Election Day is Coming – What are Your Obligations as Employer?

election dayWith Election Day drawing near, and large voter turnout expected, employers should ensure they are aware of state law requirements related to providing employees with time off. While not all states impose requirements on employers, some impose time off obligations with the possibility of criminal or civil penalties for non-compliance.

Applicable laws vary by state. Some provide for paid time while others do not mandate that such time off be paid. Laws also vary as to the amount of time that must be provided and whether an employer can dictate which hours are taken off, such as at the start or end of the workday. Further, some jurisdictions require postings to advise employees of voting leave rights. Additionally, some jurisdictions also obligate employers to provide time off to employees who serve as election officials or to serve in an elected office.

Accordingly, employers should immediately review existing policies and practices to ensure compliance with applicable laws and be prepared to address requests for time off prior to Election Day.

The following is a sample of state requirements regarding voting time off:

Arizona – Arizona Revised Statute § 16-402 provides that an employee has the right to be absent from work if he or she has fewer than 3 consecutive hours in which to vote between the opening of the polls and the beginning of his or her work shift or between the end of his or her regular work shift and the closing of the polls. An employee may be absent for a length of time at the beginning or end of his or her work shift that, when added to the time difference between work-shift hours and the opening/closing of the polls, totals 3 consecutive hours.

  • Notice: The employee must apply for leave prior to Election Day.

  • Hours: The employer may specify the hours.

  • Paid: Leave is paid.

California – Pursuant to California Election Code § 14000, employees are entitled to an amount of time off to vote that, when added to the voting time otherwise available to him or her outside of working hours, will enable him or her to vote. Employee with sufficient non-working time to vote are not entitled to additional time off to vote.

  • Notice: Two working days’ advance notice prior to the election is required if, on the third working day prior to the election, the employee knows or has reason to believe he or she will need time off in order to vote.

  • Hours: Time may be taken only at the beginning or end of the work shift, whichever allows the greatest amount of free time for voting and least time off from work, unless otherwise mutually agreed.

  • Paid: No more than 2 hours of the time taken off for voting shall be without loss of pay.

Colorado – Colorado Revised Statute §1-7-102 provides that eligible voters are entitled to be absent from work for up to 2 hours for the purpose of voting on Election Day unless the employee has 3 or more non-working hours to vote while the polls are open.

  • Hours: The employer may specify the hours of absence, but the hours must be at the beginning or end of the work shift, if the employee so requests.

  • Paid: No more than 2 hours.

Hawaii – Pursuant to Hawaii Revised Statutes § 11-95, employees who do not have 2 consecutive non-working hours to vote while the polls are open are entitled to take time off up to 2 hours (excluding any lunch or rest periods) to vote, so that the time taken when added to the non-working time totals 2 consecutive hours when the polls are open. Employees cannot be required to reschedule their normal work hours to avoid the needed time off.

  • Paid: Employees must be paid for time taken during working hours. If any employee fails to vote after taking time off for that purpose, the employer, upon verification of that fact, may make appropriate deductions from the salary or wages of the employee for the period during which the employee is entitled to be absent from employment.

  • Proof: Presentation of a voter’s receipt to the employer shall constitute proof of voting by the employee.

Maryland – Maryland Election Law Code §10-315 states that every employer in the state must allow employees who claim to be registered voters to be absent from work for up to 2 hours on Election Day to vote if the employee does not have 2 consecutive non-working hours to vote while the polls are open.

  • Paid: Employees must be paid for the up to 2 hours of absence.

  • Proof: Employees must provide proof of voting or attempt to vote on a form prescribed by the State Board.

New York – New York Election Law § 3-110 states that an employee is entitled to a sufficient amount of leave time that, when added to his or her available time outside of working hours, will enable him or her to vote. Four hours is considered sufficient time. An employee is excluded from leave if he or she has 4 consecutive hours in which to vote, either between the opening of the polls and the beginning of his or her work shift or the end of his or her work shift and the close of the polls.

  • Notice: The employee must provide notice of leave at least 2, but not more than 10, days prior to the election.

  • Hours: The employer may specify the hours. Leave must be given at the beginning or end of the work shift, as the employer may designate, unless otherwise agreed.

  • Paid: Not more than 2 hours may be without loss of pay.

ARTICLE BY Richard Greenberg & Daniel J. Jacobs of Jackson Lewis P.C.
Jackson Lewis P.C. © 2016

DOJ, FTC Announce New Antitrust Guidance for Recruiting and Hiring; Criminal Enforcement Possible

handcuffs, criminal enforcementMany companies—and the HR professionals and other executives who worked for them—have found out the hard way that business-to-business agreements on compensation and recruiting can violate the antitrust laws and bring huge corporate and personal penalties.

Last week, the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ) jointly issued antitrust guidance for anyone who deals with recruiting and compensation. The guidance is written for HR professionals, not antitrust experts. It avoids jargon and applies antitrust basics in plain English. It expands on those basics by providing short and direct answers to real-life questions.

The guidance comes in the wake of several actions in recent years by the federal antitrust agencies against so-called “no-poaching” or “wage-fixing” agreements entered by companies competing for the same talent. It announces that DOJ will prosecute criminally some antitrust violations in this space. While the new guidance is explicitly aimed at HR professionals, senior executives should understand it as well.

The guidance starts with the basics: The antitrust laws establish the rules for a competitive marketplace, including how competitors interact with each other. From an antitrust perspective, firms that compete to recruit or retain employees are competitors, even if they do not compete when selling products or services. Therefore, agreements among employers not to recruit certain employees (no-poaching) or not to compete on various terms of compensation (wage-fixing) can violate the antitrust laws.

To be illegal, these agreements need not be explicit or formal. Evidence of exchanges of information on compensation, recruiting, or similar topics followed by parallel behavior can lead to an inference of agreement. Intent to lower a company’s labor costs is no defense. Also, there is no “non-profit” defense: while they might not compete to sell services, non-profits are considered competitors for the staff they hire.

The potential costs of antitrust violations are huge: fines by the agencies; treble damages for injured actual or potential employees; and intrusive regulation of basic company operations from consent decrees and judgments. In addition, the DOJ used this guidance to announce that it will now prosecute criminally any naked wage-fixing or no-poaching agreements. According to DOJ, these naked agreements—“separate from or not reasonably necessary to a larger legitimate collaboration between the employers”—harm competition in the same irredeemable way as hardcore price-fixing cartels. So now, any executives involved in such agreements—whether HR professionals or not—face personal consequences, including threats of potential jail time.

Even unsuccessful attempts to reach an anticompetitive agreement on these topics can be illegal in the eyes of the regulators. As the guidance makes clear, so-called “invitations to collude” have been and will continue to be pursued by the FTC as actions that might violate the Federal Trade Commission Act.

Some of these information exchanges and agreements do not automatically violate the antitrust laws and there is nothing in this new guidance that suggests otherwise. If the agreements are reasonably necessary to an actual or potential joint venture or merger, legitimate benchmarking activity, or other collaboration that might help consumers, their net effect on competition would need to be judged. In prior actions, the agencies also have recognized as legitimate certain no-poaching clauses in agreements with consultants and recruiting agencies. Even such common uses as employment or severance agreements might not run afoul of the antitrust law’s prohibitions.

