A week never goes by without some bank regulatory developments, and this last week was no exception.
The week began with the realization that, the prior Friday (May 11), the Federal Financial Institutions Examination Council released examination procedures for banks, thrifts, credit unions, and U. S. branches and agencies of foreign banks for compliance with beneficial ownership and customer due diligence (“CDD”) requirements of the rule issued by the Financial Crimes Enforcement Network (“FinCEN”) for which mandatory compliance became effective that day. As readers know, that rule requires identification and verification of the identity of beneficial owners of new accounts of “legal entities,” which include any entity created by the filing of a public document, as well as general partnerships and similar entities formed under foreign laws. Verification is to be within a reasonable period of time after the account is opened, and, if attempts to verify fail, the account may have to be closed. Two types of beneficial ownership information are to be collected: a control prong (a senior manager who must be identified) and an ownership prong (any individual who directly or indirectly owns 25% or more of the equity).
Banks are entitled to rely on information provided by the legal entity customer if they have no knowledge that would call that information into question. If a bank suspects that equity holders are trying to avoid the reporting threshold, it may be required to file a suspicious-activity report.
Banks are to collect, at a minimum, the name, address, date of birth, and taxpayer identification number for each beneficial owner. As with customer identification programs, records are to be retained for five years after the account closes, and the bank may rely on other regulated financial institutions pursuant to contracts requiring annual certifications.
FinCEN’s beneficial ownership rule requires a bank to collect beneficial ownership information regardless of the legal entity customer’s risk profile.
The CDD examination procedures suggest that a bank is to conduct ongoing monitoring, on a risk basis, not only to maintain information regarding beneficial owners, but also to update that information. Should the bank become aware, as a result of its ongoing monitoring, that beneficial ownership information has materially changed, it should update that information accordingly. A change in ownership is a factor that might be relevant in determining whether it is appropriate to review a customer relationship. Beneficial ownership information also is to feed into customer risk profiles.
In addition, the CDD examination procedures suggest that, in the case of higher-risk-profile customers, a bank may consider obtaining information on the occupation or type of business of individuals with ownership or control over the account.
Then, on Tuesday, the Senate Banking Committee conducted a hearing to consider the nominations of Dr. Richard Clarida from PIMCO and Michelle Bowman, the Bank Commissioner of Kansas, to be members of the Federal Reserve Board. Dr. Clarida would serve as vice chairman for monetary policy. Commissioner Bowman would provide community banking experience to the Board.
Dr. Clarida repeatedly explained that, while he favored tailoring and efficiency in regulation, he wishes to preserve improvements in financial stability and soundness and does not wish to put the system at risk in an unnecessary way.
Commissioner Bowman, in response to questions from the Committee’s Ranking Member, Senator Sherrod Brown (D-OH), testified that her family’s bank had been very highly capitalized (Tier 1 leverage ratio of more than 20%), but still served the community well.
Senator Tim Scott (R-NC) asked the nominees how they would integrate state-based insurance regulation into their work, and Commissioner Bowman responded about the importance of dialogue. The Senator then mentioned that an insurance company may have a small bank and asserted that, if the entire insurance company is treated as if it were a bank, costs to policyholders increase unnecessarily. He urged the nominees to learn more about that issue. Senator Thom Tillis (R-NC) subsequently expressed agreement with Senator Scott.
Senator Jack Reed (D-RI) asked whether smaller bank holding companies should be required to have someone with cyber expertise. The nominees generally agreed with that concept.
Senator Tillis asked whether the regulatory reform bill that the Senate passed is the right way to tailor regulatory burden. (As explained below, that bill would exempt certain smaller banks from regulations imposed on the largest banks.) Commissioner Bowman agreed, citing the example of a bank that she regulates in Kansas that has $7 million in assets and a staff of three struggling to comply with the same regulations that apply to larger banks. The Senator speculated that one of the three was in regulatory compliance, and Commissioner Bowman responded that that one person probably devoted 100% of his or her time to compliance. Senator Tillis then asked whether the regulatory burden imposed by the Dodd-Frank Act had contributed to the reduction in the number of community banks, and Commissioner Bowman acknowledged that regulatory burden was part of that. Ranking Member Brown subsequently argued that there is no way to ascribe to the Dodd-Frank Act an acceleration of the decline in the number of community banks.
Senator Robert Menendez (D-NJ) asked whether the presence of physical branches may be the only way to help meet the credit needs of low- and moderate-income communities. The nominees responded by expressing opposition to unlawful discrimination and support for the Community Reinvestment Act (“CRA”).
Senator Elizabeth Warren (D-MA) asked whether Dr. Clarida thought that it was appropriate, as bank regulators have proposed, to reduce capital requirements for the largest bank-holding companies, which are buying back their stock. Dr. Clarida responded that he would prefer to wait to see the public comments on the proposal, but would be reluctant to give up gains in stability that have been achieved.
Senator Catherine Cortez Masto (D-NV) asked Commissioner Bowman what it would have taken for the Commissioner’s bank to earn an outstanding CRA rating. Commissioner Bowman responded that most banks do not have a clear understanding as to precisely what activities qualify for credit under the CRA.
Also on Tuesday, it was reported that the House of Representatives will vote this Tuesday, May 22, on the financial regulatory relief bill that passed the Senate in March with bipartisan support. The Senate bill raises the threshold at which banking organizations are deemed to be in need of enhanced prudential supervision from $50 billion in assets to $250 billion; the bill also would exempt banks with less than $10 billion in assets from the Volcker Rule and certain other rules. The bill is expected to be approved by the House. The Senate bill was delayed in the House as Congressmen sought additions to relieve regulatory burden even more; however, those Congressmen agreed to move the bill when Senate leaders agreed to consider further regulatory relief legislation separately.
On Wednesday, The Wall Street Journal reported that federal bank regulators and the Securities and Exchange Commission are considering changes to Volcker Rule regulations; those “Volcker 2.0” changes could be published as soon as by the end of the month.
The article suggested that definitions of permitted hedging and market-making activities may change, as would compliance requirements for smaller banks. The effort will also reportedly clarify the regulations’ requirements, possibly affect a requirement that a bank’s chief executive officer attest to compliance, and change the treatment of swaps and clearing activities.
Also on Wednesday, FinCEN issued a ruling to provide 90-day exceptive relief from its beneficial ownership rule for financial products and services that roll over or renew and were originally established before the rule’s mandatory compliance date of May 11, 2018. During the 90 days, FinCEN will determine whether permanent exceptive relief should be granted for such products.
It is rare when there are no bank regulatory developments.