Integration of Licensing Rules for National Banks and Federal Savings Associations Docket ID: OCC RIN: 1557-AD80 (June 10, 2014)

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1 Shaun Kern Counsel Center for Securities, Trust & Investments P skern@aba.com September 02, 2014 Legislative and Regulatory Activities Division Office of the Comptroller of the Currency th Street, S.W. Washington, DC Re: Integration of Licensing Rules for National Banks and Federal Savings Associations Docket ID: OCC RIN: 1557-AD80 (June 10, 2014) To Whom it May Concern: The American Bankers Association 1 appreciates the opportunity to comment on the proposal of the Office of the Comptroller of the Currency (OCC) to integrate the licensing rules for national banks and Federal savings associations (Proposal). As stated in our initial comment letter dated August 8, 2014, ABA also appreciates the OCC s flexibility in considering comments through both this Proposal and the current Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review. As required by the Dodd-Frank Act, all functions of the former Office of Thrift Supervision have transferred to various federal banking agencies. This change made the OCC responsible for the examination, supervision, and regulation of Federal savings associations (sometimes referred to here as thrifts). The Proposal, the subject of this letter, is part of the ongoing effort to integrate the former functions of the Office of Thrift Supervision which had, among other things, different regulations applicable to corporate activities and transactions (licensing rules) for thrifts than the OCC has maintained for national banks under 12 C.F.R. Part 5. The Proposal integrates many though not all licensing rules, as different federal statutes applicable to national banks and thrifts inhibit full integration. I. GENERAL COMMENTS ABA supports the OCC s effort to integrate these licensing rules, which can serve as a starting point for a more efficient and streamlined regulatory regime for both national banks and thrifts. Several examples of the Proposal s suggested improvements to the current licensing rules include: 1 The American Bankers Association is the voice of the nation s $15 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits and extend more than $8 trillion in loans. ABA believes that government policies should recognize the industry s diversity. Laws and regulations should be tailored to correspond to a bank s charter, business model, geography and risk profile. This policymaking approach avoids the negative economic consequences of burdensome, unsuitable and inefficient bank regulation. Through a broad array of information, training, staff expertise and resources, ABA supports banks as they perform their critical role as drivers of America s economic growth and job creation.

2 Section 5.12 which calculates a slightly more generous computation time for national bank filings, no longer allowing weekends or Federal holidays to be a filing due date; Section 5.20(e) which prohibits national banks from adopting a misleading corporate title; and Section 5.20(i) which provides Federal savings associations a lengthier expiration of preliminary approval for charter applications. These changes further the goal of integrating two different licensing regimes by making technical changes and reducing burden where possible. The Proposal s many changes are difficult to address cumulatively, but ABA notes that the OCC has proposed other technical changes and burden reducing measures in addition to the examples provided. ABA s concerns with this Proposal stem from instances where the OCC departs from the approach of reducing burden wherever possible, either through the imposition of new requirements or the increase of regulatory burden by eliminating less burdensome rules and applying more burdensome ones. A. This Proposal Moves Beyond Integration by Imposing New Requirements The Proposal s summary describes the integration as an effort to revise some of these rules in order to eliminate unnecessary requirements consistent with safety and soundness, and to make other technical and conforming changes. 2 A major point of this comment letter is to remind the OCC that the Proposal still contains a number of substantive new requirements and alterations that are inconsistent with the OCC s goal, that go beyond technical and conforming changes, where a less burdensome path can and should be taken. For instance, 5.33(d)(2)(vi) creates a new requirement to submit an application for acquisitions conducted by national banks or thrifts if they engage in a purchase and assumption transaction that would increase the asset size of the institution by 25% or more. However, neither national banks nor thrifts were subject to such a requirement before this Proposal was released, meaning this requirement is not connected to the task of integration. Instead, this is a new substantive requirement. This new requirement is one of many. Another example, found in proposed 5.34(e)(5)(viii), would create a 12 month expiration for OCC approvals of operating subsidiaries for national banks, an expiration which can be shortened or extended by the OCC. Again, this is a new substantive requirement that neither national banks nor thrifts were subject to before this Proposal was released. These and other new requirements found in the Proposal conflate the task of integration with setting new policies and procedures for corporate activities and transactions. ABA encourages the OCC to separate out this latter category of changes and solicit broader feedback on them before imposing new operational requirements that move beyond technical and conforming changes, which are congruent with the foundational purpose of the Proposal Fed. Reg. 33,260, (June 10, 2014). 2

