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Special Alert: Banks no longer required to file SARs for hemp-related businesses
Federal and state banking regulators confirmed in a December 3 joint statement that banks are no longer required to file a suspicious activity report on customers solely because they are “engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.”
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Click here to read the full special alert.
For questions about the alert and related issues, please visit our Bank Secrecy Act/Anti-Money Laundering practice page, or contact a Buckley attorney with whom you have worked in the past.2nd Circuit says loan requests at Fed banks are claims under the FCA
On November 21, the U.S. Court of Appeals for the Second Circuit vacated the dismissal of a relator’s qui tam action, concluding that allegedly fraudulent loan requests made to one or more of the Federal Reserve Banks (FRBs) qualify as claims within the meaning of the False Claims Act (FCA). In the case, two qui tam relators brought an action under the FCA against a national bank and its predecessors-in-interest (defendants), alleging the defendants presented false information to FRBs in connection with their applications for loans. However the district court dismissed the action, holding that allegations of false or fraudulent claims being presented to the FRBs cannot form the basis of an FCA action because the FRBs cannot be characterized as the federal government for purposes of the FCA. In addition, the district court agreed with the defendants’ argument that the bank’s loan requests did not create FCA liability for claims, because the relators did not, and could not, “allege that the [g]overnment either provided any portion of the money loaned to the defendants, or reimbursed FRBs for making the loans.” (Previously covered by InfoBytes here.)
On appeal, the 2nd Circuit concluded that although the FRBs are not a “part of any executive department or agency,” the FRBs still act as agents of the U.S. because the U.S. “created the FRBs to act on its behalf in extending emergency credit to banks; the FRBs extend such credit; and the FRBs do so in compliance with the strictures enacted by Congress and the regulations promulgated by the [Board of Governors of the Federal Reserve System], an independent agency within the executive branch.” The 2nd Circuit also held that the loan requests qualified as claims under the FCA because the money requested by the defendants is provided from the Federal Reserve System’s (Fed’s) emergency lending facilities and “is to be spent to advance a [g]overnment program or interest.” In supporting its conclusion, the appellate court stated that the U.S. “is the source of the purchasing power conferred on the banks when they borrow from the Fed’s emergency lending facilities.” The 2nd Circuit also referred to a U.S. Supreme Court holding in Rainwater v. United States, which stated that “the objective of Congress was broadly to protect the funds and property of the government from fraudulent claims, regardless of the particular form or function, of the government instrumentality upon which such claims were made.”
FDIC, OCC approve final rule revising Volcker Rule
On November 14, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule, which will amend the Volcker Rule to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the five financial regulators released a joint notice of proposed rulemaking in July 2018 designed to reduce compliance costs for banks and tailor Volcker Rule requirements to better align with a bank’s size and level of trading activity and risks. The final rule clarifies prohibited activities and simplifies compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The final rule also addresses the activities of foreign banking entities outside of the United States.
Specifically, the final rule focuses on the following areas:
- Compliance program requirements and thresholds. The final rule includes a three-tiered approach to compliance program requirements, based on the level of a banking entity’s trading assets and liabilities. Banks with total consolidated trading assets and liabilities of at least $20 billion will be considered to have “significant” trading activities and will be subject to a six-pillar compliance program. Banks with “moderate” trading activities (total consolidated trading assets and liabilities between $1 billion and $20 billion) will be subject to a simplified compliance program. Finally, banks with “limited” trading activities (less than $1 billion in total consolidated trading assets and liabilities) will be subject to a rebuttable presumption of compliance with the final rule.
- Proprietary trading. Among other changes, the final rule (i) retains a modified version of the short-term intent prong; (ii) eliminates the agencies’ rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account; and (iii) adds a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account. Additionally, banks subject to the market risk capital prong will be exempt from the short-term intent prong.
- Proprietary trading exclusions. The final rule modifies the liquidity management exclusion to allow banks to use a broader range of financial instruments to manage liquidity. In addition, exclusions have been added for error trades, certain customer-driven swaps, hedges of mortgage servicing rights, and certain purchases or sales of instruments that do not meet the definition of “trading assets and liabilities.”
