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GAO Report Examines Effectiveness of the Financial Regulatory System
Recently, the Government Accountability Office (GAO) released a report on the effectiveness of the U.S. financial system’s existing regulatory structure. In examining the financial regulatory system, the GAO conducted a performance audit from April 2014 to February 2016, dividing the regulatory system into the following sectors based on the various agencies’ missions: (i) safety and soundness oversight of depository institutions; (ii) consumer protection oversight; (iii) securities and derivatives markets oversight; (iv) insurance oversight; and (v) systemic risk oversight. The GAO found that “[f]ragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.” Based on its audit, the GAO concluded that the regulatory structure as it stands does not always guarantee (i) efficient and effective oversight; (ii) consistent financial oversight; and (iii) consistent consumer protections. The report further identified problems with the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR), which are regulatory groups created out of the Dodd-Frank Act to address gaps in systemic risk oversight. Specific problems highlighted in the GAO’s findings include: (i) potential missed opportunities and duplicative analyses as a result of the Federal Reserve’s and the OFR’s similar systemic risk monitoring goals but lack of key collaboration; (ii) a lack of reliance by FSOC on the Federal Reserve’s and the OFR’s systemic risk monitoring efforts; and (iii) limitations on FSOC’s authority to address broader systemic risks that are not specific to a particular entity. The GAO emphasized that, “[w]ithout congressional action it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that more effective and efficient oversight of financial institutions can be achieved.”
HUD Issues Guidance Regarding the Application of Fair Housing Act Standards to the Use of Criminal Records
On April 4, HUD issued guidance deploying a disparate impact analysis with respect to the Fair Housing Act’s application to the use of criminal history by those who come under the Fair Housing Act, and in particular by providers or operators of housing and real-estate related transactions. The guidance indicates that, because African Americans and Hispanics are arrested, convicted and incarcerated at rates disproportionate to their share of the general population, criminal records-based barriers to housing are likely to have a disproportionate impact on minority home seekers. HUD then walks through the three step burden-shifting disparate impact analysis to support its argument. To determine whether the use of criminal history has, on its face, a discriminatory effect, HUD looks at national statistics to demonstrate that incarceration rates are disproportionate for African Americans and Hispanics. HUD also notes that, while state or local statistics should be presented when available, national statistics may be used where state or local statistics are not readily available and there is no reason to believe they would differ markedly from the national statistics. HUD then moves to a discussion of whether the practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. HUD warns that, while ensuring resident safety and protecting property may be considered substantial and legitimate interests, bald assertions based on generalizations or stereotypes that any individual with an arrest or conviction record poses a greater risk than any individual without such a record would be insufficient to satisfy the burden set by the second prong. For the final prong, regarding the availability of a less discriminatory alternative, HUD notes that the inquiry is fact specific, but suggests that individualized assessment of relevant mitigating information beyond that contained in an individual’s criminal record is likely to have a less discriminatory effect than a categorical exclusion that does not take additional information into account. The guidance also discusses the potential for intentional discrimination, and notes that a disparate treatment violation may be proven based on evidence that exceptions to a general disqualification based on criminal record are provided to white applicants, but not African American applicants.
OCC Lends Perspective on Responsible Innovation
Last week, the OCC published a whitepaper titled, “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.” The whitepaper reports on the OCC’s vision for responsible innovation in the federal banking system with emphasis on the concept that when managed appropriately “risk should not impede growth.” The paper provides a preliminary framework for how the OCC intends to improve its evaluation of innovative products, services, and processes identified as having potential associated risks and requiring regulatory approval. According to the paper, the rapid pace at which fintech companies are expanding provides both opportunities – with some banks investing in and partnering with leading fintech companies – and challenges for national banks and federal savings associations. The paper noted that, “[t]hrough strategic and prudent collaboration, banks can gain access to new technologies, and nonbank innovators can gain access to funding sources and large customer bases.” In order to guide the agency’s approach toward regulating and evaluating innovations within the financial services space, the OCC formulated the following eight principles: (i) support responsible innovation; (ii) foster an internal culture receptive to responsible innovation; (iii) leverage agency experience and expertise; (iv) encourage responsible innovation that provides fair access to financial services and fair treatment of consumers; (v) further safe and sound operations through effective risk management; (vi) encourage banks of all sizes to integrate responsible innovation into their strategic planning; (vii) promote ongoing dialogue through formal outreach; and (viii) collaborate with other regulators. The paper concludes with posing questions and soliciting feedback on its evolving framework for understanding and evaluating innovation. Comments on the paper are due by May 31, 2016 and should be sent to innovation@occ.treas.gov.
FinCEN Assesses Civil Money Penalty Against Nevada-Based Casino for BSA/AML Violations
On April 5, FinCEN assessed a civil money penalty against a Nevada-based casino for willfully violating the anti-money laundering provisions of the BSA. From 2010 through November 2013, the casino allegedly failed to (i) establish and implement an effective, written anti-money laundering program; (ii) establish and maintain appropriate internal controls in compliance with the BSA’s reporting requirements; (iii) conduct independent testing of its AML program; (iv) implement automated data processing systems that ensured compliance with the BSA and the casino’s AML program; (v) report suspicious activity; and (vi) secure and retain certain required records. According to FinCEN, the casino generally “lacked a culture of compliance” and had a “blatant disregard for AML compliance permeat[ing] at all levels.” The casino agreed to a $1 million civil money penalty and admitted to willfully violating the BSA’s program, reporting, and recordkeeping requirements.
