OCC Revises “Background Investigations” Booklet

The Office of the Comptroller of the Currency (“OCC”) made technical changes to the “Background Investigations” booklet of the Comptroller’s Licensing Manual. The booklet was substantively revised in November 2017.

The booklet outlines requirements for banks (i) to notify the OCC when there is a change of directors or senior executive officers, and (ii) to submit documents required by the OCC to review the background of proposed directors and executive officers. The booklet also describes prerequisites for exceptions and waiving the submission of required documents.

Lofchie Comment: Firms not regulated by the OCC may find the process outlined by the OCC useful in reviewing their own procedures for conducting background checks.

OCC Revises “Background Investigations” Booklet

The Office of the Comptroller of the Currency (“OCC”) made technical changes to the “Background Investigations” booklet of the Comptroller’s Licensing Manual. The booklet was substantively revised in November 2017.

The booklet outlines requirements for banks (i) to notify the OCC when there is a change of directors or senior executive officers, and (ii) documents required by the OCC to review the background of proposed directors and executive officers. The booklet also describes prerequisites for exceptions and waiving submission of required documents.

Lofchie Comment: Firms not regulated by the OCC may find the process outlined by the OCC useful in reviewing their own procedures for conducting background checks.  

New Fed Chair Vows Vigilance in Preserving Financial Stability

Chair of the Board of Governors of the Federal Reserve System (“FRB”) Jerome H. Powell pledged to preserve the “essential” financial regulatory gains made since the financial crisis and to remain vigilant to risks to financial stability. In remarks delivered at his ceremonial swearing in, Mr. Powell emphasized the importance of transparency in the FRB, and vowed a commitment to fulfilling the goals of stable prices and maximum employment. He said that the FRB is “in the process of gradually normalizing both interest rate policy and [the Federal Reserve] balance sheet,” with the intention of “extending the recovery.”

D.C. Court of Appeals Decides to Exempt CLOs from Dodd-Frank Risk Retention Rules

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the Loan Syndications and Trading Association (“LSTA”) in its litigation against the SEC and Board of Governors of the Federal Reserve System (“FRB”) over the application of risk retention rules to managers of collateralized loan obligations (“CLOs”).

The Court concluded that “open-market CLO managers” are not subject to the credit risk retention rules mandated under the Dodd-Frank Act, which require firms to hold 5% of their fund. The Court explained that because CLO managers are not “securitizers” under Dodd-Frank Section 941, managers have no requirement to retain any credit risk.

The LSTA, which represents participants in the syndicated corporate loan market, first sued the SEC and FRB in 2014. On December 22, 2016, the United States District Court for D.C. ruled against LSTA. In overturning that ruling, the Court of Appeals agreed with LSTA’s primary contention that “given the nature of the transactions performed by CLO managers, the language of the statute invoked by the agencies does not encompass their activities.”

If the decision stands, (i) managers of open market CLOs will no longer be required to comply with the U.S. Risk Retention Rules, (ii) there may be no “sponsor” of this type of securitization transaction needed, and (iii) no party may be required to acquire and retain an economic interest in the credit risk of the securitized assets of such a transaction.

Implementation of the decision reached by the Panel could be delayed, modified, or reversed if the SEC and FRB seek rehearing in the Appellate Court or petition the United States Supreme Court to accept the case.


Senate Banking Committee Approves Three Trump Nominees

In executive session, the Senate Committee on Banking, Housing, and Urban Affairs considered the following nominations: Ms. Jelena McWilliams to be Chairperson and a Member of the Board of Directors of the Federal Deposit Insurance Corporation, Dr. Marvin Goodfriend to be a Member of the Board of Governors of the Federal Reserve System, and Mr. Thomas E. Workman to be a Member of the Financial Stability Oversight Council. All three nominees were approved. The nominations will now be advanced to the Senate floor for confirmation.

SEC Shuts Down ICO

The SEC obtained a court order freezing the assets of an allegedly fraudulent initial coin offering claiming to use cryptocurrency to “revolutionize banking.”

According to the SEC’s Complaint, Jared Rice Sr., Stanley Ford and their company, AriseBank (collectively, the “Defendants”), offered investors the “AriseCoin” cryptocurrency, which they claimed would fund the world’s first decentralized bank. The SEC alleged that AriseCoin was an improperly unregistered security, and that Defendants made various fraudulent misrepresentations to solicit investments from retail investors. Among the misrepresentations was the claim that AriseBank was FDIC-insured and had raised over $600 million in two months. In addition, the SEC contended that Defendants failed to disclose AriseBank executives’ relevant criminal histories to investors.

