Category Archives: Banking

New Supervisory Rating System for Large Banking Organizations

by Sullivan & Cromwell LLP

Federal Reserve Establishes a New Rating System for the Supervision of Large Financial Institutions

Summary

On November 2, the Board of Governors of the Federal Reserve System (the “FRB”) issued a final rule (the “Final Rule”) that establishes a new rating system for the supervision of large financial institutions (“LFIs”). The LFI rating system applies to all bank holding companies with total consolidated assets of $100 billion or more; all non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $100 billion or more; and all U.S. intermediate holding companies of foreign banking organizations with total consolidated assets of $50 billion or more.[1] The LFI rating system is designed to align with the FRB’s existing supervisory program for LFIs,[2] enhance the clarity and consistency of supervisory assessments, and provide greater transparency regarding the consequences of a given rating. For LFIs, the new rating system replaces the RFI/C(D) rating system currently used by the FRB for holding companies of all sizes.[3] Continue reading

New York Office Of The Attorney General Publishes Report On Virtual Currency Platforms And Their Potential Risks

by Arthur S. Long, Carl E. Kennedy, and Jeffrey L. Steiner

This post reviews the New York State Office of the Attorney General’s (the “OAG”) Virtual Markets Integrity Initiative Report (the “Report”), which was published on September 18, 2018.[1]  The publication of the OAG’s 42-page Report brings to a close its six-month fact-finding inquiry of several virtual currency platforms.[2]  The OAG sent out detailed letters and questionnaires to a number of virtual currency platforms seeking information from the platforms across a wide-range of issues, including trading operations, fees charged to customers, the existence of robust policies and procedures, and the use of risk controls.  Continue reading

UK Law Commission Proposes Reforms to Suspicious Activity Reports for Money Laundering

by Karolos Seeger, Andrew Lee, and Natasha McCarthy

The Law Commission has published an extensive consultation paper examining the UK’s current Suspicious Activity Report (“SAR”) regime for reporting suspected money laundering to the National Crime Agency (“NCA”) and outlining provisional reform proposals.[1] The consultation runs until 5 October 2018, after which the Law Commission will present its final recommendations to the Government. This is the first step in a process that could result in significant changes to Part 7 of the Proceeds of Crime Act 2002 (“POCA”), affecting all organisations that deal with money laundering issues.

We summarise below the key views expressed and changes proposed in the consultation paper, and analyse the likely practical effect if the reforms are implemented. Continue reading

“Economic Growth, Regulatory Relief, and Consumer Protection Act” is Enacted

by Samuel R. Woodall III, Mitchell S. Eitel, Michael T. Escue, C. Andrew Gerlach, Camille L. Orme, Benjamin H. Weiner, and Michael A. Wiseman

Summary

Earlier today, President Trump signed into law the “Economic Growth, Regulatory Relief, and Consumer Protection Act,”[1] which provides certain limited amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), as well as certain targeted modifications to other post-financial crisis regulatory requirements.  In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements.  The legislation, which enjoyed substantial bipartisan support, was adopted on May 22, 2018, in the U.S. House of Representatives, by a vote of 258 to 159, and in the U.S. Senate, by a vote of 67 to 31, on March 14, 2018.

The legislation preserves the fundamental elements of the post-Dodd-Frank regulatory framework, but it includes modifications that will result in some meaningful regulatory relief for smaller and certain regional banking organizations. Continue reading

Banking Regulators’ Examination Authority Does Not Override Attorney-Client Privilege

by Cleary Gottlieb Steen & Hamilton LLP, Covington & Burling LLP, DavisPolk, Debevoise & Plimpton, Simpson Thacher & Bartlett LLP, Sullivan & Cromwell LLP, and Wilmer Cutler Pickering Hale and Dorr LLP

MEMORANDUM[1]

RE: Bank Regulators’ Legal Authority to Compel the Production of Material That Is Protected by Attorney-Client Privilege

I. Introduction

The attorney-client privilege (the “Privilege”) is deeply enshrined in the common law.[2] In protecting the confidentiality of communications between lawyers and their clients, the Privilege both bars the admission of such communications as evidence in legal proceedings and insulates the communications from compelled disclosure by government authorities. Accordingly, absent an explicit exception, neither courts nor government authorities may require a client or the client’s lawyer to produce or reveal privileged information. Continue reading

FinCEN Releases Frequently Asked Questions Regarding Customer Due Diligence and Beneficial Ownership Requirements

by David S. Cohen, Franca Harris Gutierrez, Sharon Cohen Levin, Jeremy Dresner and Michael Romais

Last week the Financial Crimes Enforcement Network (FinCEN) issued much-anticipated Frequently Asked Questions (PDF: 387 KB) (FAQs) that provide additional guidance to financial institutions relating to the implementation of the new Customer Due Diligence Rule (CDD Rule), set to go into effect on May 11, 2018.[1] In general, the FAQs clarify certain issues that have caused implementation challenges for financial institutions. While FinCEN’s earlier guidance provided a general overview of the CDD Rule—including the purpose of the rule, the institutions to which it is applicable, and some relevant definitions—the new FAQs provide greater detail for financial institutions seeking to comply with the CDD Rule. The FAQs are meant to assist covered financial institutions in understanding the scope of their customer due diligence (CDD) obligations, as well as the rule’s impact on their broader anti-money laundering (AML) compliance. While the guidance is helpful in clarifying some of FinCEN’s expectations, the implementation challenge lies in applying the CDD Rule to a financial institution’s specific products and services.

