Header graphic for print
Banking & Finance Law Report

Category Archives: Bank Regulation

Subscribe to Bank Regulation RSS Feed

CIP To Cover Small Business Ownership And Control

Posted in Bank Regulation, BSA/AML, Regulation and Compliance

It has been an active couple of weeks for FinCEN from a regulatory pronouncement perspective. For example, FinCEN has proposed a regulation to amend existing “know your customer” rules for certain financial institutions to require the verification of beneficial owners of legal entities. Legal entities in this context would mean corporations, partnerships or similar business entities. Public companies, regulated entities and trusts other than business and statutory trusts, would not be covered.

In addition, FinCEN issued an advisory for financial institutions on the importance of a “culture of compliance” with respect to BSA/AML. The guidance had these suggestions based on recent enforcement actions: ensure leadership that supports compliance; don’t mitigate BSA/AML efforts in light of revenue considerations; operating departments must share with compliance staff BSA/AML information; the organization must devote adequate resources to BSA/AML compliance; BSA/AML compliance should be tested by an independent party and the organization’s leadership and staff should understand the purpose and use of BSA/AML reporting. FIN-2014-A007 is available here.

FinCEN’s proposal to amend existing “know your customer” rules requires a financial institution would have to identify each individual who directly or indirectly own 25% or more of the equity and one individual who has responsibility to control, manage or direct the legal entity. This information is to be recorded on the standard certification form.

The proposal is available here. Comments are due on October 3rd, 2014. The original release contemplates that the rule would be effective one year after adoption, so it would appear …


Continue Reading →

Covered affirmative action employers — more scary news from the OFCCP

Posted in Bank Regulation, Labor Law, Regulation and Compliance

On August 6, 2014, the Office of Federal Contract Compliance Programs (OFCCP) announced a proposed rule that should be of real concern to covered affirmative action federal contractors. The OFCCP is the agency that enforces federal affirmative action laws. If the proposed rule is adopted, it will add compensation data to the information that covered employers must submit with their annual EEO-1 reports. Keep in mind the “web” of coverage under affirmative action laws reaches far. Coverage is triggered not just by direct federal contracts but also by contracts to provide goods or services to any private sector entity, as long as those goods or services are used in connection with fulfilling some federal contract that your customer or their customers may have. Coverage of financial institutions is triggered by being a depository for federal funds or by being an issuing or paying agent for U.S. Savings Bonds or Notes. Coverage issues and obligations can vary with the dollar volume of the covered work.

The Specifics:

What:

Currently, the annual EEO-1 report contains race, ethnicity, and gender information about your workplace, sorted by nine EEO job-type categories. The proposed rule would expand the report to include the following information for each of the EEO categories by race, ethnicity, and gender: total number of employees; total W-2 income; total hours worked.

Who:

The obligation to provide compensation information on EEO-1 reports would apply to covered affirmative action employers with more than 100 employees and a covered federal contract or subcontract for …


Continue Reading →

FDIC Guidance on Agricultural Credits

Posted in Agricultural Lending, Bank Lending, Bank Regulation, Commercial Lending, Community Banking, Regulation and Compliance

At a time of relative affluence in the farming industry, the FDIC has issued a warning on a need for monitoring agricultural credits. FIL-39-2014 (July 16, 2014) suggests that banking institutions of all sizes should carefully consider a recent, negative projection by the U.S. Department of Agriculture.

While current market conditions are good, the projection suggests there will be a slowdown in the growth of the farming and livestock sectors and that agriculture may be affected by adverse weather and declining land values, among other factors.

The guidance suggests that financial institutions should work carefully with agricultural borrowers when they experience financial difficulties. The guidance states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue (although the letter is rescinded in light of the current letter).

Cash flow analysis, secondary repayment sources and collateral support levels must be considered in order to properly analyze agricultural credits, according to the guidance.

The guidance notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required.

