I INTRODUCTION

After promising to dismantle the Dodd-Frank Act during his campaign, Donald Trump was elected and then inaugurated as President of the United States in January 2017. The Dodd-Frank Act, more formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed into law in 2010, following the global financial crisis of 2008.2 The Dodd-Frank Act was the most drastic overhaul of US financial regulation since the 1930s. The Act produced fundamental changes to the shape and scope of banking regulation, adding new regulation in a wide range of areas, including systemic risk oversight, derivatives, hedge funds, credit rating agencies, consumer financial protection and securitisation, to name a few. Few believe that a full repeal of the Dodd-Frank Act is now sought by the Trump administration or is likely, but some changes to the regulatory framework are to be expected. Within two weeks of his inauguration, President Trump signed an executive order laying out the core principles for regulating the US financial system that will guide the policy of his administration in this area.3 One example for regulatory reform already under way is the Financial CHOICE Act,4 which would completely repeal significant elements of Dodd-Frank such as the Durbin Amendment, the Volcker Rule, and the Orderly Liquidation Authority, and would provide an ‘off-ramp’ from many aspects of the Dodd-Frank Act’s prudential requirements to certain banking organisations that have a leverage ratio of at least 10 per cent and CAMELS ratings of either 1 or 2. Nevertheless, many of the Dodd-Frank Act’s fundamental features are likely to remain in place. This chapter summarises the principal elements of banking regulation in the United States.

II THE REGULATORY Regime APPLICABLE TO BANKS

i Dual banking system

The United States has a dual banking system, whereby banks, or depository institutions, may be chartered by either federal or state authorities. To accept deposits, an institution must apply for and obtain a bank or thrift charter from either a federal or state regulator. The Office of the Comptroller of the Currency (OCC) is the federal bank regulator with the power to charter national banks5 and, as of 2011, thrifts or federal savings associations.6 The OCC is part of the US Treasury Department. Separately, each state also has a regulatory agency that may charter either banks or thrifts. The Board of Governors of the Federal Reserve System (Federal Reserve) is the primary federal supervisor of state-chartered banks that choose to become members of the Federal Reserve System.

The Federal Deposit Insurance Corporation (FDIC) is the primary federal supervisor of state-chartered banks that are not members of the Federal Reserve System.7 The FDIC also administers the federal deposit insurance programme that insures certain bank deposits, including supervising any bank failures, and regulates certain bank activities and operations to protect the federal deposit insurance fund.

All nationally chartered banks are required to hold stock in one of the 12 Federal Reserve banks, while state-chartered banks may choose to be members of and hold stock in a regional Federal Reserve bank, upon meeting certain standards. Benefits of Federal Reserve membership include eligibility to vote in the election of their regional Federal Reserve bank’s board of directors, which affords member banks the opportunity to participate in monetary policy formulation.8

ii Bank holding companies (BHCs)

Any legal entity with a controlling ownership interest in a bank or thrift is regulated as a bank or thrift holding company by the Federal Reserve.9

iii Foreign banks

Foreign bank activities in the United States are supervised by the Federal Reserve, as well as any other regulator implicated by the type of charter or entity that a foreign bank uses to conduct its banking business in the United States.

iv Relationship with the prudential regulator

Most banks are first regulated by their chartering entities, or their primary regulators. Primary regulators are generally responsible for conducting bank examinations, initiating supervisory and enforcement actions, and approving branch, change of control, merger and other applications. State-chartered institutions are regulated at the federal level by the Federal Reserve in the case of state member banks or by the FDIC in the case of state non-member banks. The following chart summarises these relationships:

Institution type

Chartering agency

Primary federal regulator

Secondary federal regulator

Federal charter

National bank

OCC

OCC

Federal Reserve, FDIC

Federal savings association

OCC

OCC

FDIC

Federal savings bank

OCC

OCC

FDIC

State charter

State non-member bank

State agency

FDIC

N/A

State member bank

State agency

Federal Reserve

FDIC

State savings bank

State agency

FDIC

N/A

State savings association

State agency

FDIC

N/A

Foreign banks

Foreign bank uninsured state branches and agencies

State agency

Federal Reserve

N/A

Foreign bank uninsured federal branches and agencies

OCC

OCC

Federal Reserve

Foreign bank commercial state chartered lending companies

State agency

Federal Reserve

N/A

Foreign bank representative offices

State agency

Federal Reserve

N/A

Banks and BHCs may also be subject to functional regulation by other regulatory agencies, depending on the types of activities in which they engage. For instance, a BHC’s securities underwriting and dealing activities are also regulated by the US Securities and Exchange Commission (SEC), the functional regulator of any SEC-registered broker-dealer.

III PRUDENTIAL REGULATION

i Regulatory reporting requirements and bank examinations

Regulators have two primary tools to supervise BHCs and banks: regulatory reporting requirements and on-site examinations. BHCs and banks are subject to extensive financial, structural and other periodic reporting requirements. Financial reporting requirements for banks include capital, asset and liability data reported quarterly on call reports, and requirements for BHCs include financial statements for the BHC and certain non-bank subsidiaries. BHCs also must provide annual reports to the Federal Reserve that detail their shareholders and organisational structure. Banking institutions that are experiencing financial difficulties or that are not in compliance with regulatory requirements face more frequent and additional reporting obligations.

Bank regulators also conduct on-site examinations of BHCs and banks. Regulators generally conduct three principal types of formal examinations: safety and soundness, or ‘full scope’, examinations that determine the bank’s fundamental financial health and generally occur every 12 or 18 months;10 compliance examinations covering consumer compliance and fair lending issues; and specialty examinations covering areas such as trust activities and information technology infrastructure.

Congress expanded bank regulators’ authority to examine entities beyond BHCs and banks in the Dodd-Frank Act. For instance, the Federal Reserve was granted the authority to examine functionally regulated subsidiaries (i.e., subsidiaries whose activities are regulated by another US regulatory authority, such as the SEC) and all insured depository institutions (IDIs) (including those for which the Federal Reserve is not currently the primary federal banking regulator).11

The Dodd-Frank Act also requires the Federal Reserve to examine the permissible activities of BHCs’ non-depository institution subsidiaries that are not functionally regulated or subsidiaries of a depository institution.12 The Federal Reserve must examine these entities subject to the same standards and with the same frequency as would be required if such activities were conducted in the lead IDI. With respect to federal consumer financial law, these expanded examination authorities are shared with the Consumer Financial Protection Bureau (CFPB).

Aside from transactions such as mergers and acquisitions or other matters that require formal approvals,13 bank regulators are also routinely informed or involved on a more informal basis with certain key decisions contemplated by a bank or BHC, including capital-raising activities, dividend policies, and changes in business plans or strategies.

ii Deposit insurance requirements

The Dodd-Frank Act permanently increased the Standard Maximum Deposit Insurance Amount (SMDIA) to $250,000.14 For a foreign bank to establish or operate a state branch without federal deposit insurance, the branch, in addition to meeting other requirements, may only accept initial deposits in an amount equal to the SMDIA or greater.15

In addition, the Dodd-Frank Act changed how the FDIC assesses deposit insurance premiums against IDIs. An IDI’s quarterly deposit insurance assessment is determined by multiplying its assessment rate by its assessment base.16 An IDI’s assessment base was historically its domestic deposits, with some adjustments.17 The Dodd-Frank Act, however, requires the FDIC to redefine the assessment base as total consolidated liabilities or average consolidated total assets minus average tangible equity during the assessment period.18 As a result, the distribution of assessments and the cost of federal deposit insurance has been shifted to larger banks, which fund a greater percentage of their balance sheet through non-deposit liabilities.19 The FDIC uses an assessment system for large IDIs and highly complex IDIs20 that combines supervisory ratings and certain financial measures into two scorecards, one for most large IDIs and another for highly complex IDIs, and modifies and introduces new assessment rate adjustments.21

iii Management of banks

The two traditional areas of regulatory focus on the management of banks have been the responsibilities and duties of BHCs and bank boards, directors and senior management, and the regulation of insider loans.

Bank and BHC boards of directors are different from corporate boards in that they normally have more competing interests to balance, such as shareholder, depositor, parent holding company (in the case of a bank), creditor and regulatory interests. Bank and BHC boards are generally responsible for overseeing management plans and ensuring that adequate controls and systems are in place to identify and manage risk, while management is responsible for the implementation, integrity and maintenance of risk-management systems. Bank examiners normally review bank and BHC board performance and make recommendations for improvement if they find weaknesses.22

The Federal Reserve Act (FRA) of 1913 and implementing regulations also govern extensions of credit by a bank to an executive officer, director or principal shareholder of that bank, of a BHC of which the member bank is a subsidiary or of any other subsidiary of that BHC. In general, a bank may not extend credit to any such ‘insider’ unless the extension of credit is made on substantially all the same terms, and subject to no less stringent credit underwriting procedures, as those for comparable transactions by the bank with persons who are not insiders and not employed by the bank, and the transaction does not involve more than the normal repayment risk or present other unfavourable features. The Dodd-Frank Act expanded the types of transactions subject to insider lending limits to include derivative transactions, repurchase agreements, and securities lending or borrowing transactions. It also imposed limitations on the sale of assets to, or the purchase of assets from, insiders by requiring that such transactions be on market terms and, in the case of significant transactions, have the approval of the majority of disinterested board members.23

iv Enhanced prudential standards (EPS)

Section 165 of the Dodd-Frank Act subjects BHCs with total consolidated assets of $50 billion or more and systemically important non-bank financial companies to heightened prudential and other standards, and enhanced reporting and disclosure requirements. The heightened standards include increased capital and liquidity requirements, leverage limits, contingent capital, resolution plans, credit exposure reporting, concentration limits, public disclosures and short-term debt limits. The Financial Stability Oversight Council (FSOC)24 is authorised

to make recommendations to the Federal Reserve concerning prudential standards, and the Federal Reserve must consider those recommendations in prescribing standards.25

In February 2014, the Federal Reserve adopted final rules implementing certain EPS under Section 165.

All BHCs covered by the final rules must comply with, and hold capital commensurate with, the requirements of any regulations adopted by the Federal Reserve related to capital plans and stress tests, including the Federal Reserve’s capital planning final rule. The capital planning final rule, effective from 31 December 2011, described in greater detail below, requires firms to meet minimum capital regulatory requirements, and a pro forma Tier I common ratio above 5 per cent under baseline, adverse and severely adverse conditions.

The liquidity provisions of the final rules require BHCs to maintain a sufficient quantity of highly liquid assets to survive a projected 30-day liquidity stress event, conduct regular liquidity stress tests and implement liquidity risk-management requirements, including periodic reviews of business lines for liquidity risks. A BHC’s board of directors is ultimately responsible for liquidity risk management, including periodic review, and a risk committee is responsible for approving a contingency funding plan to address potential liquidity stress events.

BHCs with total consolidated assets of $10 billion or more must also comply with a range of corporate governance requirements, such as establishing a risk committee of the board of directors and, for BHCs with at least $50 billion in assets, appointing a chief risk officer with defined responsibilities.

The final rules also incorporate the Federal Reserve’s annual supervisory stress test and company-run stress test requirements for covered companies. The stress tests, which are designed to assess firms’ capital adequacy, involve nine-quarter planning horizons under baseline, adverse and severely adverse scenarios. The Federal Reserve publishes public summaries of companies’ stress test results, with more detailed information remaining confidential. The stress tests are designed to work in tandem with the capital planning final rule, which requires large US BHCs to submit annual capital plans to the Federal Reserve for approval while demonstrating capital adequacy under baseline, adverse and severely adverse scenarios.

The final rule also implements a provision of Section 165 imposing a 15:1 debt-to-equity limit on any BHC that is determined by the FSOC to represent a ‘grave threat’ to US financial stability.

On 4 March 2016, the Federal Reserve re-proposed rules that would implement a statutory requirement to create new single-counterparty credit exposure limits.26 Such limits were originally proposed as part of the EPS rules published in 2012, but were not finalised in the final rule on EPS. The proposed rules would limit net credit exposure to any single counterparty to 25 per cent of capital stock and surplus for BHCs with $50 billion or more in total consolidated assets. A more stringent net credit exposure limit of 25 per cent of Tier 1 capital would apply to BHCs with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures, and an even more stringent net credit exposure limit of 15 per cent of Tier 1 capital would apply to the US global systemically important banks (G-SIBs) with respect to certain large counterparties, including other G-SIBs and non-bank SIFIs. The proposed rule would also require BHCs to aggregate exposures between counterparties that are economically interdependent or in the presence of certain control relationships.

The early remediation regime in rules proposed in 2012 would address material financial distress or management weaknesses at any company covered by the proposed rules. A company would be placed into one of four early remediation levels based on triggers related to capital and leverage, forward-looking stress tests, risk management or liquidity. In addition, under the proposed rules, a company may be considered for placement into the lowest early remediation category in response to volatility in certain market indicators tied to the company’s financial strength. The four levels of early remediation, which include increasingly severe limitations and requirements, are heightened supervisory review, initial remediation, recovery and resolution assessment. As of 31 December 2016, the Federal Reserve had not yet adopted final rules implementing the early remediation framework.

v Regulation of foreign banking organisations (FBOs)

The Federal Reserve on 18 February 2014 adopted final rules that use a tiered approach for applying US capital, liquidity and other Dodd-Frank EPS to the US operations of FBOs with total global consolidated assets of $50 billion or more (large FBOs).27 The most burdensome requirements apply to FBOs with $50 billion or more in US assets, excluding US branch and agency assets, and certain other US assets (IHC FBOs).28 Fewer requirements apply to FBOs with limited US footprints, but a large FBO that is not subject to the IHC requirement must still comply with new EPS, including liquidity, stress testing and risk management requirements.

An IHC FBO must create a separately capitalised, top-tier US intermediate holding company (IHC) to hold all of its ownership interests in its US bank and non-bank subsidiaries. For purposes of identifying subsidiaries, the final rule relies on the BHC Act definition of control, including the facts and circumstances-based controlling influence test. An IHC FBO may not retain any ownership interest in the US subsidiary directly or through non-US affiliates. However, the final rule does not require an IHC FBO to be the 100 per cent owner of any US subsidiary. In other words, an IHC FBO is not required to buy out other, unaffiliated third-party investors in a US subsidiary. Regardless of whether an IHC controls a US bank, an IHC will be subject to US Basel III (subject to limited adjustments),29 capital planning and Dodd-Frank company-run and supervisory stress-testing requirements, qualitative and quantitative liquidity standards, risk-management standards and other EPS. In addition, the Federal Reserve has the authority to examine any IHC and any IHC subsidiary. Although the US branches and agencies of an IHC FBO’s foreign bank are not required to be held beneath the IHC, they too are subject to certain EPS.

A large FBO with $50 billion or more in US assets (including US branch and agency assets) is subject to a qualitative liquidity framework that includes liquidity risk management and related governance requirements, as well as a requirement to maintain separate US liquidity buffers (based on results of internal liquidity stress tests) for its US branches or agencies and, if applicable, its IHC. The liquidity buffers must consist of unencumbered highly liquid assets sufficient to meet net stressed cash flow needs. The Federal Reserve’s prescribed method for calculating net stressed cash flow needs distinguishes between external and internal stressed cash flow needs such that internal cash flows cannot be used to offset external cash flows; it is designed to minimise maturity mismatches such that intragroup cash flow sources may offset intragroup cash flow needs of the US branches or agencies or IHC only to the extent the term of the intragroup cash flow source is the same as or shorter than the term of the intragroup cash flow need.

EPS of more general applicability to FBOs include risk management requirements. All large FBOs, as well as publicly traded FBOs with $10 billion or more in total global consolidated assets (public mid-size FBO), must establish a US risk committee. A large FBO with $50 billion or more in US assets (including US branch and agency assets) that conducts its operations through US branches or agencies (in addition to its IHC, if any) may maintain its US risk committee either as a committee of its global board of directors, on a stand-alone basis or as part of its enterprise-wide risk committee, or as a committee of its IHC’s board of directors, on a stand-alone basis or as a joint committee with the IHC’s risk committee. The US risk committee for an IHC FBO must include at least one member with experience in identifying, assessing and managing risk exposures of large, complex financial firms and at least one member who meets certain independence requirements. A large FBO with $50 billion or more in US assets (including US branch and agency assets) must also employ a US chief risk officer with specified risk management expertise and responsibilities, and must adopt a risk management framework for its combined US operations. The US risk committee of a large FBO with less than $50 billion in US assets or a public mid-size FBO is not subject to the independent committee member requirement, but must have at least one committee member with experience in identifying, assessing and managing risk exposures of large, complex firms, which may be acquired in a non-banking or non-financial field. The general compliance date for the EPS rules was 1 July 2016.

The Federal Reserve still must finalise two other EPS that would apply to US operations of an FBO: an early remediation framework and single counterparty credit limits. The 4 March 2016 single counterparty credit limits re-proposal would apply tiered requirements substantially identical to those applicable to US BHCs to IHCs, and to the combined US operations of FBOs with $50 billion or more in total consolidated assets.

vi Regulatory capital

Regulatory capital emerged from the global financial crisis of 2008 as one of bank regulators’ primary areas of supervisory focus. This section focuses on the US implementation of the Basel Committee on Banking Supervision’s (Basel Committee) third accord on regulatory capital, known as Basel III, and related provisions in the Dodd-Frank Act.

Federal Reserve policy and regulations traditionally required a BHC to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This policy became a statutory requirement pursuant to the Dodd-Frank Act. Section 616(d) requires all companies that directly or indirectly control an IDI to serve as a source of strength for the institution.30 US banking agencies were required to issue regulations implementing this requirement not later than 21 July 2012, but as of 31 December 2016 had not proposed such regulations.

In November 2011, the Federal Reserve adopted a final rule making capital plans and related stress tests part of the annual supervisory process for US BHCs with consolidated assets of $50 billion or more (large BHCs).31 Effective from December 2011, large BHCs must submit annual capital plans incorporating projected capital distributions over a planning horizon of at least nine quarters to the Federal Reserve for non-objection. Among other things, the capital plan must demonstrate a large BHC’s ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis after taking planned capital actions, such as planned distributions, under baseline, adverse and severely adverse economic conditions throughout the planning horizon.

