The following federal laws enacted during 2006 affect the Federal Reserve System and the institutions it regulates: the Financial Services Regulatory Relief Act of 2006; the Unlawful Internet Gambling Enforcement Act of 2006; the Military Personnel Financial Services Protection Act; and the Financial Netting Improvements Act of 2006.
On October 13, 2006, President Bush signed into law the Financial Services Regulatory Relief Act of 2006 (Regulatory Relief Act), culminating more than four years of work by Congress, the Board, and other interested parties. The act incorporates a number of significant monetary policy, supervisory, and regulatory provisions that were proposed or supported by the Board. These provisions should reduce unnecessary burden on banking organizations and improve operation of the financial system. The most important provisions of the Regulatory Relief Act affecting the Federal Reserve System and banking organizations supervised by the Federal Reserve are discussed below. Except as noted below, the act became effective on October 13, 2006.
For monetary policy purposes, federal law obliges the Board to establish reserve requirements on certain deposits held at depository institutions and mandates that the Board set the ratio of required reserves on transaction accounts above a certain percentage (8 percent for amounts above the so-called low reserve tranche, and 3 percent for amounts within the low reserve tranche). Because the Federal Reserve does not pay interest on balances held at Reserve Banks to meet reserve requirements, depositories have an incentive to reduce their reserve balances to a minimum. To do so, they engage in a variety of reserve-avoidance activities, including using "sweep" arrangements that move funds from accounts that are subject to reserve requirements to accounts and money market investments that are not. These sweep programs and similar activities absorb resources and therefore diminish banking system efficiency. Depository institutions also may voluntarily hold contractual clearing balances and excess reserve balances at a Reserve Bank. These balances also do not explicitly earn interest, although contractual clearing balances implicitly earn interest in the form of credits that may be used to pay for Federal Reserve services, such as check clearing.
The Regulatory Relief Act gives the Federal Reserve the authority, effective as of October 1, 2011, to pay explicit interest on all types of balances (including required reserves, excess reserves, and contractual clearing balances) held by or for depository institutions at a Reserve Bank. Paying interest on required reserve balances, once authorized, will remove a substantial portion of the incentive for depositories to engage in reserve-avoidance measures, and the resulting improvements in efficiency should eventually be passed through to bank borrowers and depositors.
Moreover, if the Board were to determine to pay explicit interest on contractual clearing balances, once authorized to do so, the action could provide a stable enough supply of voluntary balances to allow the Federal Reserve to effectively implement monetary policy using existing procedures without the need for required reserves.
Importantly, the Regulatory Relief Act gives the Board the discretion, effective as of October 1, 2011, to lower the ratio of reserves that a depository institution must maintain against its transaction accounts below the ranges currently established by law, including potentially establishing a zero reserve ratio. Thus, once these authorities become effective, the Board could reduce or even eliminate reserve requirements if it determined that such action was consistent with the effective implementation of monetary policy. Such action, if taken, would reduce a significant regulatory burden for all depository institutions.
Having the authority to pay interest on excess reserves also will enhance the Federal Reserve's monetary policy toolkit. If the Board were to determine to pay interest on such balances at some point in the future, the rate paid would act as a minimum for overnight interest rates and, thus, could help mitigate potential volatility in overnight interest rates.
The Regulatory Relief Act also eliminated the statutory provisions that prohibited banks that are members of the Federal Reserve from counting as reserves their deposits in other banks that are "passed through" by those banks to the Federal Reserve as required reserve balances. These amendments, once implemented, will enable national and state member banks to take advantage of the same type of pass-through reserve arrangements previously available only to state nonmember banks.
Before the Gramm-Leach-Bliley Act (GLB Act) of 1999, banks had a blanket exception from the definition of "broker" in the Securities Exchange Act of 1934. This meant that banks could engage in any type of securities activity permissible under federal and state banking laws without registering with the Securities and Exchange Commission (SEC) as a broker and without complying with the SEC's rules applicable to registered brokers. In the GLB Act, Congress eliminated this blanket exception for banks from the definition of "broker" and replaced it with eleven exceptions for broad types of securities activities conducted by banks. These new activity-focused exceptions were designed and intended to allow banks to continue to provide their customers with securities services as part of their usual trust, fiduciary, custodial, and other banking functions. The SEC requested comment on rules that would implement these "broker" exceptions for banks in 2001 and 2004.
