Financial Institutions

Image by Gerd Altmann from Pixabay

How did we get here?

On September 11, 2020, the SEC adopted new rules to “update and expand the statistical disclosures” that bank holding companies, banks, savings and loan holding companies, and savings and loan associations are required to provide to investors. The old regime – Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” – had not been meaningfully updated for more than 30 years.  There have been all sorts of developments since then, including new accounting standards, a financial crisis, and new disclosure requirements imposed by banking agencies. So it’s not surprising that the SEC began questioning the need to make changes to Industry Guide 3, requesting comments in 2017 and again with a proposed rule in September 2019.

So, what’s new?

The changes were implemented in part to eliminate overlaps with disclosures already required under SEC rules, U.S. GAAP, and International Financial Reporting Standards (“IFRS”), as well as to incorporate new accounting standards. Under the new rules, disclosures are required for each annual period presented (as well as any additional interim period should a material change in the information or trend occur), aligning these disclosures with the annual periods for financial statements.
Continue Reading Out with the old, in with the new: Banks and S&Ls must now provide updated and expanded statistical disclosures

Image by Gerd Altmann from Pixabay

From where I sit, the SEC under the chairmanship of Jay Clayton has generally done a good job for public companies.  It has adopted a number of rules and amendments that make disclosure more effective without appreciably adding to – and in some cases reducing – the burdens on public companies.  Examples include streamlining financial disclosure requirements, rationalizing the definitions of “smaller reporting company”, “accelerated filer”, and “large accelerated filer”, and revising the rules governing financial statements of acquired and disposed businesses (although the latter do not take effect until 2021). And let’s not forget the very recent rule changes affecting proxy advisory firms, including a critical requirement that those firms provide companies with their voting recommendations.

While I wish that the SEC had also focused on proxy plumbing, it’s still a pretty good record, and it’s only a partial listing.

However (you knew there would be a “however”), I’m profoundly disappointed in the SEC’s proposal to “fix” Form 13F – the form on which large investment managers report their equity holdings of public companies.  While it’s nice that the SEC has turned its attention to a form that has long been in need of updating, the proposal seems to me to be unacceptable in at least two major respects.
Continue Reading 13F proposal — the SEC can (and should) do better

Photo by TaxRebate.org.uk

For several years we’ve been advocating that state-chartered banks that do not require a bank holding company should ditch the holding company structure. It now appears that several banks are paying attention. This morning, The Wall Street Journal published an article spotlighting banks that have recently dispensed with their bank holding company in an effort to reduce their regulatory burden.

Bank holding companies previously gained popularity as a means by which banks could conduct business across state lines when states had rules about interstate banking. Banks also used holding company structures to bolster their regulatory capital, including through the issuance of trust preferred securities. However, with the passage of Dodd-Frank, which effectively eliminated prohibitions on interstate banking and the ability of banks to count newly issued trust preferred securities for regulatory capital purposes, the reasons for smaller banks to maintain a holding company structure are fewer and farther between now more than ever.

Stand-alone bank structures can offer several advantages over bank holding company structures. For example, as compared to a bank holding company, banks can raise capital at a substantially lower cost due to the exemptions available under the Securities Act of 1933 for securities issued by a bank. Related to this, banking organizations that are publicly held, or are seeking to become publicly held, have the advantage of filing their Exchange Act filings and reports with the FDIC as opposed to the SEC. Among other advantages, the FDIC’s reporting system does not require the payment of any fees and is available 24 hours a day, seven days a week. Certain filings with the SEC require the payment of filing fees and may only be filed during the times that the EDGAR filing system is open. Speaking of EDGAR, one of the other benefits of not filing with EDGAR is that it is more difficult for plaintiff lawyers to monitor the FDIC’s filing system to bring strike suits in connection with announced mergers. There are several software programs or services that can be used to monitor merger-related filings on EDGAR, but we aren’t aware of any such programs or systems for the FDIC’s system.

