August 3, 2016

Rules In Focus: FSR Notes Problems with Regulatory Proposal on Incentive-Based Compensation

On July 22, the Financial Services Roundtable (“FSR”) submitted comments to the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) (jointly, “Agencies”) regarding a joint-agency incentive-based compensation proposal. As well as an individual letter to the agencies, FSR also participated in a joint-industry comment letter with several other trade associations.

Rules In Focus: FSR Notes Problems with Regulatory Proposal on Incentive-Based Compensation
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Rules In Focus

Rules in Focus is FSR’s regulatory newsletter featuring the latest insights from the Fed, CFPB, SEC and other major regulators that oversee the financial services industry and the implementation of the Dodd Frank law.

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FSR Notes Problems with Regulatory Proposal on Incentive-Based Compensation

On July 22, the Financial Services Roundtable (“FSR”) submitted comments to the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) (jointly, “Agencies”) regarding a joint-agency incentive-based compensation proposal. As well as an individual letter to the agencies, FSR also participated in a joint-industry comment letter with several other trade associations.

FSR’s individual comment letter expresses its concern that institutions covered under the Proposal will be at a disadvantage to non-covered institutions in retaining talented employees unless the proposed rule is drastically overhauled. FSR’s letter also addresses the overly prescriptive nature of the Agencies’ proposal, notes a disconnect between the Proposal and the actual text of Section 956 of the Dodd-Frank Act, and outlines a variety of other negative consequences that could occur as a result of the Proposal. FSR’s comment also addresses how the Proposal is at odds with the Federal Reserve’s principle-based guidance on incentive-based compensation which was released in 2011.

Addendum A of FSR’s letter further explains several problems with the Proposal in its current form. First, FSR asserts that the structure of the Proposal is inappropriate because the asset thresholds it establishes are inappropriate as proxies for risk. Second, the letter notes area where definitions and regulatory categories within the Proposal must be clarified. Third, the way that the Proposal determines which employees are subject to its requirements is arbitrary, overly broad, and unnecessarily complicated. In particular, the Agencies’ definition of “senior executive officer” and “significant risk-taker” encompass an extremely wide category of employees. Fourth, the Proposal’s deferral, forfeiture, downward adjustment and clawback requirements are unnecessary, overreaching, and extend for too long a period. These requirements would also result in adverse tax, accounting, and other effects on covered institutions and their covered employees. Fifth, portions of the Proposal would be better suited as guidelines, not rules. Sixth, the requirements of the Proposal should leave more discretion and flexibility to the board of directors.

In Addendum B, FSR presents reasons why insurance companies should not be regulated under the Proposal. First, the letter notes that insurance companies, compared to banks, have different compensation and incentive structures for their employees. Second, FSR argues that regulation of these companies under the Proposal is inconsistent with the McCarran-Ferguson Act. Third, the Federal Reserve Board’s regulation as it applies to “persons providing insurance” is inconsistent with the proposals of the OCC and FDIC. Fourth, the application of the Proposal to insurance companies would be premature since the Federal Reserve Board has yet to adopt final capital rules or other measures for assessing and controlling risk at the insurance companies that it regulates.

For more information, please contact Robert Hatch,

House GOP Report and Hearing Details Data Breaches at FDIC

The House Majority Science, Space, and Technology Committee released a report detailing recent data breaches at the FDIC and the FDIC’s response. The report also included allegations of a cover-up directed by FDIC staff members.

The report detailed that there were a number of data breaches that occurred within the FDIC from late 2015 to early 2016. According to the report, the Committee received the FDIC’s Federal Information Security Modernization Act (“FISMA”) report for 2015, and Committee staff initially reported some anomalies in the report. Then, on February 26, 2016, and March 18, 2016, the Committee received written notification of major breaches. However, these written notifications did not disclose all the breaches that had occurred, as others were reported later either in an amended FISMA report or by the FDIC Office of Inspector General (“OIG”).

