On June 25, Federal Reserve Governor Jerome Powell delivered remarks at a payments conference hosted by the Federal Reserve Bank of Kansas to discuss improvements to the U.S. payments system. Specifically, Powell advised that payment system participants must work together to improve the payment system, stating “[A]t a minimum, banks, merchants, and other institutions that process or store sensitive financial information need to keep their hardware and software current to the latest industry standards.” He noted that the Federal Reserve has established two task forces regarding the U.S. payment system, one geared towards faster payments and the other geared towards payment security. Powell cited the use of EMV chip cards and tokenization technology as examples of effective payment security measures. In addition, Powell discussed the importance of proactive efforts to implement preventative measures to prepare for potential cyber-attacks or data breaches.
On June 22, the federal banking agencies issued a joint final rule that modifies the mandatory purchase of flood insurance regulations to implement some provisions of the Biggert-Waters and Homeowner Flood Insurance Affordability Acts. Notable highlights include that the final rule, among other things: (i) expands escrow requirements for lenders who do not qualify for a small lender exception, (ii) clarifies the detached structure exemption, (iii) introduces new and revised sample notice forms and clauses relating to the escrow requirement and the availability of private flood insurance, and (iv) clarifies the circumstances under which lenders and servicers may charge borrowers for lender-placed flood insurance coverage. The escrow provisions and sample notice forms will become effective on January 1, 2016, and all other provisions will become effective October 1, 2015. The agencies reminded that the escrow provisions in effect on July 5, 2012, the day before Biggert-Waters was enacted, will remain in effect and be enforced through December 31, 2015.
The agencies also indicated that they plan to address Biggert-Waters’ private flood insurance provisions through a separate rulemaking.
On June 23, the Board of Governors announced the execution of an enforcement action against a California-based community bank over BSA/AML deficiencies. According to the Cease and Desist Order, the deficiencies were identified by the Federal Reserve Bank of San Francisco and the California Department of Business Oversight, and directs the Bank to submit written plans outlining their efforts to strengthen their BSA/AML risk management program, including customer due-diligence and suspicious activity monitoring and reporting policies and procedures. In addition, the Bank must retain an independent third party to conduct a review of account and transaction activity affiliated with any high-risk customer and foreign branch accounts conducted at, by, or through the Bank from July 2014 through December 2014. No civil money penalty was imposed on the Bank.
Recently, the Federal Reserve submitted to Congress its 2015 Annual Performance Plan, which sets forth the Board’s planned projects, initiatives, and activities for the upcoming year. The Plan, which complements the Federal Reserve’s Strategic Framework 2012-15, outlines planned activities in the following six areas aimed at assisting the Board in meeting its strategic framework’s long-term objectives: (i) supervision, regulation, and monitoring risks to financial stability; (ii) data governance; (iii) facilities infrastructure; (iv) human capital; (v) management process; and (vi) cost reduction and budgetary growth. Among its initiatives, the Board aims to continue building an interdisciplinary infrastructure for supervision, regulation, and monitoring of risks to financial stability. In addition, the Board’s staff plans to develop “analytical tools” that enhance the Board’s understanding of evolving market structures and practices, including changes in risk-management practices and incentives for financial institutions to appropriately manage risk exposures. With respect to the supervision of individual institutions, the report highlights the Board’s intent to develop supervisory approaches for community and regional banks, as well as for savings and loan holding companies, that “identify and support taking action against early warning indicators of outlier risk.”
On June 9, six federal agencies – the Federal Reserve, CFPB, FDIC, NCUA, OCC, and the SEC – issued a final interagency policy statement creating guidelines for assessing the diversity policies and practices of the entities they regulate. Mandated by Section 342 of the Dodd-Frank Act, the final policy statement requires the establishment of an Office of Minority and Women Inclusion at each of the agencies and includes standards for the agencies to assess an entity’s organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of diversity and inclusion within the organization. The final interagency guidance incorporates over 200 comments received from financial institutions, industry trade groups, consumer advocates, and community leaders on the proposed standards issued in October 2013. The final policy statement will be effective upon publication in the Federal Register. The six agencies also are requesting public comment, due within 60 days following publication in the Federal Register, on the information collection aspects of the interagency guidance.
On June 1, a Boston-based international financial services holding company and its banking subsidiary agreed to address deficiencies in how they manage compliance risks with respect to their BSA/AML compliance program. The Agreement, entered into with the Federal Reserve Bank of Boston and the Massachusetts Division of Banks, requires both entities to submit a written plan outlining their efforts to improve their compliance with OFAC and internal controls, customer due-diligence procedures, and suspicious activity monitoring and reporting, among other things. In addition, the banking subsidiary must hire an independent third-party to review account and transaction activity during a specified period to ensure suspicious activity was properly identified and reported.
In a separate enforcement action, the Federal Reserve Bank of Chicago entered into an agreement on May 26 with an Illinois-based financial services company, requiring the parent company and its banking subsidiary to, among other things, submit written plans to (i) strengthen its BSA/AML compliance risk management program; and (ii) “ensure the identification and timely, accurate, and complete reporting” of suspicious transactions to the appropriate law enforcement and supervisory [banking] authorities.” No civil money penalties were imposed in either enforcement action.
