President Trump Signs FSOC Bill Assuring Insurance Regulator Continuity

President Donald J. Trump signed into law the Financial Stability Oversight Council Insurance Member Continuity Act (H.R. 3110) on September 27, 2017.

The bill, introduced by Representatives Randy Hultgren (R-IL) and Maxine Waters (D-CA), permits an FSOC independent member with insurance expertise to remain past his or her term for the earlier of (i) 18 months or (ii) when a successor is confirmed.

Representative Hultgren explained the importance of the bipartisan bill:

“[I]t is now extremely important that we have someone with a deep understanding of our insurance markets, and how they interact with our entire financial system, to continue serving as a voting member of FSOC. The Financial Stability Oversight Council Insurance Member Continuity Act ensures that this key regulatory body is able to benefit from the perspective of a voting member with insurance expertise without any unnecessary lapses.”

 

Lofchie Comment: The realization of the “importance” of industry participation in the FSOC designation process is welcome. When FSOC designated MetLife as being systemically important, it generally ignored the views of the FSOC member with insurance industry experience. See FSOC Proposes Preliminary Designation of MetLife as a Non-Bank Systematically Important Financial Institution (with Lofchie Comment).  See also D.C. District Court Calls FSOC’s Review of MetLife’s Status “Fatally Flawed”.

Senate Banking Committee Votes on Key Administration Nominees

The U.S. Senate Banking committee voted to advance the nominees for two prominent banking regulatory positions. The two nominations will now proceed to the Senate floor for a confirmation vote.

Joseph Otting was approved to serve as Comptroller of the Currency. Mr. Otting most recently was managing partner of Ocean Blvd LLC and Lake Blvd LLC. He previously held positions as President and CEO of OneWest Bank and Vice Chair of U.S. Bancorp. Keith Noreika has served as Acting Comptroller of the Currency since Thomas J. Curry stepped down in May 2017 (see previous coverage).

Randal Quarles was approved to serve as Vice Chair of the Board of Governors of the Federal Reserve System (“FRB”). Mr. Quarles had served as Under Secretary for Domestic Finance under President George W. Bush, Assistant Secretary of the Treasury for International Affairs and U.S. Executive Director of the International Monetary Fund. He is the founder and managing director of Cynosure, a private investment firm, and also was a partner at Davis Polk & Wardwell. Current FRB Vice Chair Stanley Fischer recently announced his intention to step down from his position in October 2017 (see previous coverage).

Stanley Fischer to Resign from Federal Reserve Board

Board of Governors of the Federal Reserve System (“FRB”) Vice Chair Stanley Fischer will resign from the FRB on or around October 13, 2017. Dr. Fischer announced his plans in a letter to President Donald J. Trump.

Dr. Fischer was appointed to the FRB by President Barack Obama in 2014 for an unexpired term set to end in 2020. Dr. Fischer’s term as Vice Chair was set to expire on June 12, 2018. During his tenure, Dr. Fischer served as chair of FRB Committees on (i) Financial Stability and (ii) Financial Monitoring and Research. He also represented the FRB internationally in various capacities.

NY Department of Financial Services Cybersecurity Regulation Now Effective

New York State’s “first-in-the-nation” cybersecurity regulation became effective on August 28, 2017.

The New York Department of Financial Services (“DFS”) cybersecurity regulation requires banks, insurance companies and other institutions regulated by the DFS (“covered entities”) to implement a cybersecurity program to protect consumer data (see previous coverage). A covered entity is required to have (i) a written cybersecurity policy or policies approved by the entity’s board of directors or a senior officer, (ii) a “Chief Information Security Officer” in place to protect data and systems, and (iii) other relevant “controls and plans” intended to fortify the safety of the financial services industry.

Firms also will be required to submit a Certification of Compliance annually that concerns the firm’s cybersecurity compliance program. The first such Certificate must be submitted by February 15, 2018. The DFS now requires covered entities to submit notices of certain cybersecurity events to the DFS Superintendent within 72 hours of any occurrence. Covered entities will be able to report cybersecurity events through the DFS online cybersecurity portal.  Institutions also will be able to use the portal to file notices of exemption.

DFS Superintendent Maria Vullo commented on the program:

“With cyber-attacks on the rise and comprehensive federal cybersecurity policy lacking for the financial services industry, New York is leading the nation with strong cybersecurity regulation requiring, among other protective measures, set minimum standards of a cybersecurity program based on the risk assessment of the entity, personnel, training and controls in place in order to protect data and information systems.”

 

Lofchie Comment: As if the life of a compliance officer trying to manage technology risk was not worrisome enough, the NY DFS has now added a state-wide regulatory burden to their job. On the positive side, there is a three-day weekend coming.