The guidance does not—and really cannot—go into all the detail necessary to determine when any particular effort will pass antitrust muster. It does refer readers to the earlier Health Care Guidelines but those helpful tips relate only to information exchanges. The guidance also provides links to the many prior civil actions taken by the agencies on these types of matters. It is accompanied by a two-sided index card entitled Antitrust Red Flags for Employment Practices that could be part of an effective compliance program.

ARTICLE BY Steven J. Cernak of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

Down to the Wire: DOL’s “Blacklisting Rule” Enjoined

blacklisting ruleA federal judge in Texas has blocked implementation of major portions of the U.S. Department of Labor’s (DOL) Fair Pay and Safe Workplaces rule, the so-called “blacklisting” rule.

Judge Marcia A. Crone of the U.S. District Court for the Eastern District of Texas entered a nationwide preliminary injunction order on Oct. 24 blocking the Oct. 25 implementation date of the DOL rule, along with a related Obama Executive Order, the Federal Acquisitions Regulations (“FAR”) Rule and the DOL’s Guidance regarding the FAR Rule.

Had they gone into effect, the new rules would have imposed significant and stringent reporting and disclosure requirements on contractors bidding on federal projects. Moreover, those disclosures of non-final and non-adjudicated “violations” could have been used to bar contractors from federal projects.

Judge Crone determined that the plaintiffs in this action, the Associated Builders and Contractors of Southeast Texas, had a likelihood of success on the merits of establishing that the new regulations exceeded the authority of the president, the FAR Council and the DOL; were otherwise preempted by other federal labor laws; violated the First Amendment rights of federal contractors through compelled speech; violated contractors’ due process rights; are arbitrary and capricious; and violated the Federal Arbitration Act.

The opinion focuses in large part on the disclosure requirements contained in the president’s Executive Order, the DOL Guidance and the FAR Rule, which Judge Crone found to be “drastic new requirements” which are “a substantial departure from and a significant expansion of prior reporting rules.”

The disclosure requirements, among other things, would require contractors to report all “violations” of 14 separate federal labor and employment statutes; disclosures could then be used to disqualify bidders on federal projects. Judge Crone’s opinion finds fault with the Executive Order, Rule and Guidance for broadly defining “violations” to include non-final decisions or administrative determinations, which have not been preceded by a hearing or made subject to judicial review. Moreover, the “violations” to be reported are not confined to performance of past government contracts.

Judge Crone determined that “[i]n the present case, the Executive Order, FAR Rule, and DOL Guidance arrogate to contracting agencies the authority to require contractors to report for public disclosure mere allegations of labor law violations, and then to disqualify or require contractors to enter into premature labor compliance agreements based on their alleged violations of such laws in order to obtain or retain federal contracts. By these actions, the Executive Branch appears to have departed from Congress’s explicit instructions dictating how violations of the labor law statutes are to be addressed.”

Judge Crone also enjoined enforcement of the portion of the Executive Order and the Rule that provided that contractors and subcontractors who enter into contracts for non-commercial items of more than $1 million must agree not to enter into any mandatory, pre-dispute arbitration agreements with their employees or independent contractors on any matter arising under Title VII, as well as any tort related to or arising out of sexual assault or harassment.

Left standing by Judge Crone is the portion of the Executive Order requiring that all covered contractors inform their employees in each paycheck of the number of hours worked, overtime calculations (for non-exempt employees), rates of pay, gross pay, additions or deductions from pay, and whether they have been classified as independent contractors. That requirement in the Executive Order has an effective date of January 1, 2017.

ARTICLE BY Gerald F. Lutkus of Barnes & Thornburg LLP

© 2016 BARNES & THORNBURG LLP

Attend NAWL’s General Counsel Institute – Pathways to Success

NAWL Logo General Counsel InstituteSuccessful people share common characteristics that drive them on their road to success, including keeping a positive mindset and being comfortable taking on new challenges. No matter what your definition of success is, the National Association of Women Lawyers’ Twelfth General Counsel Institute offers a roadmap for getting to where you want to go.

 

When: November 3-4, 2016

Where: Crowne Plaza Times Square Manhattan, NYC

Register today!

In today’s ever changing legal landscape, we invite you to advance your career by securing success through agility and creativity. Gain insight into the hottest topics in the law. Acquire knowledge or enhance your proficiency about the most talked about labor and employment matters. Take a deep dive into today’s regulatory and compliance issues. Tap into technology and embrace the challenges and changes that accompany this ever-evolving area of the law.

At GCI 12, you will be asked to think outside the box and blaze your own trail of success by articulating your own vision, laying your own foundation, and growing both personally and professionally. Through powerful stories, substantive legal workshops, and GCI’s unique open exchange of ideas, GCI 12 will empower you to embrace opportunities with agility and creativity and gain leadership skills and business acumen on your pathway to success.

Yelling at Your Smartphone Could Get You Fired!

smartphonesMichael Schrage at Harvard Business Review warns his readers, “Stop swearing at Siri. Quit cursing Cortana,” arguing such behavior could soon be seen just as destructive to an organization as ridiculing a subordinate. In the 1993 film, Demolition Man, Sylvester Stallone’s character, John Spartan, received multiple tickets from a wall box that overheard him violate the “Verbal Morality Statute” during a conversation with a colleague. [mature ears only please!] Spartan, who had been awoken from his cryogenic sleep, was not aware of the dramatic changes in technology that had taken place while he had been asleep. We see technological change every day, but we may not be ready for the far-reaching implications machine learning and artificial intelligence (AI) will have on society and the workplace.

Schrage describes how adaptive bots enable devices to learn from each encounter they have with humans, including negative ones, such as cursing at Siri or slamming a smartphone down when it reports about one restaurant, though the user was searching for a different eating place. Faced with repeated interactions like this, the bot is likely to be adversely affected by the bad behavior, and will fail to perform as intended. As companies leverage more of this technology to enhance worker productivity and customer interactions, employee abuse of bots will frustrate the company’s efforts and investment. That can lead to reduced profits and employee discipline.

Employees are seeing some of this already with the use of telematics in company vehicles. Telematics and related technologies provide employers with a much more detailed view of their employees’ use of company vehicles including location, movement, status and behavior of the vehicle and the employees. That detailed view results from the extensive and real time reports employers receive concerning employees’ use of company vehicles. Employers can see, for example, when their employees are speeding, braking too abruptly, or swerving to strongly. With some applications, employers also can continually record the activity and conversations inside the vehicle, including when vehicle sensors indicate there has been an accident. It is not hard to see that increased use of these technologies can result in more employee discipline, but also make employees drive more carefully.

Just as employers can generate records of nearly all aspects of the use of their vehicles by employees, there surely are records being maintained about the manner in which individuals interact with Siri and similar applications. While those records likely are currently being held and examined by the providers of the technology, that may soon change as organizations want to collect this data for their own purposes. Employers having such information could be significant.

