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Nutter Bank Report, June 2018
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- Federal Banking Agencies Propose to Ease Compliance Burdens Under the Volcker Rule
- OCC Issues Guidance on Community Reinvestment Act Performance Evaluations
- SEC Official Indicates that Two Popular Cryptocurrencies Will Not Be Viewed as Securities
- U.S. Senate Considering Legislation to Decriminalize Marijuana Under Federal Law
- Other Developments: Deposit Return Items and Securities Settlement Cycles
1. Federal Banking Agencies Propose to Ease Compliance Burdens Under the Volcker Rule
The federal banking agencies, together with the SEC and the CFTC, have jointly proposed to amend the Volcker Rule to tailor the application of the rule based on the size and scope of a banking organization’s trading activities and to reduce the compliance burden for small and mid-sized banking organizations that do not have large trading operations. The proposed amendments first published on June 4 would apply to banking organizations that have $10 billion or more in total consolidated assets or that have total trading assets and trading liabilities that are more than 5% of total consolidated assets. The proposed amendments would require banking organizations with trading activities of greater than $10 billion in total trading assets and liabilities (excluding U.S. government obligations) to adopt a six pillar compliance program that would include a system of internal controls reasonably designed to monitor compliance and independent testing and audit of the effectiveness of the compliance program, among other things. Banking organizations with trading activities between $1 billion and $10 billion in total trading assets and liabilities (excluding U.S. government obligations) would be permitted to adopt a simplified compliance program under the proposed amendments. Banking organizations with trading activities of less than $1 billion in total trading assets and liabilities (excluding U.S. government obligations) would be granted a presumption of compliance and would not be required to demonstrate compliance with the Volcker Rule on an ongoing basis. Public comments on the proposed amendments are due within 60 days after the proposed amendments are published in the Federal Register, which is expected shortly. Click here for a copy of the proposed amendments.
Nutter Notes: The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) added a new section 13 to the Bank Holding Company Act of 1956 (the “BHC Act”), commonly known as the Volcker Rule, that generally prohibits a banking entity from engaging in proprietary trading of securities and other financial instruments or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund, subject to certain exceptions. Section 13 of the BHC Act generally prohibits banking entities from engaging as principal in trading for the purpose of selling financial instruments in the near term or otherwise with the intent to resell in order to profit from short-term price movements. The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”), which was signed into law on May 24, 2018, amended section 13 of the BHC Act by narrowing the definition of banking entity and revising the statutory provisions related to the naming of covered funds. The federal banking agencies announced that they plan to address these amendments to section 13 of the BHC Act through a separate rulemaking process, and that none of the proposed amendments to the regulations that implement the Volcker Rule would implement the recent statutory changes. The federal banking agencies also announced, however, that, until the adoption of regulations that address the amendments to section 13 of the BHC Act, the agencies will not enforce the current regulations that implement the Volcker Rule in a manner inconsistent with the changes made by the EGRRCPA with respect to banking organizations excluded by the statute and with respect to the naming restrictions for covered funds.
2. OCC Issues Guidance on Community Reinvestment Act Performance Evaluations
The OCC has issued new guidance to national banks and federal savings associations on supervisory policies and processes relating to the ways in which examiners evaluate and communicate bank performance under the Community Reinvestment Act (the “CRA”). The OCC announced that its guidance published on June 15 is meant to clarify and simplify the OCC’s CRA examination policies and processes while the agency works on CRA modernization efforts. The new guidance addresses the type of information considered and presented in written CRA performance evaluations, the process for sharing CRA evaluation data and ratings with OCC-supervised institutions, and factors considered by examiners when evaluating CRA performance under the small- and large-bank lending tests, among other things. According to the new guidance, the CRA evaluation period for small and intermediate small banks will be expanded to three full calendar years. The evaluation period for large banks will include each full calendar year starting with the end date of the previous CRA exam, according to the new guidance. Click here for a copy of the new CRA guidance.
Nutter Notes: The CRA guidance also explains that each CRA assessment area is reviewed under either full-scope procedures, which require analysis of both quantitative and qualitative data, or limited-scope procedures, which focus primarily on quantitative data with consideration of qualitative data generally limited to demographic and competitive factors. According to the new guidance, if a bank has more than one assessment area in a state, at least one area will be evaluated using full-scope procedures, but the remaining areas in the state may be reviewed using limited-scope procedures. Examiners consider several factors when determining which assessment areas receive a full- or limited-scope review, such as prior CRA performance evaluations, available community contact materials, Home Mortgage Disclosure Act and CRA data, and the bank’s lending, investment, and service activities. The new guidance also clarifies that community development credit for activities that promote economic development will be given for loans, investments, and services that help to create, retain, or improve jobs for low- and moderate-income (“LMI”) individuals, in LMI geographies, or in areas targeted for redevelopment by federal, state, local, or tribal governments.