Large BHCs must submit their capital plans by April 5 of each year, effective from the capital planning cycle beginning 1 January 2016, and the Federal Reserve must take action by 30 June.32 If the Federal Reserve objects to a capital plan on either quantitative or qualitative grounds, the company generally may not increase dividends or make other changes to capital distributions.33 In January 2017, the Federal Reserve adopted a rule that would remove certain large and non-complex firms from the scope of the Federal Reserve’s qualitative assessment of their capital plans and that would reduce certain reporting requirements for these firms.34

The Dodd-Frank Act codified capital stress tests into the EPS framework of Section 165, requiring large BHCs and non-bank SIFIs (collectively, covered companies) to conduct semi-annual company-run stress tests. All other financial companies with total consolidated assets of more than $10 billion that are regulated by a primary federal financial regulatory agency must conduct annual company-run stress tests. Section 165 also requires the Federal Reserve to conduct annual supervisory stress tests of covered companies. Companies subject to stress test requirements must publish summaries of their company-run stress test results, and the Federal Reserve must publish summaries of its supervisory stress test results.

The Federal Reserve has integrated capital planning and Dodd-Frank Act stress test requirements into its Comprehensive Capital Analysis and Review, an annual exercise designed to ensure that large BHCs have robust, forward-looking capital planning processes and sufficient capital to continue operations throughout times of economic and financial stress.35

US Basel III

US Basel III is the most complete overhaul of US bank capital standards in nearly a quarter of a century. It comprehensively revises the regulatory capital framework for the entire US banking sector, and has significant implications for all US banking organisations from business, operations, M&A and regulatory compliance perspectives.

US Basel III applies to all national banks, state member and non-member banks, and state and federal savings associations regardless of size. The regulation also applies to all BHCs and covered savings and loan holding companies (SLHCs) other than certain BHCs and SLHCs with less than $1 billion in total assets. However, the bank and thrift subsidiaries of these small BHCs and SLHCs are still subject to US Basel III.

US Basel III implements many aspects of the Basel Committee’s Basel III capital standards, including higher minimum risk-based capital ratios, capital buffers, revised eligibility criteria for common equity Tier 1, additional Tier 1 and Tier 2 capital instruments, certain deductions from and adjustments to regulatory capital, and the recognition of minority interests. US Basel III introduces a revised and expanded standardised approach for calculating risk-weighted assets (RWAs), the denominator of the risk-based capital ratios, which replaced the previously applicable Basel I-based rules. In addition to the standardised approach, large and internationally active US banking organisations (i.e., those with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) must calculate RWAs using the advanced internal ratings-based approach for credit risk and advanced measurement approaches for operational risk (together, advanced approaches). A key difference between the standardised approach and advanced approaches is that the former mandates the use of standardised risk weights and methodologies for calculating RWAs, whereas the latter permit the use of supervisor-approved internal models and methodologies that meet specified qualitative and quantitative requirements, which generally give rise to more risk-sensitive measurements.

US Basel III implements the capital floor requirement of Section 171 of the Dodd-Frank Act (known as the Collins Amendment) by requiring advanced approaches banking organisations to calculate their risk-based capital ratios using both the standardised approach and the advanced approaches. An advanced approaches banking organisation’s risk-based capital ratios for regulatory purposes, including for calculating capital buffers, are the lower of each ratio calculated under the standardised approach and advanced approaches.

Advanced approaches banking organisations must also maintain a minimum supplementary leverage ratio of 3 per cent beginning in 2018. The supplementary leverage ratio is based on the Basel Committee’s Basel III leverage ratio. The US banking agencies have established enhanced supplementary leverage ratio standards for the eight US BHCs identified by the Financial Stability Board as G-SIBs as well as their IDI subsidiaries.36 Under the enhanced supplementary leverage ratio standards, a US G-SIB’s IDI subsidiaries must maintain a supplementary leverage ratio of at least 6 per cent to be considered well-capitalised for regulatory purposes. A US G-SIB, on a global consolidated basis, must maintain a leverage capital buffer that functions in a similar way to US Basel III’s risk-based capital buffers – the capital conservation buffer, the countercyclical buffer and the G-SIB capital surcharge. Specifically, a US G-SIB that does not maintain a supplementary leverage ratio of greater than 5 per cent (i.e., a buffer of more than 2 per cent on top of the 3 per cent minimum) will be subject to increasingly stringent restrictions on its ability to make capital distributions and discretionary bonus payments.

Besides the enhanced supplementary leverage ratio requirements, US G-SIBs are also subject to a risk-based capital surcharge buffer under US Basel III, which implements the Basel Committee’s G-SIB capital surcharge standard with certain modifications. The G-SIB capital surcharge functions as an extension of the Basel III capital conservation buffer, requiring each G-SIB to hold an additional buffer of common equity Tier 1 capital, on top of the capital conservation and countercyclical buffers, to avoid limitations on making capital distributions and discretionary bonus payments. Under the US implementation of the G-SIB capital surcharge, the resulting buffers for the eight US G-SIBs currently range from 1 to 3.5 per cent of RWAs, depending on the size of the G-SIB’s systemic footprint.37 The US implementation modifies the measure of each US G-SIB’s systemic footprint to include a component linked to the G-SIB’s reliance on short-term wholesale funding.38

Finally, in September 2016, the Federal Reserve issued a notice of proposed rulemaking that would, among other things, increase risk-based capital requirements for certain commodities-related activities and commodities-related merchant banking investments of US financial holding companies, impose new limitations on the physical commodity trading activities of certain US financial holding companies, and enhance reporting requirements with respect to US financial holding companies’ commodities-related activities and investments.39 The Federal Reserve explained that the proposed rulemaking was designed to reflect the potential legal, reputational and financial risks associated with financial holding companies’ commodities-related activities and investments.40 If adopted in its current form, the proposed rulemaking would likely result in increases in risk-weighted assets with respect to certain commodity infrastructure investments and physical commodity holdings.

vii Resolution planning

Section 165(d) under Title I of the Dodd-Frank Act requires all BHCs and FBOs with assets of $50 billion or more, as well as any non-bank financial institution that has been designated as systemically important,41 to prepare and regularly update a resolution plan (Title I resolution plan).42 Under the final rules implementing this provision, these entities must each periodically submit a report regarding the plan of the company for rapid and orderly resolution under the US Bankruptcy Code or other applicable insolvency law in the event of material financial distress at or failure of the company.43 The resolution plan is submitted to and evaluated by the Federal Reserve and the FDIC.44 If the plan were deficient, or deemed not credible, the Federal Reserve and the FDIC could jointly agree to impose increasingly onerous restrictions on the company until the plan was determined to be credible.45 The FDIC separately requires all US IDIs with assets of $50 billion or more to also submit and regularly update a resolution plan.46

viii Orderly liquidation authority

Title II of the Dodd-Frank Act includes an orderly liquidation authority, modelled on the US bank resolution authority in the Federal Deposit Insurance Act, which would allow the government, under certain circumstances, to resolve a US financial company outside the bankruptcy process.

Specifically, if a determination to place a financial company under this resolution regime were made, the FDIC would step in as receiver of the company, with the authority to sell all or any assets and liabilities to a third party, or establish one or more bridge financial companies to hold the part of the business worth preserving until it could be recapitalised, sold or liquidated in an orderly fashion. The Act provides for an orderly liquidation fund to be used to provide liquidity to the covered financial company or bridge financial company. That fund would not be pre-funded, but rather would be funded initially through borrowing from the US Treasury. Any loss in the fund would be paid back over time, either through a clawback from creditors who received additional benefits or through assessments on eligible financial companies.

On 15 July 2011, the FDIC issued its final rule implementing certain provisions of the orderly liquidation authority, including:

  • a how the preferential transfer and fraudulent transfer provisions of the orderly liquidation authority will be harmonised with the Bankruptcy Code;
  • b the priorities of administrative expenses and unsecured claims;
  • c the obligations of bridge financial companies with respect to assumed claims and the use of any proceeds realised from the sale or other disposition of the bridge;
  • d certain details of the FDIC’s administrative claims process;
  • e special rules for secured claims;
  • f proposals for determining whether senior executives or directors of a covered financial company were ‘substantially responsible’ for its failure and may therefore be ordered to return up to two years of their remuneration; and
  • g the treatment of claimants whose set-off rights are destroyed by the FDIC.47

After public statements by the FDIC Chair indicating that the FDIC’s preferred method for resolving the largest and most complex banking groups under Title II is the single-point-of-entry (SPOE) recapitalisation model,48 the FDIC released a notice providing information about how the FDIC would carry out an SPOE recapitalisation in resolving a US G-SIB under Title II.49 Under the SPOE model, only the parent BHC of a banking group would be put into a resolution proceeding. All of the parent’s assets, including its ownership interests in operating subsidiaries, would be transferred to a bridge financial company. The transferred business would be recapitalised by leaving the failed company’s equity capital and a sufficient amount of its unsecured long-term debt behind in a receivership. The operating subsidiaries would be recapitalised and kept out of insolvency proceedings by converting loans or other extensions of credit from the parent into new equity in the operating subsidiaries or otherwise downstreaming available parent assets to the subsidiaries. If the bridge financial holding company (FHC) or any of its operating subsidiaries were unable to obtain sufficient liquidity from the market, the Federal Reserve’s discount window50 or Section 13(3) of the FRA,51 the FDIC could provide such liquidity with an ‘orderly liquidation fund’ by borrowing from the US Treasury subject to certain limits.52

ix Total loss-absorbing capacity

To facilitate an SPOE recapitalisation, the parent BHC of a banking group must have a sufficient amount of long-term debt or other resources capable of absorbing losses to be left behind in a receivership or bankruptcy proceeding. To that end, the application of a minimum requirement of ‘total loss-absorbing capacity’ (TLAC) for G-SIBs was discussed by the international regulatory community for several years, resulting in the publication by the Financial Stability Board of a statement of principles and a term sheet for an international TLAC standard.53 On 15 December 2016, the Federal Reserve released a final rule implementing the international TLAC standard for the parent BHCs of US G-SIBs and IHCs created pursuant to EPS that are controlled by foreign G-SIBs.54 Under the rule, parent BHCs of US G-SIBs and IHCs that are controlled by foreign G-SIBs would face minimum TLAC requirements, separate minimum long-term debt requirements and ‘clean holding company requirements’ intended to simplify holding company balance sheets. TLAC requirements could generally be satisfied with a combination of Tier 1 capital instruments and unsecured long-term debt that, unlike short-term debt, would not run off as a G-SIB experiences financial distress. Separately, the rule would require parent BHCs of US G-SIBs and IHCs that are controlled by foreign G-SIBs to hold certain minimum amounts of unsecured long-term debt. The clean holding company requirements would prohibit parent BHCs of US G-SIBs and IHCs that are controlled by foreign G-SIBs from entering into certain transactions that might impede an orderly resolution, such as issuing short-term debt to or entering into certain types of collateralised financial contracts with third parties, and would limit the amount of operational liabilities and liabilities such as structured notes that rank pari passu or junior to TLAC to ensure that losses can be imposed on TLAC with limited risk of successful legal challenge.

x Qualified financial contracts

One potential impediment to an SPOE recapitalisation is the inclusion of cross-default provisions in qualified financial contracts that would not be automatically stayed in the resolution proceeding of the parent BHC. Under such provisions, a counterparty could terminate a qualified financial contract against a subsidiary would be deemed to be in default as soon as its parent enters resolution proceedings, making continuing operations for that subsidiary difficult. This would defeat the purpose of an SPOE resolution in which all legal entities and businesses are intended to continue unimpeded, except for the parent. The US banking agencies have proposed rules that would require banking organisations to eliminate cross-default and related provisions from many new and existing qualified financial contracts, and to require that these contracts add provisions that would facilitate automatic stays.55 These proposed rules complement the international protocol developed by the International Swaps and Derivatives Association (ISDA) at the request of various financial regulators around the world, including the Federal Reserve and the FDIC (ISDA Protocol). The ISDA Protocol provides for the contractual recognition of statutory stays under certain special resolution regimes and contractual limitations on early termination rights based on cross-defaults under ISDA master agreements and certain other types of financial contracts. The proposed rules would enable banking organisations to comply with the proposed requirements through adherence to the ISDA Protocol and its annexes.56

xi Enhanced cyber risk management standards

As a result of recent high-profile cyberattacks on banks and other financial institutions, state57 and federal regulators have proposed new cybersecurity regulations to protect financial institutions and consumers to supplement the already expansive web of regulator-issued cybersecurity rules and guidance to which BHCs and banks are currently subject.58 In October 2016, the US federal banking agencies issued an advance notice of proposed rulemaking on enhanced cyber risk management standards (Enhanced Standards) for large and interconnected entities59 and their third-party service providers.60 The agencies proposed the Enhanced Standards to strengthen the operational resilience of banking institutions and, in the event that one of these entities experience a cyber-attack, to reduce the impact that a potential cyberattack would have on the financial system as a whole. The proposed rule addresses five broad categories of cyber standards: cyber risk governance; cyber risk management; internal dependency management; external dependency management; and incident response, cyber resilience, and situational awareness. The Enhanced Standards, if they are formalised in a final rule, would represent a major expansion of existing cyber security regulations and guidance.

IV CONDUCT OF BUSINESS

The activities of BHCs and banks are subject to a number of overlapping legal requirements. Some of the most important are summarised below.

i Permissible activities

The BHC Act generally prohibits a BHC from owning or controlling any company other than a US bank, or from engaging in, or directly or indirectly owning or controlling any company engaged in, any activities that are not ‘so closely related to banking as to be a proper incident thereto’.61 These restrictions on a BHC’s non-banking activities and investments reflect the traditional US policy of maintaining an appropriate separation between banking and commerce.62 In 1999, Congress amended the BHC Act to codify and freeze a laundry list of non-banking activities that the Federal Reserve approved by regulation prior to 12 November 1999 as being ‘so closely related to banking as to be a proper incident thereto’.63 These activities can be divided into 14 general categories:

  • a extending credit and servicing loans;
  • b activities related to extending credit;
  • c leasing personal or real property;
  • d operating non-bank depository institutions;
  • e trust company functions;
  • f financial and investment advisory activities;
  • g agency transactional services for customer investments;
  • h investment transactions as principal;
  • i management consulting and counselling activities;
  • j support services;
  • k insurance agency;
  • l community development activities;
  • m money orders, savings bonds, and traveller’s cheques; and
  • n data processing.64

The BHC Act was amended by the Gramm-Leach-Bliley Act of 1999 (GLB Act) to permit BHCs to exercise certain expanded powers if they qualify for and elect to be treated as FHCs.65 In contrast to ordinary BHCs, FHCs are not limited to owning and controlling banks and engaging in, or owning or controlling companies engaged in, activities that are ‘closely related to banking’. FHCs may also engage in, or own or control companies engaged in, any activity that is financial in nature, incidental to a financial activity or complementary to a financial activity.66 This category of financial and financial-related activities includes everything deemed to be ‘closely related to banking’ and much more.67 In particular, FHCs may make controlling and non-controlling investments in companies engaged exclusively in financial activities or activities that are incidental or complementary to financial activities, including securities underwriting and dealing beyond that permitted for banks, insurance underwriting, merchant banking, insurance company portfolio investments and certain commodities trading.68 Under the merchant banking authority, FHCs may make controlling and non-controlling investments in non-financial and mixed financial or non-financial companies, including companies engaged in owning and managing real estate, subject to certain conditions.69

The GLB Act also permits FHCs to engage within or outside the United States in ‘activities determined to be usual in connection with the transaction of banking abroad’.70 FHCs may engage in any activity permissible for US BHCs outside the United States under the Federal Reserve’s Regulation K,71 including management consulting services, travel agency services, and organising, sponsoring and managing mutual funds, subject to certain limitations.72

ii Changes in permissible activities
Volcker Rule

Section 619 of the Dodd-Frank Act, popularly known as the ‘Volcker Rule’,73 amends the BHC Act74 to prohibit any ‘banking entity’75 from engaging in proprietary trading or sponsoring or investing in a ‘covered fund’, the definition of which is intended to cover ‘hedge funds’ and ‘private equity funds’, subject to certain exceptions for permitted activities and a conformance period.76 The Volcker Rule’s prohibitions and other restrictions affect not just the worldwide activities of US banking organisations, but the US activities of FBOs that engage in the prohibited or restricted activities as well as certain of their non-US activities. Final implementing regulations were issued on 10 December 2013.77 Banking entities had until 21 July 2015 to comply with most requirements, and have until 21 July 2017 for certain funds activities that were already in place before 31 December 2013 (legacy covered funds).78 The following discussion summarises the key terms of the Volcker Rule as set forth in the statutory text and final regulations.

