Weekly RoundUp
December 15, 2022

OCC Reports on Key Risks Facing Federal Banking System

In This Weekly Roundup Issue. The Office of the Comptroller of the Currency (OCC) reported the key issues facing the federal banking system in its Semiannual Risk Perspective for Fall 2022; the Consumer Financial Protection Bureau (CFPB) proposed registration requirements for nonbank consumer protection law violators; the Federal Deposit Insurance Corporation (FDIC) proposed a rule to amend Part 328 of its regulations (Advertisement of Membership, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC's Name or Logo); and the FDIC approved revised Guidelines for Appeals of Material Supervisory Determinations (Guidelines) following the conclusion of the comment period for the proposed changes. These and other developments are discussed in more detail below.

The Roundup will be on hiatus during the weeks of December 19, December 26, and January 2 due to the Christmas and New Year holidays. We will resume publication on Thursday, January 12.

Regulatory Developments

OCC Reports on Key Risks Facing Federal Banking System 

On December 8, the OCC reported the key issues facing the federal banking system in its Semiannual Risk Perspective for Fall 2022. The report covers risks facing national banks, federal savings associations, and federal branches and agencies based on data as of June 30, 2022. The report presents information in five main areas: the operating environment, bank performance, emerging risks relating to crypto assets, trends in key risks, and supervisory actions. The report focuses on issues that pose threats to those financial institutions regulated by the OCC and is intended as a resource to the industry, examiners, and the public.

Highlights from the report include:

  • Bank investment portfolios have been adversely impacted by the rising rate environment, resulting in portfolio depreciation.
  • Operational risk is elevated. Cyber threats continue to evolve, with threat actors continuing to target the financial services industry with ransomware and other attacks.
  • Compliance risk remains elevated as banks continue to operate in an increasingly complex environment that includes significant regulatory changes.
  • The quantity of credit risk in commercial and retail loan portfolios is moderate. Loan portfolio performance has been resilient, but signs of potential weakening in some segments warrant careful monitoring.

CFPB Proposes Registration Requirements for Nonbank Consumer Protection Law Violators

On December 12, the CFPB proposed a rule that would require certain nonbank covered persons to register with the CFPB upon becoming subject to public consumer financial protection agency or court orders (local, state, or federal) that impose obligations based on consumer protection law violations. . The proposed online registry would be used to monitor those entities r subject to agency and court orders, track and mitigate risks posed by repeat offenders, and share information with other regulators, law enforcement agencies, and the public. Larger companies subject to the CFPB’s supervisory authority would be required to designate an individual to attest whether the company is adhering to registered law enforcement orders. The proposed rule does not currently apply to insured depository institutions, insured credit unions, related persons, states, certain other entities, or natural persons. The deadline for public comment is 60 days after publication in the Federal Register.

“Protecting American households is a shared effort across local, state, and federal authorities. The proposed registry will help the CFPB, the law enforcement community, and the public limit the harms from repeat offenders.”
~ CFPB Director Rohit Chopra 

FDIC Issues Proposed Rule to Amend Part 328 of Its Regulations

On December 13, the FDIC Board issued a proposed rule for public comment to amend Part 328 of its regulations in order to modernize the rules governing use of the FDIC’s official sign and advertising statements, and to clarify the FDIC’s regulations regarding misrepresentations of deposit insurance coverage.

The FDIC official sign, normally found at bank branch teller windows, would be extended to digital channels, such as bank websites and mobile applications, through which consumers are increasingly handling their banking needs. The proposed rule would require the use of signs that differentiate insured deposits from non-deposit products across banking channels and disclose to consumers that certain financial products are not “insured by the FDIC, are not deposits, and may lose value.” Additionally, the proposed rule would clarify that FDIC-associated terms or images may not be used in marketing and advertising materials to imply or represent that any uninsured financial product is insured or guaranteed by the FDIC.

In addition, the proposed rule would clarify the FDIC’s regulations regarding misrepresentations of deposit insurance coverage by addressing specific scenarios where persons or entities provide information to consumers that may be misleading and confuse consumers as to whether they are doing business with a bank and whether their funds are protected by deposit insurance. 

FDIC Approves Revised Guidelines for Appeals of Material Supervisory Determinations

On December 13, the FDIC approved revised Guidelines following the conclusion of the comment period for the proposed changes. 

The revised Guidelines allow institutions to request a stay of supervisory determinations while an appeal is pending and require that materials considered by the Supervision Appeals Review Committee (SARC) be shared with both parties on a timely basis, and in time to prepare for a meeting with the SARC, if one is requested, subject to applicable legal limitations on disclosure and oversight by the ombudsman. The revised Guidelines also expand and clarify the role of the agency’s ombudsman, adding the ombudsman to the SARC as a non-voting member. The ombudsman will also monitor the supervision process following an institution’s submission of an appeal under the revised Guidelines and report to the FDIC periodically.

SEC Staff Risk Alert Criticizes Broker-Dealer Reports on Best Execution and Payment for Order Flow

The U.S. Securities and Exchange Commission (SEC) Division of Examinations recently published a risk alert on quarterly reports required under Exchange Act Rule 606, which are published by broker-dealers to provide customers with insight into factors influencing order routing decisions. The Risk Alert follows a Financial Industry Regulatory Authority (FINRA) Report earlier this year highlighting deficiencies in 606 Reports and comes on the heels of criticism by SEC Chairman Gary Gensler of current best execution and payment for order flow practices, as well as a lack of competition for retail order flow. The Risk Alert also came just a few weeks before the SEC announced its highly anticipated slate of proposals for sweeping market structure reforms covering best execution, Rule 605 disclosures by market centers, and routing retail equity orders into auctions to increase competition.

Read the client alert for more background and what’s to come.

SEC Exams Division Issues Reg. S-ID Risk Alert

As highlighted in last week’s Roundup, the SEC Division of Examinations recently published a risk alert summarizing observations from exams of registered investment advisers and broker-dealers related to compliance with Reg. S-ID, which is generally designed to protect and prevent retail customers from identity theft and financial loss. Reg. S-ID requires certain registered investment advisers and broker-dealers (as well as certain investments) to establish and implement a written program designed to detect, prevent, and mitigate identity theft for covered accounts offered and maintained primarily for personal, family, or household purposes that involve, or are designed to permit, multiple payments or transactions. Covered accounts also include any other accounts that pose a reasonably foreseeable risk to customers of identity theft.

Read the client alert for key takeaways.

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