Transcript Legislative and Regulatory Trust Update

Trust Legislative Update
FIRMA National Training
Conference
Fort Worth, TX
March 26, 2012
Cecelia Calaby
American Bankers Association
202-663-5325
[email protected]
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Topics
• Dodd Frank Act
– Big Picture
– Where Are We?
– Wealth Management Impact
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Tax Issues
DOL
Collective Funds
Examation Topics
Broader Context – Conduct of Your Business
Washington Thoughts
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Dodd Frank Act- Big Picture
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Where are we?
• By the numbers:
– 400 rulemakings required; as of February 1, 2012
• 93 finalized
• 158 proposed
• 149 to come
• So less than 25% through rulemakings and
just over half-way through the picture
• But already up to over 3,000 pages of final
rules and guidance with over 3500 pages of
proposed rules and guidance
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Where are we?
• By objectives:
– Better assess systemic risk
• FSOC created; one-year annual report business as
usual
• OFR slow start- no director; insufficient governance
– End too big to fail
• Heightened standards proposed-some differentiation
for non-SIFIs but insufficient among SIFIs
• Higher capital underway
• Living wills, contingent resolution plans and orderly
liquidation early stages
• Non-bank SIFIs undesignated
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Where are we?
• By objectives:
– Better protect consumers
• CFPB formed – director appointed under a cloud
• Some indication prudential regulators treating
compliance within safety and soundness rubric
– Regulate the OTC derivatives market
• Plethora of proposals – nothing on market
structure final
• ABA Focus
– Banks are end-users too
– SDs should be SDs (broad loan and de minimis exemptions)
– Push-out doesn’t make sense
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So….
• Story not yet written
• Final rules, so far, not generally relevant to
primary objectives
• Many deadlines missed
• Agencies extending comment periods
• Agencies stating that phased implementation is
necessary - especially true in derivatives and
living wills areas
• Increasingly clear that bankers cannot make
long-range business plans
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DFA-OTS and CFPB (Titles III and X)
• New Regulator for Thrifts
• Bureau of Consumer Financial Protection
– Enforcement bias
• Staffing; number of potential entities within scope;
‘nimble’; adjudication and investigation rules out
– CFPB in the banks (>$10 billion)
• Largest 20% have continuous onsite
• Others have exam cycle – goal to coordinate with
other agencies
• Primarily occupied in mortgage space: no
indication trust is on radar screen
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DFA-Volcker Rule (Section 619)
• Joint Rulemaking by Consensus
– Fed, FDIC, OCC, SEC with CFTC following
– Comment period ended February 13, 2012 with CFTC
comment period ending April 16, 2012
– Increasingly clear that the proposal approach to keep
impermissible activities undefined and define
permissible carve-outs is unworkable
– Affects merchant banking activities, public welfare
investments, bank common/collective funds, custody
services provided to covered funds, foreign funds,
directed trustees of covered funds
– Growing realization that overall market liquidity in many
instruments likely to be affected
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DFA-Volcker Rule (cont.)
• Applies to all banks
– Statements by agencies that smaller, less complex
banking entities are not affected not borne out in rule
• Banker initial reaction
– Concern regarding number of respondents
• FED – 10,000
• FDIC – 1,139
• OCC - 469
– Concern about “prove the negative” compliance
approach
– Concern about timing for compliance procedures
– Concern about consistency of regulator interpretation
and supervision of the final rule
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DFA- BD Standard of Care (Sec. 913)
• SEC Study on Broker-Dealer Standard
– Concluded that B-Ds should be subject to same
standard of care as RIAs when providing personalized
advice to retail customers on securities
• Banker Concerns
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Dilution of fiduciary brand
Multiple distribution channels
Customer confusion
Education vs. advice
• Ongoing work at SEC by a cross-divisional team
– Commissioner dissent together with increased attention
to cost-benefit analysis may slow effort
– Currently expect an SEC release requesting data
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DFA-Municipal Advisors (Sec. 975)
• “Municipal advisors” must register with SEC and MSRB
• Enforcement/examination by SEC
• Traditional bank activities potentially affected:
– Bank deposits
– Cash management products
– Advice to muni pension plans
– Banks acting as indenture trustees for muni bonds
• MSRB rules for:
– Business conduct (including “pay-to play”)
– Reporting and recordkeeping requirements
– Continuing education
– Fiduciary standard set by MSRB
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DFA – Municipal Advisors (cont.)