Prohibition on proprietary trading

Under the final regulations, ‘proprietary trading’ is defined broadly to include, with limited exceptions, the purchase or sale as principal of any securities, derivatives, futures contracts or options on futures contracts, for the ‘trading account’ of the banking entity.79 Trading account is defined as any account used by a banking entity to purchase or sell any such financial instruments principally for the purpose of short-term resale, benefiting from short-term price movements, realising short-term arbitrage profits or hedging one of those positions.80 The definition of trading account also includes any account used by the banking entity to purchase or sell financial instruments regardless of purpose if the banking entity is licensed or registered to engage in the business of a dealer, swap dealer or security-based swap (SBS) dealer, and the purchase or sale of financial instruments is in connection with the activities that require the banking entity to be licensed or registered; and any account used by the banking entity to purchase or sell financial instruments if the position is both a market risk capital rule covered position and a trading position (or hedges of those positions).81

As noted above, the proprietary trading limitation applies to ‘financial instruments’ including securities, derivatives, futures and options on futures. ‘Derivatives’ include swaps, SBS, foreign exchange forwards and swaps, physical commodity forwards, and retail foreign exchange and retail commodity transactions.82 A number of instruments are explicitly excluded from the definition of ‘financial instrument’, including loans, non-financial spot commodities, and foreign exchange and currency.83

Certain activities in financial instruments are excluded from the definition of proprietary trading, including, subject to certain conditions, purchases or sales of financial instruments:

  • a arising under a repurchase or reverse repurchase agreement;
  • b arising under a securities lending transaction;
  • c for the purpose of liquidity management in accordance with a documented liquidity management plan;
  • d by a banking entity that is a derivatives clearing organisation or a clearing agency in connection with clearing financial instruments;
  • e by a banking entity that is a member of a clearing agency, derivatives clearing organisation or designated financial market utility, in specified circumstances;
  • f to satisfy an existing delivery or legal obligations;
  • g in which the banking entity acts solely as an agent, broker or custodian;
  • h through employee compensation plans; and
  • i in the ordinary course of collecting a debt previously contracted.84

In addition to these exclusions from proprietary trading, there are also conditional permitted activity exemptions. Permitted activity exemptions include:

  • a trading in US government obligations and, in the case of non-US banking entities, trading in certain foreign government obligations;85
  • b trading ‘in connection with underwriting or market-making-related activities’;
  • c ‘risk-mitigating hedging activities’;86
  • d trading ‘on behalf of customers’;87
  • e certain trading activities outside the United States by non-US banking entities;88
  • f trading by a regulated insurance company or its affiliate solely for the general account of the regulated insurance company in compliance with applicable insurance company investment laws;89 and
  • g such other activity as the agencies determine ‘would promote and protect the safety and soundness of the banking entity and the financial stability of the United States’.90

Permitted activities may not include, however, any activity that would involve or result in a material conflict of interest between the banking entity and its clients, customers or counterparties; result, directly or indirectly, in a material exposure by the banking entity to ‘high-risk assets or high-risk trading strategies’; or pose a threat to US financial stability or the safety and soundness of the banking entity.91

Prohibition on certain relationships with hedge funds and private equity funds

The Volcker Rule and final regulations prohibit a banking entity from, as principal, acquiring or retaining any ownership interest in or sponsoring a ‘covered fund’, subject to a conformance period and certain exclusions and permitted activities.92 Covered fund is defined in the final regulations as an issuer that would be an investment company, as defined in the Investment Company Act of 1940,93 but for Section 3(c)(1) or 3(c)(7) of the 1940 Act;94 certain funds organised or established outside the United States in which a US banking entity invests or which a US banking entity sponsors;95 and certain commodity pools.96

The final regulations expressly exclude certain categories of entities from the definition of covered fund, provided they meet certain conditions, such as:

  • a wholly-owned subsidiaries;97
  • b joint ventures;98
  • c investment companies and business development companies registered under the 1940 Act;99
  • d entities that qualify for an exemption or exclusion from the definition of investment company under the 1940 Act other than Section 3(c)(1) or 3(c)(7) of the 1940 Act;100
  • e foreign public funds;101
  • f foreign pension or retirement funds;102
  • g insurance company separate accounts;103
  • h loan securitisation vehicles;104
  • i asset-backed commercial paper conduits;105 and
  • j special purpose vehicles established to hold collateral for covered bond issuances.106

An ownership interest is defined in the final regulations as ‘any equity, partnership, or other similar interest’.107 An ‘other similar interest’ is any interest, other than certain restricted profit interests,108 that has or exhibits certain characteristics, such as the right to participate in the selection or removal of a covered fund’s general partner, investment manager or similar party,109 certain economic rights commonly present in equity110 or synthetic rights to these rights.111

Subject to certain conditions, the prohibition on acquiring or retaining an ownership interest in a covered fund does not apply to an interest acquired by a banking entity not acting as principal, for example:112

  • a solely as agent, broker or custodian;
  • b through employee compensation plans;
  • c in the ordinary course of collecting a debt previously contracted; or
  • d on behalf of customers as trustee or in a similar fiduciary capacity for a customer that is not a covered fund.

A banking entity is a sponsor of a covered fund if, generally, it serves as a covered fund’s general partner, managing member, trustee with investment discretion over the covered fund113 or commodity pool operator;114 selects or controls a majority of a covered fund’s directors, trustees or management; or shares the same name or a variation thereof with a covered fund.

Subject to the same limitations on permitted activities described in the discussion of proprietary trading above, the Volcker Rule and the final regulations provide conditional

permitted activity exemptions from the prohibition on acquiring or retaining ownership interests in and sponsoring a covered fund. These include:

  • a organising and offering a covered fund in connection with asset management or similar customer services;115
  • b organising and offering an issuer of asset-backed securities (ABS);116
  • c underwriting and market making in ownership interests in covered funds;117
  • d risk-mitigating hedging of employee compensation arrangements;118
  • e certain covered fund activities and investments outside the United States by non-US banking entities;119
  • e covered fund activities and investments by a regulated insurance company;120 and
  • f such other activity as the agencies determine ‘would promote and protect the safety and soundness of the banking entity and the financial stability of the United States’.121
Limitations on certain transactions with sponsored, advised, managed, or organised and offered covered funds

The Volcker Rule prohibits any banking entity that, among other relationships, serves as the investment manager or adviser, commodity trading adviser or sponsor of a covered fund, or that organises and offers a covered fund pursuant to the permitted activity exemptions for asset management and similar customer services or for issuers of ABS, and any affiliate of such banking entity, from entering into a ‘covered transaction’ as defined in Section 23A of the FRA with any such fund, or any covered fund controlled by such fund, as if the banking entity or an affiliate, other than the fund, were a member bank and the fund were its affiliate.122 In addition, any transactions between any such banking entity and any such fund are subject to Section 23B of the FRA as if the banking entity were a member bank, and the fund were its affiliate.123

This prohibition is commonly referred to as ‘Super 23A’ to distinguish it from regular Section 23A of the FRA. Unlike Super 23A, regular 23A only applies to covered transactions between an IDI and its affiliates, whereas Super 23A applies to covered transactions between any banking entity (including a BHC, an FBO, and any of their subsidiaries or affiliates) and any sponsored or advised covered fund. In addition, Super 23A imposes an absolute ban on any covered transactions that fall within its scope, whereas regular 23A generally imposes only certain numerical limitations and collateral requirements on covered transactions.124

Subject to certain conditions, the Volcker Rule and final regulations grant an exemption from the Super 23A prohibition for purposes of permitting a banking entity to enter into any ‘prime brokerage transaction’ with any covered fund in which a covered fund managed, sponsored or advised by such banking entity has taken an ownership interest.125 Prime brokerage transactions are defined as ‘any transaction that would be a covered transaction […] that is provided in connection with custody, clearance and settlement, securities borrowing or lending services, trade execution, financing, or data, operational, and administrative support’.126

Application to FBOs and extraterritorial application

The Volcker Rule and the final regulations generally apply to FBOs in the same manner as banking entities organised under US law. Nevertheless, the statutory text of the Volcker Rule specifically permits FBOs to engage in proprietary trading ‘pursuant to’ Section 4(c)(9)127 or (13)128 of the BHC Act, provided that the trading occurs ‘solely outside’ the United States.129 Likewise, the statutory text specifically permits sponsorship of and investments in hedge funds and private equity funds conducted by a banking entity pursuant to the Section 4(c)(9) or (13) exemptions ‘solely outside’ the United States (known as SOTUS) provided that ‘no ownership interest in such hedge fund or private equity fund is offered for sale or sold’ to a US resident.130 In both cases, the banking entity also must not be ‘directly or indirectly controlled’ by a banking entity organised under US federal or state law.131 The final regulations state that the SOTUS exemption applies to interests and activities related to both US and non-US based funds and, critically, no ownership interest in the covered fund may be sold to a ‘US person’ in an offering that ‘targets’ US persons.132 The federal agencies responsible for implementing the Volcker Rule clarified this ‘marketing restriction’ in an FAQ that explicitly noted the restriction’s scope is limited to activities of the relevant banking entity. 133 Thus, offerings targeted at or sales to US persons by someone other than the banking entity would not preclude the banking entity from investing in the fund.134

Conformance period

Banking entities in general had to comply with most requirements of the Volcker Rule by 21 July 2015,135 and will have to comply with the remaining requirements for legacy covered funds by 21 July 2017.136 The Dodd-Frank Act permits the Federal Reserve to provide, upon the application of a banking entity, an additional extension period of up to five years to conform investments in certain legacy ‘illiquid funds’. On 12 December 2016, the Federal Reserve released a policy statement setting out the process for requesting such an extension. Applications were due by 21 January 2017. The rules define the grounds for such extensions quite narrowly. For example, the funds themselves are required to be generally invested in illiquid assets.137

Derivatives

Title VII of the Dodd-Frank Act created a new, comprehensive regulatory system for the previously (mostly) unregulated over-the-counter derivatives market. While a full treatment of this topic is beyond the scope of this chapter, the most significant aspects of Title VII for BHCs and banks are those provisions that:

  • a require standardised swaps138 and SBS139 (collectively referred to here as ‘swaps’) to be cleared through regulated central clearinghouses and executed on regulated trade execution platforms;
  • b provide for the registration and comprehensive regulation (including capital, margin, business conduct, documentation, risk management, corporate governance and record-keeping requirements) of swap dealers, security-based swap dealers, major swap participants and major security-based swap participants (collectively referred to as ‘swaps entities’) by the CFTC and the SEC;
  • c require data concerning all swaps to be reported to trade repositories or regulators and require certain of that data, including price and volume, to be publicly disseminated in an anonymous manner as soon as technologically practicable after a swap transaction is executed; and
  • d require IDIs and US branches and agencies of non-US banks to push certain limited swap dealing activities out of their banking institutions and into separately capitalised affiliates, subject to important exceptions (referred to as the ‘Swaps Pushout Rule’).

Title VII of the Dodd-Frank Act provided the basic outline of these requirements, but directed the CFTC (for swaps that are not SBS and for swap dealers and major swap participants) and the SEC (for SBS, security-based swap dealers and major security-based swap participants) to implement its provisions through rule-makings, which are ongoing. As of 25 January 2017, the CFTC had finalised 37 of its 43 required Title VII rule-makings, while the SEC had finalised 19 of its 29 Title VII required rule-makings.140

The Dodd-Frank Act contains very little about the extraterritorial reach of its swap provisions.141 In July 2013, the CFTC issued final guidance regarding the cross-border application of its Title VII rules.142 Very generally, the CFTC’s final cross-border guidance applies Title VII swap rules based on the status of counterparties to the swap transaction, including whether either counterparty is a ‘US person’, and has the effect of minimising the application of the CFTC’s Title VII regulations to swaps entered into between a non-US person counterparty (such as a non-US swap dealer) and another non-US person counterparty that is neither guaranteed by a US person nor acting as a conduit for the swap activities of its US affiliates. CFTC staff subsequently provided further guidance on these issues, some of which imposes Title VII requirements on non-US persons based on the location of their conduct.143 The SEC has finalised most of its rules on the cross-border application of its Title VII rules.144 Very generally, the SEC applies its Title VII rules based on the status of counterparties to security-based swap transactions, and on whether security-based swap transactions are arranged, negotiated or executed by personnel located in the United States on behalf of personnel located outside of the United States.

Clearing and exchange trading

Title VII of the Dodd-Frank Act requires swaps that the CFTC or SEC determines are required to be cleared to be submitted for central clearing to a regulated clearinghouse or one that is explicitly exempt from registration.145 This requirement is meant to reduce systemic risk posed by swaps. The mandatory clearing requirement applies to all persons engaging in such swaps that meet the territorial nexus described in the Commissions’ cross-border guidance, except for certain end users that use these swaps to hedge or mitigate commercial risk.146 Procedures relating to these requirements, and further exceptions to them, have been adopted through rule-making by the SEC and the CFTC. Title VII sets forth comprehensive requirements with which clearinghouses must comply to obtain and maintain regulation. As of 25 January, 2017, swap clearing was mandatory under these rules for certain liquid and standardised interest rate swaps and index credit default swaps.147

Title VII also requires the execution of those swaps that are required to be cleared to occur on regulated trade execution platforms. It introduces a new type of regulated trade execution platform, known as a ‘swap execution facility’, which provides for various modes of execution of swaps between multiple buyers and multiple sellers.148 There is an exception to this execution requirement where no such platforms make these swaps ‘available to trade’, which is a technical determination relating to the liquidity and other features of the swaps in question.149 As of 25 January 2017, certain interest rate swaps and credit default swaps are subject to the mandatory execution requirements. These interest rate swaps and credit default swaps constitute a subset of those subject to mandatory clearing. In addition, the statute sets forth comprehensive registration, operational and self-regulatory requirements with which trade execution platforms must comply.

Registration and regulation of swap dealers and major swap participants

Title VII defines new classes of swap market participants: swap dealers and major swap participants with respect to CFTC-regulated swaps, and security-based swap dealers and major security-based swap participants with respect to SEC-regulated SBS. The concepts of swap dealer and security-based swap dealer are meant to capture market participants that serve as dealers in their relevant markets. The statute defines swap dealer and security-based swap dealer in terms of whether an entity engages in certain types of activities:

  • a holding oneself out as a dealer in swaps;
  • b making a market in swaps;
  • c regularly entering into swaps with counterparties as an ordinary course of business for one’s own account; or
  • d engaging in activity causing oneself to be commonly known in the trade as a dealer or market maker in swaps.150

In addition, the swap dealer definition (but not the definition of security-based swap dealer) provides that an IDI is not to be considered a swap dealer to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer. The statute also provides for a de minimis exception that permits entities to engage in a minimal amount of swap dealing activity without being deemed a swap dealer. These definitions and exceptions were further defined through a joint CFTC and SEC rule-making on the topic.151 As of 25 January 2017, 104 entities were provisionally registered with the CFTC as swap dealers. The SEC has finalised its SBS dealer registration requirement, but the registration compliance date is based on the SEC’s finalisation of certain fundamental security-based swap rules, which are still in proposed form.152

The concept of a ‘major swap participant’ in the swaps markets is meant to capture entities that are not dealers but have a sufficiently large position in swaps as to threaten systemic stability. The statutory definitions of major swap participant and major security-based swap participant focus on the market impacts and risks associated with an entity’s swap positions.153 These definitions were further defined through a joint CFTC and SEC rule-making, which introduced a complex quantitative test for determining whether an entity must register as a major swap participant or as a major security-based swap participant.

Entities that act as swap dealers or SBS dealers, or that are major swap participants or major security-based swap participants, must register as such with the CFTC or the SEC. In addition, Title VII requires comprehensive regulation of these registered swap entities. Specifically, swaps entities must comply with minimum capital and minimum initial and variation margin collection requirements with respect to non-cleared swaps.154 The five prudential regulators and the CFTC have finalised uncleared swap margin collection requirements155 that largely mirror the international standards outlined in September 2013 (and as modified in March 2015) by the Basel Committee and the International Organization of Securities Commissions. The variation margin compliance deadline is either 1 September 2016 or 1 March 2017, and the initial margin compliance deadline is phased in between 1 September 2016 and 1 September 2020, each depending upon the size of the swap entity’s (and its affiliates’) combined swap positions with the counterparty. As of 25 January 2017, the SEC has proposed, but not yet finalised, its uncleared swap margin collection rules.156

Additionally, swap dealers must establish comprehensive risk-management systems adequate for managing their businesses, and must designate a chief compliance officer to carry out certain enumerated duties and prepare annual compliance reports. Registered swaps entities must also comply with business conduct requirements that address, inter alia, interactions with counterparties, disclosure, supervision, reporting, recordkeeping, documentation, confirmation, valuation, conflicts of interest, and avoidance of fraud and other abusive practices. Heightened business conduct requirements apply to dealings with ‘special entities’, including US federal or state agencies, municipalities, pension plans and endowments. Swaps entities must also comply with documentation standards established by the CFTC or SEC, as applicable, that relate to timely and accurate confirmation, processing, netting, documentation and valuation of all swaps.

Reporting

Title VII requires all swaps to be reported to a registered data repository or, if no such repository will accept the swap, to the CFTC or the SEC, as applicable. Under the CFTC’s reporting rules, the ‘reporting counterparty’ to a swap must report transaction and other specified information about a swap to a swap data repository. This information includes creation data (all primary economic terms of a swap and confirmation data for the swap) and continuation data (all of the data elements that must be reported during a swap’s existence to ensure that all data in the swap data repository remain current and accurate, including all subsequent changes to the swap’s primary economic terms).157 Title VII also requires public dissemination of certain data relating to a swap transaction, including price and volume, as soon as technologically practicable after the transaction has been executed. In addition, Title VII sets forth comprehensive requirements with which data repositories must comply. The SEC issued final reporting rules in February 2015 and July 2016.158

The Swaps Pushout Rule

The Swaps Pushout Rule, as amended in December 2014,159 requires IDIs and US branches and agencies of non-US banks that are swap dealers or security-based swap dealers (collectively, covered depository institutions or CDIs) to push out certain swaps based on an ABS or a group or index primarily composed of ABS (structured finance swaps) to their affiliates.160 An exception to this requirement allows CDIs to enter into structured finance swaps as principal for hedging and risk management purposes or if the ABS underlying such swaps is of a type authorised jointly by the prudential regulators in future uncompleted regulation, although until the prudential regulators jointly adopt rules permitting ABS swaps, the scope of the Swaps Pushout Rule remains unclear. In addition, the amended rule confirmed that uninsured branches of foreign banks are entitled to the same exceptions as IDIs and are similarly required to push out only certain structured finance swaps.

The Swaps Pushout Rule became effective on 16 July 2013, with up to an additional two-year transition period for IDIs, plus the possibility of a discretionary one-year extension.161 In January 2013, the OCC published guidance notifying federally chartered IDIs that it was prepared to grant applications to delay compliance with the Swaps Pushout Rule for up to two years. Formal requests were required to be submitted to the OCC by 31 January 2013.162 The Federal Reserve’s interim final rule also established a process for uninsured state branches and agencies of foreign banks and state member banks to apply to the Federal Reserve for a transition period from the rule’s effective date. The Swaps Pushout Rule also authorises the appropriate US banking agency, after consulting with the CFTC and the SEC, to provide an IDI a transition period of up to two years, which can be extended by one additional year, to cease any non-exempt swap activities. The December 2014 amendment did not change the conformance period.

iii Transactions with affiliates

Sections 23A and 23B of the FRA and the Federal Reserve’s Regulation W impose quantitative and qualitative limits on a variety of transactions, including loans and other extensions of credit (collectively referred to as ‘covered transactions’), between a bank and an affiliate. Section 23A of the FRA limits a bank’s covered transactions163 with any single affiliate to no more than 10 per cent of the bank’s capital stock and surplus, and limits its covered transactions with all affiliates combined to no more than 20 per cent of the bank’s capital stock and surplus.164 In addition, certain covered transactions must be secured at all times165 by a statutorily defined amount of collateral.166 Section 23B of the FRA requires that covered transactions167 between a bank and its affiliates be on market terms and at arm’s length.