The guidance also notes workout strategies must be specifically tailored for agricultural credits in light of experience in the 1980’s with depreciating farm land values, among other factors. The guidance suggests that properly restructured loans to farming operations with a documented ability to repay under the modified terms will not be subject to adverse classification because the value of the underlying collateral …


Continue Reading →

Personal Liability, Bank Directors and the Business Judgment Rule

Posted in Bank Regulation, Community Banking, Corporate Governance, Corporate Law, Regulation and Compliance

Last April, a trade association for bank directors, the American Association of Bank Directors reported the results of a survey designed to measure the impact of concerns about personal liability on the decision of bank board members to resign and by individuals to turn down board seats on banking organizations.

One of the key concerns, the survey highlighted, is the possibility of an FDIC lawsuit against the directors if a bank failure occurs. The fear was bank directors would be liable for decisions made as directors notwithstanding what is commonly referred to as the business judgment rule. Generally, the business judgment rule shields corporate directors, including bank directors, from liability when board decisions result in losses to the corporation or to shareholders.

The AABD mentioned in particular a then pending lawsuit in Georgia arising out of FDIC claims related to the failure of Buckhead Bank. These claims against the directors sounded in simple negligence regarding the making of loans. And the directors had asserted the business judgment as a defense.

A few days ago the Georgia Supreme Court ruled on the matter and the decision is worth a review by bank directors and managers even though they don’t do business in Georgia. The Georgia Supreme Court decision elegantly summarizes the business judgment rule including its history and common law origins. So the opinion is a useful “read” for bankers everywhere because the development of local jurisprudence in most states is likely similar to the process described in the opinion.

The …


Continue Reading →

Intellectual Property and Banking – The Complications of Distinguishing Your Bank Name

Posted in Bank Regulation, Community Banking, Intellectual Property

Expansion of Banking: What happens when First National Bank is no longer First?

Ask any community banker and she will tell you that bank name disputes are on the rise. The Third Federal Circuit Court of Appeals attributes the rise of bank name disputes to “an outgrowth of aggressive and expansionist banking flowing from the Congressional liberalization… of national banking laws.” Citizens Financial Group, Inc., v. Citizens Nat’l Bank, 383 F.3d 110, 112 (3rd Cir. 2004). This case is one of many examples of disputes arising between two financial institutions, in similar geographic regions, operating under identical or a confusingly similar name (e.g., Citizens National Bank of Evans City and Citizens Financial Group, Inc.).

Today we are accustomed to large banks having developed into multinational corporations, such as JP Morgan Chase or Wells Fargo, but this growth occurred in most cases only in the late twentieth century. But the banking industry began with banks being purely local entities, the sole bank within a town or a smaller city as opposed to multi-branch banks within the same metropolis or state. For many banking organizations, this is still true. Within these towns, the use of names like First National Bank or Columbus City Bank were distinctive enough because that was the only show in town and everyone knew where they were banking. It was unlikely that another First National Bank two towns over would confuse or mislead consumers. The National Bank Act fostered the practice of bank names being rather undistinctive …


Continue Reading →

Risk Management and In-house Bank Lawyers

Posted in Bank Regulation

In-house bank lawyers got a vote of confidence last week. The context was a comment submitted to the Office of the Comptroller of the Currency regarding proposed enforceable guidelines on the risk management practices for the nation’s largest banks. Last January, the OCC proposed the guidelines and asked for comments. Previously, risk management practices suggested by the OCC have been largely precatory.

The proposed guidelines suggest minimum standards for the design and implementation of a risk governance framework. While the proposed guidelines would apply to banking organizations with consolidated assets equal to or greater than $50 billion, once they are effective, they will be influential regarding the risk management practices of smaller banks. The guidelines document (Docket ID OCC-2014-0001) is available here.

The overall goal of the proposal is to help banking institutions in “defining and communicating an acceptable risk appetite across the organization.” The measures should address such things as the capital, earnings, and liquidity that may be at risk on a firm-wide basis, the risk that may be taken in each line of business, and each key risk category monitored by the institution. A bank’s risk management practices should cover the following categories of risk: credit risk, interest rate risk, liquidity risk, price risk, operational risk, compliance risk, strategic risk, and reputation risk.

