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11 January 2007
[Federal Register: January 11, 2007 (Volume 72, Number 7)]
[Notices]
[Page 1372-1380]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja07-82]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 06-17]
Office of Thrift Supervision
[Docket No. 2006-55]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1254]
FEDERAL DEPOSIT INSURANCE CORPORATION
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55043; File No. S7-08-06]
Interagency Statement on Sound Practices Concerning Elevated Risk
Complex Structured Finance Activities
AGENCIES: Office of the Comptroller of the Currency, Treasury
(``OCC''); Office of Thrift Supervision, Treasury (``OTS''); Board of
Governors of the Federal Reserve System (``Board''); Federal Deposit
Insurance Corporation (``FDIC''); and Securities and Exchange
Commission (``SEC'') (collectively, the ``Agencies'').
ACTION: Notice of final interagency statement.
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SUMMARY: The Agencies are adopting an Interagency Statement on Sound
Practices Concerning Elevated Risk Complex Structured Finance
Activities (``Final Statement''). The Final Statement pertains to
national banks, state banks, bank holding companies (other than foreign
banks), federal and state savings associations, savings and loan
holding companies, U.S. branches and agencies of foreign banks, and
SEC-registered broker-dealers and investment advisers (collectively,
``financial institutions'' or ``institutions'') engaged in complex
structured finance transactions (``CSFTs''). In May 2004, the Agencies
issued and requested comment on a proposed interagency statement
(``Initial Proposed Statement''). After reviewing the comments received
on the Initial Proposed Statement, the Agencies in May 2006 issued and
requested comment on a revised proposed interagency statement
(``Revised Proposed Statement''). The modifications to the Revised
Proposed Statement, among other things, made the statement more
principles-based and focused on the identification, review and approval
process for those CSFTs that may pose heightened levels of legal or
reputational risk to the relevant institution (referred to as
``elevated risk CSFTs''). After carefully reviewing the comments on the
Revised Proposed Statement, the Agencies have adopted the Final
Statement with minor modifications designed to clarify, but not alter,
the principles set forth in the Revised Proposed Statement. The Final
Statement describes some of the internal controls and risk management
procedures that may help financial institutions identify, manage, and
address the heightened reputational and legal risks that may arise from
elevated risk CSFTs. As discussed further below, the Final Statement
will not affect or apply to the vast majority of financial
institutions, including most small institutions, nor does it create any
private rights of action.
EFFECTIVE DATE: The Final Statement is effective January 11, 2007.
FOR FURTHER INFORMATION CONTACT:
OCC: Kathryn E. Dick, Deputy Comptroller, Credit and Market Risk,
(202) 874-4660; Grace E. Dailey, Deputy Comptroller, Large Bank
Supervision, (202) 874-4610; or Ellen Broadman, Director, Securities
and Corporate Practices Division, (202) 874-5210, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
OTS: Fred J. Phillips-Patrick, Director, Credit Policy, (202) 906-
7295, and Deborah S. Merkle, Project Manager, Credit Policy, (202) 906-
5688, Examinations and Supervision Policy; or David A. Permut, Senior
Attorney, Business Transactions Division, (202) 906-7505, Office of
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
Board: Sabeth I. Siddique, Assistant Director, (202) 452-3861, or
Virginia Gibbs, Senior Supervisory Financial Analyst, (202) 452-2521,
Division of Banking Supervision and Regulation; or Kieran J. Fallon,
Assistant General Counsel, (202) 452-5270, or Anne B. Zorc, Senior
Attorney, (202) 452-3876, Legal Division, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551. Users of Telecommunication Device for Deaf (TTD)
only, call (202) 263-4869.
FDIC: Jason C. Cave, Associate Director, (202) 898-3548; Division
of Supervision and Consumer Protection; or Mark G. Flanigan, Counsel,
Supervision and Legislation Branch, Legal Division, (202) 898-7426,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
SEC: Mary Ann Gadziala, Associate Director, Office of Compliance
Inspections and Examinations, (202) 551-6207; Catherine McGuire, Chief
Counsel, Linda Stamp Sundberg, Senior Special Counsel (Banking and
Derivatives), or Randall W. Roy, Branch Chief, Division of Market
Regulation, (202) 551-5550, Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background
Financial markets have grown rapidly over the past decade, and
innovations in financial instruments have facilitated the structuring
of cash flows and allocation of risk among creditors, borrowers, and
investors in more efficient ways. Financial derivatives for market and
credit risk, asset-backed securities with customized cash flow
features, specialized financial conduits that manage pools of assets,
and other types of structured finance transactions serve important
purposes, such as diversifying risk, allocating cash flows and reducing
cost of capital. As a result, structured finance transactions,
including the more complex variations of these transactions, now are an
essential part of U.S. and international capital markets.
When a financial institution participates in a CSFT, it bears the
usual market, credit, and operational risks associated with the
transaction. In some circumstances, a financial institution also may
face heightened legal or reputational risks due to its involvement in a
CSFT. For example, a financial institution involved in a CSFT may face
heightened legal or reputational risk if the customer's regulatory, tax
or accounting treatment for the CSFT, or disclosures concerning the
CSFT in its public filings or financial statements, do not comply with
applicable laws, regulations or accounting principles.\1\
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\1\ For a memorandum on the potential liability of a financial
institution for securities laws violations arising from
participation in a CSFT, see Letter from Annette L. Nazareth,
Director, Division of Market Regulation, Securities and Exchange
Commission, to Richard Spillenkothen and Douglas W. Roeder, dated
December 4, 2003 (available at http://www.federalreserve.gov/boarddocs/srletters/2004/ and http://www.occ.treas.gov).
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In some cases, certain CSFTs appear to have been used in illegal
schemes
[[Page 1373]]
that misrepresented the financial condition of public companies to
investors and regulatory authorities. After conducting investigations,
the OCC, Federal Reserve System and SEC took strong and coordinated
civil and administrative enforcement actions against certain financial
institutions that engaged in CSFTs that appeared to have been designed
or used to shield their customers' true financial health from the
public. These actions involved the assessment of significant financial
penalties on the institutions and required the institutions to take
several measures to strengthen their risk management procedures for
CSFTs.\2\ The complex structured finance relationships involving these
financial institutions also sparked an investigation by the Permanent
Subcommittee on Governmental Affairs of the United States Senate,\3\ as
well as numerous lawsuits by private litigants.