3 B. The Proposal Often Elects the More Burdensome Approach when Integrating Comparable Rules without Justification The differences in licensing rules for national banks and thrifts stem from these types of institutions having different histories and different charters. We recognize the challenges of integrating two different banking regimes with such long and divergent histories and appreciate the OCC s efforts. We also appreciate the OCC s commitment to being mindful and particularly sensitive to the compliance burden that new rules impose on community banks and thrifts. 3 When compared side-by-side, some licensing requirements for national banks are more burdensome than the requirements for Federal savings associations, and vice versa. Upon review, the Proposal too frequently seems to apply the more burdensome requirement to both types of institutions when a less burdensome option is available. For instance, as proposed, 5.34(e)(2)(iii) will require national banks to have policies and procedures to preserve the limited liability of the bank and its subsidiaries. Though the OCC characterizes this as a clarifying change, no such requirement currently exists for national banks. This new requirement for national banks was adapted from a Federal savings association requirement in , but the Proposal provides no analysis as to the effectiveness or purpose of this obligation, or why extending this new burden to national banks is justified. Similarly in proposed 5.38(e)(8) and 5.59(k), the more burdensome national bank requirement found in 5.34(e)(7) is applied to Federal savings associations. If adopted, these sections would impose a new compliance burden by requiring annual reports for certain operating subsidiaries and bank service corporations. Here, there is little discussion or analysis as to why this new compliance burden being extended to Federal savings associations is justified. Instead of extending this burden to Federal savings associations, the Proposal should consider eliminating this requirement for national banks. At times, the Proposal has suggested a more burdensome rule than is currently applicable to either national banks or thrifts. Under current regulation 5.35(f)(2), for example, well managed and well capitalized national banks and thrifts can invest in a bank service company, so long as they provide the OCC with after the fact notice, no later than 10 days after the investment. The Proposal would convert this after the fact requirement into a prior notice requirement for both national banks and thrifts. ABA believes the OCC should take a different approach. We recommend using integration as an opportunity to review the current rules and provide relief from rules that have proven unnecessarily costly, burdensome, or outdated. OCC should place the new requirements in a separately proposed rulemaking where they can be considered on their own merits rather than confused with a rulemaking intended for integrating existing but different standards. 3 Comptroller of the Currency Thomas Curry, Remarks before the Florida Bankers Association. (Oct. 23, 2012). ( So, we are mindful, as we consider new regulations implementing the Dodd-Frank Act and enhanced capital standards, that community banks and thrifts are dealing with challenges on many fronts, and we will be particularly sensitive to the compliance burden that all new rules impose as we proceed. ) 3

