This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
Fed finalizes rules tailoring bank regulation to business models. The Federal Reserve has finalized its new supervisory framework for domestic and foreign banks, tailoring regulations to firms’ business models, relieving most domestic banks with $100 billion to $250 billion in assets from enhanced capital and liquidity rules, and making the heretofore annual stress tests an every-other-year exercise. The rules, passed on a 4-1 vote on October 10, establish a framework that sorts banks with $100 billion or more in total assets into four categories based on factors including:
- asset size
- cross-jurisdictional activity
- reliance on short-term wholesale funding
- nonbank assets and
- off-balance sheet exposure
While generally similar to the proposals released for comment over the past year, the final rules simplify the proposals by applying liquidity standards to a foreign bank’s US intermediate holding company based on the risk profile of the IHC, rather than on the combined US operations of the foreign bank. For larger firms, the final rules apply standardized liquidity requirements at the higher end of the range that was proposed for both domestic and foreign banks. The first of the tailoring rules, developed with the FDIC and OCC, revises the criteria for determining the applicability of regulatory capital and liquidity requirements for large US banking organizations and IHCs of foreign banks. The second tailoring rule establishes risk-based categories for determining prudential standards for large domestic and foreign banks, consistent with the Dodd-Frank overhaul law enacted in 2018. The Fed has summarized its new rules in a 2-page visual, spelling out requirements for banks and lists of foreign and domestic firms by category. The rules will be effective 60 days after publication in the Federal Register.
- Fed Vice Chair for Supervision Randal Quarles indicated that the Fed will be working with international partners to address an issue not covered in the newly finalized rules: liquidity rules for US branches of foreign banks. “We will be focusing our attention in the coming months on the question of branch liquidity requirements,” Quarles said in his October 10 statement in support of the rules.
- The one dissenting vote from the Fed’s Board of Governors came from Lael Brainard, the sole Democratic appointee, who voted against both tailoring rules, saying in her October 10 statement, “Today’s actions go beyond what is required by law and weaken the safeguards at the core of the system before they have been tested through a full cycle.”
Volcker rule changes finalized as Fed, SEC approve. The remaining two of the five agencies with jurisdiction over the Volcker rule have approved an overhaul of the regulation intended to simplify compliance requirements while providing greater clarity and certainty for activities allowed under the law. The Fed and the SEC both approved the rule on October 8. The changes were jointly developed by those two regulators, along with the FDIC, OCC and CFTC, which had already given their approvals. Under the final rule, firms that do not have significant trading activities will have simplified and streamlined compliance requirements. Community banks are generally exempt from the Volcker rule by statute. But the agencies say that firms with significant trading activity will have more stringent compliance requirements. With the changes, the agencies expect that the types of trades considered prohibited proprietary trading will remain generally the same as under the previous 2013 rule.
- The revised Volcker rule has been opposed by Democratic members of several of the regulatory bodies, including Fed Board member Lael Brainard, who said she voted against the final rule because it reduces the scope of covered activity and would “excessively rely on firms’ self-policing.”
- The new rules will be effective on January 1, 2020, with a compliance date of January 1, 2021.
Regulators will allow more small banks to share top officials. The three main bank regulatory agencies have finalized a rule allowing a director or other management official to serve at more than one depository institution or holding company provided that both banks have less than $10 billion in assets. The final rule, announced on October 2 by the Fed, FDIC and OCC, would expand the number of community banks that qualify for management interlocks where they were previously restricting in doing so by the “major assets” test. The rule simplifies and increases the relevant threshold from US$2.5 billion in total assets for one of the two interlocking banking entities and US$1.5 billion for the other to US$10 billion in total assets for both institutions, which officials said would be particularly helpful for banks in rural areas. The geographic interlock prohibitions (namely the “community” and the “RMSA” tests) were unchanged by the rulemaking. The final rule, which became effective as of its publication in the Federal Register on October 10, was not changed from the original proposal that was opened to public comment last December.
CFPB issues final rule exempting small lenders from HDMA reporting requirements. The CFPB has finalized its rule exempting certain smaller institutions from reporting requirements under the Home Mortgage Disclosure Act. The final HDMA rule, issued October 10, extends for another two years a temporary threshold exempting lenders that originated fewer than 500 open-end lines of credit in a two-year period. In addition, CFPB has proposed raising the permanent coverage thresholds for closed-end mortgage loans and open-end lines of credit. Comments on that proposal are due October 15 and a final rule will be issued next year, the bureau said in its October 10 announcement.
