On November 18, the New York DFS announced a consent order with a foreign bank for allegedly misleading regulators regarding its transactions with sanctioned countries, most notably Iran, Sudan, and Myanmar. According to the press release and consent order, from approximately 2007 through 2008, the bank convinced a consulting firm to “water down” reports submitted to regulators on its transactions. Specifically, the bank pressured the consulting firm to alter an historic transaction review (HTR) report to exclude key information, such as: (i) the English translation of the bank’s wire transfer instructions, which included a statement that the bank conducted business with “’enemy countries’ of the U.S.;” (ii) a majority of the consultant’s description of the bank’s wire transfer activities; and (iii) information “concerning [the bank’s] potential misuse of OFAC screening software” in connection with its wire transfer activities. The DFS ordered the bank to pay $315 million in penalties, in addition to the $250 million the DFS ordered the bank to pay June 2013 in connection with its sanctioned transactions.
On November 18, Representative Elijah Cummings (D-MD) and Senator Elizabeth Warren (D-MA) sent letters to 16 financial service institutions regarding recent data breaches. The letters requested that the institutions provide information about the data breaches, including “detailed briefings from corporate IT security officers.” The letters were tailored to the specific institutions, with requests to two companies that they provide information on how the “potential data breaches may have affected their administration of government purchase and charge cards under contracts with the General Services Administration.” The letters also remind the institutions of their responsibility to protect and safeguard consumers’ personal information.
Second Circuit Court of Appeals Prohibits Courts from Granting Garnishment Orders Against Foreign Bank Branches
On November 14, the Second Circuit Court of Appeals upheld the District Court for the Southern District of New York’s October 23 ruling that prohibited courts from granting garnishment orders against certain banks for assets maintained at bank branches. The Second Circuit noted that it had previously certified to the New York Court of Appeals the following question: “whether the separate entity rule precludes a judgment credit from ordering a garnishee bank operating branches in New York to restrain a debtor’s assets held in foreign branches of the bank.” The New York Court of Appeals held that according to New York’s separate entity rule, a creditor does not have the authority to freeze assets held at a foreign branch. The New York Court of Appeals rejected the plaintiffs’ argument that in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009), New York abandoned the requirements of the separate entity rule, observing that “abolition of the separate entity rule would result in serious consequences in the realm of international banking to the detriment of New Yorkʹs preeminence in global financial affairs.ʺ Upholding the District Court’s October 23 ruling, the Second Circuit Court of Appeals ordered that the District Court annul the restraining order on the defendants’ assets. Motorola Credit Corp. v. Nokia Corp., No. 13-2535-cv (2d Cir. Nov. 14, 2014).
On November 10, FinCEN released a statement to reiterate that banking organizations can serve Money Services Businesses (MSB) while meeting obligations under the Bank Secrecy Act. FinCEN noted that there is concern that banks may be terminating the accounts of MSBs on a wholesale basis because of potential regulatory scrutiny and that as a result MSBs are losing access to banking services. FinCEN stated that they do “not support the wholesale termination of MSB accounts without regard to the risks presented or the bank’s ability to manage the risk.” Rather, the risks presented by a given MSB can vary and, therefore, financial institutions should assess the risks on a case-by-case basis. FinCEN expects that banking organizations will manage the risks associated with MSB accounts and are committed to addressing the “wholesale de-banking of an important part of the financial system.”
On November 12, the Obama administration nominated Antonio Weiss as Under Secretary for Domestic Finance at the Department of Treasury. If confirmed as Under Secretary, Weiss would be responsible for coordinating policies on banking, debt financing, capital markets, and financial regulation – specifically overseeing implementation of the Dodd-Frank Act. Currently, Weiss serves as the global head of investment banking at a financial advisory and asset management firm.
On November 12, the FCA announced that it was fining five banks for their foreign exchange practices. Specifically, ineffective controls at the banks allegedly allowed traders to strategize and manipulate exchange rates for their benefit. Additionally, confidential bank information was compromised in online chat rooms, including “the disclosure of information regarding customer order flows and proprietary Bank information, such as [foreign exchange] rate spreads.” The combined amount of civil money penalties against the banks is $1.7 billion.
On November 10, the Financial Stability Board issued policy proposals in response to G20 Leaders’ request at the 2013 St. Petersburg Summit to develop proposals by the end of 2014. The proposals consist of “a set of principles and a detailed term sheet on the adequacy of loss-absorbing and recapitalization capacity of global systemically important banks (G-SIBs).” The proposals will establish a new minimum standard for total loss-absorbing capacity (TLAC). The new TLAC standard should (i) ensure home and host authorities that G-SIBs have adequate capacity to absorb losses; (ii) allow resolution authorities “to implement a resolution strategy that minimi[zes] any impact on financial stability and ensures the continuity of critical economic functions;” and (iii) help achieve an equal playing field internationally. Comments and responses to the proposals are due by February 2, 2015.