• Timing: temporary registration extended until
9-30-12
• Like Dorothy, we want to believe
⁻ Withdrawal of MSRB rules– positive
⁻ Hill pressure– positive
⁻ High–level SEC attention-positive (but not sure
fully engaged)
• Important, significant issue for banking industry
⁻ OCC letter to SEC with follow-up from
Comptroller Walsh to Senator Toomey
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DFA-Adviser Issues
• Sec. 929Q: SEC may request documents
relating to custody of RIA “client” assets from
banks
– Banks already getting request from SEC
examination staff
• Watch scope of requests
• May have altered the privacy dynamics
– Sec. 412: GAO study on compliance costs of
the SEC custody rule still to come
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DFA-Adviser Issues (cont.)
• Elimination of Private Adviser Exception (Sec. 403)
– Final Rule (Release IA-3222) issued June 22, 2011
exempts (except for reporting requirements) advisers
to venture funds, advisers to private funds if <$150M
AUM in the U.S. and certain foreign private advisers.
– Form PF adopted October 2012; effective date
staggered through 2012 depending on assets under
management
• Definition of hedge fund & private equity fund here
• Bank sponsored hedge fund and private equity
reporting
• Window into market begins to open
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DFA-Adviser Issues (cont.)
• SEC’s “Pay to Play Rule”
– Requires RIAs to identify clients that are governmental
entities, including investors in a pooled investment vehicle
managed by the RIA
– If bank or broker-dealer invests governmental entities in a
fund through an omnibus account, RIA may not know
underlying investors
– SEC No Action Letter relieves the RIA from having to
obtain from bank the names of the governmental entities
invested in registered investment companies – relief not
provided for unregistered funds, like 3(c)(11) funds
• CFTC “ Pay to Play Rule” for Swap Dealers and Major
Swap Participants
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DFA-SEC and the Proxy Process
• 13f Investment Manager Disclosure of
“Say on Pay” Votes (Sec. 951)
– Public Disclosure required if exercising proxy
power over securities in fiduciary or
investment accounts
– Proposed Amended Form N-PX includes:
• Issuer name, ticker symbol, CUSIP, meeting date
• # shares voted, how voted
– Reporting Burden
– No final rule yet
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Tax-Cost Basis in Securities Transactions
• Tracking and reporting required of “brokers” on behalf of
customers for:
– Equity securities purchased after 12/31/2010
– Mutual funds/ DRP purchased after 12/31/2011
– Debt/Options purchased after 12/31/2012
• Banker Concerns
– Scope of applicability of rule
– Who has the information?
• Treatment of gifted & inherited securities
• Bearer bonds
– Manual information transfer
– ABA comment letter 2012 re extension of compliance
dates for debt instruments and options and certain
issues specific to calculating and reporting for these
instruments
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Tax - Cost Basis Reporting
• Brokers Must Report:
– adjusted cost basis
– acquisition/disposition dates
– whether gain/loss is short/long term
• Transfer Statements
– When transferring covered securities, transferring broker must
furnish to receiving broker a written statement with all necessary
CBR information
– Statements general due no later than 15 days following the
transfer of covered securities
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Tax – Unbundling of Trust Fees (IRC New
Proposal Under Sec. 67(e))
• IRS objective: treat trusts consistently with
individuals
– Sec. 67(e) does not permit trusts to fully deduct investment
advisory fees
– Challenge for bankers because trustee fees (formerly fully
deducted) usually cover some type of advisory activity
• IRS Reproposal under 67(e)
– A cost is subject to the 2% floor if:
• Is within the definition of “miscellaneous itemized deductions”
under section 67(b)
• Incurred by an estate or non-grantor trust, and
• Commonly or customarily would be incurred by a
hypothetical individual holding the same property
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Tax – Unbundling of Trust Fees (IRC New
Proposal Under 67(e))
• Examples of costs subject to 2% floor:
– Defense of claims against estate/trust unrelated to
existence, validity, or administration of the estate or
trust
– Property ownership costs
– Certain tax returns (e.g., gift tax, 1040s)
– Investment advisory fees.