As Mr. Schrage argues, making the most of new AI and machine learning technologies requires that the users of those technologies be good actors. In short, workers will need to be “good” people when interacting with machines that learn, otherwise, it will be more difficult for the machines to perform as intended. Perhaps this will have a positive impact on the bottom line as well as human interactions generally. But it also will raise interesting challenges for human resource professionals as they likely will need to develop and enforce policies designed to improve interactions between human employees and company machines.

We’ll have to see. But in the meantime, be nice to Siri!

Jackson Lewis P.C. © 2016

ACA Notice Requirements, Big Data Analytics, OSHA Retaliation Final Rule: Employment Law This Week – October 24, 2016 [VIDEO]

ACA Notice RequirementACA Section 1557 Notice Requirements Take Effect

Our top story: The Section 1557 ACA Notice Requirements have taken effect. Section 1557 prohibits providers and insurers from denying health care for discriminatory reasons, including on the basis of gender identity or pregnancy. Beginning last week, covered entities are required to notify the public of their compliance by posting nondiscrimination notices and taglines in multiple languages.

Final Rule on ACA Issued by OSHA

The Occupational Safety and Health Administration (OSHA) has issued a final rule for handling retaliation under the Affordable Care Act (ACA). The ACA prohibits employers from retaliating against employees for receiving Marketplace financial assistance when purchasing health insurance through an Exchange. The ACA also protects employees from retaliation for raising concerns regarding conduct that they believe violates the consumer protections and health insurance reforms in the ACA. OSHA’s new final rule establishes procedures and timelines for handling these complaints. The ACA’s whistleblower provision provides for a private right of action in a U.S. district court if agencies like OSHA do not issue a final decision within certain time limits.

EEOC Discusses Concerns Over Big Data Analytics

The Equal Employment Opportunity Commission (EEOC) is fact-finding on “big data.” The EEOC recently held a meeting at which it heard testimony on big data trends and technologies, the benefits and risks of big data analytics, current and potential uses of big data in employment, and how the use of big data may implicate equal employment opportunity laws. Commissioner Charlotte A. Burrows suggested that big data analytics may include errors in the data sets or flawed assumptions causing discriminatory effects. Employers should implement safeguards, such as ensuring that the variables correspond to the representative population and informing candidates when big data analytics will be used in hiring.

Seventh Circuit Vacates Panel Ruling on Sexual Orientation

The U.S. Court of Appeals for the Seventh Circuit may consider ruling that Title VII of the Civil Rights Act of 1964 (Title VII) protects sexual orientation. On its face, Title VII prohibits discrimination only on the basis of race, color, religion, sex, or national origin, and courts have been unwilling to go further. In this case, the Seventh Circuit has granted a college professor’s petition for an en banc rehearing and vacated a panel ruling that sexual orientation isn’t covered. Also, an advertising executive who is suing his former agency has asked the Second Circuit to reverse its own precedent holding that Title VII does not cover sexual orientation discrimination. We’re likely to see more precedent-shifting cases like these as courts grapple with changing attitudes towards sexual orientation discrimination.

Tip of the Week

October is Global Diversity Awareness Month, and we’re celebrating by focusing on diversity in our tips this month. Kenneth G. Standard, General Counsel Emeritus and Chair Emeritus of the Diversity & Professional Development Committee, shares some best practices for creating an inclusive environment.

ARTICLE BY George Carroll Whipple, III of Epstein Becker & Green, P.C.

©2016 Epstein Becker & Green, P.C. All rights reserved.

DOJ-AmEx Case Could Have Ramifications for Health Care Providers

AmEx American ExpressThe U.S. Department of Justice’s loss to American Express sends a message to health care providers: Steering, tiering, exclusive dealing and other contractual arrangements that appear to suppress competition in one part of the market may be legitimate where the arrangements facilitate lower prices and better access to services in another part of the market, or have other valid business purposes.

The decision came Sept. 26 when the Second Circuit Court of Appeals reversed a judgment for the DOJ in a suit accusing AMEX of violating antitrust laws by initiating rules prohibiting merchants who accept AMEX’s credit cards from steering its cardholders to other credit card brands. The court of appeals directed the district court to enter a judgment for AMEX, saying the trial court erred when it found that AMEX’s anti-steering provisions were anticompetitive by focusing only on the interests of merchants and not also on those of cardholders.

The court of appeals said that the district court’s approach “does not advance overall consumer satisfaction.” It concluded that “[t]hough merchants may desire lower fees, those fees are necessary to maintaining cardholder satisfaction—and if a particular merchant finds that the cost of AMEX fees outweighs the benefit it gains by accepting AMEX cards, then the merchant may choose to not accept AMEX cards.”

At issue was whether AMEX’s nondiscriminatory provisions (“NDPs”) in agreements with merchants prohibiting them from encouraging consumers to use other credit cards were anticompetitive. The court of appeals found that the trial court’s ruling against AMEX was wrong in several ways, including its market definition, its analysis of AMEX’s market power and its finding of an adverse effect on competition.

The district court wrongly concluded that the relevant product market consisted of services offered by credit card companies to merchants, while excluding services offered to cardholders. The Second Circuit said that the functions provided by the credit card industry are inter-dependent, and result in what is called a “two-sided market.” The district court erroneously failed “to define the relevant product market to encompass the entire multi-sided platform.”

In addition, the court of appeals said that the district court erroneously determined that AMEX had significant market power. The trial court found that AMEX was able to unilaterally impose price increases on merchants, but it did not acknowledge that AMEX’s increase in merchant fees was necessary to provide increased benefits to cardholders, which amounts to a price reduction to cardholders. “A firm that can attract customer loyalty only by reducing its price does not have the power to increase prices unilaterally.”

Also, the district court’s erroneous market definition resulted in it wrongly finding that the NDPs had an anticompetitive effect on the market. The court of appeals said that “the market as a whole includes both cardholders and merchants, who comprise distinct yet equally important and interdependent sets of consumers sitting on either side of the payment-card platform.” The DOJ made no showing at trial that the NDPs caused anti-competitive effects on the relevant market as a whole.

In 2011, the DOJ issued a policy giving guidance to accountable care organizations that said anti-steering provisions may raise antitrust concerns and should not be implemented by providers with a large market share. Federal Trade Commission and Department of Justice, “Statement of Antitrust Enforcement Policy Statement Regarding Accountable Care Organizations Participating In the Medicare Shared Savings Program,” 76 Fed. Reg. 67026, 76030 (2011) (“An ACO with high PSA shares or other possible indicia of market power may wish to avoid . . . [p]reventing or discouraging private payers from directing or incentivizing patients to choose certain providers, including providers that do not participate in the ACO, through ‘anti-steering,’ ‘anti-tiering,’ ‘guaranteed inclusion,’ ‘most-favored-nation,’ or similar contractual clauses or provisions”).

Healthcare markets have aspects of a two-sided market, including separate interests of insurers and of patients. As a result, after AMEX, claims that steering provisions initiated by providers are anticompetitive because they thwart competition with other providers in the market will likely be evaluated by fully considering the anticompetitive effect of the provisions on the entire marketplace, rather than taking the DOJ’s more narrow enforcement view.