The Regulatory Relief Act requires that the SEC and the Board, within 180 days of enactment, jointly request comment on a new "single set" of rules to implement the "broker" exceptions for banks that were adopted as part of the GLB Act. The Regulatory Relief Act also requires that the SEC and the Board jointly adopt a "single set" of final rules to implement these exceptions after consulting with, and seeking the concurrence of, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS). In addition, the act provides that the single set of final rules adopted jointly by the Board and the SEC shall supersede the rules previously issued by the SEC to implement these exceptions.
On December 18, 2006--well before the end of the 180-day period established by the Regulatory Relief Act--the Board and the SEC issued and requested comment on joint proposed rules to implement the "broker" exceptions for banks. See 71 FR 77,522 (Dec. 26, 2006). These joint proposed rules--designated Regulation R--are designed to accommodate the securities activities that banks conduct as part of their normal banking functions, consistent with the purposes of the GLB Act.
The Regulatory Relief Act expands the number of well-capitalized and well-managed small insured depository institutions that may qualify for an eighteen-month (rather than a twelve-month) on-site safety and soundness examination schedule. Before the act, an insured depository institution could qualify for an extended eighteen-month safety and soundness examination schedule only if the institution had less than $250 million in total assets, was well capitalized and well managed, and met certain other supervisory criteria. See 12 USC 1820(d)(4). The act raised this $250 million asset threshold for an eighteen-month exam cycle to $500 million, thereby allowing additional small, well-run institutions to potentially qualify for an extended examination schedule. On January 11, 2007, President Bush also signed into law a complementary bill, Pub. L. 109-473, that allows an insured depository institution that meets the new $500 million total assets threshold to potentially qualify for an eighteen-month on-site exam cycle if the institution received a composite rating of either a 1 or a 2 at its most recent safety and soundness examination.
The Regulatory Relief Act includes an important provision that should facilitate the sharing of information between banking organizations and federal, state, and foreign banking authorities. Specifically, the act provides that any privilege (for example, attorney-client or work-product privilege) a person may have with respect to information is not waived or destroyed if the person provides that information to "any federal banking agency, state bank supervisor, or foreign banking authority for any purpose in the course of the supervisory or regulatory process of such agency, supervisor, or authority."
Another provision of the Regulatory Relief Act adds a state representative as a voting member of the Federal Financial Institutions Examination Council (FFIEC). Specifically, the act provides for the current State Liaison Committee of the FFIEC (which is composed of five representatives of state supervisory agencies for depository institutions) to elect a chairperson, and adds this chairperson as a full voting member of the FFIEC.
The Regulatory Relief Act eliminated certain reporting requirements previously imposed on banks and their executive officers and principal shareholders that the federal banking agencies did not find particularly useful in monitoring insider lending or preventing insider abuse. Specifically, the act eliminated the statutory provisions that previously required
Although the act eliminated these reporting requirements, it did not alter the statutory and regulatory limits and restrictions on lending to insiders or the ability of the federal banking agencies to examine for potential insider lending abuses as part of the supervisory process. On December 6, 2006, the Board adopted, on an interim basis, and requested public comment on amendments to the Board's Regulation O (12 CFR 215) that implement the elimination of these reporting requirements. See 71 FR 71,472 (December 11, 2006).
The Regulatory Relief Act streamlines the supervisory process for Bank Merger Act (12 USC 1828(c)) transactions in two respects. First, it eliminates the need for the responsible agency in a Bank Merger Act transaction to request a report on the competitive effects of the transaction from each of the other federal banking agencies, as well as the Attorney General. Instead, the act requires that the responsible agency request a competitive factors report only from the Attorney General and provide a copy of the request to the FDIC (if it is not the responsible agency). Second, the Regulatory Relief Act allows the reviewing agency for a Bank Merger Act transaction to avoid requesting a competitive factors report from the other federal banking agencies and the Attorney General if the transaction involves affiliated institutions. The act also eliminates the post-approval waiting period for bank mergers involving affiliated institutions, as these transactions typically do not present any competitive issues. The act does not, however, alter in any way the reviewing agency's obligation to conduct a competitive analysis of a proposed Merger Act transaction.
