FDIC Part 370 frequently asked questions

For the benefit of insured depository institutions with two million or more deposit accounts (a “Covered Institution” or “CI”), FDIC has recently published a compilation of frequently asked questions (“FAQs”) from the inquiries it had received from covered institutions as well as outreach meetings it had conducted with them. This publication also provides FDIC responses and staff opinions as guidance to covered institutions in implementing 12 C.F.R. Part 370 (“Part 370”).

In the publication, FDIC also notes that the Technical Guide will be updated over time, as when “new information regarding system architecture, interfaces, capabilities, and limitations may come to light resulting in additional feedback” from input from FDIC to covered institutions.

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Allowance for credit losses and FFIEC 002 reporting

The significant changes in the accounting for credit losses (e.g., Current Expected Credit Losses or “CECL”, and International Financial Reporting Standards 9 or “IFRS 9”) can have a unique effect on the US branches and agencies of foreign banking organizations (FBOs).  As US banking institutions are in the process of getting ready for the upcoming requirement, this may also be a good time to discuss the relevant Allowance for Loan and Lease Losses (ALLL) considerations for the US branches and agencies of the FBOs. In this article, we consider the current reporting, common problems, and issues to be considered concerning the adoption of CECL.

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Appeals Court vacates DOL fiduciary rule

On March 15, 2018, the US Court of Appeals for the Fifth Circuit (the “Court”) issued a decision vacating the Department of Labor’s (DOL) “Conflict of Interest Rule” on fiduciary investment advice (the “Rule”).  The court concluded that the DOL exceeded its regulatory authority in implementing the rule, which set forth a new definition of an ERISA investment-advice fiduciary and modified and created new exemptions to prohibited transactions.  Because the court found that the regulatory package is “plainly not amenable to severance,” it vacated the rule in its entirety.

The court has until May 7, 2018 to file the mandate allowing the decision to take effect (giving the government time to file a petition for rehearing en banc or appeal to the Supreme Court). While there are several possible outcomes, including appeal, this decision is the most significant blow to the Rule since its finalization in April 2016.

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Senate passes financial services regulatory reform bill, would amend key Dodd-Frank thresholds

On March 14, 2018, the Senate passed, by a vote of 67 to 31, S. 2155 (the “Economic Growth, Regulatory Relief, and Consumer Protection Act”), which marks the most significant changes to the Dodd-Frank Act since its enactment in 2010.

Most notably, the bill would raise the statutory asset thresholds related to the imposition of enhanced prudential standards (EPS) and the Dodd-Frank Act stress tests (DFAST):

  • EPS – The threshold would be raised from $50 billion to $250 billion, though the Federal Reserve Board (FRB) would retain the authority to impose EPS on banks with between $100 billion and $250 billion in assets.
  • DFAST – The threshold for the FRB’s annual supervisory stress test would be raised from $50 billion to $250 billion and the threshold for the company-run stress test would be raised from $10 billion to $250 billion, though the FRB would be required to conduct a separate, periodic supervisory stress test of banks with between $100 billion and $250 billion in assets.

Below are several key takeaways with respect to the bill’s potential impact on regulatory thresholds.

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Proposed capital rules for swap dealers and security-based swap dealers

In December 2016, the Commodity Futures Trading Commission (“CFTC”) released its re-proposed capital rules for swap dealers (“SDs”) and major swap participants (“MSPs”).1  Additionally, the Securities and Exchange Commission (“SEC”) proposed its capital rules in 20122 for security-based SDs and MSPs.  The CFTC’s re-proposal attempts to accomplish several things, including harmonization with the proposed SEC capital rules.  It further provides optionality for financial and non-financial SDs regarding computing capital under a standardized versus models-based approaches.3  It is important for each financial SD to assess the implications of the proposed rulemaking to its swap dealing operating model.  Questions to consider include:  (1) Why should SDs consider a models-based capital approach versus non-model?  (2) How does entity type (e.g., bank, broker-dealer) impact capital methodology?

