Financial regulatory reform has remained firmly on the agenda of both lawmakers and regulators in the United States throughout 2018 and into 2019. On 24 May 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) into law,2 which requires various aspects of the financial regulatory framework imposed by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act)3 to be tailored to bank organisations' business model, risk profile and size. With a divided Congress following the midterm elections, the prospects of further statutory reform are uncertain, and will require bipartisan support and extensive negotiation and compromise. Notwithstanding any resulting reduction in the pace of statutory reform, reforms are continuing through regulations, interpretations and guidance driven both by new agency leadership and statutory mandates, such as the EGRRCPA. We further expect the scope of laws and regulations to continue to adapt to technological and market changes, for example with respect to digital tokens, fintech charters and virtual currencies. Overall, the fundamental features of the post-financial crisis financial regulatory framework established by the Dodd–Frank Act remain in place, albeit subject to additional tailoring and recalibration as well as adaptation to an ever-changing market environment for the financial industry. 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 banks4 and, since 2011, thrifts or federal savings associations.5 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.6 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.7
ii Bank holding companies
Any legal entity with a controlling ownership interest in a bank or thrift is regulated as a bank holding company (BHC) or savings and loan holding company (SLHC) by the Federal Reserve.8
iii Foreign banks
Foreign bank activities in the United States are supervised by the Federal Reserve, or 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|
|National bank||OCC||OCC||Federal Reserve, FDIC|
|Federal savings association||OCC||OCC||FDIC|
|Federal savings bank||OCC||OCC||FDIC|
|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 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 must also 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, which determine the bank's fundamental financial health and generally occur every 12 or 18 months;9 compliance examinations covering consumer compliance and fair lending issues; and speciality 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).10
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.11 The Federal Reserve must examine these entities subject to the same standards and with the same frequency as would be required if the 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), as described in more detail in Section IV.iv.
Aside from transactions such as mergers and acquisitions or other matters that require formal approvals,12 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 US$250,000.13 For a foreign bank to establish or operate a state branch without federal deposit insurance, the branch, in addition to meeting other requirements, may accept initial deposits only in an amount equal to the SMDIA or greater.14
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.15 An IDI's assessment base was historically its domestic deposits, with some adjustments.16 The Dodd–Frank Act, however, requires the FDIC to redefine the assessment base as average consolidated total assets minus average tangible equity during the assessment period.17 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.18 The FDIC uses an assessment system for large IDIs and highly complex IDIs19 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.20
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.21 The Federal Reserve has recently devoted additional attention to these issues, issuing proposed guidance for large financial institutions on board effectiveness22 and supervisory expectations for management.23
The Federal Reserve Act of 1913 (FRA) 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.24
iv Enhanced prudential standards
Section 165 of the Dodd–Frank Act, as amended by the EGRRCPA, subjects BHCs with total consolidated assets of US$100 billion or more and systemically important non-bank financial companies to enhanced prudential standards (EPS) and other standards, and enhanced reporting and disclosure requirements. In November 2019, this statutory threshold will increase from US$100 billion to US$250 billion, although the Federal Reserve has the authority under the EGRRCPA to apply any of the EPS requirements to any BHC with US$100 billion or more but less than US$250 billion in total consolidated assets.25 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) is authorised to make recommendations to the Federal Reserve concerning prudential standards, and the Federal Reserve must consider those recommendations in prescribing standards.26
All BHCs covered by the relevant rules finalised by the Federal Reserve under Section 165 of the Dodd–Frank Act 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 rule. The capital planning rule, described in greater detail below, requires firms to meet minimum capital regulatory requirements under economic scenarios published by the Federal Reserve.
The liquidity provisions of the final rules require covered 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 US$50 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 appointing a chief risk officer with defined responsibilities.
The final rules also incorporate the Federal Reserve's 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 both supervisory and company-designed 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 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.27
The final rule also implements a provision of Section 165 that imposes 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.
In June 2018, the Federal Reserve finalised a rule to implement single-counterparty credit limits.28 The final rule limits net credit exposure to any single counterparty to 25 per cent of Tier 1 capital for BHCs with US$250 billion or more in total consolidated assets. A 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 rule also requires BHCs to aggregate exposures between counterparties that are economically interdependent or in the presence of certain control relationships. Compliance is required beginning on 1 January 2020 for G-SIBs and beginning on 1 July 2020 for all other covered companies.
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 at 31 December 2018, the Federal Reserve had not yet adopted final rules implementing the early remediation framework.
v Regulation of foreign banking organisations
On 18 February 2014, the Federal Reserve adopted final rules that use a tiered approach for applying US capital, liquidity and other Dodd–Frank EPS to the US operations of foreign banking organisations (FBOs) with total global consolidated assets of US$50 billion or more (large FBOs). The most burdensome requirements apply to FBOs with US$50 billion or more in US assets, excluding US branch and agency assets, and certain other US assets (each such FBO, an IHC FBO).29 Fewer requirements apply to FBOs with limited US footprints, but a large FBO that is not subject to the requirement to form a US intermediate holding company (IHC) must still comply with new EPS, including liquidity, stress testing and risk management requirements.30
An IHC FBO must create a separately capitalised, top-tier US IHC to hold substantially all of its ownership interests in its US bank and non-bank subsidiaries. For the purposes of identifying subsidiaries, the final rule relies on the BHC Act definition of control, including the facts and circumstances-based controlling influence test. With very limited exceptions, 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),31 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 are also subject to certain EPS.
A large FBO with US$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 that the term of the intragroup cash flow source is the same as or shorter than the term of the intragroup cash flow need.
FBOs that meet the characteristics of G-SIBs, FBOs with US$250 billion or more in total global consolidated assets and US IHCs are subject to single-counterparty credit limit requirements established by the Federal Reserve.32 Under these requirements, which become effective in 2020, an FBO that meets the characteristics of a global systemically important bank will be required to limit, with respect to its combined US operations, its net credit exposure to each counterparty to 15 per cent of Tier 1 capital. Other FBOs with US$250 billion or more in total global consolidated assets and their US IHCs will be subject to single-counterparty net credit exposure limits of 25 per cent of Tier 1 capital, while US IHCs of FBOs with US$50 billion or more but less than US$250 billion in total global consolidated assets will be subject to single-counterparty net credit exposure limits of 25 per cent of capital stock and surplus, which is a broader base than Tier 1 capital.
EPS of more general applicability to FBOs include risk management requirements. All large FBOs, as well as publicly traded FBOs with US$10 billion or more in total global consolidated assets (public mid-size FBO), must establish a US risk committee. A large FBO with US$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 US$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 US$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 Federal Reserve must still finalise an early remediation framework that would apply to US operations of an FBO.
vi Regulatory capital
Regulatory capital emerged from the global financial crisis of 2008 as one of bank regulators' primary areas of supervisory focus. This part 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) of the Dodd–Frank Act requires all companies that directly or indirectly control an IDI to serve as a source of strength for the institution.33 US banking agencies were required to issue regulations implementing this requirement not later than 21 July 2012, but as of 31 December 2018 had not proposed such regulations.
Under the Dodd–Frank Act, as amended by the EGRRCPA, US BHCs with consolidated assets of US$100 billion or more (large BHCs) and non-bank SIFIs are subject to periodic (or in the case of US G-SIBs and US BHCs with consolidated assets of US$250 billion or more, annual) supervisory and company-run stress tests.34 Supervisory stress tests, along with related capital plans required by Federal Reserve rules, are part of the supervisory process for large US BHCs.35 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 DFAST requirements into its CCAR, 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.36 Capital plans incorporate projected capital distributions over a planning horizon of at least nine quarters and are submitted 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 the year of the applicable capital planning cycle, and the Federal Reserve must take action by 30 June.37 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.38 In January 2017, the Federal Reserve adopted a rule that removed certain large and non-complex firms from the scope of the Federal Reserve's qualitative assessment of their capital plans and that reduced certain reporting requirements for these firms.39
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 SLHCs other than certain BHCs and SLHCs with less than US$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 US$250 billion or more in total consolidated assets or US$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.
As of January 2018, advanced approaches banking organisations must also maintain a minimum supplementary leverage ratio of 3 per cent. 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.40 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.41
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 1.5 to 3.5 per cent of RWAs, depending on the size of the G-SIB's systemic footprint.42 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.43
US banking agencies proposed further amendments to US Basel III and the Federal Reserve's capital planning and stress testing rules that would simplify and tailor requirements for non-advanced approaches banking organisations; enhance the transparency of supervisory scenarios, models and assumptions used in capital planning and stress testing; simplify the interactions between capital requirements and capital planning requirements for certain large banking or other financial organisations; and recalibrate the enhanced supplementary leverage ratio requirement for US G-SIBs and their US IDI subsidiaries.44 In November 2017, in connection with the proposal to simplify and tailor requirements for non-advanced approaches, the US banking agencies finalised a rule to freeze the final step of the transition provisions for certain US Basel III requirements applicable to non-advanced approaches banking organisations. The Federal Reserve in April 2018 proposed a rule that would change how stress testing is used to impose capital requirements for large BHCs by incorporating a firm's modelled stress losses directly into the firm's point-in-time capital requirements. The proposal would replace the 2.5 per cent fixed portion of the capital conservation buffer with a new stress capital buffer (on top of the G-SIB surcharge and any applicable countercyclical capital buffer) and would impose a new stress leverage buffer, each based on a firm's peak-to-trough stress losses and four quarters of planned dividends.