- Proprietary trading exemptions. The final rule includes changes from the proposed rule related to the exemptions for underwriting and market making-related activities, risk-mitigating hedging, and trading by foreign entities outside the U.S.
- Covered funds. Among other things, the final rule incorporates proposed changes to the covered funds provision concerning permitted underwriting and market making and risk-mitigating hedging with respect to such funds, as well as investments in and sponsorships of covered funds by foreign banking entities located solely outside the U.S.
- Application to foreign banks. The final rule aligns the methodologies for calculating the “limited” and “significant” compliance thresholds for foreign banking organizations by basing both thresholds on the trading assets and liabilities of the firm’s U.S. operations. The final rule includes changes to the exemptions from the prohibitions for underwriting and market making-related activities, risk mitigating hedging, and trading by foreign banking entities solely outside the U.S. Additionally, the final rule also includes changes to the covered funds provisions, including with respect to permitted underwriting and market making and risk-mitigating hedging with respect to a covered fund, as well as investment in or sponsorship of covered funds by foreign banking entities solely outside the U.S. and the exemption for prime brokerage transactions.
FDIC board member Martin J. Gruenberg voted against the rule, stating the “final rule before the FDIC Board today would effectively undo the Volcker Rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker Rule. It would thereby allow the largest, most systemically important banks and bank holding companies to engage in speculative proprietary trading funded with FDIC-insured deposits.” Gruenberg emphasized that the final rule “includes within the definition of trading account only one of these categories of fair valued financial instruments—those reported on the bank’s balance sheet as trading assets and liabilities. This significantly narrows the scope of financial instruments subject to the Volcker Rule.”
The final rule will take effect January 1, 2020, with banks having until January 1, 2021, to comply. Prior to the compliance date, the 2013 rule will remain in effect. Alternatively, banking entities may elect to voluntarily comply, in whole or in part, with the final rule’s amendments prior to January 1, 2021, provided the agencies have implemented necessary technological changes.
Fed giving foreign banks more time to comply with SCCL
On November 8, the Federal Reserve Board announced a proposal to extend the initial compliance dates for foreign banks subject to its single-counterparty credit limit rule by 18 months, which would require the largest foreign banks to comply by July 1, 2021 and smaller foreign banks to comply by January 1, 2022.
As previously covered by InfoBytes, in June 2018, the Federal Reserve Board approved a rule to establish single-counterparty credit limits for U.S. bank holding companies with at least $250 billion in total consolidated assets, foreign banking organizations operating in the U.S. with at least $250 billion in total global consolidated assets (as well as their intermediate holding companies with $50 billion or more in total U.S. consolidated assets), and global systemically important bank holding companies (GSIBs). The rule, which implements section 165(e) of the Dodd-Frank Act, requires the Board to limit a bank holding company’s or foreign banking organization’s credit exposure to an unaffiliated company. Under the rule, a GSIB’s credit exposure is limited to 15 percent of its tier 1 capital to another systemically important firm. A U.S. bank holding company and other applicable foreign institution is limited to a credit exposure of 25 percent of its tier 1 capital to a counterparty.
Comments on the proposal to extend the compliance dates will be accepted for 30 days after publication in the Federal Register.
Agencies adjust threshold for Regulations Z and M
On October 31, the CFPB and the Federal Reserve Board finalized the annual dollar threshold adjustments that govern the application of Regulation Z (Truth in Lending Act) and Regulation M (Consumer Leasing Act) to credit transactions, as required by the Dodd-Frank Act (published in the Federal Register here and here). Each year the thresholds must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The exemption threshold for 2020, based on the annual percentage increase in the CPI-W, is now $58,300 or less, except for private student loans and loans secured by real property, which are subject to TILA regardless of the amount.
Agencies increase threshold for appraisal exemption under TILA for HPMLs
On October 30, the CFPB, OCC, and the Federal Reserve Board published a final rule in the Federal Register, which increases the smaller loan exemption threshold for the special appraisal requirements for higher-priced mortgage loans (HPMLs) under TILA. TILA requires creditors to obtain a written appraisal before making a HPML unless the loan amount is at or below the threshold exemption. Each year the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption threshold for 2020 is $27,200, up from $26,700 in 2019. The final rule will take effect January 1, 2020.