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Exam priorities for financial services firms in 2018

The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) recently released their annual examination priorities for 2018.  Although the regulators independently develop their areas of focus, there are five overlapping priorities that securities firms may want to address in the near term.

The SEC’s priorities are organized around five thematic areas: (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and the Municipal Securities Rulemaking Board (MSRB); (4) cybersecurity; and (5) anti-money laundering (AML) programs.

FINRA’s priorities fall into six main categories: (1) fraud, (2) high-risk and firms and brokers, (3) operational and financial risks, (4) sales practice risks, (5) market integrity, and (6) new rules.

Our detailed review reveals five priorities shared by the SEC and FINRA:

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SEC’s Enforcement Division announces self-reporting initiative for investment advisers

On February 12, 2018, the US Securities and Exchange Commission’s (SEC) Division of Enforcement (the Division) announced1 the Share Class Selection Disclosure (SCSD) Initiative,2 under which the Division will agree not to recommend financial penalties against investment advisers who self-report violations of securities laws relating to certain mutual fund share class selection issues and promptly return money to affected clients.

Specifically, under the terms of the SCSD Initiative, the Division will recommend “standardized, favorable settlement terms to investment advisers that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients in a 12b-1 fee paying share class when a lower-cost share class of the same mutual fund was available.”

For eligible participating advisers, the Division will recommend settlements that would require disgorgement and payment of such profits to affected clients, but would not impose a civil monetary penalty.  The settlements would also require advisers to undertake several specific actions, including evaluating, updating (if necessary), and reviewing the implementation effectiveness of compliance policies and procedures regarding mutual fund share class selection within 30 days.

The SEC has expressed “significant concern that many investment advisers have not been complying with their obligation under the Advisers Act to fully disclose all material conflicts of interest related to their mutual fund share class selection practices, and that investor harm involving this lack of disclosure may be widespread.”

In conjunction with the announcement, the Division warned that it “expects to recommend stronger sanctions in any future actions against investment advisers that engaged in the misconduct but failed to take advantage of [the SCSD Initiative].”

The SEC published a questionnaire3 and a related attachment4 alongside the announcement.
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Where do conduct, culture, and compliance intersect?

Culture has always been fundamental to determining how an organization operates.  Recently, however, the topic of culture has moved to the top of the agenda for regulators, investors, and consumers. Regulators have come to realize that that without a culture of integrity, organizations are likely to view their ethics and compliance programs as a set of check-the-box activities.

Organizations understand that culture is one of the biggest determinants of how employees behave. Strong cultures have two common elements: there is a high level of agreement about what is valued, and a high level of intensity with regard to those values. Organizations with strong positive cultures create trusting relationships with stakeholders and investors and—in turn—stakeholders and investors trust the organization and the brand.

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FRB, FDIC provide resolution plan feedback to 19 FBOs, tailor supervisory expectations

On August 8, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) extended, from December 31, 2017 to December 31, 2018, the resolution plan deadline for 21 firms, including 19 foreign banking organizations (FBOs).

On January 29, 2018, the agencies issued firm-specific feedback to these 19 FBOs based on their last resolution plans filed in 2015.1 Although the feedback letters do not identify any deficiencies or shortcomings with respect to the 2015 plans,2 they outline key supervisory expectations that must be met as the FBOs prepare to file their next plans.

FBOs with US IHCs

Eight of the 19 FBOs were required to establish US intermediate holding companies (IHCs) as of July 1, 2016.3 Accordingly, these FBOs are required to describe any changes they have made to their resolution plan resulting from the implementation of the IHC requirement.

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FRB finalizes US risk committee, home country stress testing certifications for FBOs

More than two years after issuing its proposal, the Federal Reserve Board (FRB) finalized1 changes to the FR Y-7 (Annual Report of Foreign Banking Organizations) with respect to the US risk committee and home country stress testing certification requirements for foreign banking organizations (FBOs).

The changes are effective beginning with the reports submitted on or after March 1, 2018.

For more information on the reporting requirements, please click here.

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