Guidance on Due Diligence Requirements in Determining Whether Securities Are Eligible for Investment, 35259-35263 [2012-14168]
Download as PDF
Federal Register / Vol. 77, No. 114 / Wednesday, June 13, 2012 / Rules and Regulations
35259
Aggregate limitation
(1) General obligations ...............................................................................................
(2) Other obligations of a governmental entity (e.g., revenue bonds) if the issuer
has an adequate capacity to meet financial commitments under the security for
the projected life of the asset or exposure. An issuer has an adequate capacity
to meet financial commitments if the risk of default by the obligor is low and the
full and timely repayment of principal and interest is expected.
(3) Obligations of a governmental entity that do not qualify under any other paragraph but are approved by the OCC.
*
*
*
*
*
(d) For all securities, the institution
must consider, as appropriate, the
interest rate, credit, liquidity, price,
transaction, and other risks associated
with the investment activity and
determine that such investment is
appropriate for the institution. The
institution must also determine that the
obligor has adequate resources and
willingness to provide for all required
payments on its obligations in a timely
manner.
15. In § 160.93, revise paragraph (d)(5)
introductory text and paragraph (d)(5)(i)
to read as follows:
■
§ 160.93
*
*
*
*
*
(d) * * *
(5) Notwithstanding the limit set forth
in paragraphs (c)(1) and (c)(2) of this
section, a savings association may invest
up to 10 percent of unimpaired capital
and unimpaired surplus in the
obligations of one issuer evidenced by:
(i) Commercial paper or corporate
debt securities that are, as of the date of
purchase, investment grade.
*
*
*
*
*
16. In § 160.121, revise paragraphs
(b)(1) and (2) to read as follows:
■
§ 160.121 Investments in state housing
corporations.
erowe on DSK2VPTVN1PROD with RULES
*
*
*
*
*
(b) * * *
(1) The obligations are investment
grade; or
(2) The obligations are approved by
the OCC. The aggregate outstanding
direct investment in obligations under
paragraph (b) of this section shall not
exceed the amount of the Federal
savings association’s total capital.
*
*
*
*
*
Dated: June 4, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012–14169 Filed 6–12–12; 8:45 am]
BILLING CODE 4810–33–P
12:20 Jun 12, 2012
None ....................................
None ....................................
None.
10% of the institution’s total
capital.
As approved by the OCC ....
10% of the institution’s total
capital.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 1 and 160
[Docket ID OCC–2012–0006]
RIN 1557–AD36
Guidance on Due Diligence
Requirements in Determining Whether
Securities Are Eligible for Investment
Office of the Comptroller of the
Currency, Treasury (OCC).
ACTION: Final guidance.
AGENCY:
On November 29, 2011, the
Office of the Comptroller of the
Currency (OCC) proposed guidance to
assist national banks and Federal
savings associations in meeting due
diligence requirements in assessing
credit risk for portfolio investments.
Today, the OCC is issuing final
guidance that clarifies regulatory
expectations with respect to investment
purchase decisions and ongoing
portfolio due diligence processes.
DATES: This guidance is effective
January 1, 2013.
FOR FURTHER INFORMATION CONTACT:
Kerri Corn, Director for Market Risk, or
Michael Drennan, Senior Advisor,
Credit and Market Risk Division, (202)
874–4660; or Carl Kaminski, Senior
Attorney, or Kevin Korzeniewski,
Attorney, Legislative and Regulatory
Activities Division, (202) 874–5090; or
Eugene H. Cantor, Counsel, Securities
and Corporate Practices Division, (202)
874–5202, Office of the Comptroller of
the Currency, 250 E Street SW.,
Washington, DC 20219.
SUPPLEMENTARY INFORMATION: Section
939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act 1
requires each Federal agency, within
one year of enactment, to review:
(1) Any regulations that require the use
of an assessment of the creditworthiness
of a security or money market
instrument and (2) any references to or
SUMMARY:
Lending limitations.
VerDate Mar<15>2010
Per-issuer limitation
Jkt 226001
1 Public Law 111–203, 939A (July 21, 2010)
(Dodd-Frank Act).
