September 2016


Banking Regulators Report to Congress on Investment Activities of Regulated Financial Institutions

On September 8, the FRB, FDIC, and OCC released a report to the Congress and the FSOC on the activities and investments that banking entities may engage in under applicable law. This report was required under Section 620 of the Dodd-Frank Act.

Each regulatory agency drafted its own section of the report, describing types of permissible investments, risks posed by these investment activities, how those risks are mitigated through regulation, and recommendations for further mitigating risks.

Federal Reserve Board

The FRB noted that it is the primary regulator for bank holding companies, state-chartered commercial banks that are members of the Federal Reserve System (state member banks), and savings and loan holding companies. As it relates to state member banks, the FRB noted that Section 24 of the FDI Act generally provides that a state bank may not engage as principal in any activity that is not permissible for national banks. As a consequence, the activities of national banks outlined by the OCC generally represent the activities that state-chartered banks may engage in as principals.

The FRB did not directly discuss investments in BOLI by institutions it oversees.


The FDIC is the primary federal supervisor for state-chartered banks and savings institutions that are not members of the Federal Reserve System. The FDIC’s report included a section on “Insurance Activities Approved Under Part 362” which noted that state banks are permitted to maintain life insurance policies on bank directors, officers, and employees. The FDIC went on to comment on the risks associated with BOLI programs and referred to the Interagency Statement on the Purchase and Risk Management of Life Insurance (commonly referred to as OCC 2004-56). The FDIC did not identify any recommendations with respect to insurance-related activities.

The FDIC recommendations addressed enhancing and clarifying the part 362 policy and procedures relating to investments in other financial institutions and other equity investments (to evaluate the interaction of existing FDIC regulations with more recent regulatory and statutory rules) and part 362 filings with respect to mineral rights, commodities, or other non-traditional activities.


The OCC oversees national banks, federal savings associations, and federal branches of foreign banks. The OCC noted that four activities warranted special focus:

  • Derivatives
  • Physical commodities
  • Securities
  • Structured products

In the Securities section of the OCC’s report, it described the five “types” of securities identified in 12 CFR 1 (part 1).

Under the Structured Products section of the report, the OCC focused on investment activities in Asset-backed Securities and Structured Notes. This section also included a few sentences specific to BOLI (see page 102 of the report); however, BOLI did not appear to be referenced in the OCC’s Risk Mitigation or Recommendations sections.

While the OCC did not recommend any legislative action, it identified several regulatory priorities, including:

  • issuing a proposed rule that restricts national banks and federal savings associations from holding as Type III securities asset-backed securities, which may be backed by bank-impermissible assets;
  • addressing concentrations of mark-to-model assets and liabilities with a rulemaking or guidance;
  • clarifying minimum prudential standards for certain national bank swap dealing activities;
  • considering providing guidance on clearinghouse memberships;
  • clarifying regulatory limits on physical hedging;
  • addressing national banks’ authority to hold and trade copper; and
  • incorporating the Volcker Rule into the OCC’s investment securities rules.
OCC Releases Bank Supervision Operating Plan for Fiscal Year 2017

On September 14, the OCC released its bank supervision operating plan for fiscal year 2017. The plan is intended to help regulated institutions better understand the OCC’s supervisory priorities.

Items that may be noteworthy to our clients include:

  • Large Bank Supervision:
    • Operational risk: Reviewing banks’ programs for assessing the evolving cyber threat environment and banks’ cyber resilience. Also, assessing information security and data protection, model risk management, and third-party risk management, including risks associated with third-party relationships (OCC 2013-29). OCC supervisory staff members evaluate bank managements’ plans to respond to increasing operational risk resulting from the introduction of new or revised business products, processes, delivery channels, or third-party relationships.
    • Compliance: Developing and executing plans for assessing compliance with new regulatory requirements, including those related to capital, liquidity, trading activities, residential mortgages, and risk retention. OCC supervisory staff will assess a bank’s change-management procedures for implementing new platforms, technologies, and processes required by significant changes to regulatory requirements.
  • Midsize and Community Bank Supervision
    • Strategic risk: Evaluating business models as banks make decisions regarding whether to adopt new strategies, products, and services to meet economic and competitive pressures, including strategies focused on mergers, acquisitions, and partnerships.
    • Operational risk: Assessing information security, data protection, and third-party risk management, including risks associated with third-party relationships. This includes reviewing banks’ programs for assessing the evolving cyber threat environment and banks’ cyber resilience. Examiners will continue to use the Cybersecurity Assessment Tool at banks not examined in FY 2016, and will follow up on any gaps identified in FY 2016. OCC supervisory staff members will evaluate bank management’s plans to respond to increasing operational risk resulting from the introduction of new or revised business products, processes, delivery channels, or third-party relationships.

Interest rate risk: Evaluating management of interest rate risk, including the ability to accurately identify and quantify interest rate risk in assets and liabilities under varying model scenarios. This includes assessing the potential effect of rising interest rates on deposit stability and increased competitive pressures for retail deposits as a result of banks preparing for implementation of the liquidity coverage ratio requirements.


Federal Reserve Board Proposed Rule to Modify CCAR Requirements for Large, Noncomplex Firms

On September 26, the FRB released a proposed rule to modify its capital plan and stress-testing rules for the 2017 cycle. Among other changes, the proposal would tailor the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) to remove certain large and noncomplex firms from the qualitative assessment of CCAR.

The proposal would remove the qualitative assessment of CCAR for large and noncomplex firms, or bank holding companies and intermediate holding companies of foreign banking organizations with total consolidated assets between $50 billion and $250 billion, on-balance sheet foreign exposure of less than $10 billion, and total consolidated nonbank assets of less than $75 billion.

The proposed rule would also decrease the amount of capital any firm subject to the quantitative requirements of CCAR can distribute to shareholders outside of an approved capital plan without seeking prior approval from the FRB. Currently, if a firm does not receive an objection to its capital plan, it may distribute up to 1 percent of its tier 1 capital above the distributions in its capital plan. The proposal would reduce that amount to 0.25 percent of tier 1 capital.

The proposed rule would take effect for the 2017 CCAR. Comments on the proposal are due by November 25, 2016.



Transamerica COI Litigation Update

We previously reported that the various cases other than Feller v. Transamerica had been voluntarily dismissed. It is now clear that all of the named plaintiffs (Kriegman, Lyons, Thompson, et al.) have joined Feller in the Central District of California. Additionally, the court denied Transamerica’s motion to change the venue to the Northern District of Iowa.

On September 30, the plaintiffs moved the court for permission to exceed the page limitation as they prepare to submit a Renewed Application for Preliminary Injunction. We previously reported that Kriegman had sought a preliminary injunction to prevent Transamerica from charging the higher COI rates pending the outcome of the litigation.