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Nutter Bank Report, January 2017

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The Nutter Bank Report is a monthly publication of the firm's Banking and Financial Services Group.

1. DOL Issues New Guidance on the ERISA Fiduciary Rule
2. Dramatic Rise in Website Accessibility Lawsuits Expected to Continue
3. Sessions’ Testimony Casts Doubt on Federal Marijuana Enforcement Priorities
4. OCC Rules Changes to Reduce Regulatory Burden on National Banks and Federal Thrifts
5. Other Developments: Call Reports, Audit Guidance and Third-Party Relationships

1. DOL Issues New Guidance on the ERISA Fiduciary Rule

The U.S. Department of Labor (“DOL”) has released a second set of answers to frequently asked questions (“FAQs”) that provide new guidance about recent amendments to the DOL’s conflict of interest rule that defines who is a fiduciary under the Employee Retirement Income Security Act of 1974 (“ERISA”). The new FAQs published on January 13 primarily address questions received by the DOL about investment advice concerning IRAs and other ERISA-covered plans. However, some guidance in the new FAQs addresses the Best Interest Contract Exemption, which was a focus of the DOL’s first round of FAQs released in October 2016. For example, the new FAQs clarify that a bank or other financial institution that relies on the Best Interest Contract Exemption will not be liable as an investment advice fiduciary for investment decisions made by a client against the adviser’s recommendation. The FAQs also point out in this context that, depending on the nature of the relationship with the client (e.g., applicable contract terms), the adviser or financial institution may have ongoing duties to monitor and advise the client regarding investment decisions even if those investment decisions were made solely by the client. Click here for a copy of the DOL’s new FAQs.

     Nutter Notes: The DOL’s new FAQs also address whether a bank or other financial institution is providing fiduciary investment advice if the institution offers an optional, automated daily cash sweep service to its clients, including IRA accounts with cash sweeps, that automatically sweep uninvested cash from the account into a short-term investment vehicle on a daily basis pursuant to the client’s standing investment instructions. The FAQs clarify that under these circumstances, the institution’s communications with its client would not constitute an investment recommendation under the new fiduciary rule if the institution only offers an optional cash sweep service and describes the features of the service. The FAQs also explain that if the institution’s cash sweep service offers a limited list of short-term investment vehicles, that fact alone would not mean that the institution is recommending all of the investment vehicles as appropriate for the IRA or covered plan. According to the FAQs, an institution may rely on the investment education provision under the new fiduciary rule to describe the product features, investor rights and obligations, fee and expense information, applicable trading restrictions and certain other characteristics of the short term investment vehicles. The FAQs point out that, if an institution’s communication to an IRA accountholder or other covered plan client recommends using a particular cash sweep service, such a communication may constitute fiduciary investment advice subject to the new rule.

2. Dramatic Rise in Website Accessibility Lawsuits Expected to Continue

There was a significant increase in 2016 in the number of website accessibility lawsuits filed under Title III of the Americans with Disabilities Act (“ADA”), with reports of more than 250 such lawsuits filed by the end of the year against a wide range of businesses, including banks. Other sources reported that fewer than 50 website accessibility lawsuits were filed in 2015. Legal commentators expect the upward trend to continue in 2017, with most lawsuits filed as class actions. In general, these lawsuits claim that a particular business has violated the ADA by failing to maintain a public website that is accessible to persons with visual, auditory, cognitive recognition, speech or other disabilities. The U.S. Department of Justice (“DOJ”), which is responsible for enforcing and writing rules to implement the ADA, has not adopted rules defining minimum requirements for website accessibility. Yet, the DOJ has brought ADA enforcement actions against businesses for website accessibility problems in which it has used the World Wide Web Consortium’s Web Content Accessibility Guidelines 2.0 (“WCAG 2.0”) as a website accessibility standard for compliance with the ADA. Banks may wish to consider modifying their websites to conform to the WCAG 2.0 standards to avoid a possible DOJ enforcement action or private website accessibility lawsuit. Click here for more information about the WCAG 2.0 standards.