In December 2017, the Basel Committee finalised revisions to the international Basel III standards, marking the finalisation and completion by the Basel Committee of all remaining components of the Basel III framework.45 The primary purpose of this final set of revisions was to reduce excessive variability in RWAs and to restore credibility in the calculation of RWAs by enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, constraining the use of internally modelled approaches and complementing the risk-weighted capital ratio with a finalised leverage ratio and a revised capital floor. In January 2019, following its fundamental review of the trading book, the Basel Committee finalised updated minimum capital requirements for market risk. As of 31 December 2018, the US banking agencies have not proposed rules to implement the revisions to the international Basel III standards, including the market risk requirements, in the United States.
vii Resolution planning
Section 165(d) under Title I of the Dodd–Frank Act requires all BHCs and FBOs with assets of US$50 billion or more, or any non-bank financial institution that has been designated as systemically important,46 to prepare and regularly update a resolution plan (Title I resolution plan).47 Under the final rules implementing this provision, these entities must each periodically submit a report regarding the company's plan 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.48 In May 2018, the EGRRCPA raised the asset threshold for financial institutions that need to submit resolution plans – resolution plans are now statutorily required for BHCs with assets of US$250 billion or more; any BHC, regardless of asset size, that has been identified as a G-SIB; any BHC with assets of US$100 billion or more for which the Federal Reserve by order or rule chooses to require a resolution plan; and any non-bank financial institution that has been designated as systemically important.49 The EGRRCPA also made clear that its changes do not alter the Federal Reserve's treatment of FBOs with assets of US$100 billion or more under pre-existing regulations.50 Although regulators have indicated that they will enforce resolution planning requirements consistently with the new thresholds established in the EGRRCPA,51 revised implementing regulations have not yet been proposed as of 31 December 2018.
The resolution plan is submitted to and evaluated by the Federal Reserve and the FDIC. 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 is determined to be credible. The FDIC separately requires all US IDIs with assets of US$50 billion or more to also submit and regularly update a resolution plan.52 Resolution planning is one of the areas that has frequently been identified by the Federal Reserve and the FDIC as one of potential financial regulatory reform and tailoring, including by extending the filing deadlines between resolution plan submissions.53 On 20 December 2018, the Federal Reserve and FDIC issued guidance for the largest US financial institutions regarding their 2019 resolution plan submissions,54 and senior officials of the Federal Reserve and FDIC, including FDIC Chair Jelena McWilliams in November 2018, publicly discussed Federal Reserve and FDIC efforts to propose amendments to tailor and focus their resolution planning regulations in light of the EGRRCPA, suggesting the likelihood of changes in the near future.55
viii Orderly liquidation authority
Title II of the Dodd–Frank Act includes an orderly liquidation authority (OLA), 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 a final rule implementing certain provisions of OLA, including:
- how the preferential transfer and fraudulent transfer provisions of OLA will be harmonised with the Bankruptcy Code;
- the priorities of administrative expenses and unsecured claims;
- 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;
- certain details of the FDIC's administrative claims process;
- special rules for secured claims;
- 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
- the treatment of claimants whose set-off rights are destroyed by the FDIC.56
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,57 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.58 Under the SPOE model, only the parent BHC of a banking group would be put into a resolution proceeding. All 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 behind the failed company's equity capital and a sufficient amount of its unsecured long-term debt 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 window59 or Section 13(3) of the FRA,60 the FDIC could provide such liquidity with an orderly liquidation fund by borrowing from the US Treasury, subject to certain limits.61
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.62 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.63 Under the rule, beginning on 1 January 2019, parent BHCs of US G-SIBs and IHCs that are controlled by foreign G-SIBs became subject to minimum TLAC requirements, separate minimum long-term debt requirements and clean holding company requirements intended to simplify holding company balance sheets. The BHCs and IHCs subject to the rule are generally able to satisfy TLAC requirements 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 requires 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 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 financial contracts with third parties, and limit the amount of operational liabilities and liabilities such as structured notes that rank pari passu or junior to TLAC in part to limit the risk of successful legal challenge to losses being imposed on holders of TLAC instruments.
x Qualified financial contracts
One potential impediment to an SPOE recapitalisation is the inclusion of cross-default provisions in qualified financial contracts (QFCs) that would not be automatically stayed in a resolution of the parent BHC under ordinary insolvency proceedings. This would mean that a counterparty could terminate a QFC against a subsidiary based on the entry of its parent into resolution proceedings, even if the subsidiary otherwise remains operational and able to perform on its obligations, which could impair the continued viability of the subsidiary. This would defeat the purpose of an SPOE resolution, which is meant to enable subsidiaries of the parent BHC to continue operating without entering into their own bankruptcy or resolution proceedings.
The US banking agencies have issued final rules that would require US G-SIBs and the US operations of non-US G-SIBs to remediate certain QFCs to eliminate the ability of a counterparty to exercise any cross-default right against a G-SIB entity based on the top-tier parent's or any other affiliate's entry into insolvency, resolution, or similar proceedings, subject to certain creditor protections, and to eliminate the right of counterparties to object to the transfer of any related credit enhancements provided by an affiliate following the entry into any such proceedings. In addition, US G-SIBs and the US operations of non-US G-SIBs must amend certain QFCs to expressly recognise the FDIC's authority under the Federal Deposit Insurance Act and Title II of the Dodd–Frank Act (the OLA provisions described in Section III.viii) to impose a temporary stay on the ability of counterparties to exercise certain default rights, and to transfer the contracts of the failed institution to a third party or bridge institution. There is a phased-in compliance schedule based on counterparty type, beginning with 1 January 2019 for contracts with other US G-SIBs or the US operations of non-US G-SIBs, 1 July 2019 for contracts with certain other financial counterparties and 1 January 2020 for contracts with all other counterparties. The requirements apply to new and existing QFCs.64
These 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 rules would enable relevant G-SIBs to comply with the requirements through adherence to the ISDA Protocol and its annexes or through a new US Protocol that is substantively similar to the ISDA Protocol, which was published by ISDA on 31 July 2018.65
xi Enhanced cyber risk management standards
As a result of recent high-profile cyberattacks on banks and other financial institutions, state and federal regulators66 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.67 In March 2017, the New York Department of Financial Services' (NYDFS) new cybersecurity regulations68 that apply to banks (including New York branches and agencies of foreign banks) and certain other financial institutions chartered or licensed in New York State became effective. The rules require covered entities to, among other things, establish and maintain a cybersecurity programme with a written cybersecurity policy, appoint a chief information security officer, conduct regular penetration testing and vulnerability assessments, create a written incident response plan, encrypt non-public information in transit and at rest, and certify compliance with the rules annually. The regulation includes a phase-in schedule, with the final compliance date being 1 March 2019.69 Covered entities will be required to certify compliance with the phase four requirements by 15 February 2020.70 We expect cybersecurity to continue to be an area of focus by lawmakers and regulatory agencies in the United States.
xii Fintech charters
Fintech charters continue to be an area of interest in the United States. On 31 July 2018, the OCC issued a policy statement announcing that it would consider applications from fintech companies to become special purpose national banks.71 In contrast to the regulatory sandbox initiatives by some non-US regulators, the OCC's special-purpose charter, like all national bank charters, comes with a host of regulatory obligations and activity limitations. The special purpose national bank charter is available to qualifying companies engaged in a limited range of banking activities, including paying cheques or lending money, but that do not take deposits. Concurrent with the announcement, the OCC issued a supplement to its licensing manual to provide guidance for evaluating special purpose national bank charters for fintech companies.72 Following the announcement, the NYDFS and the Conference of State Bank Supervisors separately filed suit against the OCC to stop it from granting applications for the special purpose national bank charter, arguing that the agency lacks the legal authority to charter non-depository institutions. As of 31 December 2018, the OCC had not received any applications for the special purpose national bank charter.
xiii Virtual currencies
As digital assets have grown in both popularity and market size, the US Congress and a number of US federal and state agencies, including the SEC, the US Commodity Futures Trading Commission (CFTC) and the CFPB, have examined the operations of digital asset networks, with particular focus on the extent to which digital assets can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises and the safety and soundness of exchanges or other service providers that take custody of digital assets for users.73 Many of these state and federal agencies have issued consumer advisories regarding the risks posed to investors in digital assets. The SEC and US state securities regulators have issued warnings that digital assets sold in initial coin offerings (ICOs) may be classified as securities and that both those digital assets and ICOs may be subject to securities regulations.74 In addition, federal and state agencies have issued rules or guidance about the treatment of digital asset transactions or requirements for businesses engaged in digital asset activity.75
IV CONDUCT OF BUSINESS
The activities of banks, BHCs and FHCs are subject to a number of overlapping legal requirements. While chartered banks and their subsidiaries are restricted to engaging in the business of banking, BHCs and their subsidiaries are permitted to engage in a broader range of financial activities 'so closely related to banking as to be a proper incident thereto'. BHCs that elect to become FHCs are permitted to engage in an even broader range of activities that are financial in nature or incidental to such financial activity or complementary to a financial activity. Some of the most important legal requirements defining the relationship between banks, BHCs and FHCs are summarised below.
i Permissible activities
The types of activities that are permissible for banks in the United States depend on banks' charter type. The baseline is the activities permissible for nationally chartered banks, which are set forth in the National Banking Act and pursuant to which national banks may engage in the business of banking and any activities that are incidental to banking.76 State law, which generally governs the permissibility of activities in which state-chartered banks may engage, varies from state to state, but tends to be consistent with or slightly broader in scope in terms of permissible activities for banks chartered in the relevant state.
Pursuant to the National Banking Act, a national bank's permitted activities expressly include securities brokerage77 and investments in certain debt securities.78 In addition to the activities expressly permitted under the National Banking Act, the OCC has the power to authorise activities beyond those that are specifically enumerated.79 The OCC has exercised this authority by issuing numerous interpretations concluding that specific activities are permissible for national banks, and has summarised many of these interpretations in a publication entitled 'Activities Permissible for National Banks and Federal Savings Associations, Cumulative'.80
Bank holding companies
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'.81 The BHC Act's general prohibition is subject to a series of exemptions, which are principally contained in Sections 4(c) and 4(k) of the BHC Act.
The activities permitted to BHCs pursuant to the exemptions in Section 4(c) of the BHC Act are divided into several categories, the most important of which was enacted in 1999 through the Gramm–Leach–Bliley Act (GLB Act), when Congress amended the BHC Act to codify a 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'.82 BHCs and their subsidiaries may thus engage in activities contained in the Federal Reserve's Regulation Y (informally known as the laundry list),83 subject to any applicable notice or other procedures. This list is now frozen in the sense that, pursuant to the GLB Act, no new non-banking activities may be determined to be so closely related to banking as to be a proper incident thereto and thus permissible for BHCs. There are some additional activities that were approved by specific orders issued by the Federal Reserve,84 and staff of the Federal Reserve have issued interpretations that particular activities fall within one or more existing laundry list activities.85 Activities that are considered so closely related to banking as to be a proper incident thereto include:86
- extending credit and servicing loans, and activities related to extending credit;
- leasing personal or real property;
- operating non-bank depository institutions and performing trust company functions;
- financial and investment advisory activities, and management consulting and counselling activities;
- agency transactional services for customer investments, and investment transactions as principal;
- insurance agency; and
- data processing.
