TO: |
Chief Executive Officers of National Banks, Department and Division Heads, All Examining Personnel, and Other Interested Parties
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The Office of the
Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the
Office of Thrift Supervision, and the Securities and Exchange
Commission (the agencies) are adopting the attached “Interagency
Statement on Sound Practices Concerning Complex Structured Finance
Activities” that may pose heightened legal or reputational risks to
financial institutions. The statement was issued on January 5, 2007,
and will be published in the Federal Register.
SUMMARY
In May 2004, the
agencies issued and requested comment on a proposed “Interagency
Statement on Sound Practices Concerning Complex Structured Finance
Activities” (initial statement). After carefully considering
comments received, the agencies issued a revised statement for
comment in May 2006. The modifications to the initial statement
addressed issues and concerns raised by commenters. These
modifications made the statement more principles-based; focused the
statement on those complex structured finance transactions (CSFTs)
that may pose heightened levels of legal or reputational risk to the
relevant institution (referred to as elevated risk CSFTs);
recognized more explicitly
that an institution’s review and approval process for elevated risk CSFTs should be commensurate with, and should focus on, the potential risks presented by the transaction to the institution; clarified that the statement 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, to its shareholders, or to other third parties under applicable law; and noted that it does not affect the vast majority of financial institutions, including most small financial institutions. The agencies have adopted the final statement with minor modifications designed to clarify, but not alter, the principles outlined in the revised statement.
Examples of
CSFTs that often pose elevated risks and thus would be covered by the final statement include transactions that:
·
Lack economic substance or business
purpose;
·
Are 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 with
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;
·
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 statement points out that if a financial
institution determines through its due diligence that participation
in a particular 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. The statement also establishes that 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.
FURTHER INFORMATION
For further information, please contact Kathy Dick, Deputy Comptroller for Credit and Market Risk, (202) 874-4660; Grace Dailey, Deputy Comptroller for Large Banks, (202) 874-4610; or Ellen Broadman, Director, Securities and Corporate Practices Division, (202) 874-5210.
/signed/
Emory W. Rushton
Senior Deputy Comptroller and Chief National Bank Examiner
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/signed/
Douglas W. Roeder
Senior Deputy Comptroller for Large Bank Supervision
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Attachment – http://www.occ.treas.gov/ftp/bulletin/2007-1a.pdf
[http://www.occ.treas.gov/ftp/bulletin/2007-1a.pdf]
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