On November 3, the FFIEC released its observations from a cybersecurity assessment of more than 500 institutions, and recommended that all regulated financial institutions participate in the Financial Services Information Sharing and Analysis Center (FS-ISAC) as a medium to “identify, respond to, and mitigate cybersecurity threats and vulnerabilities.” The FS-ISAC is a non-profit information sharing forum created by industry participants to share physical and cybersecurity threat information within the public and private sector. The assessment supplemented regularly scheduled bank examinations and built upon supervisory expectations contained within existing FFIEC information technology guidance.
On November 5, the OCC, FDIC, and the Fed announced that they will hold an outreach meeting on December 2 to review regulations under the Economic Growth and Regulatory Paperwork Reduction Acts of 1996 (EGRPRA). This is the first of a series of outreach meetings and will be held at the LA branch of the Federal Reserve Bank of San Francisco. Under the EGRPRA, the FFIEC and the previously mentioned agencies must review their regulations at least every 10 years to identify any unnecessary or outdated regulations. The December 2 meeting will feature panel presentations by industry participants and consumer and community groups.
On November 5, the Board finalized Reg. XX thereby implementing Section 622 of the Dodd-Frank. The final rule, which was proposed in May, prohibits a financial company from combining with another company if the resulting company’s liabilities exceed 10 percent of the aggregate consolidated liabilities of all financial companies. The final rule also adds an exemption to clarify that a financial company may continue to engage in securitization activities if it has reached the limit and establishes reporting requirements for financial companies that do not otherwise report consolidated information to the Board or other Federal banking agency. Financial companies subject to the limit include insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision. The final rule will be effective on January 1, 2015.
On November 6, the Financial Stability Board published its annual update of global systemically important banks (G-SIBs). Included in its annual update is the addition of one international bank bringing the total number of institutions on the list to 30. Eight U.S. G-SIBs remain on the list. Coinciding with the updated list, the Basel Committee on Banking Supervision also published updated information regarding denominators and capital thresholds used to calculate bank scores and allocate capital requirements of G-SIBs.
On October 31, the Basel III Committee on Banking Supervision released its final standard for the net stable funding ratio (NSFR), which requires that banks maintain stable funding sources to mitigate liquidity risk. The standard will complement the liquidity coverage ratio finalized earlier this year. The NSFR will ensure banks have enough cash or assets that can reliably be converted into cash to cover their expected outflows on a one-year horizon. In 2010, the Basel III Committee established a rigorous review process of the financial market and economy, and revised that standard in January 2014 to “focus on the riskier types of funding profile employed by banks while improving alignment with the LCR and reducing cliff effects in the measurement of available and required stable funding.” The most recent revisions cover the required stable funding for: (i) short-term exposures to financial institutions, including but not limited to banks; (ii) derivatives exposures; and (iii) assets posted as initial margin for derivatives contracts. The NSFR will become a minimum standard by January 1, 2018.
On October 27, the OCC announced the appointment of Darrin Benhart as Deputy Comptroller for Supervision Risk Management and Bethany Dugan as Deputy Comptroller for Operational Risk. Mr. Benhart will assume the position of full-time chair of the agency’s National Risk Committee, responding to a recommendation from a peer review that the agency create such a role. Mr. Benhart’s position is intended to strengthen the OCC’s ability to address risk in the national banking system. Prior to his appointment, Mr. Benhart served as the Deputy Comptroller for Credit and Market Risk. In her new role, Ms. Dugan will oversee the policy and examination procedures developments, specifically those that address operational risk issues.
On October 29, the FOMC released its policy statement announcing an end to the Fed’s mortgage and treasury bond purchase program used to boost the economy. Quantitative Easing 3 (QE3) was the third in a series of subsequent monetary policy tools used to spur investing and spending in part by keeping long-term interest rates low. The end of QE3 marks a significant milestone in the post-crisis era. Regarding the end of QE3, the FOMC noted that it had seen “a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month.”
Eleventh Circuit Vacates Dismissal, Rules Bank Officers Subject To Negligence Claims Under Georgia Law
On October 24, based on the Georgia Supreme Court’s response to the federal appellate court’s certified questions, the United States Court of Appeals for the Eleventh Circuit issueda per curiam opinion overturning a district court’s order to dismiss a lawsuit under Georgia’s business judgment rule. In this case, the court addressed whether bank directors and officers of failed banking institutions could be held liable under the state’s law for claims of ordinary negligence and breach of fiduciary duty based on ordinary negligence. In light of the responses from the Georgia Supreme Court, the Eleventh Circuit noted, “a bank director or officer may violate the standard of care established by O.C.G.A. § 7–1–490, even where he acts in good faith, where, with respect to the process by which he makes decisions, he fails to exercise the diligence, care, and skill of ‘ordinarily prudent men [acting] under similar circumstances in like positions.’” The case was remanded back to the district court for further proceedings. FDIC v. Skow, No. 12-15878, WL 5394321 (11th Cir. Oct. 24, 2014)