Recently, the CFTC’s Division of Swaps Oversight issued Staff Advisory No. 14-21, which recommends best practices for CFTC-regulated intermediaries to comply with applicable Gramm-Leach-Bliley (GLB) Act privacy requirements, consistent with the Division’s intention to focus more resources on GLB privacy compliance. The advisory states that its recommendations are generally consistent with guidelines and regulations issued by other federal financial regulators, and the majority of the specific best practices are supported with references to prior rules and guidance. A number of the best practices cite the Interagency Guidelines Establishing Standards for Safeguarding Customer Information and Rescission of Year 2000 Standards for Safety and Soundness and a parallel FTC rule. Notably, several of the recommendations rely on a rule proposed by the SEC in 2008 but which has not yet been finalized. For example, the CFTC recommends based on that SEC proposal and the Interagency Guidelines that covered entities establish a breach investigation and notice process to alert potentially impacted individuals and to notify the CFTC. In addition, without referencing any other federal rule or guidance the Staff Advisory recommends that covered entities engage at least once every two years an independent party to test and monitor the safeguards’ controls, systems, policies and procedures, maintaining written records of the effectiveness of the controls.
On May 19, the Senate Banking Committee’s chairman and ranking member, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID), sent a letter to the leaders of the Treasury Department, the SEC, the CFTC, the OCC, the FDIC, and the Federal Reserve Board regarding recent developments in the use of virtual currencies and their interaction with the global payment system. The Senators ask the regulators a series of questions related to the role of virtual currencies in the U.S. banking system, payment system, and trading markets, and the current role of federal regulators in developing local, national, and international enforcement policies related to virtual currencies. The Senators also seek the agencies’ expectations on virtual currency firms’ BSA compliance, and ask whether an enhanced regulatory framework for virtual currencies is needed.
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.
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.
DOJ Announces LIBOR-related Criminal Charges and Penalties, Regulators Announce Parallel Civil Enforcement Actions
On December 19, both federal law enforcement and U.S. and foreign regulatory authorities announced that a Japanese bank and its Swiss bank parent company agreed to pay more than $1.5 billion to resolve criminal and civil investigations into the firms’ role in the manipulation of the London Interbank Offered Rate (LIBOR), a global benchmark rate used in financial products and transactions. The DOJ announced that the Japanese bank has signed a plea agreement, whereby the bank agreed to pay a $100 million fine and plead guilty to one count of engaging in a scheme to defraud counterparties to interest rate derivatives trades by secretly manipulating LIBOR benchmark interest rates. In addition, its parent company entered into a non-prosecution agreement (NPA), whereby the parent company agreed to pay an additional $400 million penalty, admit to specified facts, and assist the DOJ with its ongoing LIBOR investigation. The DOJ explained that the NPA reflects the parent company’s substantial cooperation in discovering and disclosing LIBOR misconduct within the institution and recognizes the significant remedial measures undertaken by new management to enhance internal controls. Domestic and foreign regulators also announced penalties and disgorgement to resolve parallel civil investigations, including a $700 million penalty obtained by the CFTC, $259.2 million as a result of a U.K. Financial Services Authority action, and $64.3 million to resolve a Swiss Financial Markets Authority action.
This week the CFTC and the SEC approved jointly written rules and guidance to further define “swap”, “security-based swap,” and other related terms for use in regulating over-the-counter (OTC) derivatives. The Dodd-Frank Act defines these terms but also requires both the SEC and CFTC to jointly define the terms further and jointly establish regulations regarding “mixed swaps” as may be necessary to carry out the purposes of swap and security-based swap regulation under the Act. The SEC and CFTC final rules and guidance identify specific products and services that do and do not fall within the further-defined terms. The approved rules will take effect 60 days after being published in the Federal Register. The approval of the definitions also triggers the period for swap dealers to comply with other Dodd-Frank Act rules put in place to regulate the OTC derivatives markets. The CFTC also approved a final rule that implements an exemption to the clearing requirement for non-financial entities and financial institutions with total assets of $10 billion or less that hedge or mitigate business risk through swaps.