Financial holding companies
The BHC Act was further amended in 1999 by the GLB Act to permit BHCs to exercise certain expanded powers if they qualify for and elect to be treated as FHCs.87 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.88 This category of financial and financial-related activities includes everything deemed to be closely related to banking and much more.89 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.90 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.91
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.92 FHCs may engage in any activity permissible for US BHCs outside the United States under the Federal Reserve's Regulation K,93 including management consulting services, travel agency services, and organising, sponsoring and managing mutual funds, subject to certain limitations.94
ii Changes in permissible activities
Section 13 of the BHC Act, popularly known as the Volcker Rule,95 as implemented in final regulations issued by the five US federal financial regulatory agencies with rulemaking authority under Section 13 (Volcker Agencies) on 10 December 2013 (2013 Regulations),96 prohibits any banking entity97 from engaging in proprietary trading, or sponsoring, investing in or having a certain relationship with a covered fund, the definition of which is intended to cover hedge funds and private equity funds, subject to certain exceptions for permitted activities.98 The prohibitions and other restrictions imposed by the Volcker Rule and the 2013 Regulations affect not only the worldwide activities of US banking organisations but also the US activities of FBOs that engage in the prohibited or restricted activities as well as certain of their non-US activities. The following discussion summarises the key terms of the Volcker Rule as set forth in the statutory text and 2013 Regulations along with certain recent developments, including a proposal to amend the 2013 Regulations.
Prohibition on proprietary trading
Under the 2013 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.99 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 (purpose test).100 The 2013 Regulations also include within the definition of trading account certain purchases or sales of financial instruments by banking entities that are subject to the US market risk capital rule (market risk capital rule test), and purchases or sales of financial instruments by banking entities that are registered or licensed (or required to be registered or licensed) to conduct certain dealing activities, provided that the purchases or sales occur in connection with activities that require such registration or licensing (status test).101
Certain definitions, exclusions and exemptions limit the scope of the proprietary trading prohibition. First, the prohibition applies only to financial instruments, including securities, derivatives, futures and options on futures,102 and a number of instruments are explicitly excluded from the definition of financial instrument.103 Second, certain activities in financial instruments are excluded from the definition of proprietary trading, including, subject to certain conditions, purchases or sales of financial instruments.104 Lastly, there are also conditional permitted activity exemptions, which include:105
- trading in US government obligations and, in the case of non-US banking entities, trading in certain foreign government obligations;
- trading in connection with underwriting or market-making-related activities;
- risk-mitigating hedging activities;
- trading on behalf of customers;
- certain trading activities outside the United States by non-US banking entities;
- 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; and
- 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.
Prohibition on certain relationships with hedge funds and private equity funds
The Volcker Rule and the 2013 Regulations prohibit a banking entity from, as principal, acquiring or retaining any ownership interest in or sponsoring a covered fund, subject to certain exclusions and permitted activities.106 Covered fund is defined broadly in the 2013 Regulations as an issuer that would be an investment company, as defined in the Investment Company Act of 1940 (1940 Act),107 but for Section 3(c)(1) or 3(c)(7) of the 1940 Act;108 certain funds organised or established outside the United States in which a US banking entity invests or which a US banking entity sponsors;109 and certain commodity pools.110 The 2013 Regulations, however, expressly exclude certain categories of entities from the definition of covered fund, provided they meet certain conditions.111
An ownership interest is defined in the 2013 Regulations as any equity, partnership or other similar interest.112 An other similar interest is any interest, other than certain restricted profit interests,113 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,114 certain economic rights commonly present in equity115 or synthetic rights to these rights.116 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.117
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 fund118 or commodity pool operator;119 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.120 Subject to the same backstop provisions limiting permitted activities as described in the discussion of proprietary trading above, the Volcker Rule and the 2013 Regulations provide conditional permitted activity exemptions from the prohibition on acquiring or retaining ownership interests in or sponsoring a covered fund.121
Limitations on certain transactions with sponsored, advised, managed or organised and offered covered funds
The Volcker Rule and the 2013 Regulations prohibit any banking entity that 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 (or that holds an interest under the exemption for ABS issuers), and any affiliate of that 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 that fund, as if the banking entity were a member bank and the fund were its affiliate. 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.122
This prohibition is commonly referred to as Super 23A to distinguish it from the regular provisions of Section 23A of the FRA. Regular Section 23A applies only 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 Section 23A generally imposes only certain numerical limitations and collateral requirements on covered transactions.123
Subject to certain conditions, the Volcker Rule and the 2013 Regulations grant an exemption from the Super 23A prohibition for the 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 the banking entity has taken an ownership interest.124 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'.125
Application to FBOs and extraterritorial application
The Volcker Rule and the 2013 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)126 or (13)127 of the BHC Act, provided that the trading occurs solely outside the United States (known as TOTUS).128 Likewise, the statutory text specifically permits sponsorship of and investments in covered 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.129 In both cases, the banking entity must also not be directly or indirectly controlled by a banking entity organised under US federal or state law.130 The 2013 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.131 The Volcker Agencies clarified this marketing restriction in an FAQ that explicitly noted the restriction's scope is limited to activities of the relevant banking entity.132 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.133
In June 2018, the Volcker Agencies issued a proposal meant to simplify and tailor the application of the 2013 Regulations (2018 Proposal).134 The 2018 Proposal, which has not yet been finalised and remains subject to further revision, would modify the definition of trading account in the 2013 Regulations by eliminating the purpose test and replacing it with an accounting test.135 Under the proposed accounting test, the purchase or sale of a financial instrument would be included within the Volcker Rule trading account if that financial instrument is recorded at fair value on a recurring basis under applicable accounting standards. In addition, among other changes, the 2018 Proposal would streamline the requirements of the TOTUS and SOTUS exemptions by eliminating certain conditions that the Volcker Agencies believe to have proven burdensome and inefficient. The Volcker Agencies also sought comment in the 2018 Proposal on other potential changes, such as changes to the definition of banking entity, to the definition of covered fund and exclusions from that definition, and to Super 23A.
In addition, recent Congressional action has revised Section 13 to exclude from the definition of banking entity (and thus from the Volcker Rule) certain community banking organisations with limited trading activities. As a result of changes enacted by the EGRRCPA, Section 13's definition of banking entity now excludes an institution that does not have, and is not controlled by a company that has, more than US$10 billion in total consolidated assets, and total trading assets and trading liabilities that are more than 5 per cent of total consolidated assets. The EGRRCPA also revised Section 13's covered fund name-sharing restriction to allow a covered fund to share the same name, or a variation of the same name, as a banking entity that is an investment adviser to the fund, subject to certain conditions.136 The Volcker Agencies have proposed, but have not yet finalised, revisions to the 2013 Regulations to implement the EGRRCPA's changes to the definition of banking entity and the covered fund name-sharing restriction.137
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 provisions that:
- require standardised swaps138 and SBS139 (collectively referred to here as swaps) to be cleared through regulated central clearing houses and executed on regulated trade execution platforms;
- provide for the registration and comprehensive regulation (including capital, margin, business conduct, documentation, risk management, corporate governance and record-keeping requirements) of swap dealers, SBS dealers, major swap participants and major SBS participants (collectively referred to as swaps entities) by the CFTC and the SEC;
- 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
- 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).
The Dodd–Frank Act contains very little about the extraterritorial reach of its swap provisions.140 In July 2013, the CFTC issued final guidance regarding the cross-border application of its Title VII rules and, in May 2016, it issued a rule-making regarding the cross-border application of its margin requirements for uncleared swaps.141 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, or is guaranteed by 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.142 The SEC has finalised most of its rules on the cross-border application of its Title VII rules.143 Very generally, the SEC applies its Title VII rules based on the status of counterparties to SBS transactions, and on whether SBS transactions are arranged, negotiated or executed by personnel located in the United States on behalf of personnel located outside 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 clearing house or one that is explicitly exempt from registration.144 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 and rule-makings, except for certain end users that use these swaps to hedge or mitigate commercial risk.145 Procedures relating to these requirements, and further exceptions to them, have been adopted through rule-making by the CFTC.146 Title VII sets forth comprehensive requirements with which clearing houses must comply to obtain and maintain regulation. As of 31 December 2018, swap clearing is mandatory under these rules for certain liquid and standardised interest rate swaps and index credit default swaps subject to the CFTC's jurisdiction.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 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 31 December 2018, certain interest rate swaps and credit default swaps subject to the CFTC's jurisdiction 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 SBS dealers and major SBS participants with respect to SEC-regulated SBS. The concepts of swap dealer and SBS dealer are meant to capture market participants that serve as dealers in their relevant markets. The statute defines swap dealer and SBS dealer in terms of whether an entity engages in certain types of activities:
- holding oneself out as a dealer in swaps;
- making a market in swaps;
- regularly entering into swaps with counterparties as an ordinary course of business for one's own account; or
- 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 SBS dealer) provides that an IDI is not to be considered a swap dealer to the extent that 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 or SBS dealer. These definitions and exceptions were further defined through a joint CFTC and SEC rule-making on the topic.151 As of 31 December 2018, 101 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 SBS rules, some of 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 SBS participant focus on the market impacts and risks associated with an entity's swap positions. 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 SBS participant. As of 31 December 2018, no entities were registered as major swap participants.
Entities that act as swap dealers or SBS dealers must register as such with the CFTC or the SEC. In addition, Title VII requires comprehensive regulation of these registered swaps entities. Specifically, swaps entities must comply with minimum capital and minimum initial and variation margin requirements with respect to non-cleared swaps.153 The five prudential regulators and the CFTC have finalised uncleared swap margin requirements154 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 was either 1 September 2016 or 1 March 2017 and the initial margin compliance deadline is subject to a phase-in period that began on 1 September 2016 and continues until 1 September 2020, with the applicable compliance date depending upon the size of the swaps entity's (and its affiliates') combined swap positions with the counterparty. As of 31 December 2018, the SEC has proposed, but not yet finalised, its uncleared swap margin collection rules.155
Additionally, swap dealers must establish comprehensive risk-management programmes that are 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, record-keeping, 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.
