating the 5% risk retention requirement for non-QRM mortgages and other non-exempt assets based on fair value (rather than par value) of the securitization transaction; (iii) eliminating the premium capture cash reserve account requirements; (iv) permitting the sale and hedging of required risk retention after specified time periods; (v) permitting a sponsor to hold any combination of vertical and horizontal first-loss interests that together represent 5% of the fair value of a securitization; (vi) providing that commercial, commercial real estate and automobile loans satisfying underwriting requirements for exemption from risk retention could be blended in asset pools with non-qualifying loans of the same asset class and remain eligible for reduced risk retention; and (vii) adding a new risk retention option for open market collateralized loan obligations (CLOs), available if the lead arrangers of the loans purchased by the CLO retain the required risk. The agencies also seek comment on an alternative QRM definition called QM-plus, which would encapsulate the core QM requirements but add additional conditions, including a 70% cap on LTV at closing, certain evaluation criteria with respect to credit history, and other product limitations. Comments on the re-proposed rule are due by October 30, 2013.
CFPB Announces Suit Against Debt Settlement Firm
On August 20, the CFPB announced an enforcement action against a debt settlement company for violations of the Telemarketing Sales Rule and the Dodd-Frank Act. The complaint alleges that the company disguised illegal upfront fees charged for debt-relief services as bankruptcy-related charges and deceived consumers into believing they would become debt free when only “a tiny fraction” of its customers actually do. The enforcement action follows a lawsuit filed against the CFPB on July 22, in which the same debt settlement company and an attorney jointly accused the CFPB of “grossly overreaching its authority” in the investigation on which the enforcement action is based.
Federal Reserve Board Issues Final Large Bank Assessment Rule
On August 16, the Federal Reserve Board issued a final rule establishing the process by which it will assess annual fees for its supervision and regulation of large financial companies. The Dodd-Frank Act directed the Board to collect assessment fees equal to the expenses it estimates are necessary or appropriate to supervise and regulate bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets and nonbank financial companies designated by the Financial Stability Oversight Council. The final rule outlines how the Board will (i) determine which companies are assessed, (ii) estimate the total anticipated expenses, (iii) determine the assessment for each of the covered companies, and (iv) bill for and collect the assessment from the companies. For the 2012 assessment period, the first year for which assessment fees will be collected, the Board will notify each company of the amount of its assessment when the rule becomes effective in late October. Payments for the 2012 assessment period will be due no later than December 15, 2013. The Board estimates it will collect about $440 million for the 2012 assessment period. Beginning with the 2013 assessment period, the Federal Reserve will notify each company of the amount of its assessment fee no later than June 30 of the year following the assessment period. Payments will be due by September 15.
OCC Issues Bulletin on Lending Limits Rule
On August 15, the OCC issued bulletin OCC 2013-17 regarding its final lending limits rule. In June 2012, the OCC promulgated an interim final rule to apply its existing lending limits rule to certain credit exposures arising from derivative transactions and securities financing transactions, as required by the Dodd-Frank Act. With the interim final rule and subsequent actions, the OCC extended the compliance date while it accepted comments and prepared a final rule. As explained in the bulletin, the final rule outlines permissible methods available to banks to measure credit exposures arising from derivative transactions and securities financing transactions. For derivative transactions, banks can generally choose to measure credit exposure through (i) the Conversion Factor Matrix Method, which uses a lookup table that locks in the attributable exposure at the execution of the transaction, (ii) the Current Exposure Method, which replaces the Remaining Maturity Method included in the interim final rule and provides a more precise calculation of credit exposure, or (iii) an OCC-approved internal model. For securities financing transactions, the final rule specifically exempts securities financing transactions relating to Type I securities and for other securities financing transactions allows banks to (i) lock in the attributable exposure based on the type of transaction, (ii) use an OCC-approved internal model, or (iii) use the Basel Collateral Haircut Method, which applies standard supervisory haircuts for measuring counterparty credit risk for such transactions under the capital rules’ Basel II Advanced Internal Ratings-Based Approach or the Basel III Advanced Approaches. The final rule also extends the compliance period through October 1, 2013.
Federal Circuit Court Accepts Appeals of Challenges to Dodd-Frank Act
On August 12, the U.S. Court of Appeals for the District of Columbia Circuit agreed to hear appeals filed by several state Attorneys General (AGs) and certain private plaintiffs regarding the U.S. District Court for D.C.'s dismissal of a suit in which the AGs and the private plaintiffs challenged the Orderly Liquidation Authority (OLA) created by the Dodd-Frank Act, and in which the private plaintiffs challenged the constitutionality of Title X, which created the CFPB, and the Financial Stability Oversight Council (FSOC) created by Title I. The parties separately appealed, but the court consolidated the appeals for its review.
Prudential Regulators Propose Stress Test Guidance for Mid-Size Institutions
On July 30, the OCC, the FDIC, and the Federal Reserve Board proposed guidance for stress tests conducted by institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act mandated regulations adopted by the regulators last October, such firms are required to conduct annual company-run stress tests starting in October 2013. The guidance discusses supervisory expectations for stress test practices, provides examples of practices that would be consistent with those expectations, and offers additional details about stress test methodologies. It also underscores the importance of stress testing as an ongoing risk management practice that supports a company’s forward-looking assessment of its risks and better equips the company to address a range of macroeconomic and financial outcomes. Comments on the proposed guidance are due by September 25, 2013.
Federal District Court Dismisses Challenge to Dodd-Frank Act, CFPB
On August 1, the U.S. District Court for the District of Columbia dismissed in its entirety a lawsuit that challenged Titles I, II, and X of the Dodd-Frank Act as unconstitutional. The lawsuit was brought originally by three private parties and later joined by several state attorneys general. The court determined that that the plaintiffs lacked standing and had not demonstrated injury sufficient to permit a challenge of the law on any of their claims.
The private plaintiffs' challenge to Title X, which created the CFPB, was based on “financial injuries directly caused by the unconstitutional formation and operation of the [CFPB,]” including substantial compliance costs, increased costs of doing business, and forced discontinuance of profitable and legitimate business practices in order to avoid risk of prosecution. The court concluded that such “self-inflicted” harm could not confer standing to challenge Title X. With respect to the private plaintiffs’ challenge to the Financial Stability Oversight Council (FSOC) created by Title I, the court concluded that while an unregulated party is not precluded from establishing standing to challenge the creation and operation of FSOC, standing is “substantially more difficult to establish” under such circumstances and the theories asserted by the plaintiffs were too remote to confer standing.
Both the private plaintiffs and the state attorneys general challenged Title II, claiming that the “orderly liquidation authority” (OLA) provisions violate the separation of powers, deny due process to creditors of a liquidated firm, and violate the requirement for uniformity in bankruptcy. The court again concluded that none of the plaintiffs established either present or future injury sufficient to confer standing to challenge the OLA.
According to media reports, an appeal of the ruling by at least one of the private plaintiffs is anticipated.
FHFA Proposes Rule to Replace Federal Home Loan Banks' Use of Credit Ratings
On May 23, the FHFA proposed a rule to require the Federal Home Loan Banks (FHLBs) to base determinations about the appropriateness of specific investments or activities on their own internal documented analyses of credit and other risks. Currently the FHLBs use credit ratings provided by certain national credit rating organizations. Dodd-Frank Act section 939A requires the FHFA and other federal regulators to review regulations that require use of such credit rating firms. The FHFA proposal seeks comment on alternative analyses for use by the FHLBs in assessing investments, standby letters of credit, and liabilities. Comments on the proposal are due by July 22, 2013.