This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

  • Financial regulators: guidance does not have the force of law. The five regulatory agencies with jurisdiction over most banking and financial services issues have sought to clarify the role of supervisory guidance. "Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance," states a September 11 interagency statement from the Fed, FDIC, OCC, National Credit Union Administration and CFPB (officially known as the Bureau of Consumer Financial Protection). "Rather, supervisory guidance outlines the agencies" supervisory expectations or priorities and articulates the agencies' general views regarding appropriate practices for a given subject area." The agencies say they will limit the use of numerical thresholds or other "bright-lines" in supervisory guidance, with thresholds intended to serve only as examples, not requirements. Citations issued as the result of examinations will be based only on violations of law or regulation, or non-compliance with enforcement orders or other enforceable conditions. The regulators stressed that seeking public comments on supervisory guidance does not mean that such guidance is intended to have the force of law. And they said they will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will continue to make the role of supervisory guidance clear in their communications to examiners and to supervised institutions, encouraging those firms to discuss their questions with the agencies. Members of Congress have expressed concerns that agency guidance documents have often been treated as de facto rules and regulations and have called on the agencies to make clear that such guidance is not binding.

SEC agrees. Two days after the five banking regulatory agencies issued their statement, SEC Chairman Jay Clayton issued a Statement Regarding SEC Staff Views in which he said communications – including written statements, compliance guides, letters, speeches, responses to frequently asked questions and responses to specific requests for assistance – "are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties," noting that such statements "frequently include a disclaimer underscoring the important distinction between the Commission's rules and regulations, on the one hand, and staff views on the other." He said he has instructed the Division of Enforcement and the Office of Compliance Inspections and Examinations to further emphasize this distinction to their staff, and that SEC officials "will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments."

  • New York renews litigation to block OCC's fintech charters. The NYDFS has filed suit against the OCC to prevent the agency from offering a Special Purpose National Bank charter for companies – especially those in the fast-emerging financial technology sector – seeking to engage in non-depository banking. The new charter, announced by the OCC in July, is intended to allow fintech startups the opportunity to obtain charters under federal oversight rather than under the current state-by-state approach to regulation. But in a September 14 complaint filed in the US District Court for the Southern District of New York (Vullo v. Office of the Comptroller of the Currency et al, 18-cv-08377-VM), New York Financial Services Superintendent Maria T. Vullo argues that the OCC charter is "lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State." The suit further argues that the state's financial consumers would be put "at great risk of exploitation" because of "OCC's reckless folly." In a related development, the Conference of State Bank Supervisors announced on September 12 that it will also file suit against the OCC "at a time deemed appropriate." Both NYDFS and CSBS had challenged OCC in 2017, before the charter proposal was officially finalized, but federal courts determined that the litigation was not yet ripe for consideration since the policy was not yet in effect and the plaintiffs could not claim injury since no charters had been issued. OCC has not yet received any applications for the new SPNB charters.

Otting fires back. Comptroller Joseph Otting responded forcefully to the lawsuit in a September 19 op-ed in American Banker titled "Why do state regulators want to limit consumer choice?" Otting said OCC's decision to accept applications for the charters promotes innovation, creates more choices for consumers and business, and "is also good for America's dual banking system." He dismissed as "without basis" the arguments of "the few critics of OCC's decision" that the charters will undermine consumer protection, that state regulators – whose requirements, he noted, "vary wildly" from state to state – are better positioned to supervise financial innovation, and that OCC lacks proper authority. "The complaints about the OCC's decision really come down to defending turf and licensing revenue of a few big states at the expense of economic opportunity for others," Otting wrote." What is masquerading as concern for the health of the nation's banking system is really a protectionist effort to set federal standards and limit competition for state institutions."