Title VII requires all swaps that meet the territorial nexus described in the Commissions' cross-border guidance and rule-makings to be reported to a registered data repository. 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 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).156 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 but as of 31 December 2018, compliance is not yet required.157
The Swaps Pushout Rule
The Swaps Pushout Rule, as amended in December 2014,158 requires IDIs and US branches and agencies of non-US banks that are swap dealers or SBS dealers (collectively, covered depository institutions (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.159 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.160 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.
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 between a bank and an affiliate, including loans and other extensions of credit (collectively referred to as covered transactions). Section 23A of the FRA limits a bank's covered transactions161 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.162 In addition, certain covered transactions must be secured at all times163 by a statutorily defined amount of collateral.164 Section 23B of the FRA requires that covered transactions165 between a bank and its affiliates be on market terms and at arm's length. 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.166
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.167 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 that they create bank credit exposure168 to the affiliate and, as a result, such transactions have been subject to quantitative limits and collateral requirements under these sections since 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. However, as of 31 December 2018, the Federal Reserve has not proposed any such regulations.
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. Disclosure laws include the Truth in Lending Act,169 the Truth in Savings Act170 and the Electronic Fund Transfer Act.171 Civil rights laws include the Equal Credit Opportunity Act172 and the Community Reinvestment Act (CRA). The CRA is intended to encourage depository institutions to help meet the credit and development needs of their communities, especially low and moderate-income neighbourhoods, with potentially significant penalties for noncompliance.173 The federal banking regulators are currently reviewing the CRA's implementing regulations to determine how those regulations can be modernised, and the OCC has released an advanced notice of proposed rulemaking seeking comments on the best ways in which to do so.174
Banks are also subject to laws regarding consumer privacy and the use of certain consumer information. Title V of the GLB Act175 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.176
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 bring enforcement actions, including the imposition of civil money penalties. A number of federal and state consumer protection laws can also be enforced by consumers through civil lawsuits.
Consumer Financial Protection Bureau
The CFPB has broad regulatory, supervisory and enforcement authority with respect to consumer financial services or products. The CFPB is authorised to write regulations under federal consumer financial protection laws, including with respect to small dollar lending, prepaid cards, payday lending, mortgage-related issues and debt collection. 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.177
The CFPB examines and supervises large depository institutions regarding compliance with federal consumer protection laws and regulations.178 In addition, the CFPB may supervise certain non-bank entities of any size engaged in certain consumer finance-related activities.179 Under its enforcement authority, the CFPB may investigate potential violations of federal consumer financial protection laws (including unfair, deceptive and abusive acts and practices) and may initiate enforcement actions. CFPB enforcement actions may result in, among other consequences, the assessment of significant civil monetary penalties.180 In the years following its creation, the CFPB actively investigated and brought enforcement actions against persons subject to its jurisdiction, but has adopted a comparatively less aggressive approach under new leadership appointed by President Trump.
The director of the CFPB is removable by the President only for cause. Persons subject to the CFPB's jurisdiction have brought several actions challenging the constitutionality of this CFPB leadership structure. Although the United States Court of Appeals for the District of Columbia Circuit, sitting en banc, has held that the structure of the CFPB is not constitutionally impermissible,181 challenges to the CFPB's authority on these grounds remain under consideration in a number of federal courts of appeal.
Pre-emption in the context of consumer protection regulation refers to the degree to which the activities of a federally chartered IDI are regulated by federal law rather than by the laws of any individual state in which the IDI may have a branch or otherwise conduct activities. The OCC may determine that federal law pre-empts 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'.182 Even where the OCC has made a pre-emption determination with respect to state consumer financial laws as applied to a national bank, those state laws remain applicable to the national bank's operating subsidiaries and affiliates. Further, no provision of the National Bank Act relating to state visitorial authority may be construed to limit the authority of state attorneys general to bring actions to enforce any applicable law against a national bank.
v Bank Secrecy Act and anti-money laundering
The Bank Secrecy Act (BSA),183 as amended by the USA PATRIOT Act in 2001,184 requires all financial institutions, including banks, 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).
Beneficial ownership identification
FinCEN continues to focus on enhancing access to beneficial ownership information to combat the abuse of legal entities by those engaging in financial crimes.185 On 11 May 2016, FinCEN issued a final rule that (among other things) added a new requirement for covered financial institutions to identify, and verify the identity of, the beneficial owners of legal entity customers (CDD Rule).186 The CDD Rule became effective on 11 July 2016, and covered financial institutions were required to comply by 11 May 2018. 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:
- financial institutions regulated by a federal functional regulator and banks regulated by a state bank regulator;
- publicly held companies traded on the New York, American or NASDAQ stock exchange;
- SEC-registered investment companies, investment advisers, exchanges and clearing agencies;
- US bank holding companies; and
- 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 currently 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 the CDD requirements may be extended to other types of financial institutions in the future.
US economic sanctions
The Office of Foreign Assets Control of the US Department of the Treasury (OFAC) administers US economic sanctions against foreign countries, entities and individuals to counter threats to the national security, foreign policy or economy of the United States. 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 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 and Syria (target countries). 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.187
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 those involved in narcotics trafficking, terrorism and terrorist financing, transnational crime, proliferation of weapons of mass destruction, piracy, and malicious cyber activities; 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 company that is 50 per cent or more owned 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 Sectoral Sanctions Identifications List (SSI List). US persons are generally prohibited from dealing in new debt of greater than a specified maturity188 of the listed companies and of companies that are (50 per cent or more) owned, 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 and in certain projects outside Russia that meet specified criteria. On 2 August 2017, President Trump signed into law the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA), which, among other things, codifies certain sanctions against Russia previously imposed by Executive Order and establishes new congressional review procedures for terminating or waiving sanctions against Russia.189
Starting in 2015, the government imposed sanctions on certain persons associated with the government of Venezuela.190 On 31 July 2017, OFAC designated Venezuelan President Maduro as an SDN pursuant to that 2015 Executive Order. Other executive orders issued in 2017 and 2018 imposed financial sanctions on the government of Venezuela intended to deny a critical source of funding to the Maduro regime.191 In 2018, President Trump issued additional executive orders that ban US transactions in Venezuela's 'petro' digital currency, and block the property of persons determined to operate in the gold sector of the Venezuelan economy, or to engage in deceptive or corrupt transactions involving the government of Venezuela, among other things.192
The United States implemented significant sanctions relief with respect to Iran on 16 January 2016, pursuant to the Joint Comprehensive Plan of Action (JCPOA) among the permanent members of the United Nations Security Council plus Germany, the European Union, 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 distinct from direct sanctions, which generally prohibit US persons from dealing with Iranian parties.
However, on 8 May 2018, President Trump announced that he was terminating the United States' participation in the JCPOA. In June 2018, OFAC revoked General License H, issued on 16 January 2016 (Implementation Day under the JCPOA), which had authorised US-owned or US-controlled foreign entities to engage in most transactions with the government of Iran and persons subject to the jurisdiction of the government of Iran, subject to certain conditions and restrictions. As of 5 November 2018, following the conclusion of certain wind-down periods, all US sanctions (both direct and secondary) that had been waived or lifted under the JCPOA were reimposed and fully effective. Also on 5 November 2018, OFAC added back to the SDN List a number of persons that had been removed on Implementation Day from such list.
The US government revoked comprehensive sanctions with respect to Sudan and the government of Sudan with effect from 12 October 2017. The revocation of sanctions came after the conclusion of the period established by Executive Order 13762, as amended by Executive Order 13804, during which the US government assessed whether the government of Sudan had sustained positive developments that would justify permanent sanctions relief. This review period was originally scheduled to conclude in July 2017 but was extended to October by Executive Order 13804.
The United States has also expanded sanctions against North Korea in recent years. CAATSA includes a number of secondary sanctions provisions and other measures targeting sources of economic support for the North Korean government. In addition, Executive Order 13810, 'Imposing Additional Sanctions With Respect to North Korea' (20 September 2017), expanded OFAC's authority to target those who enable the North Korean regime's economic activity.
OFAC civil penalties, which vary depending on the authorising statute, can reach a maximum of US$86,976 per violation (as of 19 March 2018) under the Trading With the Enemy Act (the primary authorising statute for the Cuba sanctions programme), or the greater of US$295,141 per violation (as of 19 March 2018) or twice the value of the violative transaction or transactions under the International Emergency Economic Powers Act (IEEPA).193 Most US sanctions programmes are authorised by IEEPA.194
OFAC's enforcement guidelines195 note that the Office 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.
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'.196 Its overnight extensions of credit to depository institutions can 'relieve liquidity strains in a depository institution and in the banking system as a whole',197 and ensure 'the basic stability of the payment system more generally by supplying liquidity during times of systemic stress'.198 Almost all discount window credit has been extended as secured advances for many years.199
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.200 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).201
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 such as 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.202 In the preamble to the guidance, regulators noted that they had 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 intra-day 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.203 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 exposures204 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.205
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 US$50 billion or more in average total consolidated assets, and minimum standards for a board of directors in overseeing the framework's design and implementation.206 The final guidelines also apply to banks with less than US$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 US$50 billion, and the OCC explicitly reserved authority to apply the guidelines to an entity with less than US$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.207 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.208
As discussed in Section III.v, a large FBO with US$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, and 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.209 The US LCR rule is designed 'to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations'.210 Banking organisations subject to the rule are 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.
In 2016, bank regulators proposed a rule that would implement a net stable funding ratio (NSFR) requirement.211 The proposed rule takes a binary approach in that it applies the full NSFR requirements to certain large banking organisations,212 whereas certain smaller banking organisations would be subject to modified NSFR requirements.213 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. As of 31 December 2018, the proposed NSFR has not been finalised.
