InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Regulators Alter Volcker Rule On TruPS CDOs
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.
Prudential Regulators Announce Final Changes To Call Report
On January 14, the Federal Reserve Board, the OCC, and the FDIC announced final changes to the Call Report to implement the Basel III capital standards and consumer data collection after delaying certain changes last year. The agencies now plan to implement in March 2014 the proposed reporting requirements for (i) depository institution trade names; (ii) a modified version of the reporting proposal pertaining to international remittance transfers; (iii) the proposed screening question about the reporting institution’s offering of consumer deposit accounts; and (iv) for institutions with $1 billion or more in total assets that offer such accounts, the proposed new data items on consumer deposit account balances. The agencies would then implement the proposed breakdown of consumer deposit account service charges in March 2015, but only for institutions with $1 billion or more in total assets that offer consumer deposit accounts. The proposed instructions for these new items also were revised. In addition, the agencies will not at this time proceed with the proposed annual reporting by institutions with a parent holding company that is not a bank or savings and loan holding company of the amount of the parent holding company’s consolidated total liabilities.
OCC Announces Workshops For National Community Bank Directors
On January 15, the OCC announced its 2014 schedule of workshops for directors of national community banks and federal savings associations. The workshops, which are led by OCC examiners and are meant to provide practical training and guidance to directors, include (i) Mastering the Basics: A Director’s Challenge; (ii) Risk Assessment for Directors: Where is the Risk in Your Institution?; (iii) Compliance Risk: What Directors Need to Know; and (iv) Credit Risk: A Director’s Focus.
Senators Seek More Transparency In Federal Agency Settlements
On January 8, Senate Banking Committee members Elizabeth Warren (D-MA) and Tom Coburn (R-OK) released the “Truth in Settlements Act.” The legislation would mandate that for any criminal or civil settlement entered into by a federal agency that requires total payments of $1 million or more, the agency must post online in a searchable format a list of each covered settlement agreement. The list must include, among other things: (i) the total settlement amount and a description of the claims; (ii) the names of parties and the amount each settling party is required to pay; and (iii) for each settling party, the amount of the payment designated as a civil penalty or fine, or otherwise specified as not tax deductible. The bill also would require that public statements by an agency about a covered settlement describe: (i) which portion of any payments is a civil or criminal penalty or fine, or is expressly specified as non-tax deductible; and (ii) any actions the settling company is required to take under the agreement, in lieu of or in addition to any payment. The bill would exempt disclosure of information subject to a confidentiality provision, but would in cases where partial or full confidentiality is applied, require the agency to issue a public statement about why confidential treatment is required to protect the public interest of the U.S. The bill also would require public companies to describe in their annual and periodic SEC reports any claim filed for a tax deduction that relates to a payment required under a covered settlement. In announcing the legislation, Senator Warren stated that the bill is needed to “shut down backroom deal-making and ensure that Congress, citizens and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest.”
Federal Authorities Announce Major BSA/AML Action Related To Madoff Scheme
On January 7, the U.S. Attorney for the Southern District of New York, the OCC, and FinCEN announced the resolution of criminal and civil BSA/AML violations by a major financial institution in connection with the bank’s relationship with Bernard L. Madoff Investment Securities and Madoff Securities’ Ponzi scheme. The bank entered into a deferred prosecution agreement (DPA) to resolve two felony violations of the Bank Secrecy Act: (i) that the bank failed to enact adequate policies, procedures, and controls to ensure that information about the bank’s clients obtained through other lines of business – or outside the United States – was shared with compliance and AML personnel; and (ii) that the bank violated the BSA by failing to file a Suspicious Activity Report on Madoff Securities in October 2008. According to the U.S. Attorney, pursuant to the DPA the bank (i) agreed to waive indictment and to the filing of a Criminal Information; (ii) acknowledged responsibility for its conduct by, among other things, stipulating to the accuracy of a detailed Statement of Facts; (iii) agreed to pay a $1.7 billion non-tax deductible penalty in the form of a civil forfeiture (the largest ever financial penalty imposed by the DOJ for BSA violations); and (iv) agreed to various cooperation obligations and to continue reforming its BSA/AML compliance programs and procedures. In a separate action, the OCC levied a $350 million civil money penalty to resolve parallel BSA/AML allegations included in a January 2013 cease and desist order. Finally, the bank consented to a FinCEN assessment pursuant to which it must pay an additional $461 million.
Prudential Regulators Announce Coordinated Action Against Technology Service Provider
Recently, the OCC released a formal agreement it entered with the FDIC, the Federal Reserve Bank of St. Louis, and a banking software company to resolve allegations of unsafe and unsound practices relating to the software company’s disaster recovery and business continuity planning and processes. The action reportedly resulted from the third-party service provider’s (TSP) delay in reestablishing full operations at a processing center in the wake of Hurricane Sandy. The agreement requires the TSP to continue to maintain a compliance committee, which must submit quarterly written reports to the TSP’s board. The agreement also details minimum requirements for (i) an enhanced disaster recovery and business continuity planning (DR/BCP) process; and (ii) a DR/BCP risk management program and audit process. The agreement also reaffirms the TSP board’s responsibility for proper and sound management of the TSP. The action demonstrates the OCC’s and other federal authorities’ continued focus on third-party service providers. While in this instance the regulators employed the Bank Services Company Act to directly address concerns about a TSP, recent Federal Reserve Board and OCC guidance also focuses on financial institutions’ responsibilities with regard to managing risks related to third parties’ disaster recovery and business continuity.
