Weekly RoundUp
August 4, 2023

Federal Banking Agencies Propose Basel III Endgame Capital Rules

In this Issue. The Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) proposed Basel III endgame capital rules; the Federal Reserve, FDIC, National Credit Union Administration (NCUA), and OCC issued an update to the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management; the Federal Reserve announced the individual capital requirements for large banks, incorporating the results of this past year’s stress testing; the Consumer Financial Protection Bureau (CFPB) released its Summer Supervisory Highlights; and the Securities and Exchange Commission (SEC) proposed new requirements to conflicts of interest risk associated with the use of predictive data analytics and proposed reforms relating to investment advisors operating exclusively through the internet. These and other updates are featured below.

Regulatory Developments

Federal Banking Agencies Propose Basel III Endgame Capital Rules
On July 27, the Federal Reserve, FDIC, and OCC issued a notice of proposed rulemaking and request for comment on a proposal (the Proposal) to implement the final components of the Basel III Capital Accords, often referred to as the Basel III endgame — and to strengthen the banking system following the failure of Silicon Valley Bank (SVB) — by applying a broader set of capital requirements to banking organizations with $100 billion or more in assets. The Proposal would not generally affect capital requirements for banks with less than $100 billion in assets. The Proposal was issued in tandem with the Federal Reserve’s July 27 notice of proposed rulemaking and request for comment on a proposal to adjust the calculation of the so-called GSIB surcharge applicable to the largest and most complex banks.

Learn more about the guidance in the Proposal in a recent client alert.

Agencies Update Guidance on Liquidity Risks and Contingency Planning
On July 28, the Federal Reserve, FDIC, NCUA, and OCC (agencies) issued an update to the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management to address the importance of contingency funding plans. The agencies encouraged banks to assess the stability of their funding sources and maintain a broad range of sources that can reasonably be expected to remain available in adverse circumstances. The availability of a range of reliable contingency funding sources is seen as a key component of safety and soundness by regulators.

Among other things, the agencies encouraged banks to take steps to ensure that they are in a position to utilize contingency funding sources when needed. Recommended actions include reviewing and updating contingency funding plans periodically and as the bank’s operations change and market conditions evolve, regularly testing contingency borrowing lines and taking steps to understand and address operational challenges in accessing such lines, calling particular attention to challenges involved in moving and posting collateral to secure such borrowing lines expeditiously. Additionally, the agencies encouraged banks to incorporate the discount window as part of their contingency funding arrangements and provide information on the availability of the Central Liquidity Facility as a contingent federal liquidity source for Federal and state-chartered credit unions.

Federal Reserve Announces Individual Capital Requirements for Large Banks
On July 27, the Federal Reserve announced the individual capital requirements for large banks, incorporating the results of this past year’s stress testing. The Federal Reserve annually conducts stress testing, which assesses how large banks would perform under certain adverse economic conditions. The stress testing evaluates the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels. Under the Federal Reserve’s capital framework, the stress testing impacts the capital requirements imposed on large banks via the stress capital buffer requirement. The requirement is a component of the total common equity Tier 1 capital ratio. At minimum, the requirement is 2.5%, but may be higher based on the stress testing results. If a bank's capital falls below the required amount, the bank is subject to automatic restrictions on both capital distributions and discretionary bonus payments. The new capital requirements go into effect on October 1st.

CFPB Releases Summer Supervisory Highlights, Identifying UDAAPs Across Consumer Financial Product Lines
On July 26, the CFPB released its Summer Supervisory Highlights, reporting on violations of federal consumer financial laws identified through CFPB supervisory examinations completed between July 2022 and March 2023. The Supervisory Highlights focus on UDAAPs in the areas of auto loans, debt collection, and payday loans. Findings included auto lenders using marketing to mislead consumers about the quality of car for which they were eligible under the terms of an auto loan offer, and auto loan servicers knowingly charging interest on inflated loan balances, charging unavoidable late fees when cancelling consumers’ automatic payments without sufficient notice, and accelerating and requiring payments from consumers on unrelated debts to reclaim repossessed vehicles. Findings also included debt collectors pursuing work-related medical debt after having reason to know that the debt was uncollectible under applicable worker’s compensation law, prohibiting consumers by agreement from revoking their consent to be contacted about collection of an outstanding balance, and making false collection threats or unauthorized collection attempts involving wage garnishment. The CFPB also noted that it has begun scheduling and conducting examinations of new products in emerging markets, including data aggregators, financial data brokers, and other nonbank entities.

“[This] report furthers our efforts to highlight conduct that violates federal law, including the prohibition on abusive practices in consumer financial services.”
- Rohit Chopra, Director, CFPB

SEC Proposes New Requirements to Conflicts of Interest Risk Associated With the Use of Predictive Data Analytics
On July 26, the SEC published proposed regulations requiring broker-dealers and investment advisers (firms) to reduce conflicts of interest resulting from their use of predictive data analytics and related technology. According to the new regulations, which are based on current legal requirements, firms must determine if their use of specific technology results in any conflicts that advance their interests over those of investors. Firms would be obliged to end or neutralize such confrontations, but they might manage the risks by using the techniques they thought were most useful. Firms would also be required to have written policies and procedures, reasonably designed to achieve compliance with the proposed rules and to make and keep books and records related to these requirements. The Federal Register publication of these proposed rules will be followed by a 60-day public comment period.

SEC Proposes Reforms Relating to Investment Advisers Operating Exclusively Through the Internet
On July 26, the SEC proposed amendments to the “internet adviser exemption” promulgated under Rule 203A-2(e) of the Investment Advisers Act, which allows investment advisers to register with the SEC if they provide investment advice almost exclusively through the internet. The proposal would limit investment advisers relying on the exemption to those who provide all investment advice through an operational interactive website on an ongoing basis to more than one client, eliminate the de minimis exemption allowing an internet adviser to have no more than 14 non-internet clients, and make certain corresponding changes to Form ADV.

Although Scaled Back, the SEC’s Newly Adopted Cybersecurity Disclosure Rule Will Require Significant Effort by Public Companies to Comply
On July 26, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The SEC also adopted rules requiring foreign private issuers to make comparable disclosures.

Read more about these adopted rules in a recent client alert.

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