Regulatory Developments
Federal Banking Agencies Propose Rule to Limit Impact of Large Bank Failures
On April 2, the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) proposed a rule to limit the interconnectedness of large banking organizations and reduce the impact from failure of the largest banking organizations. Currently, global systemically important bank holding companies (GSIBs) are required to issue debt with certain features under the Federal Reserve’s “total loss-absorbing capacity,” or TLAC, rule. That debt would be used to recapitalize the holding company during bankruptcy or resolution if it were to fail. To discourage GSIBs and “advanced approaches” banking organizations — generally, firms that have $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure — from purchasing large amounts of TLAC debt, the proposal would require such banking organizations to hold additional capital against substantial holdings of TLAC debt. Specifically, the proposal would:
- Amend the regulatory capital rule such that an investment in a covered debt instrument by an advanced approaches banking organization generally would be treated as if it were an investment in a tier 2 capital instrument, and therefore be subject to the existing deduction approaches under the regulatory capital rule.
- Require advanced approaches banking organizations to fully deduct from tier 2 capital any significant investment in or reciprocal cross-holding of covered debt instruments, and direct, indirect, or synthetic investment in the banking organization's own covered debt instrument.
- Generally require advanced approaches banking organizations to include investments in covered debt instruments in the calculation of nonsignificant investments in the capital of unconsolidated financial institutions.
- Provide for separate, 5% common equity tier 1 thresholds for advanced approaches banking organizations that are GSIBs and advanced approaches banking organizations that are not GSIBs. The aggregate amount of certain investments in covered debt instruments that are below these thresholds would not be subject to deduction.
- Provide that any covered debt instrument held for five or fewer business days in connection with bona fide underwriting activities would not be subject to deduction.
The agencies believe that these requirements would reduce interconnectedness between large banking organizations and, if a GSIB were to fail, reduce the impact on the financial system from that failure. The proposal would also require the holding companies of GSIBs to report publicly their TLAC debt outstanding. Comments will be accepted for 60 days following publication in the Federal Register.
The SEC and the U.K. FCA Sign Updated Supervisory Cooperation Arrangements
On March 29, the SEC and the United Kingdom’s FCA signed two updated memoranda of understanding (MOUs) to ensure that information-sharing between the nations would continue in the event the U.K. withdraws from the European Union. The first MOU, originally signed in 2006, is a comprehensive supervisory arrangement covering regulated entities that operate across the national borders. This updated MOU expands the scope of covered entities to include firms that conduct derivatives, credit rating agencies, and derivatives trade repository businesses. The second MOU, originally signed in 2013, provides a framework for supervisory cooperation and exchange of information relating to the supervision of covered entities in the alternative investment fund industry. This updated MOU ensures that cross-border operations of regulated industries will not be interrupted post-Brexit. These MOUs will take effect the date on which EU legislation no longer has a direct effect in the U.K. For more information, read the press release issued by the SEC.
CFTC Eases Regulatory Burdens on Swap Dealers and FCMs
On March 28, the CFTC announced two rule changes as part of Chairman Christopher Giancarlo’s Project KISS initiative. As a result of the changes, swap dealers will no longer be required to notify swap counterparties prior to each transaction (or not less than annually) of each counterparty’s right to require the swap dealer to segregate margin collateral at a third-party custodian. Going forward, the swap dealer will be required to notify counterparties at the beginning of the swap trading relationship. Swap dealers should add the notice provisions currently emailed to counterparties annually into their swap trading relationship documentation entered into pursuant to Regulation 23.504. The CFTC’s amendments also permit the swap dealer to (i) notify any appropriate person at the counterparty who can evaluate and act on it (instead of specifying the job title of the person) and (ii) negotiate the terms pursuant to which margin will be segregated and the types of investments permitted for segregated margin. Consistent with the ability to negotiate terms of the custodial arrangement, the amendments eliminate the requirement to identify in advance the custodian who will hold segregated margin and permit the parties to make that selection if the counterparty elects to segregate.
