On November 16, 2020, the US Office of the Comptroller of the Currency (“OCC”) finalized extensive revisions (the “Revisions”) to its rules governing the corporate activities and transactions of US national banks and federal savings associations (“Federal Institutions”).1 While many of the changes are procedural or cosmetic, a number are substantive and will affect day-to-day compliance processes at Federal Institutions. The Revisions generally are effective on January 1, 2021.2
As the chartering authority for Federal Institutions, the OCC establishes rules that govern corporate activities and transactions. These rules were last overhauled in 1996 and have since been amended in a piecemeal fashion, such as for rulemakings required under the Gramm–Leach–Bliley Act and Dodd-Frank Act, the latter which required the integration of rules for federal savings associations.3 The changes in the Revisions were proposed earlier this year and attracted little comment from industry.4
The Revisions affect nearly every section of Part 5 of Title 12. This Legal Update highlights some of the more significant changes.
Inclusion of Management Rating in Definition of “Well Managed”
Federal Institutions that are “well managed” may rely on expedited or streamlined procedures for making investments, establishing subsidiaries or engaging in other transactions (subject to meeting other requirements). Previously, there were multiple definitions of “well managed” in the OCC rules. Most of those definitions did not require an institution to have a minimum management rating under the Uniform Financial Institutions Rating System to be well managed.
The Revisions create a single definition for being well managed that requires an institution to have a composite rating of 1 or 2 and a management rating of 1 or 2.5
Election to Use State Law Procedures for Business Combinations
Federal Institutions are chartered under federal law and, therefore, are subject to federal, not state, requirements for purposes of corporate law, including mergers, acquisitions and other business combinations. Historically, the OCC interpreted the authority for interstate consolidations and mergers that result in a national bank to include the requirements for intrastate consolidations and mergers. Additionally, the OCC recognized that state corporate law is more developed than the federal analogue by authorizing national banks to elect to use state law for corporate governance procedures but not for corporate activities.6
The Revisions reinterpret the structure of the National Bank Consolidation and Merger Act such that interstate consolidations and mergers are no longer subject to the requirements for intrastate consolidations and mergers. It also authorizes all Federal Institutions that seek to engage in a business combination that is not subject to statutory requirements (e.g., interstate transactions) to use the procedures for intrastate transactions or de minimis transactions or the procedures that would apply to a similarly situated state-chartered institution for a business combination that is not subject to statutory procedures. For example, a federal savings association with its home office in Chicago will be able to follow the merger procedures that apply to a state savings association located in Chicago instead of the procedures in the OCC’s rules. However, it is not clear how this authorization will operate for Federal Institutions that have elected to follow the corporate governance procedures of a state other than that where their main office is located (e.g., a national bank located in Illinois that has elected to follow Delaware corporate law).7
Securitization and Titling Trusts
A trust generally is treated as a legal entity under the OCC’s rules, and the agency has long-recognized that a Federal Institution may establish and control a trust.8 However, if a trust were an operating subsidiary, the OCC could require the Federal Institution to submit a notice or application.
The Revisions explicitly recognize that a trust formed for the purposes of (i) securitizing assets held by the institution as part of its banking business or (ii) holding legal titles in conjunction with lease financing transactions (e.g., titling trust) is not an operating subsidiary or noncontrolling investment. The Revisions also codify the OCC’s position that securitization trusts generally do not qualify as operating subsidiaries because of the Federal Institution’s limited control over the trusts and because beneficial interests in the trust lack many of the indicia of traditional equity. Accordingly, a Federal Institution will not need to make filings under the OCC’s rules to form such a trust.
Expedited Processing Changes
The Revisions expand the list of entities eligible for after-the-fact notice procedures (currently corporations, limited liability companies and limited partnerships) to include trusts provided that the national bank or the operating subsidiary has the ability to replace the trustee at will and be the sole beneficial owner of the trust. A similar change was made to permit federal savings associations to rely on expedited prior notice procedures for trusts that will be held as operating subsidiaries.9
The Revisions also authorize the OCC to continue to process any filing under the expedited review procedures if an adverse comment regarding the filing is received and the comment (i) is non-substantive or (ii) relates to an issue that the OCC previously reviewed through non-examination supervisory activity and resolved. This is an expansion of the existing criteria that allow a filing to be processed through expedited review even if there are adverse comments and is intended to ensure that comments that may slow application processing have sufficient factual and analytical support to allow the OCC to conduct additional review.
Elimination of National Bank Operating Subsidiary Annual Reports
A national bank was required to file an annual report with the OCC that discloses information about operating subsidiaries that do business directly with consumers and are not functionally regulated.10
The Revisions eliminate this requirement because the information in such reports is duplicative of information disclosed elsewhere. Further, the majority of operating subsidiaries being reported under this requirement are engaged in consumer financial services subject to the jurisdiction of the Consumer Financial Protection Bureau, not the OCC, for most consumer law issues.
Broader Authorization for Certain Noncontrolling Investments
A Federal Institution and its subsidiaries generally are subject to supervision and examination by the OCC.11 The OCC permits Federal Institutions to make noncontrolling equity investments in legal entities if the institution certifies that the entity “agrees to be subject to OCC supervision and examination.”12 It has been difficult for Federal Institutions to make this certification because, by definition, they lack control over the entity in which they are making the noncontrolling investment and target entities often are reluctant to agree to such conditions.