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\2\ See, e.g., In the Matter of Citigroup, Inc., Securities
Exchange Act Release No. 48230 (July 28, 2003), Written Agreement by
and between Citibank, N.A. and the Office of the Comptroller of the
Currency, No. 2003-77 (July 28, 2003) (pertaining to transactions
entered into by Citibank, N.A. with Enron Corp.) and Written
Agreement by and between Citigroup, Inc. and the Federal Reserve
Bank of New York, dated July 28, 2003 (pertaining to transactions
involving Citigroup Inc. and its subsidiaries and Enron Corp. and
Dynegy Inc.); SEC v. J.P. Morgan Chase, SEC Litigation Release No.
18252 (July 28, 2003) and Written Agreement by and among J.P. Morgan
Chase & Co., the Federal Reserve Bank of New York, and the New York
State Banking Department, dated July 28, 2003 (pertaining to
transactions involving J.P. Morgan Chase & Co. and its subsidiaries
and Enron Corp.).
\3\ See Fishtail, Bacchus, Sundance, and Slapshot: Four Enron
Transactions Funded and Facilitated by U.S. Financial Institutions,
Report Prepared by the Permanent Subcomm. on Investigations, Comm.
on Governmental Affairs, United States Senate, S. Rpt. 107-82
(2003).
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The OCC, Federal Reserve System and SEC also conducted special
reviews of several large financial institutions engaged in CSFTs, and
the Agencies have focused attention on the CSFT activities of financial
institutions in the normal course of the supervisory process. These
reviews and activities indicate that many of the large financial
institutions engaged in CSFTs have taken meaningful steps in recent
years to improve their control infrastructure relating to CSFTs.
II. Initial and Revised Proposed Statements
To assist financial institutions in identifying, managing, and
addressing the risks that may be associated with CSFTs, the Agencies
developed and requested public comment on the Initial Proposed
Statement.\4\ The Initial Proposed Statement described the types of
policies and procedures that a financial institution engaged in CSFTs
should have in place to allow the institution to identify, document,
evaluate, and control the full range of credit, market, operational,
legal, and reputational risks that may arise from CSFTs. The agencies
collectively received comments from more than 40 commenters on the
Initial Proposed Statement. Although commenters generally supported the
Agencies' efforts to describe the types of risk management procedures
and internal controls that may help institutions manage the risks
associated with CSFTs, virtually all of the commenters recommended
changes to the Initial Proposed Statement.
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\4\ See 69 FR 28980, May 19, 2004.
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After carefully reviewing the comments on the Initial Proposed
Statement, the Agencies issued and requested comment on a Revised
Proposed Statement.\5\ The Revised Proposed Statement was modified in
numerous respects to clarify the purpose, scope and effect of the
statement; make the statement more risk-focused and principles based;
and focus the statement on those CSFTs that may pose elevated levels of
legal or reputational risk to the relevant institution.\6\
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\5\ See 71 FR 28326, May 16, 2006.
\6\ A more detailed summary of the comments on the Initial
Proposed Statement, as well as the changes made in response to those
comments, is contained in the Federal Register notice accompanying
the Revised Proposed Statement (71 FR 28326, 28328-29 (May 16,
2006)).
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III. Overview of Comments on the Revised Proposed Statement
The Agencies collectively received written comments from 19
commenters on the Revised Proposed Statement, although many commenters
submitted identical comments to multiple Agencies. Commenters included
banking organizations, financial services trade associations, and
individuals. Commenters generally expressed strong support for the
Revised Proposed Statement, including its principles-based structure
and focus on elevated risk CSFTs. Many commenters also asserted that
the Revised Proposed Statement provides a financial institution
appropriate flexibility to develop internal controls and risk
management procedures that are tailored to the institution's own
business activities and organizational structure.
Several commenters requested that the Agencies clarify or revise
the Revised Proposed Statement in certain respects. For example, some
commenters asked the Agencies to further streamline the provisions in
the statement pertaining to documentation of elevated risk CSFTs, or
clarify how the U.S. branches or agencies of foreign banks might
implement risk management systems, policies or controls consistent with
the statement's principles. In addition, some commenters asked the
Agencies to set forth or clarify the legal standards governing the
potential liability of financial institutions for CSFTs or provide
``safe harbors'' from such potential liability. One group of commenters
also argued that the Revised Proposed Statement should not be
implemented because it allegedly would encourage or condone illegal
conduct by financial institutions. The comments received on the Revised
Proposed Statement are further discussed below.
IV. Overview of Final Statement
After carefully reviewing the comments on the Revised Proposed
Statement, the Agencies have made minor modifications to the Revised
Proposed Statement in response to comments and to clarify the
principles, scope, and intent of the Final Statement. The Final
Statement has been adopted as supervisory guidance by the Board, OCC,
FDIC and OTS and as a policy statement by the SEC. The Agencies will
use the Final Statement going forward in reviewing the internal
controls and risk management policies, procedures and systems of
financial institutions engaged in CSFTs as part of the Agencies'
ongoing supervisory process.
The Agencies continue to believe that it is important for a
financial institution engaged in CSFTs to have policies and procedures
that are designed to allow the institution to effectively manage and
address the full range of risks associated with its CSFT activities,
including the elevated legal or reputational risks that may arise in
connection with certain CSFTs. For this reason, the Final Statement
describes the types of risk management principles that the Agencies
believe may help a financial institution to identify elevated risk
CSFTs and to evaluate, manage, and address these risks within the
institution's internal control framework.\7\ These policies and
procedures should, among other things, be designed to allow the
institution to identify elevated risk CSFTs during its
[[Page 1374]]
transaction and new product approval processes, and should provide for
elevated risk CSFTs to be reviewed by appropriate levels of control and
management personnel at the institution, including personnel from
control areas that are independent of the business line(s) involved in
the transaction.
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\7\ As noted in the Final Statement, financial institutions are
encouraged to refer to other supervisory guidance and materials
prepared by the Agencies for further information concerning market,
credit and operational risk, as well as for further information on
legal and reputational risk, internal audit and internal controls.