The proposed guidelines define some organizational units as “fundamental” to the risk management. These units are “front-line units, independent risk management, and internal audit.”

The comment on the role of in-house lawyers came from …


Continue Reading →

Banking & Finance Law Report Top 10: News and Trends from 2013

Posted in Agricultural Lending, Bank Lending, Bank Regulation, Collection and Foreclosure, Commercial Lending, Community Banking, Health Care Lending, Ohio Law, Real Estate

2013 was an active year for the Banking & Finance Law Report. Our authors covered a wide range of topics — from legislative and regulatory changes to court opinions to financing and bankruptcy matters in the healthcare, agricultural and oil and gas industries. To offer a glimpse into the news and trends of the past year, following is a synopsis of the 10 best-read articles of 2013.

1. Major Changes to Affirmative Action Requirements Become Effective March 24, 2014
by Mike Underwood

In just two months, financial institute and other types of employers will need to comply with new affirmative action rules that:

  • Require employers to gather and retain data showing the results of their recruiting and hiring efforts and to set numeric targets for hiring veterans and disabled persons
  • Include significant additional obligations for reviewing, analyzing and documenting good-faith efforts and results
  • Specify that employers must offer applicants the opportunity to self-identify as a covered veteran or disabled person before a job offer occurs

Many employers may face a real challenge identifying and networking with recruiting sources that can refer qualified candidates for their businesses. They also will likely need to adjust data collection, retention, and analysis processes. Read the full article.

2. Ohio Passes Legislation Preventing Recovery on “Cherryland” Insolvency Carveouts in Nonrecourse Loans, Among Other Changes
by Amy Strang

Ohio’s Legacy Trust Act (Am. Sub. H.B. 479), which became effective in March 2013, prohibits the use of post-closing solvency covenants as nonrecourse carveouts in a nonrecourse …


Continue Reading →

Some Big Picture Links

Posted in Bank Regulation

At year-end, when there may be more time and inclination for busy bank executives (and their counsel) to consider the big picture, a look at financial research from your federal bank regulators may provide insight and food for thought. As a place to start, here are two recent examples.

The first is a research project that was devoted to stress tests, and in particular, the use of stress testing in conjunction with the Basel III capital reforms. See Wall, Measuring Capital Adequacy Supervisory Stress Tests in a Basel World, Working Paper 2013-15 (December 2013).

The second is the transcription of a speech describing a modelling project focused on why, from a theoretical point of view, bank balance sheets are constructed the way they are. See Stein, Banks as Patient Debt Investors, given at the American Economic Association/American Finance Association Joint Luncheon, Philadelphia, Pennsylvania (January 3, 2014).…


Continue Reading →

Regulatory Guidance on the Classification of Investment Securities Without Reliance on Credit Ratings

Posted in Bank Regulation, Regulation and Compliance

Recently, the primary federal bank regulators took the latest step in the long and winding road toward the replacement of credit ratings in the analysis of investment securities by insured financial institutions. You will recall this process began with the passage of the Dodd-Frank Act in July 2010 that, in the wake of the financial crisis in 2008, required government regulators of all types to deemphasize the role of credit ratings from the traditional credit rating firms.

The three primary federal bank regulators — the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation — in November issued regulatory guidance in the form of an agreement among themselves regarding the appropriate approach to the asset classification of investment securities for regulatory purposes. The guidance applies to national banks, state-chartered banks, and state- and federally-chartered savings associations, and supersedes previous guidance from 2004.…


Continue Reading →

Ohio Financial Institutions Tax – Draft Regulations

Posted in Bank Regulation, Tax Law

The Ohio Department of Taxation recently released draft administrative regulations (the “Regulations”) designed to implement the new Ohio financial institutions tax. The new tax takes effect Jan. 1, 2014 and replaces the corporation franchise tax and dealers in intangible tax, which financial institutions have historically paid in Ohio.