Reducing regulation, or at least the number of regulators, is also a key advantage to operating as a stand-alone bank. A publicly held bank holding company with a state-chartered non-member bank
Continue Reading Our organizational suggestions for bank holding companies has gone mainstream!

Earlier this month, the Federal Reserve proposed changes to its guidance on corporate governance for banking organizations.  The proposals suggest a new approach to corporate governance that could extend beyond the banking industry; among other things, they suggest that boards should spend more time on more important matters, such as strategy and risk tolerance, than on compliance box-ticking. However, taken as a whole, the proposals strike me as being something of a mixed bag.  And some of the positive aspects of the proposals are already being subjected to attacks.

The Good News

The good news is that the Fed seems to be acknowledging that the board’s role is that of oversight and that boards are spending far too much time micro-managing compliance and should focus on big picture items such as strategy and risk.  Those of us who speak with board members know that this has been a significant concern since the enactment of Dodd-Frank.


Continue Reading Federal Reserve governance guidance: the pendulum swings back (?)

Photo by Nancy Kamergorodsky
Photo by Nancy Kamergorodsky

Earlier this week, the Financial Crimes Enforcement Network (“FinCEN”) proposed a rule that would require investment advisers registered with the Securities Exchange Commission (“SEC”) to establish anti-money laundering (“AML”) programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (“BSA”). FinCEN’s proposed rule would

There have been a number of press reports in recent days about attempts by the new Republican majority to repeal all or part of Dodd-Frank.  Depending upon whom you choose to believe (assuming you choose to believe anyone in the current political environment), the Republicans want to eviscerate it, and the Democrats refuse to change

Foreign Account Tax Compliance ActThe Foreign Account Tax Compliance Act (“FATCA”) is a US law designed to counter offshore tax avoidance by US persons. Controversial because of its wide-ranging breadth and application to non-US financial institutions, in the most general sense, FATCA imposes a 30% withholding tax on payments of US source income made to foreign financial institutions (“FFIs”) unless they enter into an agreement with the US Internal Revenue Service (“IRS”) and disclose information about their US account holders.

After having revised the timelines for FATCA’s implementation on several occasions (culminating in an implementation delay of over three years from the date of its adoption in March of 2010), FATCA’s official July 1, 2014 implementation date is on the horizon. As a result, FFIs worldwide have made a mad dash in the race toward FATCA compliance over the last few months.

So why does this matter to non-banking/non-financial institutions? Well, as an initial matter, FATCA’s definition of an FFI is broad, including more types of entities than one might expect. As a result, US entities must make sure they have evaluated their corporate structure to determine whether its network includes an FFI. Under FATCA rules, the following types of entities may qualify as FFIs, subject to certain exceptions:

  • Non-US retirement funds and foundations
  • Special purpose entities and banking-type subsidiaries
  • Captive insurance companies
  • Treasury centers, holding companies, and captive finance companies

Additionally, even if an organization’s affiliate network does not include an FFI, US-based entities could be
Continue Reading FATCA: What it is, and why it may apply to your business

Cybersecurity in the cross hairs of the SEC
Photo by Marina Noordegraaf

The SEC continues to increase its focus on cybersecurity preparedness. As we have reported in prior blogs here and here, we believe that cybersecurity will become an increasingly important element of the SEC’s disclosure and enforcement efforts. Recent events show that the SEC is ramping up its efforts in the cybersecurity area, and we believe that all companies who are potentially affected by these SEC activities should pay special attention to their cybersecurity preparedness and should anticipate possible SEC action in this area.

The SEC’s most recent activity in the cybersecurity area involves registered broker-dealers and registered investment advisers. These entities are logical choices for a cybersecurity focus because of the large volume of confidential and very sensitive customer information that they hold. The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced this cybersecurity focus in an April 15, 2014 Risk Alert which stated that the SEC plans to mount an initiative to assess cybersecurity preparedness in the securities industry. The SEC had previously laid the groundwork for this initiative during a March 26, 2014 Cybersecurity Roundtable when Chair White stressed the vital importance of cybersecurity to our market system and consumer data protection. She also called for more public/private cooperation in strengthening cybersecurity preparedness. Other SEC participants at this Roundtable stressed the importance of gathering data and information regarding cybersecurity preparedness so that the SEC could determine what additional steps it should take in this area.