---------------------------------------------------------------------------
The Final Statement--like the Revised Proposed Statement--applies
to financial institutions that are engaged in CSFT activities and
focuses on those CSFTs that may create heightened levels of legal or
reputational risks for a participating financial institution. Because
CSFTs typically are conducted by a limited number of large financial
institutions, the Final Statement will not affect or apply to the vast
majority of financial institutions, including most small institutions.
As the Final Statement recognizes, structured finance transactions
encompass a broad array of products with varying levels of complexity.
Most structured finance transactions, such as standard public mortgage-
backed securities and hedging-type transactions involving ``plain
vanilla'' derivatives or collateralized debt obligations, are familiar
to participants in the financial markets, have well-established track
records, and typically would not be considered CSFTs for purposes of
the Final Statement. Some commenters requested that the Agencies
provide a more extensive list of structured finance transactions that
typically would not be considered CSFTs. The Agencies note that the
types of non-complex transactions listed in the Final Statement are
only examples of the types of transactions that typically would not be
considered CSFTs and that any list of examples would not, and could
not, be all inclusive given the changing nature of the structured
finance market. Consistent with the principles-based approach of the
Final Statement, the Agencies believe the statement appropriately
highlights the hallmarks of a non-complex transaction--i.e., a well
established track record and familiarity to participants in the
financial markets--that may guide institutions and examiners in
considering whether a particular type of transaction should be
considered a CSFT now or in the future.
A. Identification, Due Diligence, and Approval Processes for Elevated
Risk CSFTs
As noted above, a financial institution should establish and
maintain policies, procedures and systems that are designed to identify
elevated risk CSFTs as part of the institution's transaction or new
product approval processes, and to ensure that transactions or new
products identified as elevated risk CSFTs are subject to heightened
review.\8\ In general, a financial institution should conduct the level
and amount of due diligence for an elevated risk CSFT that is
commensurate with the level of risks identified. A financial
institution's policies and procedures should provide that CSFTs
identified as potentially having elevated legal or reputational risk
are reviewed and approved by appropriate levels of management. The
Agencies continue to believe that the designated approval process for
elevated risk CSFTs should include the institution's representatives
from the relevant business line(s) and/or client relationship
management, as well as from appropriate control areas that are
independent of the business line(s) involved in the transaction. An
institution's policies should provide that new complex structured
finance products receive the approval of all relevant control areas
that are independent of the profit center before the product is offered
to customers.\9\
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\8\ In response to comments, the Agencies have modified the
Final Statement to clarify that a U.S. branch or agency of a foreign
bank is not necessarily expected to establish or adopt separate
U.S.-based risk management structures or policies for its CSFT
activities. In addition, the Agencies believe the Final Statement
provides U.S. branches and agencies of foreign banks sufficient
flexibility to develop controls, risk management and reporting
structures, and lines of authority that are consistent with the
internal management structure of U.S. branches and agencies.
However, the risk management structure and policies used by a U.S.
branch or agency, whether adopted or implemented on a group-wide or
stand-alone basis, should be effective in allowing the branch or
agency to manage the risks associated with its CSFT activities.
\9\ One commenter sought clarification regarding when during the
new product approval process a new complex structured finance
product should receive the approval of relevant control areas. The
Agencies note that the Final Statement is not intended to prevent
institutions from engaging in initial or preliminary discussions or
negotiations with potential customers about a new complex structured
finance product. However, an institution should obtain the necessary
approvals for a new complex structured finance product from
appropriate control areas before the institution enters into, or
becomes obligated to enter into, a transaction with the customer.
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The Final Statement--like the Revised Proposed Statement--provides
examples of transactions that may warrant additional scrutiny by an
institution. These examples include, among other things, transactions
that appear to the institution to:
Lack economic substance or business purpose;
Be designed or used primarily for questionable accounting,
regulatory, or tax objectives, particularly when the transactions are
executed at year-end or at the end of a reporting period for the
customer; or
Raise concerns that the client will report or disclose the
transaction in its public filings or financial statements in a manner
that is materially misleading or inconsistent with the substance of the
transaction or applicable regulatory or accounting requirements.
A few commenters contended that the examples of elevated risk CSFTs
contained in the Revised Proposed Statement have characteristics that
are signals, if not conclusive proof, of fraudulent activity, and
recommended that the Agencies inform financial institutions that
transactions or products with any of these characteristics should be
considered presumptively prohibited. The commenters also argued that
the statement encourages or condones illegal conduct by financial
institutions. The Agencies believe that CSFTs that initially appear to
an institution, during the ordinary course of its new product or
transaction approval process, to have one or more of the
characteristics identified in the Final Statement should generally be
identified as an elevated risk CSFT, and the institution should conduct
due diligence for the transaction that is commensurate with the level
of identified, potential risks. The Agencies, however, do not believe
it is appropriate to provide that all transactions initially identified
as potentially creating elevated legal or reputational risks for an
institution should be considered presumptively prohibited. For example,
an institution, after conducting additional due diligence for a
transaction initially identified as an elevated risk CSFT, may
determine that the transaction does not, in fact, have the
characteristics that initially triggered the review. Alternatively, the
institution may take steps to address the legal or reputational risks
that initially triggered the review. In this regard, the Final
Statement expressly provides that, if after evaluating an elevated risk
CSFT, a financial institution determines that its participation in the
transaction would create significant legal or reputational risks for
the institution, the financial institution should take appropriate
steps to manage and address these risks. Such steps may include
modifying the transaction or conditioning the institution's
participation in the transaction upon the receipt of representations or
assurances from the customer that reasonably address the heightened
risks presented by the transaction.
Importantly, the Final Statement continues to provide that a
financial
[[Page 1375]]
institution should decline to participate in an elevated risk CSFT if,
after conducting appropriate due diligence and taking appropriate steps
to address the risks from the transaction, the institution determines
that the transaction presents unacceptable risks to the institution or
would result in a violation of applicable laws, regulations or
accounting principles.\10\ The Final Statement also expressly notes
that financial institutions must conduct their activities in accordance
with applicable statutes and regulations. The Agencies believe the
Final Statement should assist financial institutions engaged in CSFTs
in managing the risks associated with these activities and complying
with the law, and does not, as some commenters alleged, encourage or
condone illegal conduct.