FHFA structure ruled unconstitutional. The en banc 5th US Circuit Court of Appeals has ruled that the structure of the Federal Housing Finance Agency is unconstitutional under the separation of powers doctrine because the agency’s director is insufficiently accountable to the president. In its September 6 opinion, the en banc court largely upheld its earlier panel findings that the FHFA is unconstitutionally structured in violation of Article II because its director may be removed only “for cause,” and held that the provision of the Housing and Economic Recovery Act of 2008 governing the director’s removal process must be severed. Plaintiffs in the case, Collins v. Mnuchin, are Freddie Mac and Fannie Mae shareholders who objected to the 2012 arrangement by which the GSE’s net worth was sent to the Treasury, known as a net worth sweep. The 5th Circuit found that the sweep exceeded FHFA’s statutory authority as the GSEs’ conservator. The case has drawn inevitable comparisons to the legal uncertainty over the structure of the CFPB (see item below). As with the CFPB, the Trump Administration Justice Department agrees with the plaintiffs who argue that FHFA’s director wields unconstitutional power. But, unlike the CFPB, the FHFA maintains that its structure is constitutional.
House Democratic leadership asks Supreme Court to reject challenge to CFPB’s constitutionality. The House of Representatives has filed a brief opposing a request for the Supreme Court to consider a case from the Ninth Circuit of Appeals arguing that the structure of the CFPB unconstitutionally infringes on the president’s executive authority. The House’s motion to the high court, filed October 7, seeks to file an amicus brief in support of the appeals court’s ruling in favor of the commission in the Seila Law v. CFPB case, which involved a law firm that refused to comply with a CFPB request for documents. Initially, in 2016, the Ninth Circuit found the CFPB’s leadership structure to be unconstitutional, but that ruling was overturned by the full court in 2018. The dispute centers on the provision that CFPB’s director can be removed only for cause, which the Trump Administration has asked the Supreme Court to strike down. Congressional Democrats say the for-cause provision, part of Dodd-Frank, was intended to provide the agency with a greater degree of independence, as House Speaker Nancy Pelosi (D-CA) and Financial Services Committee Chair Maxine Waters (D-CA) noted in an October 7 statement announcing the filing. As reported in the September 23 edition of Bank Regulatory News and Trends, the CFPB itself filed a brief with the Supreme Court on September 17 arguing that the structure of the bureau violates the separation of powers doctrine by infringing on the president’s authority to remove executive branch officials from their posts. The Financial Services Committee is scheduled to hold its semi-annual review hearing of the CFPB on October 16, and the Senate Banking Committee holds its review the following day.
Treasury, IRS propose guidance to ease tax implications of LIBOR transition. The Treasury Department and the IRS have issued proposed regulations to help taxpayers “avoid adverse tax consequences” as US banks move from the London Interbank Offered Rate to alternative reference rates. The proposed regulation, published in the Federal Register on October 9, provides guidance on the tax consequences of the transition to the use of other reference rates in debt instruments and non-debt contracts. It comes in response to a request for guidance from the Alternative Reference Rates Committee, composed of private sector and regulatory stakeholders and convened by the Fed in advance of the expected market transition from IBORs to alternative reference rates, such as the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York. In 2017, the U.K. Financial Conduct Authority announced that all currency and term variants of LIBOR, including USD LIBOR, may be phased out at the end of 2021 following a rigging scandal that undermined confidence in the benchmark. Given the prevalence of USD LIBOR as the reference rate in a broad range of financial instruments, domestic and international regulators have recognized that its probable elimination has created risks to the safety and soundness of individual financial institutions and to financial stability generally. “A smooth and successful transition away from LIBOR and towards an alternative rate, such as SOFR, is important for the stability of global financial markets,” said Treasury Secretary Steven Mnuchin. “These proposed regulations provide certainty and clarity to taxpayers as they make the critical transition away from LIBOR.” Treasury and IRS are asking for written comments on the proposed regulations through November 25, 2019.
- Treasury’s move came on the heels of a September 17 letter from the FHFA to the 11 Federal Home Loan Banks instructing them that, as of December 31, 2019, they should stop purchasing investments in assets tied to LIBOR with a contractual maturity beyond December 31, 2021.
- DLA Piper on September 23 announced the launch of its LIBOR Transition practice, which will focus on assisting companies with impact assessment and advising on benchmark reform implementation across multiple jurisdictions and products.
SEC proposes Guide 3 update. The SEC has announced rules to update the statistical disclosures that bank and savings and loan registrants provide to investors, and eliminate disclosures that overlap with Commission rules, US Generally Accepted Accounting Principles or International Financial Reporting Standards. The proposed rule, announced September 17, would replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with updated disclosure in a new subpart of Regulation S-K. The proposal results from the SEC’s 2017 request for comment on possible changes to Guide 3. The proposed rules would require disclosure about the following: distribution of assets, liabilities and stockholders’ equity, the related interest income and expense, and interest rates and interest differential; weighted average yield of investments in debt securities by maturity; maturity analysis of the loan portfolio including the amounts that have predetermined interest rates and floating or adjustable interest rates; an allocation of the allowance for credit losses and certain credit ratios; and information about bank deposits including amounts that are uninsured. “Guide 3 has not been substantively updated for more than 30 years” said SEC Chairman Jay Clayton. “Today’s proposals are another example of how thoughtful reviews can improve disclosures for the benefit of investors and public companies.” The SEC is requesting comments on the proposed rules, which will be due 60 days after the publication of its proposal in the Federal Register.