FRB Seeks Comments on Proposed Repo-Based Reference Rates

The Board of Governors of the Federal Reserve System (“FRB”) issued a request for public comment on a proposal to publish three new benchmark interest rates based on overnight repurchase agreement (“repo”) transactions backed by Treasuries.

According to the FRB, the following rates would be produced in coordination with the Office of Financial Research:

  • Secured Overnight Financing Rate, which would be the “broadest measure of rates on overnight Treasury financing transactions” by including tri-party repo data from Bank of New York Mellon (“BNYM”), as well as cleared bilateral and General Collateral Financing (“GCF”) repo data from the Depository Trust & Clearing Corporation (“DTCC”). This rate was recently chosen by the Alternative Reference Rates Committee to be used as the alternative to U.S. dollar LIBOR.
  • Tri-Party General Collateral Rate, which would be based only on tri-party repo data from BNYM only.
  • Broad General Collateral Rate, which would be based on tri-party repo data from BNYM, as well as cleared GCF repo data from DTCC.

The FRB noted that since these rates are based on Treasury-backed repo data, they are “essentially risk-free.” FRB is proposing to use a “volume-weighted median” as the “central tendency measure” for the aforementioned rates. The FRB is also proposing to publish the reference rates and accompanying summary statistics at 8:30 a.m. Eastern time, each morning beginning in mid-2018.

FRB is soliciting comments from the public, which must be submitted within 60 days of publication in the Federal Register.

Lofchie Comment: Note that these rates are for fully collateralized transactions, while LIBOR was (at least in theory) a rate for uncollateralized transactions. It would be informative to see how these rates perform in terms of financial stress. For example, would it be the case that a “flight to safety” results in the Secured Overnight Financing Rate declining when rates generally are rising to reflect a perception of increased risk?

Senator Warren Asks Bank CEOs to Publicly Take Positions on CFPB Arbitration Rule

Senator Elizabeth Warren (D-MA) sent letters to the CEOs of 16 major financial institutions asking for information related to the Consumer Financial Protection Bureau (“CFPB”) arbitration rule.

Both House and Senate Republicans have recently introduced resolutions to block the rule using the Congressional Review Act, and the House resolution was approved on July 25, 2017. In light of this effort, Senator Warren requested that the CEOs of the 16 banks publicly express whether they support or oppose the rule. Senator Warren pointed to the lobbying groups that represent these banks and questioned why the financial institutions themselves would not take a position publicly:

“These organizations represent your bank and your industry, but you – and other CEOs of large banks – have remained silent on the rule. If your lobbyists are taking such strong positions against the rule, is there a reason both you and your bank have been unwilling to take a public position?”

While asking the banks to take a public position, Senator Warren also maintained that the information would be used in order to contribute to a better understanding of potential effects that may come from a reversal of the rule:

“This rushed process leaves little time for public hearings and other traditional congressional fact-gathering. I am seeking this information so that the public, my colleagues, and I can better analyze the impact of reversing this CFPB rule.”

In addition to requesting information regarding the banks’ positions on the rule, Senator Warren solicited data on outcomes of customer arbitration cases against the banks. She also requested that the banks provide copies of internal or public documents that demonstrate the impact of the rule on customers or company profits, and asked that each of the banks respond to her letter by September 1, 2017.

Lofchie Comment: There is little mystery as to why banks might choose to “remain silent” at this stage. They do not want to subject themselves to overtly political attacks, or be used in an obvious political stunt by Senator Warren. Senator Warren’s requests for a mountain of information from these banks suggest that the information gathered to date by the CFPB is lacking and that the resolutions under the Congressional Review Act are warranted. The fact that the Senator feels it necessary to ask these questions, rather than being able to argue from evidence already gathered by the CFPB, seems like an admission that the rulemaking was insufficiently considered.

OCIE Cybersecurity Report Shows “Overall Improvement”

The SEC Office of Compliance Inspections and Examinations (“OCIE”) examined 75 broker-dealers, investment advisers and investment companies as part of its Cybersecurity 2 Initiative to assess industry practices concerning cybersecurity preparedness. OCIE National Examination Program staff reported an overall improvement in awareness of cyber-related risks and the implementation of certain cybersecurity practices since the OCIE’s Cybersecurity 1 Initiative.

According to the OCIE Risk Alert, the Cybersecurity 2 Initiative examinations focused on written policies and procedures, and included more testing of controls. Specifically, it addressed:

  1. governance and risk assessment;
  2. access rights and controls;
  3. data loss prevention;
  4. vendor management;
  5. training; and
  6. incident response.

Notably, the OCIE found that all broker-dealers, all funds, and nearly all advisers examined in the Cybersecurity 2 Initiative maintained written cybersecurity policies and procedures around the protection of customer/shareholder records. These findings contrasted with those of the Cybersecurity 1 examinations. The OCIE also found firms that were not “adhering to or enforcing” policies and procedures, and firms where guidance for employees was too general. The OCIE report included recommendations for improving controls in their respective cyber programs.