The report found that FDIC staff misrepresented the nature of the breaches in a briefing to Committee staff. Upon further questioning by Committee staff, it was revealed that FDIC staff intentionally provided inaccurate information in an effort to deter the Committee from pursuing the issue of the agency’s cybersecurity breaches further.

In addition, the report found that FDIC staff failed to produce all documents and communications responsive to the Committee’s request. Agency whistleblowers told Committee staff that the FDIC had not provided a full and complete production or relevant information, contrary to verbal statements made by FDIC staff that they had done so. Furthermore, witnesses testified before the Committee that FDIC staff intentionally limited the scope of the documents provided to the Committee in order to obstruct the investigation. The FDIC’s Deputy General Counsel also instructed, on numerous occasions, that certain employees not put opinions related to the cybersecurity breaches in writing, seemingly in an effort to avoid Congressional oversight.

The report stated that the FDIC could have implemented an insider threat program that could have prevented or mitigated the breaches. The OIG also found that the FDIC’s data breach incident policies, procedures, and guidelines did not address major incidents. The Committee strongly urged the FDIC to minimize employee use of portable storage devices as a step to help prevent future breaches. The Committee also noted that Digital Rights Management (DRM) software could have been utilized by the FDIC to prevent unauthorized distribution of sensitive materials.

In a Committee hearing held on July 14th, FDIC Chairman Martin J. Gruenberg faced questions from lawmakers on his knowledge of the breaches and the alleged subsequent cover-up, as well as on steps the FDIC has taken to prevent data breaches in the future. Chairman Gruenberg claimed that he could not speak to the accuracy of the cover-up allegations. He further stated that the FDIC had made personnel changes and was updating its cyber security policy.

For more information, please contact Robert Hatch,
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IAIS Releases Proposed Guidelines on Capital Standards for Internationally Active Insurance Groups

On July 19, the International Association of Insurance Supervisors (“IAIS”) released a Public Consultation Document related to its Risk-based Global Insurance Capital Standard (“ICS”). This document is the latest step in the IAIS’s plan to develop a risk-based global insurance capital standard in response to a request by the Financial Stability Board (“FSB”) that the IAIS produce a work plan to create a comprehensive group-wide supervisory and regulatory framework for internationally active insurance groups.
The purpose of the 2016 ICS Public Consultation Document is to solicit further feedback from Internationally Active Insurance Groups (“IAIGs”), Global Systemically Important Insurers (“G-SIIs”) and other members of the public on three key components for ICS Version 1.0 (scheduled for mid-2017). The areas are valuation, qualifying capital resources, and a standard method for determining the ICS capital requirement. The deadline for feedback to the IAIS is October 19.

The 2016 ICS Public Consultation Document is the second ICS consultation document issued by the IAIS. It is the result of extensive and ongoing field testing with over 40 international insurance groups. The ICS issued its first ICS consultation document in December 2014. The ICS is the third step of a multi-year project to develop a risk-based, group-wide global insurance capital standard. The IAIS’s adoption of the Basic Capital Requirement in 2014 and Higher Loss Absorbency requirement in 2015 represented the first two steps.

Once finalized, the ICS will be a suggested measure of capital adequacy for IAIGs and G-SIIs. It will constitute the minimum standard which the regulators represented in the IAIS will implement or propose to implement, taking into account specific market circumstances in their respective jurisdictions. The ICS would not be a legal entity prescribed capital requirement (“PCR”), but would serve as a minimum standard for a group PCR.

For more information, please contact Robert Hatch,

Federal Reserve Allows the Industry More Time to Comment on Insurance Capital Standards Proposal

In responses to requests by FSR and others, the Federal Reserve has extended the deadline for public comments in response to its advanced notice of proposed rulemaking (ANPR) on developing a capital standards framework for insurance companies under their jurisdiction. The new deadline for comment is September 16. FSR has already developed a draft comment letter which, at a high level, praises the Federal Reserve for proposing a tailored approach for calculating capital requirements for Insurance Companies that own Savings and Loan Holding Companies (SLHCs) that is based on state-level capital standards (the so-called “building block approach” or “BBA”). The letter will likely address other ways that the Federal Reserve can leverage aspects of the state level system in setting up other regulatory standards.