The Revisions resolve this issue by authorizing Federal Institutions to apply to the OCC for approval to make noncontrolling equity investments in legal entities that have not agreed to be subject to OCC supervision and examination. Applications for investments in such entities that pose minimal risks to safety and soundness will be subject to an expedited review process. An application will be deemed approved by the OCC within 10 days after receipt if the following five conditions are satisfied: (i) the entity is engaged in permissible activities for the Federal Institution or an operating subsidiary; (ii) the Federal Institution is well capitalized and well managed; (iii) the book value of the investment is one percent or less of the Federal Institution’s capital and surplus; (iv) no more than 50 percent of the entity may be owned or controlled by banks or savings associations subject to examination by a federal banking agency or credit unions insured by the National Credit Union Administration13; and (v) the OCC has not notified the Federal Institution that its application has been removed from expedited review.
Codification of Branch Licensure Requirements for Savings Associations
Under Section 5(m) of the Home Owners’ Loan Act, a federal or state savings association must obtain approval from the OCC to establish or move a branch or main office in the District of Columbia.14 Savings associations are subject to different branching requirements than banks. In particular, the definition of “branch” for savings associations historically has included an automated teller machine (“ATM”) that accepts deposits or disburses customer funds even though all ATMs and remote service units are explicitly excluded from the definition of “branch” for national banks.15
The Revisions codify the OCC’s historical position on savings association branches by making it clear that an ATM established in the District of Columbia by a federal or state savings association that permits account opening, payment receipt or withdrawals is a branch that requires OCC approval.
Limitations on Mobile Branches
The Revisions clarify that a mobile branch of a national bank may be stationed continuously at a single location within the geographic area it is approved to serve for a period of up to four months. The OCC also notes in the preamble to the Revisions that a mobile branch of a national bank may be established only in states where a state-chartered bank is permitted to establish a mobile branch.
Narrower Definition of “Troubled Condition” for Changes in Directors and Senior Executive Officers
A Federal Institution that is in troubled condition must notify the OCC of changes regarding its directors and senior executive officers and provide the regulator with an opportunity to disapprove.16 The definition of “troubled condition” includes being “subject to a cease and desist order, a consent order, or a formal written agreement, unless otherwise informed in writing by the OCC.”17 As a practical matter, the OCC often waives this condition for Federal Institutions that are subject to an enforcement action for reasons other than financial condition.
The Revisions codify the OCC’s supervisory practice by narrowing the definition of “troubled condition” to apply when an institution is subject to an enforcement action that requires it to improve its financial condition. The preamble to the Revisions does not indicate whether this change would apply to Federal Institutions that currently are in troubled condition due to an enforcement action for reasons other than financial condition (i.e., whether it relieves such Federal Institutions from the obligation to notify the OCC of changes in directors and senior executive officers).
In recent years, the OCC has focused on the importance of the chief risk officer.18 The Revisions add the chief risk officer to the list of senior executive officers who are subject to OCC approval if the Federal Institution is in troubled condition.
Background Check for Certain Trust Personnel
A Federal Institution that seeks to exercise fiduciary powers must submit “[s]ufficient biographical information on proposed trust management personnel to enable the OCC to assess their qualifications.”19 The Revisions change this requirement to require the submission of biographical information on proposed senior trust management personnel, as identified by the OCC. It also potentially expands the requirement by providing that the OCC may request that an institution submit an Interagency Biographical and Financial Report and fingerprints for the proposed personnel.
Securities Disclosures Requirements for Debt Issuances
A national bank issuing subordinated debt is required to disclose that “the holders of the instrument may be fully subordinated to interests held by the US government in the event that the national bank … enters into a receivership, insolvency, liquidation, or similar proceeding” if the national bank is an advanced approaches institution under the regulatory capital rules and the debt will be included in its Tier 2 capital.20 National banks that are not advanced approaches institutions are not required to make this disclosure. Additionally, a national bank is not required to notify the OCC if the bank makes a material change to its outstanding subordinated debt note or any related subordinated debt documents.
The Revisions expand the disclosure requirement to apply to all subordinated debt issuances by national banks and federal savings associations, regardless of whether they are advanced approaches institutions or if they intend the debt to be included in regulatory capital. It also now requires national banks to obtain OCC approval for material changes to subordinated debt documents if the bank would have been required to obtain OCC approval to issue the debt or include it in Tier 2 capital.
The Revisions reflect the OCC’s attempts to update and streamline licensing requirements for Federal Institutions. Given that some of the OCC’s changes could be seen as imposing new requirements, Federal Institutions should review their activities to determine if action is required.
1 OCC Bull. 2020-100 (Nov. 16, 2020), https://occ.gov/news-issuances/bulletins/2020/bulletin-2020-100.html.
2 A change to remove a reference to an already deleted thrift regulation is effective on the date that the Revisions are published in the Federal Register, which is expected to occur prior to January 1, 2021.
4 85 Fed. Reg. 18,728 (April 2, 2020). The Revisions also include changes made by an interim final rule related to telephonic and electronic participation of members and shareholders, which is applicable to both annual and special meetings. See 85 Fed. Reg. 31,943 (May 28, 2020).
13 The Revisions use the term “National Credit Union Association” although no such organization exists. See 12 U.S.C. § 1752a(a) (“There is established in the executive branch of the Government an independent agency to be known as the National Credit Union Administration.”).
20 12 C.F.R. § 5.47(e). The disclosure also is required under the regulatory capital rules for issuances of Additional Tier 1 or Tier 2 capital by an advanced approaches national bank or advanced approaches federal savings association. 12 C.F.R. § 3.20(c)(1)(xiv), (d)(1)(xi).