3. SEC Official Indicates that Two Popular Cryptocurrencies Will Not Be Viewed as Securities
In a recent speech, William Hinman, the SEC’s Director of the Division of Corporation Finance, announced that two popular cryptocurrencies—Bitcoin and Ether—are not securities, but that some other cryptocurrencies may be classified and regulated as securities by the SEC. In a June 14 speech, Director Hinman explained that a key to the SEC’s determination about whether a cryptocurrency sale represents an offering of securities is whether purchasers may reasonably expect to realize a profit based on the efforts of a central third party. The expectation of profits from the efforts of a third party is part of the “investment contract” test for whether a financial transaction represents the sale of a security, according to Director Hinman. He added that the SEC reasoned that, if the network on which a cryptocurrency functions is sufficiently decentralized, then the cryptocurrency may not represent an investment contract because the efforts of a central third party are no longer a key factor for determining the value of the cryptocurrency. Director Hinman stated that in the cases of Bitcoin and Ether, the SEC determined that the networks of those two cryptocurrencies are sufficiently decentralized so that a purchaser may not reasonably expect to realize a profit from the efforts a centralized person or group carrying out essential managerial or entrepreneurial efforts. As a result, he said, the SEC does not view those two cryptocurrencies as securities. Director Hinman did point out that other cryptocurrencies may be sold and managed in a way that will result in the SEC classifying and regulating them as securities. Click here for the text of the speech.
Nutter Notes: Director Hinman explained that if a cryptocurrency is sold as part of an investment by promoters to develop an enterprise, that can cause a cryptocurrency to be classified as a security because it is evidence of an investment contract. While the SEC did not see a central third party whose efforts are a key determining factor in Bitcoin and Ether, other initial coin offerings are likely to be classified as securities offerings by the SEC. Director Hinman explained that promoters who sell cryptocurrencies to raise money to develop networks on which digital assets will operate, as an alternative to raising capital through traditional equity or debt financing, are engaged in the sale of investment contracts that are best viewed as securities. In such cases, Director Hinman explained, funds are raised with the expectation that the promoters will build their system and purchasers of the cryptocurrency can earn a return on the instrument, usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases. Such promoters will be subject to SEC enforcement action if they have failed to comply with the federal securities laws, including disclosure requirements applicable to the offering or sale of securities.
4. U.S. Senate Considering Legislation to Decriminalize Marijuana Under Federal Law
Senator Elizabeth Warren, a Massachusetts Democrat, and Senator Cory Gardner, a Colorado Republican, have co-sponsored a bill known as the Strengthening the Tenth Amendment Through Entrusting States Act, or STATES Act, which would exempt those in compliance with state marijuana laws from prosecution under federal law, subject to certain exceptions. The STATES Act, introduced in the U.S. Senate on June 7, would not remove or “delist” marijuana under the federal Controlled Substances Act (the “CSA”). Instead, the STATES Act would amend the CSA to provide that any person acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marijuana is generally exempt from the CSA. The STATES Act would also expressly provide that the proceeds from any marijuana transaction in compliance with state law and the STATES Act will not be deemed to be the proceeds of an unlawful transaction for BSA/AML compliance purposes. The STATES Act would not extend the federal exemption to any person who violates the CSA with respect to any other drug, violates any state marijuana law, or hires a person under the age of 18 to participate in a marijuana business. The STATES Act would also impose criminal penalties on certain other dangerous marijuana-related activity regardless of whether a person is in compliance with state law. Click here for a copy of the STATES Act.
Nutter Notes: In a related development, Senators Chuck Schumer and Bernie Sanders (both Democrats) proposed a bill to delist marijuana under the CSA on June 27. The bill, known as the Marijuana Freedom and Opportunity Act, would decriminalize marijuana at the federal level, though it would maintain federal law enforcement authority to prevent marijuana trafficking from states that have legalized marijuana to those that have not. The bill would also provide authority to the Treasury Department to regulate marijuana advertising and promotion in the same way as is currently done with tobacco, so that marijuana businesses would not be permitted to target children. The STATES Act is currently co-sponsored by a bipartisan group of nine senators, including Senators Warren and Gardner. The Marijuana Freedom and Opportunity Act is expected to be introduced in the Senate shortly and it is not clear whether either bill has sufficient support to be enacted. Click here for a copy of the Marijuana Freedom and Opportunity Act.
5. Other Developments: Deposit Return Items and Securities Settlement Cycles
- Massachusetts Division of Banks Raises Deposit Return Item Fee
The Massachusetts Division of Banks issued its annual determination of the maximum allowable fee that banks may charge for deposit return items (“DRI fee”), raising the DRI fee from $7.23 per item to $7.81 per item. The new DRI fee announced on May 31 will be in effect from July l, 2018 to June 30, 2019, or until the Division issues its 2019 DRI fee decision.
Nutter Notes: The DRI fee is the maximum allowable fee that Massachusetts state-chartered banks can charge to certain consumer deposit accounts (those established for personal, family, or household purposes) for processing dishonored checks, drafts, or money orders. Click here for a copy of the Division’s decision.
- Federal Banking Agencies Shorten Standard Settlement Cycle for Bank Securities Transactions
The federal banking agencies issued a final rule on June 1 to shorten the standard settlement cycle for securities purchased or sold by banks from three days to the number of business days in the standard settlement cycle followed by registered broker-dealers. The new standard settlement cycle, which will become effective as of October 1, 2018, will be two days unless otherwise agreed to by the parties at the time of the transaction.
Nutter Notes: The final rule aligns the standard securities settlement cycle for banks with the new industry standard settlement cycle as implemented by the SEC. Click here for a copy of the final rule.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
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