The Regulations state that the tax has been designed based upon two fundamental concepts:

  1. The tax return will be reported on a consolidated basis at the highest level of ownership rather than on a separate entity basis.
  2. The equity of the consolidated reporting group will be based upon generally accepted accounting principles reported to the appropriate federal regulatory agency rather than on a federal income tax basis.

The most significant aspects of the Regulations deal with how financial institutions will file tax returns to pay the tax. Bank organizations that are owned through a holding company structure will report the equity of the holding company and all of the entities over which the bank holding company exercises significant influence on a form called an “FR Y-9.” A financial institution that is required to file the FR Y-9C pursuant to Federal Reserve Board regulations will instead report the total equity capital from its FR Y-9C on its Ohio financial institution annual tax return.…


Continue Reading →

Basel III Capital Rules and Community Banks

Posted in Bank Regulation

When the new capital rules were issued this summer, there was no dearth of comment and analysis. The federal banking regulators took pains to emphasize how community bankers were treated and much of the 971 page release parsed the distinctions between “advanced approaches” organizations and community banks.

In general, the basic conclusion is that the community banks could have done much worse, although there are a number of critical concerns that remain. Here is an outline of how some of the important issues under the final Basel III Rules were resolved:…


Continue Reading →

Hot topics affecting your bank

Posted in Bank Regulation, Commercial Loans and Leases, Labor Law

From time to time we deviate from our normal prose on the banking and finance industry and give you, our reader, insight into other areas of the law that impact your business. A recent post regarding overhauling the Ohio employee-friendly employment discrimination law, Senate Bill 383, tops our list of quality reading material.

The post, ‘Senate Bill 383 is an Ohio employer’s wish list,’ from our Employer Law Report blog discusses significant amendments introduced to the Ohio Senate. In particular, Sara Hutchins Jodka goes into detail portions of the bill including defining employers to exclude managers and supervisors, limiting the statue of limitations to 365 days for discrimination and retaliation claims and put a statutory cap on noneconomic and punitive damages.…


Continue Reading →

Dodd-Frank Act Anniversary

Posted in Bank Regulation

In July the second anniversary of the signing of the Dodd-Frank Act passed, giving community bankers an opportunity to consider where things stand. For some banking institutions, particularly larger ones, it has been an active two years even though at least half of the regulatory requirements of the Act remain to be finalized. For smaller institutions, as will become clear, the action appears to be just beginning.

The sweeping overall scope of the Act is underscored when one considers there have been significant delays to much of the parts and pieces of the regulatory actions required under the Act. Yet much has been done.  According to various reports, there have been more than 100 finalized regulations under the Act and, there has been public comment requested on nearly as many significant proposals. 

The most critical regulations for smaller financial institutions are those proposed in recent months: new regulations on capital adequacy and new consumer lending regulations from the Consumer Financial Protection Bureau, the formation of which is thought to be one of central accomplishments of the Act.…


Continue Reading →

FFIEC Statement on Outsourced Cloud Computing

Posted in Bank Regulation

Financial institutions should apply the same risk management strategies and considerations to outsourced "cloud computing" activities as are required with more traditional forms of outsourcing, according to a statement issued July 10th by the Federal Financial Institution Examination Counsel (FFIEC).

The FFIEC’s statement explains that while there is no universal definition of "cloud computing," it generally involves a migration from owned resources to shared resources, through which a user can access and receive information technology services on demand from third-parties via the online "cloud." Cloud computing can be used to provide infrastructure, computing platforms, and software, and a cloud may be operated privately by one organization, as a community cloud shared by several organizations, as a public cloud available to any paying customer, or as a hybrid combination of two or more private, community or public clouds.

