This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
- Volcker 2.0: Federal bank regulators announce Volcker Rule modifications. The Federal Reserve on May 30 joined with four other federal bank regulatory agencies in rolling out a 373-page proposed rule to simplify and relax some of the regulatory burdens of the Volcker Rule restrictions on proprietary trading by financial institutions. The new rule, which won unanimous approval at the Fed's Wednesday board meeting, would seek to tailor restrictions based on a firm's level of trading activity. The changes are intended to provide banks with more flexibility and lower compliance costs and are part of an ongoing revision of the regulatory regime intended to boost lending and economic growth. Under the banking regulatory reform bill signed into law on May 24 by President Trump, banks with less than $10 billion in assets are now exempted from the Volcker probation on depository institutions engaging in riskier investments.
Key provisions of the proposed multi-agency rule include:
- Creating three tiers for banks based on their level of trading activity, with those having $10 billion or more in trading assets and liabilities deemed to have "significant" activity, banks in the $1 billion to $10 billion range, defined as having "moderate" activity and those under $1 billion presumed to be in compliance, though they would still have to report their net trading gains and losses
- Providing more clarity by revising the definition of "trading account" in the rule, in part by relying on commonly used accounting definitions
- Clarifying that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity
- Streamlining the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition
- Limiting the Volcker Rule's impact on the foreign activity of foreign banks
- Simplifying the trading activity information that banking entities are required to provide to the agencies.
Enacted as part of Dodd-Frank, the rule named for former Fed Chair Paul Volcker was intended to prevent banks that receive taxpayer backing in the form of deposit insurance from engaging in risky trading activities. But a consensus has emerged among industry stakeholders and regulators that the rule in practice has been marred by unclear enforcement metrics and differing interpretations by overlapping agencies charged with administering it. The new proposed rule does not overturn the Volcker Rule; as Fed Chair Jerome Powell noted, it remains "faithful to both the text and the spirit of the [Dodd-Frank] law." The other agencies charged with enforcement of Volcker – the FDIC, OCC, SEC and CFTC – are also expected to approve the rule change in the coming days. Comment will be accepted for 60 days after the proposal's publication in the Federal Register.
- President signs banking deregulation bill into law. As we reported in our May 23 issue, the House of Representatives passed the major bank-deregulation bill, rolling back key parts of Dodd-Frank, which had previously been passed by the Senate. On May 24, President Trump signed the measure into law at a White House ceremony. The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) would ease the regulatory burden on small community banks and, with the goal of giving consumers easier access to credit, provide relief for some larger regional banks from enhanced prudential standards and provide protections against class-action suits for credit-reporting agencies.
- Beneficial ownership procedures unveiled. The Federal Financial Institutions Examination Council on May 11 issued new examination procedures pursuant to the final rule, Customer Due Diligence Requirements for Financial Institutions, issued by the Financial Crimes Enforcement Network exactly two years earlier. FinCEN's 2016 final rule, aimed at improving anti-money laundering efforts, clarifies customer due diligence requirements and includes a new requirement for covered financial institutions to identify and verify the identity of beneficial owners of certain legal entity customers. FinCEN is requiring financial firms to collect information about any individual who owns at least a 25 percent stake in any company opening a new account, as well as anyone who directly controls or manages the entity. Banks must also develop a risk profile of their customers. The new examination procedures apply to banks, savings and loan associations, savings associations, credit unions, and branches, agencies, and representative offices of foreign banks. The FFIEC member agencies – the Fed, FDIC, OCC, CFPB and the National Credit Union Administration – created the procedures in collaboration with FinCEN and the Treasury Department. Subsequently, on May 16, FinCEN announced a 90-day exemption for the beneficial ownership requirements "with respect to certain financial products and services that automatically rollover or renew (ie, certificate of deposit [CD] or loan accounts) and were established before the Beneficial Ownership Rule's Applicability Date." The new rule was the subject of a May 16 hearing of the Terrorism and Illicit Finance Subcommittee of the House Financial Services Committee, chaired by Representative Steve Pearce (R-NM), who said, "there are legitimate concerns about the application of this rule and the impact it could have on banks already struggling with BSA compliance. Adding additional requirements will likely lead to the de-risking of legitimate business accounts because of increased regulatory burdens. It is important for our federal regulators to strike the appropriate balance between ensuring safety as well as access to the financial system."
Here are links to the FFIEC's overviews of the new examination procedures for Customer Due Diligence and for Beneficial Ownership for Legal Entity. FinCEN's announcement of the 90-day limited relief can be found here.
