On March 5, a group of 16 Democratic U.S. House members sent letters to the leaders of the Federal Reserve Board, the OCC, the FDIC, and the NCUA requesting that the agencies issue guidance that would provide legitimate marijuana businesses access to the federal banking system. Last November, those agencies declined to provide such guidance, stating that the DOJ and FinCEN first needed to agree on a framework to apply BSA/AML provisions to banks seeking to serve marijuana businesses. With FinCEN and DOJ having recently issued such guidance, the lawmakers renewed their push for legitimate marijuana businesses—now operating in 20 states and the District of Columbia—to have “equal access to banking services as other licensed businesses.”
On March 5, the Federal Reserve Board, the OCC, and the FDIC issued final guidance for stress tests conducted by banking institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act-mandated regulations adopted in October 2012, such firms are required to conduct annual stress tests. The guidance discusses (i) supervisory expectations for stress test practices, (ii) provides examples of practices that would be consistent with those expectations, and (iii) offers additional details about stress test methodologies. Covered institutions are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.
On February 27, Federal Reserve Board Chairman Janet Yellen made her first appearance as Chair before the Senate Banking Committee. During the course of the question and answer session, Ms. Yellen responded to a recent letter from Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) that encouraged the Federal Reserve Board to play a larger role in major supervisory and enforcement decisions, as opposed to delegating most examination and settlement responsibilities to staff. Chairman Yellen generally agreed that the Board itself should play a larger part in supervision and enforcement and stated that she “fully expects” the Board to make changes to its policies. She added that with regard to legislation recently introduced by Senators Elizabeth Warren and Tom Coburn (R-OK) that would require greater transparency in federal settlements, the Federal Reserve Board intends to look carefully at what it discloses about enforcement actions and settlements and will try to provide more disclosure. Among the numerous other topics covered during the hearing, Chairman Yellen also addressed virtual currency issues, stating the Federal Reserve Board currently has no authority to oversee virtual currency. Her comments followed a letter sent on February 26, 2014 by Banking Committee member Joe Manchin (D-WV) to federal financial and enforcement authorities asking for a complete ban on Bitcoin in the United States. Ms. Yellen stated that while Congress should consider the appropriate legal framework for virtual currency, “there’s no intersection at all in any way between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.”
Federal Reserve Plans Regular Reporting On Bank Applications, Outlines Common Issues Resulting In Application Withdrawals
On February 24, the Federal Reserve Board announced in SR 14-2 that it will start publishing a semi-annual report to provide certain information on bank applications and notices filed with the Federal Reserve. The Board stated that the report will include statistics on the length of time taken to process various applications and notices and the overall volume of approvals, denials, and withdrawals. The report also will provide the primary reasons for withdrawals. The first report will be released in the second half of 2014 and will include filings acted on from January through June 2014. The letter also describes common issues identified by the Federal Reserve that have led to recent withdrawal of applications, including (i) less-than-satisfactory supervisory rating(s) for safety and soundness, consumer compliance, or CRA; (ii) inadequate compliance with the Bank Secrecy Act; and (iii) concerns regarding the financial condition or management of the proposed organization.
Federal Reserve Board Finalizes Enhanced Prudential Standards For Large Bank Holding Companies, Foreign Banks
On February 18, the Federal Reserve Board issued a final rule that incorporates elements of two previously proposed rules related to U.S. bank holding companies with assets of $50 billion or more and foreign banking organization with assets of $50 billion or more. For covered domestic bank holding companies, the final rule (i) incorporates as an enhanced prudential standard previously-issued capital planning and stress testing requirements; and (ii) imposes enhanced risk-management, including liquidity risk-management standards. The rule further imposes a 15-1 debt-to-equity limit for companies that pose a grave threat to U.S. financial stability, as determined by the FSOC. For covered foreign banking organizations, the rule (i) implements enhanced risk-based and leverage capital requirements, liquidity requirements, risk-management requirements, stress testing requirements, and the debt-to-equity limit for FSOC-designated companies; and (ii) requires foreign banking organizations with U.S. non-branch assets of $50 billion or more to form a U.S. intermediate holding company (IHC) and imposes the same enhanced requirements on the IHC. The rule also establishes enterprise-wide risk-committee requirements for publicly traded domestic bank holding companies with total consolidated assets of $10 billion or more and for publicly traded foreign banking organizations with total consolidated assets of $10 billion or more, and implements stress-testing requirements for foreign banking organizations and foreign savings and loan holding companies with total consolidated assets of more than $10 billion. The final rule does not apply to non-bank financial firms designated as systemically important by the FSOC. The rule takes effect on June 1, 2014, but covered U.S. bank holding companies have until January 1, 2015 to comply. Foreign banking organizations must submit an implementation plan by January 1, 2015, but have until July 1, 2016 to comply. The final rule generally defers application of the leverage ratio to IHCs until 2018.