Although a financial institution’s use of outsourced cloud computing can have many potential benefits, such as cost reduction, flexibility and speed, the FFIEC statement indicates that the fundamentals of risk and risk management defined in the FFIEC Information Technology Examination Handbook (IT Handbook), particularly the Outsourcing Technology Services Booklet (Outsourcing Booklet), are as applicable to cloud computing as to other forms of information technology outsourcing. The nature of a cloud computing environment can increase the complexity of issues a financial institution may face with regard to information security, legal and regulatory considerations, and business continuity of outsourced operations. Financial institutions should perform adequate due diligence reviews, practice good vendor management, and use …


Continue Reading →

Operating Subsidiaries – Protecting the Bank When Taking Title to Real Estate

Posted in Bank Regulation

With certain limitations, a bank may own real estate it acquires by foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in satisfaction of a debt previously contracted. Ownership of such property can create potential liability for the bank in a number of ways, though most commonly from personal injuries which occur on the property (another possibility with the potential to be very costly is environmental liability). While insurance can mitigate much of this risk, it has its limitations and a bank has options to be further protected.

One way to mitigate the risk is for a bank to own such property in an operating subsidiary wholly owned by the bank. Ownership of the property in an operating subsidiary would help limit the liability exposure to the assets of the subsidiary and protect the bank itself. Thus, the bank’s income and assets from other activities are insulated from the risks associated with property ownership. While common for large banks, many small banks do not have this level of protection in place, often because of the administrative burden associated with establishing a wholly owned subsidiary.

Under Ohio law, establishing an operating subsidiary requires a bank to submit a letter of notification to the superintendent of financial institutions in accordance with OAC 1301:1-3-10(B). The bank then must wait thirty (30) days for the superintendent to review the notification and, unless notified to the contrary, may establish the operating subsidiary for holding property. The operating subsidiary will be subject to the same …


Continue Reading →

CFPB Releases Examination Manual

Posted in Bank Regulation, Consumer Law, Consumer Law and Litigation, Regulation and Compliance

In October, the Consumer Financial Protection Bureau published its first supervision examination manual which will be of interest to bankers and other financial service executives.

On one level, the manual is fairly pedestrian and may contain little surprising in that most bankers have a fairly extensive appreciation of (and experience with) an examination process. And, of course, the Bureau has direct supervisory authority only over the roughly 100 large banks, thrifts, and credit unions that have assets more than $10 billion.

What should be interesting to many bankers, however, is the insight the Manual provides into the examination approach of the Bureau, an approach that will doubtlessly influence and inform the practices and procedures of all other financial institution regulators, large and small. Essentially, the Manual describes the Bureau’s process for risk assessment: first there will be the establishment of the inherent risk of a particular "product" line for consumers and then there will be an assessment of an entity’s set of quality controls to manage and mitigate the risks.…


Continue Reading →

New Interim Final Rule Governing Garnishment of Accounts-76 Fed. Reg. (Feb. 23, 2011) (to be codified at 31 C.F.R. pt. 212)

Posted in Bank Regulation

A new interim federal rule effective May 1, 2011 protects from garnishment a portion of certain federal benefits direct-deposited into judgment debtor’s account within two months of the garnishment. The interim rule requires banks, credit unions and other financial institutions to change the way they process and respond to garnishments of accounts containing federal benefits, including Social Security benefits, SSI benefits, Civil Service Retirement benefits, Federal Employee Retirement Systems, VA benefits and Federal Railroad retirement, unemployment and sickness benefits. The interim rule does not protect from garnishment federal benefits paid into a judgment debtor’s account by check, cash, money order or other non-direct deposits, and the interim rule preempts inconsistent State or local garnishment laws and exempts certain federal and state child support garnishments.

The interim rule addresses the common practice of financial institutions that freeze a judgment debtor’s account in response to a garnishment without examining whether the account contains exempt federal benefit payments. This practice can leave judgment debtors who receive federal benefits without income or the ability to meet their immediate financial needs.…


Continue Reading →

Patent Reform and Financial Institutions

Posted in Bank Regulation

The U.S. Senate overwhelmingly passed (95–5) the America Invents Act (formerly titled the Patent Reform Act of 2011) (S.23 or AIA), on March 8, 2011. This legislation represents a major patent reform initiative and is quite possibly the most significant patent reform since the 1952 Patent Act. This legislation could have significant impact on financial institutions.