Section 2(g)(2) of the Bank Holding Company Act (BHC Act) (12 USC 1841(g)(2)) provides that in all circumstances, a company is deemed to control any shares that are held by a trust for the benefit of the company or its shareholders, members, or employees. This attribution rule was intended to prevent a bank holding company from using a trust established for the benefit of its management, shareholders, or employees to evade the BHC Act's restrictions on the acquisition of shares of banks and nonbanking companies. However, the rule can create inappropriate results in situations in which the bank holding company does not have the ability to control, directly or indirectly, the shares acquired by the trust. Accordingly, the Regulatory Relief Act allows the Board to waive application of this attribution rule if the Board determines that the exception is appropriate in light of the facts and circumstances of the case and the purposes of the BHC Act. Such an exception might be appropriate, for example, if the shares are held by the trust as part of a participant-directed and widely held 401(k) plan and the plan's investment options are selected by an independent fiduciary (and not by the bank holding company or its officers, directors, or employees).
The Regulatory Relief Act requires the Board and the other federal banking agencies to conduct a review of the Call Report forms within one year of enactment, and at least once every five years thereafter, and to eliminate any information or schedule that the agencies determine is no longer necessary or appropriate.
The Depository Institution Management Interlocks Act, among other things, generally prohibits a management official of one depository organization from serving as a management official of any other nonaffiliated depository organization if the organizations have offices located in the same metropolitan statistical area. The act provides an exception from this restriction if each of the depository organizations involved has less than a specified amount of total assets. The Regulatory Relief Act raised this specified amount from $20 million to $50 million, thus allowing a greater number of small depository organizations to qualify for the exception.
The Regulatory Relief Act clarifies the authority of the Board and the other federal banking agencies to maintain the confidentiality of information obtained from a foreign regulatory or supervisory authority. Specifically, the act provides that a federal banking agency may not be compelled to disclose information received from a foreign regulatory or supervisory authority if public disclosure of the information would violate the law of the foreign country and the federal banking agency obtained the information in connection with the administration and enforcement of the federal banking laws or under a memorandum of understanding between the foreign authority and the agency. The act, however, would not authorize the agencies to withhold such information from Congress or if the information was sought under a court order in an action initiated by the United States or the agency.
Another provision of the Regulatory Relief Act allows the depository institution subsidiaries of a financial holding company, with prior Board approval, to engage in cross-marketing activities through "statement stuffers" and Internet web sites with nonfinancial portfolio companies held by the financial holding company under the GLB Act's merchant banking authority. Previously, the depository institution subsidiaries of a financial holding company were permitted to engage, with Board approval, in these limited types of cross-marketing activities only with portfolio companies held by the financial holding company under the GLB Act's insurance company investment authority.
The Regulatory Relief Act expands the factors that the Board and the other federal banking agencies may consider in determining whether to disapprove, or extend the time period for processing, a notice filed under the Change in Bank Control Act (CIBC Act). In particular, the act allows the appropriate federal banking agency to disapprove a CIBC Act notice if the agency determines that the future prospects of the institution to be acquired might jeopardize the stability of the institution or the interests of depositors. (Currently, the financial and managerial factors in the CIBC Act focus on the resources of the acquiring person, not the institution to be acquired.) In addition, the act allows an agency to extend the time for processing a CIBC Act notice for up to an additional two 45-day periods (beyond the initial 60-day review period and discretionary 30-day extension) if the agency determines that additional time is needed to analyze (1) the future prospects of the institution to be acquired or (2) the safety and soundness of any plans by the acquiring person to make major changes in the business, corporate structure, or management of the institution.
The Regulatory Relief Act makes several technical changes to the Federal Reserve Act to allow banks chartered in the District of Columbia to become state member banks.
The Federal Deposit Insurance Act (FDI Act) currently allows the appropriate federal banking agency to suspend, remove, or prohibit an institution-affiliated party (IAP) from participating in the affairs of the depository institution with which he or she is affiliated if the IAP is charged with or convicted of certain crimes involving dishonesty, breach of trust, or money laundering. See 12 USC 1818(g)(1). The Regulatory Relief Act expands this authority by allowing the appropriate federal banking agency to suspend an IAP that has been charged with such a crime from participating in the affairs of any depository institution (not just the institution at which the IAP then serves). In addition, the act clarifies that the appropriate agency may suspend, remove, or prohibit an IAP even if the IAP is no longer associated with any depository institution at the time the action is taken.
