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11.30.2016 | Legal Update

The Nutter Bank Report is a monthly publication of the firm's Banking and Financial Services Group.

Headlines
1. Massachusetts Voters Approve Legalization of Marijuana for Recreational Purposes
2. DOL Issues Guidance on Bank Networking Arrangements Exemption to Fiduciary Rule
3. FFIEC Issues Guidance on Revisions to Consumer Compliance Rating System
4. FDIC Adopts Final Rule on Deposit Recordkeeping Requirements for Large Banks
5. Other Developments: Asset Quality, Service Providers and Exempt Employees

1. Massachusetts Voters Approve Legalization of Marijuana for Recreational Purposes

Massachusetts voters have approved a ballot initiative legalizing the use of marijuana for recreational purposes, which will become law on December 15, 2016 and likely expand an already underbanked industry in the state. The ballot initiative approved on November 8, known as Question 4, will permit the sale to, and use of marijuana by, persons at least 21 years old, and will create a new Cannabis Control Commission intended to oversee marijuana legalization in a manner generally similar to the way alcoholic beverages are regulated in Massachusetts. While the use of marijuana for medical purposes has been legal in Massachusetts since 2013, it is a federal crime under the federal Controlled Substances Act (“CSA”) to manufacture, distribute, or dispense marijuana. Financial transactions involving proceeds generated by marijuana-related activities can become subject to federal enforcement action, including criminal prosecution, under federal anti-money laundering statutes and the Bank Secrecy Act (“BSA”). Banks that conduct transactions in the proceeds of marijuana-related activities could face criminal liability under the BSA for failing to identify or report financial transactions that involved such proceeds. Although the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has previously issued guidance on customer due diligence and reporting requirements under the BSA for banks providing services to marijuana-related businesses legalized under state law, banks still face substantial risks related to violation of federal law for providing financial services to marijuana-related businesses. Click here for a copy of the text of Question 4.

    Nutter Notes: FinCEN published FIN-2014-G001 (the “FinCEN Guidance”) on February 14, 2014 to “enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” The FinCEN Guidance responded to the issuance on August 29, 2013 of a memorandum from Deputy Attorney General James M. Cole to all United States Attorneys (the “Cole Memo”) that clarifies whether and to what extent the U.S. Department of Justice intends to enforce federal law prohibiting the possession, production, processing, use and sale of marijuana where such activities are permissible under state law. The Cole Memo implies that activities that do not threaten one or more specified federal marijuana enforcement priorities are less likely to become subject to federal law enforcement action. The FinCEN Guidance describes the due diligence review that a bank should conduct in order to determine whether a marijuana-related business threatens one of the federal enforcement priorities or violates state law. The Cole Memo describes the federal marijuana enforcement priorities in broad terms that encompass a wide range of potential conduct that may result in federal law enforcement action. Therefore, a bank that reasonably determines that a marijuana-related business does not threaten one of the federal enforcement priorities or violate state law, based on a due diligence review in compliance with the FinCEN Guidance, still faces risks related to violation of federal law if the bank provides financial services to that business. In addition, although the FinCEN Guidance is meant to clarify how a bank can provide services to a marijuana-related business consistent with the bank’s BSA obligations, the FDIC, Federal Reserve System, and OCC have not provided any guidance as to whether compliance with FinCEN’s due diligence procedures would provide any sort of a safe harbor from examination criticism or regulatory enforcement action for providing financial services to a marijuana-related business.

2. DOL Issues Guidance on Bank Networking Arrangements Exemption to Fiduciary Rule

The U.S. Department of Labor (“DOL”) has issued guidance in the form of answers to frequently asked questions about recent amendments to the DOL’s conflict of interest rule that define who is a fiduciary under the Employee Retirement Income Security Act of 1974 (“ERISA”) as a result of providing investment advice. The DOL guidance issued on October 27, titled Conflict of Interest Exemptions FAQs, clarifies that merely recommending an unaffiliated investment advisor to an investor constitutes fiduciary investment advice under the new fiduciary rule. According to the DOL guidance, a bank’s receipt of compensation as a result of such advice is a prohibited transaction under the new fiduciary rule unless an exemption is available. In particular, the Best Interest Contract (“BIC”) Exemption under the new fiduciary rule is available for advisers, including banks, that make investment recommendations to retail “Retirement Investors,” including employee benefit plan participants and beneficiaries, IRA owners, and non-institutional (i.e., retail) fiduciaries. The BIC Exemption provides that a bank or bank employee may receive compensation pursuant to a Bank Networking Arrangement in connection with their provision of investment advice to a Retirement Investor, provided the investment advice adheres to the “Impartial Conduct Standards” set forth in BIC Exemption. While the DOL’s final conflict of interest rule became effective on June 7, the rule’s amended definition of fiduciary advice and the associated exemptions, including the BIC Exemption and Bank Networking Arrangement provisions, will apply to investment recommendations made on or after April 10, 2017. Click here for a copy of the DOL’s guidance on the new fiduciary rule.

    Nutter Notes: A Bank Networking Arrangement is defined in the BIC Exemption as an arrangement for the referral of retail non-deposit investment products that satisfies applicable federal banking, securities, and insurance regulations, under which bank employees refer bank customers to an unaffiliated investment adviser registered under the Investment Advisers Act of 1940 or under the laws of the state in which the adviser maintains its principal office and place of business, an insurance company qualified to do business under the laws of a state, or a broker or dealer registered under the Securities Exchange Act of 1934. The Impartial Conduct Standards require that the advice satisfy the core fiduciary standards required under the BIC Exemption for conflicted investment advice—the bank must provide advice that is in the customer’s best interest (i.e., advice that reflects the care, skill, prudence, and diligence that a prudent person would use under the circumstances), avoid misleading statements, and receive no more than reasonable compensation. Additional standards of fiduciary conduct generally required to qualify for the BIC Exemption do not apply if the advice (including a recommendation by a bank of an unaffiliated investment adviser) qualifies under the Bank Networking Arrangement provisions of the BIC Exemption.