The headline change ofthe AIA is that a patent would be awarded to the first-to-file a patent application rather than to the first-to-invent the invention. This should favor large financial institutions who are regularly active in patenting innovations because they will have the resources and systems in place to win a race to the patent office. Small financial institutions or those not regularly active in patenting innovations will need to adapt to more quickly react to their innovations or risk losing the race. Perhaps a more significant impact on financial institutions due to this change is that the first-to-file system makes prior users vulnerable to patent infringement. A financial institution can use an innovation for years as a trade secret and then be liable for patent infringement when another party patents that innovation. This could be very problematic in the financial industry which has largely considered its business methods and software as either unpatentable or better protected by trade secrets. As a result, the financial industry should be lobbying for prior user rights to be added to this legislation.

Other aspects of the AIA significant to banks and financial institutions are the creation of a proceeding to challenge business method patents …


Continue Reading →

Whistleblowing Galore Under the Dodd-Frank Act

Posted in Bank Regulation

Congress’ recent passage and President Obama’s signing of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” provides significant incentives for financial industry whistleblowers to assist the government root out fraudulent practices and other unlawful conduct in the industry. Supporters of the Dodd-Frank Act are praising its expansive whistleblower protections as a necessary good corporate-citizen tool to help the government ensure a financial crisis like 2008 never happens again.

Under the Dodd-Frank Act, whistleblowers in publicly traded companies are provided significant personal financial incentives to disclose to the SEC “original” information concerning securities laws violations occurring within their companies. “Original” information means the information must be derived from the whistleblower’s independent knowledge or analysis and cannot be known to the SEC from any other source. The available financial reward — or “bounty” — available to a qualifying whistleblower will range from 10% to 30% of any financial recovery in excess of $1,000,000 that the SEC obtains from the targeted corporation, including the amount of any penalties, disgorgement and interest.…


Continue Reading →

Wall Street Reform Legislation Requires Public Companies to Revise Clawback Policies

Posted in Bank Regulation

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Although the Act focuses primarily on the financial industry, the Act contains a section that requires the Securities and Exchange Commission (“SEC”) to publish rules that direct the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement an appropriate clawback policy.

Specifically, a clawback policy must provide that an issuer that is required to restate its financial statements because of a material financial reporting violation must recover from certain executive officers the amount in excess of what would have been paid to them under the issuer’s restated financial statements. No showing of misconduct or negligence on the part of the affected executives is required. In other words, public companies must recover the excess, if any, between the actual pay-out under the original financial statements and the amount payable under the restated financial statements. This policy must apply to any current or former executive officer who received incentive-based compensation (including stock options) during the three-year period preceding the date on which the restatement is required. The Act also requires that companies disclose this clawback policy to shareholders. Any former employee who was an executive officer at any time apparently will be subject to the clawback policy without regard to whether he or she was an executive officer at the time of the restatement or whether the compensation that was …


Continue Reading →

Dodd-Frank Act: An Overview for Community Banks

Posted in Bank Regulation

Trying to understand the whole of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, is tough. The Act is long, complex and if you are focusing directly on the credit crisis, the Act is not particularly intuitive. Much of the Act has only a tangential relationship to the core purpose of the bill, preventing a reoccurrence of the credit crisis. Here is a brief, title by title summary to help, and along the way, I will point out the more important sections for community bankers.

I. Financial Stability – addresses the core purpose of the bill by creating a new oversight regulator, the Financial Stability Oversight Council. This council of regulators will monitor the financial system for "systemic risk" and will determine which entities pose significant systemic risk. Generally speaking, it will make recommendations to regulators for the implementation of the increased risk standards, also known as prudential regulation, to be applied to bank-holding companies with total consolidated assets of $50 billion or more and to designated nonbanks.…


Continue Reading →

New Data Breach Strategy Uses Banks and Telephone

Posted in Bank Regulation

Is your phone ringing off the hook? Then you’d better check your bank account. According to the Federal Bureau of Investigation, a new “telephone denial-of-service” attack is combining high-tech and low-tech fraud techniques to steal money from the bank accounts of unsuspecting victims.