PO 00000
Frm 00015
Fmt 4700
Sfmt 4700
requirements in those regulations
regarding credit ratings. Section 939A
then requires the Federal agencies to
modify the regulations identified during
the review to substitute any references
to or requirements of reliance on credit
ratings with such standards of
creditworthiness that each agency
determines to be appropriate. The
statute provides that the agencies shall
seek to establish, to the extent feasible,
uniform standards of creditworthiness,
taking into account the entities the
agencies regulate and the purposes for
which those entities would rely on such
standards.
On November 29, 2011 (76 FR 73777),
the OCC issued proposed guidance
together with a notice of proposed
rulemaking (NPRM) to remove
references to credit ratings in the OCC’s
non-capital regulations. In particular,
the OCC proposed to amend the
definition of ‘‘investment grade’’ in 12
CFR part 1 to no longer reference credit
ratings. Instead, ‘‘investment grade’’
securities would be those where the
issuer has an adequate capacity to meet
the financial commitments under the
security for the projected life of the
investment. An issuer has an adequate
capacity to meet financial commitments
if the risk of default by the obligor is low
and the full and timely repayment of
principal and interest is expected.
Generally, securities with good to very
strong credit quality will meet this
standard. National banks will have to
meet this new standard before
purchasing investment securities. In
addition, national banks and Federal
savings associations should continue to
maintain appropriate ongoing reviews of
their investment portfolios to verify that
their portfolios meet safety and
soundness requirements that are
appropriate for the institution’s risk
profile and for the size and complexity
of their portfolios.
The OCC received 11 comments on
the proposed rules and guidance from
banks, bank trade groups, individuals,
and bank service providers. The
majority of the commenters generally
supported the proposed rules and stated
that the proposal presented a workable
alternative to the use of credit ratings.
E:\FR\FM\13JNR1.SGM
13JNR1
35260
Federal Register / Vol. 77, No. 114 / Wednesday, June 13, 2012 / Rules and Regulations
A few commenters raised specific
issues, which are addressed in more
detail in the preamble to the final rules
published in today’s Federal Register.
erowe on DSK2VPTVN1PROD with RULES
Text of Final Supervisory Guidance
The text of the final supervisory
guidance on due diligence that national
banks and Federal savings associations
should conduct in assessing credit risk
for portfolio investments as required by
12 CFR part 1 and 12 CFR part 160
(specifically, 12 CFR 1.5 and 12 CFR
160.1(b) and 160.40(c)) follows:
Purpose
The OCC has issued final rules to
revise the definition of ‘‘investment
grade,’’ as that term is used in 12 CFR
parts 1 and 160 in order to comply with
section 939A of the Dodd-Frank Act.
Institutions have until January 1, 2013,
to ensure that existing investments
comply with the revised ‘‘investment
grade’’ standard, as applicable based on
investment type, and safety and
soundness practices described in 12
CFR 1.5 and this guidance. This
implementation period also will provide
management with time to evaluate and
amend existing policies and practices to
ensure new purchases comply with the
final rules and guidance. National banks
and Federal savings associations that
have established due diligence review
processes as described in previous
guidance, and that have not relied
exclusively on external credit ratings,
should not have difficulty establishing
compliance with the new standard.
The OCC is issuing this guidance
(‘‘Guidance’’) to clarify steps national
banks ordinarily are expected to take to
demonstrate they have properly verified
their investments meet the newly
established credit quality standards
under 12 CFR Part 1 and steps national
banks and Federal savings associations
are expected to take to demonstrate they
are in compliance with due diligence
requirements when purchasing
investment securities and conducting
ongoing reviews of their investment
portfolios. Federal savings associations
will need to follow FDIC requirements
when that agency promulgates credit
quality standards under 12 U.S.C.
1831e. The standards below describe
how national banks may purchase, sell,
deal in, underwrite, and hold securities
consistent with the authority contained
in 12 U.S.C. 24(Seventh), and how
Federal saving associations may invest
in, sell, or otherwise deal in securities
consistent with the authority contained
in 12 U.S.C. 1464(c). The activities of
national banks and Federal savings
associations also must be consistent
with safe and sound banking practices,
VerDate Mar<15>2010
12:20 Jun 12, 2012
Jkt 226001
and this Guidance reminds national
banks and Federal savings associations
of the supervisory risk management
expectations associated with
permissible investment portfolio
holdings under Part 1 and Part 160.