  • FSOC grants Zions' petition to lose SIFI designation. The Financial Stability Oversight Council announced on September 12 its final decision to remove Zions Bank's designation as a systemically important financial institution, marking the first time a bank has successfully petitioned FSOC on ending post-crisis supervision. The council voted unanimously to grant the petition from ZB, N.A. (Zions) to no longer be considered a SIFI under section 117 of Dodd-Frank. As a result of the Council's decision, ZB will not be treated as a designated nonbank financial company upon completion of its proposed merger with its parent bank holding company, Zions Bancorporation. "Zions engages in limited capital markets activities, presents minimal fire sale risks, uses a simple operational structure, and is subject to extensive regulation and supervision," Treasury Secretary Steven T. Mnuchin, who chairs the council, said in a September 12 press release. "The Council determined that there is not a significant risk that Zions could pose a threat to U.S. financial stability, and I am pleased that the Council used its authority to promote regulatory efficiency."
  • House passes bill to tailor supervision of insurance-focused S&L holding companies. The House of Representatives on September 12 approved, by a voice vote, bipartisan legislation that would remove the Fed from examining or applying supervisory guidance to an insurance savings and loan holding company, or any subsidiary (including a bank subsidiary) of the SLHC, if it meets applicable state insurance and Fed capital standards. The State Insurance Regulation Preservation Act (HR 5059), sponsored by Representatives Keith Rothfus (R-PA) and Joyce Beatty (D-OH), would affect insurers such as State Farm, USAA and TIAA that were put under Fed oversight after their previous federal regulator, the Office of Thrift Supervision, was merged with other regulatory agencies under Dodd-Frank and ultimately ceased to exist in 2011. Although Senate leaders have not indicated when they would consider the measure, the fact that it sailed through the House without controversy would seem to bolster its chances of moving in the upper chamber. "The lack of clarity regarding how Fed supervision of these insurers should complement, rather than supplant, state regulation has led to regulatory inefficiency, duplication of effort, and higher compliance costs," Representative Rothfus said in remarks on the House floor. "Bank-centric Fed supervision has also been a poor fit for companies that are primarily in the insurance business and it has not been consistent with the actual risks posed by ISLHCs."
  • Financial Services Forum offers recommendations on living wills. An economic policy and advocacy group led by the CEOs of the eight largest and most diversified US-based financial institutions is calling on regulators to improve the current resolution planning process to promote efficiency. In a September 14 comment letter to the Fed and the FDIC, the Financial Services Forum urged regulators to recognize that the Single Point of Entry strategy that these firms have adopted – whereby if the institution should fail, only the parent holding company would enter bankruptcy, leaving operating subsidiaries (often in other jurisdictions) to continue unaffected – "is the most effective way to resolve a large financial institution in an orderly manner." The Forum also called on the agencies to formalize a two-year submission cycle for holding company resolution plans in their regulations; eliminate the separate requirement for insured depository institution plans; avoid using the resolution planning process as a means to impose heightened capital and liquidity standards; and consolidate all applicable resolution planning guidance. "In light of the progress that has [been] made to strengthen the financial system and the resiliency and resolvability of our member institutions, these adjustments are warranted and appropriate to strike the right balance between financial stability and economic growth," Forum CEO Kevin Fromer said. The Forum states that its member institutions "have significantly enhanced their safety and soundness and improved their capital and liquidity since the post-crisis financial regulatory framework was implemented." The living wills are intended to provide a detailed roadmap of how supervised financial firms would execute a rapid and orderly resolution in the event of material financial distress or failure.