Democratic Lawmakers Urge Federal Reserve Board To Increase Direct Role In Supervision And Enforcement
On February 11, Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) sent a letter to newly appointed Federal Reserve Board Chairman Janet Yellen, asking that she reconsider the Board’s policy of delegating supervisory and enforcement powers to staff. The lawmakers cite a recent letter from former Federal Reserve Chairman Ben Bernanke, in which he explained that in the last 10 years, the Board of Governors voted on only 11 of nearly 1,000 enforcement actions, and that under current application of the Federal Reserve’s enforcement delegation policy, the Federal Reserve can enter into consent orders without ever receiving formal approval of senior staff. The letter asks for a change in policy that would require the Board to retain greater authority over the Federal Reserve’s enforcement and supervisory activities. Specifically, the lawmakers recommend that (i) the Board vote on any consent order that involves $1 million or more or that requires a bank officer to be removed and/or new management installed; (ii) staff formally notify the Board before entering into a consent order under delegated authority; (iii) each Board member be provided with the necessary staffing capacity to review and analyze pending enforcement actions; and (iv) all Board members receive a copy of all letters sent to the Chairman or another Board member by a committee or member of Congress.
Federal Reserve Board Proposes To Repeal Duplicative Regulations Amend Identity Theft Red Flags Rule
On February 12, the Federal Reserve Board proposed to repeal its Regulation DD, which implements the TISA, and Regulation P, which implements Section 504 of the GLBA because the Dodd-Frank Act transferred rulemaking authority for those laws to the CFPB, and the CFPB has already issued interim final rules implementing them. The Board also proposed to amend the definition of “creditor” in its Identity Theft Red Flags rule, which implements Section 615 of the FCRA. Generally, the Indemnity Theft Red Flags rule requires each financial institution and creditor that holds any consumer account to develop and implement an identity theft prevention program. The proposed revision will exclude from the foregoing requirements businesses that do not regularly and in the ordinary course of business (i) obtain or use consumer reports in connection with a credit transaction; (ii) furnish information to consumer reporting agencies in connection with a credit transaction; or (iii) advance funds to or on behalf of a person. The Board will accept comments on the proposal for 60 days from publication in the Federal Register.
On January 24, the Federal Reserve Board issued SR 14-1, which attached new guidance for certain large banks titled Principles and Practices for Recovery and Resolution Preparedness. The document outlines additional expectations for the recovery and resolution preparedness of eight large domestic bank holding companies. The guidance stresses the importance of robust systems to manage collateral, information, and payments, clearing, and settlement activities. It also highlights the importance of adequate liquidity and funding arrangements during times of stress, and robust arrangements for the provision of shared or outsourced services necessary for critical operations. The Federal Reserve will incorporate the guidance into its ongoing recovery and resolution preparedness assessments of large bank holding companies subject to the guidance.
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 January 14, the Federal Reserve Board, the OCC, and the FDIC announced final changes to the Call Report to implement the Basel III capital standards and consumer data collection after delaying certain changes last year. The agencies now plan to implement in March 2014 the proposed reporting requirements for (i) depository institution trade names; (ii) a modified version of the reporting proposal pertaining to international remittance transfers; (iii) the proposed screening question about the reporting institution’s offering of consumer deposit accounts; and (iv) for institutions with $1 billion or more in total assets that offer such accounts, the proposed new data items on consumer deposit account balances. The agencies would then implement the proposed breakdown of consumer deposit account service charges in March 2015, but only for institutions with $1 billion or more in total assets that offer consumer deposit accounts. The proposed instructions for these new items also were revised. In addition, the agencies will not at this time proceed with the proposed annual reporting by institutions with a parent holding company that is not a bank or savings and loan holding company of the amount of the parent holding company’s consolidated total liabilities.