The CFTC also eased examination requirements applicable to futures commission merchants (FCMs). Currently, Regulation 1.52 requires the National Futures Association (NFA) to routinely conduct examinations of FCMs and their compliance with minimum capital, customer fund protection, record-keeping, and reporting requirements. The final amendments to Regulation 1.52 revise certain minimum standards that the NFA must maintain in its financial surveillance program over FCMs to ensure the FCM’s compliance with CFTC and NFA rules and regulations.
FDIC Proposes Changes to Record-Keeping Requirements for Deposit Insurance Determinations
On March 29, the FDIC announced the approval of proposals to amend certain rules related to insurance determinations made when a bank is placed into receivership. One proposal addresses changes to Part 370 of the FDIC’s Rules and Regulations for “Recordkeeping for Timely Deposit Insurance Determination,” which was originally approved in November 2016 and currently applies to FDIC-insured institutions that have more than 2 million deposit accounts. This rule requires such institutions to have record-keeping capabilities to facilitate rapid payment of insured deposits if such institutions were to fail. The proposed amendments would, among other things, provide an optional one-year extension of the rule’s original compliance deadline of April 1, 2020. The second proposal would amend Part 330 of the FDIC’s Rules and Regulations, which applies to all FDIC-insured institutions, to provide additional methods by which co-ownership of a joint account can be established for purposes of ensuring deposit insurance coverage for such joint account separate and apart from the coverage of individually held accounts by each such co-owner. The public comment period for each proposal will run for 30 days from publication in the Federal Register.
Enforcement & Litigation
OCC Fines Mortgage Lender for Fair Housing Act Violations
On March 19, the OCC announced that it had entered into a consent order with a major mortgage lender over allegations that the lender did not adequately ensure that its relationship loan pricing program was offered to all eligible customers, resulting in adverse effects on customers on the basis of race, color, national origin, and/or sex in violation of the Fair Housing Act, 42 U.S.C. § 3601-19, and its implementing regulation, 24 C.F.R. Part 100. Read the Enforcement Watch blog post.
California DBO Files Administrative Action Against Auto Title Lender
On March 19, the California Department of Business Oversight (DBO) announced that it filed an action to void the loans and revoke the licenses of a Southern California auto title lender for repeated breaches of the state’s California Financing Law, Fin. Cod. section 22000 et seq. The DBO alleges that the auto lender illicitly added fees to the principal of loans to avoid interest-rate caps on smaller loans and failed to properly assess borrowers’ ability to repay loans as required under Section 1452 of Title 10 of the California Code of Regulations. The DBO further alleged that the lender issued misleading advertising, operated from unlicensed locations, and failed to maintain adequate records. The accusation seeks to require the lender to either forfeit any interest or charges or void all loans where it charged excess interest and charges. The CBO also seeks to revoke the auto lender’s state lending license. Read the Enforcement Watch blog post.
Goodwin News
2019 Napa 401(k) Summit — April 7
The NAPA 401(k) Summit is the nation’s largest and most prestigious retirement plan advisor event, and the only industry convention that brings actionable, unbiased content designed for advisors by advisors. The 30 individualized sessions cover everything from practice management and plan optimization to sales and marketing, as well as a full spectrum of technical topics, including 401(k), 403(b), 457 and nonqualified plans, IRA rollovers, and much more. Financial Industry partner, Jamie Fleckner, will be a speaker at the NAPA 401(k) Summit. For more information, visit the event website.
LendIt Fintech USA 2019 — April 8-10
LendIt Fintech USA is the world's leading event in financial services innovation including Fintech, Digital Banking, Blockchain and Lending. Goodwin is a sponsor and nominee in the "Top Law Firm" category at this year's award event. For more information, please visit the event website.
This week’s Roundup contributors: Viona Miller and Stephen Shaw.