In addition to freezing the Defendants’ assets, the court appointed a digital receiver over AriseBank.

The SEC charged Defendants with violating Securities Act Sections 5(a), 5(c) and 17(a)(2), and Exchange Act Section 10(b) and Rule 10b-5.

CFPB Acting Director Promises Restrained Approach

In a memorandum to Consumer Financial Protection Bureau (“CFPB”) employees, Acting Director Mick Mulvaney outlined his approach to governing the agency.

After disputing reports that he intends to shut down the CFPB, Director Mulvaney made it clear that the agency will adopt a different approach from that of his predecessor, former Director Richard Cordray. Director Mulvaney said that the agency will pull back on aggressive actions and no longer seek to “push the envelope.” Instead, he pledged that the CFPB will focus on protecting consumers without immediately looking to pursue aggressive enforcement actions. Director Mulvaney asserted that vigorous action will be pursued when necessary, but “only reluctantly, and when all other attempts at resolution have failed.”

Director Mulvaney shared that the CFPB will undertake a comprehensive review of its policies, procedures, and strategies. Specifically, he promised that the agency will be less focused on filing lawsuits, and will engage in more formal rulemaking to provide clarity to market participants. He explained that the CFPB will reorganize its priorities, and employ quantitative analysis to determine whether agency efforts are appropriately taking into account costs and benefits of a particular action.

Director Mulvaney expressed a commitment to a “new mission” focused on “faithfully enforc[ing] the law” in accordance with the CFPB’s Congressional mandate, but without expanding authority or seeking to push its boundaries.

Lofchie Comment: While Mr. Mulvaney’s statement will undoubtedly attract some negative reaction, he is describing the right approach to managing the CFPB. The notion that government regulators should “push the envelope” in seeking to expand the scope of their legal mandate is offensive. It is the job of Congress or the legislators to write laws that are both good and clear, and the job of the regulators to write rules that are good and clear. Once those good and clear laws and rules are established, regulators and enforcement actions should seek to enforce those laws, by judicial action where necessary, within their bounds. If those bounds are not broad enough, it is not appropriate for regulators to expand them through creative enforcement actions; they must go back to Congress for authority. Those defending against the government are entitled to be creative; those serving the government need to be restrained by due process.

FRB Vice Chair Explains Plan for Tailored Banking Supervision

Board of Governors of the Federal Reserve System (“FRB”) Vice Chair for Supervision Randal Quarles advocated for a more tailored approach to supervising banks.

In an address before the American Bar Association Banking Law Committee Annual Meeting, Vice Chair Quarles discussed the need for increased efficiency and transparency and identified several measures the FRB is taking to improve the regulatory regime. Among them are appropriately recalibrating the capital and leverage ratio rules and reforming the Volcker Rule. Vice Chair Quarles shared that the agencies are collectively working on a “Volcker Rule 2.0” proposal. He indicated the Federal Reserve is committed to a continued  review and refinement of the resolution planning process and stress testing program.

Vice Chair Quarles explained that the FRB will tailor supervision to the “size, systemic footprint, risk profile, and business model” of banks. He said that the goal of such supervision is relevant to both small, mid-size and big banks. He reported that the FRB is supportive of raising the $50 billion statutory threshold for application of enhanced prudential standards or implementing an approach that takes into account other factors besides consolidated assets. Vice Chair Quarles called for more appropriate calibration of liquidity requirements for large Global Systemically Important Banks (“GSIBs”) as opposed to large non-GSIBs.

Vice Chair Quarles also stated that the FRB will revisit the “advanced approaches” thresholds that are used to identify the internationally active banks subject to certain risk-based capital requirements and Basel Committee standards. He added that he is not “advocating an enervation of the regulatory capital regime applicable to large banking firms.”

Separately, Vice Chair Quarles indicated that the Federal Reserve is “rationalizing and recalibrating” the concept of “control” as used under the Bank Holding Company Act, given that the standard has become somewhat ambiguous even though “a determination of control under the [Bank Holding Company] Act is significant because even remote entities in a controlled group can be subject to the BHC Act’s restrictions on activities and a host of other regulatory requirements.”