Agencies simplify capital calculation for community banks
On October 29, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a final rule to simplify capital rule compliance requirements and reduce the regulatory burden for community banks in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among other things, the final rule allows qualifying community banks to adopt a simple community bank leverage ratio to measure capital adequacy, removing requirements for calculating and reporting risk-based capital ratios. Qualifying community banks must have less than $10 billion in total consolidated assets and meet additional criteria such as a leverage ratio greater than 9 percent. The agencies estimate that approximately 85 percent of community banks will qualify. The final rule also grants a community bank that temporarily fails to comply with the framework a two-quarter grace period to come back into full compliance, as long as its leverage ratio remains above 8 percent. According to the agencies, banking organizations will be permitted to use the community bank leverage ratio framework in their March 31, 2020 Call Report or Form FR Y-9C, as applicable. The final rule will take effect January 1, 2020.
Agencies finalize living will requirements
On October 28, the Federal Reserve Board and the FDIC issued a joint press release to announce the adoption of a final rule amending resolution planning requirements (known as living wills) for large domestic and foreign firms with more than $100 billion in total consolidated assets, while tailoring requirements to the level of risk a firm poses to the financial system. The final rule—which is substantially similar to the April 2019 proposal (previous InfoBytes coverage here)—makes improvements to the November 2011 joint resolution plan rule, and is consistent with amendments to Dodd-Frank made by the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among other things, the final rule tailors resolution planning requirements by using four “risk-based categories,” and extends the default resolution plan filing cycle. Global systemically important bank holding companies (GSIBs) will continue to be required to submit resolution plans on a two-year cycle; however, firms that do not pose the same systemic risk as GSIBs will only be required to submit their resolution plans on a three-year cycle. The agencies note in their release that both groups will alternate between submitting full and targeted resolution plans, and that “[f]oreign firms with relatively limited U.S. operations would be required to submit reduced resolution plans.” Additionally, firms with less than $250 billion in total consolidated assets that do not meet certain risk criteria will now be exempt under the final rule. The agencies also emphasize a change from the proposed rule: only smaller and less complex firms may request changes to their full resolution plans, subject to approval by both agencies prior to taking effect.
The final rule takes effect 60 days following publication in the Federal Register.
Waters and Brown urge regulators to reconsider Volcker Rule changes
On October 17, House Financial Services Committee Chairwoman Maxine Waters (D-Calif) and Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) wrote to the heads of the Federal Reserve Board, FDIC, OCC, SEC, and CFTC to oppose the federal financial regulators’ recent approval of changes to the Volcker Rule. (Previous InfoBytes coverage here.) According to Waters and Brown, the final revisions—which are designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds—“open the door to the very risky, speculative activities that Congress sought to prohibit.” Specifically, the letter addresses rollback concerns such as (i) narrowing the definition of a “trading account,” which would weaken the short-term intent prong; (ii) “eliminating metrics reporting”; (iii) “removing activity restrictions on non-U.S. banks”; and (iv) “expanding permitted activity related to covered funds.” Waters and Brown urged the regulators to reconsider their decision to adopt the revisions, and requested that they be provided with the data and metrics used by the regulators during their analysis, as well as the regulators’ justification for “eliminating or reducing the information and data reported by banking entities.”
Agencies seek comments on proposed changes to CECL
On October 17, the OCC, Federal Reserve Board, FDIC, and NCUA published a proposed interagency policy statement on allowances for credit losses and proposed interagency guidance on credit risk review systems.
The proposed policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology for determining allowances for credit losses applicable to financial assets measured at amortized costs. It will apply to financial assets measured at amortized cost, loans held-for-investment, net investments in leases, held-to-maturity debt securities, and certain off-balance-sheet credit exposures. The proposed policy statement also stipulates financial assets for which the CECL methodology is not applicable, and includes supervisory expectations for designing, documenting, and validating expected credit loss estimation processes. Once finalized, the proposed policy would be effective at the time of each institution’s adoption of CECL.
The proposed credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—will update the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The proposed guidance “discusses sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution's loan portfolio to its management and board of directors.” Furthermore, the proposed guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.
Comments on both proposals are due December 16.