On January 11, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2016. The examination priorities, which address issues across a variety of financial institutions, include (i) protecting retail investors, including those planning for retirement, by undertaking examinations to review exchange-traded funds (ETFs) and ETF practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds; (ii) evaluating market-wide risks by, among other thing, continuing to focus on cybersecurity controls at broker-dealers and investment advisers; and (iii) using enhanced data analytics to assess anti-money laundering compliance, detect microcap fraud, and complete reviews of excessive trading. Additional areas of examination priority for 2016 include (i) municipal advisors; (ii) private placements; (iii) investment advisers and investment companies that have not yet been examined; (iv) private fund advisers; and (v) transfer agents.
On February 3, the SEC named Jane Jarcho Deputy Director of its Office of Compliance Inspections and Examinations (OCIE). Jarcho will continue to serve as the National Director of the OCIE’s Investment Adviser/Investment Company examination program, a role she assumed in 2013. As the head of the Investment Adviser/Investment Company examination program, Jarcho increased company examinations more than 27% and “targeted areas such as cybersecurity, never before examined investment advisers and investment companies, alternative mutual funds, fixed incomes, and retirement accounts.” Jarcho’s SEC career began in 1990 in the Division of Enforcement, where she held various positions, including Branch Chief, Senior Trial Counsel, and Assistant Regional Director. In 2008, Jarcho joined the OCIE; prior to being named National Director of the office, she served as Associate Director of the Investment Adviser/Investment Company examination program.
On January 5, FINRA released a letter regarding its regulatory and examination priorities for 2016. The letter focuses on the following three broad issues within the securities industry: (i) culture, conflicts of interest and ethics; (ii) supervision, risk management and controls; and (iii) liquidity. Regarding FINRA’s assessment of firm culture, the letter notes that FINRA “will focus on the frameworks that firms use to develop, communicate, and evaluate conformance to their culture,” assessing five specific indicators of a firm’s culture, including (among others) whether policy or control breaches are tolerated. In connection with supervision and risk management, FINRA will focus its examination efforts on the following four areas that continue to affect firms’ business conduct and market integrity: (i) management of conflicts of interest; (ii) technology; (iii) outsourcing; and (iv) anti-money laundering. Finally, in connection with liquidity, FINRA plans to review firms’ contingency funding plans as they relate to their business models, noting that the framework for FINRA’s reviews will be driven by the effective practices contained in Regulatory Notice 15-33. Additional areas of regulatory and examination focus for FINRA in 2016 will include but are not limited to: (i) protecting seniors and vulnerable investors from fraud, sales practice abuse, and financial exploitation; (ii) private placements and Regulation A+ public offerings; (iii) financial and operational controls concerning exchange-traded funds and fixed-income prime brokerage; and (iv) market integrity.
On December 17, the New York DFS announced an enforcement action against a New York branch of a Pakistan-based bank. The Federal Reserve Bank of New York (FRBNY) and the DFS recently conducted an examination of the branch and found significant risk management and compliance failures with regard to state and federal laws, rules, and regulations relating to anti-money laundering (AML) compliance. Under the terms of the DFS’s order, the branch agreed to reform its policies and procedures to ensure compliance with AML laws. Per the order, the bank must submit to the DFS, within 60 days of the order, a number of written programs regarding its (i) corporate governance and management oversight; (ii) BSA/AML compliance review; (iii) customer due diligence; and (iv) suspicious activity monitoring and reporting. The branch must also hire an independent third-party approved by the DFS and the FRBNY to review the effectiveness of the bank’s compliance program, and to prepare a written report of its findings, conclusions, and recommendations for the program. Because the branch’s compliance with OFAC regulations was insufficient, the order also mandates that the bank retain an independent third-party to examine its U.S. dollar-clearing transactions between October 2014 and March 2015. Significantly, the order does not require the branch to pay a civil money penalty.