4 C. Communication and Outreach with Affected Institutions While Developing and Implementing Licensing Changes is Critical We are unaware of any industry outreach that occurred in advance of the integration contemplated by this Proposal and believe that the extensive changes contemplated would have warranted such outreach. This Proposal is also missing a plan for the outreach and education of institutions that will be subject to an extensively overhauled set of licensing rules should this integration be put into effect. We encourage the OCC to create such a plan so that national banks and thrifts are aware of the changes that will affect them. Additionally, due to the periodic nature of the transactions subject to the licensing rules, we encourage the OCC to remain willing to make necessary rule adjustments, as these transactions present unanticipated burdens or challenges. Such an approach, for example, will be important as new banks attempt to enter the market and the OCC applies these new, untested licensing rules to de novo applications. II. SPECIFIC COMMENTS The Proposal imposes several new, unfamiliar, and unnecessary burdens on institutions that may complicate regulatory compliance without commensurate improvement in bank supervision. We detail several areas of concern below. A. Section 5.3(g) Should Not Include an OCC Compliance Rating Requirement ABA does not support the proposed amendment to 5.3(g) to require national banks and Federal savings associations to have an OCC compliance rating of 1 or 2 in order to be defined as an eligible bank or eligible savings association for purposes of expedited review. The OCC compliance rating already informs the Management component of the CAMELS composite rating which obviates the need for a separate, redundant requirement. This proposed change would place an undue focus on the OCC compliance rating and elevate one portion of the Management rating over others. It is more appropriate for the OCC to rely on the overall Management rating of an institution for purposes of 5.3(g), especially in light of the OCC s discretion to remove filings from expedited review for significant compliance concerns under Further, this newly proposed compliance rating would provide no greater certainty to national banks regarding eligibility for expedited review, since the removal power under 5.13 before and after this Proposal remains the same. Accordingly, ABA does not support this proposed change. B. Section 5.30 Should Not Integrate Thrift Branching Requirements by Repealing Prior EGRPRA Regulatory Burden Relief The Proposal describes the different branching regimes applicable to national banks and thrifts as stemming from the different statutes applicable to those institutions and proposes to retain these branching differences. ABA believes this approach is the best option found in the Proposal and strongly prefers it to the Proposal s first alternative approach. However, ABA would support 4

5 integrating these branching regimes if the OCC extended to national banks the flexible branching treatment applicable to thrifts. Current regulations require national banks to submit an application and obtain prior OCC approval to establish or relocate a branch. Thrifts have less burdensome requirements, permitting the establishment of new branches without OCC approval, provided that certain criteria are met. This approach for thrifts was enacted in 2005, in response to the regulatory burden review conducted pursuant to EGRPRA. 4 ABA is concerned by the Proposal s first alternative approach to reverse the less burdensome branching requirements of thrifts by applying the national bank branching requirements of 5.30 to both national banks and thrifts. This alternative approach would impose an unnecessary regulatory burden on thrifts by making their branching decisions subject to OCC application and prior approval, which would restrict thrift business operations and strategy. Further regulatory burden would be placed on thrifts by forcing them to adapt to what the Proposal fairly describes as the extensive case law and regulatory history that also may apply to Federal savings associations in connection with the meaning of branch. Adopting this alternative approach would reverse a burden reducing measure from the last decennial EGRPRA review contrary to the spirit of the law and the intent of Congress in enacting EGRPRA while the OCC is concurrently seeking comment on regulatory burden reducing measures in this second decennial EGRPRA review. Such an outcome would be discordant with the ongoing EGRPRA review. ABA believes that branching requirement integration should only occur by extending the thrifts less burdensome approach to national banks, not by extending more burdensome requirements to thrifts. This would allow both national banks and thrifts to establish new branches without prior OCC approval, but still subject to meeting the certain conditions specified in the regulations. C. Section 5.34(e)(2) Should be Clarified to Avoid Unintentionally Restricting Joint Venture Arrangements To be permitted to invest in an operating subsidiary, a national bank must satisfy three prongs found in 5.34(e)(2)(i)(A)-(C). The Proposal makes minor wording adjustments to 5.34(e)(2)(i)(A), which the Proposal describes as a clarifying change. 5 However, the new language included in this change could become a source of uncertainty with major consequences for joint venture arrangements organized as operating subsidiaries. The OCC has long recognized that joint ventures can be organized as operating subsidiaries, 6 and at least one interpretation of this change would represent a significant departure from OCC precedent. Under the current rule, prong (A) requires that the bank has the ability to control the management and operations of the subsidiary. The Proposal would add new language to this prong, so that it would read the bank has the ability to control the management and operations of the subsidiary and no other person or entity has the ability to control the management or operations of the subsidiary. (emphasis added) Fed. Reg. 51,582, 51,583 (Aug. 31, 2005) (codified at 12 C.F.R. pt. 145) Fed. Reg. 33,260, 33,287. (June 10, 2014) 6 See OCC Corporate Decision (authorizing a bank to organize a joint venture in which the bank owns and controls more than 50% of the voting shares and equity, and two other investors own and control 33% and 13%, respectively). 5