AMEX’s analysis likely has ramifications for any case challenging steering provisions or other allegedly anticompetitive restraints in multi-sided markets. For example, Methodist Medical Center in Peoria, Illinois, brought suit against its rival, St. Francis Medical Center, also in Peoria, challenging St. Francis’ exclusive contracts with health insurers that allegedly foreclosed Methodist from competing for patients in the Peoria hospital market. Consistent with the analysis of antitrust violations that was used in AMEX, on Sept. 30 a federal district court granted summary judgment for St. Francis, saying:

“Market dynamics at each level impact the ultimate inquiry of whether a provider is foreclosed from competing for a commercially insured patient’s business. Accordingly, whether Methodist was foreclosed from competition must be analyzed at each level in the distribution chain—its ability to compete to be included in a payer’s network, the ability of end users to choose among plans that feature each hospital, and also the hospitals’ ability to reach retail customers notwithstanding out-of-network status.”

Applying this analysis at each level, the court found that the exclusive arrangements excluded Methodist from a limited portion of patients and, as a result, the arrangements did not violate antitrust law.

ARTICLE BY Dennis D. Palmer & Mitchell D. Raup of Polsinelli PC
© Polsinelli PC, Polsinelli LLP in California

Coming Soon to a Lawbook Near You – New Cosmetic Requirements

Cosmetics, Personal Care Products

Back in April 2015, Senators Dianne Feinstein (D-CA) and Susan Collins (R-ME) introduced the Personal Care Products Safety Act (S.1014).  More recently, on September 22, 2016, the Senate Health, Education, Labor, and Pensions Committee received testimony from Senators Feinstein and Collins in support of this bipartisan legislation.  The HELP Committee also heard from experts in the cosmetics industry about product developments and health standards.

Witnesses in favor of the Personal Care Products Safety Act stated that the FDA has not done enough to ban endocrine-disrupting chemicals in cosmetic products and that industry-financed review programs should not substitute government regulatory programs in collecting chemical toxicity data.  They contrasted FDA’s inability to ban products unless they are “adulterated” with the more expansive authorities of similar regulatory agencies in Canada, Japan, and the European Union.

Witnesses against the proposed legislation described chemical toxicity testing procedures already place, such as the Human Repeat Insult Patch Test (HRIPT).  They also noted the proposed legislation would have a disproportionate impact on smaller companies, as stricter national standards for the entire industry are expected to increase the costs of producing and distributing all kinds of personal care and cosmetic products.

As we described last year when the bill was first introduced, the Personal Care Products Safety Act would introduce significant changes to the current U.S. regulatory system for cosmetics.  Among other provisions, the bill would require cosmetic manufacturers to register with FDA annually and submit ingredient information to the agency, and for larger firms registration would be accompanied by a user fee.  Such a registration and user fee system would be similar to what is currently mandated for drug and device manufacturers.  Registered cosmetic firms would also be required to comply with Good Manufacturing Practices for their products, analogous to what drug and device companies must comply with today; such “cosmetic GMPs” would need to be developed by FDA through notice-and-comment rulemaking so that industry and other stakeholders have an opportunity to provide feedback before the rules are finalized.  In addition, S. 1014 would give FDA mandatory recall authority over cosmetics (an authority that the agency only recently obtained for food products under the Food Safety Modernization Act of 2011), and cosmetic firms would be required to report serious adverse events to FDA within 15 business days of becoming aware of the event.

Despite some opposition, congressional aides say the proposed legislation is likely to see movement next year.  FDA, too, welcomes the opportunity to increase its regulatory power over the cosmetics and personal care products.  Citing recent adverse event reports about WEN hair products, the Agency has stressed the need to do away with voluntary reporting for adverse events so that companies are required to report serious adverse events as they become aware of them.  FDA also has raised concerns about studies done by the industry self-regulatory process called Cosmetic Ingredient Review (CIR), claiming they are summaries of voluntary data rather than analyses of raw data from clinical trials.  Overall, therefore, FDA is supportive of the Senate’s effort to expand the agency’s cosmetic oversight power.  Many industry members also support the bipartisan compromise legislation, as do consumer protection groups who view some strengthening of the U.S. regulatory system as “better than nothing.”

Fatema Ghasletwala contributed to this article.

©1994-2016 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Amid Hours of Debate and Insult, Campaign Finance Gets 85 Seconds

All but ignored during the previous two presidential debates, campaign finance appeared ready to have its moment in the sun during the final televised bout. Within two minutes of the debate’s opening, former Secretary of State Hillary Clinton, the Democratic nominee, raised the issue of the landmark 2010 Supreme Court decision that allowed a flood of money from outside groups to pour into elections.

Clinton promised to appoint justices “that will stand up and say no to Citizens United, a decision that has undermined the election system in our country because of the way it permits dark, unaccountable money to come into our electoral system.”

Then, crickets.

Hillary Clinton, Donald Trump, Debates
Photo credit: Ethan Miller, Getty Images News

Republican nominee Donald J. Trump, who attacked Clinton on Twitter earlier this month as “the single biggest beneficiary of Citizens United in history,” passed on the issue, instead using the question to pledge his support for gun rights and opposition to abortion.

The debate encapsulated the two candidates’ approaches to the issue of money in politics during the general election campaign. Across three debates spanning four-and-a-half hours, Clinton and Trump have spent a grand total of one minute and 25 seconds on a subject that an overwhelming number of Americans consider to be a major threat to the nation’s democratic traditions. A poll last year found that 85 percent of Americans believe the system of campaign financing requires either a complete rebuilding or fundamental changes. The two candidates have so far raised more than a half-billion dollars on their presidential bids.

Trump, who launched his campaign with a grandiose promise to pay for his own presidential bid, has used the issue of money in politics occasionally to jab at Clinton, mostly claiming she used her office to encourage donations to her family’s eponymous charitable foundation or her presidential campaign.

The billionaire mogul has sought to tie Clinton to unpopular bankers, claiming during the debate that her advertisements were paid for by her “friends on Wall Street that gave so much money because they know you’re going to protect them.” Meanwhile, Trump has claimed: “By self-funding my campaign, I am not controlled by my donors, special interests or lobbyists. I am only working for the people of the U.S.!”

Even so, Trump, who said last year he “loved the idea of campaign finance reform,” has soft-pedaled earlier critiques of money in politics. He was criticized last month for hiring David Bossie, a long-time Clinton critic who helped orchestrate the Citizens United battle, as his deputy campaign manager. His campaign also is currently the subject of a complaint alleging that two former campaign staffers went to work for a super PAC boosting his campaign without going through a mandatory 120-day “cooling-off” period.

Hacked emails published recently by WikiLeaks show how the Clinton campaign staff turned supportive super PACs into integral parts of her campaign, despite FEC rules prohibiting coordination between candidates and outside groups. A July 2015 campaign memo, posted by a hacker known as Guccifer 2.0., laid out plans for collaborating with Correct the Record, a super PAC created by a longtime ally. The memo recommended that the Clinton campaign “work with CTR… to publicize specific GOP candidate vulnerabilities.”

While the Clinton campaign has confirmed its chairman’s personal email account was hacked, her team has not corroborated the authenticity of the emails that Wikileaks has been posting online daily.