• Trustees would be required to determine the amount
charged for this service (whether or not provided by a
third party)
• Incremental costs above fees normally incurred by
individuals may be deducted in full if for unusual
investment objective
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Tax – Unbundling of Trust Fees (IRC New
Proposal Under 67(e))
• Bank trustee issue:
– Educating the IRS regarding trustee fees, or
transitioning to explicit advisory fees (potential
litigation)
• Effective date: taxable years beginning on or
after release of final rules
• ABA comment letter
– Proposal unnecessary given statutory language
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DOL-ERISA Definition of Fiduciary Proposal
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DOL decided September 19, 2011 to re-propose its
controversial proposal to re-define “fiduciary” under ERISA
The re-proposal is expected mid 2012
As initially proposed, customer choice in the IRA market
would have been adversely impacted and consumers would
have had difficulty obtaining sound, professional advise in
retirement planning
Letter from 32 House democrats to Secretary Solis November
7, 2011and Letter from 53 House Republicans to Secretary
Solis both noting need for real cost-benefits analysis
Election year considerations
DOL Request for information to several industry trade
associations
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Clear response to Hill letters-focused on conflicts of IRA advisers
Requests information not available or difficult to compile
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Collective Funds
• Section 408(b)(2) disclosure requirements
– Finalized February 2012
– Regulation Intended to Assist Plan Fiduciaries
– Establishes a Reasonable Contract/ Arrangement
under Section 408(b)(2)
– Covered Plans: DB/DC Plans (Not IRAs)
– Covered Service Providers: $1,000+ for
Fiduciary/Recordkeeping/Brokerage/Indirect Fees for
Professional/Administrative Services
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Collective Funds
• Section 408(b)(2) disclosure requirements
• Covered Service Provider to Covered Plan Must
Disclose to Responsible Plan Fiduciary:
• Services to be provided
• (Fiduciary/adviser) status
• Direct and indirect compensation
– Incomplete or erroneous disclosures could trigger
prohibited transaction and associated penalties
(potential rescission)
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Collective Funds (cont.)
• Banking Challenges:
– Logistics: meeting compliance deadline date
– Disclosure: how much is enough?
– Fees: indirect compensation arrangements
– Bank as plan fiduciary: “I’ve got the
information – now what?”
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Collective Funds
• Participant disclosure for CIFs – DOL
404a-5
– CIF Glossary-available on ABA website
• DFA and Study on Stable Value Contracts
– CFTC and SEC requested comment Aug.
2011
– ABA joint comment letter submitted Sept.
2011
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Collective Funds (cont.)
• OCC Bulletin 2011-11 on Collective
Investment Funds and Outsourced
Arrangements
– Delegation to third parties does not relieve bank
of fiduciary responsibility
– Due diligence of third-party vendor prior to
delegation and ongoing monitoring
– Third party may not advertise/market CIF
unless clear/prominent disclosure that CIF is
managed and offered by bank
– SEC reaction
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Examination Topics
• FDIC
– Stmt of Principles of Trust Department Mgmt
• Federal Reserve
• OCC
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Broader Context-Conduct of Your Business
• Multiple Regulators
– Dodd-Frank undoes GLBA functional regulation without
consolidating the regulators
– Expect to see the SEC and CFTC and MSRB
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Swaps (interest rate; FX; credit default)
Custody
Business conduct (qualified plans & governmental entities)
Municipal advisory activities
Volcker rule
– Greater role of global bodies in standard setting
• G-20-including U.S. Treasury-empowers the Financial
Stability Board
• Basel and IOSCO active
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Broader Context-Conduct of Your Business
• Dilution and diffusion of the “fiduciary” brand
– States competing for trust business
– Further federal standards
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OCC attention to state directed trustee statutes
ERISA re-defined “fiduciary”
B-D Standard of Care uses “fiduciary” rubric
MSRB “fiduciary” standard for municipal advisors
Additional conduct standards from SEC/CFTC in swaps
context
– Expect confusion in the courts: What preempts?
– Expect customer confusion
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Broader Context-Conduct of Your Business
• Micro-scrutiny by regulators
– Dodd-Frank furthers statutory inflexibility
• Durbin amendment fixing interchange fees
• Potential for CFPB UDAAP in the trust context (long way away)
– Trend to individual responsibility- e.g. for retirement drives
more protective rules and disclosure
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DOL participant disclosure
IRS unbundling proposal
Overdraft guidance-OCC and Fed-CFPB to come
Granular supervision drives need for more and better process
• Human Capital
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A few thoughts on Washington Politics
• The Hill
– Senate largely inactive
– House setting the stage with issue specific bills
• Financial Crisis  Regulatory Crisis
– Some recognition that the uncertainty caused by
the regulatory environment is a factor stalling any
robust recovery.
• Cost benefit analysis of regulatory proposals
– SEC proxy access rule vacated in July, 2012 as
arbitrary and capricious; the SEC will not appeal
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DFA Resources
• ABA Website
– Dodd-Frank Tracker
http://regreformtracker.aba.com
• Government Websites
– Federal Reserve Board
http://www.federalreserve.gov/newsevents/reform.htm
– Federal Deposit Insurance Corporation
http://www.fdic.gov/regulations/reform/index.html
– Securities and Exchange Commission
http://www.sec.gov/spotlight/dodd-frank.shtml
– Commodity Futures Trading Commission
http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
– Treasury Department
http://www.treasury.gov/initiatives/wsr/Pages/wall-street-reform.aspx
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Questions?
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