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\10\ Some commenters asked the Agencies to clarify that the
Final Statement does not necessarily prevent a financial institution
from proceeding with a CSFT simply because there may be some
ambiguity in how the transaction might be viewed under the law or
applicable accounting principles. The Agencies recognize that in
certain circumstances ambiguities may exist as to how the law or
accounting principles apply to a CSFT, particularly in light of the
inherent complexity and rapidly evolving nature of CSFTs.
Nevertheless, as discussed in the Final Statement, a financial
institution should maintain strong and effective processes and
controls designed to determine whether any such ambiguities may
create significant legal or reputational risks for the institution
and to manage and address those risks as appropriate.
---------------------------------------------------------------------------
Some commenters also requested that the Agencies enunciate, clarify
or modify the legal standards governing the potential liability of a
financial institution for participating in a CSFT that is used for
fraudulent or illegal purposes. For example, some commenters asked the
Agencies to declare that institutions do not have a duty to ensure the
accuracy of a client's public filings or accounting. Other commenters
asked that the Agencies state that an institution will not be held
liable or responsible for a CSFT if the institution has a reasonable
degree of confidence that the customer will report or account for the
transactions properly. Other commenters expressed concern that the
Revised Proposed Statement, or the comments submitted on that document,
attempted to alter the current legal standards under which a financial
institution may be held liable for fraudulent activity or criminally
responsible under the Federal securities law or other laws.
As events in recent years have highlighted, institutions may in
certain circumstances bear significant legal or reputational risk from
participating in a CSFT. In light of these risks, the Final Statement
describes the types of risk management systems and internal controls
that may help a financial institution engaged in CSFTs to identify
those CSFTs that may pose heightened legal or reputational risk to the
institution, and to evaluate, manage, and address those risks. Because
the Final Statement represents guidance on the part of the Banking
Agencies and a policy statement on the part of the SEC, it does not, by
itself, establish any legally enforceable requirements or obligations.
Moreover, as the Final Statement expressly provides, it does not create
any private rights of action, nor does it alter or expand the legal
duties and obligations that a financial institution may have to a
customer, its shareholders or other parties under applicable law.
Accordingly, the Agencies do not believe it is appropriate or possible
to address in the Final Statement these legal concerns expressed by
commenters.
B. Documentation
The Final Statement states that a financial institution should
create and collect sufficient documentation to, among other things,
verify that the institution's policies and procedures related to
elevated risk CSFTs are being followed and allow the internal audit
function to monitor compliance with those policies and procedures. The
Final Statement also provides that, when an institution's policies and
procedures require an elevated risk CSFT to be submitted for approval
to senior management, the institution should maintain the transaction-
related documentation provided to senior management as well as other
documentation that reflect management's approval (or disapproval) of
the transaction, any conditions imposed by senior management, and the
reasons for such action.
Several commenters strongly suggested that the Agencies should
eliminate or modify the portions of the statement that provide for a
financial institution to maintain certain documentation related to
elevated risk CSFTs that are submitted to the institution's senior
management for approval (or denial). For example, some commenters
argued that institutions should not be required to maintain any
documentation for declined transactions. Other commenters expressed
concern that this provision was inconsistent with the current practice
of financial institutions, would require financial institutions to
create new and potentially extensive documentation to memorialize all
aspects of the institution's analytical and decision-making process
with respect to an elevated risk CSFT, or would require institutions to
create or maintain extensive documentation even for transactions that
are approved or rejected by junior staff.
As an initial matter, the Agencies note that the Final Statement's
provisions regarding documentation for elevated risk CSFTs submitted to
senior management for approval (or disapproval) do not apply to
transactions that may be reviewed and acted on by more junior personnel
in accordance with the institution's policies and procedures. Rather,
these provisions apply only to those elevated risk CSFTs that are
identified by the institution as potentially involving the greatest
degree of risk to the institution and, for this reason, are required to
be reviewed by the institution's senior management. The Agencies
believe that it is important for institutions to maintain documentation
for this category of elevated risk CSFTs, whether approved or declined,
that reflects the factors considered by senior management in taking
such action. The Agencies believe this type of documentation may be of
significant benefit to the institution and to the Agencies in reviewing
the effectiveness of the institution's CSFT-related policies,
procedures, and internal controls. However, to help address the
commenter's concern about potential burden, the Agencies have modified
the Final Statement to recognize that the minutes of an institution's
reviewing senior management committee may have the information
described and to clarify that the documentation for a transaction
should reflect the factors considered by senior management in taking
action, but does not have to detail every aspect of the institution's
legal or business analysis of the transaction.\11\
---------------------------------------------------------------------------
\11\ In light of comments, the Agencies have modified the
Documentation section of the Statement to clarify that an
institution should retain sufficient documentation to establish that
it has provided the customer any disclosures concerning an elevated
risk CSFT that the institution is otherwise required to provide to
the customer.
---------------------------------------------------------------------------
C. General Risk Management Principles for Elevated Risk CSFTs
The Final Statement--like the Revised Proposed Statement--also
describes some of the other key risk management policies and internal
controls that financial institutions should have in place for elevated
risk CSFTs. For example, the Final Statement provides that the board of
directors and senior management of an institution should establish a
``tone at the top'' through both actions and formalized policies that
sends a strong message throughout
[[Page 1376]]
the financial institution about the importance of compliance with the
law and overall good business ethics. The Final Statement also
describes the types of training, reporting mechanisms, and audit
procedures that institutions should have in place with respect to
elevated risk CSFTs. The Final Statement also provides that a financial
institution should conduct periodic independent reviews of its CSFT
activities to verify and monitor that its policies and controls
relating to elevated risk CSFTs are being implemented effectively and
that elevated risk CSFTs are accurately identified and receive proper
approvals.
