Financial Services Alert - August 28, 2012

In a statement issued on August 22, 2012, SEC Chairman Mary Schapiro announced that the SEC would not vote on money market fund reform proposals at a meeting scheduled for August 29, 2012 due to a lack of support from a majority of the SEC commissioners.  Ms. Schapiro noted that she believed that structural reform was still necessary in light of her position that money market funds remain susceptible to “runs.”  She also signaled that the SEC’s decision not to advance a formal proposal could provide “the needed clarity for other policymakers” to consider addressing money market fund issues.  These other policymakers include the Financial Stability Oversight Council (“FSOC”) and the FRB.  For example, the FSOC could exercise jurisdiction over a money market fund by designating the fund or its sponsoring advisory organization as a “systemically important financial institution.”  The FRB could take indirect measures, such as imposing stress testing for banks that sponsor money market funds.  There have been several reports that members of FSOC will be considering appropriate next steps.

On August 23, 2012, SEC Commissioner Luis Aguilar issued a statement discussing his opposition to a formal money market fund reform proposal at this time, and expressing his support for issuing a concept release to solicit input on the cash management industry, as a whole, including the role of SEC-registered money market funds.  Commissioner Aguilar also called for further study on the impact of the SEC’s 2010 amendments to its money market fund regulations before any additional reforms are advanced.  On August 28, 2012, as the Financial Services Alert was preparing for publication, SEC Commissioners Gallagher and Paredes issued a statement discussing their decision not to support the money market fund reform proposal favored by the SEC Chairman and outlining their favored approach to improving SEC oversight and regulation of money market funds.

The Alert will continue to provide ongoing coverage of developments related to money market fund reform as they occur.

The OCC, FDIC and FRB (the “Agencies”) each separately announced that they are considering a delay of the implementation timeline for the annual capital-adequacy stress testing requirement under Section 165 of the Dodd-Frank Act for banks and other covered financial institutions (“Covered Financial Institutions”) with consolidated assets between $10 billion and $50 billion.  The Agencies’ announcements (e.g., the OCC’s announcement available here) did not request public comment.  A discussion of the proposed version of the FDIC’s rule concerning stress tests for Covered Financial Institutions with assets between $10 billion and $50 billion (the “Proposed Rule”) was included in the January 24, 2012 Financial Services Alert.  Should the Agencies take the contemplated action, the stress testing implementation requirement for $10 billion to $50 billion Covered Financial Institutions would be delayed approximately one year to a date in September 2013.  The Agencies said that the delay would be intended to “help ensure that all covered institutions have sufficient time to develop sound stress testing programs.”  Covered Financial Institutions with consolidated assets in excess of $50 billion are still expected to be required to begin conducting annual stress tests in 2012.

The Federal Reserve Bank of Boston (“FRB Boston”) released a report “The U.S. Regulatory Landscape for Mobile Payments” (the “Report”) examining the gaps in U.S. laws and regulations governing mobile payments.  The Report was the result of a key principle set forth by the Mobile Payments Industry Workgroup (“MPIW”), which includes industry stakeholders such as banks, retailers, and wireless and technology companies.  The Report noted two trends in the mobile payments industry: (1) the use of remote payments and money transfers for person-to-person payments and (2) the growth in non-bank money transfer services that subject companies to state money transmitter licenses and regulatory oversight. Ultimately, the Report found that consumer education is key and that management of third party service providers is critical to the safety and soundness of mobile retail payment systems.

The Report highlights five themes raised in the meetings held by the MPIW: (1) adequacy of the current regulatory environment; (2) education for all stakeholders including regulators, policymakers, and consumer advocacy groups; (3) consumer protection; (4) the impact of new mobile payment entities on regulation; and (5) financial inclusion.  Moreover, the Report identifies risks associated with new mobile payment systems.  For example, new mobile payment entities often fall outside of the regulatory purview because they fail to obtain licensing and registrations as required under state law due to the cost associated with state licensing requirements.  In addition, according to the Report, organizations subject to the Federal Financial Institutions Examination Council’s multiregional data processing service program have the potential to pose a systemic risk to the banking system if, when processing applications for numerous financial institutions, these institutions experience operational or financial difficulties.

Furthermore, noting that the regulatory environment was fragmented between financial institutions and non-bank entities, the Report found that the existing regulatory guidance is sufficient for existing mobile payment services.  However, the Report cautions that regulators need to stay “abreast” of industry trends and developments.  The MPIW plans to develop an outreach program to reach more regulators and policymakers and develop tools to educate regulators on developments in mobile payments. 

The OCC issued new guidance to examiners and bankers, in the form of a handbook booklet (the “Booklet”), concerning assessing a bank’s management of unique and hard-to-value assets when the assets are held in fiduciary or custody accounts maintained by the bank.  The OCC said that such unique and hard-to-value assets, which require specialized expertise, controls and valuation methods, can include, e.g., marketable securities (not traded on a financial market), real estate, mineral assets, timber interests, shares of closely held companies, life insurance policies and collectibles.

The Booklet discusses operational, compliance, strategic and reputation risks associated with management of unique and hard-to-value assets and describes risk mitigation techniques.  The Booklet also describes bank regulatory examination procedures used by the OCC when examining a bank’s management of unique and hard-to-value assets, and when evaluating the quantity of the Bank’s risk and the quality of the bank’s risk management of such assets.