These restrictions are designed to protect a depository institution from suffering losses in its transactions with affiliates and to limit the ability of a depository institution to transfer to its affiliates the subsidy arising from the institution’s access to the federal safety net.168 The Federal Reserve implements Sections 23A and 23B of the FRA for all depository institutions and, jointly with the FDIC, has the power to grant exemptions from these provisions in addition to the exemptions contained in the statute itself.169

The Dodd-Frank Act further constrains the ability of banks to engage in derivatives and securities financing transactions with affiliates, and imposes more stringent collateral requirements on transactions with affiliates, all of which may require changes to banking organisations’ risk-management systems and practices related to inter-company derivatives.170 Sections 23A and 23B of the FRA were modified by the Dodd-Frank Act to cover derivatives and securities lending and financing transactions with affiliates to the extent they create bank credit exposure171 to the affiliate and, as a result, such transactions have been subject to quantitative limits and collateral requirements under these sections from 21 July 2012. The Dodd-Frank Act further requires that collateral must be maintained at all times on a mark-to-market basis for credit transactions, rather than only at the time the transactions are entered into, and debt obligations issued by an affiliate cannot be used to satisfy Section 23A collateral requirements. The Federal Reserve has indicated that it will issue regulations to implement the Dodd-Frank Act’s revisions to Sections 23A and 23B. As of 31 December 2016, the Federal Reserve has not issued such regulations. In other Dodd-Frank rule-makings, the Federal Reserve and other US banking agencies have looked to methodologies set forth in their bank capital framework, including the current exposure method and the internal models methodologies, as a means of quantifying a bank’s credit exposure arising from derivatives.

iv Consumer protection regulation

Traditional bank activities such as lending and deposit taking are subject to a broad range of consumer protection statutes and regulations at the federal and state levels. Consumer protection statutes can generally be grouped into three categories: disclosure laws, civil rights laws and privacy laws. The Dodd-Frank Act has significantly changed the consumer protection regulatory landscape, as discussed below.

Overview

Disclosure laws include the Truth in Lending Act,172 which establishes standard disclosures for consumer creditors nationwide. Important loan terms must be disclosed in uniform terminology, with rules for each type of credit, such as residential mortgage loans and credit cards. The Truth in Savings Act173 requires that consumers receive written information about the terms of their deposit accounts, and it also governs the advertising of deposits and interest computations. The Electronic Fund Transfer Act requires certain disclosures, and provides other protections for consumers engaging in electronic fund transfers and remittance transfers.

Civil rights laws include the Equal Credit Opportunity Act,174 which prohibits certain types of discrimination in personal and commercial transactions,175 and the Community Reinvestment Act (CRA),176 intended to encourage depository institutions to help meet the credit and development needs of their communities, especially low and moderate-income neighbourhoods.177

Banks are also subject to laws regarding consumer privacy and the use of certain consumer information. Title V of the GLB Act178 requires initial and periodic communications with consumers about institutions’ privacy policies and the sharing of customer information, as well as an opportunity for customers to ‘opt out’ of having their non-public personal information disclosed to non-affiliated third parties. The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, requires disclosures to consumers about the use of credit report information in certain credit decisions, and requires lenders to undertake remedial actions if there is a breach in the lender’s data security. Regulatory guidelines require financial institutions to implement and maintain a comprehensive written information security programme designed to ensure the security and confidentiality of customer information, and protect against unauthorised access to or use of such information that could result in substantial harm or inconvenience to any customer.179

Other key consumer protection laws include provisions of the Dodd-Frank Act that prohibit unfair, deceptive, or abusive acts or practices, and the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications. Depository institutions normally correct consumer protection violations voluntarily during the course of regulators’ examinations. However, if institutions do not voluntarily comply or the violations are particularly severe or pervasive, regulators may impose enforcement actions, including civil money penalties. A number of federal and state consumer protection laws can also be enforced by consumers through civil lawsuits, which may entitle consumers to an award of actual damages as well as punitive damages in some cases.

CFPB

The CFPB, created by the Dodd-Frank Act,180 has broad regulatory, supervisory and enforcement authority with respect to consumer financial services or products. Carved out

from the CFPB’s authority are a number of entities and activities, including persons regulated by the SEC and the CFTC and the business of insurance.181

The CFPB is authorised to write regulations under federal consumer financial protection laws. Two recent rulemakings are of particular interest. On 24 May 2016, the CFPB proposed rules that would prohibit providers of consumer financial products or services from including mandatory arbitration clauses in their contracts with consumers.182 On 22 November 2016, the CFPB finalised rules extending federal consumer protection to general purpose prepaid cards and other prepaid accounts.183 Additional recent CFPB rule-making activity has focused on a variety of mortgage-related issues, including loan origination and servicing standards and mortgage transaction disclosures, as well as remittance transfers. Other topics on the CFPB’s rule-making agenda include debt collection, small dollar credit and bank overdrafts.

The CFPB has examination and supervision authority over large depository institutions regarding compliance with federal consumer protection laws and regulations.184 In addition, the CFPB has the authority to supervise certain non-bank entities, of any size in the residential mortgage, private education lending and payday lending markets.185 The CFPB has promulgated regulations extending its supervision authority to larger participants186 in the consumer reporting, consumer debt collection, international money transfer, student loan servicing and auto finance markets.

Under its enforcement authority, the CFPB is authorised to conduct investigations, including jointly with other regulators, of potential violations of federal consumer financial protection laws and to initiate enforcement actions for violations. Enforcement actions may include large civil money penalties, customer restitution, rescission or reformation of contracts, remediation of practices and external compliance monitoring. The CFPB has been active in investigations and enforcement actions, including with respect to credit card and mortgage servicing practices.

The CFPB also collects, investigates and responds to consumer complaints, and makes information about consumer complaints publicly available through an online database.

The CFPB’s wide-ranging rulemaking, investigation and enforcement powers have proved controversial. On 11 October 2016, the United States Court of Appeals for the District of Columbia Circuit held that the current structure of the CFPB – an agency headed by a single director, removable only for cause – was unconstitutional.187 The CFPB sought en banc review, which the Court of Appeals granted in February 2017. As a result, the decision has not taken effect. If the decision is allowed to stand, the CFPB’s Director would be removable by the President of the United States at will.

Pre-emption

‘Pre-emption’ in this context refers to the degree to which the activities of a federally chartered IDI, such as a national bank or thrift, are regulated by federal law rather than by the laws of any individual state in which it may have a branch or otherwise conduct activities. Title X of the Dodd-Frank Act revises the pre-emption standards for state consumer financial laws applicable to national banks and thrifts, introducing obstacles to pre-emption determinations by the OCC and creating uncertainty about the continuing pre-emptive effect of certain OCC regulations.188 Under Title X, the OCC may make pre-emption determinations with respect to state consumer financial laws only on a case-by-case basis, on the basis of ‘substantial evidence’ and ‘in accordance with the holding of the Supreme Court in Barnett Bank v. Nelson’.189 Title X also expands the authority of state attorneys general and state regulators by declaring that state consumer financial laws are applicable to operating subsidiaries and affiliates of national banks and thrifts, contrary to the Supreme Court’s holding in Watters v. Wachovia Bank ;190 and by citing the Supreme Court’s holding in Cuomo v. Clearing House Ass’n191 to clarify that no provision of the National Bank Act relating to state visitorial authority may be construed so as to limit the authority of state attorneys general to bring actions to enforce any applicable law against a national bank.

v Bank Secrecy Act (BSA) and anti-money laundering (AML)

The BSA,192 as amended by the USA PATRIOT Act in 2001,193 requires all financial institutions, including banks, inter alia, to establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA includes a variety of record-keeping and reporting requirements (such as currency and suspicious activity reporting) as well as due diligence and know-your-customer documentation requirements. Bank regulators and the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department, issue and enforce BSA implementing regulations. Additionally, criminal AML violations may be prosecuted by the Department of Justice (DoJ).

Developments of interest to banks
Beneficial ownership

FinCEN continues to focus on enhancing access to beneficial ownership information to combat the abuse of legal entities by those engaging in financial crimes.194 On 11 May 2016, FinCEN issued a final rule that (among other things) adds a new requirement for covered financial institutions to identify, and verify the identity of, the ‘beneficial owners’ of ‘legal entity customers’ (CDD Rule).195 The CDD Rule defines a ‘legal entity customer’ as a corporation, limited liability company, other entity created by the filing of a public document with a secretary of state or similar office, general partnership, or any similar entity formed under the laws of a foreign jurisdiction, that opens an account. The CDD Rule excludes certain types of legal entities from the definition of legal entity customer, including, among others:

  • a financial institutions regulated by a federal functional regulator and banks regulated by a state bank regulator;
  • b publicly held companies traded on the New York, American or NASDAQ stock exchange;
  • c SEC-registered investment companies, investment advisers, exchanges and clearing agencies;
  • d US bank holding companies; and
  • e state-regulated insurance companies.

The definition of ‘beneficial owner’ is two-pronged, focusing on the ownership and control of customers that are legal entities: under the ownership prong, a beneficial owner is any individual who, directly or indirectly, owns 25 per cent or more of the equity interests of a legal entity customer; and the control prong requires identification of one individual with significant responsibility to control, manage or direct a legal entity, including an executive officer, senior manager or any other individual who regularly performs similar functions.

Information to be collected with respect to the beneficial owners is name (and title for the controlling individual or individuals, date of birth, address; and social security number (for US persons); or passport number and country of issuance, or other similar identification number (for non-US persons).

The CDD Rule covers only those financial institutions subject to a customer identification programme requirement – banks, brokers or dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities – but FinCEN notes that it believes that extending CDD requirements to other types of financial institutions in the future may ultimately promote a more consistent, reliable and effective AML regulatory structure across the financial system.

The CDD Rule became effective on 11 July 2016, and covered financial institutions must comply by 11 May 2018. The CDD Rule is not retroactive; it does not require financial institutions to ‘look back’ to obtain beneficial ownership information from existing customers, unless those customers open new accounts.

Suspicious activity report (SAR) confidentiality and information sharing

On 3 December 2010, FinCEN published a final rule clarifying principles of confidentiality with respect to SAR filings.196 The final rule prohibits, with certain exceptions, financial institutions from disclosing SARs to any person and not only the persons involved in the relevant transaction, as the prior regulation provided. The final rule also clarifies that SARs and any information that would reveal the existence of a SAR are confidential;197 however, the underlying facts, transactions and documents upon which a SAR is based are not confidential, and may be disclosed in civil litigation or any other proceedings.

FinCEN has identified information sharing among governmental agencies and financial institutions regarding potential money laundering and terrorist activities as an important tool in combating financial crimes and a strategic focus area for the agency.198

FinCEN issued guidance, effective 3 January 2011, on the sharing of SARs by depository institutions with certain affiliates.199 Prior FinCEN guidance permitted sharing SARs upward in an organisational structure to entities that are deemed to control the financial institution. For example, depository institutions could share SARs with their US or non-US head offices or controlling companies. The guidance clarifies that financial institutions may share SARs more broadly with all affiliates that have SAR filing requirements.

FinCEN regulations require financial institutions, upon FinCEN’s request, to search their records to determine whether they have maintained accounts for, or conducted transactions for or on behalf of, a person that a federal law enforcement agency has certified is suspected, based upon credible evidence, of engaging in terrorist activity or money laundering.200 On 10 February 2010, FinCEN adopted a final rule that expands this requirement to allow certain foreign, state and local law enforcement agencies to initiate 314(a) inquiries as well, generally following the same procedures currently applicable to federal agencies.201

The USA PATRIOT Act also allows two or more financial institutions to ‘share information with one another regarding individuals, entities, organizations, and countries suspected of possible terrorist or money laundering activities’.202 Section 314(b) establishes a safe harbour from liability for a financial institution or a group of financial institutions that voluntarily chooses to share information with other financial institutions for the purpose of identifying and reporting possible money laundering or terrorist activities. Financial institutions had been hesitant to share information pursuant to this authority particularly in cases of fraud, since it is often unclear at the outset of a fraud investigation whether money laundering or terrorist activities are implicated.

To promote more information sharing, in October 2013, FinCEN issued a fact sheet that ‘strongly encourages’ financial institutions to increase information sharing under Section 314(b) and outlines its information-sharing programme (314(b) Fact Sheet).203 The Fact Sheet makes clear that non-bank money services businesses can participate in, and have access to, 314(b) information. FinCEN indicated in October 2015 that there had been a rise in SAR filings referencing 314(b) communications.204 Initiatives like the 314(b) Fact Sheet, which signal regulatory support for safe-harbour protections, could encourage financial institutions to share information with less fear of civil liability.

US economic sanctions

The Office of Foreign Assets Control (OFAC) administers US economic sanctions against foreign countries, entities and individuals to counter threats to the US’ national security, foreign policy or economy. The goal of these programmes is to deny, wholly or partly, the benefits of the US economy to targets of sanctions, by denying access to the financial system, capital markets, and import and export markets for goods, services and technology. There are more than 25 separately imposed OFAC sanctions programmes. While OFAC is responsible for promulgating and administering the sanctions, all of the bank regulatory agencies cooperate in ensuring that financial institutions comply with the sanctions. Wilful sanctions violations may also carry criminal penalties enforced by the DoJ. In addition, violations can result in the imposition of penalties by banking regulators. A number of bank settlements with OFAC have been part of global settlements with state and federal prosecutors and banking regulators.

The countries and territories that are currently targets of territorial US sanctions are Crimea, Cuba, Iran, North Korea, Sudan and Syria (target countries). As discussed below, territorial US sanctions on Sudan were suspended in January 2017 but have not yet been officially terminated. In most cases, individuals and entities located, organised or resident in a target country are also targets of sanctions. Target countries are subject to various trade embargoes that ban imports or exports, or both, of goods and services (including financial services) and technology into the United States or from the United States or by ‘US persons’.205

OFAC also administers ‘list-based’ sanctions that are imposed on individuals and entities designated under various programmes for certain activities. These specially designated nationals and blocked persons (SDNs) include persons involved in narcotics trafficking, terrorism and terrorist financing, transnational crime, proliferation of weapons of mass destruction and piracy; persons related to former or current regimes of certain countries; and persons engaged in certain targeted activities in specified countries.

US persons are generally prohibited from conducting financial or commercial transactions with SDNs, and any assets the SDNs may have within the United States or within the possession or control of any US person are blocked. In addition, any property that is 50 per cent or more owned, directly or indirectly, by one or more SDNs is blocked property. This includes entities; thus, a subsidiary owned 50 per cent or more by one or more SDNs is also a sanctions target, regardless of whether the entity is placed on the SDN list.

Starting in July 2014, the US government has imposed targeted, non-blocking, less comprehensive ‘sectoral’ sanctions on certain Russian energy and defence companies and financial institutions. OFAC has included these companies’ names on its new ‘Sectoral Sanctions Identifications List’ (SSI List). US persons are generally prohibited from dealing in new debt of greater than a specified maturity206 of the listed companies and of companies that are owned, 50 per cent or more, directly or indirectly, by one or more SSI Listed entities. In addition, US persons are generally prohibited from dealing in new equity of the SSI Listed financial institutions. Further, the sectoral sanctions prohibit US persons from providing goods, non-financial services or technology to certain entities in the Russian energy sector identified on the SSI List that are involved in Russian deep-water, Arctic offshore and shale-oil projects.

From January 2015 to October 2016, OFAC amended the Cuban Assets Control Regulations (CACR) several times to implement policy changes announced by President Obama in late 2014. According to OFAC, the amendments are intended to expand economic engagement, empower the Cuban people and advance their financial freedoms, increase the flow of information to, from and within Cuba, and expand Cuba’s and Cuban nationals’ access to the US financial system as well as trade and commercial opportunities. In January 2015, OFAC added a general licence that authorises US depository institutions, which include certain financial institutions other than banks, to establish and maintain correspondent accounts at Cuban financial institutions to facilitate the processing of authorised transactions. Other amendments to the CACR have eased sanctions related to travel, financing, exports, telecommunications and internet-based services, business operations in Cuba and remittances. However, the Cuba embargo remains in place, and most transactions between the United States (or US persons or persons owned or controlled by US persons) and Cuba continue to be prohibited.

The United States implemented significant sanctions relief with respect to Iran on 16 January 2016, pursuant to the Joint Comprehensive Plan of Action (JCPOA) agreed to on 14 July 2015 by the permanent members of the United Nations Security Council plus Germany, the European Union (EU), Iran and the United States. Specifically, the United States lifted its ‘secondary sanctions’ predicated on Iran’s nuclear programme. Secondary sanctions target non-US persons for engaging in certain business with Iran and Iranian parties; they are intended to force non-US banks and companies to choose between doing business with Iran or with the United States. They are distinct from direct sanctions, which generally prohibit US persons from dealing with Iranian parties. Comprehensive US direct sanctions against Iran remain in place, as do US secondary sanctions predicated on Iranian activities other than its nuclear programme (e.g., its support for terrorism and human rights violations). The United States also suspended, with certain exceptions, the requirement that non-US subsidiaries of US companies comply with US sanctions on Iran; as a result, the relief generally allows foreign subsidiaries of US parents to resume business with Iran.

On 17 January 2017, OFAC published a general licence amending the Sudanese Sanctions Regulations (SSR)207 to authorise all transactions previously prohibited by the SSR and by Executive Orders (EOs) 13067 and 13412, including transactions involving property in which the government of Sudan has an interest.208 Under the general licence, US persons are generally able to transact with individuals and entities in Sudan, and the property of the government of Sudan subject to US jurisdiction has been unblocked. In conjunction with these actions, on 13 January 2017 President Obama signed EO 13761, ‘Recognizing Positive Actions by the Government of Sudan and Providing for the Revocation of Certain Sudan-Related Sanctions’, which provides for the revocation of the sanctions provisions in EOs 13067 and 13412 on 12 July 2017 if the government of Sudan sustains ‘the positive actions’ that gave rise to EO 13761 related to bilateral cooperation, the ending of internal hostilities, regional cooperation and improvements to humanitarian access.