In response to comments, the Agencies have modified the Final
Statement to clarify that the independent reviews conducted by a
financial institution may be performed by the institution's audit
department or an independent compliance function within the
institution. One commenter also asked the Agencies to state that the
proper role of an institution's independent review function is only to
confirm that the institution's policies and procedures for elevated
risk CSFTs are being followed and that the function should not assess
the quality of the decisions made by institution personnel. The
Agencies believe that an institution's audit or compliance department
should have the flexibility, in appropriate circumstances, to review
the decisions made by institution personnel during the review and
approval process for elevated risk CSFTs and for this reason have not
made the recommended change.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR Part 1320, Appendix A.1), the Agencies reviewed the Final
Statement. The Agencies may not conduct or sponsor, and an organization
is not required to respond to, this information collection unless it
displays a currently valid OMB control number. The Agencies previously
determined that certain provisions of the Revised Proposed Statement
contained information collection requirements. OMB reviewed and
approved the information collections contained in the Revised Proposed
Statement for the FDIC, OTS, OCC and SEC; and the Board reviewed the
Revised Proposed Statement under the authority delegated to the Board
by OMB (5 CFR Part 1320, Appendix A.1).
OMB control numbers:
OCC: 1557-0229.
OTS: 1550-0111.
FRB: 7100-0311.
FDIC: 3064-0148.
SEC: 3235-0622.
Burden Estimates
OCC
Number of Respondents: 21.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 525 hours.
OTS
Number of Respondents: 5.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 125 hours.
Board
Number of Respondents: 20.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 500 hours.
FDIC
Number of Respondents: 5.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 125 hours.
SEC
Number of Respondents: 5.
Estimated Time per Response: 25 hours.
Total Estimated Annual Burden: 125 hours.
No commenters addressed the Agencies' information collection
estimates. The Agencies do not believe that the clarifications included
in this Final Statement impact the burden estimates previously
developed and approved for these information collections. The Agencies
have a continuing interest in the public's opinions of our collections
of information. At any time, comments regarding the burden estimate, or
any other aspect of this collection of information, including
suggestions for reducing the burden, may be sent to:
OCC: You should direct your comments to:
Communications Division, Office of the Comptroller of the Currency,
Public Information Room, Mailstop 1-5, Attention: 1557-0229, 250 E
Street, SW., Washington, DC 20219. In addition, comments may be sent by
fax to (202) 874-4448, or by electronic mail to
regs.comments@occ.treas.gov. You can inspect and photocopy the comments
at the OCC's Public Information Room, 250 E Street, SW., Washington, DC
20219. You can make an appointment to inspect the comments by calling
(202) 874-5043. Additionally, you should send a copy of your comments
to OCC Desk Officer, 1557-0229, by mail to U.S. Office of Management
and Budget, 725 17th Street, NW., 10235, Washington, DC 20503,
or by fax to (202) 395-6974.
You can request additional information or a copy of the collection
from Mary Gottlieb, OCC Clearance Officer, or Camille Dickerson, (202)
874-5090, Legislative and Regulatory Activities Division, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
OTS: Information Collection Comments, Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552;
send a facsimile transmission to (202) 906-6518; or send an e-mail to
infocollection.comments@ots.treas.gov. OTS will post comments and the
related index on the OTS Internet site at http://www.treas.gov. In
addition, interested persons may inspect the comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-7755.
To obtain a copy of the submission to OMB, contact Marilyn K.
Burton at marilyn.burton@ots.treas.gov, (202) 906-6467, or fax number
(202) 906-6518, Chief Counsel's Office, Office of Thrift Supervision,
1700 G Street, NW., Washington, DC 20552
Board: You may submit comments, identified by FR 4022, by any of
the following methods:
Agency Web site: http://www.federalreserve.gov Follow the instructions for submitting comments at http://www.federalreserve.gov/.
.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: Regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Michelle Long, Federal Reserve Board Clearance
Officer (202) 452-3829, Division of Research and Statistics, Board of
Governors of the Federal Reserve System, Washington, DC 20551.
Telecommunications Device for the Deaf (TDD) users may contact (202)
263-4869, Board of Governors of the Federal Reserve System, Washington,
DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted,
[[Page 1377]]
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed electronically or in paper in Room MP-500
of the Board's Martin Building (20th and C Streets, NW.) between 9 a.m.
and 5 p.m. on weekdays.
FDIC: Interested parties are invited to submit written comments to
the FDIC concerning the Paperwork Reduction Act implications of this
proposal. Such comments should refer to ``Complex Structured Finance
Transactions, 3064-0148.'' Comments may be submitted by any of the
following methods:
http://www.FDIC.gov/regulations/laws/federal/propose.html.. E-mail: comments@FDIC.gov. Include Complex Structured
Financial Transactions, 3064-0148 in the subject line of the message.
Mail: Steven F. Hanft (202) 898-3907, Federal Deposit
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery: Comments may be hand-delivered to the guard
station at the rear of the 17th Street Building (located on F Street),
on business days between 7 a.m. and 5 p.m.
SEC: You should direct your comments to: Office of Management and
Budget, Attention Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Room 10102,
New Executive Office Building, Washington, DC 20503, with a copy sent
to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549-1090 with reference to File No. S7-
08-06.
The Final Statement follows:
Interagency Statement on Sound Practices Concerning Elevated Risk
Complex Structured Finance Activities
I. Introduction
Financial markets have grown rapidly over the past decade, and
innovations in financial instruments have facilitated the structuring
of cash flows and allocation of risk among creditors, borrowers and
investors in more efficient ways. Financial derivatives for market and
credit risk, asset-backed securities with customized cash flow
features, specialized financial conduits that manage pools of assets
and other types of structured finance transactions serve important
business purposes, such as diversifying risks, allocating cash flows,
and reducing cost of capital. As a result, structured finance
transactions now are an essential part of U.S. and international
capital markets. Financial institutions have played and continue to
play an active and important role in the development of structured
finance products and markets, including the market for the more complex
variations of structured finance products.
When a financial institution participates in a complex structured
finance transaction (``CSFT''), it bears the usual market, credit, and
operational risks associated with the transaction. In some
circumstances, a financial institution also may face heightened legal
or reputational risks due to its involvement in a CSFT. For example, in
some circumstances, a financial institution may face heightened legal
or reputational risk if a customer's regulatory, tax or accounting
treatment for a CSFT, or disclosures to investors concerning the CSFT
in the customer's public filings or financial statements, do not comply
with applicable laws, regulations or accounting principles. Indeed, in
some instances, CSFTs have been used to misrepresent a customer's
financial condition to investors, regulatory authorities and others. In
these situations, investors have been harmed, and financial
institutions have incurred significant legal and reputational exposure.
In addition to legal risk, reputational risk poses a significant threat
to financial institutions because the nature of their business requires
them to maintain the confidence of customers, creditors and the general
marketplace.
The Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, and the Securities and Exchange
Commission (the ``Agencies'') have long expected financial institutions
to develop and maintain robust control infrastructures that enable them
to identify, evaluate and address the risks associated with their
business activities. Financial institutions also must conduct their
activities in accordance with applicable statutes and regulations.
II. Scope and Purpose of Statement
The Agencies are issuing this Statement to describe the types of
risk management principles that we believe may help a financial
institution to identify CSFTs that may pose heightened legal or
reputational risks to the institution (``elevated risk CSFTs'') and to
evaluate, manage and address these risks within the institution's
internal control framework.\12\
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\12\ As used in this Statement, the term ``financial
institution'' or ``institution'' refers to national banks in the
case of the Office of the Comptroller of the Currency; federal and
state savings associations and savings and loan holding companies in
the case of the Office of Thrift Supervision; state member banks and
bank holding companies (other than foreign banking organizations) in
the case of the Federal Reserve Board; state nonmember banks in the
case of the Federal Deposit Insurance Corporation; and registered
broker-dealers and investment advisers in the case of the Securities
and Exchange Commission. The U.S. branches and agencies of foreign
banks supervised by the Office of the Comptroller, the Federal
Reserve Board and the Federal Deposit Insurance Corporation also are
considered to be financial institutions for purposes of this
Statement.
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Structured finance transactions encompass a broad array of products
with varying levels of complexity. Most structured finance
transactions, such as standard public mortgage-backed securities
transactions, public securitizations of retail credit cards, asset-
backed commercial paper conduit transactions, and hedging-type
transactions involving ``plain vanilla'' derivatives and collateralized
loan obligations, are familiar to participants in the financial
markets, and these vehicles have a well-established track record. These
transactions typically would not be considered CSFTs for the purpose of
this Statement.
Because this Statement focuses on sound practices related to CSFTs
that may create heightened legal or reputational risks--transactions
that typically are conducted by a limited number of large financial
institutions--it will not affect or apply to the vast majority of
financial institutions, including most small institutions. As in all
cases, a financial institution should tailor its internal controls so
that they are appropriate in light of the nature, scope, complexity and
risks of its activities. Thus, for example, an institution that is
actively involved in structuring and offering CSFTs that may create
heightened legal or reputational risk for the institution should have a
more formalized and detailed control framework than an institution that
participates in these types of transactions less frequently. The
internal controls and procedures discussed in this Statement are not
all inclusive, and, in appropriate circumstances, an institution may
find that other controls, policies, or procedures are appropriate in
light of its particular CSFT activities.
Because many of the core elements of an effective control
infrastructure are the same regardless of the business line involved,
this Statement draws heavily on controls and procedures that the
Agencies previously have found to be effective in assisting a financial
institution to manage and control risks and identifies ways in which
these controls and procedures can be
[[Page 1378]]
effectively applied to elevated risk CSFTs. Although this Statement
highlights some of the most significant risks associated with elevated
risk CSFTs, it is not intended to present a full exposition of all
risks associated with these transactions. Financial institutions are
encouraged to refer to other supervisory guidance prepared by the
Agencies for further information concerning market, credit,
operational, legal and reputational risks as well as internal audit and
other appropriate internal controls.
This Statement does not create any private rights of action, and
does not alter or expand the legal duties and obligations that a
financial institution may have to a customer, its shareholders or other
third parties under applicable law. At the same time, adherence to the
principles discussed in this Statement would not necessarily insulate a
financial institution from regulatory action or any liability the
institution may have to third parties under applicable law.
III. Identification and Review of Elevated Risk Complex Structured
Finance Transactions
A financial institution that engages in CSFTs should maintain a set
of formal, written, firm-wide policies and procedures that are designed
to allow the institution to identify, evaluate, assess, document, and
control the full range of credit, market, operational, legal and
reputational risks associated with these transactions. These policies
may be developed specifically for CSFTs, or included in the set of
broader policies governing the institution generally. A financial
institution operating in foreign jurisdictions may tailor its policies
and procedures as appropriate to account for, and comply with, the
applicable laws, regulations and standards of those jurisdictions.\13\
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\13\ In the case of U.S. branches and agencies of foreign banks,
these policies, including management, review and approval
requirements, should be coordinated with the foreign bank's group-
wide policies developed in accordance with the rules of the foreign
bank's home country supervisor and should be consistent with the
foreign bank's overall corporate and management structure as well as
its framework for risk management and internal controls.
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A financial institution's policies and procedures should establish
a clear framework for the review and approval of individual CSFTs.
These policies and procedures should set forth the responsibilities of
the personnel involved in the origination, structuring, trading,
review, approval, documentation, verification, and execution of CSFTs.
Financial institutions may find it helpful to incorporate the review of
new CSFTs into their existing new product policies. In this regard, a
financial institution should define what constitutes a ``new'' complex
structured finance product and establish a control process for the
approval of such new products. In determining whether a CSFT is new, a
financial institution may consider a variety of factors, including
whether it contains structural or pricing variations from existing
products, whether the product is targeted at a new class of customers,
whether it is designed to address a new need of customers, whether it
raises significant new legal, compliance or regulatory issues, and
whether it or the manner in which it would be offered would materially
deviate from standard market practices. An institution's policies
should require new complex structured finance products to receive the
approval of all relevant control areas that are independent of the
profit center before the product is offered to customers.
A. Identifying Elevated Risk CSFTs
As part of its transaction and new product approval controls, a
financial institution should establish and maintain policies,
procedures and systems to identify elevated risk CSFTs. Because of the
potential risks they present to the institution, transactions or new
products identified as elevated risk CSFTs should be subject to
heightened reviews during the institution's transaction or new product
approval processes. Examples of transactions that an institution may
determine warrant this additional scrutiny are those that (either
individually or collectively) appear to the institution during the
ordinary course of its transaction approval or new product approval
process to:
Lack economic substance or business purpose;
Be designed or used primarily for questionable accounting,
regulatory, or tax objectives, particularly when the transactions are
executed at year end or at the end of a reporting period for the
customer;
Raise concerns that the client will report or disclose the
transaction in its public filings or financial statements in a manner
that is materially misleading or inconsistent with the substance of the
transaction or applicable regulatory or accounting requirements;
Involve circular transfers of risk (either between the
financial institution and the customer or between the customer and
other related parties) that lack economic substance or business
purpose;
Involve oral or undocumented agreements that, when taken
into account, would have a material impact on the regulatory, tax, or
accounting treatment of the related transaction, or the client's
disclosure obligations; \14\
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\14\ This item is not intended to include traditional, non-
binding ``comfort'' letters or assurances provided to financial
institutions in the loan process where, for example, the parent of a
loan customer states that the customer states that the customer
(i.e., the parent's subsidiary) is an integral and important part of
the parent's operations.