Wednesday night’s forum also featured a pointed question about ethics, with moderator Chris Wallace asking Clinton about her pledge to “avoid even the appearance of a conflict of interest” involving her family’s foundation while she was Secretary of State. Wallace referred to a recent ABC report that found individuals considered “FOB,” or friends of Bill Clinton, were given special attention by the State Department when they offered to provide assistance in Haiti in the aftermath of a devastating earthquake in 2010.

“Everything I did as Secretary of State was in furtherance of our country’s interests and our values,” said Clinton, who chose to talk about her family foundation’s efforts to help millions of people get access to HIV/AIDS medication, rather than explain any potential ethical issues.

When Trump questioned the foundation’s work in Haiti — which was scrutinized by The Nation in 2011 — Clinton said that the foundation had “raised $30 million to help Haiti after the catastrophic earthquake,” adding that “we’re going to keep working to help Haiti because it’s an important part of the American experience.”

Clinton said she would “be happy to compare what we do with the Trump Foundation,” noting that Trump had used his charity’s money to purchase a six-foot-tall portrait of himself. The Washington Post reported that the Donald J. Trump Foundation had spent $20,000 to buy the artwork, and “may have violated IRS rules against ‘self-dealing.’”

When Trump said his foundation’s money “one hundred percent goes to different charities,” Wallace asked him about a report that he had used the charity’s funds to settle a number of lawsuits involving his for-profit businesses.

“No, we put up American flag, and that’s it,” Trump responded. “They put up the American flag. We fought for the right in Palm Beach to put up the American flag.”

One of the lawsuits did involve the height of a flagpole at Trump’s golf course in Palm Beach, Florida. The Post found that Trump also used his charity to pay a settlement in New York. Both of the expenditures could violate self-dealing rules, the paper wrote.

Earlier this month, New York’s attorney general, Eric Schneiderman, ordered the Trump Foundation to stop raising money in his state, following a report that the charity did not obtain the required certification to solicit donations there.

This article was written by Frank Bass. Andrew Perez contributed reporting. Read the original article here: Amid Hours of Debate and Insult, Campaign Finance Gets 85 Seconds

© Copyright MapLight

Federal Reserve Board Seeks New Limits on Bank Activities in Physical Commodities

Federal Reserve BoardAs a result of both legislative mandates as well as Congressional and public concern, the Board of Governors of the Federal Reserve System (Board) has been examining whether to impose new restrictions on the activities of banks related to physical commodities. Following these examinations, the Board recently took two actions designed to impose new limits on the activities of banks related to physical commodities: (i) a notice of proposed rulemaking to impose new capital requirements and other limits on such activities of financial holding companies (FHCs[1]) (the “proposed rule”[2]); and (ii) a report, issued pursuant to Section 620 of the Dodd-Frank Act (620 Report),[3] which contains recommendations for legislation to repeal several current authorities for banks to engage in physical commodities activities.

Proposed rule. In brief, the proposed rule would:

  • increase the capital requirements for activities of FHCs involving commodities for which existing laws would impose liability if the commodities were released into the environment;
  • lower the limit on the amount of physical commodities that may be held by banks that conduct commodity trading activities;
  • rescind authority for banks to engage in energy tolling and energy management services;
  • delete copper from the list of precious metals that BHCs are permitted to own and store; and
  • establish new public reporting requirements on the nature and extent of firms’ physical commodities holdings and activities.

620 Report. The 620 Report is divided into three sections, by federal banking regulator. Section I, prepared by the Board, covers state member banks, depository institution holding companies, Edge Act and agreement corporations, and US operations of foreign banking organizations. In its section, with respect to physical commodities, the Board recommends legislative action that would:

  • repeal the authority of FHCs to engage in merchant banking activities; and
  • repeal the grandfather authority for certain FHCs to engage in commodities activities under section 4(o) of the Bank Holding Company Act (BHCA).[4]

Current AuthoritiesAlthough participants in energy and other physical commodity markets have commented to the Board that the imposition of new capital requirements and other restrictions on bank participation in physical commodity markets could reduce liquidity and increase costs for end users, the Board has nonetheless proceeded with the proposed rule and legislative recommendations. The Board estimates that the proposed rule will not have a significant impact on the physical commodity markets or the related derivative markets.

In this article, we summarize and provide key takeaways from the proposed rule and the 620 Report.

The Proposed Rule

Background

Prior to 1999, BHCs were generally barred from participating in “commercial” activities and had very limited authority to engage in physical commodities activities. Pursuant to the BHCA, BHCs could undertake only those commodities activities that were “so closely related to banking as to be a proper incident thereto,” such as buying, selling and storing precious metals and copper, or acting as principals in cash-settled commodities derivative contracts.

The Gramm-Leach-Bliley Act (GLBA) amended the BHCA by allowing BHCs with well-capitalized bank subsidiaries to expand the scope of their activities with respect to commodities. Specifically, three key provisions gave BHCs greater opportunities in this area: (1) the complementary authority under BHCA section 4(k), which allows FHCs to engage in any activity deemed by the Board to be “complementary to a financial activity”; (2) the merchant banking authority, which allows FHCs to invest in nonfinancial companies that engage in commodities activities that FHCs themselves are not permitted to undertake; and (3) the grandfather clause authority under BHCA section 4(o), which permits certain institutions that were conducting physical commodities activities prior to becoming FHCs to engage in a broad range of physical commodities activities, including those beyond the scope of both the complementary and the merchant banking authorities.

To date, the Board has approved three types of complementary activities: (i) physical commodities trading, which includes taking delivery of commodities under derivative contracts and buying and selling in the spot market; (ii) energy management services, such as providing advisory services to or arranging transactions for power plant owners; and (iii) energy tolling agreements, under which firms pay power plant owners fixed payments in exchange for the rights to plant output.

Advance Notice of Proposed Rulemaking. In January 2014, the Board issued an Advance Notice of Proposed Rulemaking to review the scope of physical commodities activities currently permitted by law, and determine whether such activities pose significant risks to the safety and soundness of insured depository institutions or the financial system generally, and whether additional limits or requirements should be imposed on the banks conducting these activities.[5]

Senate testimony on rulemaking. In November 2014, Federal Reserve Board Governor Tarullo testified to Congress that the Board would be issuing a notice of proposed rulemaking and was considering whether to impose more stringent overall caps on complementary and merchant banking activities, as well as stricter capital requirements by increasing the risk weighting for physical commodities activities associated with catastrophic or environmental risks.[6]

Current AuthoritiesThe proposal

On September 23, 2016, the Board issued a proposed rule to (i) adopt new limits on physical commodities trading activity conducted by FHCs under the complementary authority; (ii) impose new risk-based capital requirements on FHC physical commodities activities; (iii) rescind the authorizations for FHCs to engage in energy management services and energy tolling; (iv) remove copper from the list of precious metals that BHCs are permitted to own and store as an activity closely related to banking; and (v) impose new public reporting requirements to increase transparency into physical commodities activities of FHCs.