Penalties for OFAC violations

OFAC civil penalties, which vary depending on the authorising statute, can reach a maximum of $83,864 per violation (as of 1 August 2016) under the Trading With the Enemy Act (the primary authorising statute for the Cuba sanctions programme), or the greater of $284,582 per violation (as of 1 August 2016) or twice the value of the violative transaction or transactions under the International Emergency Economic Powers Act (IEEPA).209 Most US sanctions programmes are authorised by IEEPA.210

OFAC issued final enforcement guidelines on 9 November 2009 to make its enforcement approach to apparent OFAC violations more transparent.211 OFAC’s enforcement guidelines note that OFAC will consider certain ‘general factors’ in determining the appropriate enforcement response to an apparent violation and, if a civil monetary penalty is warranted, in establishing the amount of that penalty. If it is determined that a civil penalty is appropriate, OFAC will generally mitigate the penalty based upon certain factors such as voluntary self disclosure, cooperation with OFAC and whether the case involved is a first-time violation.

V FUNDING

i Traditional funding sources

BHCs and banks have a number of different funding sources, including consumer-driven bank products and services such as demand deposit accounts, certificates of deposit and deposit sweeps; interbank borrowing through agreements such as repurchase agreements; and capital markets activities including commercial paper, subordinated debt, preferred securities, and equity issuances and offerings.

BHCs and banks also have access to additional funding and liquidity sources during strained credit markets when traditional funding sources may either be prohibitively expensive or unavailable. The Federal Reserve’s discount window, available only to member banks and other depository institutions, which has existed since the Federal Reserve System was created in 1913, has long served the banking industry ‘as a safety valve in relieving pressures in reserve markets’.212 Its typical overnight extensions of credit to depository institutions can ‘relieve liquidity strains in a depository institution and in the banking system as a whole’,213 as well as ensuring ‘the basic stability of the payment system more generally by supplying liquidity during times of systemic stress’.214 Almost all discount window credit has been extended as secured advances for many years.215

The Dodd-Frank Act enacted a variety of changes to the Federal Reserve’s emergency financial stabilisation powers. The Act limits emergency assistance to a ‘program or facility with broad-based eligibility’ rather than to any single and specific individual, partnership or corporation that is not part of such a broad-based programme.216 In addition, the Federal Reserve must establish by regulation, in consultation with the Treasury secretary, policies and procedures designed to ensure that any emergency lending is to provide liquidity to the financial system and not to aid a single and specific failing financial company; that collateral for emergency loans is sufficient to protect taxpayers from losses; and that any such programme is terminated in a timely and orderly fashion. In addition, the Federal Reserve is required to obtain the Treasury Secretary’s approval before establishing a programme or facility under Section 13(3).217

The Dodd-Frank Act also changed the FDIC’s emergency financial stabilisation powers, and imposed new substantive and procedural requirements over the FDIC’s ability to establish programmes like the Temporary Liquidity Guarantee Program. The Act limits the FDIC’s authority to provide assistance to individual banks upon a systemic risk finding to only those banks that have been placed in receivership and only for the purpose of winding up the institution.

In the case of future guarantee programmes, the Act provides that upon a written determination of the FDIC and the Federal Reserve that a liquidity event exists, the FDIC would create a widely available programme to guarantee obligations of solvent depository institutions, depository institution holding companies and affiliates during times of severe economic distress. Such a determination requires a vote of two-thirds of the members of the boards of the Federal Reserve and the FDIC and the written consent of the Treasury Secretary. The Treasury Secretary, in consultation with the President, would determine the maximum amount of debt that the FDIC may guarantee. The Treasury Secretary must provide notice to Congress and the FDIC could exercise its authority only upon passage of a joint congressional resolution of approval.

ii Post-financial crisis funding developments

In 2010, bank regulators issued two significant policy statements on their expectations regarding how BHCs and banks manage their funding and liquidity risks.

On 22 March 2010, federal bank regulators issued an inter-agency policy statement on funding and liquidity risk management.218 In the preamble to the guidance, regulators noted that they have observed deficiencies in liquidity risk management including ‘funding risky or illiquid asset portfolios with potentially volatile short-term liabilities and a lack of meaningful […] liquidity contingency plans’. The guidance clarifies the processes that institutions should implement to identify, measure, monitor and control their funding and liquidity risk, such as having cash-flow projections, diversified funding sources, stress testing, a cushion of liquid assets and a formal well-developed contingency funding plan. Aside from overall funding needs, the guidance was specific in highlighting the importance of monitoring and managing intraday liquidity positions.

On 30 April 2010, the federal regulatory agencies issued final guidance addressing the risks associated with funding and credit concentrations arising from correspondent interbank relationships.219 The guidance highlights the need for institutions to identify, monitor and manage correspondent concentration risk on a stand-alone and organisation-wide basis. Notably, the guidance states that a financial institution should consider credit exposures220 of over 25 per cent of total capital and funding exposures as low as 5 per cent of total liabilities indicative of correspondent concentration risk.

Pursuant to the guidance, financial institutions are to establish written policies and procedures to monitor and prevent such correspondent concentration risk. The guidance also highlights regulators’ concern with financial institutions conducting proper due diligence on all credit and funding relationships, including confirmation that terms for all credit and funding transactions are on an arm’s-length basis and that they avoid potential conflicts of interest.221

On 2 September 2014, the OCC adopted final guidelines that establish minimum standards for the design and implementation of a risk-governance framework for large insured national banks, insured federal savings associations and insured federal branches of foreign banks with $50 billion or more in average total consolidated assets along with minimum standards for a board of directors in overseeing the framework’s design and implementation.222 The final guidelines also apply to banks with less than $50 billion in average total consolidated assets if that bank’s parent company controls at least one bank with assets greater than or equal to $50 billion, and the OCC explicitly reserved authority to apply the guidelines to an entity with less than $50 billion in average total consolidated assets entity not under such common control if it determines its operations to be ‘highly complex’ or to otherwise present a heightened risk, but will only exercise this authority in ‘extraordinary circumstances’.223 The guidelines supersede the OCC heightened expectations programme initially formulated after the financial crisis, and include requirements for risk-governance frameworks to cover liquidity risk and concentration risk, concentration risk limits, and the definition and communication of an acceptable risk appetite with respect to, inter alia, liquidity and liquidity buffers.224

As discussed in Section III.v, supra, a large FBO with $50 billion or more in US assets (including US branch and agency assets) is subject to a qualitative liquidity framework that includes liquidity risk management and related governance requirements, as well as a requirement to maintain separate US liquidity buffers (based on results of internal liquidity stress tests) for its US branches or agencies and IHC.

In 2014, the US banking agencies issued a final rule implementing the Basel Committee’s quantitative liquidity standards, known as the liquidity coverage ratio (LCR), in the United States.225 The US LCR rule is designed ‘to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations’.226 Once the US LCR rule is fully phased in, banking organisations subject to the rule will be required to hold an amount of high-quality liquid assets sufficient to meet their total net cash outflows, as modelled over a 30-day period based on prescribed assumptions about the average outflow and inflow rates for specified categories of funding sources and funding needs. The US LCR rule is generally consistent with the Basel Committee’s standards, but is more stringent in certain respects and is subject to a shorter phase-in schedule, first becoming effective starting 1 January 2015 and becoming fully phased in on 1 January 2017. A less stringent, modified version of the US LCR applies to US BHCs and their IDI subsidiaries with more than $50 billion in total consolidated assets that are not advanced approaches banking organisations for purposes of the US Basel III regulatory capital rules.

In 2016, bank regulators proposed a rule that would implement a net stable funding ratio (NSFR) requirement.227 The proposed rule takes a binary approach in that it applies the ‘full’ NSFR requirements to certain large banking organisations,228 whereas certain smaller banking organisations would be subject to ‘modified’ NSFR requirements.229 The NSFR is designed to reduce the likelihood that disruptions to a banking organisation’s regular source of funding will compromise its liquidity position. The proposed rule requires bank organisations to maintain a stable funding profile relative to the liquidity of their assets, derivatives and commitments over a one-year period.

VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

In the United States, investing in banks or BHCs has long been a strictly regulated process. There are three federal statutes that may potentially govern the acquisition of a bank or BHC, depending on the structure of the acquisition and the type of bank or holding company to be acquired:230

  • a the BHC Act: Section 3(a) of the BHC Act requires the prior approval of the Federal Reserve for transactions that result in the formation of a BHC or cause a bank to become a subsidiary of a BHC; acquisitions by a BHC of more than 5 per cent of any class of voting shares of a bank or another BHC; acquisitions of all or substantially all of a bank’s assets (except by merger into another bank); and mergers of BHCs.231 Under the BHC Act, a controlling investment in a bank or BHC will generally cause the investor (and any controlling person of that investor) to become a BHC and subject it to Federal Reserve regulation.232 Control is presumed if a person or entity, acting alone or in concert with others, controls or has the power to vote 25 per cent or more of the outstanding shares of any class of voting stock of a bank or company; has the power to control the election of a majority of the board of directors of a bank or company; or has the power to exercise a controlling influence over the management or policies of a bank or company;233
  • b the Bank Merger Act: the Bank Merger Act requires the approval of the appropriate federal bank regulator for any merger involving two or more IDIs, transfers of assets by an IDI to an uninsured bank (or uninsured branch of a non-US bank) in consideration for the assumption of deposits, an insured bank’s acquisition of assets of another insured bank and assumptions of liabilities of any depository institution (insured or uninsured) by an IDI.234 The appropriate federal bank regulator is that of the surviving entity in a merger;235 and
  • c the Change in Bank Control Act: the Change in Bank Control Act (CIBC Act) applies primarily to the acquisition of control of a US bank or BHC and requires that prior written notice be given to the bank regulator of the target bank or BHC.236 Control (defined as the power, directly or indirectly, to direct the management or policies of an IDI or to vote 25 per cent or more of any class of voting securities of an IDI)237 is presumed, but may be rebutted, and a filing under the CIBC Act is required, if a person (including a bank or company) will, immediately after the transaction, own or control 10 per cent or more of any class of voting securities of a US bank and either no other person owns or controls a greater percentage of the same class of voting securities; or the shares of the bank or its holding company are registered with the SEC.238 The CIBC Act does not apply to transactions requiring approval under the BHC Act or the Bank Merger Act.239

On 22 September 2008, the Federal Reserve issued its Policy Statement on Equity Investments in Banks and BHCs,240 clarifying the Federal Reserve’s views with respect to how a minority equity investment can be structured to prevent an investor from being deemed to exercise a controlling influence over a bank or BHC for purposes of the BHC Act, including with respect to the following issues:

  • a director representation: a minority investor may generally have one representative on the board of directors of a bank or BHC, provided the representative is not the chair of the board or any committee of the board, and does not represent more than 25 per cent of the seats on any board committee. A minority investor may have up to two representatives on the board if its aggregate director representation is proportionate to its total equity interest in the bank or BHC but does not exceed 25 per cent of the membership of the board, and another shareholder is a BHC that controls the bank or BHC under the BHC Act;
  • b total equity interest: a minority investor may generally own up to 24.9 per cent of any class of voting securities of a bank or BHC, or a combination of voting and non-voting securities that, in the aggregate, represents less than one-third of the total equity and less than 15 per cent of any class of voting securities of the bank or BHC;
  • c consultations with management: although a minority investor may generally communicate with management of a bank or BHC about the organisation’s policies and operations, just like any other shareholder, the decision of whether to adopt a particular position or take a particular action must remain with the organisation’s shareholders as a group, its board of directors or management, as applicable. A minority investor may not accompany its communications with explicit or implicit threats to dispose of its shares or to sponsor a proxy solicitation if the organisation or its management does not follow the minority investor’s recommendations. This and other limitations on a minority investor’s actions are generally reflected in written ‘passivity commitments’ the Federal Reserve requires the minority investor to make as a condition for determining that the investor does not control the bank or BHC;
  • d business relationships: a minority investor is generally required to limit its business relationships with the bank or BHC in which it holds its investment, particularly when its voting stake is above 10 (and typically 5) per cent, and to ensure that those relationships are on market terms, non-exclusive and terminable without penalty by the banking organisation. A minority investor’s written ‘passivity commitments’ will frequently contain a quantitative limit to business relationships (whether a fixed dollar amount or a percentage of revenues) above which prior approval of the Federal Reserve would be required for any transaction; and
  • e covenants: a minority investor is generally not able to impose covenants or contractual terms on a bank or BHC that substantially limit management’s discretion over major policies and decisions, such as the hiring, firing and remuneration of executive officers; engaging in new business lines or making substantial changes to a bank’s or BHC’s operations; raising additional debt or equity capital; merging or consolidating; selling, leasing, transferring or disposing of material subsidiaries or major assets; or acquiring significant assets or control of another firm.
i Dodd-Frank Act

The Dodd-Frank Act introduced significant changes to the regulation of investments in banks or BHCs in the United States.

Capital and management requirements

The Federal Reserve may approve a Section 3 application by a BHC to acquire control of all, or substantially all, the assets of a bank only if the BHC is ‘well capitalised’ and ‘well managed’.241 The federal banking agencies may approve interstate merger transactions only if the resulting bank will be ‘well capitalised’ and ‘well managed’ after the transaction.

Financial stability factor

The Federal Reserve must consider the extent to which a proposed acquisition would result in greater or more concentrated risks to the stability of the US banking or financial system.242

The Federal Reserve has considered the financial stability factor in its review of several recent applications. It uses the following non-exhaustive criteria, both individually and in combination, in evaluating an acquisition’s risk to the broader economy:

  • a the size of the resulting firm;
  • b the availability of substitute providers for any critical products and services offered by the resulting firm;
  • c the interconnectedness of the resulting firm with the financial system;
  • d the extent to which the resulting firm contributes to the complexity of the financial system; and
  • e the extent of the cross-border activities of the resulting firm.243

In addition, the Federal Reserve has considered qualitative factors indicative of the difficulty of resolving the resulting firm, such as the opaqueness and complexity of the institution’s internal organisation.244

In considering the financial stability factor in its order approving the acquisition by Capital One of ING Direct, the Federal Reserve further explained that certain types of transactions would likely have only a de minimis impact on the ‘systemic footprint’ of the institution, thereby not likely raising concerns regarding financial stability.245 According to the Federal Reserve, ‘a proposal that involves an acquisition of less than $2 billion in assets, results in a firm with less than $25 billion in total assets, or represents a corporate reorganisation may be presumed not to raise financial stability concerns’ unless there is ‘evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risk factor’.246

Limitations on non-bank acquisitions by systemically important companies

Systemically important companies, including systemically important BHCs, must provide prior notice to the Federal Reserve before acquiring control of voting shares of a company engaged in activities that are financial in nature or incidental thereto that has $10 billion or more of consolidated assets.247 Such acquisitions also may not rely on the statutory exemption from Hart-Scott-Rodino Act filing requirements for transactions that require prior approval of the Federal Reserve.

The Dodd-Frank Act states that the prior notice requirement does not apply to an acquisition permitted under Section 4(c) of the BHC Act, thus exempting, among certain other types of investments, investments of less than 5 per cent and investments in companies the activities of which are ‘closely related to banking;’ and an acquisition made in the course of a systemically important company’s underwriting, dealing or market-making activities.248 This provision is already in effect; as of 31 December 2016 no implementing regulations had been issued.

Expansion of nationwide deposit cap

The Dodd-Frank Act prohibits acquisitions by IDIs and their holding companies of additional depository institutions that would result in the applicant controlling more than 10 per cent of the total amount of deposits of US IDIs.249 Current law imposes a deposit cap on BHCs, but not on other IDI holding companies. An exemption is provided for IDIs in default or in danger of default.

Concentration limits

A ‘financial company’ is prohibited from merging with or acquiring substantially all of the assets or control of another company if the resulting company’s total consolidated liabilities would exceed 10 per cent of the aggregate consolidated liabilities of all financial companies at the end of the prior calendar year.250 There are exceptions for acquisitions of a bank in default or in danger of default, FDIC-assisted transactions, acquisitions that would result in only a de minimis increase in the liabilities of the financial company and certain securitisation transactions. The term ‘financial company’ is defined as an IDI, a BHC, an SLHC, a company that controls an IDI, a systemically important non-bank financial company, and a foreign bank or company treated as a BHC for purposes of the BHC Act. While a majority of merger and acquisition deals will likely not trigger this provision, the concentration limits imposed by the Act may affect the prospects of much larger mergers between financial institutions.

The Act required the FSOC to complete a study of concentration limits and make recommendations regarding their implementation, including any ‘modifications’ that would ‘more effectively implement’ the concentration limits. The FSOC issued its study and recommendations on 18 January 2011.251 The Federal Reserve issued final rules implementing the concentration limits in light of the FSOC’s recommendations on 11 November 2014.252 Pursuant to the methodology set forth in the final rules, the Federal Reserve calculated ‘aggregate financial sector liabilities’ for the initial period between 1 July 2015 and 30 June 2016 using financial companies’ consolidated financial sector liabilities as of 31 December 2014.253 For all subsequent periods, aggregate financial sector liabilities are calculated as the average of financial companies’ aggregate financial sector liabilities as of 31 December of the prior two years.

Additionally, for a US company subject to applicable risk-based capital rules, consolidated liabilities are equal to its total RWAs minus its regulatory capital, calculated pursuant to the applicable rules. For companies not subject to applicable risk-based capital rules, consolidated liabilities are calculated using ‘applicable accounting standards’, specifically US generally accepted accounting principles or other standard approved by the Federal Reserve.254 The liabilities of an FBO are calculated with reference solely to the FBO’s ‘US operations’, enumerated as the total liabilities of all of the FBO’s US branches, agencies, and subsidiaries domiciled in the United States.255 The concentration limit rules establish a de minimis exception to engage in transactions exceeding the limit by up to $2 billion in the aggregate during any 12-month period, but to rely on this exception the financial company must provide notice to the Federal Reserve within 10 days of the acquisition to ensure the particular transaction does not ‘pose a threat to financial stability’.256 The rules do subject transactions made in the ordinary course of business that are structured as controlling investments to the concentration limit and also include merchant banking investments as covered acquisitions, explicitly distinguishing between ‘intentional investment’ decisions covered by the limits and less-targeted investment activities such as collecting a previously contracted debt or bona fide underwriting or market making activity.257

VII OUTLOOK AND CONCLUSIONS

As part of the most extensive overhaul of the US financial regulatory system since the 1930s, the Dodd-Frank Act extended the principles of BHC and bank regulation to many other players in the financial markets, including investment banks, non-depository lenders, hedge funds, insurance companies and any others deemed to be systemically important. Given the recent presidential election, many aspects of these reforms are likely to face significant scrutiny. Even so, the regulatory implementation of Dodd-Frank’s requirements will structure, constrain and channel the behaviour of institutions, markets and individuals for the foreseeable future.