Federal Reserve Board Seeks Comment On Designated Utilities’ Risk Management Standards, Payment System Risk Policy
On January 10, the Federal Reserve Board proposed revisions to the Regulation HH risk-management standards for certain financial market utilities that have been designated as systemically important by the Financial Stability Oversight Council, and for which the Federal Reserve Board is the Supervisory Agency pursuant to Title VIII of the Dodd-Frank Act. The Board also requested comment on related revisions to part I of the Federal Reserve Policy on Payment System Risk (PSR policy), which applies to financial market infrastructures more generally, including those operated by the Federal Reserve Banks. The Federal Reserve states that both sets of proposed changes are based on and generally are consistent with the April 2012 Principles for Financial Market Infrastructures developed jointly by the international standard-setting bodies, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions. Among other things, the revisions: (i) establish separate standards to address credit risk and liquidity risk, (ii) add a standard on general business risk, and (iii) heighten requirements on transparency and disclosure. Comments on both proposals must be submitted by March 31, 2014.
On January 8, Senate Banking Committee members Elizabeth Warren (D-MA) and Tom Coburn (R-OK) released the “Truth in Settlements Act.” The legislation would mandate that for any criminal or civil settlement entered into by a federal agency that requires total payments of $1 million or more, the agency must post online in a searchable format a list of each covered settlement agreement. The list must include, among other things: (i) the total settlement amount and a description of the claims; (ii) the names of parties and the amount each settling party is required to pay; and (iii) for each settling party, the amount of the payment designated as a civil penalty or fine, or otherwise specified as not tax deductible. The bill also would require that public statements by an agency about a covered settlement describe: (i) which portion of any payments is a civil or criminal penalty or fine, or is expressly specified as non-tax deductible; and (ii) any actions the settling company is required to take under the agreement, in lieu of or in addition to any payment. The bill would exempt disclosure of information subject to a confidentiality provision, but would in cases where partial or full confidentiality is applied, require the agency to issue a public statement about why confidential treatment is required to protect the public interest of the U.S. The bill also would require public companies to describe in their annual and periodic SEC reports any claim filed for a tax deduction that relates to a payment required under a covered settlement. In announcing the legislation, Senator Warren stated that the bill is needed to “shut down backroom deal-making and ensure that Congress, citizens and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest.”
Recently, the OCC released a formal agreement it entered with the FDIC, the Federal Reserve Bank of St. Louis, and a banking software company to resolve allegations of unsafe and unsound practices relating to the software company’s disaster recovery and business continuity planning and processes. The action reportedly resulted from the third-party service provider’s (TSP) delay in reestablishing full operations at a processing center in the wake of Hurricane Sandy. The agreement requires the TSP to continue to maintain a compliance committee, which must submit quarterly written reports to the TSP’s board. The agreement also details minimum requirements for (i) an enhanced disaster recovery and business continuity planning (DR/BCP) process; and (ii) a DR/BCP risk management program and audit process. The agreement also reaffirms the TSP board’s responsibility for proper and sound management of the TSP. The action demonstrates the OCC’s and other federal authorities’ continued focus on third-party service providers. While in this instance the regulators employed the Bank Services Company Act to directly address concerns about a TSP, recent Federal Reserve Board and OCC guidance also focuses on financial institutions’ responsibilities with regard to managing risks related to third parties’ disaster recovery and business continuity.
On January 3, the Federal Reserve Board announced that Sandra Braunstein, the director of the Division of Consumer and Community Affairs, will retire on April 1, 2014. Ms. Braunstein has led the division for 10 years, part of her nearly 27 years of service with the Federal Reserve Board. During her time leading the division, the Federal Reserve developed a new regulatory framework for credit cards and established new regulatory protections for consumers in the residential mortgage market. Ms. Braunstein also oversaw the creation of mortgage foreclosure mitigation and neighborhood stabilization programs, and played a key role in the transition of division staff and resources to the CFPB.