3. FFIEC Issues Guidance on Revisions to Consumer Compliance Rating System

The Federal Financial Institutions Examination Council (“FFIEC”) has issued guidance on its final revisions to the Uniform Interagency Consumer Compliance Rating System (“CC Rating System”) that reflect various regulatory and other changes that have occurred in the years since the system was established. According to the guidance released on November 8, the revisions to the CC Rating System are meant to better align the system with the federal banking agencies’ current risk-based examination approaches. The revisions to the CC Rating System do not set new or higher supervisory expectations for banks and will represent no additional regulatory burden, according to the guidance. The consumer compliance rating is derived through an evaluation of a bank’s performance under each of three assessment factors: Board and Management Oversight, Compliance Program, and Violations of Law and Consumer Harm. Click here for a copy of the guidance on the revised CC Rating System.

    Nutter Notes: According to the FFIEC’s guidance, the revised CC Rating System does not assign specific numeric ratings to any of the above assessment factors and a bank’s rating is not based on a numeric average or any other quantitative calculation. As a result, a bank does not have to receive a satisfactory rating in all categories to receive an overall satisfactory rating. On the other hand, even if some assessments are rated as satisfactory, a bank can still receive an overall less than satisfactory rating, according to the guidance. The revised rating system uses a scale of 1 through 5, with 1 representing the highest rating and lowest degree of supervisory concern and 5 representing the lowest rating and most critically deficient level of performance and thus the highest degree of supervisory concern. A bank’s overall rating under the CC Rating System is intended to reflect a comprehensive evaluation of the bank’s performance by considering the categories and assessment factors in the context of the bank’s size, complexity, and risk profile, according to the guidance.

4. FDIC Adopts Final Rule on Deposit Recordkeeping Requirements for Large Banks

The FDIC has adopted a final rule establishing recordkeeping requirements for banks with more than two million deposit accounts to facilitate rapid payment of insured deposits to customers if the bank were to fail. The new rule, adopted on November 15, generally requires these banks to maintain complete and accurate data on each depositor, and to ensure that their information technology (“IT”) systems are capable of calculating the amount of insured money for most depositors within 24 hours of a failure. Banks with more than two million deposit accounts will have three years to develop the recordkeeping and IT systems required for compliance with the new rule. The final rule becomes effective on April 1, 2017. The FDIC announced that it intends to issue functional design assistance for system programming prior to the effective date of the rule. Click here for a copy of the new deposit recordkeeping rule.

    Nutter Notes: In response to comments the FDIC received on the proposed rule indicating that covered banks might have difficulty meeting the new recordkeeping requirements with respect to certain deposit accounts, including trust deposits, brokered deposits, and other accounts that qualify for pass-through deposit insurance coverage, the final rule establishes alternative requirements for these accounts and also permits banks to develop systems that process these accounts during a longer period after a failure, except for certain accounts that have transactional features. The final rule also permits banks to submit a request to the FDIC for an exemption from the recordkeeping requirements if the bank’s deposit-taking business model does not pose a significant risk to the FDIC insurance fund or depositors because all deposits the bank accepts are fully insured.

5. Other Developments: Asset Quality, Service Providers and Exempt Employees

• OCC Updates Asset Quality Core Assessment Procedures

The OCC published updated asset quality core assessment procedures for the Community Bank Supervision booklet of the Comptroller’s Handbook on November 3. The updates incorporate supervisory guidance issued since the last update to the booklet and enhance the existing core assessment procedures. Click here for a copy of the updated booklet.

    Nutter Notes: The revisions to the Community Bank Supervision booklet include updated concentration risk management procedures, updated stress testing guidance for community banks, and procedures for the credit underwriting assessment. According to the OCC, the revised booklet also enhances retail credit examination procedures, enhances appraisal and evaluation examination procedures, and enhances allowance for loan and lease losses examination procedures.

• CFPB Amends and Reissues Guidance to Banks on Oversight of Service Providers

The CFPB on October 31 issued revised guidance to banks and other financial institutions on the oversight of service providers. The revised guidance, Compliance Bulletin and Policy Guidance; 2016-02, Service Providers, replaces CFPB Bulletin 2012-03. Click here for a copy of the revised bulletin.

    Nutter Notes: According to the revised guidance, the CFPB expects banks to oversee their business relationships with service providers in a manner that assures compliance with federal financial consumer law, protects the interests of consumers, and avoids consumer harm. The CFPB also expects that the scope of a bank’s risk management program for service providers may vary depending upon the size, scope, complexity, importance, and potential for consumer harm of the service being performed, according to the revised guidance.

• Federal Court Delays Effective Date of DOL Overtime Rule

A federal district court in Texas on November 22 issued a preliminary injunction that blocks the DOL from enforcing a new rule that would have reduced the number of employees who are exempt from overtime requirements. The rule was set to take effect on December 1. Click here for a copy of the court’s order.

    Nutter Notes: The new DOL rule would double the salary level used to determine whether employees are classified as exempt from overtime under the Fair Labor Standards Act, increasing the exemption threshold from an annual salary of $23,660 to $47,476. The injunction prevents the rule from taking effect pending the outcome of the court’s decision on the claims brought against the DOL challenging the new 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 Bridget L. Vellucci. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.