1 Luigi L De Ghenghi is a partner at Davis Polk & Wardwell LLP. The author would like to express his gratitude to Darren Bartlette, Nuveen Dhingra, Scott Farbish, Reuben Grinberg, Ryan Johansen, Nancy Lee, Jeanine McGuinness, Britt Mosman, Andrew Rohrkemper, Gabriel D Rosenberg and Dana Seesel, all of Davis Polk & Wardwell LLP, for their contributions; their efforts in preparing this chapter were invaluable.

2 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong (2010).

3 Proclamation No. 13772, 82 Fed Reg 25 (3 February 2017), www.whitehouse.gov/the-press-office/2017/
02/03/presidential-executive-order-core-principles-regulating-united-states. The core principles outlined in this executive order are:

a empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement and build individual wealth;

b preventing taxpayer-funded bailouts;

c fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

d enabling American companies to be competitive with foreign firms in domestic and foreign markets;

e advancing American interests in international financial regulatory negotiations and meetings;

f making regulation efficient, effective and appropriately tailored; and

g restoring public accountability within federal financial regulatory agencies and rationalising the federal financial regulatory framework.

4 Financial CHOICE Act of 2016, HR 5983 114th Cong (2016).

5 National Bank Act Section 2, 12 USC Section 26.

6 OCC, Interim Final Rule: Office of Thrift Supervision Integration Pursuant to the Dodd-Frank Act, 76 Fed Reg 48950 (9 August 2011), www.gpo.gov/fdsys/pkg/FR-2011-08-09/pdf/2011-17581.pdf; OCC, Final Rule: Office of Thrift Supervision Integration; Dodd-Frank Act Implementation, 76 Fed Reg 43549 (21 July 2011), www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18231.pdf. This chapter largely focuses on bank and bank holding company regulation, and does not cover the entire scope of thrift and thrift holding company regulation.

7 Federal Deposit Insurance Act, Section 1, 12 USC Section 1811(a).

8 See Federal Reserve Bank of Boston, Federal Reserve Membership, www.bostonfed.org/bankinfo/members; Federal Reserve Bank of Dallas, Becoming a Member Bank of the Federal Reserve System: Questions and Answers, www.dallasfed.org/banking/apps/faq.cfm.

9 The Bank Holding Company Act of 1956 (BHC Act) defines a ‘bank holding company’ as any company that has control over any bank or over any company that is or becomes a BHC by virtue of the Act. A company has control over a bank or over any company if the company directly or indirectly, or acting through one or more other persons, owns, controls or has power to vote 25 per cent or more of any class of voting securities of the bank or company; the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or the Federal Reserve determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company (12 USC Section 1841(a)). Some banks do not fall within the definition of ‘bank’ under the BHC Act and do not trigger bank holding company status for companies that control such banks – for example, a national bank that does not accept deposits and is not insured. The OCC has noted that there are several uninsured, non-depository national banks in the US, OCC, Final Rule: Receiverships for Uninsured National Banks 81 Fed Reg 92594 (20 December 2016), www.gpo.gov/fdsys/pkg/FR-2016-12-20/pdf/2016-30666.pdf, and that number may increase if the OCC’s proposal for special purpose (‘FinTech’) charters is finalised. Office of the Comptroller of the Currency, Exploring Special Purpose National Bank Charters for Fintech Companies ( 2 December 2016), www.occ.treas.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf.

10 The largest BHCs and banks are generally subject to continuous examinations. On 16 December 2016, the FDIC, Federal Reserve and OCC adopted a final rule increasing the number of small banks and savings associations eligible for an 18-month examination cycle rather than a 12-month examination cycle. OCC, Federal Reserve and FDIC, Final Rule: Expanded Examination Cycle for Certain Small Insured Depository Institutions and U.S. Branches and Agencies of Foreign Banks, 81 Fed Reg 90949 (16 December 2016), www.gpo.gov/fdsys/pkg/FR-2016-12-16/pdf/2016-30133.pdf.

11 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 604 (2010).

12 Ibid.

13 For a further discussion, see Section VI, infra.

14 Pub L No 111-203, Section 335, 124 Stat 1,540.

15 12 CFR Section 347.213, www.gpo.gov/fdsys/pkg/CFR-2011-title12-vol4/pdf/CFR-2011-title12-vol4-sec347-213.pdf; FDIC, Final Rule: Deposit Insurance Regulations; Temporary Increase in Standard Coverage Amount; Mortgage Servicing Accounts; Revocable Trust Accounts; International Banking; Foreign Banks, 74 Fed Reg 47711 (17 September 2009), www.fdic.gov/regulations/laws/federal/2009/09Final917.pdf.

16 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 331(b) (2010).

17 FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672, 10673 (25 February 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.

18 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 331(b) (2010).

19 FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672 (25 February 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.

20 A ‘large IDI’ is defined as an IDI with at least $10 billion in total assets for at least four consecutive quarters, while a ‘highly complex IDI’ is an IDI (other than a credit card bank) with $50 billion or more in total assets for at least four consecutive quarters controlled by a parent or intermediate parent company with more than $500 billion in total assets, or a processing bank or trust company with at least $10 billion in total assets for at least four consecutive quarters. FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672, 10688 (25 February 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.

21 Each scorecard assesses certain risk measures to produce two scores that are combined and converted into an initial assessment rate. The performance score measures an IDI’s financial performance and its ability to withstand stress. The loss severity score quantifies the relative magnitude of potential losses to the FDIC in the event of the IDI’s failure. According to the FDIC, the scorecard method better captures risk at the time it is assumed by a large or highly complex IDI, better differentiates risk among such institutions during periods of good economic and banking conditions based upon how they would fare during periods of stress or economic downturns, and better takes into account the losses that the FDIC may incur if such an institution fails.

22 OCC, Detecting Red Flags in Board Reports – a Guide for Directors (2004), www.occ.gov/publications/publications-by-type/other-publications-reports/rf_book.pdf; OCC, Internal Controls – a Guide for Directors (2000), www.occ.gov/publications/publications-by-type/other-publications-reports/IntCtrl.pdf; OCC, The Director’s Book – the Role of National Bank Director (2010), www.occ.gov/publications/publications-by-type/other-publications-reports/The-Directors-Book.pdf.

23 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Sections 614, 615 (2010).

24 The Dodd-Frank Act created the FSOC to oversee and identify risks in the financial system. The FSOC’s duties include collecting information to assess risks to the US financial system through its Office of Financial Research; monitoring the financial services marketplace; designating as ‘systemically important’ any non-bank financial company if the failure of such company would threaten US financial stability; identifying gaps in regulation; recommending supervisory priorities; and facilitating information sharing and coordination among financial regulatory agencies.

25 Between its formation in 2010 and 31 December 2016, the FSOC designated General Electric Capital Corporation, American International Group, Inc, Prudential Financial, Inc and MetLife, Inc as US non-bank financial companies subject to supervision by the Federal Reserve (non-bank systemically important financial institution (SIFI)), finding that these institutions’ material financial distress could pose a threat to US financial stability. The FSOC had established enhanced prudential standards for General Electric Capital Corporation. Federal Reserve, Application of Enhanced Prudential Standards and Reporting Requirements to General Electric Capital Corporation, 80 Fed Reg 44,111 (24 July 2015), www.gpo.gov/fdsys/pkg/FR-2015-07-24/pdf/2015-18124.pdf. In late June 2016, however, the FSOC rescinded its designation of General Electric Capital Corporation as a non-bank SIFI, finding that the company had sufficiently restructured itself to shed the label. Financial Stability Oversight Council, Basis for the Financial Stability Oversight Council’s Rescission of Its Determination Regarding GE Capital Global Holdings, LLC (28 June 2016), www.treasury.gov/initiatives/fsoc/designations/Documents/GE%20Capital%20Public%20Rescission%20Basis.pdf. MetLife, Inc filed suit seeking to overturn its designation, arguing that the resulting increase in regulatory scrutiny would unfairly inflate costs to consumers, that the designation was arbitrary and capricious, and that the FSOC violated MetLife, Inc’s due process rights by refusing to give it access to the full record the FSOC relied on in making the decision. See Jeff Sistrunk, MetLife Continues SIFI Fight Alone 5 Years After Dodd-Frank, Law360, 22 July, 2015, www.law360.com/articles/681664/metlife-continues-sifi-fight-alone-5-years-after-dodd-frank. On 30 March, 2016, the US District Court for the District of Columbia ordered the recission of MetLife’s designation as a non-bank SIFI on various grounds, including that the FSOC had not followed its own interpretative guidance in designating MetLife. Wall Street Journal, ‘MetLife Wins Bid to Shed ‘Systemically Important’ Label’, 30 March, 2016, www.wsj.com/articles/federal-judge-rescinds-federal-government-determination-that-metlife-is-systemically-important-1459349828?mod=djemFinancialRegulationAlertPro. In October
2016, the FSOC’s appeal from the District Court’s decision was heard by the US Court of Appeals for the District of Columbia; a decision is pending. Wall Street Journal, ‘U.S. Oversight of MetLife Called Into Question at Court Hearing’ (24 October 2016), www.wsj.com/articles/u-s-oversight-of-metlife-
called-into-question-at-court-hearing-1477323670.

26 Federal Reserve, Single Counterparty Credit Limits for Large Banking Organizations; Proposed Rule, 81 Fed Reg 14328 (16 March 2016).

27 Federal Reserve, Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations, 12 CFR Part 252, www.gpo.gov/fdsys/pkg/FR-2014-03-27/pdf/2014-05699.pdf; see also Davis Polk, Foreign Banks: Overview of Dodd-Frank Enhanced Prudential Standards Final Rule (24 February 2014), www.davispolk.com/sites/default/files/Visual.Summary.Foreign%20Banks.Dodd_.Frank_.Enhanced.Prudential.Standards.Final_.Rule_.pdf.

28 US assets include all on-balance sheet assets of US subsidiaries other than assets held by a branch subsidiary that holds assets acquired in the ordinary course of business for the sole purpose of securing or collecting debt previously contracted in good faith by that branch or agency and all held pursuant to Section 2(h)(2) of the BHC Act, which exemption allows qualifying FBOs to retain their interest in foreign commercial firms that conduct business in the United States. The asset amount may be reduced by the amount corresponding to any balances and transactions between any top-tier US subsidiaries that would be eliminated in consolidation if an IHC were already formed.

29 An IHC will not be subject to the US advanced approaches capital rules unless the IHC expressly opts in. However, an IHC that crosses the applicability threshold for the US advanced approaches capital rules will be subject to the US Basel III supplementary leverage ratio and certain other capital requirements applicable to advanced approaches banking organisations.

30 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 616(d) (2010).

31 Federal Reserve, ‘Capital Plans’, 76 Fed Reg 74631 (1 December 2011), www.gpo.gov/fdsys/pkg/FR-2011-12-01/pdf/2011-30665.pdf.

32 Federal Reserve, Capital Plan and Stress Test Rules, 12 CFR Parts 225 and 252, www.gpo.gov/fdsys/pkg/FR-2014-10-27/pdf/2014-25170.pdf. Previously, large BHCs were required to submit their capital plans by early January of each year, and the Federal Reserve was required to take action by March. Ibid.

33 Even if a large BHC receives a non-objection, it may not pay a dividend or make other capital distributions without Federal Reserve approval under specified circumstances, such as if the distribution would result in the BHC not meeting a minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout a planning horizon.

34 Federal Reserve, Amendments to the Capital Plan and Stress Test Rules, 82 Fed Reg 9308 (proposed 3 February 2017), www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02257.pdf. The Federal Reserve’s final rule removed the qualitative assessment for bank holding companies or IHCs of FBOs with total consolidated assets of $50 billion or greater but less than $250 billion, and non-bank assets of less than $75 billion that are not identified as US G-SIBs.

35 For a detailed discussion of the 2016 capital planning and stress testing process for large BHCs, see Davis Polk & Wardwell LLP, Visuals of 2016 CCAR and DFAST Results (8 July 2016), usbasel3.com/docs/2016%20DFAST%20and%20CCAR%20Results%20DPW%20Visuals.pdf.

36 Federal Reserve, OCC and FDIC, Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and their Subsidiary Insured Depository Institutions, 79 Fed Reg 24528 (1 May 2014), www.gpo.gov/fdsys/pkg/FR-2014-05-01/pdf/2014-09367.pdf.

37 These numbers reflect currently available public reporting.

38 See 12 CFR Section 217.405–06.

39 Federal Reserve, Notice of Proposed Rulemaking: Regulations Q and Y; Risk-Based Capital and other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-Based Capital Requirements for Merchant Banking Investments, 81 Fed Reg 67220 (30 September 2016), www.gpo.gov/fdsys/pkg/FR-2016-09-30/pdf/2016-23349.pdf.

40 Ibid. at 67221.

41 See Dodd-Frank Act, US Public Law No. 111-203, Section 113, 124 US Statutes at Large 1375, 1398 (2010); 77 Federal Register 21637 (11 April 2012). See also Davis Polk & Wardwell LLP, FSOC Issues Final Rule on Designation of Systemically Important Nonbank Financial Companies (4 April 2012),
www.davispolk.com/files/Publication/bd4d269c-ecc1-4757-a5ae-007f26f378e1/Presentation/Publication
Attachment/c6a028ce-271b-4aef-b140-02f4b9094236/040412_FSOC.Final.Rules.pdf.

42 Dodd-Frank Act, US Public Law No. 111-203, Section 165(d), 124 US Statutes at Large 1375, 1426 (2010).

43 Federal Reserve, FDIC, Final Rule, Resolution Plans Required, 76 Federal Register 67323 (1 November
2011).

44 On 17 December 2015, the OCC proposed complementary recovery standards that would apply to certain banks with at least $50 billion in assets, which may include US G-SIBs’ bank subsidiaries. These standards would require each bank to develop and maintain recovery plans that illustrate the actions necessary for the bank to remain operating as a going concern when the bank is undergoing considerable financial or operational stress and to avoid liquidation or resolution without relying on any extraordinary government support. OCC, Proposed Rule, Guidelines Establishing Standards for Recovery Planning by Certain Large Insured national Banks, Insured Federal savings Associations, and Insured Federal Branches, 80 Fed Reg 78681, 78685 (17 December 2015), www.gpo.gov/fdsys/pkg/FR-2015-12-17/pdf/2015-31658.pdf. The US G-SIBs were already subject to a requirement to submit recovery plans to the Federal Reserve annually. Federal Reserve Letter SR 14-8, Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies (25 September, 2014), www.federalreserve.gov/bankinforeg/srletters/sr1408.htm.

45 Dodd-Frank Act Section 165(d)(3)–(4). In April 2016, 7 US G-SIBs received letters from the Federal Reserve and FDIC finding deficiencies in their 2015 resolution plans. Federal Reserve & FDIC, Resolution Plan Assessment Framework and Firm Determinations (13 April 2016), www.fdic.gov/news/news/press/2016/pr16031a.pdf. All but Wells Fargo were informed in December 2016 that they had adequately addressed those deficiencies in their October 2016 submissions. Because Wells Fargo had not adequately remedied the deficiencies in its plan, it is now prohibited from establishing international bank entities or acquiring non-bank subsidiaries, with further repercussions if it does not remedy the deficiencies in its July 2017 resolution plan submission. Federal Reserve & FDIC, Agencies Announce Determinations on October Resolution Plan Submissions of Five Systemically Important Domestic Banking Institutions (13 December 2016), www.fdic.gov/news/news/press/2016/pr16109.html.

46 FDIC, Final Rule, Resolution Plans Required for Insured Depository Institutions with $50 Billion or More in Total Assets, 77 Federal Register 3075 (23 January 2012).

47 FDIC, Final Rule: Certain Orderly Liquidation Authority Provisions under Title II of the Dodd-Frank Act (15 July 2011), www.gpo.gov/fdsys/pkg/FR-2011-07-15/pdf/2011-17397.pdf.

48 Martin J Gruenberg, acting chair, FDIC, Remarks to the Federal Reserve Bank of Chicago Bank Structure Conference (10 May 2012), www.fdic.gov/news/news/speeches/chairman/spmay1012.html.

49 FDIC, Notice and Request for Comment, Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy, 78 Fed Reg 76614 (18 December 2013).

50 See, e.g., 12 US Code of Federal Regulations Part 201; the Federal Reserve Discount Window (21 July
2010), www.frbdiscountwindow.org/discountwindowbook.cfm?hdrID=14&dtlID=43#eligibilityps.

51 12 USC Section 343.

52 See Dodd-Frank Act, US Public Law No. 111-203, Section 210(n), 124 US Statutes at Large 1375, 1506-09 (2010).

53 Financial Stability Board, Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution: Total Loss-absorbing Capacity (TLAC) Term Sheet (9 November 2015).

54 Federal Reserve, Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations, 82 Fed Reg 8266 (15 December 2016).

55 Federal Reserve, Notice of Proposed Rulemaking, Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and the U.S. Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions’, 81. Fed Reg 29169 (11 May 2016).

56 Ibid. at 29182.

57 In March 2017, the New York State Department of Financial Services finalised new cybersecurity regulations that apply to banks and certain other financial institutions chartered or licensed in New York State. The rules require covered entities to, among other things, establish and maintain a cybersecurity programme with a written cybersecurity policy, appoint a chief information officer, participate in quarterly and annual tests to assess vulnerabilities, create a written incident response plan, and encrypt non-public information in transit and at rest.

58 See, e.g., Federal Financial Institutions Examination Council Information Technology Examination Handbook, Internet Security (September 2016), ithandbook.ffiec.gov/media/216407/informationsecurity
2016booklet.pdf.

59 Large and interconnected entities include BHCs and SLHCs with $50 billion or more in total consolidated assets; banks and savings associations, regardless of size, that are subsidiaries of a BHC or SLHC with $50 billion or more in total consolidated assets; banks and savings associations with $50 billion or more in total consolidated assets; US operations of FBOs with $50 billion or more in total US assets; designated non-bank SIFIs; Federal Reserve-Supervised financial market infrastructures; and service providers to all of the above.

