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07.31.2023 | Legal Update

Headlines

1. The Federal Reserve’s New Instant Payments Service Has Gone Live
2. SEC Adopts Rules on Cybersecurity Incident and Risk Management Disclosures
3. Agencies Propose Changes to Large Bank Capital Requirements to Implement Basel III
4. Mutual Holding Company and its Majority-Owned Mid-Tier Holding Company Subsidiary Ordered to Serve as a Source of Strength for Subsidiary Bank
5. Other Developments: Money Market Funds and Mortgage Lending

1. The Federal Reserve’s New Instant Payments Service Has Gone Live

The Federal Reserve has announced that its FedNow^SM Service, a new interbank settlement service with clearing functionality to support instant payments, went live on July 20 with 35 early-adopting banks and credit unions. The Federal Reserve Banks may grant access to FedNow to any financial institution that is eligible to maintain a master account with a Federal Reserve Bank. FedNow participants have the option to play one or a combination of roles in the service, including as a service provider of a FedNow participant or acting as a correspondent. A FedNow service provider acts as agent of another FedNow participant to perform tasks such as initiating, transmitting, or receiving messages on behalf of the participant, operating or managing the electronic connection used to send or receive messages on behalf of the participant, or selecting security procedures, profile settings, or processing options on behalf of the participant. A correspondent maintains a master account with a Federal Reserve Bank and a settlement account for another FedNow participant. For all payments settled with FedNow, the originators and beneficiaries must either be FedNow participants or must have a direct U.S. deposit account relationship with a FedNow participant. Click here for a copy of the Federal Reserve’s announcement.

Nutter Notes:  Unlike peer-to-peer payment systems, FedNow payments will be settled in the Federal Reserve master accounts of participating banks and will not require prefunding. FedNow participants are required to settle transactions either in their own master account or the master account of a single correspondent bank. According to the Federal Reserve, FedNow participants are expected to manage their master account balances to avoid overnight overdrafts and to stay within intraday overdraft capacity. The FedNow Operating Procedures state that the Federal Reserve Banks generally will not reject FedNow transactions based on a participant’s insufficient balance or overdraft capacity, but that a Federal Reserve Bank may temporarily suspend the participant from using the service if a participant’s intraday overdraft reaches a level that the Federal Reserve Bank has determined would pose heightened risk to that Federal Reserve Bank. A participant will be notified in the event that a Federal Reserve Bank has determined to suspend the participant’s use of FedNow. The FedNow System differs from other payment systems operated by the Federal Reserve, such as FedWire and FedACH, because FedNow will be accessible to consumers and their funds will be available instantly. In comparison, FedWire is geared toward large-scale corporate payments that are only processed during business hours, and FedACH is a batch processing-based system. The maximum transaction value limit for FedNow is initially set at $500,000, but participating banks will have the option to adjust the default limit within that maximum transaction value limit, according to the Federal Reserve.

2. SEC Adopts Rules on Cybersecurity Incident and Risk Management Disclosures

The SEC has adopted a final rule that will require publicly traded companies, including banking organizations, to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The final rule released on July 26 will require a company to disclose any cybersecurity incident it has experienced that is determined to be material, and to describe the material aspects of the nature, scope, and timing of the incident on a Form 8-K. The disclosure must also describe any material impact or reasonably likely material impact of the incident on the company, including its financial condition and results of operations. The Form 8-K will generally be due four business days after the publicly traded company determines that a cybersecurity incident is material, although the disclosure may be delayed if the U.S. Attorney General determines that immediate disclosure would pose a substantial risk to national security or public safety and notifies the SEC of such determination in writing. The final rule also will require companies to make disclosure annually of their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats. The disclosure must describe the material effects or reasonably likely material effects of risks from cybersecurity threats and previous cybersecurity incidents on the company’s Form 10-K. The final rule will become effective 30 days after it is published in the Federal Register, which is expected shortly. The Form 10-K disclosures will be due beginning with annual reports for fiscal years ending on or after December 15, 2023. The Form 8-K disclosures will be due beginning the later of 90 days after the date of publication in the Federal Register or December 18, 2023. Click here to view the SEC’s final rule.

Nutter Notes:  The final rule requires a company to determine the materiality of a cybersecurity incident without unreasonable delay after discovering it. The standard for determining whether a cybersecurity incident is material is consistent with the standard established in existing case law that addresses materiality in the securities laws. Under that standard, a cybersecurity incident will be material if there is a substantial likelihood that a reasonable person would consider it important in making an investment decision, or if it would have significantly altered the “total mix” of information made available to investors. The new disclosure requirements do not specify whether the materiality determination should be performed by the board of directors, a board committee, or one or more officers. According to the SEC, a company may establish a policy tasking one or more persons to make the materiality determination.