Background
Parts 1 and 160 provide standards for
determining whether securities have
appropriate credit quality and
marketability characteristics to be
purchased and held by national banks
or Federal savings associations. These
requirements also establish limits on the
amount of investment securities an
institution may hold for its own
account. As defined in 12 CFR Part 1,
an ‘‘investment security’’ must be
‘‘investment grade.’’ For the purpose of
Part 1, ‘‘investment grade’’ securities are
those where the issuer has an adequate
capacity to meet the financial
commitments under the security for the
projected life of the investment. An
issuer has an adequate capacity to meet
financial commitments if the risk of
default by the obligor is low and the full
and timely repayment of principal and
interest is expected. Generally,
securities with good to very strong
credit quality will meet this standard. In
the case of a structured security (that is,
a security that relies primarily on the
cash flows and performance of
underlying collateral for repayment,
rather than the credit of the entity that
is the issuer), the determination that full
and timely repayment of principal and
interest is expected may be influenced
more by the quality of the underlying
collateral, the cash flow rules, and the
structure of the security itself than by
the condition of the issuer.
National banks and Federal savings
associations must be able to
demonstrate that their investment
securities meet applicable credit quality
standards. This Guidance provides
criteria that national banks can use in
meeting Part 1 credit quality standards
and that national banks and Federal
savings associations can use in meeting
due diligence requirements.
Determining Whether Securities Are
Permissible Prior to Purchase
The OCC’s elimination of references
to credit ratings in its regulations, in
accordance with the Dodd-Frank Act,
does not substantively change the
standards institutions should use when
deciding whether securities are eligible
for purchase under Part 1. The OCC’s
investment securities regulations
generally require a national bank or
Federal savings association to determine
whether or not a security is ‘‘investment
grade’’ in order to determine whether
PO 00000
Frm 00016
Fmt 4700
Sfmt 4700
purchasing the security is permissible.
Investments are considered ‘‘investment
grade’’ if they meet the regulatory
standard for credit quality. To meet this
standard, a national bank must be able
to determine that the security has
(1) low risk of default by the obligor,
and (2) the full and timely repayment of
principal and interest is expected over
the expected life of the investment.2 A
Federal savings association must meet
the same standard when purchasing
certain municipal revenue bonds
pursuant to 12 CFR 160.24 and must
meet the standards in 12 U.S.C. 1831e
when purchasing corporate debt
securities.
For national banks, Type I securities,
as defined in Part 1, generally are
government obligations and are not
subject to investment grade criteria for
determining eligibility to purchase.
Typical Type I obligations include U.S.
Treasuries, agencies, municipal
government general obligations, and for
well-capitalized institutions, municipal
revenue bonds. While Type I obligations
do not have to meet the investment
grade criteria to be eligible for purchase,
all investment activities should comply
with safe and sound banking practices
as stated in 12 CFR 1.5 and in previous
regulatory guidance. Under OCC rules,
Treasury and agency obligations do not
require individual credit analysis, but
bank management should consider how
those securities fit into the overall
purpose, plans, and risk and
concentration limitations of the
investment policies established by the
board of directors. Municipal bonds
should be subject to an initial credit
assessment and then ongoing review
consistent with the risk characteristics
of the bonds and the overall risk of the
portfolio.
Financial institutions should be well
acquainted with fundamental credit
analysis as this is central to a wellmanaged loan portfolio. The foundation
of a fundamental credit analysis—
character, capacity, collateral, and
covenants—applies to investment
securities just as it does to the loan
portfolio. Accordingly, the OCC expects
national banks and Federal savings
2 Federal savings associations may invest in and
hold investment securities under section 5(c) of the
Home Owners’ Loan Act (HOLA), to the extent
specified in regulations of the OCC. While OCC
regulations imposing investment limitations
generally apply to Federal savings associations, the
Federal Deposit Insurance Act (FDIA), 12 U.S.C.
