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Trust Legislative Update

Trust Legislative Update. FIRMA National Training Conference Fort Worth, TX March 26, 2012 Cecelia Calaby American Bankers Association 202-663-5325 ccalaby@aba.com. Topics. Dodd Frank Act Big Picture Where Are We? Wealth Management Impact Tax Issues DOL Collective Funds

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Trust Legislative Update

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  1. Trust Legislative Update • FIRMA National Training • Conference • Fort Worth, TX • March 26, 2012 • Cecelia Calaby • American Bankers Association • 202-663-5325 • ccalaby@aba.com

  2. Topics • Dodd Frank Act • Big Picture • Where Are We? • Wealth Management Impact • Tax Issues • DOL • Collective Funds • Examation Topics • Broader Context – Conduct of Your Business • Washington Thoughts

  3. Dodd Frank Act- Big Picture

  4. Where are we? • By the numbers: • 400 rulemakings required; as of February 1, 2012 • 93 finalized • 158 proposed • 149 to come • So less than 25% through rulemakings and just over half-way through the picture • But already up to over 3,000 pages of final rules and guidance with over 3500 pages of proposed rules and guidance

  5. Where are we? • By objectives: • Better assess systemic risk • FSOC created; one-year annual report business as usual • OFR slow start- no director; insufficient governance • End too big to fail • Heightened standards proposed-some differentiation for non-SIFIs but insufficient among SIFIs • Higher capital underway • Living wills, contingent resolution plans and orderly liquidation early stages • Non-bank SIFIs undesignated

  6. Where are we? • By objectives: • Better protect consumers • CFPB formed – director appointed under a cloud • Some indication prudential regulators treating compliance within safety and soundness rubric • Regulate the OTC derivatives market • Plethora of proposals – nothing on market structure final • ABA Focus • Banks are end-users too • SDs should be SDs (broad loan and de minimis exemptions) • Push-out doesn’t make sense

  7. So…. Story not yet written Final rules, so far, not generally relevant to primary objectives Many deadlines missed Agencies extending comment periods Agencies stating that phased implementation is necessary - especially true in derivatives and living wills areas Increasingly clear that bankers cannot make long-range business plans

  8. DFA-OTS and CFPB (Titles III and X) • New Regulator for Thrifts • Bureau of Consumer Financial Protection • Enforcement bias • Staffing; number of potential entities within scope; ‘nimble’; adjudication and investigation rules out • CFPB in the banks (>$10 billion) • Largest 20% have continuous onsite • Others have exam cycle – goal to coordinate with other agencies • Primarily occupied in mortgage space: no indication trust is on radar screen

  9. DFA-Volcker Rule (Section 619) • Joint Rulemaking by Consensus • Fed, FDIC, OCC, SEC with CFTC following • Comment period ended February 13, 2012 with CFTC comment period ending April 16, 2012 • Increasingly clear that the proposal approach to keep impermissible activities undefined and define permissible carve-outs is unworkable • Affects merchant banking activities, public welfare investments, bank common/collective funds, custody services provided to covered funds, foreign funds, directed trustees of covered funds • Growing realization that overall market liquidity in many instruments likely to be affected

  10. DFA-Volcker Rule (cont.) • Applies to all banks • Statements by agencies that smaller, less complex banking entities are not affected not borne out in rule • Banker initial reaction • Concern regarding number of respondents • FED – 10,000 • FDIC – 1,139 • OCC - 469 • Concern about “prove the negative” compliance approach • Concern about timing for compliance procedures • Concern about consistency of regulator interpretation and supervision of the final rule

  11. DFA- BD Standard of Care (Sec. 913) • SEC Study on Broker-Dealer Standard • Concluded that B-Ds should be subject to same standard of care as RIAs when providing personalized advice to retail customers on securities • Banker Concerns • Dilution of fiduciary brand • Multiple distribution channels • Customer confusion • Education vs. advice • Ongoing work at SEC by a cross-divisional team • Commissioner dissent together with increased attention to cost-benefit analysis may slow effort • Currently expect an SEC release requesting data

  12. DFA-Municipal Advisors (Sec. 975) • “Municipal advisors” must register with SEC and MSRB • Enforcement/examination by SEC • Traditional bank activities potentially affected: • Bank deposits • Cash management products • Advice to muni pension plans • Banks acting as indenture trustees for muni bonds • MSRB rules for: • Business conduct (including “pay-to play”) • Reporting and recordkeeping requirements • Continuing education • Fiduciary standard set by MSRB