For more information, please contact Robert Hatch,

Financial Industry Files Brief Opposing HUD Rule on Fair Housing Act

On July 15, FSR, in collaboration with a number of other trade associations, submitted an amicus brief in the U.S. District Court for the District of Columbia arguing that a regulatory rule finalized by the U.S. Department of Housing and Urban Development (“HUD”) that interprets the scope of the Fair Housing Act (FHA) should be vacated. The brief was filed in support of a motion for summary judgment by the plaintiffs in the case, the American Insurance Association and National Association of Mutual Insurance Companies.

The brief argues that the HUD rule must be vacated because it failed to follow the requirements of the Administrative Procedures Act (“APA”) and fails to honor binding Supreme Court precedent. Under the rule at issue, HUD determined that plaintiffs can use a “disparate impact” theory of liability to bring claims under the FHA. Disparate impact claims do not require a plaintiff to show discriminatory intent, only that a policy harms a protected class.

The brief argues that in promulgating the Rule, HUD disregarded binding Supreme Court precedent on when disparate-impact claims can be used in discrimination lawsuits. In particular, the HUD Rule fails to follow the standard established by the Supreme Court in the 1989 case Wards Cove Packing Co. v. Antonio. The brief further alleges that HUD violated the APA by not giving adequate reasons for the agency’s decisions in promulgating the Rule, despite public comments urging HUD to adopt the Wards Cove standard. The brief also argues that HUD exceeded its authority by failing to acknowledge congressional intent under the FHA that disparate impact claims only be available in cases without monetary claims. The brief also argues that the Rule is defective because it ignores the limitations on the application of disparate-impact claims required by the 2015 U.S. Supreme Court case, Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. Taken together, the brief argues that these defects show HUD exceeded its statutory authority and that the Rule should be set aside under the APA as being arbitrary and capricious, an abuse of discretion, and otherwise not in accordance with law.

In additions to FSR, the signatories to the brief included the American Bankers Association, the American Financial Services Association, the Consumer Bankers Association, the Consumer Mortgage Coalition, the Mortgage Bankers Association, and the Independent Community Bankers of America.

For more information, please contact Richard Foster,

CFPB Director Alleges Racial Disparities in Lending Markets in Speech to the NAACP

In a speech at the NAACP’s annual convention in July, the Consumer Financial Protection Bureau’s (“CFPB”) Director, Richard Cordray, spoke out sharply against three perceived areas of discrimination: redlining in mortgage lending, discrimination in auto lending, and high-cost payday loans. According to Cordray, these are areas where the CFPB will continue to combat racial disparities. Cordray likened discriminatory financial practices to acts of violence against minority groups that have made recent news headlines. Cordray asserted that increasing transparency regarding financial practices — “the investigation and analysis and identification and exposure of wrongdoing” – is the key to affecting change. Economic rights, Cordray said, are civil rights, and the CFPB will continue to impose protective regulation.

Although Cordray admitted that so-called “redlining” in mortgage lending has decreased in recent years, he argued that it has not disappeared completely. Furthermore, he contended, some mortgage practices are increasing the disparities that exist between white and African-American households. Geographic redlining, in which minority groups in certain low-income areas have little or no access to credit, still frequently occurs, and the issue of “credit invisibility” in low-income areas leads to further economic deprivation.

Similarly, Cordray argued auto lending discrimination heightens disparities and cycles of poverty. He noted that “indirect auto lending,” in which auto dealerships sell loans to banks or credit unions, allow dealers to charge higher interest to the consumer than was offered by the bank, regardless of a consumer’s creditworthiness. The CFPB, Cordray said, has found many instances where dealers make quick assessments regarding loan rates. This dealer discretion can lead to discrimination, and the CFPB claims it has found that African-Americans and Hispanics are often charged higher rates. To combat discrimination in this area, the CFPB has required some banks to implement aggressive compliance management frameworks.