As financial institutions work to meet the CDD Rule’s fast-approaching May 11 compliance deadline, they should pay special attention to the following key areas summarized below. Continue reading

Ninth Circuit Rejects Challenges to a Cease-and-Desist Order Imposed by the FDIC for Violations of the Bank Secrecy Act

by Thomas C. Baxter Jr., Michael M. Wiseman, and Jordan M.H. Wish

Court Defers to the FDIC and the Bank Secrecy Act/Anti-Money Laundering Examination Manual in Rejecting a Rare Challenge by a Bank to an Agency-Imposed Cease-and-Desist Order

Summary

On March 12, in California Pacific Bank v. FDIC, the U.S. Court of Appeals for the Ninth Circuit refused to set aside a cease-and-desist order imposed by the Federal Deposit Insurance Corporation (the “FDIC”) on California Pacific Bank (“California Pacific”).[1]  The order requires the bank to comply with, and correct identified violations of, the Bank Secrecy Act (the “BSA”) by improving the bank’s BSA compliance program and Suspicious Activity Report (“SAR”) filing procedures.  In reaching its decision, the court deferred to the Bank Secrecy Act/Anti-Money Laundering Examination Manual, which is published by the Federal Financial Institutions Examination Council (the “FFIEC Manual”),[2] as a definitive statement of the regulatory requirements for satisfying BSA program obligations.  This deference along with an agency-friendly standard of review confirm the broad discretion that the FDIC and other federal banking agencies have in determining violations of the BSA and requiring related remedial actions. Continue reading

Increasing Regulatory Focus on Reforming Financial Institution Culture and Addressing Employee Misconduct Risk

by Brad Karp, H. Christopher Boehning, Susanna Buergel, Jessica Carey, Michael Gertzman, Roberto Gonzalez, and Grace Tiedemann

Since the financial crisis—and more recently in the wake of the Wells Fargo sales practices scandal and the benchmark manipulation enforcement actions—bank regulators in the United States and around the world have become increasingly focused on reforming institutional culture and pursuing other actions to mitigate employee misconduct risk. The Federal Reserve Board’s recent and unprecedented enforcement action against Wells Fargo, which we have discussed previously,[1] is a stark demonstration of regulators’ vigorous focus on these issues. In addition to misconduct that may take place against customers, counterparties, and markets, the recent attention on sexual harassment and employee treatment has also raised questions about the capacity of companies across sectors to address misconduct that takes place within the walls of the company itself. Continue reading

Federal Reserve Takes Severe and Unprecedented Action Against Wells Fargo: Implications for Directors of All Public Companies

by Edward D. Herlihy, Richard K. Kim, and Sabastian V. Niles

In a stinging rebuke, the Federal Reserve on February 2nd issued an enforcement action barring Wells Fargo from increasing its total assets and mandating substantial corporate governance and risk management actions.  The Federal Reserve noted in its press release that Wells will replace three current board members by April and a fourth board member by the end of the year.  In addition, the Federal Reserve released three supervisory letters publicly censuring Wells’ board of directors, former Chairman and CEO John Stumpf and a past lead independent director.  These actions are a sharp departure from precedent, both in their severity and their public nature.  They come on the heels of significant actions already taken by Wells, including appointing a former Federal Reserve governor as independent Chair and replacing a number of independent directors as well as its General Counsel.  Continue reading

Supreme Court Grants Certiorari on the Constitutionality of SEC ALJ Appointments– What This Means for the Securities Industry

by Matthew C. Solomon, Alexander Janghorbani, and Richard R. Cipolla

On January 12, 2018, the Supreme Court granted a writ of certiorari in Raymond J. Lucia Cos., Inc. v. SEC, No. 17 130,[1] a case raising a key constitutional issue relating to the manner in which the U.S. Securities and Exchange Commission’s (SEC or Commission) appoints its administrative law judges (ALJs).  The Court will decide “[w]hether administrative law judges of the [SEC] are Officers of the United States within the meaning of the Appointments Clause.”  The answer to this question matters because if SEC ALJs are “officers,” then they should have been appointed by the Commission itself instead of hired through traditional government channels—and the Commission only exercised its ALJ appointment authority in late-2017.  Although the question is limited to SEC ALJs, any decision could also impact ALJs at other agencies government-wide.

At this point, both the petitioner and the Solicitor General (SG) actually agree that ALJs are officers.  In its response to the cert petition raising this issue in Lucia, the SG, in an about-face, had abandoned the SEC’s long-held defense of the manner in which it appoints its ALJs.  Up until now, in an attempt to fend off an asserted constitutional defect in their AJL’s method of appointment, the SEC has argued (with SG approval) that ALJs are “mere employees” of the SEC, and not “officers.”  The day after the SG dropped this position—and with no warning in its briefing—the Commission took the step to appoint the current ALJs.[2]   Continue reading