  13. DFA – Municipal Advisors (cont.) • Timing: temporary registration extended until 9-30-12 • Like Dorothy, we want to believe • Withdrawal of MSRB rules– positive • Hill pressure– positive • High–level SEC attention-positive (but not sure fully engaged) • Important, significant issue for banking industry • OCC letter to SEC with follow-up from Comptroller Walsh to Senator Toomey

  14. DFA-Adviser Issues • Sec. 929Q: SEC may request documents relating to custody of RIA “client” assets from banks • Banks already getting request from SEC examination staff • Watch scope of requests • May have altered the privacy dynamics • Sec. 412: GAO study on compliance costs of the SEC custody rule still to come

  15. DFA-Adviser Issues (cont.) • Elimination of Private Adviser Exception (Sec. 403) • Final Rule (Release IA-3222) issued June 22, 2011 exempts (except for reporting requirements) advisers to venture funds, advisers to private funds if <$150M AUM in the U.S. and certain foreign private advisers. • Form PF adopted October 2012; effective date staggered through 2012 depending on assets under management • Definition of hedge fund & private equity fund here • Bank sponsored hedge fund and private equity reporting • Window into market begins to open

  16. DFA-Adviser Issues (cont.) • SEC’s “Pay to Play Rule” • Requires RIAs to identify clients that are governmental entities, including investors in a pooled investment vehicle managed by the RIA • If bank or broker-dealer invests governmental entities in a fund through an omnibus account, RIA may not know underlying investors • SEC No Action Letter relieves the RIA from having to obtain from bank the names of the governmental entities invested in registered investment companies – relief not provided for unregistered funds, like 3(c)(11) funds • CFTC “ Pay to Play Rule” for Swap Dealers and Major Swap Participants

  17. DFA-SEC and the Proxy Process • 13f Investment Manager Disclosure of “Say on Pay” Votes (Sec. 951) • Public Disclosure required if exercising proxy power over securities in fiduciary or investment accounts • Proposed Amended Form N-PX includes: • Issuer name, ticker symbol, CUSIP, meeting date • # shares voted, how voted • Reporting Burden • No final rule yet

  18. Tax-Cost Basis in Securities Transactions • Tracking and reporting required of “brokers” on behalf of customers for: • Equity securities purchased after 12/31/2010 • Mutual funds/ DRP purchased after 12/31/2011 • Debt/Options purchased after 12/31/2012 • Banker Concerns • Scope of applicability of rule • Who has the information? • Treatment of gifted & inherited securities • Bearer bonds • Manual information transfer • ABA comment letter 2012 re extension of compliance dates for debt instruments and options and certain issues specific to calculating and reporting for these instruments

  19. Tax - Cost Basis Reporting • Brokers Must Report: • adjusted cost basis • acquisition/disposition dates • whether gain/loss is short/long term • Transfer Statements • When transferring covered securities, transferring broker must furnish to receiving broker a written statement with all necessary CBR information • Statements general due no later than 15 days following the transfer of covered securities

  20. Tax – Unbundling of Trust Fees (IRC New Proposal Under Sec. 67(e)) • IRS objective: treat trusts consistently with individuals • Sec. 67(e) does not permit trusts to fully deduct investment advisory fees • Challenge for bankers because trustee fees (formerly fully deducted) usually cover some type of advisory activity • IRS Reproposal under 67(e) • A cost is subject to the 2% floor if: • Is within the definition of “miscellaneous itemized deductions” under section 67(b) • Incurred by an estate or non-grantor trust, and • Commonly or customarily would be incurred by a hypothetical individual holding the same property

  21. Tax – Unbundling of Trust Fees (IRC New Proposal Under 67(e)) • Examples of costs subject to 2% floor: • Defense of claims against estate/trust unrelated to existence, validity, or administration of the estate or trust • Property ownership costs • Certain tax returns (e.g., gift tax, 1040s) • Investment advisory fees. • Trustees would be required to determine the amount charged for this service (whether or not provided by a third party) • Incremental costs above fees normally incurred by individuals may be deducted in full if for unusual investment objective

  22. Tax – Unbundling of Trust Fees (IRC New Proposal Under 67(e)) • Bank trustee issue: • Educating the IRS regarding trustee fees, or transitioning to explicit advisory fees (potential litigation) • Effective date: taxable years beginning on or after release of final rules • ABA comment letter • Proposal unnecessary given statutory language