Federal Agencies Issue Statement On Subjecting TruPS CDOs To Volcker Rule
On December 27, in response to substantial criticism and legal action by banking trade groups, the Federal Reserve Board, the OCC, the FDIC, and the SEC stated that they are reviewing whether it is appropriate and consistent with the provisions of the Dodd-Frank Act (DFA) not to subject pooled investment vehicles for Trust Preferred Securities (TruPS), such as collateralized debt obligations backed by TruPS, to the prohibitions on ownership of covered funds in section 619 of the DFA, as implemented by the recently finalized Volcker Rule. Community banks and their trade group representatives state that the Volcker rule treatment of TruPS conflicts with a separate section of the DFA that requires TruPS issued by depository institution holding companies to be phased out of such companies’ calculation of Tier 1 capital, but provides for the permanent grandfathering of TruPS issued before May 19, 2010, by certain holding companies with total consolidated assets of less than $15 billion. The banks assert that banking entities investing in pooled TruPS are facing “unexpected and precipitous write-downs” that are not justified by any safety and soundness concern, and that the resulting write-downs are actually causing safety and soundness concerns. The agencies promised to address the matter by January 15, 2014.
OCC Releases Annual Assessment Schedule
On December 12, the OCC issued Bulletin 2013-37, which informs all national banks, federal savings associations, and federal branches and agencies of foreign banks of fees and assessments charged by the OCC for calendar year 2014. The Bulletin states that, given its increased supervisory responsibilities associated with the Dodd-Frank Act, the OCC has removed the $20 billion asset cap on inflation indexing for all asset brackets and raised the asset cap from $20 billion to $40 billion for application of the surcharge related to lower-rated institutions. Marginal rates of the OCC’s general assessment schedule continue to be indexed based on changes in the Gross Domestic Product Implicit Price Deflator for the previous June-to-June period. The 2014 adjustment will be 1.4 percent, and, given the removal of the asset cap, will apply to all assets. The Bulletin further explains that the assessment schedule continues to include a surcharge for institutions that require increased supervisory resources, and that the OCC will continue to provide a 12 percent reduction on the assessment for nonlead national banks, federal savings associations, or federal branches or agencies of a foreign bank. The new assessments are effective January 1, 2014 and are due March 31, 2014 and September 30, 2014, based on call report information as of December 31, 2013 and June 30, 2014, respectively.
Prudential Regulators Address Impact Of QM Lending On CRA Ratings
On December 13, the Federal Reserve Board, the FDIC, the OCC, and the NCUA issued an interagency statement to clarify safety and soundness expectations and CRA considerations in light of the CFPB’s ability-to-repay/qualified mortgage rule. The statement emphasizes that institutions may originate both QM and non-QM loans based on their business strategies and risk appetites and that residential mortgage loans “will not be subject to safety-and-soundness criticism based solely on their status as QMs or non-QMs.” Acknowledging that some institutions may choose to originate only or predominantly QM loans, the agencies state that, consistent with recent guidance concerning the fair lending implications of QM-only lending, “the agencies that conduct CRA evaluations do not anticipate that institutions’ decision[s] to originate only QMs, absent other factors, would adversely affect their CRA evaluations.”
Banking Regulators Finalize Social Media Guidance
On December 11, the FFIEC, on behalf of the CFPB, the FDIC, the OCC, the Federal Reserve Board, the NCUA, and the State Liaison Committee, released final guidance on the applicability of consumer protection and compliance laws, regulations, and policies to activities conducted via social media by federally supervised financial institutions and nonbanks supervised by the CFPB. The guidance was finalized largely as proposed. However, in response to stakeholder comments, the regulators clarified certain provisions. For example, the final guidance clarifies that traditional emails and text messages, on their own, are not social media. The final guidance also explains that to the extent consistent with other applicable legal requirements, a financial institution may establish one or more specified channels that customers must use for submitting communications directly to the institution, and that a financial institution is not expected to monitor all Internet communications for complaints and inquiries, but should take into account the results of its own risk assessment in determining the appropriate approach regarding monitoring and responding to communications. The regulators also clarified that the guidance is not intended to provide a “one-size-fits-all” approach; rather financial institutions are expected to assess and manage the risks particular to the individual institution, taking into account factors such as the institution’s size, complexity, activities, and third party relationships. The final guidance also contains further discussion regarding the application of certain laws and regulations to social media activities, such as the Community Reinvestment Act. Finally, consistent with other recent regulatory initiatives, the final guidance clarifies that prior to engaging with a prospective third party an institution should evaluate and perform due diligence appropriate to the risks posed.