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:
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:
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:
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.
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.
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.