In 2018, US banking agencies proposed rules that would tailor certain enhanced prudential standard requirements, including the US LCR and the proposed NSFR, based on the size of firms as well as other financial measures.214 Under the proposed rules, the full US LCR and proposed NSFR would apply to US G-SIBs and US BHCs that have either US$700 billion or more in total consolidated assets, or US$100 billion or more in total consolidated assets and US$75 billion or more in cross-jurisdictional activity. Less stringent, modified versions of the US LCR and proposed NSFR would apply to firms with either US$250 billion or more in total consolidated assets, or US$100 billion or more in total consolidated assets and US$75 billion or more of one of three other measures of financial activity, provided that firms have less than US$75 billion of a weighted measure of short-term wholesale funding. The proposed rules would also reduce the frequency of internal liquidity stress testing requirements and tailor certain qualitative liquidity risk management requirements for US BHCs with US$100 billion or more in total consolidated assets that do not meet the proposed size threshold or other financial criteria for the US LCR and proposed NSFR requirements.
VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
Investing in banks or BHCs has long been a strictly regulated process in the United States. 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:215
- 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 that 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; and mergers of BHCs.216 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.217 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;218
- 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.219 The appropriate federal bank regulator is that of the surviving entity in a merger;220 and
- the Change in Bank Control Act (CIBC Act): the 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.221 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)222 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.223 The CIBC Act does not apply to transactions requiring approval under the BHC Act or the Bank Merger Act.224
On 22 September 2008, the Federal Reserve issued its Policy Statement on Equity Investments in Banks and BHCs,225 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 the purposes of the BHC Act, including with respect to the following issues:
- 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;
- 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;
- 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 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', which the Federal Reserve requires the minority investor to make as a condition for determining that the investor does not control the bank or BHC;
- 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
- 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 and 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.226 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.227
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:
- the size of the resulting firm;
- the availability of substitute providers for any critical products and services offered by the resulting firm;
- the interconnectedness of the resulting firm with the banking or financial system;
- the extent to which the resulting firm contributes to the complexity of the financial system; and
- the extent of the cross-border activities of the resulting firm.228
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.229 In considering the financial stability factor in its order approving the merger of People's United Financial, Inc with Suffolk Bancorp and People's United's indirect acquisition of The Suffolk County National Bank of Riverhead, the Federal Reserve further explained that its experience has shown that proposals involving an acquisition of less than US$10 billion in assets, or that result in a firm with less than US$100 billion in total assets, are generally not likely to pose systemic risks.230 Accordingly, the Federal Reserve presumes that a proposal does not raise material financial stability concerns if the total assets involved fall below either of these size thresholds, absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities or other risk factors.231
Limitations on non-bank acquisitions by systemically important companies
Systemically important companies, including systemically important BHCs and nonbank financial companies supervised by the Federal Reserve, 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 US$10 billion or more of consolidated assets.232 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.233 This provision is already in effect; however, as at 31 December 2018, 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.234 Current law imposes a deposit cap on BHCs and SLHCs.235 Exemptions are provided for acquisitions by BHCs or SLHCs of IDIs in default or in danger of default.
A financial company is prohibited from merging with or acquiring substantially all 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.236 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 the majority of merger and acquisition deals are not likely to 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 2011.237 The Federal Reserve issued final rules implementing the concentration limits in light of the FSOC's recommendations on 14 November 2014.238 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 2014.239 For all subsequent periods, aggregate financial sector liabilities are calculated as the average of financial companies' aggregate financial sector liabilities as at 31 December of the previous 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.240 The liabilities of an FBO are calculated with reference solely to the FBO's US operations, enumerated as the total liabilities of all the FBO's US branches, agencies, and subsidiaries domiciled in the United States.241 The concentration limit rules establish a de minimis exception to engage in transactions exceeding the limit by up to US$2 billion in the aggregate during any 12-month period, but to rely on this exception the financial company must obtain prior consent from the Federal Reserve to ensure the particular transaction does not pose a threat to financial stability.242 In the alternative, if the financial company's transactions in the aggregate during any 12-month period do not exceed US$100 million, the financial company can meet the de minimis exception by providing notice to the Federal Reserve within 10 days after an acquisition.243 The rules do subject transactions made in the ordinary course of business that are structured as controlling investments to the concentration limit, and 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.244
VII OUTLOOK AND CONCLUSIONS
Financial regulatory reform as well as technological and market changes continue to shape the regulatory environment in the United States. Further, regulatory implementation, including the tailoring of rules and regulations according to a banking organisation's business model, size and risk profile in the United States, has been, and is likely to remain, a significant focus in reforms to the financial regulatory framework in the United States. With a divided Congress following the midterm elections, momentum in financial regulatory reform going forward is unlikely to continue through statutory reform, but is expected to be driven by regulatory agencies under new leadership. Despite these reforms and tailoring efforts, the post-crisis regulatory framework will continue to structure, constrain and channel the behaviour of financial institutions, markets and individuals for the foreseeable future, given its broad scope and significant impact on financial regulation in the United States.
1 Luigi L De Ghenghi and John W Banes are partners and Karen C Pelzer is counsel at Davis Polk & Wardwell LLP. The authors would like to express their gratitude to contributors Adam Fovent, Ryan Johansen, Meghan King, Nancy Lee, Eric Lewin, Jeanine McGuinness, Andrew Rohrkemper, Andrew Ruben, Dana Seesel and Greg Swanson, all of Davis Polk & Wardwell LLP, for their contributions; their efforts in preparing this chapter were invaluable.
2 EGRRCPA, Pub L No. 115-174, S 2155, 115th Cong Sections Section 402 (2018).
3 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong (2010).
4 National Bank Act Section 2; 12 USC Section 26.
5 OCC, Interim Final Rule: Office of Thrift Supervision Integration Pursuant to the Dodd–Frank Act, 76 Fed Reg 48950 (9 Aug 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 Jul 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.
6 Federal Deposit Insurance Act, Section 1; 12 USC Section 1811(a).
7 See Federal Reserve Bank of Boston, Federal Reserve Membership, https://www.bostonfed.org/supervision-and-regulation/supervision/federal-reserve-membership.aspx; Federal Reserve Bank of Dallas, Becoming a Member Bank of the Federal Reserve System: Questions & Answers, www.dallasfed.org/banking/apps/faq.cfm.
8 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. See BHC Act, 12 USC Section 1841(a). The Home Owners' Loan Act of 1933 (HOLA) defines a savings and loan holding company as any company that controls a savings association or any other company that is an SLHC. See HOLA, 12 USC Section 1467a(a)(1)(D)(i). Some depository institutions do not fall within the definition of bank under the BHC Act and do not trigger BHC status for companies that control such institutions – for example, an industrial loan company or a credit card bank.
9 The largest BHCs and banks are generally subject to continuous examinations. On 28 December 2018, the FDIC, Federal Reserve and OCC published final rules 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 US Branches and Agencies of Foreign Banks, 83 Fed Reg 43961 (28 December 2018), www.govinfo.gov/content/pkg/FR-2018-12-28/pdf/2018-28267.pdf.
10 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 604 (2010).
12 For a further discussion, see Section VI.
13 Pub L No. 111-203, Section 335, 124 Stat 1,540.
14 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 Sep 2009), www.fdic.gov/regulations/laws/federal/2009/09Final917.pdf.
15 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 331(b) (2010).
16 FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672, 10673 (25 Feb 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.
17 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 331(b) (2010).
18 FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672 (25 Feb 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.
19 A large IDI is defined as an IDI with at least US$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 US$50 billion or more in total assets for at least four consecutive quarters controlled by a parent or intermediate parent company with more than US$500 billion in total assets, or a processing bank or trust company with at least US$10 billion in total assets for at least four consecutive quarters. FDIC, Final Rule: Assessments, Large Bank Pricing, 76 Fed Reg 10672, 10688 (25 Feb 2011), www.gpo.gov/fdsys/pkg/FR-2011-02-25/pdf/2011-3086.pdf.
20 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.
21 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 – Role of Directors for National Banks and Federal Savings Associations (2016), www.occ.gov/publications/publications-by-type/other-publications-reports/The-Directors-Book.pdf.
22 Federal Reserve, Proposed Guidance on Supervisory Expectations for Boards of Directors, 82 Fed Reg 37219 (9 Aug 2017), www.govinfo.gov/content/pkg/FR-2017-08-09/pdf/2017-16735.pdf.
23 Federal Reserve, Proposed Supervisory Guidance, 83 Fed Reg 1351 (11 Jan 2018), www.govinfo.gov/content/pkg/FR-2018-01-11/pdf/2018-00294.pdf.
24 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Sections 614, 615 (2010).
25 In October 2018, the Federal Reserve proposed rules that would tailor the applicability of the EPS requirements consistent with the threshold changes under the EGRRCPA. Federal Reserve, Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies, 83 Fed Reg 61408 (29 Nov 2018). Because the EGRRCPA became effective in May 2018 for BHCs with less than US$100 billion in total consolidated assets, and the Federal Reserve's EPS tailoring proposal has not yet been finalised, the Federal Reserve has stated that it will not seek to enforce EPS requirements that had previously applied to BHCs at a lower asset threshold.
26 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.
27 The EGRRCPA eliminates the adverse scenario from the Dodd–Frank Act stress tests (DFAST) and the Federal Reserve is expected to follow suit for the Comprehensive Capital Analysis and Review (CCAR).
28 Federal Reserve, Single Counterparty Credit Limits for Large Bank Holding Companies and Foreign Banking Organizations; Final Rule, 83 Fed Reg 38460 (6 Aug 2018).
29 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.
30 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 Feb 2014), www.davispolk.com/sites/default/files/Visual.Summary.Foreign%20Banks.Dodd_.Frank_.Enhanced.Prudential.Standards.Final_.Rule_.pdf. Although the EGRRCPA generally raised the threshold for EPS from US$50 billion to US$100 billion in May 2018 and to US$250 billion effective November 2019, the statute did not alter the application of the Federal Reserve's EPS regulations to FBOs with US$100 billion or more in total consolidated assets. While the Federal Reserve has indicated that it plans to develop a separate proposal relating to FBOs that would implement Section 401 of the EGRRCPA for IHCs of FBOs (see 83 Fed. Reg. 61408, 61411), it has, as of 31 December 2018, not issued any such proposal.
31 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.