The higher capital requirements would be imposed through new proposed risk weights for the various types of permissible commodities activities.[7]To determine the risk-weighted asset exposure for covered physical commodities, these proposed risk weights would be multiplied by (i) the market value of all section 4(o) permissible commodities; (ii) the original cost basis of section 4(o) infrastructure assets; (iii) the market value of section 4(k) permissible commodities;[8] and (iv) the carrying value of an FHC’s equity investment in companies that engage in covered physical commodities activities.[9]

The proposed rule would affect each of the GLBA authorities as follows:

Complementary authority

New risk-based capital requirements. A 300% risk weight would apply to physical commodities holdings permissible under complementary physical commodities trading activities. The proposed requirements would apply with respect to physical commodities that are substances covered under federal or relevant state environmental statutes and regulations (“covered physical commodities”). According to the Board, “These physical commodities carry the greatest potential liability under relevant environmental laws.”[10] The Board states that this would provide a level of capitalization for these activities that is “roughly comparable to that of nonbank commodities trading firms.”[11]

Tighten the cap on physical commodities holdings. In order to limit the aggregate risks from physical commodities trading activities that an FHC may face, the limit placed on physical commodities holdings of FHCs under complementary authority (5% of tier 1 capital) would also take into account physical commodities held anywhere in the FHC, subject to a few exceptions.[12] The ability of an FHC to undertake or expand its physical commodities activities under the complementary authority therefore would be constrained by the extent to which the FHC and its subsidiaries engage in physical commodities activities under other authorities.[13]

Clarify prohibition on operations. The proposal would codify in the Board’s Regulation Y the prohibition on owning, operating or investing in facilities for the extraction, transportation, storage or distribution of commodities under the complementary authority. It also would clarify that this prohibits directing the operations of third-party extraction, storage or transportation providers. The proposed list of restrictions is not intended to be exhaustive; the Board states that the purpose of this proposal is to ensure that FHCs refrain from activities related to physical commodities that could impose environmental liability upon the FHC.[14]

Rescind authority for energy management services and tolling. Energy management services and tolling would no longer be permitted under complementary authority. According to the Board, the proposal would affect the actual activity of only one firm and the authority of five FHCs. The Board states that the fact that only one firm is now engaging in these activities indicates that the activities are not “as directly or meaningfully connected to a financial activity as is physical commodities trading,” and that the expected benefits from permitting these activities have not materialized.[15] The Board mentions that the rescission of these authorities would not affect the ability of FHCs to provide derivatives and related financial products and services to power plants or engage in physical trading. The proposal provides a two-year transition period to conform to these new restrictions.

Merchant banking authority

New risk-based capital requirements. The proposal would apply a 1,250% risk weight to a merchant banking investment in a company engaged in physical commodities activities unless all of the physical commodities activities of the portfolio company are permissible under complementary authority (e.g., physical commodities trading). If all the physical commodities activities of the portfolio company are permissible under complementary authority, then: (i) a 300% risk weight would apply to the investment if the company is publicly traded (the same risk weight that would apply to physical commodities trading activities conducted under the complementary authority); and (ii) a 400% risk weight would apply if the company is not publicly traded (this is intended to be consistent with the standardized approach to equity exposures).

The capital requirements would not apply to certain end user physical commodities activities where the portfolio company uses covered physical commodities to operate businesses otherwise unrelated to physical commodities. The proposed capital requirements would not apply to a merchant banking investment solely because the portfolio company owns or operates a facility or vessel that purchases, stores, or transports a covered physical commodity only as necessary to power or support the facility or vessel.[16]

The Board explains that these risk weights are designed to address the risks from merchant banking investments generally, “the potential reputational risks associated with the investment, and the possibility that the corporate veil may be pierced and the FHC held liable for environmental damage caused by the portfolio company.”[17] In the Board’s view, a higher risk weight for privately traded portfolio companies is warranted because an FHC “may not be able to gain access to markets for a privately held portfolio company after an environmental catastrophe” involving that company.[18]

Grandfather authority

New risk-based capital requirements. A 1,250% risk weight would apply to physical commodities and related assets (e.g., infrastructure assets) permitted to be owned solely under the statutory grandfather provision. This risk weight would be applied to the market value of all commodities permitted to be held only under the grandfather authority, as well as to the original cost basis of section 4(o) infrastructure assets.

A 300% risk weight would apply to activities that are conducted under the grandfather provision or through merchant banking authority but that are also permissible under complementary authority. The 300% risk weight would apply only, however, to the extent that the market value of the amount of physical commodities held under this authority, when aggregated with the market value of other physical commodities owned by the FHC that the proposal would not already subject to a 1,250% risk weight, does not exceed 5% of the consolidated tier 1 capital of the FHC.[19]

The Board states that the 1,250% risk weight, which is the highest risk weight currently specified by the Board under its standardized approach, is “intended to address the risk of legal liability resulting from the unauthorized discharge of a covered substance in connection with the infrastructure asset.”[20] The Board notes that this risk weighting is not intended to require capital against the full potential liability that might result from a catastrophic event, but rather is intended to reflect “the higher risks of physical commodity activities permissible only under section 4(o) grandfather authority without also making the activities prohibitively costly by attempting to capture the risks of the largest environmental catastrophes.”[21]

Reclassification of copper

Copper would be deleted from the list of precious metals that BHCs are permitted to own and store for their own accounts or the accounts of others. The Board explains that although in 1997 copper was added to the list that included gold, silver, platinum and palladium bullion, coins, bars and rounds, over time copper has “become most commonly used as a base or industrial metal, and not as a store of value in the same way as gold, silver, platinum, and palladium.”[22] The Board notes, and we discuss below, that the Office of the Comptroller of the Currency (OCC) has recently proposed a similar reclassification of copper under the National Bank Act.

Public reporting

The proposed rule would impose new public reporting requirements for commodities holdings of FHCs in order to increase transparency, allow better monitoring by regulators and improve firm management of these activities.[23] The proposed rule would require the reporting of the total fair values of various commodities held in inventory, as well as the risk-weighted asset amounts associated with an FHC’s covered physical commodities activities, section 4(o) infrastructure assets or investments in covered commodity merchant banking investments.

FHCs also would be required to identify whether they own any covered physical commodities, any section 4(o) infrastructure assets or any investments in covered commodity merchant banking investments; whether they are engaged in the exploration, extraction, production or refining of physical commodities; and whether they own facilities, vessels or conveyances for the storage or transportation of covered physical commodities. Further, FHCs would be required to report the total fair value of section 4(k)- and section 4(o)-permissible commodities owned, the original cost basis of any section 4(o) infrastructure assets, and the carrying value of investments in covered commodity merchant banking investments.

Board analysis of impacts

The Board believes the proposal will not have a material impact on the markets for physical commodities or derivative instruments related to those commodities.[24] According to the Board, the amount of additional capital required to be held by FHCs under the proposal would be approximately $4.1 billion in the aggregate. The Board estimates the proposal would result in an “insignificant” increase of 0.7% in total risk-weighted assets and a 7.1% increase in risk-weighted assets attributable to trading business. The Board concludes that, among FHCs that engage in physical commodities activities, this increase in risk weighting “would not cause any FHC to breach the minimum capital requirements.”[25]

The Board observes that “if FHCs consider their physical commodities trading on a standalone basis, the proposed increases in capital requirements could make this activity significantly less attractive based on its return on capital, and could result in decreased activity.”[26] The Board states, however, that such a reduction in activity “is not likely expected to have a material impact on the broader physical commodity markets.”[27]Although the Board acknowledges that information on the markets covered by the proposal is “relatively scarce,” the Board states that it appears that Board-regulated entities account for a small fraction of the physical markets for these commodities.