6 Certain stakeholders in operating subsidiaries (other than the investing national bank) may have a valuable perspective that benefits management, or have special expertise that justifies a prominent role in the operations of the subsidiary. Section 5.34 does not have a definition for control, which makes it unclear whether prong (A) would permit such stakeholders described above, or whether such levels of influence would rise to the level of control. If this new language were to be interpreted as prohibiting an operating subsidiary from being significantly influenced (or able to be significantly influenced) by any person or entity other than the investing national bank, it would effectively prohibit national banks from entering into joint ventures organized as operating subsidiaries. A requirement that a national bank have no other influential partners in setting up a joint venture as an operating subsidiary would undermine the very notion of a joint venture. When read in conjunction with the current language for prong (A), it is also unclear what the Proposal s new language in prong (A) intends to achieve. Prong (A) as it currently exists already provides that a national bank must be able to control the management and operations of the operating subsidiary. Furthermore, the proposed version of prong (B) would also ensure that the investing national bank is the largest holder of voting interest stock. 7 When combined, these current requirements seem sufficient to ensure that any operating subsidiary is not under the direction of anyone other than the investing national bank. ABA respectfully asks the OCC to delete this newly proposed language in prong (A), inasmuch as it puts in doubt whether joint venture arrangements could be organized as operating subsidiaries without violating 5.34(e)(2). For consistency, the OCC should also make a corresponding change to 5.34(e)(5)(ii) to ensure that joint ventures organized as operating subsidiaries will be eligible for expedited notice treatment. D. Section 5.38(e)(2)(B) Could be Clarified to Assist Thrifts with a New Standard Under newly proposed 5.38(e)(2)(B), a Federal savings association can only invest in an operating subsidiary if it controls more than 50 percent of the voting interest of the operating subsidiary or otherwise controls the operating subsidiary. While a comparable standard has been in place for national banks under 5.34, this will be a new standard for Federal savings associations, and clarity on how a Federal savings association would be deemed to otherwise control the operating subsidiary would be helpful. E. Section 5.39 Could Detail How to Convert a Financial Subsidiary Back to an Operating Subsidiary ABA believes it would be helpful to have greater clarity on how to convert a financial subsidiary back to an operating subsidiary. Within the national bank s licensing rules is 5.39, which describes the procedures required to establish a financial subsidiary and the activities in which a financial subsidiary may and may not engage. However, nowhere in this section is there a provision that clarifies how to convert a financial subsidiary back to an operating subsidiary. Nor is there any such clarity in 5.24 on conversion, as this only covers conversions between (e)(2)(i)(B) of the Proposal reads: The parent bank owns and controls more than 50 percent of the voting (or similar type of controlling) interest of the operating subsidiary, or the parent bank otherwise controls the operating subsidiary and no other party controls a percentage of the voting (or similar type of controlling) interest of the operating subsidiary greater than the bank s interest 6

7 charters, such as between a national bank and a thrift or between a national bank and a state bank. Section 5.34 covers the procedures required to establish operating subsidiaries and their permitted activities, but it does not address a financial subsidiary to operating subsidiary conversion. III. CONCLUSION ABA looks forward to working with the OCC to assist in this integration and ensure that affected institutions are aware of the finalized changes. If there are any questions on these comments or desire for further information, please do not hesitate to contact the undersigned at skern@aba.com or (202) Sincerely, Shaun Kern Counsel Center for Securities, Trust & Investments 7