US regulators consult on proposed rule to require large banks to maintain long-term debt
The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation have issued a proposed rule for comment that would require certain large depository institution holding companies, US intermediate holding companies of foreign banking organizations, and certain insured depository institutions, to issue and maintain outstanding a minimum amount of long-term debt.
The proposed rule would require large banks with total assets of $100 billion to maintain a minimum amount of long-term debt to absorb losses in case of failure. This would increase the options available to resolve such banks and reduce the risk of bank runs in the event of failure.
The proposal would not materially change the existing requirements for global systemically important banks (GSIBs). It would also prohibit large banks from engaging in certain activities that could complicate their resolution and disincentivise them from holding long-term debt issued by other banks. The proposal would provide a three-year phase-in period and allow certain outstanding long-term debt to count toward the minimum requirements.
The proposal is out for consultation and comments are requested by 30th November 2023.
Goldman and Citi fined for recordkeeping violations
The Commodity Futures Trading Commission (CFTC) has announced that it has fined Goldman Sachs & Co. LLC (Goldman Sachs) $5.5 million for violating the Commodity Exchange Act (CEA) and CFTC regulations by failing to properly record and retain certain audio files.
The latest case finds that Goldman Sachs violated the cease-and-desist provision of a prior order entered by the CFTC in November 2019. That order found that Goldman Sachs failed to record the phone lines of a trading and sales desk for 20 calendar days in January and February 2014, after its recording hardware malfunctioned following a software patch.
The current order also finds Goldman Sachs committed additional recordkeeping violations after the November 2019 order. Specifically, the order finds that Goldman Sachs:
- Used a vendor service to record calls made on mobile devices, but failed to fully record and retain thousands of mobile device calls due to increased failures in the vendor’s hardware during the pandemic.
- Began using software from another vendor that was designed to replicate the experience of a hard-wired trading turret (a specialized phone setup used to facilitate trading) via a computer but failed to fully record and retain thousands of calls due to a software issue.
The order requires Goldman Sachs to pay the $5.5 million civil monetary penalty and to cease and desist from further violations of the CEA and CFTC regulations. The order recognizes Goldman Sachs’ cooperation with the CFTC’s investigation and acknowledges Goldman Sachs’ representations concerning its remediation in connection with this matter.
Meanwhile, the Securities and Exchange Commission (SEC) has also announced that it has fined Citigroup Global Markets Inc. (CGMI) $2.9 million for willfully violating recordkeeping requirements concerning expenses that the firm incurred in connection with its underwriting business.
The SEC’s order finds that, from at least 2009 through May 2019, CGMI used an unsubstantiated and unverified method to calculate and record indirect expenses associated with its work as an underwriter.
Specifically, the order finds that CGMI:
- Calculated an indirect expense amount based on a fixed percentage of the underwriting fee for each deal where it was engaged as a lead underwriter.
- Then, using fixed “allocation grids,” divided that amount into specific categories of expenses.
- Upon calculating these indirect expenses through this unsubstantiated method, CGMI recorded the amounts in its general ledger.
The order finds that, for at least a decade, CGMI did not know the basis of this indirect expense calculation method and conducted no review or similar process to verify that this method was reasonable.
The SEC’s order charges CGMI with violating Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. Without admitting or denying the SEC’s findings, CGMI consented to a cease-and-desist order, a censure, and a civil penalty of $2.9 million.
Both actions are a reminder that regulators take record-keeping breaches very seriously indeed and compliance teams should take steps to ensure that their firms are in compliance with recordkeeping requirements and have a process in place to periodically review and verify the accuracy of their recordkeeping systems.
A selected summary of key developments for regulated financial institutions
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