As reported in the alert issued by the FBI, the scam begins with the suspect obtaining a victim’s personal and banking information, perhaps including bank account numbers, PINs, and passwords. Scammer can obtain a victim’s personal and banking information in a variety of ways, such as through phishing emails, social engineering tactics, or malware surreptitiously installed on a person’s computer.

Once the scammers have the victim’s personal information, they begin tying up the victim’s telephone line by using automated resources to place hundreds or thousands of calls to the victim’s telephone, not unlike a Distributed Denial of Service attack aimed at a computer network that overwhelms a computer with requests for information resulting in a slowing or failure of the network.

While the victim is busy dealing with the onslaught of telephone calls, the scammers quickly drain the victim’s bank account using the previously obtained personal and banking information to gain access to the account. If the banking institution calls its customer to verify the transactions they find the victim’s telephone line to be busy. In some cases, scammers are brazen enough to change a victim’s contact information listed with the bank. As a result, calls from a bank to verify fraudulent transactions are redirected to …


Continue Reading →

Regulatory Changes for Money Market Funds

Posted in Bank Regulation

On February 23, 2010, the Securities and Exchange Commission began what may become radical revisions to the regulation of money market funds when it adopted a number of significant changes to its rules governing money market funds. The changes were accompanied by a statement from the SEC chairman that indicated more regulatory change is on the way. SEC Release No. IC-29132 (Feb. 23, 2010) is online.

The new rules are generally intended to increase investor protections by increasing regulatory oversight of money market funds. For example, among other things, the new rules establish:

  • liquidity requirements for money market funds (a daily cash or equivalent requirement of 10 per cent);
  • a new restriction on the ability of funds to acquire illiquid securities;shorter maturity limits for securities held by money market funds;
  • “know your investor” procedures requiring funds to hold liquid securities to meet foreseeable redemptions;
  • a requirement for periodic stress testing to assess ability of a fund to maintain a stable net asset value upon the occurrence of events such as a sudden increase in interest rates;
  • andnew disclosure requirements including a monthly report of holdings to the Commission and a monthly posting of holdings online.

In many of these areas there previously was little or no regulation. The rules are effective May 5, 2010, but a number of the new requirements are phased in over two years, including a new requirement that funds be able, as a matter of processing capability, to process transactions at prices other than a stable …


Continue Reading →

Obama Proposes No Proprietary Trading for Financial Institutions

Posted in Bank Regulation

January 21, 2010, President Obama proposed reforms to the financial system designed to ensure no bank, or financial institution that contains a bank, will own, invest in, or sponsor a hedge fund, private equity fund, or proprietary trading operation for the bank’s own profit. The new reforms, known as the Volcker Rule after former chair of the Federal Reserve Board, Paul Volcker, are intended to prevent banks from engaging in what are now perceived as risky investments.

How the Volcker Rule will be drafted and applied is unclear. At a minimum it seems that banks may have to halt investments that use solely the bank’s capital. Banks may therefore have to divest their proprietary trading desks, although most banks have significantly smaller proprietary trading desks than they did prior to the economic crisis.

What constitutes proprietary trading operations under the Volcker Rule is unknown. For example, do such activities include the practice of facilitating trading for clients and investing alongside clients? Additionally, it is unclear whether only wholly-owned bank funds would be prohibited or any bank involvement in a hedge fund or private equity fund above a certain threshold. One approach, which would be a broad interpretation of the Volcker Rule, would be to prohibit any trading activity that could affect a bank’s balance sheet.

President Obama has pledged to work with Congress to implement the Volcker Rule as part of a comprehensive financial reform bill. The dynamics of the bill should have a direct effect on whether some banks …


Continue Reading →