Finally, Cordray addressed payday lending. In lower income areas where some consumers live paycheck to paycheck, payday lending stores offer quick cash and, quoting the late NAACP chairman Julian Bond, consumers become “trapped in the quicksand of poverty.” The CFPB is addressing what Cordray called, “long-term debt traps” by supervising payday lenders’ compliance and using enforcement actions to stop harmful practices.

For more information, please contact Richard Foster,

FSR comments on the Proposed Consolidated Audit Trail Plan

On Friday, July 15, 2016, the Financial Services Roundtable (“FSR”) submitted a comment letter to the U.S. Securities and Exchange Commission (“SEC”) regarding the Joint Notice on the National Market System (”NMS”) Plan Governing the Consolidated Audit Trail.

The SEC adopted Rule 613 of Regulation NMS to create a single comprehensive database—the Consolidated Audit Trail (“CAT”)—that would allow efficient and accurate tracking of all trading activity throughout the U.S. markets in equity and option securities. The SEC and other regulators expect the CAT to “increase the effectiveness of market research and monitoring, event re-construction, and the ability to identify and investigate market misconduct.” Among other things, the rule requires the self-regulatory organizations to jointly submit a plan (called an NMS plan) to create, implement and maintain the CAT. The rule specifies the type of data to be collected (such as customers’ personally identifiable information), and when the data is to be reported to a central repository.

FSR generally supports the CAT Plan, but addressed key concerns in the comment letter. Most notably, FSR is concerned that, given the sensitivity of the CAT data collected, the SEC and the Participants should consider the security protocols for the CAT data and ensure that they are strong. Specifically, they should vet each Plan Processor’s proposal regarding personally identifiable information security, protect the data throughout its lifecycle using secure, industry-accepted encryption mechanisms, and develop reporting procedures to notify industry members promptly of any CAT data breach.

Furthermore, FSR noted that the current proposal fails to adequately delineate liability in case of a cybersecurity breach for data in transit and at the Central Repository, and fails to prohibit the export of personally identifiable information once it is submitted by industry members and stored in the central repository. To address members concerns about cybersecurity breaches—including the cost of insurance coverage for such incidents—FSR proposed that CAT NMS LLC purchase an insurance policy that covers potential breaches and extends to the Industry Members, which would be more cost-effective than individual firms purchasing coverage.

FSR also noted concerns about the cost of the CAT Plan—estimated to be in excess of $3 billion—and its impact on investors. FSR suggested that costs may be reduced by decommissioning current reporting systems simultaneously with implementation of the CAT Plan to avoid duplicative reporting requirements and costs. Additionally, costs also should be allocated to SEC and other regulators who will use the system to fulfill their regulatory oversight and surveillance needs.

FSR proposed the synchronization of retirement and implementation of all reporting systems, and a six- to twelve-month extension of the CAT Plan implementation timetable to allow Industry Members to comply with other significant regulatory changes, including the Department of Labor’s fiduciary duty regulation as well as the T+2 implementation.

For more information, please contact Felicia Smith,

FSR Responds to SEC Request for Comment on Required Financial Disclosures

On Thursday, July 21, 2016, the Financial Services Roundtable (“FSR”) submitted a comment letter to the U.S. Securities and Exchange Commission (“SEC”) regarding the Concept Release, Business and Financial Disclosure Required by Regulation S-K.

Regulation S-K was adopted to provide a uniform and integrated disclosure system and later expanded to be a central repository for non-financial statement disclosure requirements to reduce costs to registrants and remove duplicative disclosures. The SEC’s Concept Release is a part of an initiative by the Division of Corporation Finance to assess whether the requirements under Regulation S-K “provide the information that investors need to make informed investment and voting decisions and whether any of [the SEC’s] rules have become outdated or unnecessary.”

In its comment letter to the SEC, FSR urged the SEC to honor the recently enacted Defend Trade Secrets Act of 2016 and not expand the Description of Business to include new disclosures relating to trade secrets, because the economic value of trade secrets would be depleted if disclosure were required.