FinCEN Prohibits U.S. Financial Institutions from Holding Correspondent Accounts for FBME Bank Ltd.
On March 31, FinCEN published a final rule imposing the fifth special measure against FBME Bank Ltd. (FBME). Pursuant Section 311 of the USA PATRIOT Act, the fifth special measure prohibits U.S. financial institutions from opening or maintaining a correspondent account for, or on behalf of, FBME. As previously covered in InfoBytes, on July 29, 2015, FinCEN published a similar final rule, which did not take effect as, one day before its effective date, a U.S. district court granted FBME’s motion for a preliminary injunction to stop the rule from taking effect. In November 2015, FinCEN subsequently re-opened its comment period for the final rule, soliciting additional comments “particularly with respect to the unclassified, non-protected documents that support the rulemaking and whether any alternatives to the prohibition of the opening or maintaining of correspondent accounts with FBME would effectively mitigate the risk to domestic financial institutions.” According to FinCEN, its recently issued final rule will “guard against the international money laundering and terrorist financing risks that FBME poses to the U.S. financial system.” The Final Rule is effective July 29, 2016.
DOJ Announces New Pilot Program to Encourage FCPA Cooperation and Self-Reporting
On April 5, the DOJ announced a one-year pilot program designed to encourage corporations to voluntarily self-report FCPA-related misconduct and cooperate with the DOJ. The program emerges from the DOJ’s heightened focus on individual accountability as highlighted in the Yates Memo. For corporations that (i) voluntarily disclose the misconduct and all relevant facts related to the misconduct “within a reasonably prompt time after becoming aware of the offense”; (ii) fully cooperate with the DOJ investigation; and (iii) take appropriate actions towards remediation, the DOJ may offer up to a 50% fine reduction from the bottom of the applicable Sentencing Guidelines fine range calculation, and will generally not require the appointment of a monitor if the corporation has already implemented an effective compliance plan. Furthermore, the DOJ notes that in certain circumstances, it will consider declining prosecution altogether.
While the pilot program ends in one year, any corporation that voluntarily self-reports or cooperates in FCPA matters during the pilot period will be eligible for the benefits, even if the pilot period expires during the investigation. More details and specific requirements can be found in the DOJ’s Foreign Corrupt Practices Act Enforcement Plan and Guidance.
FinCEN Proposes Imposing BSA Requirements on Crowdfunding Portals
On April 4, FinCEN issued a proposed rule to amend the definitions of “broker or dealer in securities” and “broker-dealer” under the regulations implementing the BSA. Specifically, FinCEN proposed that the definitions be amended to “explicitly include funding portals that are involved in the offering or selling of crowdfunding securities pursuant to section 4(a)(6) of the Securities Act of 1933.” Intended to help prevent money laundering, terrorist financing, and other financial crimes, the amendments would require funding portals to implement policies and procedures reasonably designed to ensure compliance with the BSA requirements currently applicable to brokers or dealers in securities. Comments on the proposal are due by June 3, 2016.
Pakistani Bank Reaches Agreement with NYDFS to Enhance AML Compliance Controls
Recently, the Federal Reserve and NYDFS announced that a New York branch of a Pakistani bank agreed to strengthen its compliance with BSA/AML requirements and OFAC regulations. The NYDFS’s and the NY Federal Reserve Bank’s recent examination into the bank’s branch found deficiencies related to its risk management and compliance with BSA/AML and OFAC regulations. Pursuant the agreement, the bank must submit written plans to the NYDFS and the NY Federal Reserve Bank on its strategy to improve its BSA/AML/OFAC compliance and its suspicious activity reporting. In addition, the bank must submit quarterly progress reports to the aforementioned regulators.
The recently issued agreement comes after a similar agreement earlier this month in which a New York branch of a Korean bank agreed to enhance its BSA/AML/OFAC compliance.
Department of Labor Publishes Final Rule to Define Fiduciary of an Employee Benefit Plan
On April 7, the Department of Labor issued a final rule defining who is a fiduciary investment advisor of an employee benefit plan under the Employee Retirement Income Security Act of 1974. The Final Rule requires financial advisors and brokers handling 401(k) accounts, as well as Individual Retirement Accounts and Annuities (IRAs), to “put their clients’ best interest before their own profits.” The final rule is scheduled to be published in the Federal Register on April 8. Compliance with the rule is not required until April 10, 2017, providing “adequate time” for financial services and other services providers affected by the rule to adjust their statuses from non-fiduciary to fiduciary.
FCC Reveals Consumer Broadband Labels; CFPB Director Cordray Weighs In
On April 4, the FCC released new broadband disclosure labels for Internet services. According to the FCC, consumers submit more than 2,000 complaints annually related to surprise fees associated with consumers’ Internet service bills. Specifically designed for mobile broadband services and fixed broadband services, the newly released labels “will provide consumers with more information on service speed and reliability and greater clarity regarding the costs of broadband services, including fees and other add-on charges that may appear on their bills.”
In coordination with the FCC to provide greater transparency to consumers using broadband services, CFPB Director Cordray likened the broadband disclosure labels to the CFPB’s “know before you owe” initiative, noting that, “[c]onsumers must be able to understand the terms of the agreement, and if there are options, they need to be able to comparison shop for the best deal.”