32 Federal Reserve, Single Counterparty Credit Limits for Large Bank Holding Companies and Foreign Banking Organizations; Final Rule, 83 Fed Reg 38460 (6 Aug 2018).
33 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 616(d) (2010).
34 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 165(i) (2010), as amended by the EGRRCPA, Pub L No. 115-174, S 2155, 115th Cong Sections Section 402 (2018).
35 Federal Reserve, Capital Plans, 76 Fed Reg 74631 (1 December 2011), www.gpo.gov/fdsys/pkg/FR-2011-12-01/pdf/2011-30665.pdf.
36 For a discussion of the 2018 capital planning and stress testing process for large BHCs, see Davis Polk & Wardwell LLP, 'Visuals of 2018 CCAR and DFAST Results' (3 July 2018), https://www.finregreform.com/wp-content/uploads/sites/32/2018/07/DPW-CCAR-DFAST-2018-Visual-Summary.pdf.
37 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.
38 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.
39 Federal Reserve, Amendments to the Capital Plan and Stress Test Rules, 82 Fed Reg 9308 (proposed 3 Feb 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 BHCs or IHCs of FBOs with total consolidated assets of US$50 billion or greater but less than US$250 billion, and non-bank assets of less than US$75 billion that are not identified as US G-SIBs.
40 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.
41 In April 2018, the Federal Reserve and the OCC proposed a rule that would tailor the calibration of the enhanced supplementary leverage ratio requirement for each firm, changing it from a fixed 2 per cent buffer for all firms to a firm-specific buffer determined annually and based on the firm's risk-based G-SIB capital surcharge discussed below. Federal Reserve and OCC, Enhanced Supplementary Leverage Ratio Standards for US G-SIBs, 83 Fed Reg 17317 (19 Apr 2018).
42 These numbers reflect currently available public reporting.
43 See 12 CFR Section 217.405–06.
44 See Federal Reserve, FDIC, OCC, Proposed Rule on Simplifications to the Capital Rule, 82 Fed. Reg. 49984 (27 Oct 2017); Federal Reserve, Proposed Rule on Enhanced Disclosure of the Models Used in the Federal Reserve's Supervisory Stress Test, 82 Fed. Reg. 59547 (15 Dec 2017); Federal Reserve, Proposed Policy Statement on the Scenario Design Framework for Stress Testing, 82 Fed. Reg. 59533 (15 Dec 2017); Federal Reserve, Proposed Stress Testing Policy Statement, 82 Fed. Reg. 59528 (15 Dec 2017); Federal Reserve, Proposed Amendments to the Regulatory Capital, Capital Plan and Stress Test Rules (10 April 2018), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180410a2.pdf; Federal Reserve and OCC, Proposed Rule on Enhanced Supplementary Leverage Ratio Standards for US G-SIBs (11 Apr 2018), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180411a2.pdf.
45 Basel Committee, Basel III: Finalising Post-Crisis Reforms (December 2017), available at https://www.bis.org/bcbs/publ/d424.htm.
46 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 Apr 2012), www.davispolk.com/files/Publication/bd4d269c-ecc1-4757-a5ae-007f26f378e1/Presentation/PublicationAttachment/c6a028ce-271b-4aef-b140-02f4b9094236/040412_FSOC.Final.Rules.pdf.
47 Dodd–Frank Act, US Public Law No. 111-203, Section 165(d), 124 US Statutes at Large 1375, 1426 (2010).
48 Federal Reserve, FDIC, Final Rule, Resolution Plans Required, 76 Federal Register 67323 (1 Nov 2011).
49 Economic Growth, Regulatory Relief, and Consumer Protection Act, US Public Law No. 115-174, Section 402, 132 US Statutes at Large 1296, 1356 (2018).
50 Ibid; see also Federal Reserve, Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations, 79 Fed Reg 17240 (27 Mar 2014).
51 See Federal Reserve, FDIC, and OCC, Interagency Statement Regarding the Impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) (6 July 2018), www.occ.treas.gov/news-issuances/news-releases/2018/nr-ia-2018-69a.pdf; Federal Reserve, Statement Regarding the Impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) (6 July 2018), www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706b1.pdf.
52 FDIC, Final Rule, Resolution Plans Required for Insured Depository Institutions with $50 Billion or More in Total Assets, 77 Federal Register 3075 (23 Jan 2012).
53 For example, in September 2017, the Federal Reserve and the FDIC gave a one-year filing extension for the eight large domestic banks, following the Treasury's banking report which recommended that the agencies change the living wills process by moving to a two-year cycle, see https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171219a.htm.
54 Federal Reserve, FDIC, Final Guidance for the 2019, 84 Federal Register 1438 (4 Feb 2019).
55 Jelena McWilliams, Keynote Remarks to 2018 Annual Conference of The Clearing House (TCH) and Bank Policy Institute (BPI) (28 Nov 2018), www.fdic.gov/news/news/speeches/spnov2818.html.
56 FDIC, Final Rule: Certain Orderly Liquidation Authority Provisions under Title II of the Dodd–Frank Act, 76 Fed. Reg. 41626 (15 Jul 2011).
57 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.
58 FDIC, Notice and Request for Comment, 'Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy', 78 Fed Reg 76614 (18 Dec 2013).
59 See, e.g., 12 US Code of Federal Regulations Part 201; the Federal Reserve Discount Window (21 Jul 2010), www.frbdiscountwindow.org/Home/Pages/General-Information/The-Discount-Window#eligibilityps.
60 12 USC Section 343.
61 See Dodd–Frank Act, US Public Law No. 111-203, Section 210(n), 124 US Statutes at Large 1375, 1506-09 (2010).
62 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).
63 Federal Reserve, Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important US Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations, 82 Fed Reg 8266 (15 Dec 2016).
64 Federal Reserve, Restrictions on Qualified Financial Contracts of Systemically Important US Banking Organizations and the US Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 82 Fed. Reg. 42,882 (12 Sep 2017); FDIC, Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 82 Fed. Reg. 50,228 (30 Oct 2017); OCC, Mandatory Contractual Stay Requirements for Qualified Financial Contracts, 82 Fed. Reg. 56,630 (29 Nov 2017).
65 12 CFR Section 252.85(a); 12 CFR Section 382.5(a); 12 CFR Section 47.6.
66 In October 2016, the US federal banking agencies issued an advance notice of proposed rule-making on enhanced cyber risk management standards (Enhanced Standards) for large and interconnected entities and their third-party service providers. The proposed rule addressed 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. In January 2017, the comment period for the proposed rule was extended. The US federal banking agencies have yet to issue a final rule.
67 See, e.g., Federal Financial Institutions Examination Council Information Technology Examination Handbook, Internet Security (Sep 2016), ithandbook.ffiec.gov/media/216407/informationsecurity2016booklet.pdf.
68 NYCRR Part 500.
69 The first three phases of requirements include penetration testing and vulnerability assessments, a risk assessment, multi-factor authentication, cybersecurity awareness training, audit trails, application security, limitations on data retention, monitoring and encryption of non-public information.
70 The final phase of compliance includes a third-party service provider policy.
71 OCC, Policy Statement on Financial Technology Companies' Eligibility to Apply for National Bank Charters (31 July 2018), https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-other-occ-policy-statement-fintech.pdf.
72 OCC, Comptroller's Licensing Manual Supplement: Considering Charter Applications from Financial Technology Companies (July 2018), https://www.occ.treas.gov/publications/publications-by-type/licensing-manuals/pub-considering-charter-apps-from-fin-tech-co.pdf.
73 See, e.g., Government Accountability Office, Virtual Currencies – Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges (May 2014), https://www.gao.gov/assets/670/663678.pdf.
74 SEC, Statement on Potentially Unlawful Online Platforms for Trading Digital Assets (7 Mar 2018), https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading.
75 For example, in 2015, the NYDFS finalised a rule that requires most businesses involved in digital asset business activity in or involving New York, excluding merchants and consumers, to apply for a licence, commonly known as a BitLicense, from the NYDFS and to comply with anti-money laundering (AML), cyber security, consumer protection, and financial and reporting requirements, among others, see, https://www.dfs.ny.gov/legal/regulations/bitlicense_reg_framework.htm.
76 See 12 USC Section 24. The specific authorising language is contained in Section 24(7) of the National Banking Act, pursuant to which a national banking association has the power to 'exercise . . . all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes'.
77 12 USC Section 24(7) permits the 'purchasing and selling [of securities and stock] without recourse, solely upon the order, and for the account of, customers'. In contrast, securities underwriting and dealing are expressly prohibited by the National Banking Act – 'The business of dealing in securities and stock by the association shall be limited to purchasing and selling [such securities as agent] and in no case for its own account, and the association shall not underwrite any issue of securities or stock' – except that the association may deal in US government or agency securities and purchase for its own account certain other investment securities.
78 12 USC Section 24(7) also permits 'the association [to] purchase for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe', subject to certain limits on the amount of investment securities issued by any single issuer, other than the United States and certain agencies and other bodies specified in the statute. The term investment securities is defined as 'marketable obligations, evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes and/or debentures commonly known as investment securities under such further definition of the term “investment securities” as may by regulation be prescribed by the Comptroller of the Currency'. The OCC has further defined investment securities in 12 CFR Part 1.
79 It was debated for many years whether the business of banking was limited to the activities enumerated in 12 USC Section 24(7), or whether those activities were merely illustrative of the activities included within the business of banking. The US Supreme Court settled this debate in 1995 by holding that 'the business of banking is not limited to the enumerated powers in [12 USC Section 24(7)] and that the [OCC] therefore has discretion to authorise activities beyond those specifically enumerated. The exercise of the [OCC]'s discretion, however, must be kept within reasonable bounds'. See footnote 2 in NationsBank of North Carolina v. Variable Annuity Life Insurance Co, 513 US 252 (1995).
80 OCC, Activities Permissible for National Banks and Federal Savings Associations, Cumulative (Oct 2017), https://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/pub-other-activities-permissible-october-2017.pdf.
81 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)).
82 12 USC Section 1843(a), (c)(8).
83 12 CFR Part 225.