60 Federal Reserve, Notice of Proposed Rulemaking, Enhanced Cyber Risk Management Standards, 81 Fed Reg 74315 (26 October 2016). See also Davis Polk & Wardwell LLP, Banking Regulators Float Broad Cyber Risk Approach (31 October 2016), www.davispolk.com/sites/default/files/2016-10-31_banking_regulators_float_broad_cyber_risk_approach.pdf.

61 See 12 USC Section 1843(a), (c)(8). The BHC Act also contains various narrow exemptions from this general prohibition, including exemptions that allow a BHC to make non-controlling investments for its own account or an investment fund controlled by it in up to 4.9 per cent of any class of voting securities and up to 24.9 per cent of the total equity (including voting, non-voting securities and subordinated debt) of any non-banking company; invest in a subsidiary that does not have any office or direct or indirect subsidiary or otherwise engage in any activities directly or indirectly in the United States, other than those that are incidental to its foreign or international business; hold investments as a fiduciary; or furnish services to its subsidiaries (12 USC Sections 1843(c)(1)(C), (c)(4), (c)(6), (c)(7), (c)(13)).

62 This traditional policy is justified mainly on the grounds that mixing banking and commerce would lead to conflicts of interest in the allocation of credit; potential increased risks to IDIs and expansion of the federal deposit insurance safety net; undue concentration of economic power, and therefore anticompetitive behaviour; and the creation of conglomerates that would be too complex to manage or supervise because of the different skills needed to manage or supervise both financial and commercial businesses in the same group. See, e.g., Leach, ‘The Mixing of Commerce and Banking’, in Proceedings of the 43rd Annual Conference on Banking Structure and Competition, Federal Reserve Bank of Chicago, 13 (May 2007).

63 12 USC Section 1843(a), (c)(8).

64 See 12 USC Section 1843(a), (c)(8), 12 CFR Section 225.28(b).

65 Gramm-Leach-Bliley Act of 1999, Pub L No 106-102, 106th Cong, 1st Sess (12 November 1999), 113 Stat 1338–1481 (1999). Although the GLB Act softened the US policy of maintaining an appropriate separation between banking and commerce, it did not eliminate that separation. To become an FHC, a BHC and each of its IDI subsidiaries must be ‘well capitalised’ and ‘well managed’ as those terms are defined in the Federal Reserve’s Regulation Y. See 12 CFR Section 225.2(r) and (s).

66 12 USC Section 1843(k)(1).

67 12 USC Section 1843(k)(4), especially (k)(4)(F).

68 12 USC Sections 1843(k)(4)(B) (insurance underwriting); (k)(4)(E) (securities underwriting and dealing); (k)(4)(H) (merchant banking); (k)(4)(I) (insurance company portfolio investments). See, e.g., The Royal Bank of Scotland, 94 Federal Reserve Bulletin C60 (2008) (certain energy commodities trading as a complement to energy derivatives trading).

69 12 USC Section 1843(k)(4)(H) (merchant banking). The merchant banking authority is currently under scrutiny, and calls for its reform range from increasing risk-based capital requirements for certain commodities-related activities and commodities-related merchant banking investments of US financial holding companies (see Federal Reserve, Notice of Proposed Rulemaking: Regulations Q and Y; Risk-Based Capital and other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-Based Capital Requirements for Merchant Banking Investments, 81 Fed Reg 67220 (30 September 2016), www.gpo.gov/fdsys/pkg/FR-2016-09-30/pdf/2016-23349.pdf) to a repeal of the merchant banking authority (see Federal Reserve, FDIC and Office of the Comptroller of the Currency (OCC), Report to the Congress and the Financial Stability Oversight Council Pursuant to Section 620 of the Dodd-Frank Act (2016), 28, www.occ.gov/news-issuances/news-releases/2016/nr-ia-2016-107a.pdf).

70 12 USC Section 1843(k)(4)(G).

71 See 12 CFR Part 211, subpart A.

72 See 12 CFR Section 225.86(b).

73 Former Federal Reserve Chair Paul Volcker, although not formally involved in the Dodd-Frank Act legislative process, was among the leading advocates for imposing restrictions on proprietary trading and private funds activities by banks and their affiliates in the Act.

74 The Volcker Rule adds a new Section 13 to the BHC Act. Dodd-Frank Act, Pub L No 111-203, Section 619 (2010) (codified at 12 USCA Section 1851).

75 The statute defines ‘banking entity’ as ‘any insured depository institution (as defined in Section 3 of the Federal Deposit Insurance Act (12 USCA [Section ]1813)), any company that controls an IDI, or that is treated as a BHC for purposes of Section 8 of the International Banking Act (IBA), and any affiliate or subsidiary of any such entity’, not including certain institutions that function solely in a trust or fiduciary capacity, under certain conditions. 12 USCA Section 1851(h)(1). Under Section 8 of the IBA, a foreign bank with a US commercial banking presence, and any company deemed to control such a foreign bank, is treated as a BHC. 12 USCA Section 3106(a). The final regulations largely conform to the statutory definition of ‘banking entity’, but expand on the exclusions from banking entity to include any covered fund, portfolio company held under the merchant banking or insurance company investment authorities of Section 4(k) of the BHC Act, or portfolio concern controlled by a small business investment company, in each case, that is not itself a banking entity under the definition of such term, as well as the FDIC acting in its corporate capacity or as conservator or receiver. 12 CFR Section 248.2(c)(2).

76 12 USCA Section 1851(a).

77 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed Reg 5536 (31 January 2014).

78 See Federal Reserve, Order Approving Extension of Conformance Period Under Section 13 of the BHC Act (7 July 2016). See also ‘Conformance period’, below.

79 12 CFR Section 248.3(a). The regulations provide a more detailed definition of the term ‘proprietary trading’ than in the statute. 12 USCA Section 1851(h)(4).

80 ‘Trading account’ is defined in the statute as ‘any account used for acquiring or taking positions in the securities and instruments described in [the definition of ‘proprietary trading’] principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements), and any such other accounts’ as the appropriate regulators may determine by rule. 12 USCA Section 1851(h)(6). The final regulations expand the scope of ‘trading account’. See 12 CFR Section 248.3(b).

81 12 CFR Section 248.3(b)(ii)-(iii).

82 12 CFR Section 248.2(h).

83 12 CFR Section 248.3(c)(2).

84 12 CFR Section 248.3(d).

85 12 USCA Section 1851(d)(1)(A); 12 CFR Section 248.6(b).

86 12 USCA Section 1851(d)(1)(C).

87 12 USCA Section 1851(d)(1)(D).

88 12 USCA Section 1851(d)(1)(H).

89 12 USCA Section 1851(d)(1)(F).

90 12 USCA Section 1851(d)(1)(J).

91 12 USCA Section 1851(d)(2)(A).

92 12 USCA Section 1851(a)(1).

93 15 USCA Section 80a-3.

94 Investment Company Act of 1940 Section 3(c)(1), (7), 15 USCA Section 80a-3. This definition is very broad. The exemptions under Section 3(c)(1) and (7) of the 1940 Act can be used to exempt any entity from the definition of ‘investment company’ regardless of how it invests or what it invests in, so long as certain limits on the number or financial characteristics of its investors are satisfied.

95 A fund that is organised or established outside the United States that is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities, and all the ownership interests of which are offered and sold solely outside the United States, is a covered fund with respect to a banking entity that is located in or organised under US law, and any banking entity directly or indirectly controlled by such a banking entity, if that banking entity or an affiliate sponsors or directly or indirectly holds an ownership interest in that fund. 12 CFR Section 248.10(b)(1)(iii). A fund that is organised or established outside the United States but that relies on Section 3(c)(1) or 3(c)(7) of the 1940 Act is also a covered fund.

96 A commodity pool, as defined in Section 1a(10) of the CEA, 7 USC Section 1a(10), is a covered fund if the commodity pool operator has claimed exempt pool status under 17 CFR Section 4.7, or if the operator is registered with the Commodity Futures Trading Commission (CFTC) as a commodity pool operator in connection with the operation of the pool in question, and the pool’s participation units are substantially all owned by qualified eligible persons (QEPs), as defined in 17 CFR Section 4.7(a)(2) and (3), and have not been publicly offered to persons that are not QEPs. 12 CFR Section 248.10(b)(1)(ii).

97 12 CFR Section 248.10(c)(2).

98 12 CFR Section 248.10(c)(3).

99 12 CFR Section 248.10(c)(12)(i), (iii).

100 12 CFR Section 248.10(c)(12)(ii).

101 12 CFR Section 248.10(c)(1).

102 12 CFR Section 248.10(c)(5).

103 12 CFR Section 248.10(c)(6).

104 12 CFR Section 248.10(c)(8).

105 12 CFR Section 248.10(c)(9).

106 12 CFR Section 248.10(c)(10).

107 12 CFR Section 248.10(d)(6)(i).

108 12 CFR Section 248.10(d)(6)(ii).

109 12 CFR Section 248.10(d)(6)(i)(A).

110 12 CFR Section 248.10(d)(6)(i)(B)-(F).

111 12 CFR Section 248.10(d)(6)(i)(G).

112 12 CFR Section 248.10(a)(2).

113 A banking entity that serves as a trustee that does not exercise investment discretion is not a sponsor of a covered fund. See 12 CFR Section 248.10(d)(10)(i). With respect to such a covered fund, however, a banking entity that directs such a trustee or that otherwise possesses investment discretion with respect to the fund will be considered a sponsor of the fund. See 12 CFR Section 248.10(d)(10)(ii).

114 Serving as a commodity pool operator will only cause a banking entity to be a sponsor of a covered fund if the fund is a covered fund under 12 CFR Section 248.10(b)(1)(ii).

115 12 CFR Section 248.11(a).

116 12 CFR Section 248.11(b).

117 12 CFR Section 248.11(c).

118 12 CFR Section 248.13(a).

119 12 CFR Section 248.13(b).

120 12 CFR Section 248.11(c).

121 12 USCA Section 1851(d)(1)(J).

122 The final regulations expanded the scope of relationships that trigger Super 23A.

123 Section 23B requires that many transactions, including any ‘covered transaction’ under Section 23A, between a bank and an affiliate be conducted on market terms. 12 USCA Section 371c-1(a). For more information on Section 23B, see ‘Transactions with affiliates’ below.

124 For a detailed discussion of regular Section 23A, see ‘Transactions with affiliates’ below.

125 12 USCA Section 1851(f)(3); 12 CFR Section 248.14(a)(2)(ii).

126 12 CFR Section 248.10(d)(7).

127 12 USCA Section 1843(c)(9).

128 12 USCA Section 1843(c)(13).

129 12 USCA Section 1851(d)(1)(H).

130 12 USCA Section 1851(d)(1)(I).

131 12 USCA Section 1851(d)(1)(H) to (I).

132 12 CFR Section 248.13(b).

133 See Volcker Rule Frequently Asked Questions (27 February 2015), www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm#13.

134 Where the fund is a ‘related covered fund’ because the FBO ‘sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator, or commodity trading adviser’ to the covered fund, the fund’s own participation in an offering targeting US persons would preclude the use of the SOTUS exemption.

135 See Federal Reserve, Order Approving Extension of Conformance Period (10 December 2013).

136 See Federal Reserve, Order Approving Extension of Conformance Period Under Section 13 of the BHC Act (18 December 2014); Federal Reserve, Statement Regarding the Treatment of Collateralized Loan Obligations Under Section 13 of the BHC Act (7 April 2014).

137 See 12 CFR Section 225.180(g) to (i), 225.181(b)(2) to (3).

138 The definition of swap includes a wide range of agreements, contracts and transactions. In general, a swap includes swaps and options on non-securities, such as interest rate swaps and options, energy and metal swaps, agricultural swaps, commodity swaps and options, cross-currency swaps and non-deliverable forwards, foreign exchange options, swaps on broad-based indices and swaps on government securities. Exclusions from the definition of ‘swap’ include puts, calls, options on securities, indices of securities, certificates of deposit; contracts for purchase or sale of securities on a fixed basis or based on contingencies not related to creditworthiness; commodity futures contracts and security futures products; the sale of a non-financial commodity for deferred delivery, where intended to be physically settled; deliverable FX forwards and swaps (for some provisions); and identified banking products, unless bank regulators find that they are actually swaps or SBS or they are not regulated by a bank regulator and are swaps or SBS. See the Commodity Exchange Act (CEA) Section 1a(47).

In November 2012, the US Treasury Secretary issued, pursuant to Title VII, a determination that deliverable FX swaps and FX forwards, as such terms are defined in the CEA, are not ‘swaps’ and are exempt from many Title VII requirements. Department of the Treasury, Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 Fed Reg 69694 (20 November 2012), www.gpo.gov/fdsys/pkg/FR-2012-11-20/pdf/2012-28319.pdf.

139 SBS are defined as instruments that otherwise would be swaps, but have certain specified characteristics. Specifically, SBS are instruments that would otherwise be swaps but are based on certain underlying assets, including a single security, a loan, a narrow-based group or index of securities, or events relating to a single issuer or issuers of securities in a narrow-based security index, with exceptions for certain types of government-issued securities. Securities Exchange Act of 1934 (Exchange Act) Section 3(a)(68).

In August 2012, the CFTC and SEC jointly issued a final regulation to further define the terms ‘swap’ and ‘security-based swap’. CFTC and SEC, Further Definition of ‘Swap’, ‘Security-Based Swap’, and ‘Security-Based Swap Agreement’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 Fed Reg 48208 (13 August 2012), www.gpo.gov/fdsys/pkg/FR-2012-08-13/pdf/2012-18003.pdf.

140 Dodd-Frank Progress Report generated using the Davis Polk Regulatory Tracker™ January 2017.

141 Section 2(i) of the CEA states that the CFTC’s swap rules added by the Dodd-Frank Act will not apply ‘to activities outside the United States unless those activities – (1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) contravene such rules or regulations as the [CFTC] may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of this chapter that was enacted by the [Dodd-Frank Act]’. Section 30(c) of the Exchange Act states that the SEC’s SBS rules added by the Dodd-Frank Act will not apply ‘to any person insofar as such person transacts a business in SBS without the jurisdiction of the United States, unless such person transacts such business in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate to prevent the evasion of any provision of this chapter that was added by the [Dodd-Frank Act]’.

142 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed Reg 45292 (26 July 2013). The CFTC issued on 11 October 2016 a proposed rule that addresses the cross-border application of certain of its swaps rules that, if adopted, would generally supersede a number of the provisions in the CFTC’s cross-border guidance. See Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants; Proposed Rule, Interpretations, 81 Fed Reg 71946 (18 October 2016).

143 See CFTC Staff Advisory No. 13-69, Division of Swap Dealer and Intermediary Oversight Advisory Applicability of Transaction-Level Requirements to Activity in the United States (14 November 2013), www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf. Advisory 13-69 is subject to no-action relief until the earlier of 30 September 2017 or the effective date of any CFTC actions related to the Advisory. See CFTC Letter No. 16-64, Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers (4 August 2016), www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/16-64.pdf. The CFTC’s proposed cross-border rule described in note 140, if adopted, would modify certain aspects of the cross-border regime outlined in CFTC Staff Advisory No. 13-69.

144 See Application of ‘Security-Based Swap Dealer’ and ‘Major Security-Based Swap Participant’ Definitions to Cross-Border Security-Based Swap Activities, 79 Fed Reg 47278 (12 August 2014). Security-Based Swap Transactions Connected with a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed By Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception, 81 Fed Reg 8598 (19 February 2016).

145 See CEA Section 2(h) and Exchange Act Section 3C, as amended by the Dodd-Frank Act.

146 CEA Section 2(h)(7) and Exchange Act Section 3C(g) provide an exception from the mandatory clearing requirement for swaps if one of the swap counterparties is not a financial entity; is using swaps to hedge or mitigate commercial risk; and notifies the CFTC (for swaps) or the SEC (for SBS) how the counterparty generally meets its financial obligations associated with entering into non-cleared swaps.

147 See 17 CFR 50.4.

148 CEA Section 1a(50) defines a ‘swap execution facility’ as ‘a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that (A) facilitates the execution of swaps between persons; and (B) is not a designated contract market’.

149 See CEA Section 2(h)(8) and Exchange Act Section 3C, as amended by the Dodd-Frank Act. See also Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement under the Commodity Exchange Act, 78 Fed Reg 33606 (4 June 2013).

150 Entities that enter into swaps or SBS for their own accounts, either individually or in a fiduciary capacity but not as part of a regular business, are not included within the definitions.

151 CFTC and SEC, Further Definition of ‘Swap Dealer’, ‘Security-Based Swap Dealer’, ‘Major Swap Participant’, ‘Major Security-Based Swap Participant’ and ‘Eligible Contract Participant;’ 77 Fed Reg 30596 (23 May 2012), www.gpo.gov/fdsys/pkg/FR-2012-05-23/pdf/2012-10562.pdf. These rules initially establish the threshold for the de minimis exclusion from swap dealer registration requirements at $8 billion notional for swaps connected with dealing activity effected in a 12-month period for CFTC-regulated swaps and all credit default swaps, and $400 million notional for other SBS. Without further action by the CFTC, this threshold is currently set to decrease to $3 billion on 31 December 2018.

152 Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, 80 Fed Reg 48964 (14 August 2015).

153 Specifically, the statute defines major swap participants and major security-based swap participants as entities that maintain a substantial position in any of the major categories of swaps, as those categories are determined by the CFTC or the SEC; entities whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the US banking system or financial markets; or any financial entity that is highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate US banking agency, and that maintains a substantial position in swaps for any of the major categories of swaps.

154 See generally CEA Section 4s and Exchange Act Section 15F.

155 See Margin and Capital Requirements for Covered Swap Entities, 80 Fed Reg 74840 (30 November 2015); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed Reg 636 (6 January 2016); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants – Cross-Border Application of the Margin Requirements, 81 Fed Reg 34818 (31 May 2016).

156 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Release No. 34-68071.

157 See 17 CFR Part 45.

158 See Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, 81 Fed Reg 53546 (12 August 2016); Regulation SBSR– Reporting and Dissemination of Security-Based Swap Information, 80 Fed Reg 14563 (19 March 2015).