On November 12, the SEC named Marc Wyatt as the Director of the Office of Compliance Inspections and Examinations (OCIE) and the leader of the agency’s National Exam Program. When Andrew Bowden left the SEC in April 2015, Wyatt stepped in to serve as the agency’s Acting Director. Prior to joining the SEC in 2012, Wyatt was a principal and senior portfolio manager of a global multi-strategy hedge fund and a senior investment banker in both the U.S. and the U.K. In a separate November 13 announcement, the SEC appointed Sanket Bulsara as the Deputy General Counsel for Appellate Litigation and Adjudication, succeeding Michael A. Conley, who was appointed as SEC Solicitor. Former SEC Solicitor Jacob H. Stillman will continue to serve as senior advisor.
On November 5, the SEC announced Bryan Bennett as head of its Los Angeles examination program. Bennett will oversee examiners, accountants, and attorneys based in Southern California, Nevada, Arizona, Hawaii, and Guam. Bennett joined the SEC in 2008 and was later named manager, leading various teams in the investment adviser and investment company examination program. In January 2015, the SEC named Bennett the assistant director of the Los Angeles examination program. Prior to joining the SEC, Bennett was a litigator in private practice.
On November 3, the CFPB released its latest Supervisory Highlights report, which covers examination findings from May 2015 to August 2015. According to the report, which summarizes supervisory observations in the areas of consumer reporting, debt collection, mortgage origination, mortgage servicing, student loan servicing, and fair lending, recent non-public CFPB supervisory actions resulted in $107 million in restitution to more than 238,000 consumers. The report recognizes that certain efforts were made by institutions to improve compliance, including (i) mortgage servicers making improvements to their compliance audits and conducting information technology reviews; and (ii) student loan servicers alerting borrowers of unpaid balances remaining after borrowers attempt to pay off their loans but fall short. The report also discusses the CFPB’s revised exam appeals process, which includes changes to the supervisory appeals process originally outlined in Bulletin 2012-07. Among other things, the revised exam appeals process extends the expected time to issue a written decision on appeals from 45 to 60 days, and “[p]revents an institution from appealing adverse findings or an unsatisfactory rating related to a recommended or pending investigation or public enforcement action until the enforcement investigation or action has been resolved.”
On October 27, the OCC issued an updated Floor Plan Lending booklet of the Comptroller’s Handbook. The revised booklet (i) summarizes the basics of floor plan lending for examiners, including a description of indirect dealer lending and the regulatory and legal foundation for floor plan lending; (ii) provides banks with sound risk management practices and describes regulatory risk rating guidelines; and (iii) includes an expanded examination procedures section with examples of risk rating cases and factors for determining the quantity of credit risk and the quality of credit risk management. The updated booklet replaces a similarly titled booklet issued in March 1990, as well as section 216 of “Floor Plan and Indirect Lending” issued in January 1994 as part of the former Office of Thrift Supervision’s Examination Handbook.
CSBS’ Multi-State Mortgage Committee: Mortgage Companies Must Comply with Technology-Based Examination Process
On September 29, the Conference of State Bank Supervisors (CSBS) and the Multi-state Mortgage Committee (MMC) released a bulletin titled, “Supervisory Expectations Regarding the Use of Electronic Examination Tools.” The bulletin explains the MMC’s use of electronic examination tools and the supervisory expectations for mortgage companies undergoing the state examination process. As a result of a 2008 initiative by the MMC, state regulators have been using technology to review loan transaction data for years, originally setting the expectation that companies fully participate with the process by 2011. According to the bulletin, however, “the mortgage industry has regularly failed to provide clean data in a format acceptable to the regulators’ technology platform.” As a result of this non-compliance, the MMC recommended that, going forward, state regulators take enforcement action against companies that are unable to provide accurate data in a timely fashion, so as to ensure a “more efficient and timely regulatory process.”