1831e(d)(1) also applies. Under this provision,
savings associations currently are prohibited from
investing in corporate debt securities unless they
are rated ‘‘investment grade.’’ However, the DoddFrank Act provides that on July 21, 2012, this
statutory requirement will be replaced by standards
of creditworthiness established by the FDIC. Pub. L.
111–203, Section 939(a)(2) (July 21, 2010).
E:\FR\FM\13JNR1.SGM
13JNR1
Federal Register / Vol. 77, No. 114 / Wednesday, June 13, 2012 / Rules and Regulations
associations to conduct an appropriate
level of due diligence to understand the
inherent risks and determine that a
security is a permissible investment.
The extent of the due diligence should
be sufficient to support the institution’s
conclusion that a security meets the
investment grade standards. This may
include consideration of internal
analyses, third party research and
analytics including external credit
ratings, internal risk ratings, default
statistics, and other sources of
information as appropriate for the
particular security. Some institutions
may have the resources to do most or all
of the analytical work internally. Some,
however, may choose to rely on third
parties for much of the analytical work.
While analytical support may be
delegated to third parties, management
may not delegate its responsibility for
decision-making and should ensure that
prospective third parties are
independent, reliable, and qualified.
The board of directors should oversee
management to assure that an
appropriate decision-making process is
in place.
The depth of the due diligence should
be a function of the security’s credit
quality, the complexity of the structure,
and the size of the investment. The
more complex a security’s structure, the
more credit-related due diligence an
institution should perform, even when
the credit quality is perceived to be very
high. Management should ensure it
understands the security’s structure and
how the security may perform in
different default environments, and
should be particularly diligent when
purchasing structured securities.3 The
OCC expects national banks and Federal
savings associations to consider a
variety of factors relevant to the
particular security when determining
whether a security is a permissible and
sound investment. The range and type
of specific factors an institution should
erowe on DSK2VPTVN1PROD with RULES
Confirm spread to U.S. Treasuries is consistent with bonds of similar credit
quality ...........................................................................................................
Confirm risk of default is low and consistent with bonds of similar credit
quality ...........................................................................................................
Confirm capacity to pay and assess operating and financial performance
levels and trends through internal credit analysis and/or other third party
analytics, as appropriate for the particular security .....................................
Evaluate the soundness of a municipal’s budgetary position and stability of
its tax revenues. Consider debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority, and management experience
Understand local demographics/economics. Consider unemployment data,
local employers, income indices, and home values ....................................
Assess the source and strength of revenue structure for municipal authorities. Consider obligor’s financial condition and reserve levels, annual debt
service and debt coverage ratio, credit enhancement, legal covenants,
and nature of project ....................................................................................
Understand the class or tranche and its relative position in the securitization
structure .......................................................................................................
Assess the position in the cash flow waterfall .................................................
Understand loss allocation rules, specific definition of default, the potential
impact of performance and market value triggers, and support provided
by credit and/or liquidity enhancements ......................................................
Evaluate and understand the quality of the underwriting of the underlying
collateral as well as any risk concentrations ...............................................
Determine whether current underwriting is consistent with the original underwriting underlying the historical performance of the collateral and consider the affect of any changes ...................................................................
Assess the structural subordination and determine if adequate given current
underwriting standards .................................................................................
Analyze and understand the impact of collateral deterioration on tranche
performance and potential credit losses under adverse economic conditions ..............................................................................................................
VerDate Mar<15>2010
12:20 Jun 12, 2012
Jkt 226001
consider will vary depending on the
particular type and nature of the
securities. As a general matter, a
national bank or Federal savings
association will have a greater burden to
support its determination if one factor is
contradicted by a finding under another
factor.
The following matrix provides
examples of factors for national banks
and Federal savings associations to
consider as part of a robust credit risk
assessment framework for designated
types of instruments. The types of
securities included in the matrix require
a credit-focused pre-purchase analysis
to meet the investment grade standard
or safety and soundness standards.
Again, the matrix is provided as a guide
to better inform the credit risk
assessment process. Individual
purchases may require more or less
analysis dependent on the security’s
risk characteristics, as previously
described.
Corporate
bonds
Key factors
3 For example, a national bank or Federal savings
association should be able to demonstrate an
35261
Municipal
government
general
obligations
Revenue
bonds
Structured
securities
X
X
X
X
X
X
X
X
X
X
X
X
........................