  23. DOL-ERISA Definition of Fiduciary Proposal • DOL decided September 19, 2011 to re-propose its controversial proposal to re-define “fiduciary” under ERISA • The re-proposal is expected mid 2012 • As initially proposed, customer choice in the IRA market would have been adversely impacted and consumers would have had difficulty obtaining sound, professional advise in retirement planning • Letter from 32 House democrats to Secretary Solis November 7, 2011and Letter from 53 House Republicans to Secretary Solis both noting need for real cost-benefits analysis • Election year considerations • DOL Request for information to several industry trade associations • Clear response to Hill letters-focused on conflicts of IRA advisers • Requests information not available or difficult to compile

  24. Collective Funds • Section 408(b)(2) disclosure requirements • Finalized February 2012 • Regulation Intended to Assist Plan Fiduciaries • Establishes a Reasonable Contract/ Arrangement under Section 408(b)(2) • Covered Plans: DB/DC Plans (Not IRAs) • Covered Service Providers: $1,000+ for Fiduciary/Recordkeeping/Brokerage/Indirect Fees for Professional/Administrative Services

  25. Collective Funds • Section 408(b)(2) disclosure requirements • Covered Service Provider to Covered Plan Must Disclose to Responsible Plan Fiduciary: • Services to be provided • (Fiduciary/adviser) status • Direct and indirect compensation • Incomplete or erroneous disclosures could trigger prohibited transaction and associated penalties (potential rescission)

  26. Collective Funds (cont.) • Banking Challenges: • Logistics: meeting compliance deadline date • Disclosure: how much is enough? • Fees: indirect compensation arrangements • Bank as plan fiduciary: “I’ve got the information – now what?”

  27. Collective Funds • Participant disclosure for CIFs – DOL 404a-5 • CIF Glossary-available on ABA website • DFA and Study on Stable Value Contracts • CFTC and SEC requested comment Aug. 2011 • ABA joint comment letter submitted Sept. 2011

  28. Collective Funds (cont.) • OCC Bulletin 2011-11 on Collective Investment Funds and Outsourced Arrangements • Delegation to third parties does not relieve bank of fiduciary responsibility • Due diligence of third-party vendor prior to delegation and ongoing monitoring • Third party may not advertise/market CIF unless clear/prominent disclosure that CIF is managed and offered by bank • SEC reaction

  29. Examination Topics • FDIC • Stmt of Principles of Trust Department Mgmt • Federal Reserve • OCC

  30. Broader Context-Conduct of Your Business • Multiple Regulators • Dodd-Frank undoes GLBA functional regulation without consolidating the regulators • Expect to see the SEC and CFTC and MSRB • Swaps (interest rate; FX; credit default) • Custody • Business conduct (qualified plans & governmental entities) • Municipal advisory activities • Volcker rule • Greater role of global bodies in standard setting • G-20-including U.S. Treasury-empowers the Financial Stability Board • Basel and IOSCO active

  31. Broader Context-Conduct of Your Business • Dilution and diffusion of the “fiduciary” brand • States competing for trust business • Further federal standards • OCC attention to state directed trustee statutes • ERISA re-defined “fiduciary” • B-D Standard of Care uses “fiduciary” rubric • MSRB “fiduciary” standard for municipal advisors • Additional conduct standards from SEC/CFTC in swaps context • Expect confusion in the courts: What preempts? • Expect customer confusion

  32. Broader Context-Conduct of Your Business • Micro-scrutiny by regulators • Dodd-Frank furthers statutory inflexibility • Durbin amendment fixing interchange fees • Potential for CFPB UDAAP in the trust context (long way away) • Trend to individual responsibility- e.g. for retirement drives more protective rules and disclosure • DOL participant disclosure • IRS unbundling proposal • Overdraft guidance-OCC and Fed-CFPB to come • Granular supervision drives need for more and better process • Human Capital

  33. A few thoughts on Washington Politics • The Hill • Senate largely inactive • House setting the stage with issue specific bills • Financial Crisis  Regulatory Crisis • Some recognition that the uncertainty caused by the regulatory environment is a factor stalling any robust recovery. • Cost benefit analysis of regulatory proposals • SEC proxy access rule vacated in July, 2012 as arbitrary and capricious; the SEC will not appeal

  34. DFA Resources • ABA Website • Dodd-Frank Tracker http://regreformtracker.aba.com • Government Websites • Federal Reserve Board http://www.federalreserve.gov/newsevents/reform.htm • Federal Deposit Insurance Corporation http://www.fdic.gov/regulations/reform/index.html • Securities and Exchange Commission http://www.sec.gov/spotlight/dodd-frank.shtml • Commodity Futures Trading Commission http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm • Treasury Department http://www.treasury.gov/initiatives/wsr/Pages/wall-street-reform.aspx

  35. Questions?

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