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Have material economic terms that are inconsistent with
market norms (e.g., deep ``in the money'' options or historic rate
rollovers); or
Provide the financial institution with compensation that
appears substantially disproportionate to the services provided or
investment made by the financial institution or to the credit, market
or operational risk assumed by the institution.
The examples listed previously are provided for illustrative
purposes only, and the policies and procedures established by financial
institutions may differ in how they seek to identify elevated risk
CSFTs. The goal of each institution's policies and procedures, however,
should remain the same--to identify those CSFTs that warrant additional
scrutiny in the transaction or new product approval process due to
concerns regarding legal or reputational risks.
Financial institutions that structure or market, act as an advisor
to a customer regarding, or otherwise play a substantial role in a
transaction may have more information concerning the customer's
business purpose for the transaction and any special accounting, tax or
financial disclosure issues raised by the transaction than institutions
that play a more limited role. Thus, the ability of a financial
institution to identify the risks associated with an elevated risk CSFT
may differ depending on its role.
B. Due Diligence, Approval and Documentation Process for Elevated Risk
CSFTs
Having developed a process to identify elevated risk CSFTs, a
financial institution should implement policies and procedures to
conduct a heightened level of due diligence for these transactions. The
financial institution should design these policies and procedures to
allow personnel at an appropriate level to understand and evaluate the
potential legal or reputational risks presented by the transaction to
the institution and to manage and address any heightened
[[Page 1379]]
legal or reputational risks ultimately found to exist with the
transaction.
Due Diligence. If a CSFT is identified as an elevated risk CSFT,
the institution should carefully evaluate and take appropriate steps to
address the risks presented by the transaction with a particular focus
on those issues identified as potentially creating heightened levels of
legal or reputational risk for the institution. In general, a financial
institution should conduct the level and amount of due diligence for an
elevated risk CSFT that is commensurate with the level of risks
identified. A financial institution that structures or markets an
elevated risk CSFT to a customer, or that acts as an advisor to a
customer or investors concerning an elevated risk CSFT, may have
additional responsibilities under the federal securities laws, the
Internal Revenue Code, state fiduciary laws or other laws or
regulations and, thus, may have greater legal and reputational risk
exposure with respect to an elevated risk CSFT than a financial
institution that acts only as a counterparty for the transaction.
Accordingly, a financial institution may need to exercise a higher
degree of care in conducting its due diligence when the institution
structures or markets an elevated risk CSFT or acts as an advisor
concerning such a transaction than when the institution plays a more
limited role in the transaction.
To appropriately understand and evaluate the potential legal and
reputational risks associated with an elevated risk CSFT that a
financial institution has identified, the institution may find it
useful or necessary to obtain additional information from the customer
or to obtain specialized advice from qualified in-house or outside
accounting, tax, legal, or other professionals. As with any
transaction, an institution should obtain satisfactory responses to its
material questions and concerns prior to consummation of a
transaction.\15\
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\15\ Of course, financial institutions also should ensure that
their own accounting for transactions complies with applicable
accounting standards, consistently applied.
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In conducting its due diligence for an elevated risk CSFT, a
financial institution should independently analyze the potential risks
to the institution from both the transaction and the institution's
overall relationship with the customer. Institutions should not
conclude that a transaction identified as being an elevated risk CSFT
involves minimal or manageable risks solely because another financial
institution will participate in the transaction or because of the size
or sophistication of the customer or counterparty. Moreover, a
financial institution should carefully consider whether it would be
appropriate to rely on opinions or analyses prepared by or for the
customer concerning any significant accounting, tax or legal issues
associated with an elevated risk CSFT.
Approval Process. A financial institution's policies and procedures
should provide that CSFTs identified as having elevated legal or
reputational risk are reviewed and approved by appropriate levels of
control and management personnel. The designated approval process for
such CSFTs should include representatives from the relevant business
line(s) and/or client management, as well as from appropriate control
areas that are independent of the business line(s) involved in the
transaction. The personnel responsible for approving an elevated risk
CSFT on behalf of a financial institution should have sufficient
experience, training and stature within the organization to evaluate
the legal and reputational risks, as well as the credit, market and
operational risks to the institution.
The institution's control framework should have procedures to
deliver the necessary or appropriate information to the personnel
responsible for reviewing or approving an elevated risk CSFT to allow
them to properly perform their duties. Such information may include,
for example, the material terms of the transaction, a summary of the
institution's relationship with the customer, and a discussion of the
significant legal, reputational, credit, market and operational risks
presented by the transaction.
Some institutions have established a senior management committee
that is designed to involve experienced business executives and senior
representatives from all of the relevant control functions within the
financial institution (including such groups as independent risk
management, tax, accounting, policy, legal, compliance, and financial
control) in the oversight and approval of those elevated risk CSFTs
that are identified by the institution's personnel as requiring senior
management review and approval due to the potential risks associated
with the transactions. While this type of management committee may not
be appropriate for all financial institutions, a financial institution
should establish processes that assist the institution in consistently
managing the review and approval of elevated risk CSFTs on a firm-wide
basis.\16\
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\16\ The control processes that a financial institution
establishes for CSFTs should take account of, and be consistent
with, any informational barriers established by the institution to
manage potential conflicts of interest, insider trading or other
concerns.
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If, after evaluating an elevated risk CSFT, the financial
institution determines that its participation in the CSFT would create
significant legal or reputational risks for the institution, the
institution should take appropriate steps to address those risks. Such
actions may include declining to participate in the transaction, or
conditioning its participation upon the receipt of representations or
assurances from the customer that reasonably address the heightened
legal or reputational risks presented by the transaction. Any
representations or assurances provided by a customer should be obtained
before a transaction is executed and be received from, or approved by,
an appropriate level of the customer's management. A financial
institution should decline to participate in an elevated risk CSFT if,
after conducting appropriate due diligence and taking appropriate steps
to address the risks from the transaction, the institution determines
that the transaction presents unacceptable risk to the institution or
would result in a violation of applicable laws, regulations or
accounting principles.