CFPB Updates Mortgage Origination Examination Procedures to Include Requirements of TILA-RESPA Integrated Disclosure Rule
On May 4, the CFPB updated its Supervision and Examination Manual’s Mortgage Origination examination procedures to include guidance on how its compliance examiners will examine loan disclosures and terms of closed-end residential mortgage loans that are subject to the TILA-RESPA Integrated Disclosure (TRID) rule. The TRID examination procedures updates are reflected in module 4 of the Manual’s 8 modules, and instruct compliance examiners to review a sample of complete loan files to determine a company’s compliance. Further, if consumer complaints exist concerning the mortgage origination and closing disclosure requirements, then compliance examiners are permitted to interview the consumers included in the sample and inquire about each subject area listed in the module. The TRID rule is scheduled to go into effect August 1, 2015.
On March 2, OCC Comptroller Curry delivered remarks before the Institute of International Bankers regarding BSA/AML compliance obligations for financial institutions. During his remarks, Comptroller Curry emphasized that a top priority for the OCC has been to strengthen BSA/AML compliance at its supervised institutions. In this regard, the OCC has (i) modified its bank examination process so that BSA deficiencies receive proper emphasis in the evaluation of safety and soundness; (ii) focused on the BSA/AML risks posed by third-party relationships; (iii) required that institutions adequately resource their BSA/AML compliance programs; (iv) required institutions to assign accountability for BSA/AML compliance across all business lines presenting BSA/AML risk; and (v) taken enforcement action to enforce BSA/AML compliance when appropriate. Through his remarks, Comptroller Curry also addressed the need to improve the BSA/AML regulatory framework itself. Specifically, Comptroller Curry indicated that the OCC wanted (i) to streamline the SAR reporting process, (ii) to find better ways to use technology to advance BSA/AML goals, and (iii) to increase information sharing by creating safe harbors from civil liability both for financial institutions that file SARs and for financial institutions that share information about financial crimes with each other.
On February 8, New York DFS Superintendent Benjamin Lawsky announced that the DFS would begin (i) regularly examining insurance companies’ cyber security preparedness; (ii) enhancing regulations that will require insurance providers to meet higher standards of cyber security; and (iii) examining “stronger measures related to the representations and warranties insurance companies receive from third-party vendors.” Lawsky expects the targeted exams to begin in the “coming weeks and months.” The announcement was accompanied by the release of the state agency’s report on cybersecurity in the insurance industry.
On January 23, the California Department of Business Oversight (DBO) announced a $2.5 million settlement with a national mortgage servicer for failing to provide loan information to the state regulator. According to the consent order, the company must also (i) pay an independent third-party auditor selected by the DBO to ensure the servicer provides all requested information to DBO; (ii) cover administrative costs associated with the case; and (iii) cease acquiring new mortgage servicing rights that include loans secured by California properties until the DBO is satisfied that the servicer can satisfactorily respond to certain requests for information and documentation made in the course of a regulatory exam.
On January 13, the SEC announced its Office of Compliance Inspections and Examinations’ examination priorities for 2015. The examination priorities cover a wide range of financial institutions and focus on three areas: (i) protecting retail investors, especially those saving for or in retirement; (ii) assessing market-wide risks, including cybersecurity compliance and controls; and, (iii) using data analytics to identify signals of potential illegal activity. As to the risks to retail investors, the SEC noted that such investors are being sold products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products. In addition, financial services firms are offering information, advice, products, and services to help retail investors plan for retirement. The SEC intends to assess the risks to retail investors that can arise from these trends.
On July 24, Illinois Governor Pat Quinn signed HB 5342, which amends numerous provisions of state law applicable to state banks and credit unions, including requiring the Illinois Secretary of Financial and Professional Regulation to adopt formal rules that guarantee consistency and due process during the examination process of state-chartered banks. The bill also allows the Secretary to establish guidelines “that (i) define the scope of the examination process and (ii) clarify examination items to be resolved.” In addition, the bill provides that an existing loan secured by an interest in real estate shall not, under certain circumstances, require a new appraisal of the collateral during renewal, refinancing, or restructuring. The changes became effective immediately.