In a related white paper on cyber risk, the Bank for International Settlements Financial Stability Institute evaluated the regulatory and supervisory initiatives in a number of leading jurisdictions, including Hong Kong SAR, Singapore, the United Kingdom and the United States. The report reviewed supervisory approaches to assessing the cyber-risk vulnerability and resilience of banks. The paper also identified a trend toward “threat-informed” testing frameworks, which use threat intelligence to design simulated cyber attacks when testing the cybersecurity of an entity.

Federal Register: OCC Requests Comments on Volcker Reforms

The Office of the Comptroller of the Currency (“OCC”) requested public comment on the Volcker Rule. The request was published in the Federal Register and comments are due by September 21, 2017.

As reported previously, the OCC identified four areas of the rule for consideration: (1) the scope of the entities to which the final rule applies, (2) the proprietary trading restrictions, (3) the covered fund restrictions, and (4) the compliance program and metrics reporting requirements.

The OCC requested public input in order to improve and inform proposed changes that could be made to the rule (without requiring revisions to the underlying statute). The OCC also asked for comments on how regulators could implement the existing rule more effectively.

Regulatory Agencies to Review Volcker Rule Provisions for Foreign Funds

Five federal financial regulatory agencies will review the treatment of certain funds under section 13 of the Bank Holding Company Act (“BHCA”), as added by the Volcker Rule.

According to a joint statement, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the SEC, and the CFTC (collectively, the “agencies”) will undertake a coordinated review of how the Volcker Rule (codified at BHCA Section 13) applies to certain foreign funds that are excluded from the definition of “covered funds.” The purpose of the review is to examine “possible unintended consequences” and impacts of the Volcker Rule.

The agencies stated that market participants are concerned about potential competitive disadvantages that could arise as a result of certain foreign funds being subjected to the Volcker Rule’s requirements due to their affiliations with a foreign banking entity, while other foreign funds remain exempt from the Volcker Rule’s requirements because they are not affiliated with a banking entity. Such foreign funds often fall outside (or are excluded from) the Volcker Rule’s definition of “covered fund,” and thus foreign banking organizations are free to invest in or sponsor such funds without violating the Volcker Rule. Nonetheless, the act of sponsoring or investing in the so-called “foreign excluded funds” can create certain problems for the funds themselves.

A foreign banking entity’s investment in or sponsorship of such a foreign excluded fund can cause the fund to be viewed as “affiliated” with the foreign banking entity. If deemed to be affiliated, foreign excluded funds are themselves “banking entities” and the funds themselves must comply with the Volcker Rule’s requirements – in particular, such funds are prohibited from engaging in proprietary trading or investing in other covered funds, absent an exception in the Volcker Rule. In addition, such funds must maintain a Volcker compliance program.

In this regard, the agencies noted that the Volcker Rule incorporates the BHCA’s existing concept of “affiliation.” For example, a foreign excluded fund would be “affiliated” with a foreign banking entity if the foreign banking entity were the general partner of the foreign excluded fund, or if the foreign banking entity were to own more than 25% of the voting shares of the fund.

The agencies also are not willing to simply exempt all foreign excluded funds from the scope of the Volcker Rule. There is no clear definition of what is a “foreign excluded fund” – other than an entity that isn’t a Volcker Rule regulated “covered fund.” The agencies expressed concern that exempting all foreign excluded funds from the “banking entity” definition could enable foreign banking organizations to use structures self-described as foreign excluded funds to engage in proprietary trading or covered fund investing in a manner that the foreign banking organization could not do so directly.

The agencies stated that until July 21, 2018, the agencies will not treat as a “banking entity” any foreign excluded fund that meets the agencies’ definition of a “qualified foreign excluded fund.” A “qualified foreign excluded fund” is defined as an entity that:

(1) Is organized or established outside the United States and the ownership interests of which are offered and sold solely outside the United States;

(2) Would be a covered fund were the entity organized or established in the United States, or is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments;

(3) Would not otherwise be a banking entity except by virtue of the foreign banking entity’s acquisition or retention of an ownership interest in, or sponsorship of, the entity;

(4) Is established and operated as part of a bona fide asset management business; and

(5) Is not operated in a manner that enables the foreign banking entity to evade the requirements of the Volcker Rule or its implementing regulations.

The agencies further noted that ultimately any relief may require Congressional action to amend the Volcker Rule itself.

OCC Names New Chief Risk Officer

The Office of the Comptroller of the Currency (“OCC”) named William A. Rowe as Chief Risk Officer. Mr. Rowe will be in charge of the Office of Enterprise Risk Management, the Enterprise Risk Committee and will serve as Liaison to the Federal Deposit Insurance Corporation. Prior to his current appointment, Mr. Rowe served with the OCC as Deputy to the Chief of Staff.