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Fed revises Bank Holding Company Supervision Manual
The Federal Reserve Board recently updated sections of the Bank Holding Company Supervision Manual. (Changes to the manual were last made in November 2021.) The manual provides guidance for conducting inspections of bank holding companies and their nonbank subsidiaries, as well as savings and loan holding companies. “The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its nonbanking subsidiaries and its subsidiary banks,” the Fed explained. Included among the changes are updates to sections on the supervision of savings and loan holdings companies; supervision of holding companies with less than $10 billion in total consolidated assets; liquidity planning and positions applicable to large financial institutions; holding company ratings applicability and inspection frequency; supervision of subsidiaries related to nondeposit investment products; control and ownership of bank holding company formations; asset securitization risk management and internal controls; retail-credit classification; supervision of savings and loan holding companies; and Bank Holding Company Act exemptions. A new section—“Formal Corrective Actions”—revises previous guidance to include entities against which the Fed has statutory authority to take formal enforcement actions. The section also provides additional information on enforcement actions for Bank Secrecy Act and anti-money laundering compliance failures, as well as details on interagency enforcement coordination. The section further clarifies that the Fed “does not issue an enforcement action on the basis of a ‘violation’ of or ‘non-compliance’ with supervisory guidance.” Minor technical changes were made throughout the manual as well. A detailed summary of changes is available here.
OCC requests comments on various Volcker Rule requirements
On August 23, the OCC published in the Federal Register a request to renew its information collection titled “Reporting, Recordkeeping, and Disclosure Requirements Associated with Proprietary Trading and Certain Interests in and Relationships with Covered Funds.” Section 13 of the Bank Holding Company Act “generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exceptions . . . that allow certain types of permissible trading and covered fund activities.” As previously covered by InfoBytes, in 2019, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule amending the Volcker Rule to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds.
The OCC is seeking comments specifically related to the reporting, disclosure, documentation and information collection requirements under the rule, including: (i) whether the information collections are necessary for the proper function of the agency and if the information has practical utility; (ii) whether the OCC’s estimates of the burden of the information collections are accurate and the methodology and assumptions used are valid; (iii) measures to enhance the quality, utility, and clarity of the information to be collected; (iv) ways to minimize the burden of information collections on respondents, such as using automated collection techniques or other forms of information technology; and (v) capital or start-up cost estimates, as well as costs of operation, maintenance, and purchase of services to provide information. Comments are due October 24.
Fed updates legal interpretations related to several regulations
On December 30, the Federal Reserve Board added several new frequently asked questions related to legal interpretations of the Board’s regulations, including Regulations H, O, W, and Y, as well as questions concerning covered savings associations. The Fed noted that, unless specified, the FAQs are staff interpretations and have not been approved by the Board. Future revisions or supplements may be released as necessary or appropriate.
- Regulation H: Five new FAQs discuss (i) branch closing procedures and required notices; (ii) the ability to conduct branch activities should a bank relocate its main office; (iii) when a bank may acquire a debt obligation under its general powers to lend under state law; and (iv) public welfare investments made by state member banks involving housing projects with multiple residential buildings.
- Regulation O: A revised FAQ states that banks may not offer discounts on loan origination fees to an insider if the discount is not available to members of the public with one exception: a bank is not prohibited from “extending credit to an insider as part of a benefit or compensation program that (i) is widely available to employees of the member bank and (ii) does not give preference to any insider of the member bank over other employees of the member bank.”
- Regulation W: Thirty-four new FAQs address various topics related to (i) provisions concerning nonaffiliate and affiliate lending and extensions of credit under the attribution rule; (ii) valuation and timing principles; (iii) revolving credit facilities and loan commitments involving nonaffiliates; (iv) asset purchases from affiliates; (v) a bank’s acquisition of another company’s shares and liabilities; and (vi) exemptions.
- Regulation Y: Nine new FAQs discuss (i) circumstances under the Bank Holding Company Act (BHC Act) where “a bank or company that holds bank shares in a fiduciary capacity [would] be considered to have sole discretionary authority to exercise voting rights”; (ii) tying restriction qualifications, exceptions, and safe harbor; (iii) factors considered in the acquisition of bank securities or assets; (iv) trustee powers; (v) filing requirements for persons acquiring ownership or control of shares; (vi) appraisal standards for federally-related transactions; and (vii) rules for engaging in an activity that is complementary to a financial activity. The Fed notes that while these FAQs refer at times to bank holding companies, the FAQs are also applicable to foreign banking organizations that are subject to the BHC Act in the same manner as a bank holding company under the International Banking Act of 1978.
- Covered Savings Associations: Twenty-nine new FAQs address topics related to covered savings associations (CSAs) and companies that control a CSA pursuant to Section 5A of the Home Owners’ Loan Act. Among other things, the FAQs address (i) the scope of Section 5A; (ii) a CSA’s membership in the Federal Reserve System; (iii) filing requirements; (iv) requirements applicable to a CSA or a company controlling a CSA, as well as mutual CSAs and mutual holding companies controlling a CSA; (v) transactions involving a CSA or a company controlling a CSA; and (vi) the termination of an election to operate as a CSA.