     Nutter Notes: Title III of the ADA generally requires that businesses and other private parties that operate a “place of public accommodation” must ensure full and equal enjoyment of the goods, services, facilities, privileges, advantages or accommodations they offer. The ADA defines certain types of locations that are public accommodations, such as hotels, restaurants, movie theaters and retail stores. The DOJ has also adopted rules implementing the ADA’s requirements. However, the ADA became law before the internet was in common use, and the DOJ has not yet amended its rules to address website accessibility. The DOJ has, through various enforcement actions, asserted that websites offering goods or services to consumers are places of public accommodation and must be accessible to disabled persons. There is a split among federal courts about the application of Title III of the ADA to websites. Some U.S. circuit courts of appeals have held that there must be some connection between a website and a physical location in order to support a website accessibility claim. Others, including federal courts in Massachusetts, have held that connection to a physical location is not necessary. The U.S. Supreme Court has not yet undertaken to resolve the split.

3. Sessions’ Testimony Casts Doubt on Federal Marijuana Enforcement Priorities

The President’s nominee for U.S. Attorney General, Sen. Jeff Sessions, suggested during his confirmation hearing that he may repeal the DOJ’s current marijuana enforcement priorities, upon which banks and other depository institutions rely in order to provide banking services to state-licensed marijuana-related businesses. During his January 10 hearing, Sen. Sessions stated, “Congress has made the possession of marijuana in every state and distribution of it an illegal act. So if that’s something that’s not desired any longer, Congress should pass a law to change the rule.” While Sen. Sessions has not publicly committed to change the DOJ’s marijuana enforcement priorities, he stated in a written response to questions from one member of the Senate Judiciary Committee that he would “review and evaluate” the effectiveness of the current DOJ policy towards marijuana-related businesses, and that he would enforce “federal law with respect to marijuana, although the exact balance of enforcement priorities is an ever-changing determination based on the circumstances and the resources available at the time.” It has been widely reported that marijuana-related businesses have struggled to find banks willing and able to manage the risks associated with serving them. Click here for a copy of the current federal guidance for banks on customer due diligence expectations and reporting requirements under the Bank Secrecy Act (“BSA”) for financial services provided to marijuana-related businesses from the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).

     Nutter Notes: The DOJ’s current enforcement policy towards marijuana-related businesses is described in an August 29, 2013 memorandum from Deputy Attorney General James M. Cole to all United States Attorneys (the “Cole Memo”), which clarifies whether and to what extent the DOJ intends to enforce federal law against state-licensed marijuana businesses. The Cole Memo implies that activities that do not threaten one or more specified federal marijuana enforcement priorities are unlikely to become subject to federal law enforcement action. The Cole Memo describes the federal marijuana enforcement priorities in broad terms that encompass a wide range of potential conduct that may result in federal law enforcement action. For example, the enforcement priorities include preventing the distribution of marijuana to minors, preventing revenue from the sale of marijuana from going to criminal enterprises, and preventing the diversion of marijuana from states where it is legal under state law to other states. FinCEN’s guidance describes the due diligence review that a bank should conduct in order to determine whether a marijuana-related business threatens one of the federal enforcement priorities or violates state law, and establishes the filing procedures for Suspicious Activity Reports with respect to marijuana-related businesses. While certain marijuana-related activities have been legalized under Massachusetts law, it remains a federal crime to manufacture, distribute or dispense marijuana. The Cole Memo and FinCEN’s guidance do not alter federal law, the provisions of the money laundering statutes, or the BSA with respect to marijuana-related activities legalized under state law.