Using data from the Commodity Futures Trading Commission’s (CFTC’s) Bank Participation Report, the Board finds that the market share of banks in derivative contracts involving physical commodities ranges from 2% to 15% and therefore that any reduction in bank activity in these financial markets that might result from the proposal “should not materially impact” these derivative markets.[28] The Board also estimated that, in light of the relatively small share of FHCs in the commodity markets, the impact of the proposed increase in capital requirements upon merchant banking investment activities “appears insignificant.”[29]

Section 620 Report

Overview

Enacted in the shadow of the public debate over the Volcker Rule, Section 620 of the Dodd-Frank Act was intended to address activities not covered by the Volcker Rule’s restrictions on proprietary trading and covered fund activities, in particular longer-term risky holdings and trading.[30] Section 620 requires the three federal banking regulators[31] to conduct a study and report to Congress within 18 months of the enactment of Dodd-Frank. The report must address the appropriate activities and investments for banking entities under federal and state law, as well as review and consider (i) the types of permissible activities or investments; (ii) any financial, operational, managerial or reputation risks associated with or presented as a result of the banking entity engaged in the activity or making the investment; and (iii) risk mitigation activities undertaken by the banking entity with regard to the risks. The banking regulators submitted the 620 report on September 8, 2016, over six years after enactment of the statute. The 620 Report is divided into three sections, one for each regulator, covering those entities subject to its supervision:. The Board prepared Section I, the FDIC Section II, and the OCC Section III.

The three regulators have taken markedly different approaches in the 620 Report. Consistent with its approach under the proposed rule, the Board, in Section I of the 620 Report, has made a series of recommendations for legislative repeal of several of the authorities that currently allow banking entities to engage in commercial activities, calling for a greater separation of banking and commerce. The Board’s recommendations all require congressional action.

The OCC, which supervises national banks, federal savings associations, and federal branches and agencies of foreign banks does not recommend legislative action but plans to take action itself, through rulemaking or guidance, to enhance its prudential regulatory scheme. It intends to issue unilaterally rules and guidance that could have a significant and more immediate effect on banks’ asset-backed securities, derivatives, commodities and structured products activities.[32]

The FDIC, which supervises state-chartered insured banks and savings associations, has identified several areas for potential action but has taken the least drastic approach by adopting a wait-and-see posture to consider how certain activities interact with existing and new FDIC regulations and supervisory approvals.

The Board: Section I

The Board’s recommendations in its section of the 620 Report are sweeping, calling for the repeal of authorities and exemptions that currently allow FHCs and SLHCs to engage in a broad range of commercial activities. With respect to banks’ authorities to engage in physical commodities activities, the Board recommends the repeal of the merchant banking and Section 4(o) authorities under the BHCA that had been added by the GLBA.[33]

Repeal of merchant banking authority. As discussed above, under current merchant banking authority, FHCs may make investments in nonfinancial companies as part of a bona fide merchant or investment banking activity, including in any type of nonfinancial company, including portfolio companies engaged in physical commodities activities. In addition, ownership investments in a portfolio company may be in any amount. Current regulations require that corporate separateness be maintained to help ensure the limited liability of the FHC’s investment. Thus, an FHC generally may not participate in the day-to-day management of a portfolio company. FHCs are also required to establish risk management policies and procedures for these merchant banking activities. Under the GLBA, however, an FHC may manage or operate a portfolio company as may be necessary to obtain a reasonable return on the resale or disposition of the investment. According to the Board, this exposes the FHC to increased risks of being liable for operations of the portfolio company (e.g., if the portfolio company were involved in an environmental event). In the Board’s view, its regulatory authority to limit the potential risks to the FHC is not sufficient to manage the safety and soundness concerns, leading the Board to call for the wholesale legislative repeal of merchant banking authority.

Repeal of Section 4(o) grandfathering. The 620 Report also calls for a repeal of the grandfather authority under BHCA Section 4(o). The Board is concerned that this authority raises safety and soundness concerns largely because certain environmental laws impose strict liability on the owners and operators of certain physical commodities facilities for environmental releases or other events. Liability arising from environmental catastrophes can, in the Board’s view, create material financial, legal, reputational and market access harm for these firms. The Board is also concerned that lack of separation between banking and commerce creates a risk of undue concentration that could have a disproportionate effect on financial markets, production and employment if failure occurs. In addition, the Board argues that, because the Section 4(o) authority applies to only two firms, it raises competiveness concerns, including access to important industry-related information to which other FHCs do not have access, such as the amount and timing of production. The Board is also critical of the automatic nature of the Section 4(o) grandfather, which allows a covered company to engage in physical commodities activities without notice to or approval of the Board.

The OCC: Section III[34]

The OCC does not recommend any congressional action in its section of the 620 Report. Instead, it notes its intention to take regulatory action in each of the four areas it reviewed, namely physical commodities, derivatives, securities and structured products. We discuss its approach to physical commodities and derivatives below.

Physical commodities. Like FHCs, national banks currently may buy and sell coin and bullion, which, under OCC precedent, include gold, silver, platinum, palladium and copper. Banks may store these precious metals for themselves and their customers and may transport the metals to or from their customers. Banks may also serve as custodian for an exchange-traded fund that invests in these precious metals. Consistent with the proposed rule issued by the Board, the OCC plans to solicit comment on whether it should treat copper as a base metal rather than as “coin and bullion.” The OCC’s proposal will define “coin and bullion” to exclude copper cathodes and will conclude that buying and selling copper is generally not part of or incidental to the business of banking.

National banks may also buy and sell physical commodities (within limits) to hedge commodity price risk in connection with customer-driven commodity derivative transactions. The 620 Report notes that the OCC published supervisory guidance in 2015 to clarify how national banks should calculate how much of their hedging involves physical settlement so that they remain within the current precedent that requires that physical hedges be no more than 5% of a bank’s hedging activity.[35] The 620 Report notes that this guidance implements the OCC’s recommendation that physical hedging limits be clarified.

National banks may also acquire exposure, up to a limit of capital and surplus, to physical commodities through investment in renewable fuel capital investment companies, up to 5% of capital and surplus and certain investments that promote primarily the public welfare, such as in companies that generate renewable energy. In addition, national banks may acquire physical commodities in satisfaction of a debt previously contracted (e.g., the bank could foreclose on grain collateral pledged for a loan to a farmer). The 620 Report does not contain recommendations relating to these activities.

Derivatives. National banks may enter into derivatives transactions with payments based on bank-permissible holdings (e.g., tied to interest rates, foreign exchange, credit, precious metals and investment securities). With OCC-written non-objection, banks may deal in derivatives on certain other assets if part of customer-driven financial intermediation. National banks may not conduct proprietary trading in these derivatives. The OCC notes that Congress has approved national banks’ ability to offer swaps in connection with originating a loan. However, the OCC is concerned with what it views as smaller national banks’ interest in expanding their swap dealing business, particularly in commodity swaps. In 2014, the OCC enhanced its procedures for examining activities in which the bank enters into derivatives as an end user rather than as a dealer. The OCC now intends to “clarify minimum prudential standards” that apply to national banks engaging in certain swap dealing activities.[36]

The OCC is also reviewing the risks to federal banking entities of the entities’ membership in clearinghouses, particularly where their liability is not capped by the rules of the clearinghouse. The OCC may decide to issue guidance on clearinghouse membership.

