OCC Proposes “Fair Access” Requirements for Large Banks

On November 20, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a proposed rule that would impose on large national banks and federal savings associations (collectively, “banks”) a requirement to provide “fair access” to the financial products and services those institutions offer. The proposal is intended to preclude the banks it covers from making decisions about providing financial services based categorically on the type of a customer’s business or the customer’s geographic location. In support of the proposal, the OCC gives examples of nonprofit and for-profit organizations and businesses that it says banks have been encouraged or pressured to boycott, including family planning organizations, privately owned correctional facilities, gun manufacturers, independent ATM operators, agricultural businesses, and businesses conducting various activities in the energy sector of the U.S. economy.

The proposal would establish an affirmative obligation for a bank to make each of its products and services available to all individuals and lawful businesses in the geographic market it serves on “proportionally equal terms.” The text of the proposed regulation does not provide a definition of “proportionally equal terms.” A footnote in the preamble describes the standard as requiring, at a minimum, that a bank make pricing and denial decisions commensurate with “measurable risks based on quantitative and qualitative characteristics.” Elsewhere, the preamble indicates that pricing and denial decisions should be supported by quantitative, risk-based analysis and not made on the basis of personal beliefs on matters of substantive government policy or on assessments about future legal or political changes. The preamble suggests that the OCC would disfavor denial decisions based on a bank’s assessment of its reputation risk, but it does not indicate how considerations such as enhancement or preservation of shareholder value or customer relationships could affect a bank’s decisions.

In addition, the proposal would impose three prohibitions on the banks it covers. First, a bank would be prohibited from denying financial services to an individual or business except as justified by the potential customer’s “documented failure to meet quantitative, impartial risk-based standards established in advance.” Second, a bank would be prohibited from denying financial services if the denial impedes the customer from conducting business in a particular market or produces a benefit to an individual or business in which the bank has a financial interest. Third, a bank would not be permitted to act in coordination with others to deny a financial service to an individual or business.

A bank would be subject to the rule if it has the ability to affect markets by raising the price for financial services offered by that bank or its competitors, or by “significantly impeding” the business of one individual or legal entity to the advantage of another. A bank with $100 billion or more in assets would be presumed to satisfy this standard, but it could seek to rebut the presumption by submitting written argument to the OCC.  A bank with less than $100 billion in assets is presumed not to satisfy the standard.

The authority that the OCC specifically cites in support of the fair access proposal is 12 U.S.C. § 1, which was amended by the Dodd-Frank Act to describe the agency as “charged with” assuring fair access to financial services by the institutions and other persons subject to its jurisdiction, and 12 U.S.C. § 93a, which authorizes the OCC to prescribe rules to “carry out the responsibilities of the office.”  The comment period for the proposal closes on January 4, 2021.

CFTC News Roundup for October and November and a Look Ahead

There has been a flurry of activity at the Commodity Futures Trading Commission (“CFTC”) in recent weeks.  As we reported previously, the CFTC approved three final rules, including the much-anticipated position limits rule, at its October 15 open meeting, and announced significant organizational changes to its operating divisions on November 3.  This post highlights additional significant actions by the CFTC in October and November and previews what is next for the CFTC under a Biden Administration.

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Federal Banking Agencies and FinCEN Issue Joint Statement on Risk-Based Approach to Customer Due Diligence for Charities and Non-Profit Organizations

On November 19, 2020, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, and Office of the Comptroller of the Currency (collectively, the “Agencies”) issued a joint fact sheet clarifying how banks subject to the Bank Secrecy Act (“BSA”) should apply a risk-based approach to customer due diligence (“CDD”) requirements for charities and other non-profit organizations.

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Federal Reserve’s LISCC Program to Apply Only to U.S. G-SIBs

On November 6, 2020, the Board of Governors of the Federal Reserve System (the “FRB”) announced that, beginning in 2021, its Large Institution Supervision Coordinating Committee (“LISCC”) supervisory program will apply only to Category I firms as defined in the FRB’s tailoring framework.  This change will have the effect of removing three foreign banking organizations (“FBOs”) with U.S. operations from the LISCC portfolio.  Going forward, only U.S. firms that are designated as global systemically important banks (“U.S. G-SIBs”) will be included in the LISCC portfolio. Continue Reading

Privacy Oversight and the California Department of Financial Protection and Innovation

Introduction  

On August 21, 2020, the California legislature enacted the California Consumer Financial Protection Law (CCFPL), which is to take effect on January 1, 2021.[1]  The law renames the “Department of Business Oversight” (DBO) the “California Department of Financial Protection and Innovation (DFPI)” and, among other things, empowers the department to regulate the offering and provision of consumer financial products or services under California consumer financial laws.[2]  The California legislature noted that the CCFPL strengthens “consumer protections by expanding the ability of the department to improve accountability and transparency in the California financial system and promote nondiscriminatory access to responsible, affordable credit, among other purposes.”[3]  In this blog post, we examine the DFPI’s possible authority over California’s principal privacy laws.  Covington will monitor how active the DFPI is in promulgating and enforcing privacy rules as the contours of the DFPI’s authority become apparent over time.

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CFTC Announces Organizational Changes to Agency Divisions

On November 2, 2020, the U.S. Commodity Futures Trading Commission (CFTC) issued a press release announcing organizational changes to several areas of the agency’s operating divisions. According to CFTC Chairman Heath P. Tarbert, these changes are intended to better align the agency’s structure with its strategic objectives.

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OCC Issues True Lender Rule

On October 27, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a final rule that determines when a national bank or Federal savings association (collectively, “banks”) makes a loan and therefore is the “true lender” in the context of a partnership between a bank and a third party.  The rule provides that a bank makes a loan if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) it funds the loan.  It differs from the proposed rule only in providing that, in the case where one bank is named as the lender in the loan agreement and a different bank funds the loan, the bank named in the agreement is the one that makes the loan.

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FRB and FinCEN Issue Joint Notice of Proposed Rulemaking Amending Recordkeeping Rule and Travel Rule Regulations

On October 23, 2020, the Federal Reserve Board (“FRB”) and Financial Crimes Enforcement Network (“FinCEN”) issued a joint notice of proposed rulemaking that would amend the Bank Secrecy Act’s Recordkeeping Rule and Travel Rule regulations.  Comments will be accepted for 30 days after Federal Register publication of the proposed rule on October 27, 2020.  The proposed amendments would lower the threshold for covered cross-border transactions from $3,000 to $250 and also extend the applicability of the rules to convertible virtual currency and digital assets used for legal tender.

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Recent Developments on the German Ringfencing Regulation

I. The German Ringfencing Act

As a reaction to the financial crisis in 2007/2008 and to address risks in connection with the “too big to fail” phenomena, the German legislature issued the Ringfencing Act in 2014 (the “Act”).

In a nutshell, the Act forbids big CRR-credit institutions (depending on certain balance sheet thresholds) to engage in proprietary business (Eigengeschäft), proprietary trading (Eigenhandel) and credit/guarantee business with hedge funds (i.e., AIFs whose leverage exceeds three times their NAV).

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CFTC Approves Three Final Rules at Open Meeting

At an open meeting on October 15, 2020, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) voted to adopt three final rules.  First, the Commission adopted by a 3–2 vote a final rule overhauling its regulatory framework governing speculative position limits on a large variety of commodities.  Second, the Commission unanimously approved amendments to margin requirements for uncleared swaps for swap dealers and major swap participants.  Third, the Commission unanimously voted to finalize amendments to Regulation 3.10(c), which sets forth exemptions from registration for certain foreign intermediaries.

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