Documentation. The documentation that financial institutions use to
support CSFTs is often highly customized for individual transactions
and negotiated with the customer. Careful generation, collection and
retention of documents associated with elevated risk CSFTs are
important control mechanisms that may help an institution monitor and
manage the legal, reputational, operational, market, and credit risks
associated with the transactions. In addition, sound documentation
practices may help reduce unwarranted exposure to the financial
institution's reputation.
A financial institution should create and collect sufficient
documentation to allow the institution to:
Document the material terms of the transaction;
Enforce the material obligations of the counterparties;
Confirm that the institution has provided the customer any
disclosures concerning the transaction that the institution is
otherwise required to provide; and
Verify that the institution's policies and procedures are
being followed and allow the internal audit function to
[[Page 1380]]
monitor compliance with those policies and procedures.
When an institution's policies and procedures require an elevated
risk CSFT to be submitted for approval to senior management, the
institution should maintain the transaction-related documentation
provided to senior management as well as other documentation, such as
minutes of the relevant senior management committee, that reflect
senior management's approval (or disapproval) of the transaction, any
conditions imposed by senior management, and the factors considered in
taking such action. The institution should retain documents created for
elevated risk CSFTs in accordance with its record retention policies
and procedures as well as applicable statutes and regulations.
C. Other Risk Management Principles for Elevated Risk CSFTs
General Business Ethics. The board and senior management of a
financial institution also should establish a ``tone at the top''
through both actions and formalized policies that sends a strong
message throughout the financial institution about the importance of
compliance with the law and overall good business ethics. The board and
senior management should strive to create a firm-wide corporate culture
that is sensitive to ethical or legal issues as well as the potential
risks to the financial institution that may arise from unethical or
illegal behavior. This kind of culture coupled with appropriate
procedures should reinforce business-line ownership of risk
identification, and encourage personnel to move ethical or legal
concerns regarding elevated risk CSFTs to appropriate levels of
management. In appropriate circumstances, financial institutions may
also need to consider implementing mechanisms to protect personnel by
permitting the confidential disclosure of concerns.\17\ As in other
areas of financial institution management, compensation and incentive
plans should be structured, in the context of elevated risk CSFTs, so
that they provide personnel with appropriate incentives to have due
regard for the legal, ethical and reputational risk interests of the
institution.
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\17\ The agencies note that the Sarbanes-Oxley Act of 2002
requires companies listed on a national securities exchange or
inter-dealer quotation system of a national securities association
to establish procedures that enable employees to submit concerns
regarding questionable accounting or auditing matters on a
confidential, anonymous basis. See 15 U.S.C. 78j-1(m).
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Reporting. A financial institution's policies and procedures should
provide for the appropriate levels of management and the board of
directors to receive sufficient information and reports concerning the
institution's elevated risk CSFTs to perform their oversight functions.
Monitoring Compliance with Internal Policies and Procedures. The
events of recent years evidence the need for an effective oversight and
review program for elevated risk CSFTs. A financial institution's
program should provide for periodic independent reviews of its CSFT
activities to verify and monitor that its policies and controls
relating to elevated risk CSFTs are being implemented effectively and
that elevated risk CSFTs are accurately identified and received proper
approvals. These independent reviews should be performed by
appropriately qualified audit, compliance or other personnel in a
manner consistent with the institution's overall framework for
compliance monitoring, which should include consideration of issues
such as the independence of reviewing personnel from the business line.
Such monitoring may include more frequent assessments of the risk
arising from elevated risk CSFTs, both individually and within the
context of the overall customer relationship, and the results of this
monitoring should be provided to an appropriate level of management in
the financial institution.
Audit. The internal audit department of any financial institution
is integral to its defense against fraud, unauthorized risk taking and
damage to the financial institution's reputation. The internal audit
department of a financial institution should regularly audit the
financial institution's adherence to its own control procedures
relating to elevated risk CSFTs, and further assess the adequacy of its
policies and procedures related to elevated risk CSFTs. Internal audit
should periodically validate that business lines and individual
employees are complying with the financial institution's standards for
elevated risk CSFTs and appropriately identifying any exceptions. This
validation should include transaction testing for elevated risk CSFTs.
Training. An institution should identify relevant personnel who may
need specialized training regarding CSFTs to be able to effectively
perform their oversight and review responsibilities. Appropriate
training on the financial institution's policies and procedures for
handling elevated risk CSFTs is critical. Financial institution
personnel involved in CSFTs should be familiar with the institution's
policies and procedures concerning elevated risk CSFTs, including the
processes established by the institution for identification and
approval of elevated risk CSFTs and new complex structured finance
products and for the elevation of concerns regarding transactions or
products to appropriate levels of management. Financial institution
personnel involved in CSFTs should be trained to identify and properly
handle elevated risk CSFTs that may result in a violation of law.
IV. Conclusion
Structured finance products have become an essential and important
part of the U.S. and international capital markets, and financial
institutions have played an important role in the development of
structured finance markets. In some instances, however, CSFTs have been
used to misrepresent a customer's financial condition to investors and
others, and financial institutions involved in these transactions have
sustained significant legal and reputational harm. In light of the
potential legal and reputational risks associated with CSFTs, a
financial institution should have effective risk management and
internal control systems that are designed to allow the institution to
identify elevated risk CSFTs, to evaluate, manage and address the risks
arising from such transactions, and to conduct those activities in
compliance with applicable law.
Dated: December 12, 2006.
John C. Dugan,
Comptroller of the Currency.
Dated: December 21, 2006.
By the Office of Thrift Supervision.
Scott M. Polakoff,
Deputy Director & Chief Operating Officer.
By order of the Board of Governors of the Federal Reserve
System, December 20, 2006.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 22nd day of December, 2006.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: January 5, 2007.
By the Securities and Exchange Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 07-55 Filed 1-10-07; 8:45 am]
BILLING CODE 4810-33-P