Additionally, FSR supported the SEC’s removal of duplicative disclosure requirements under the Management’s Discussion and Analysis of Financial Condition and Results of Operations provision and recommended that any further requirements contain a qualitative threshold, be accompanied by guidance from the SEC, and reflect appropriate sunset provisions.

FSR supported the presentation of “risk” and “risk management” disclosures in a single section to reduce repetition and enhance the ability of investors to appreciate fully all material risks. FSR also supported the SEC’s initiative to modify or eliminate certain exhibits (e.g., computation of earnings to fixed charges) required in quarterly or annual reports filed under the Securities Exchange Act of 1934.

The SEC should review Industry Guide 3 requirements for certain bank holding companies and provide guidance that takes into account the streamlined and more up-to-date disclosure requirements related to credit risk exposure and credit mitigation techniques set forth under Basel Pillar 3.

The SEC should review Industry Guide 6 for property and casualty insurance underwriters and eliminate the 10-year consolidated-loss development table in the MD&A, in light of the FASB’s new disclosure requirements regarding short-duration insurance contracts.

For more information, please contact Felicia Smith,

OFR Releases New Tracking Resources for Money Market Funds

On July 20, the Office of Financial Research (“OFR”) released its Money Market Fund (“MMF”) Monitor, which is designed to track money market investment portfolios via funds asset types, counterparties, and other characteristics. OFR notes that the monitor, which maps trends and developments across the MMF industry in the United States and internationally, analyzes data from the portfolio holdings of about 500 funds and currently contains over five years of holdings data and 4 million records. The OFR believes the interactive nature of the monitor makes complex data accessible to users and allows for the tracking of portfolios, risk profiles of funds, and investment trends in the MMF industry.

During the 2008 financial crisis, lack of data about the holdings of money market funds made it difficult for regulators to identify vulnerabilities and risks in the market. In 2010, the Securities and Exchange Commission (“SEC”) addressed this issue by requiring money market funds to limit risk and increase their holdings of liquid securities. The SEC also began collecting data on portfolio holdings, which it passed to the OFR. This data is now being used to shape the MMF Monitor. OFR notes more comprehensive data on MMFs and fund portfolio holdings allows regulators to identify risk efficiently, and the MMF Monitor allows investors and regulators to see the big picture of collective fund investments.

The MMF Monitor contains six interactive charts:

(1)  Investments by Any U.S. MMF tracks specific funds and investments, organized by MMF fund managers. Within each fund manager, users may track investments and risk by country, sector, and credit risk.

(2)  U.S. MMFs’ Investments by Fund Category allows users to track industry-wide risks. The chart is organized according to new regulatory categories for fund reporting. The prime funds category is divided into prime retail and prime institutional; the government funds category is divided into fees and gates and no fees and gates; the tax exempt funds category is divided into tax exempt retail and tax exempt institutional.

(3)  Investments by U.S. Prime MMFs monitors the exposures of MMF managers to securities issuers by region, country, sector, credit, and fund manager.

(4) U.S. MMFs’ Investments in the Repo Market tracks the repo market via institutional cash investors such as MMFs. Investments are classified as U.S. Treasury repos backed only by U.S. Treasuries or cash; U.S. government agency repos backed only by U.S. government agency securities, U.S. Treasuries, or cash; and other repos backed by other collateral. Users can explore the data using different levels: Repo Type, Counterparty, Fund Manager, and Fund Name.

(5) U.S. MMFs’ Repos with the Federal Reserve allows users to track investments by specific fund in the Federal Reserve’s RRP and with private counterparties.

(6) Federal Reserve Repo Facility Total Utilization and MMFs’ Participation tracks total RRP use by other non-money market funds participants and allows users to view past patterns of fund participation in relation to the total use of the RRP program.

The OFR’s guide to the monitor is available on the OFR website.

For more information, please contact Felicia Smith,