OCC conditionally approves conversion of cryptocurrency trust company
On February 5, the OCC announced that it conditionally approved a Washington state-chartered trust company’s application to convert to a national trust bank. According to the OCC, the trust company—which will provide cryptocurrency custody services for clients in a fiduciary capacity—“is currently in the organizational phase of development and will have up to 18 months to meet the terms of its conditional approval before it converts to a national trust bank and begins to operate.” By receiving a national trust bank charter, the trust company will be allowed to provide nationwide services to customers through offices in Seattle, Boston, and New York, and over the internet. The trust company also intends to expand its custody services to support additional types of digital assets beyond cryptocurrencies, including certain tokens and stable coins, and plans to eventually offer, among other things, client-to-client trading and lending platforms. The OCC notes that approval of the conversion is subject to several conditions, including that the trust company “not engage in activities that would cause it to be a ‘bank’ as defined in section 2(c) of the Bank Holding Company Act.”
Fed FAQs clarify bank control structure under BHC and HOLA
On September 30, the Federal Reserve Board issued several frequently asked questions related to its control and divestiture proceedings final control rule that took effect the same day. As previously covered by InfoBytes, in January the Fed revised the bank control framework to clarify the rules used to determine whether a company controls a bank or a bank controls a company pursuant to the Bank Holding Company Act (BHC Act) and the Home Owners' Loan Act (HOLA). Among other things, the Fed notes that it “does not expect” to revisit investment structures that had previously been reviewed prior to the effective date of the control rule, and would not require changes to investment structures “that represent a reasonable interpretation of [Fed] precedent at the time the structure was created.” The FAQs also discuss what constitutes a “limiting contractual right” with respect to a contractual provision between “a first company and a second company that requires the second company to conform its activities to the activities restrictions under the [BHC Act] or [HOLA],” along with whether the control rule differentiates “between limiting contractual rights based on the circumstances under which the right was created or the nature of the document in which the right resides.”
Agencies finalize covered funds changes to Volcker Rule
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.
Fed delays revised control framework until September
On March 31, the Federal Reserve Board (Fed) announced that its control and divestiture proceedings final rule—set to take effect April 1—would be delayed for six months. As previously covered by InfoBytes, the Fed revised the bank control framework to clarify the rules used to determine if a firm controls a bank pursuant to the Bank Holding Company Act and the Home Owner’s Loan Act. The Fed stated that “[t]he delay will reduce operational burden and allow institutions to focus on current economic conditions” created by the Covid-19 pandemic. No changes were made to the final rule, which will now become effective on September 30.
Agencies seek comments on covered funds under Volcker Rule
On February 28, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC issued a notice of proposed rulemaking (NPR) to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule. (Previous InfoBytes coverage of the Volcker Rule here). According to the press release, the proposed amendments “would modify and clarify the regulations concerning covered funds and would address certain related issues, including qualifying foreign excluded funds.” Among other things, the amendments to the regulations would (i) “permit the activities of qualifying foreign excluded funds”; (ii) “revise the exclusions from the definition of covered fund for foreign public funds, loan securitizations, and small business investment companies”; (iii) create exclusions from “covered fund credit funds, qualifying venture capital funds, family wealth management vehicles, and customer facilitation vehicles”; (iv) allow certain transactions that would otherwise be prohibited under the so-called “Super 23A” restrictions; (v) redefine “ownership interest”; and (vi) exclude certain investments from “a banking entity’s calculation of its ownership interest in the covered fund.” Comments in response to the NPR must be submitted by April 1.
Fed clarifies bank control structure under BHC and HOLA
On January 30, the Federal Reserve Board (Fed) issued a final rule to simplify and increase the transparency of existing rules for determining if a company has control over a banking organization under the Bank Holding Company Act (BHC Act) and the Home Owners’ Loan Act (HOLA). According to the Fed, the final rule—proposed last April (covered by InfoBytes here)—establishes “a comprehensive and public framework to determine when a company controls a bank or a bank controls a company” through the use of several key factors including “the company’s total voting and non-voting equity investment in the bank; director, officer, and employee overlaps between the company and the bank; and the scope of business relationships between the company and the bank.” A tiered presumptions visual accompanied the final rule, which outlines the determination of control based on the level of voting ownership at four different thresholds: less than 5 percent; 5 to 9.99 percent; 10 to 14.99 percent; and 15 to 24.99 percent. In addition, the Fed noted that the final rule “generally applies the same standards in the context of the BHC Act and HOLA” in terms of the definition of “control.” Federal Reserve Governor Lael Brainard issued a statement supporting the final rule, but stressed the importance of monitoring banking organizations’ ownership structures in light of the “control framework” and industry trends in order to identify issues affecting financial stability and competition. Brainard further emphasized that the “control framework” should be monitored in terms of how it interacts with other regulations involving ownership thresholds. The final rule takes effect April 1.
Agencies to modify Volcker Rule’s “covered funds” requirements
On January 30, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC issued a notice of proposed rulemaking to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule (Rule). As previously covered by InfoBytes, last fall the regulators signed off on final revisions to the Rule to simplify and tailor its restrictions on a banking entity’s ability to engage in proprietary trading and own certain funds. Specifically, the proposed amendments would modify the restrictions for banking entities investing in, sponsoring, or having certain relationships with covered funds, including simplifying provisions related to foreign public funds, loan securitizations, and small business investment companies. The amendments would also, among other things, (i) limit the extraterritorial impact of the Rule on certain foreign funds offered by foreign banks to foreign investors; (ii) modify and propose several existing exclusions to allow banking entities to invest in or sponsor certain types of funds—subject to certain safeguards—such as credit funds, venture capital funds, family wealth management vehicles, and customer facilitation funds; and (iii) permit intraday extensions of credit, payment, clearing, and settlement transactions between a banking entity and covered funds the banking entity advises or sponsors, or with which the banking entity has certain other relationships. Comments will be accepted through April 1.