3. Agencies Propose Changes to Large Bank Capital Requirements to Implement Basel III

The federal banking agencies have released a proposed rule that would modify capital requirements for large banks to implement the final components of recent changes to international capital standards issued by the Basel Committee on Banking Supervision, commonly referred to as Basel III. According to the agencies, the proposal released on July 27 is intended to change capital requirements to better reflect underlying risks and increase the consistency and transparency of how large banks measure their risks. The proposed changes generally would apply to banks with total assets of $100 billion or more. The proposal would change the capital framework in four main areas: credit risk, market risk, operational risk, and credit valuation adjustment risk. The proposal also includes changes in response to the recent liquidity crisis that was highlighted with the failure of Silicon Valley Bank and others in March 2023. Those changes would require large banks to include unrealized gains and losses from certain securities in their capital ratios, comply with the supplementary leverage ratio requirement, and comply with the countercyclical capital buffer, if activated. Public comments on the proposal are due by November 30, 2023. Click here for a copy of the proposed rule.

Nutter Notes: According to the federal banking agencies, the proposed changes to the regulatory capital framework for large banks are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements for affected banking organizations. The agencies expect that the increase would mainly affect the largest and most complex banking organizations. The agencies believe that most affected banks currently would have enough capital to meet the proposed requirements. Separately, the Federal Reserve also released a proposal on July 27 that would make certain adjustments to the calculation of the capital surcharge for Global Systemically Important Bank Holding Companies (GSIBs). According to the Federal Reserve, the proposed changes would better align the surcharge to each banking organization’s systemic risk profile by measuring its systemic importance averaged over the entire year, instead of only at the year-end value. Public comments on the proposal are due by November 30, 2023. Click here for a copy of the proposed rule capital surcharges for GSIBs.

4. Mutual Holding Company and its Majority-Owned Mid-Tier Holding Company Subsidiary Ordered to Serve as a Source of Strength for Subsidiary Bank

In an unusual enforcement action, the Federal Reserve has entered into an agreement with a mutual holding company and its majority-owned mid-tier stock holding company subsidiary that requires the holding companies to take certain steps to serve as a source of strength for their subsidiary federal savings bank, including taking steps to ensure that the subsidiary bank complies with a consent order entered into with the OCC. The Federal Reserve’s enforcement action announced on June 30 prohibits the holding companies from declaring or paying dividends, engaging in share repurchases, or making any other capital distributions without the prior written approval of the Federal Reserve. A minority of the mid-tier holding company’s capital stock is owned by public stockholders and its subsidiary bank’s employee stock ownership plan. The enforcement action also prohibits the holding companies from, directly or indirectly, incurring, increasing, or guaranteeing any debt without the prior written approval of the Federal Reserve. Click here for a copy of the enforcement action.

Nutter Notes:  The Federal Reserve’s enforcement action includes certain restrictions on executive management of the holding companies. For example, the enforcement action requires the holding companies to notify the Federal Reserve before appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position. The enforcement action also requires the holding companies to comply with the restrictions on indemnification and severance payments to new directors, senior executive officers, and other institution-affiliated parties under section 18(k) of the Federal Deposit Insurance Act. The Federal Reserve’s enforcement action follows an earlier consent order the OCC entered into with the subsidiary federal savings bank that addressed, among other things, compliance deficiencies relating to information technology security and controls and information technology risk governance, board and management oversight of corporate risk governance, and BSA/AML risk management.

5. Other Developments: Money Market Funds and Mortgage Lending

• SEC Adopts Money Market Fund Reforms

The SEC has adopted a final rule changing certain requirements that govern money market funds under the Investment Company Act of 1940, including by increasing minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The rule changes announced on July 12 will become effective 60 days after they are published in the Federal Register, which is expected shortly, and will include a tiered transition period for funds to comply with the changes. Click here for a copy of the final rule.

Nutter Notes:  Banks that make money market funds available to fiduciary customers, offer automatic sweeps between deposit accounts and money market funds, or invest in money market funds may be affected by compliance, liquidity, operational, or other risks related to the SEC’s final rule. The changes will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. According to the SEC, these changes are intended to reduce the risk of investor runs during periods of market stress.

• FFIEC Releases 2022 Mortgage Lending Data

The FFIEC announced on June 29 the availability of HMDA data on 2022 home mortgage lending transactions. According to the report, the share of home mortgages originated by non-bank, independent mortgage companies decreased in 2022, accounting for 60.2% of first lien, one- to four-family, site-built, owner-occupied home-purchase loans, down from 63.9% in 2021. Click here to access the report.

Nutter Notes:  The 2022 HMDA data includes information on 14.3 million home loan applications. According to the FFIEC, 11.5 million of the reported applications were closed-end loans and 2.5 million were open-end loans. Another 287,000 records are from financial institutions that made use of partial exemptions under the Economic Growth, Regulatory Relief, and Consumer Protection Act and did not indicate whether the records were closed-end or open-end loans.

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 Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton and Timothy J. Rennie. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich kehrlich@nutter.com Tel: (617) 439-2989	Matthew D. Hanaghan mhanaghan@nutter.com Tel: (617) 439-2583	Michael K. Krebs mkrebs@nutter.com Tel: (617) 439-2288

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