This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

Volcker Rule overhaul approved by FDIC and OCC. Two key banking regulatory agencies have signed off on a new rule intended to clarify what types of transactions will and will not be included under the prohibition on banks engaging in proprietary trading. The final rule was approved by the FDIC Board of Directors in a 3-1 vote on August 20 and signed by Comptroller of the Currency Joseph Otting the same day. The three other financial regulators with jurisdiction over Volcker – the Fed, SEC and CFTC – are also expected to finalize the rule, which was first proposed in July 2018, in the near future. The agencies said the rule is intended to tailor compliance requirements to firms' trading assets and liabilities, and simplify the trading activity information that banking entities are required to provide to the agencies. Responding to stakeholder comments on the original rule draft, the final rule does not include an earlier proposal to use an accounting standard in defining a trading account. "Instead, the final rule would retain a modified version of the short-term intent prong, eliminate the 2013 rule's rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account, and add a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account," according to an FDIC fact sheet. In a separate but related action, the agencies are preparing another proposed rulemaking governing covered fund investments and activities and other issues related to the treatment of investment funds, including revisions to limitations on relationships between a banking entity and a covered fund. The finalized new rule, which some have called Volcker 2.0, is slated to go into effect January 1, 2020, and banks will have one year to comply, though they could opt in earlier.

  • The Volcker Rule, implemented in 2013 as part of the Dodd-Frank regulatory regime and named for the former Fed chairman who proposed the idea, was intended to prevent banks from engaging in speculative investments and from owning or controlling hedge funds or private equity funds. But banks have argued that compliance with the measure has proven to be needlessly complicated, particularly for banks that are not significantly involved in trading – an assessment shared by many of the top regulatory officials. "In fact, the rule has turned out to be so complex that it required 21 sets of frequently asked questions (FAQs) issued by the regulators within three years of its adoption," FDIC Chair Jelena McWilliams said in an August 20 statement. Otting, in a separate August 20 statement, said safeguards "remain to ensure inappropriate risk practices do not recur," but that regulators are "eliminating ineffective complexity and addressing aspects of the rule that restrict responsible banking activity based on our experience with the rule."
  • The sole vote on the FDIC Board in opposition to the final rule was cast by Martin Gruenberg, an appointee of President Barack Obama who has previously chaired the agency – in part because of the decision to drop the accounting provision. In his August 20 statement, Gruenberg said the final rule would exclude nearly half of the financial instruments currently subject to Volcker, and that "the final rule … opens up vast new opportunity – hundreds of billions of dollars of financial instruments – at both the bank and bank holding company level, for speculative proprietary trading funded by the public safety net."
  • House Financial Services Committee Chair Maxine Waters (D-CA), in her August 20 statement, also criticized the final rule, which she said would "weaken the Volcker Rule, which stops banks from gambling with taxpayer money." But Senate Banking Committee Chair Mike Crapo (R-ID), author of the Dodd-Frank rollback law that exempted many smaller banks from Volcker, praised the new rule for "reducing unnecessary compliance burden," while calling for further revisions to the covered funds definition, according to a published report.

FDIC unveils proposed changes on small bank and one-time assessment credits. The FDIC has proposed changes in the rules governing the use of small bank assessment credits and one-time assessment credits by certain insured depository institutions. Under the notice of proposed rulemaking, released August 20, the FDIC would automatically apply small bank credits to quarterly assessments when the reserve ratio is at least 1.35 percent, rather than the 1.38 percent level required under current regulation. After applying credits for eight quarters, the FDIC would remit to IDIs in lump-sum payments the nominal value of any remaining small bank credits. While the proposal would not change the total amount of credits awarded, it could affect when the FDIC would apply the credits. The agency said the proposal was intended to make the application of small bank credits to quarterly assessments more predictable for IDIs with these credits, and to simplify the FDIC's administration of them. Comments on the proposed rule will be accepted for 30 days after publication in the Federal Register.

FDIC proposes modified interest rate cap restrictions for less-than-well-capitalized banks. In another regulatory action announced August 20, the FDIC issued a notice of proposed rulemaking regarding interest rate restrictions on less-than-well-capitalized banks. The proposed rule would amend the methodology for calculating the national rate, which would be the weighted average of rates paid by all IDIs on a given deposit product, and the national rate cap, which would be set at the higher of either the 95th percentile of rates paid by insured depository institutions weighted by each institution's share of total domestic deposits, or the proposed national rate plus 75 basis points. The proposal would also simplify the current process for local rate caps by allowing less-than-well-capitalized institutions to offer up to 90 percent of the highest rate paid on a particular deposit product in the institution's local market area. In announcing the proposal, the agency said the intention behind the rule is "to provide a more balanced, reflective, and dynamic national rate cap." Comments will be accepted for 60 days after the proposed rule is published in the Federal Register, and FDIC said it is interested in hearing ideas on alternative approaches, as well as feedback on its proposed approach.

Congressional study faults major banks for lack of diversity. The House Financial Services Committee has released the results of a survey of diversity and inclusion practices at the nation's "megabanks." According to the committee's analysis, the senior leadership at the largest banks is still mostly white and male, particularly in the top posts. Women accounted for only 29 percent of the board of director memberships of the major financial institutions, and minorities held only 17 percent of those positions. The analysis also found that there was no chief diversity officer reporting directly to a major bank CEO, and less than one percent of bank spending goes to "diverse asset managers and suppliers." Financial Services Committee Chair Maxine Waters and Representative Joyce Beatty (D-OH), who chairs the panel's Subcommittee on Diversity and Inclusion, sent requests for information to the major firms to obtain their diversity and inclusion data and policies from 2015 to the present. While the committee notes that some progress has been made, banks are urged to intensify their focus on recruiting through affinity groups and minority colleges and universities;" "close the pay equity gap for women and minorities;” and “increase investment in leadership and development programs for building a pipeline of diverse talent."

FinCEN director highlights AML/CFT/BSA compliance issues for casinos and gaming. Kenneth Blanco, director of the Treasury Department’s Financial Crimes Enforcement Network, expressed concerns about a developing "gap" in reporting the illicit use of cryptocurrencies at casinos and card clubs, and called for a stronger "culture of compliance" at a time when he said some gambling-related businesses are looking to cut costs by reducing their compliance budgets. Blanco made his comments in an August 13 speech at the 12th Annual Las Vegas Anti-Money Laundering Conference in which he addressed FinCEN's policies and priorities on anti-money laundering/combating the financing of terrorism (AML/CFT) and Bank Secrecy Act issues with regard to the casino and gaming sectors. In his remarks, Blanco discussed how new technologies are impacting financial crime detection, particularly in sports betting and mobile gaming. He also emphasized the need for casinos to "pay attention to" FinCEN's May 2019 guidance on convertible virtual currencies, and a related advisory on CVCs issued at the same time, and provided an overview on the agency's regulatory reform and innovation initiatives. Blanco also touched on the national security implications of collecting beneficial ownership information at both the corporate formation stage and when entities open a bank account.

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