DOJ Announces Plea Agreements with Five Major Banks for Manipulating Foreign Currency Exchange Markets
On May 20, the DOJ announced plea agreements with five major banks relating to manipulations of foreign currency exchange markets. Four of the banks pled guilty to felony charges of “conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market.” These four banks agreed to pay criminal fines totaling more than $2.5 billion and to a three-year period of “corporate probation,” which will be “overseen by the court and require regular reporting to authorities as well as cessation of all criminal activities.” A fifth bank pled guilty to manipulating benchmark interest rates, including LIBOR, and to violating a prior non-prosecution agreement arising out of the DOJ’s LIBOR investigation. That bank agreed to pay a $203 million criminal penalty. The DOJ emphasized that these were “parent-level guilty pleas” to felony charges and that it would continue to investigate potentially culpable individuals. The five banks also agreed to various additional fines and settlements with other regulators, including the Federal Reserve, the CFTC, NYDFS, and the U.K. Financial Conduct Authority. Combined with previous payments arising out of the FX investigations, the five banks have paid nearly $9 billion in fines and penalties.
On May 26, The CFPB and the Federal Reserve will host a 60-minute webinar to answer questions with respect to the TILA-RESPA Integrated Disclosure rule under the TILA and RESPA, also known as TRID. “This fifth and final in the planned series of webinars will address specific questions related to rule interpretation and implementation challenges that have been raised to the Consumer Financial Protection Bureau by creditors, mortgage brokers, settlement agents, software developers, and other stakeholders,” according to the Federal Reserve. For those interested in attending, registration is required and can be accessed here.
On April 6, the Federal Reserve, OCC, and FDIC (Agencies) revealed that their ongoing regulatory review under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) will now be expanded to include recently issued regulations. The EGRPRA requires the Agencies and the FFIEC to review and identify outdated, burdensome, or unnecessary regulations at least every 10 years. The regulators have held two public outreach meetings with additional outreach sessions currently scheduled for May 4 in Boston, August 4 in Kansas City, October 19 in Chicago, and concluding on December 2 in Washington, D.C.
On April 6, three prudential banking regulators – the Federal Reserve, OCC, and FDIC – issued interagency guidance to clarify and answer questions from regulated financial institutions with respect to the regulatory capital rule adopted in 2013. The FAQs address various topics, including (i) the definition of capital; (ii) high-volatility commercial real estate exposures; (iii) other real estate and off-balance sheet exposures; (iv) separate account and equity exposures to investment funds; (v) credit valuation adjustment; and (vi) the definition of a qualifying central counterparty.
On March 23, the Federal Reserve and the Office of the Comptroller of the Currency – both non-parties in the suit – filed briefs requesting that a district court reject a motion to compel discovery of over 30,000 documents held by a large bank. Arguing that the documents contain confidential supervisory information, the regulators asserted the bank examination privilege – “a qualified privilege that protects communications between banks and their examiners in order to preserve absolute candor essential to the effective supervision of banks.” As for scope, the regulators argued that the privilege covers the documents because they provide agency opinion, not merely fact, and that any factual information was nonetheless “inextricably linked” with their opinions. Additionally, they contended that the privilege is not strictly limited to communications from the regulator to the bank – instead, it may also cover communications made from the bank to the regulator and communications within the bank. As for procedure, the regulators claimed that a plaintiff is required to request the disclosure of privileged documents through administrative processes before seeking judicial relief, a requirement they contend exists even where a defendant bank also holds copies of the documents. Finally, the regulators argued in the alternative that the lead plaintiff has not shown good cause to override the qualified privilege, as the interests of the government in protecting the supervisory information outweighs the interest of the plaintiffs in production.
On March 16, the Federal Reserve Board issued a proposal seeking public comment that would require all banking organizations with existing Legal Entity Identifiers (LEIs) to report their respective LEIs on regulatory reporting forms beginning June 30, 2015. Because an LEI is unique to a single legal entity, requiring disclosure of the LEI would enable regulators to facilitate information sharing and coordination on domestic financial policy, rulemaking, examination, reporting requirements, and enforcement actions
On March 12, the New York DFS issued a consent order against a Germany-based global bank for alleged Bank Secrecy Act and other anti-money laundering (BSA/AML) compliance violations that occurred between 2002 and 2008. According to the DFS’s press release, certain bank employees were selected “to manually process Iranian transactions — specifically, to strip from SWIFT payment messages any identifying information that could trigger OFAC-related controls and possibly lead to delay or outright rejection of the transaction in the United States.” The DFS also alleges that the bank’s New York branch failed to implement proper BSA/AML compliance thresholds, allowing certain alerts regarding suspicious transactions to be excluded. Under the terms of the consent order, the bank must pay a $1.45 billion penalty, to be distributed as follows: $610 million to the DFS; $300 million to the U.S. Attorney’s Office for the Southern District of New York; $200 million to the Federal Reserve; $172 million to the Manhattan District Attorney’s Office; and $172 million to the U.S. DOJ. Additionally, the order requires that the bank “terminate individual employees who engaged in misconduct, and install an independent monitor for Banking Law violations in connection with transactions on behalf of Iran, Sudan, and a Japanese corporation that engaged in accounting fraud.”
On March 3, Federal Reserve Chair Janet Yellen delivered remarks to the Citizens Budget Commission regarding actions that the Federal Reserve has taken to strengthen its supervision of large financial institutions in the wake of the recent financial crisis. In her remarks, Chairwoman Yellen highlighted five regulatory changes, including (i) higher capital standards, (ii) higher liquidity requirements, (iii) implementation of stress tests, (iv) required submission of living wills, and (v) in cooperation with the FSOC, the Fed’s enhanced authority to promote the resiliency and stability of the financial system in addition to the safety and soundness of individual institutions.
On March 5, researchers from the Federal Reserve Bank of Richmond released an essay highlighting the decline in the formation of new banks since the financial crisis. According to the essay, new bank formation has fallen from an average of approximately one hundred per year since 1990 to about three per year since 2010. The researchers cited increased banking regulations, the low interest rate environment, and a weak economic recovery as contributing factors for the low rate of new bank startups.