159 Consolidated and Further Continuing Appropriations Act of 2015 Pub L No 113-235, HR 83, 113th Cong Section 630 (2015).

160 The Swaps Pushout Rule permits an IDI to have a swaps entity affiliate as long as there is compliance with Sections 23A and 23B of the FRA (discussed below), as well as any additional requirements that the CFTC or SEC, as applicable, and the Federal Reserve, determine to be necessary and appropriate.

161 Dodd-Frank Act of 2010 Pub L No 111-203, HR 4173, 111th Cong Sections 712, 716 (2010).

162 Transition Period Under Section 716 of the Dodd-Frank Act (8 January 2013), www.gpo.gov/fdsys/pkg/FR-2013-01-08/pdf/2013-00093.pdf.

163 For purposes of Section 23A of the FRA, covered transactions include (1) a loan or extension of credit to the affiliate, including a purchase of assets subject to an agreement to repurchase; (2) a purchase of or an investment in securities issued by the affiliate; (3) a purchase of assets from the affiliate; (4) the acceptance of securities or other debt obligations issued by the affiliate as collateral security for a loan or extension of credit to any person or company; (5) the issuance of a guarantee, acceptance or letter of credit, including an endorsement or standby letter of credit, on behalf of an affiliate; (6) a transaction with an affiliate that involves the borrowing or lending of securities, to the extent that the transaction causes a bank or subsidiary to have credit exposure to the affiliate; or (7) a derivative transaction with an affiliate, to the extent that the transaction causes a bank or a subsidiary to have credit exposure to the affiliate. Parts (6) and (7) of the ‘covered transaction’ definition were added by the Dodd-Frank Act. Section 23A of the FRA also contains an ‘attribution rule’ whereby a transaction with any person is considered to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or are transferred to, the affiliate.

164 Capital stock and surplus is essentially the sum of a bank’s Tier I capital and Tier II capital, and the balance of the bank’s allowance for loan and lease losses not included in its Tier II capital.

165 The Dodd-Frank Act added the ‘at all times’ requirement, effective 21 July 2012. Previously, such transactions had to be secured by a statutorily defined amount of collateral ‘at the time of the transaction’.

166 Transactions that are subject to the collateral requirement in Section 23A include a loan or extension of credit to, or guarantee, acceptance or letter of credit issued on behalf of, an affiliate by a bank or its subsidiary, and, after 21 July 2012, any credit exposure of a bank or a subsidiary to an affiliate resulting from a securities borrowing or lending transaction or a derivative transaction.

167 Covered transactions for purposes of Section 23B of the FRA include all Section 23A covered transactions (identified above) as well as any sale of assets by a bank to an affiliate; any payment of money or furnishing of services by a bank to an affiliate; any transaction in which an affiliate acts as an agent or broker for a bank or for any other person if the bank is a participant in the transaction; and any transaction by a bank with a third party if an affiliate has a financial interest in the third party or if an affiliate is a participant in the transaction. Section 23B of the FRA contains the same ‘attribution rule’ as Section 23A.

168 The federal safety net refers to the benefits that banks receive through their access to FDIC deposit insurance as well as the Federal Reserve’s discount window and payments system.

169 The statutory and regulatory exemptions from Section 23A of the FRA include, inter alia, entering into certain covered transactions that are fully secured by obligations of the United States or its agencies; intraday extensions of credit to an affiliate (if certain risk-management and monitoring systems are in place); and giving immediate credit to an affiliate for uncollected items received in the ordinary course of business.

170 Dodd-Frank Act of 2010 Pub L No 111-203, HR 4173, 111th Cong Section 608 (2010).

171 The Dodd-Frank Act does not define ‘credit exposure’, and this and other aspects of the Dodd-Frank Act’s amendments to Sections 23A and 23B will most likely need to be addressed through amendments to Regulation W. The Dodd-Frank Act explicitly authorises the Federal Reserve to issue regulations or interpretations with respect to the manner in which a bank may take netting agreements into account under Section 23A in determining the amount of a covered transaction with an affiliate, including whether a covered transaction is fully secured. See Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 608(a) (2010).

172 Truth in Lending Act of 1968, Pub L No 90-321, 90th Cong, 2nd Sess(29 May 1968) 82 Stat 146 (1968).

173 Truth in Savings Act of 1991, Pub L No 102-242, 102nd Cong, 1st Sess (19 December 1991) 105 Stat 2236 (1991).

174 Equal Credit Opportunity Act of 1974, Pub L No 93-495, 93rd Cong, 1st Sess (28 October 1974) 88 Stat 1521 (1974).

175 Creditors may not discriminate against an applicant, or discourage a potential applicant, on the basis of race, colour, religion, national origin, sex, marital status, age, receipt of income from public assistance programmes or good faith exercise of rights under the Consumer Credit Protection Act.

176 Community Reinvestment Act of 1977, Pub L No 95-128, 95th Cong, 1st Sess (12 October 1977), 91 Stat 1111 (1977).

177 If a depository institution does not receive at least a satisfactory rating for its CRA compliance, the institution or its holding company may be prevented from engaging in certain permissible activities for FHCs or acquiring other financial institutions.

178 GLB Act of 1999, Pub L No 106-102, 106th Cong, 1st Sess (12 November 1999), 113 Stat 1338–1481 (1999). The GLB Act and its regulations apply to individuals who acquire financial products or services primarily for personal, family or household purposes.

179 Interagency Guidelines Establishing Standards for Safeguarding Customer Information and Rescission of Year 2000 Standards for Safety and Soundness; Final Rule, 66 Fed Reg 8616 (1 February 2001), frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2001_register&docid=01-1114-filed.pdf.

180 Title X of the Dodd-Frank Act established the CFPB, marking a significant change to the federal consumer financial protection framework by largely centralising rule-making, supervisory and enforcement powers in a single agency. The CFPB formally is an ‘independent bureau’ within the Federal Reserve, but is treated as an executive agency and effectively shielded from oversight by the Federal Reserve. See Title X, Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong (2010).

181 For a discussion of excluded entities and activities, see Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 1027 (2010).

182 CFPB, Proposed Rule: Arbitration Agreements, 81 Fed Reg 32830 (24 May 2016), www.gpo.gov/fdsys/pkg/FR-2016-11-22/pdf/2016-24503.pdf.

183 CFPB, Final Rule: Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth In Lending Act (Regulation Z), 81 Fed Reg 83934 (22 November 2016), www.gpo.gov/fdsys/pkg/FR-2016-05-24/pdf/2016-10961.pdf.

184 Large depository institutions in this context are those with greater than $10 billion in assets. See Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 1025 (2010).

185 See Title X, Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 1024 (2010).

186 See 12 CFR 1090.

187 Wall Street Journal, Appeals Court Deals Setback to Consumer-Watchdog Agency (11 October 2016), www.wsj.com/articles/federal-appeals-court-finds-structure-of-cfpb-unconstitutional-1476197389.

188 The OCC has adopted a final rule revising its pre-emption regulations in accordance with Title X. In its final rule, the OCC takes the position that its pre-emption regulations already applied the Barnett standard and that no substantive change to the regulations is needed. In addition, while the OCC indicates it will revisit any pre-emption determination not properly based on the Barnett standard, it states that it has not identified any determination that would require such a re-examination. See Office of Thrift Supervision Integration; Dodd-Frank Act Implementation, 76 Fed Reg 43,549 (21 July 2011).

189 517 US 25 (1996).

190 550 US 1 (2007).

191 129 S Ct 2710 (2009).

192 Currency and Foreign Transactions Reporting Act, Pub L No 91-508, Title II (1970).

193 The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub L No 107-56, 115 Stat 272 (2001).

194 Keeping Foreign Corruption Out of the United States: Hearing before the S. Comm. on Homeland Security and Governmental Affairs, Subcomm. on Investigations, 111th Cong (4 February 2010) (statement of James Freis, former Director of FinCEN); remarks of Jennifer Shasky Calvery, Director of FinCEN, 2014 Mid-Atlantic AML Conference, Washington, DC, August 12, 2014, www.fincen.gov/news_room/speech/pdf/20140812.pdf.

195 FinCEN Final Rule: Customer Due Diligence Requirements for Financial Institutions, 81 Fed Reg 29,398, 29,451 (11 May 2016) (codified at 31 CFR pts 1010, 1020, 1023, 1024, 1026), www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf.

196 FinCEN, Final Rule: Confidentiality of Suspicious Activity Reports, 75 Fed Reg 75593 (3 December 2010), edocket.access.gpo.gov/2010/pdf/2010-29869.pdf.

197 Prior regulations confused financial institutions because they contained less precise language about the confidentiality of SARs and any information that would disclose that a SAR has been prepared or filed.

198 Keeping Foreign Corruption Out of the United States: Hearing before the S. Comm. on Homeland Security and Governmental Affairs, Subcomm. on Investigations, 111th Cong (2010) (statement of James Freis, then Director of FinCEN).

199 FinCEN, Guidance on Sharing Suspicious Activity Reports by Depository Institutions with Certain US Affiliates (23 November 2010), www.fincen.gov/statutes_regs/guidance/pdf/fin-2010-g006.pdf.

200 31 CFR Section 1010.520 (known as the ‘314(a) Rule’ after Section 314(a) of the USA PATRIOT Act, which directs the Secretary of the Treasury to adopt such regulations). In the case of money laundering, FinCEN also requires the requesting agency to certify that the matter is significant, and that the requesting agency has been unable to locate the information sought through traditional methods of investigation before attempting to use this authority. See FinCEN, Final Rule: Expansion of Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity, 75 Fed Reg 6560 (10 February 2010), www.fincen.gov/statutes_regs/frn/pdf/20100204.pdf.

201 See FinCEN, Final Rule: Expansion of Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity, 75 Fed Reg 6560 (10 February 2010), www.fincen.gov/statutes_regs/frn/pdf/20100204.pdf. Members of the European Union that have signed the Agreement on Mutual Legal Assistance between the US and the European Union can initiate 314(a) inquiries. Agencies from foreign jurisdictions must first contact a federal law enforcement officer who will be appointed as a 314(a) liaison between foreign jurisdictions and FinCEN. This officer will confirm that the inquiry relates to a significant matter before referring the inquiry to a financial institution.

202 Pub L No 107-56, Section 314(b). See also the implementing regulation at 31 CFR Section 1010.540.

203 FinCEN Section 314(b) Fact Sheet (October 2013), www.fincen.gov/statutes_regs/patriot/pdf/314bfactsheet.pdf.

204 SAR Stats Technical Bulletin (October 2015), www.fincen.gov/news_room/rp/files/SAR02/SAR_Stats_2_ FINAL.pdf; see also The SAR Activity Review, Trends Tips & Issues, Issue 23 (May 2013), www.fincen.gov/news_room/rp/files/sar_tti_23.pdf.

205 US persons are defined as individual US citizens and permanent US resident aliens, wherever located; entities organised under US law, including their non-US branches (even when operating outside the United States); and individuals and entities located in the United States (even temporarily) regardless of the individual’s citizenship or the entity’s jurisdiction of incorporation (thus including branches of non-US organisations that are located in the United States). Non-US subsidiaries of US companies are also required to comply with US sanctions on Cuba. The same was true with respect to the US sanctions on Iran from October 2012 until the issuance of a general licence by OFAC on 16 January 2016 that permits non-US subsidiaries of US persons to engage in many Iran-related transactions, with certain conditions and exceptions.

206 The permissible tenor is 30 days or less for the affected financial institutions and defence companies, and 90 days or less for the affected energy companies.

207 31 CFR Part 538.

208 See 82 FR 4793 (17 January 2017), www.gpo.gov/fdsys/pkg/FR-2017-01-17/pdf/2017-00844.pdf.

209 In July 2016, OFAC published an interim final rule to amend its regulations for the relevant sanctions programmes it administers to implement adjustments made by the Federal Civil Penalties Inflation Adjustment Act Improvements of 2015. This rule adjusts for inflation the maximum amount of the civil monetary penalties that may be assessed under relevant OFAC regulations. This rule became effective on 1 August 2016. See 81 Fed Reg 43070 (1 July 2016).

210 OFAC also has penalty authority under certain special purpose economic sanctions statutes, such as the Foreign Narcotics Kingpin Designation Act (Kingpin Act). The Kingpin Act provides for penalties up to $1,414,020 (as of 1 August 2016).

211 OFAC, Economic Sanctions Enforcement Guidelines, 74 Fed Reg 215, 57,593 (9 November 2009), edocket.access.gpo.gov/2009/pdf/E9-26754.pdf.

212 Fed Reserve, The Federal Reserve Discount Window 1 (2008), www.frbdiscountwindow.org/discountwindowbook.cfm?hdrID=14&dtlID=43.

213 Ibid.

214 Ibid.

215 See James Clouse, Recent Developments in Discount Window Policy, 80 Fed Reserve Bull. 966 (November 1994).

216 Dodd-Frank Act, Pub. L. 111-203, HR 4173, 111th Cong Section 1101(a)(2) (amending Section 13(a) of the Federal Reserve Act). The final implementing regulations issued by the Federal Reserve became effective on 1 January 2016. See Federal Reserve, Final Rule: Extensions of Credit by Federal Reserve Banks, 80 Fed Reg 78959 (18 December 2015).

217 Ibid.

218 Fed Reserve, FDIC, US Dep’t of the Treasury, OCC, OTS, Final Guidance on Correspondent Concentration Risks, 75 Fed Reg 23764 (4 May 2010), www.fdic.gov/regulations/laws/federal/
2010/10noticeMay4.pdf.

219 Fed Reserve press release, Interagency Guidance on Correspondent Concentration Risk (30 April 2010), www.federalreserve.gov/boarddocs/srletters/2010/sr1010.pdf.

220 Credit exposures include, due from bank accounts, federal funds sold on a principal basis, the over-collateralised amount on repurchase agreements, the under-collateralised portion of reverse repurchase agreements, net current credit exposure on derivatives contracts, unrealised gains on unsettled securities transactions, direct or indirect loans to or for the benefit of the correspondent, and investments, such as trust preferred securities, subordinated debt and stock purchases in the correspondent.

221 The guidance does not elaborate on exactly what ‘conflicts of interests’ means within this context.

222 12 CFR Part 30.

223 The Honourable Thomas J Curry, Comptroller of the Currency, Address at the American Bankers Association Risk Management Forum (10 April 2014).

224 12 CFR Part 30.

225 OCC, Federal Reserve, and FDIC, ‘Liquidity Coverage Ratio: Liquidity Risk Measurement Standards,’ 79 Fed Reg 61440 (10 October 2014).

226 Ibid.

227 OCC, Federal Reserve, FDIC, ‘Notice of Proposed Rulemaking, Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements’, 81 Fed Reg 35124 (1 June 2016).

228 The ‘full’ NSFR requirements would apply to BHCs, certain savings and loan holding companies, and depository institutions that, in each case, have $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure, and to their consolidated subsidiaries that are depository institutions with $10 billion or more in total consolidated assets.

229 BHC and certain savings and loan holding companies that, in each case, have $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure would be subject to the ‘modified’ NSFR requirements.

230 This chapter does not address the requirements for the acquisition of thrifts or thrift holding companies. In connection with the abolition of the OTS, the power to regulate thrifts was transferred to the OCC, and the power to regulate thrift holding companies was transferred to the Federal Reserve in 2011. For a further discussion of the current state of thrift and thrift holding company regulation, see Section II, supra.

231 12 USC Section 1842(a).

232 12 USC Section 1841(a)(1).

233 12 USC Section 1841(a)(2).

234 12 USC Section 1828(c)(1).

235 12 USC Section 1828(c)(2).

236 12 USC Section 1817(j).

237 12 USC Section 1817(j)(8)(B).

238 See, e.g., 12 CFR Section 225.41(c)(2).

239 12 USC Section 1817(j)(17).

240 12 CFR Section 225.144.

241 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Sections 606–607 (2010).

242 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 604(d) (2010).

243 Mitsubishi UFJ Financial Group Inc, The Bank of Tokyo-Mitsubishi UFJ Ltd, and UnionBanCal Corp, Fed Res Bd Order No. 2012-12 at 25 (14 November 2012); Capital One Fin Corp, 98(5) Fed Res Bull 7, 23 (2012); The PNC Financial Services Group Inc and PNC Bancorp Inc, 98(3) Fed Res Bull 16, 21 (2012); Capital One Fin Corporation, 98(5) Fed Res Bull 7, 24-27 (2012).

244 Mitsubishi UFJ Financial Group Inc, The Bank of Tokyo-Mitsubishi UFJ Ltd and UnionBanCal Corp, Fed Res Bd Order No. 2012-12 at 25 (14 November 2012); Capital One Financial Corp, 98(5) Fed Res Bull 7, 24 (2012).

245 Capital One Fin Corp, 98(5) Fed Res Bull 7, 24 (2012).

246 Capital One Fin Corp, 98(5) Fed Res Bull 7, 24 (2012). See also Industrial and Commercial Bank of China Ltd, China Inv Corp and Central Huijin Inv Ltd, Fed Res Bd Order No. 2012-4 at 29 (9 May 2012).

247 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 163.

248 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 163(b) (2010).

249 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 623 (2010).

250 Dodd-Frank Act, Pub L No 111-203, HR 4173, 111th Cong Section 622 (2010).

251 FSOC, Study & Recommendations Regarding Concentration Limits on Large FinancialCompanies (2011), www.treasury.gov/initiatives/Documents/Study%20on%20Concentration%20Limits%20
on%20Large%20Firms%2001-17-11.pdf.

252 Federal Reserve, Final Rule: Concentration Limits on Large Financial Companies, 79 Fed Reg 68,095 (14 November 2014), www.gpo.gov/fdsys/pkg/FR-2014-11- 14/pdf/2014-26747.pdf.

253 Federal Reserve, Announcement of Financial Sector Liabilities, 80 Fed Reg 38,686 (7 July 2015), www.gpo.gov/fdsys/pkg/FR-2015-07-07/pdf/2015-16658.pdf.

254 See 12 CFR Section 251.3(c), (e).

255 12 CFR Section 251.3(d).

256 12 CFR Section 251.4.

257 See Federal Reserve, Final Rule: Concentration Limits on Large Financial Companies, 79 Fed Reg 68,095, 68,101-102 (14 November 2014), www.gpo.gov/fdsys/pkg/FR-2014-11- 14/pdf/2014-26747.pdf.