  • FSOC to provide more details on non-bank SIFIs supervision. A senior Treasury Department official has reportedly indicated that the FSOC will publish more details in the coming weeks on how it plans to identify activities that pose stress to the financial system, rather than the current approach of targeting specific non-bank financial institutions designated as systemically important for enhanced oversight. In September 12 remarks at the Exchequer Club in Washington reported by American Banker and Politico, Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, said FSOC was moving toward "an activities-based approach to designation … as opposed to focusing exclusively on the designation of an individual entity." The FSOC had initially designated four non-banks as SIFIs, but, as noted above, Prudential is the only non-bank still designated. A recommendation for the activities-based designation was included in a November 2017 FSOC report, one of a series issued pursuant to President Trump's April 2017 presidential memorandum on financial services regulatory reform.
  • FDIC's Gruenberg opposes reduction of capital requirements for major banks. FDIC board member Martin Gruenberg has expressed his "serious concerns" about a proposal by the Fed and the OCC to loosen the supplementary leverage ratio, an enhanced version of which applies to eight large U.S. banks considered crucial to the functioning of the global financial system. In April, the Fed and OCC issued a joint notice of proposed rulemaking seeking to tailor the leverage standard to the risk-based capital surcharge of the firm, which is based on the firm's individual characteristics. Currently, firms that are required to comply with the enhanced supplementary leverage ratio (eSLR) are subject to a fixed leverage standard. The FDIC, which Gruenberg chaired at the time the proposed rule was rolled out, did not join with the other agencies in getting behind the proposal. However, Gruenberg's successor as FDIC chair, Jelena McWilliams, has indicated that she is willing to re-evaluate the rules on bank capital. McWilliams said in an August 6 interview with the Wall Street Journal that her agency should join with the Fed and OCC to look at the capital rules "with a new eye" and said she has asked staff for data explaining FDIC's position on the issue. But Gruenberg, in a September 6 speech at the Peterson Institute for International Economics, called for "serious reconsideration" of the Fed-OCC proposal, which he said amounted to "a serious weakening of the post-crisis reforms." He said the eSLR was "the key post-crisis reform that addressed this issue" of buildup of leverage, or reliance on debt, which he said "increased the vulnerability of the financial system and was a critical contributor to the crisis." Gruenberg said that the proposed reduction in capital at the eight G-SIBs would benefit affiliates, parent companies and shareholders, but "make the banks themselves more vulnerable to disruption and failure." He added, "The changes would have the effect of reducing the capital requirement. They are not technical fixes. They would significantly weaken constraints on financial leverage in systemically important banks put in place in response to the crisis."
  • Nellie Liang to be nominated to Fed Board; Clarida sworn in as vice-chair. President Trump on September 19 announced his intention to nominate Nellie Liang to a seat on the Federal Reserve Board of Governors. Dr. Liang served for more than 30 years as an economist at the Fed and established its Division of Financial Stability in 2010. She has been a Fellow at the Brookings Institution since February 2017 and is also a consultant for the IMF's Monetary and Capital Markets Department and a member of the Congressional Budget Office's Panel of Economic Advisors. Her research specialties include financial stability, credit markets, and the intersection of monetary and financial policy. Meanwhile, Richard Clarida was sworn in on September 17 as vice chairman of the Fed board, bringing the number of currently serving Governors to four, out of seven seats. The nominations of Michelle Bowman and Marvin Goodfriend to the board are still awaiting votes by the Senate. President Trump has now put forward nominees for all of the Fed board vacancies that have come up during his presidency, including elevating Jerome Powell (who was originally nominated to the board by President Obama) to the chairmanship.
  • San Francisco Fed names Daly next president. In other Fed personnel news, the Federal Reserve Bank of San Francisco announced on September 14 that Mary C. Daly has been named its next President and CEO. Daly replaces John Williams, who took over as president of the New York Fed in June. Daly has worked at the San Francisco Fed since 1996, and she has been an executive vice president and research director since 2017. She is also the executive chair of the Federal Reserve System's Committee on Research Management.
  • Banking Committee oversight hearing rescheduled for October 2. The Senate Banking Committee hearing to review implementation of the banking deregulation law enacted earlier this year, originally scheduled for September 13, has been moved to October 2. On the agenda to testify are the Fed's Vice Chair for Supervision Randal Quarles, Comptroller of the Currency Joseph Otting, FDIC Chair Jelena McWilliams, and National Credit Union Administration Chair J. Mark McWatters.