Section 19 of the Federal Deposit Insurance Act (12 USC 1829) automatically prohibits a person that has been convicted of a crime involving dishonesty, a breach of trust, or money laundering from participating in the affairs of an insured depository institution without the consent of the FDIC. The Regulatory Relief Act extends this prohibition so that persons convicted of such crimes also may not participate in the affairs of a bank holding company (other than a foreign bank), an Edge or agreement corporation, or a savings and loan holding company unless the individual receives the prior consent of the Board or the OTS, as appropriate. The Regulatory Relief Act also gives the Board and the OTS additional discretionary authority to remove a person convicted of such a crime from, respectively, a nonbank subsidiary of a bank holding company or a savings and loan holding company.
Section 8 of the Federal Deposit Insurance Act currently permits the appropriate federal banking agency for an insured depository institution to enforce a written condition imposed by that agency on the institution or an IAP of the institution. The Regulatory Relief Act amended section 8 of the FDI Act to allow the appropriate federal banking agency for an institution to enforce a condition imposed on an insured depository institution by another federal banking agency. This will allow, for example, the Board (as the appropriate agency for a state member bank) to enforce a condition imposed on a state member bank by the FDIC in connection with the bank's application for deposit insurance.
The Regulatory Relief Act also amended section 8 of the Federal Deposit Insurance Act to allow the appropriate federal banking agency for an insured depository institution to enforce a written condition imposed on the institution or an IAP, or a written agreement entered into by the agency with the institution or IAP, without demonstrating that the institution or IAP was unjustly enriched or acted in reckless disregard of the law or a prior agency order. Similarly, the act allows the appropriate federal banking agency for an undercapitalized institution to enforce a written condition imposed on, or a written agreement entered into with, the institution or an IAP without regard to the limit in the FDI Act (12 USC 1831o(e)(2)(E)) that normally caps the liability of a controlling shareholder under a capital restoration plan.
The Regulatory Relief Act amends section 8(b) of the Federal Deposit Insurance Act to provide that the appropriate federal banking agency for an insured depository institution may enforce written conditions imposed in connection with "any action on any application, notice, or other request" by the depository institution or an IAP. These changes are designed to clarify and confirm the agencies' ability to enforce conditions imposed in connection with a notice filed under the Change in Bank Control Act.
The Regulatory Relief Act strikes the provision in the FDI Act (see 12 USC 1818(e)(4)) that required the Board to issue a final decision in any contested administrative action by the OCC to remove or prohibit an IAP of a national bank. Thus, the OCC now has the same authority as the Board, the FDIC, and the OTS to independently remove or prohibit an IAP of an institution under the agency's jurisdiction.
The Regulatory Relief Act makes several important modifications to the statutes that authorize national and state member banks to make "public welfare" investments. See 12 USC 24 (eleventh) and 338a. First, it raises, from 10 percent of capital and surplus to 15 percent of capital and surplus, the aggregate amount of "public welfare" investments that a national or state member bank may make under these authorities. 1 In addition, the act refocuses these investments on low- and moderate-income (LMI) families and communities by providing that to be considered a "public welfare" investment, an investment must primarily benefit LMI families or communities (such as by providing housing, services, or jobs). The act also clarifies that each "public welfare" investment made by a national or state member bank, either directly or through a subsidiary, must benefit primarily LMI communities or families.
The Regulatory Relief Act directs the Government Accountability Office (GAO) to conduct a study of the volume of currency transaction reports (CTRs) filed with the Secretary of the Treasury under the Bank Secrecy Act. The study must evaluate, among other things, (1) the extent to which depository institutions avail themselves of the current exemption system for CTRs, (2) ways to improve the current exemption system for CTRs, and (3) the usefulness of CTRs to law enforcement agencies. The Regulatory Relief Act also provides that the study should include recommendations for changes to the CTR exemption system that would reduce burden without adversely affecting the reporting system's effectiveness. The GAO must submit a report on its findings to Congress by January 13, 2007.
The Unlawful Internet Gambling Enforcement Act of 2006, Pub. L. 109-347, (codified at 31 USC 5361 et seq.) prohibits a person engaged in the business of betting or wagering from knowingly accepting credit, electronic fund transfers, checks, drafts, or similar instruments drawn on or payable through any financial institution in connection with the participation of another person in unlawful Internet gambling ("restricted transactions"). The act generally defines "unlawful Internet gambling" as transmitting a bet by any means that involves the use, at least in part, of the Internet and where such bet or wager is unlawful under any applicable federal or state law in the state or tribal lands in which the bet or wager is initiated, received, or otherwise made.