- McWilliams confirmed as FDIC chair. After months of delay, the Senate voted 69-24 on May 24 to confirm Jelena McWilliams as the next chair of the Federal Deposit Insurance Corp., filling one of the last remaining top posts of the Trump Administration's bank regulatory team. In her Senate testimony earlier this year, McWilliams said she plans to promote regulatory relief for community banks, speed up the application process for new institutions seeking federal deposit insurance and develop a blueprint for bank responses to cybersecurity breaches. McWilliams, previously chief legal officer at Cincinnati-based Fifth Third Bank, has served as an attorney at the Federal Reserve Board and as a Senate Banking Committee staffer. Meanwhile, according to a published report, Senate Minority Leader Chuck Schumer (D-NY) has recommended to the White House that Martin Gruenberg, the current FDIC chair, be nominated as vice chair, potentially retaining a dissenting voice on the FDIC to the Administration's deregulatory agenda.
- OCC encourages banks to re-enter small-dollar lending. The Office of the Comptroller of the Currency on May 23 issued guidance encouraging banks to re-enter the short-term, small-dollar loan markets – typically ranging between $300 and $5,000 and running 2 to 12 months in duration – to help meet the credit needs of their customers. In addition, as long as they follow sound risk management practices, banks may lend to consumers with weaker credit histories but who have the ability to repay. Comptroller Joseph Otting stressed that this area is an important space for banks to play a role in providing safer, fairer and more affordable choices for consumers. "Bank-offered products can help lead consumers to more mainstream financial services without trapping them in cycles of debt. When banks offer products with reasonable pricing and repayment terms, consumers also benefit from other services that banks regularly provide, such as financial education and credit reporting." Bureau of Consumer Financial Protection (formerly known as the CFPB) Acting Director Mick Mulvaney praised the OCC's move, saying it was consistent with his agency's efforts to expand consumer choice.
More details are available in the OCC bulletin Core Lending Principles for Short-Term, Small-Dollar Installment Lending.
- Quarles calls for review of foreign banks' capital requirements, seeks input on living will guidance. The Fed's Vice Chairman for Supervision, Randal K. Quarles, said the Fed and the FDIC plan to ask for input on liquidity requirements placed on large banks as part of the living will process. "We are interested in views from the firms and the public on how the regimes can be improved, and we expect to invite public comment on our living will guidance for U.S. and foreign firms in the near future," Quarles said in remarks at a May 16 symposium on the global banking system at Harvard Law School. The current requirements – known as Resolution Adequacy and Positioning and Resolution Liquidity Execution Need – were adopted two years ago but never subject to a public comment process. In the same speech, Quarles suggested that regulators could consider lowering capital requirements for foreign banks operating in the US. Quarles said he continues to believe that the requirement that foreign banks create capitalized intermediate holding companies to cover any significant US operations is an appropriate approach, but added that he sought a regulatory balance that would allow the home regulator of a failing global bank to direct its dissolution in an orderly manner. "Willingness by the United States to reconsider its calibration may prompt other jurisdictions to do the same, which could better the prospects of successful resolution for both foreign G-SIBs operating in the United States, and for U.S. G-SIBs operating abroad," Quarles said.
- Deputy AG: Justice to stop "piling on" banks. Deputy Attorney General Rod Rosenstein announced a new Justice Department policy that encourages DOJ units and other law enforcement agencies to coordinate when imposing multiple penalties for the same conduct. In a May 9 speech before American Conference Institute's 20th Anniversary New York Conference on the Foreign Corrupt Practices Act, Rosenstein said the new policy, to be incorporated into the US Attorneys' Manual, seeks to discourage the practice of "piling on" – imposing excessive or redundant penalties – in corporate enforcement actions. He said the concern is particularly relevant to highly regulated industries – such as banking – in which "a company may be accountable to multiple regulatory bodies. That creates a risk of repeated punishments that may exceed what is necessary to rectify the harm and deter future violations."
- Comment period extended to June 25 for proposal to ease bank capital leverage rule. The Fed and the OCC announced on May 18 that they have extended until June 25, 2018, the comment period for their proposed rule that would tailor leverage ratio requirements to the business activities and risk profiles of the largest domestic firms. The proposal, announced in April, would tie the standard to a firm's risk-based capital surcharge, rather than the current fixed leverage standard, to better tailor it to individual firms and their systemic footprint. The agencies extended the comment period to allow interested persons more time to prepare their comments, which were originally due on May 21.