4. OCC Rules Changes to Reduce Regulatory Burden on National Banks and Federal Thrifts

The OCC has published a final rule to reduce regulatory burden on national banks and federal savings associations by amending a number of regulations to remove provisions that the OCC described as outdated or unnecessary. Specifically, the rule published on January 23 removes notice and approval requirements applicable to national banks for changes in permanent capital that result solely from the application of U.S. generally accepted accounting principles, removes certain financial disclosure requirements for national banks, and simplifies certain rules for business combinations involving a federal mutual savings association and a state-chartered savings bank. The final rule also integrates and updates OCC rules for national banks and federal savings associations relating to municipal securities dealers, Securities Exchange Act disclosures, securities offering disclosures, and insider and affiliate transactions. It updates recordkeeping and confirmation requirements for national banks’ and federal savings associations’ securities transactions, and permits the electronic submission of filings required under federal securities laws. The amendments set forth in the final rule will become effective on April 1, 2017. Click here for a copy of the final rule.

     Nutter Notes: The final rule is part of the OCC’s review of regulations required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (“EGRPRA”) to be conducted at least once every 10 years. The OCC is conducting an ongoing EGRPRA review of bank regulations jointly with the other federal banking agencies, and the OCC may announce additional changes to OCC rules later this year as the joint EGRPRA review progresses. The final rule published this month affects regulations exclusive to the OCC and its supervision of national banks and federal savings associations, and the OCC determined that it was not necessary to wait until the end of the joint EGRPRA review process before reducing the regulatory burdens identified in the final rule. The federal banking agencies are considering public comments received on the reduction of regulatory burdens on all insured banks and savings associations related to consumer protection, anti-money laundering requirements, capital requirements, the Community Reinvestment Act, applications and reporting, powers and activities, safety and soundness, and other categories of banking rules.

5. Other Developments: Call Reports, Audit Guidance and Third-Party Relationships

  • FFIEC Approves Streamlined Call Report for Small Banks and Savings Associations

The Federal Financial Institutions Examination Council (“FFIEC”) has approved a new, streamlined Call Report (form FFIEC 051) for certain eligible small depository institutions, which generally are institutions with total assets of less than $1 billion and with no foreign offices. The revisions to the Call Report released on December 30 include the elimination of certain data items and new or increased reporting thresholds for other data items. Click here to see a prototype of the new form, comparisons to the current call report, and other related information.

     Nutter Notes: The implementation of the new streamlined report is part of the FFIEC’s community bank Call Report burden-reduction initiative under EGRPRA. The FFIEC also approved certain burden-reducing changes to the existing Call Report forms (FFIEC 031 and FFIEC 041). The revised Call Report requirements will take effect on March 31, 2017, subject to approval by the U.S. Office of Management and Budget.

  • OCC Issues Revised Guidance on Internal and External Audit Requirements

The OCC released a revised Internal and External Audits booklet of the Comptroller’s Handbook that provides examination guidance on assessing audit exposures, associated risks and risk management practices. The revised booklet issued on December 30 includes a description of expanded examination procedures to assess the effectiveness of a bank’s audit functions and their impact on the quantity of risk a bank takes on and the quality of risk management practices. Click here for a copy of the revised booklet.

     Nutter Notes: The revised audit booklet also replaces two sections of the OTS Examination Handbook—Section 350, External Audit, and Section 355, Internal Audit—and now applies the same guidance to the examination of both national banks and federal savings associations.

  • OCC Issues New Guidance on Risk Management of Third-Party Relationships

The OCC has issued additional examination procedures to supplement earlier guidance on third-party risk management practices contained in OCC Bulletin 2013-29, Third-Party Relationships: Risk Management Guidance. According to the OCC, the supplemental procedures released on January 24 are meant to promote consistency between examinations of national banks and federal savings associations on their risk management practices. Click here for a copy of the supplemental examination procedures.

     Nutter Notes: The supplemental examination procedures expand on the core assessment contained in three booklets of the Comptroller’s Handbook: Community Bank Supervision, Large Bank Supervision and Federal Branches and Agencies Supervision. According to the OCC, the supplemental procedures are meant to tailor the examination of each bank or savings association to the level of risk and complexity of its third-party relationships, among other things.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Bridget L. Vellucci. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
Tel: (617) 439-2989

Michael K. Krebs
Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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