The act charges the Secretary of the Treasury and the Board, in consultation with the Attorney General, with developing regulations to require each payment system that the agencies determine could be used to process restricted payments (as well as financial transaction providers participating in such payment systems) to establish "policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit the acceptance of restricted transactions." In prescribing the regulations, the Secretary and the Board must identify the types of policies and procedures, including nonexclusive examples, deemed by the agencies to be reasonably designed to identify and block restricted transactions. To the extent practical, any participant in a designated payment system must be permitted to choose among alternative means of complying, including by relying on and complying with the policies and procedures of the designated payment system, so long as these policies and procedures comply with the regulation. The act also requires the Secretary and the Board to grant exemptions from any requirement imposed under the regulations to particular types of transactions or designated payment systems if the agencies jointly find that it is not reasonably practical to identify and block, or otherwise prevent or prohibit, such restricted transactions. The regulations must be published by July 10, 2007.
The National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364, enacted on September 30, 2006, imposes restrictions on and disclosure requirements for consumer credit provided to members of the military and their families. The act charges the Department of Defense (DOD) with defining "consumer credit" in its regulations and permits the DOD to include all consumer credit apart from residential mortgages, loans to fund the purchase of a motor vehicle, and other personal property loans when the property purchased from the proceeds of the loan serves as collateral for the loan. Requirements for creditors include a 36 percent annual percentage rate (APR) cap, which includes all fees, along with APR calculations and disclosures that differ from the APR used in disclosures under the Truth in Lending Act (TILA). The act mandates that all credit disclosures, including TILA disclosures, be provided both orally and in writing prior to the extension of credit.
Moreover, the act imposes limitations on lending to members of the military and their dependents, such as prohibiting rollovers and refinancings of consumer credit by the same creditor, and prohibiting loans with prepayment penalties and mandatory arbitration clauses. The act imposes criminal and monetary penalties for knowing violations and voids contracts that are prohibited under the statute. The legislation was intended, at least in part, to address concerns about payday loans, installment loans that are secured by a motor vehicle (other than loans for the purchase of a motor vehicle), and other forms of short-term credit to military members and their dependents. In prescribing regulations for this legislation, the DOD must consult with the Board, among other federal agencies. The effective date of the act is October 1, 2007, regardless of whether the DOD adopts regulations. This statute would become effective earlier if interim regulations are issued by the DOD.
In 2005, Congress passed comprehensive legislation to revise the federal bankruptcy laws (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8). Title IX of that act contained amendments to banking laws and the Bankruptcy Code to provide increased certainty that netting and close-out of financial market contracts would be enforceable, even in the event of a counterparty insolvency. Title IX also clarified certain duties and obligations of the FDIC as receiver or conservator of an insured depository institution.
The Financial Netting Improvements Act of 2006 (Pub. L. 109-390), enacted on December 12, 2006, makes technical changes to the netting and financial contract provisions that were added or revised by title IX of the 2005 act. The 2006 act updates the descriptions of various financial contracts ("securities contract," "forward contract," and "swap agreement") in the Federal Deposit Insurance Act, the Federal Credit Union Act (FCUA), and the Bankruptcy Code to reflect current market and regulatory practice. The 2006 act also revises provisions in the Bankruptcy Code to clarify the rights of certain counterparties to exercise self-help foreclosure-on-collateral rights, setoff rights, and netting rights with respect to financial contracts with a debtor. These provisions conform the Bankruptcy Code with parallel provisions in the FDI Act and the FCUA. In addition, the 2006 act amends the FDI Act and the FCUA to clarify the conditions under which a receiver of an insolvent depository institution can enforce a financial contract that contains a "walkaway" clause (a clause that would otherwise allow a contract participant to suspend, condition, or extinguish a payment obligation when the other party becomes insolvent). The 2006 act also makes other technical and conforming revisions to the FDI Act, FCUA, Bankruptcy Code, Federal Deposit Insurance Corporation Improvement Act of 1991, and Securities Investor Protection Act of 1970.
1. As under current law, a national or state member bank would have to obtain the approval of the OCC or the Board, respectively, to make "public welfare" investments that, in the aggregate, exceed 5 percent of the bank's capital and surplus. Return to text