Financial Services Alert - January 14, 2014

The Federal Reserve Board, the OCC, the FDIC, the SEC and the CFTC (collectively, the “Agencies”) adopted an interim final rule (the “Interim Rule”) that provides relief from certain requirements of the Volcker rule for banking entities that hold investments in or that have sponsored issuers of collateralized debt obligations (“CDOs”) backed by trust preferred securities (“TruPS”).  With limited exceptions, the final Volcker rule implementing regulation adopted by the Agencies on December 10, 2013 (the “Final Rule”) prohibits banking entities from acquiring or retaining an ownership interest in or sponsoring a covered fund.  The definition of covered fund generally includes pooled investment vehicles that rely upon either Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act to avoid being treated as an investment company but that do not qualify for another exemption or exclusion under the Investment Company Act or the Final Rule, including CDOs that invest in TruPS.  Notwithstanding the prohibition on sponsoring or investment in covered funds, the Interim Rule permits a banking entity to retain an ownership interest in or act as sponsor of an issuer if (1) the issuer was established, and the ownership interest was issued before, May 19, 2010, (2) the banking entity reasonably believes that the proceeds received by the issuer were invested primarily in certain qualifying TruPS collateral, and (3) the banking entity acquired the interest on or before December 10, 2013 (or acquired such interest in connection with a merger or acquisition of a banking entity that acquired the interest on or before December 10, 2013).  For purposes of the Interim Rule, qualifying TruPS collateral refers to TruPS and subordinated debt instruments issued prior to May 19, 2010 by a depository institution holding company that, as of the end of any reporting period within 12 months immediately preceding the issuance of such TruPS or subordinated debt instrument, had total consolidated assets of less than $15 billion or was issued prior to May 19, 2010 by a mutual holding company.  The May 19, 2010 date refers to the grandfathering date in Section 171 of the Dodd-Frank Act—also known as the Collins Amendment—for TruPS issued by certain depository  institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009 and by mutual holding companies established as of May 19, 2010.  The Agencies explained that the requirement in the Interim Rule that an issuer have “invested primarily” in qualifying TruPS collateral “is intended to cover those securitization vehicles that have invested a majority of their offering proceeds in” qualifying TruPS collateral.  The Interim Rule also clarifies that a banking entity may act as a market maker for an issuer that meets the requirements described above.  The Interim Rule does not affect the status of collateralized loan obligations that are treated as covered funds under the Final Rule.  The Interim Rule will become effective on April 1, 2014, which is the effective date of the Final Rule.  Interested parties may submit comments to the Agencies for 30 days after the Interim Rule is published in the Federal Register.

JPMorgan Chase & Co. and its affiliates (collectively, “JPMorgan”) agreed to pay an aggregate of $2.05 billion to resolve civil and criminal claims generally related to JPMorgan’s Bank Secrecy Act (“BSA”) compliance program deficiencies and its failure to file suspicious activity reports (“SARs” and each an “SAR”) under the BSA with FinCEN and the OCC and admitted to two felony violations of the BSA cited by the U.S. Attorneys’ Office for the Southern District of New York (the “DOJ”) all concerning Bernard L. Madoff’s (“Madoff”) decades long Ponzi scheme that FinCEN stated “resulted in more than $20 billion in losses to thousands of victims.” 

Specifically, JPMorgan: (1) agreed, under the terms of a deferred prosecution agreement, to make a payment of $1.7 billion (the stipulated forfeiture amount) to the DOJ, the proceeds of which will be contributed to the recovery fund for Madoff’s victims; (2) consented to the payment of a $350 million civil money penalty to the OCC; and (3) was fined $461 million by FinCEN.  FinCEN stated that to ensure the maximum amount of money to the victims of Madoff, it would deem the penalty satisfied by JPMorgan’s payment to the DOJ. 

OCC  

The OCC assessed an aggregate $350 million civil money penalty against three bank subsidiaries of JPMorgan because it determined that the subsidiary banks’ BSA and anti-money laundering compliance programs were deficient “with respect to suspicious activity reporting, monitoring of transactions for suspicious activity, the conduct of customer due diligence and risk assessments, and internal controls and independent testing.”  The OCC said its penalty was partially based on the fact that JPMorgan failed to file an SAR concerning Madoff with the OCC and other U.S. authorities “despite having alerted United Kingdom authorities in the months prior to Mr. Madoff’s arrest.”

FinCEN

JPMorgan’s lead bank subsidiary was, as noted above, fined $461 million by FinCEN, but the fine was deemed satisfied by JPMorgan’s payment to the DOJ.  In FinCEN’s announcement of the fine it stated that JPMorgan failed to report suspicious transactions arising out of Madoff’s Ponzi scheme and that, in consenting to the fine, JPMorgan had admitted:  (1) to the facts asserted by FinCEN; and (2) that the conduct violated the BSA.  FinCEN stated that JPMorgan had concerns as early as in the 1990s and in 2007 and 2008 that Madoff could be engaged in fraud, had protected JPMorgan’s investment position and had notified United Kingdom authorities, but failed to notify FinCEN and other U.S. authorities.

DOJ   

Based on many of the same facts cited by FinCEN and the OCC, the DOJ entered into a deferred prosecution agreement with JPMorgan’s lead bank subsidiary under which JPMorgan will pay $1.7 billion to the DOJ that the DOJ will distribute to the victims of Madoff’s fraudulent scheme.  The DOJ determined and JPMorgan admitted to two BSA felony violations:  (1) failure to maintain an effective BSA/anti-money laundering program; and (2) failure to file an SAR regarding Madoff.  JPMorgan also agreed with the DOJ under the deferred prosecution agreement that JPMorgan would take steps to strengthen its BSA/anti-money laundering program.  Notably, the DOJ confirmed that it would not charge any JPMorgan employee in connection with the Madoff matter.  The DOJ stated that $1.7 billion penalty consented to by JPMorgan was the largest DOJ penalty ever assessed for violations of the BSA. 

Looking Forward

It is widely expected that the DOJ and banking regulatory agencies will:  (1) continue to expend significant human and financial resources to determine whether there are deficiencies in banks’ BSA/anti-money laundering compliance programs; and (2) bring additional criminal and civil enforcement actions related to such matters against banking organizations of various sizes.

A new Employee Benefits Update from Goodwin Procter’s ERISA & Executive Compensation Practice discusses: (1) recent guidance issued by the IRS concerning cafeteria plan benefits for same-sex spouses following the U.S. Supreme Court’s ruling in U.S. v. Windsor, which struck down Section 3 of the Defense of Marriage Act; and (2) the U.S. Supreme Court’s decision in Heimeshoff v. Hartford Life & Accident Insurance Co., which confirmed that ERISA plan documents may prescribe an enforceable limitations period for the assertion of benefits claims in court.