84 For a comprehensive description of these activities in general, see the 1997 Federal Reserve revision of Regulation Y, available at www.federalreserve.gov/boarddocs/press/boardacts/1997/19970220/R-0935-36.pdf.
85 For example, flood zone determination services were found to be permissible under extending credit pursuant to 12 CFR Section 225.28(b)(2) and variable production payments and certain spot purchase-forward sale transactions have been interpreted as extending credit under 12 CFR Section 225.28(b)(1), (2).
86 See 12 USC Section 1843(a), (c)(8); 12 CFR Section 225.28(b).
87 Gramm–Leach–Bliley Act of 1999, Pub L No 106-102, 106th Cong, 1st Sess (12 Nov 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).
88 12 USC Section 1843(k)(1).
89 12 USC Section 1843(k)(4), especially (k)(4)(F).
90 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).
91 12 USC Section 1843(k)(4)(H) (merchant banking).
92 12 USC Section 1843(k)(4)(G).
93 See 12 CFR Part 211, Subpart A.
94 See 12 CFR Section 225.86(b).
95 Former Federal Reserve Chair Paul Volcker, although not formally involved in the Dodd–Frank Act legislative process that added Section 13 to the BHC Act, was among the leading advocates for imposing restrictions on proprietary trading and private funds activities by banks and their affiliates in the Act.
96 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed Reg 5536 (31 Jan 2014).
97 As originally enacted, Section 13 defined 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 2013 Regulations largely conformed to the statutory definition of banking entity but expanded 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). As discussed below, the EGRRCPA revised Section 13's definition of banking entity to exclude (and thus exempt from the Volcker Rule) certain community banking organisations with limited trading activities.
98 12 USCA Section 1851(a).
99 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).
100 12 CFR Section 248.3(b)(1)(i).
101 12 CFR Section 248.3(b)(1)(ii)-(iii).
102 The term derivatives includes swaps, security-based swaps (SBSs), foreign exchange forwards and swaps, physical commodity forwards, and retail foreign exchange and retail commodity transactions. See 12 CFR Section 248.3(c)(2).
103 The exclusions cover, for example, loans, non-financial spot commodities, and foreign exchange and currency. See 12 CFR Section 248.3(c)(2).
104 See 12 CFR Section 248.3(d).
105 See 12 USCA Section 1851(d)(1)(A)-(J). 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 (backstop provisions). See 12 USCA Section 1851(d)(2)(A).
106 12 USCA Section 1851(a)(1).
107 15 USCA Section 80a-3.
108 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.
109 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.
110 A commodity pool, as defined in Section 1a(10) of the Commodity Exchange Act (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 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).
111 See 12 CFR Section 248.10(c).
112 12 CFR Section 248.10(d)(6)(i).
113 12 CFR Section 248.10(d)(6)(ii).
114 12 CFR Section 248.10(d)(6)(i)(A).
115 12 CFR Section 248.10(d)(6)(i)(B)-(F).
116 12 CFR Section 248.10(d)(6)(i)(G).
117 See 12 CFR Section 248.10(a)(2).
118 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).
119 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).
120 The EGRRCPA revised Section 13's covered fund name-sharing restriction to allow a covered fund to share the same name, or a variation of the same name, as a banking entity that is an investment adviser to the fund, if the investment adviser is not and does not share the same name as an IDI, a company that controls an IDI, or a foreign company treated as a BHC under the IBA, and the fund's name does not contain the word bank. Pub. L. 115-174, Section 204 (amending 12 USCA Section 1851(d)(1)(G)(vi)).
121 These exemptions include (1) organising and offering a covered fund in connection with asset management or similar customer services, see 12 CFR Section 248.11(a), (2) organising and offering an issuer of asset-backed securities (ABS), see 12 CFR Section 248.11(b), (3) underwriting and market making in ownership interests in covered funds, see 12 CFR Section 248.11(c), (4) risk-mitigating hedging of employee compensation arrangements, see 12 CFR Section 248.13(a), (5) certain covered fund activities and investments outside the United States by non-US banking entities, see 12 CFR Section 248.13(b), (6) covered fund activities and investments by a regulated insurance company, see 12 CFR Section 248.11(c), and (7) 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', see 12 USCA Section 1851(d)(1)(J).
122 Section 23B requires that many transactions between a bank and an affiliate, including any covered transaction under Section 23A, be conducted on market terms. 12 USCA Section 371c-1(a). For more information on Section 23B, see 'Transactions with affiliates' (subsection iii).
123 For a detailed discussion of regular Section 23A, see 'Transactions with affiliates' (subsection iii).
124 12 USCA Section 1851(f)(3); 12 CFR Section 248.14(a)(2)(ii).
125 12 CFR Section 248.10(d)(7).
126 12 USCA Section 1843(c)(9).
127 12 USCA Section 1843(c)(13).
128 12 USCA Section 1851(d)(1)(H).
129 12 USCA Section 1851(d)(1)(I).
130 12 USCA Section 1851(d)(1)(H) to (I).
131 12 CFR Section 248.13(b).
132 See Volcker Rule Frequently Asked Questions (27 Feb 2015), https://www.federalreserve.gov/supervisionreg/faq.htm#13.
133 Where the fund is a related covered fund, i.e., because the FBO sponsors or serves, directly or indirectly, as the investment manager, investment adviser, 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.
134 CFTC, FDIC, Federal Reserve, OCC and SEC, Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, 83 Fed Reg 33432 (17 July 2018).
135 The 2018 Proposal would retain the market risk capital rule test and the status test, although the market risk capital rule test would be broadened to apply not only to banking entities subject to the US market risk capital rule but also to FBOs subject to market risk capital rules in their home countries, provided that those rules are consistent with the market risk framework published by the Basel Committee.
136 See footnote 120 for more detail on the applicable conditions.
137 See Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds, 84 Fed Reg 2778 (8 Feb 2019).
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, subject to certain exclusions. See 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 Nov 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 Aug 2012), www.gpo.gov/fdsys/pkg/FR-2012-08-13/pdf/2012-18003.pdf.
140 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]'.
141 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed Reg 45292 (26 Jul 2013); 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). 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 Oct 2016). In October 2018, the Chair of the CFTC, J Christopher Giancarlo, issued a White Paper that sets out guiding principles for the CFTC in interpreting its statutory authority to regulate cross-border swaps activities. J Christopher Giancarlo, Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation (1 Oct 2018), available at https://www.cftc.gov/sites/default/files/2018-10/Whitepaper_CBSR100118_0.pdf. The White Paper is not a rule proposal and does not have any immediate effect, but is instead intended for consideration by the full Commission.
142 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 Nov 2013), www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf. Advisory 13-69 is subject to no-action relief until the effective date of any CFTC action addressing whether a particular requirement covered by Advisory 13-69 is or is not applicable to a swap transaction covered by the Advisory. See CFTC Letter No. 17-36, Extension of No-Action Relief: Transaction-Level Requirements for Non-US Swap Dealers (25 Jul 2017), www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/17-36.pdf. The CFTC's proposed cross-border rule described in note 141, if adopted, would modify certain aspects of the cross-border regime outlined in CFTC Staff Advisory No. 13-69.
143 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 Aug 2014). Security-Based Swap Transactions Connected with a Non-US Person's Dealing Activity That Are Arranged, Negotiated, or Executed By Personnel Located in a US Branch or Office or in a US Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception, 81 Fed Reg 8598 (19 Feb 2016).
144 See CEA Section 2(h) and Exchange Act Section 3C, as amended by the Dodd–Frank Act.
145 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.
146 The SEC has proposed, but not finalised, rules implementing end-user exceptions from the mandatory clearing requirement for SBSs. End-User Exception to Mandatory Clearing of Security-Based Swaps, 75 Fed Reg 79992 (21 Dec 2010).
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'. The CFTC has proposed changes to its swap execution facility rules, which would require certain additional brokers and aggregators of single-dealer execution platforms to register with the CFTC as swap execution facilities or to seek an exemption. See Swap Execution Facilities and Trade Execution Requirement, 83 Fed Reg 61949 (30 Nov 2018).
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 Jun 2013). The CFTC has proposed changes to its trade execution requirement rules, which would eliminate the made available to trade determination process and expand the scope of products that would be required to be executed on a swap execution facility to include swaps that are both subject to the CFTC's clearing requirement and listed by a swap execution facility for trading. See Swap Execution Facilities and Trade Execution Requirement, 83 Fed Reg 61949 (30 Nov 2018).
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 established the threshold for the de minimis exception from swap dealer registration requirements at US$8 billion notional for CFTC-regulated swaps connected with dealing activity effected within 12 months, and the de minimis exception from SBS dealer registration requirements at US$8 billion notional for SEC-regulated credit default swaps and US$400 million notional for other SBS connected with dealing activity effected within 12 months. The swap threshold was set to decrease to US$3 billion on 31 December 2019, but the CFTC subsequently issued a rule permanently setting the swap threshold at US$8 billion. De Minimis Exception to the Swap Dealer Definition, 83 Fed Reg 56666 (13 Nov 2018).
152 Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, 80 Fed Reg 48964 (14 August 2015).
153 See generally CEA Section 4s and Exchange Act Section 15F.
154 See Margin and Capital Requirements for Covered Swap Entities, 80 Fed Reg 74840 (30 Nov 2015); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed Reg 636 (6 Jan 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).
155 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 83 Fed Reg 53007 (19 Oct 2018).
156 See 17 CFR Part 45.
157 See Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, 81 Fed Reg 53546 (12 Aug 2016); Regulation SBSR– Reporting and Dissemination of Security-Based Swap Information, 80 Fed Reg 14563 (19 Mar 2015).
158 Consolidated and Further Continuing Appropriations Act of 2015 Pub L No 113-235, HR 83, 113th Cong Section 630 (2015).
159 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.
160 As of 31 December 2018, the prudential regulations have not adopted joint rules as to authorised ABS swap activity for CDIs.
161 For the 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. 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.
162 Capital stock and surplus is essentially the sum of a bank's Tier 1 capital and Tier 2 capital, and the balance of the bank's allowance for loan and lease losses not included in its Tier 2 capital.
163 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.
164 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.
165 Covered transactions for the 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.
166 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; intra-day 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.
