From the federal financial institution regulators
Banking agencies issue joint statement and RFI on third-party risk management
On July 25, 2024, the Federal Reserve Board (Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) issued a joint statement and related request for information (RFI) on risk management for banks engaging with third parties to provide deposit products and services.
The joint statement reiterates the principles and approach raised in guidance previously issued by the agencies. In it, the agencies state their support of “responsible innovation,” and emphasize that the use of third parties does not “diminish [a bank’s] responsibility to comply with all applicable laws and regulations.” The agencies highlight several risks that could be elevated by third-party arrangements, including:
- Operational and compliance risks, such as the outsourcing of significant operations or compliance functions, lack of access to key records and data maintained by a third party, and insufficient risk management and audit oversight
- Growth-related risks, characterized as the risk associated with rapid growth that outpaces operational and compliance capabilities, and places pressure on capital levels
- Potential end-user confusion caused by misrepresentation of deposit insurance coverage in marketing materials or other statements issued by nonbank third parties
The concurrently issued RFI calls for stakeholder feedback on the nature of bank-fintech arrangements, effective risk management practices, and potential improvements to existing supervisory guidance.
Comments are due Sept. 30, 2024.
OCC updates BAAS
On Aug. 15, 2024, the OCC released an update to the Bank Accounting Advisory Series (BAAS). The BAAS covers a variety of topics and promotes consistent application of accounting standards among national banks and federal savings associations. The BAAS is updated annually to address accounting questions, newly issued and updated accounting standards, and emerging issues observed through March 31, 2024. This edition of the BAAS does not include new questions or substantive updates to existing questions; however, the OCC has made edits to improve general clarity, including revision, relocation, and renumbering of certain existing entries. The OCC noted that these edits do not alter prior conclusions or interpretations from prior editions.
The BAAS does not represent official rules or regulations of the OCC. Rather, it represents the OCC’s Office of the Chief Accountant’s interpretations of GAAP and regulatory guidance based on the facts and circumstances presented. While the BAAS is published by the OCC, the information in the BAAS is relevant to all financial institutions.
FDIC proposes rule to revise brokered deposit regulations
On July 30, 2024, the FDIC board of directors approved a proposal which would broaden existing regulations on brokered deposits by expanding the definition of a deposit broker established under a previous 2020 rule, and amending the qualification criteria for meeting certain exemptions. In the proposal, the FDIC cites some significant risks they perceive can be posed by brokered deposits – including undue reliance on brokered deposits by less-than-well-capitalized insured depository institutions (IDIs), and of underreported brokered deposits both to IDIs and to the Deposit Insurance Fund.
Among such changes, the proposed rule would:
- Eliminate the exception for an entity that maintains an exclusive deposit placement arrangement with a single IDI
- Revise the “primary purpose exception” (PPE), requiring entities to consider both the customer-third party relationship and the third party-IDI relationship, and specifically incorporating consideration of the third party’s intent in the placement of customer deposits
- Prohibit third parties from applying for a PPE, requiring IDIs to apply for each third-party arrangement they hope to exempt
- Replace the “25% test” with an exception for registered broker-dealers or investment advisers with less than 10% of total customer assets under management placed in non-maturity accounts at one or more IDIs
- Eliminate the “enabling transactions” designated exception
Comments are due 60 days after publication in the Federal Register.
Banking agencies and NCUA propose BSA/AML rules
On July 19, 2024, the Fed, FDIC, OCC, and National Credit Union Administration (NCUA) issued for comment a proposed rule amending Bank Secrecy Act (BSA) compliance program requirements for covered institutions. The proposal would make conforming changes to align these requirements with those currently being proposed by the Financial Crimes Enforcement Network (FinCEN), pursuant to the Anti-Money Laundering Act of 2020.
The proposed amendments would establish minimum requirements for an “effective, risk-based, and reasonably designed” anti-money laundering and countering the financing of terrorism (AML/CFT) program, including a mandatory risk assessment process. Banks would be required to incorporate the national AML/CFT priorities issued by FinCEN in developing and executing their risk-based programs.
Comments are due Oct. 8, 2024.
Federal bank regulatory agencies seek comment on interagency effort to reduce regulatory burden
On July 25, 2024, the Fed, FDIC, and OCC issued a notice requesting public feedback to identify “outdated, unnecessary, or unduly burdensome” regulations as required every 10 years under the Economic Growth and Regulatory Paperwork Reduction Act of 1996. Stakeholders are invited to comment on outdated or unnecessary regulatory requirements in the following categories: consumer protection; directors, officers, and employees; and money laundering.
The agencies will hold a virtual public forum for comments on Sept. 25, 2024.
NCUA approves incentive-based compensation rules
On July 18, 2024, the NCUA board approved a re-proposed rule on incentive-based compensation arrangements in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. The revised proposal, which was previously approved by several agencies in May 2024, is pending approval from the Federal Reserve and the SEC. The joint proposal would expand regulations on the disclosure and reporting of compensation at certain financial institutions and would restrict incentive-based compensation arrangements that fail to support appropriate and effective risk management and corporate governance.
The proposed rule, which represents a re-proposal from those initially issued in 2016, identifies three categories of covered financial institutions based on average total consolidated assets – Level 3, from $1 billion to $50 billion; Level 2, from $50 billion to $250 billion; and Level 1, greater than $250 billion – with the largest institutions subject to the most rigorous requirements. In its press release, the NCUA observed that most federally insured credit unions would be exempt from the rule, with 441 credit unions categorized as Level 3 institutions as of the first quarter of 2024, two as Level 2, and none as Level 1.