Vice Chair Quarles said that post-crisis reform has largely resulted in a stronger and more resilient system. He asserted that new efforts by the FRB will result in significant progress in the “areas of core reform” (capital, liquidity, stress testing and resolution).


CFPB Director Says Agency Fully Funded

Acting Consumer Financial Protection Bureau (“CFPB”) Director Mick Mulvaney did not request funding from the Board of Governors of the Federal Reserve System (“FRB”) for the second quarter of 2018.

In a letter to FRB Chair Janet Yellen, Director Mulvaney explained that he will rely on the CFPB’s “reserve fund” at the Federal Reserve Bank of New York. He noted that the CFPB has maintained the reserve fund despite “no specific statutory mandate” to do so. As such, Director Mulvaney represented that he intends to “spend down the reserve” before requesting any additional funds from the FRB. He projected CFPB expenses at $145 million for Q2 2018, and said that the reserve fund totals $177.1 million.

Director Mulvaney asserted that by opting to draw from the reserve fund instead of requesting additional FRB funding, the CFPB will reduce the federal deficit “by the amount that the [CFPB] might have requested under different leadership.” For the first quarter of 2018, former Director Richard Cordray requested and was granted $217 million in FRB funding.

Lofchie Comment: Why would an agency that had the authority to write unlimited checks on the Federal Reserve Board need to have a stockpiled trust fund of $173 million?

NY Fed Senior VP Describes Transition Away from LIBOR

Federal Reserve Bank of New York (“NY Fed”) Senior Vice President Lorie Logan discussed the future of the London Interbank Offered Rate (“LIBOR”) and the NY Fed’s efforts to administer and produce more effective reference rates.

In remarks at the Annual Prime Dealer Meeting in New York, Ms. Logan explained that the uncertain future of LIBOR has caused the NY Fed and other regulatory bodies to consider alternatives and implement viable transition plans. She noted that efforts have thus far focused on interest rate derivatives, but that all LIBOR-reliant market participants must consider transition measures. Ms. Logan encouraged all firms to (i) adopt contract language capable of addressing the cessation of LIBOR, and (ii) reduce reliance on U.S. dollar LIBOR by transitioning to alternative rates.

Ms. Logan highlighted efforts to improve the effective federal funds rate (“EFFR”), develop the overnight bank funding rate (“OBFR”), and develop three new Treasury repo reference rates, and said that all of these rates are “anchored in active underlying markets” and designed to serve as reliable measures of market activity. She described various enhancements to the EFFR, explained the evolution of the OBFR, and asserted that the NY Fed will release statements detailing the compliance of NY Fed-administered and produced rates (including the planned Treasury repo rates) with the IOSCO Principles for Financial Benchmarks. Ms. Logan emphasized that the NY Fed intends to make clear what each reference rate is meant to measure in order to avoid making frequent changes to any of the reference rates. She acknowledged that certain changes may be necessary, as dictated by the evolution of underlying markets.

Ms. Logan said that the new Treasury repo rates were developed in order to improve transparency of conditions across a broad range of activity in the market. As previously covered, the following three rates will be produced:

  • Secured Overnight Financing Rate (“SOFR”) will be the “broadest measure” of overnight Treasury financing transactions. The rate includes tri-party repo data from the 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 will be based only on tri-party repo data from BNYM.
  • Broad General Collateral Rate will be based on tri-party repo data from BNYM, as well as cleared GCF repo data from DTCC.

Ms. Logan shared four key points relevant to the calculation of the three new rates:

  • they will be calculated as volume-weighted medians;
  • various measures have been put in place to ensure adequate data collection for all three rates;
  • trades from the FICC-cleared bilateral data set with rates below the 25th volume-weighted percentile will be excluded (or trimmed) from the SOFR calculation; and
  • the NY Fed is working to determine which historical data will be most useful to help the adoption process for all rates (with an emphasis on the SOFR).

The NY Fed intends to begin publishing these three rates on a daily basis starting in the second quarter of 2018.

Lofchie Comment: Notwithstanding the efforts described to improve certain existing rates and propose new repo reference rates, the question remains: transition to what? While the regulators are quite right to point out the deficiencies of LIBOR (e.g., the absence of transaction-volume to determine a genuine rate), the path forward is still unclear as it is not obvious that the new indices, based on collateralized borrowing, can serve the purpose for which LIBOR was intended.