Conclusion

Despite substantial input from market participants to the effect that physical commodities activities of banks have been conducted in a safe and sound manner and do not pose a significant potential for catastrophic liability or systemic risk, the proposed rule and the Board’s legislative recommendations in the 620 Report indicate the Board’s ongoing commitment to make significant changes in this area and suggest that the Board is unlikely to be receptive to overall philosophical opposition to its proposed direction. While the Board has previously floated broad ideas on reform, the proposed rule represents the first time the Board has offered specifics on how it intends new limitations to work and an estimate of the market impacts of such proposals. The Board therefore may be more receptive to comments concerning the effects of the specific measures it has proposed, including its estimates of the market impacts from these specific proposals. Comments on the proposed rule must be submitted by December 22, 2016.

The Board’s preferred direction with respect to changes to the BHCA is also clear. However, the impending election makes it impossible to predict the likelihood of legislative movement in this regard.

ARTICLE BY Dan M. Berkovitz & Gail C. Bernstein of WilmerHale
© 1994-2016 Wilmer Cutler Pickering Hale and Dorr LLP

[1] An FHC is a bank holding company (BHC) with well-capitalized subsidiaries that, pursuant to the Gramm-Leach Bliley Act (GLBA), may engage in financial activities, including securities underwriting and dealing, insurance activities, and merchant banking activities.

[2] Notice of proposed rulemaking, Risk-based Capital and Other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-based Capital Requirements for Merchant Banking Investments (Sept. 23, 2016) (hereinafter referred to as “NPRM”); available at https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160923a2.pdf.

[3] Report to the Congress and the Financial Stability Oversight Council Pursuant to Section 620 of the Dodd-Frank Act (September 2016), available at https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160908a1.pdf.

[4] The Board also makes legislative recommendations with respect to other types of activities. It recommends the repeal of (i) the exemption that permits corporate owners of industrial loan companies (ILCs) to operate outside of the regulatory and supervisory framework applicable to other corporate owners of insured depository institutions; and (ii) the exemption for grandfathered unitary savings and loan holding companies (SLHCs) from the activities restrictions applicable to all other SLHCs.

[5] Complementary Activities, Merchant Banking Activities, and Other Activities of Financial Holding Companies Related to Physical Commodities, 79 Fed. Reg. 3330 (Jan. 21, 2014). In response to the notice, critics of bank involvement in commodities argued that financial holding companies participating in these markets had an unfair competitive advantage, presented serious conflicts of interest and, most important, exposed the financial system to serious risk in the event of a catastrophic event. They believed that further regulation would help mitigate these risks, thereby protecting the financial system. Citing benefits such as increased convenience and competition, efficiency gains, more readily available liquidity, and lower commodity prices, proponents of bank involvement in physical commodities claimed that financial holding companies provide valuable services to end users, such as municipalities, that would be difficult to replace in the event of stricter regulation that might preclude banks from participating in physical commodities activities. Proponents pointed to the robust risk management processes that banks have established to ensure the safety of physical commodities activities, and further cited the sound safety record to date as evidence that these activities do not pose undue risks to financial holding companies or the financial system.

[6] Wall Street Bank Involvement with Physical Commodities: Hearing before the Perm. Subcomm. on Investigations of the S. Comm. on Homeland Sec. and Governmental Affairs, 113th Cong., 2d Sess. (Nov. 2014) (testimony of Gov. Tarullo).

[7] In general, the amount of capital an institution subject to capital requirements is required to hold is calculated by multiplying the minimum capital adequacy ratio (e.g., 4% or 8%) by the risk-weighted asset exposures. Thus, for example, if the minimum capital adequacy ratio is 8%, a risk weight of 1,250% applied to the market value of section 4(o)-permissible commodities would mean that for these activities the FHC would be required to hold an amount of capital equal to the total market value of the commodities held under that authority.

[8] The proposal provides for an FHC to use daily averages for physical commodities quantities and rolling month-end, end-of-day spot prices over a 60-month period to determine the market value of its covered physical commodities. NPRM, at p. 32.

[9] Id., at pp. 31–32.

[10] Id., at p. 25.

[11] Id., at p. 27.

[12] The proposal would exclude from the cap the physical commodities activities of portfolio companies held under the merchant banking authority, assets related to the satisfaction of debts previously contracted and insurance company investments held under BHCA § 4(k)(4)(I).

[13] Examples of such other authorities cited by the Board are the authority for certain national banks to hold physical commodities to hedge customer-driven, bank-permissible derivative transactions, and the authority to possess physical commodities provided as collateral in satisfaction of debts previously contracted in good faith. NPRM, at p. 20.

[14] Id., at p. 23.

[15] Id., at p. 42.

[16] Id., at p. 30.

[17] Id.

[18] Id.

[19] The proposal calls this the “section 4(k) cap parity amount,” which excludes commodities owned pursuant to the merchant banking authority, similar insurance investment authority, and authority to acquire assets and voting securities in satisfaction of debts previously contracted.

[20] NPRM, at p. 27.

[21] Id.

[22] Id., at p. 46.

[23] Memorandum from Staff to Board of Governors, Re: Proposed Rule Implementing Strengthened Prudential Requirements, including Risk-based Capital Requirements for Physical Commodity Activities and Investments of Financial Holding Companies, at p. 2.

[24] NPRM, at pp. 34–35.

[25] Id., at p. 34.

[26] Id.

[27] Id.

[28] Id., at p. 35.

[29] Id.

[30] See 156 Cong. Rec. S5895 (July 15, 2010) (statement of Sen. Merkley).

[31] The three federal banking regulators are the Board, the Federal Deposit Insurance Corporation (FDIC) and the OCC.

[32] Specifically, the OCC plans to:

  • issue a proposed rule that restricts national banks from holding as type III securities asset-backed securities, which may be backed by bank-impermissible assets, and to issue an analogous proposed rule for federal savings associations;
  • address concentrations of mark-to-model assets and liabilities with a rulemaking or guidance;
  • clarify minimum prudential standards for certain national bank swap dealing activities;
  • consider providing guidance on clearinghouse memberships;
  • clarify regulatory limits on physical hedging;
  • address national banks’ authority to hold and trade copper; and
  • incorporate the Volcker Rule into the OCC’s investment securities rules.

[33] The Board also recommends the repeal of the exemption that allows corporate owners of ILCs to operate outside of the regulatory and supervisory framework applicable to non-ILC corporate owners and the exemption for grandfathered unitary SLHCs from activities restrictions applicable to other SLHCs.

[34] Since the FDIC did not make any recommendations, we do not discuss Section II of the Report.

[35] OCC Bulletin 2015-35, “Quantitative Limits on Physical Commodity Transactions” (Aug. 4, 2015).

[36] 620 Report at 86.

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