167 Dodd–Frank Act of 2010 Pub L No 111-203, HR 4173, 111th Cong Section 608 (2010).
168 The Dodd–Frank Act does not define credit exposure for purposes of Sections 23A and 23B. 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).
169 The Truth in Lending Act of 1968 establishes standard disclosures for consumer creditors nationwide. See Pub L No 90-321, 90th Cong, 2nd Sess (29 May 1968) 82 Stat 146 (1968).
170 Truth in Savings Act of 1991 requires that consumers receive written information about the terms of their deposit accounts and also governs the advertising of deposits and interest computations. See Pub L No 102-242, 102nd Cong, 1st Sess (19 Dec 1991) 105 Stat 2236 (1991).
171 The Electronic Fund Transfer Act of 1978 requires certain disclosures and provides other protections for consumers engaging in electronic fund transfers and remittance transfers. See Pub L No 95-630, 95th Cong, 2nd Sess (10 Nov 1978) 92 Stat 3641 (1978).
172 The Equal Credit Opportunity Act of 1974 prohibits certain types of discrimination in personal and commercial transactions. See Pub L No 93-495, 93rd Cong, 1st Sess (28 Oct 1974) 88 Stat 1521 (1974). In addition, 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.
173 Community Reinvestment Act of 1977, Pub L No 95-128, 95th Cong, 1st Sess (12 Oct 1977), 91 Stat 1111 (1977). 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.
174 OCC, Advanced Notice of Proposed Rulemaking: Reforming the Community Reinvestment Act Regulatory Framework, 83 Fed Reg 45053 (9 Sept 2018), https://www.govinfo.gov/content/pkg/FR-2018-09-05/pdf/2018-19169.pdf.
175 GLB Act of 1999, Pub L No 106-102, 106th Cong, 1st Sess (12 Nov 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.
176 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 Feb 2001), https://www.gpo.gov/fdsys/pkg/FR-2001-02-01/pdf/01-1114.pdf.
177 For a discussion of excluded entities and activities, see Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 1027 (2010).
178 Large depository institutions in this context are those with greater than US$10 billion in assets. See Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 1025 (2010).
179 For example, the CFPB has promulgated regulations extending its supervision authority to larger participants in the consumer reporting, consumer debt collection, international money transfer, student loan servicing and auto finance markets.
180 For example, in a coordinated action with the OCC, the CFPB in April 2018 assessed a US$1 billion penalty against a large US financial institution. See CFPB, Bureau of Consumer Financial Protection Announces Settlement With Wells Fargo For Auto-Loan Administration and Mortgage Practices (20 Apr 2018), https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-announces-settlement-wells-fargo-auto-loan-administration-and-mortgage-practices.
181 Wall Street Journal, 'Appeals Court Rules CFPB Structure Is Constitutional' (31 Jan 2018), https://www.wsj.com/articles/appeals-court-rules-cfpb-structure-is-constitutional-1517415363.
182 517 US 25 (1996).
183 Currency and Foreign Transactions Reporting Act, Pub L No 91-508, Title II (1970).
184 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).
185 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 Feb 2010) (statement of James Freis, former director of FinCEN); remarks of Jennifer Shasky Calvery, Director of FinCEN, 2014 Mid-Atlantic AML Conference, Washington, DC (12 Aug 2014), www.fincen.gov/news_room/speech/pdf/20140812.pdf.
186 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.
187 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 and Iran.
188 The permissible tenor is 14 days or fewer for the affected financial institutions, 30 days or fewer for the affected defence companies, and 60 days or fewer for the affected energy companies.
189 Pub. L. 115-44, HR 3364, 115th Cong. CAATSA also provides authority for additional sanctions against Iran and North Korea.
190 See Executive Order 13692, Blocking Property and Suspending Entry of Certain Persons Contributing to the Situation in Venezuela (8 March 2015).
191 See Executive Order 13808, Imposing Additional Sanctions With Respect to the Situation in Venezuela, (24 Aug. 2017) and Executive Order 13835, Prohibiting Certain Additional Transactions With Respect to. Venezuela, (21 May 2018).
192 See Executive Order 13827, Taking Additional Steps to Address the Situation in Venezuela, (19 March 2018), and Executive Order 13580, Blocking Property of Additional Persons Contributing to the Situation in Venezuela, (1 November 2018).
193 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 Jul 2016).
194 OFAC also has penalty authority under certain special-purpose economic sanctions statutes, such as the Foreign Narcotics Designation Act (Kingpin Act). The Kingpin Act provides for penalties up to US$1,466,485 (as of 19 Mar 2018).
195 OFAC, Economic Sanctions Enforcement Guidelines, 74 Fed Reg 215, 57,593 (9 Nov 2009), edocket.access.gpo.gov/2009/pdf/E9-26754.pdf.
196 Fed Reserve, The Federal Reserve Discount Window 1 (2008), www.frbdiscountwindow.org/discountwindowbook.cfm?hdrID=14&dtlID=43.
199 See James Clouse, Recent Developments in Discount Window Policy, 80 Fed Reserve Bull. 966 (Nov 1994).
200 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 1101(a)(2) (amending Section 13(a) of the FRA). 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 Dec 2015).
202 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.
203 Fed Reserve press release, Interagency Guidance on Correspondent Concentration Risk (30 Apr 2010), www.federalreserve.gov/boarddocs/srletters/2010/sr1010.pdf.
204 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.
205 The guidance does not elaborate on exactly what conflicts of interests means within this context.
206 12 CFR Part 30.
207 The Honourable Thomas J Curry, Comptroller of the Currency, Address at the American Bankers Association Risk Management Forum (10 Apr 2014).
208 12 CFR Part 30.
209 OCC, Federal Reserve, and FDIC, Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, 79 Fed Reg 61440 (10 Oct 2014).
211 OCC, Federal Reserve, FDIC, Notice of Proposed Rulemaking, Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements, 81 Fed Reg 35124 (1 Jun 2016).
212 The full NSFR requirements would apply to BHCs, certain savings and loan holding companies, and depository institutions that, in each case, have US$250 billion or more in total consolidated assets or US$10 billion or more in total on-balance sheet foreign exposure, and to their consolidated subsidiaries that are depository institutions with US$10 billion or more in total consolidated assets.
213 BHC and certain savings and loan holding companies that, in each case, have US$50 billion or more, but less than US$250 billion, in total consolidated assets and less than US$10 billion in total on-balance sheet foreign exposure would be subject to the modified NSFR requirements.
214 Federal Reserve, OCC, FDIC, Proposed Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements (21 Dec 2018); Federal Reserve, Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies, 83 Fed Reg 61408 (29 Nov 2018).
215 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.
216 12 USC Section 1842(a).
217 12 USC Section 1841(a)(1).
218 12 USC Section 1841(a)(2).
219 12 USC Section 1828(c)(1).
220 12 USC Section 1828(c)(2).
221 12 USC Section 1817(j).
222 12 USC Section 1817(j)(8)(B).
223 See, e.g., 12 CFR Section 225.41(c)(2).
224 12 USC Section 1817(j)(17).
225 12 CFR Section 225.144, available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20080922c.htm.
226 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Sections 606–607 (2010).
227 Ibid. Section 604(d) (2010).
228 Cadence Bancorporation, Fed Res Bd Order No. 2018-26 at 20–21 (7 Dec 2018); Synovus Financial Corp and Synovus Bank, Fed Res Bd Order No. 2018-25 at 21–22 (7 Dec 2018); HarborOne Mutual Bancshares and HarborOne Bancorp, Inc, Fed Res Bd Order No. 2018-18 at 15–16 (12 Sept 2018).
230 People's United Financial, Inc, Fed Res Bd Order No. 2017-6 at 25–26 (16 Mar 2017).
231 Ibid.; Cadence Bancorporation, Fed Res Bd Order No. 2018-26 at 21 (7 Dec 2018); Synovus Financial Corp and Synovus Bank, Fed Res Bd Order No. 2018-25 at 22 (7 Dec 2018); HarborOne Mutual Bancshares and HarborOne Bancorp, Inc, Fed Res Bd Order No. 2018-18 at 16 (12 Sept 2018).
232 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 163. When initially passed, the prior notice requirement established by Dodd–Frank applied to BHCs with total consolidated assets of at least US$50 billion and nonbank financial companies subject to Federal Reserve supervision. The EGRRCPA changed the asset threshold from US$50 billion to US$250 billion, but the change is not fully effective as of 31 December 2018. The EGRRCPA § 401(d)(2) states that the increased threshold is immediately applicable to BHCs with under US$100 billion – meaning that BHCs with assets of US$50 billion or more and less than US$100 billion are no longer subject to this requirement. However, the EGRRCPA § 401(d)(1) states that the increased threshold of US$250 billion is otherwise effective 18 months from the date of the bill's enactment, which occurred on 24 May 2018. This means that the change will not take effect until November 2019 for BHCs with assets of US$100 billion or more and less than US$250 billion.
233 Ibid. Section 163(b) (2010).
234 Dodd–Frank Act, Pub L No. 111-203, HR 4173, 111th Cong Section 623 (2010).
235 12 USC Sections 1842(d)(2)(A) and 1843(i)(8)(A) for BHCs and 12 USC Sections 1467a(e)(2)(E) for SLHCs.
236 Ibid. 622 (2010).
237 FSOC, Study & Recommendations Regarding Concentration Limits on Large Financial Companies (2011), www.treasury.gov/initiatives/Documents/Study%20on%20Concentration%20Limits%20on%20Large%20Firms%2001-17-11.pdf.
238 Federal Reserve, Final Rule: Concentration Limits on Large Financial Companies, 79 Fed Reg 68,095 (14 Nov 2014), www.gpo.gov/fdsys/pkg/FR-2014-11-14/pdf/2014-26747.pdf.
239 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.
240 See 12 CFR Section 251.3(c), (e).
241 12 CFR Section 251.3(d).
242 12 CFR Section 251.4(a), (b).
243 12 CFR Section 251.4(c).
244 See Federal Reserve, Final Rule: Concentration Limits on Large Financial Companies, 79 Fed Reg 68,095, 68,101-102 (14 Nov 2014), www.gpo.gov/fdsys/pkg/FR-2014-11-14/pdf/2014-26747.pdf.