The OCIE’s cybersecurity initiative will assess cybersecurity preparedness in the securities industry and obtain data and information about the securities industry’s recent experiences with cyber threats and cybersecurity breaches. As part of this initiative, the OCIE announced that it will conduct examinations of more than 50 registered broker-dealers and registered investment advisers to obtain cybersecurity data and information and to assess the preparedness of these entities to defend against cyber threats. According to the Risk Alert, this investigation will focus on such things as
Continue Reading SEC increases focus on cybersecurity

BSA ComplianceGenerally speaking, the Bank Secrecy Act (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. But while anyone can imagine that the BSA and its implementing regulations apply to those entities we typically classify as “financial institutions” such as banks and other depository institutions, it is important to note that the BSA Rules also apply to other entities that we may not traditionally think of as “financial institutions” including securities broker-dealers.

The BSA rules require brokers-dealers to, among other things, develop and implement BSA compliance programs. In accordance with the BSA rules, FINRA Rule 3310 sets forth minimum standards for broker-dealers’ BSA compliance programs. First, the rule requires firms to develop and implement a written BSA compliance program. The program has to be approved in writing by a member of senior management and be reasonably designed to achieve and monitor the firm’s ongoing compliance with the requirements of the BSA Rules. Additionally, and consistent with the BSA Rules, the rule also requires firms, at a minimum, to:

  • establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions;
  • establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and implementing regulations;
  • provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member personnel or by a qualified outside party. If the firm does not execute transactions with customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g. engages solely in proprietary trading or conducts business only with other broker-dealers), the independent testing is required every two years (on a calendar-year basis);
  • designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program.  Such individual or individuals are associated persons of the firm with respect to functions undertaken on behalf of the firm.  Each member must review and, if necessary, update the information regarding a change to its BSA compliance person within 30 days following the change and verify such information within 17 business days after the end of each calendar year.

Compliance with the BSA Rules is no easy task. To effectively address these rules,
Continue Reading Bank Secrecy Act: Broker-Dealers Must Also Comply

Uniform fiduciary duty standard for broker-dealers
Illustration by Divine Harvester

As we blogged about last August, Section 913 of the Dodd-Frank Act directed the SEC to study the need for establishing a new, uniform, federal fiduciary standard of care for brokers and investment advisers providing personalized investment advice. Recall that, traditionally, broker-dealers and investment advisors are subject to different duties of care: a suitability standard for broker-dealers and a more stringent, fiduciary duty for investment advisors. 

Despite the express mandate given to it by Section 913 of the Dodd-Frank Act, the SEC has made slow progress in determining whether to adopt a uniform fiduciary standard rule. In January 2011, the SEC issued its Section 913 Report, recommending “the consideration of rulemakings” that would establish a uniform fiduciary standard for both broker-dealers and investment advisers. In the wake of issuing its Section 913 Report, in March 2013 the SEC opened its doors comments, requesting data and other information relating to the costs and benefits of implementing a uniform fiduciary standard. While the comment period ended in July of 2013, the SEC has apparently not yet completed its anticipated cost-benefit analysis. Based on the SEC’s regulatory agenda for the 2014 fiscal year, it does not seem to be in much of a rush: in the agenda, the SEC listed the “Personalized Investment Advice Standard of Conduct” as a “long-term action” and as its 40th priority out of 43 items. That said, in a speech at the SEC Speaks Conference in Washington on February 21, 2014, SEC Chair Mary Jo White said she
Continue Reading Uniform Fiduciary Standard for Broker-Dealers: An Update