November 2012


Regulatory Capital Proposals Update

On November 9, the federal banking agencies issued guidance indicating that the new regulatory capital rules (commonly referred to as Basel III) are not expected to become effective on January 1, 2013.  That effective date was identified in the proposed rulemakings issued in June.

The agencies acknowledged industry concerns that a January implementation date would not provide sufficient time to understand the rules or make necessary system changes.  The agencies also noted that the large number of comments received and the wide range of views expressed still require careful review and consideration from the regulators.

On November 14 and November 29, the Senate Banking Committee and the House Financial Services Committee each respectively held hearings on the impact of the proposed capital rules.  Members of both committees raised a number of issues regarding the proposed capital rules, including: 1) the overall complexity of the proposals and questions about their applicability to, and appropriateness for, community banks; 2) the proposed treatment of unrealized losses (and gains) on available-for-sale (AFS) debt securities; 3) the proposed risk-weighting of various types of assets including residential mortgages, sovereigns, corporates, structured securities and over-the-counter derivatives; and 4) how the capital requirements and supervision will be coordinated with state regulators and applied to financial holding companies that own operating insurance companies.

Senior officials from the OCC, FDIC and Federal Reserve testified at both hearings.  The House hearing also included a panel with representatives from the American Bankers Association, large and community banks, an insurer, and other trade associations.


FSOC Proposes Money Market Fund Reform Options

At a meeting held on November 13, the Financial Stability Oversight Council (FSOC) approved and now seeks public comment on proposed recommendations to the Securities and Exchange Commission (SEC) for the structural reform of money market funds (MMFs).  The options are:

  1. Floating Net Asset Value (NAV).  Require MMFs to have a floating NAV per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV of a $1.00.
  2. Stable NAV with NAV Buffer and “Minimum Balance at Risk.”  Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV. There would also be a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days – a minimum balance at risk (MBR) – be delayed for 30 days.  This requirement would not apply to Treasury MMFs.
  3. NAV Buffer and Other Measures.  Require MMFs to have a risk-based NAV of 3 percent to provide explicit loss-absorption capacity that would be combined with other measures to enhance the effectiveness of the buffer.

The first two recommendations essentially track the reform options advanced by SEC Chairman Shapiro earlier in the year that were ultimately withdrawn due to a lack of support from a majority of the SEC Commissioners.  The FSOC will consider the comments and may issue a final recommendation to the SEC, which, pursuant to Dodd-Frank, would be required to impose the recommended standards, or similar standards that the FSOC deems acceptable, or explain in writing to the FSOC within 90 days why it has determined not to follow the recommendation.  Beyond this so called “adopt or explain” approach, Dodd-Frank § 145 does not give the FSOC authority to override a primary financial regulator’s action or inaction.  Instead its recommendations can be seen as clear interagency support for SEC action, though they are not binding on the SEC.  The comment period ends on January 18, 2013.


Federal Agencies Release Stress Testing Scenarios

On November 15, the federal banking agencies released the economic and financial market scenarios that will be used in this year’s annual company-run stress testing under Dodd-Frank.  National banks and federal savings associations that have average total consolidated assets of more than $10 billion are covered under Dodd-Frank § 165.  The scenarios include baseline, adverse and severely adverse scenarios.  Each includes 26 variables, including economic activity, unemployment, exchange rates, prices, incomes and interest rates.  The adverse and severely adverse scenarios are not forecasts, but rather hypothetical scenarios designed to assess the strength and resilience of financial institutions.

Under the rule, institutions with over $50 billion in size as of October 9, 2012 must conduct the annual stress test in 2012.  Covered institutions that qualify as $10 to $50 billion are not subject to the stress test requirements under the rule until 2013.



Baker v. American Greetings (Update)

On November 19, the plaintiff filed her response to American Greetings third motion to dismiss which focused on whether the plaintiff had adequately alleged fraudulent concealment and the discovery rule toll limitations.  Fraudulent concealment is found to have occurred when the defendant takes an affirmative act that prevents the plaintiff’s discovery of her cause of action and the plaintiff fails to discover the facts giving rise to her claim despite her due diligence.  The plaintiff alleges that American Greetings had a duty to get an insured’s written consent prior to purchasing the insurance on that life.  Also included in the plaintiff’s fraudulent concealment argument is that American Greetings placed the policies in a trust to hide its receipt of policy benefits and that American Greetings entered into a “cooperative partnership” with its brokers and insurers to hide the policies. American Greetings’ motion to dismiss is based largely on the expiration of applicable statute of limitations under Ohio law.

Case number: Baker v. American Greetings Corp., No. 12-cv-00065 (N.D. Ohio)



FINRA Increases Transparency in the TBA Market for Agency Pass-Through Mortgage-Backed Securities

On November 12, the Financial Industry Regulatory Authority (FINRA), began disseminating transaction information for trades in the so-called “To-Be-Announced” (TBA) market for agency pass-through mortgage-backed securities.  This market represents more than $270 billion traded on an average daily basis in 8,400 trades.  Through FINRA’s Trade Reporting and Compliance Engine (TRACE), TBA transaction information, including the CUSIP, time of transaction, price, size and other related information are now publicly disclosed.

The SEC has also approved a FINRA proposal to publicly disseminate transaction information in agency pass-through mortgage-backed securities in “specified pool” trading.  This market represents approximately $19 billion traded on an average daily basis in 3,000 trades.  FINRA will announce the effective date of this proposal in a forthcoming Regulatory Notice.  Together, the market for agency pass-through mortgage-backed securities traded TBA and specified represent more than 93 percent of par value traded in all asset- and mortgage-backed securities.


COLI Mystery Novel

Recently, Larry Thompson authored Dead Peasants, a mystery novel with the premise of discovery of secret COLI policies and patterns of foul play leading to deaths.  The plotline involves a recently retired trial attorney that is approached by an elderly widow who has a check for life insurance proceeds on her husband but payable to his former employer.  Although fiction, the novel nevertheless creates increased reputational risk and scrutiny for well-managed BOLI/COLI programs.

Larry Thompson is a managing partner at the Houston-based law firm Lorance & Thomas.  Dead Peasants is his third “legal thriller.”