X
........................
........................
........................
X
X
........................
........................
........................
X
........................
........................
........................
........................
........................
........................
........................
X
X
........................
........................
........................
X
........................
........................
........................
X
........................
........................
........................
X
........................
........................
........................
X
........................
........................
........................
X
understanding of the effects on cash flows of a
PO 00000
Frm 00017
Fmt 4700
Sfmt 4700
structured security assuming varying default levels
in the underlying assets.
E:\FR\FM\13JNR1.SGM
13JNR1
35262
Federal Register / Vol. 77, No. 114 / Wednesday, June 13, 2012 / Rules and Regulations
erowe on DSK2VPTVN1PROD with RULES
Additional Guidance on Structured
Securities Analysis
The creditworthiness assessment for
an investment security that relies on the
cash flows and collateral of the
underlying assets for repayment (i.e., a
structured security) is inherently
different from a security that relies on
the financial capacity of the issuer for
repayment. Therefore, a financial
institution should demonstrate an
understanding of the features of a
structured security that would
materially affect its performance and
that its risk of loss is low even under
adverse economic conditions.
Management’s assessment of key factors,
such as those provided in this guidance,
will be considered a critical component
of any structured security evaluation.
Existing OCC guidance, including OCC
Bulletin 2002–19, ‘‘Supplemental
Guidance, Unsafe and Unsound
Investment Portfolio Practices,’’ states
that it is unsafe and unsound to
purchase a complex high-yield security
without an understanding of the
security’s structure and performing a
scenario analysis that evaluates how the
security will perform in different default
environments. Policies that specifically
permit this type of investment should
establish appropriate limits, and prepurchase due diligence processes
should consider the impact of such
purchases on capital and earnings under
a variety of possible scenarios. The OCC
expects institutions to understand the
effect economic stresses may have on an
investment’s cash flows. Various factors
can be used to define the stress
scenarios. For example, an institution
could evaluate the potential impact of
changes in economic growth, stock
market movements, unemployment, and
home values on default and recovery
rates. Some institutions have the
resources to perform this type of
analytical work internally. Generally,
analyses of the application of various
stress scenarios to a structured
security’s cash flow are widely available
from third parties. Many of these
analyses evaluate the performance of the
security in a base case and a moderate
and severe stress case environment.
Even under severe stress conditions, the
stress scenario analysis should
determine that the risk of loss is low
and full and timely repayment of
principal and interest is expected.
Maintaining an Appropriate and
Effective Portfolio Risk Management
Framework
The OCC has had a long-standing
expectation that national banks
implement a risk management process
VerDate Mar<15>2010
12:20 Jun 12, 2012
Jkt 226001
to ensure credit risk, including credit
risk in the investment portfolio, is
effectively identified, measured,
monitored, and controlled. The 1998
Interagency Supervisory Policy
Statement on Investment Securities and
End-User Derivatives Activities (Policy
Statement) contains risk management
standards for the investment activities
of banks and savings associations.4 The
Policy Statement emphasizes the
importance of establishing and
maintaining risk processes to manage
the market, credit, liquidity, legal,
operational, and other risks of
investment securities. Other previously
issued guidance that supplements OCC
investment standards are OCC 2009–15,
‘‘Risk Management and Lessons
Learned’’ (which highlights lessons
learned during the market disruption
and re-emphasizes the key principles
discussed in previously issued OCC
guidance on portfolio risk management);
OCC 2004–25, ‘‘Uniform Agreement on
the Classification of Securities’’ (which
describes the importance of
management’s credit risk analysis and
its use in examiner decisions
concerning investment security risk
ratings and classifications); and OCC
2002–19, ‘‘Supplemental Guidance,
Unsafe and Unsound Investment
Portfolio Practices’’ (which alerts banks
to the potential risk to future earnings
and capital from poor investment
decisions made during periods of low
levels of interest rates and emphasizes
the importance of maintaining prudent
credit, interest rate, and liquidity risk
management practices to control risk in
the investment portfolio).5
National banks and Federal savings
associations must have in place an
appropriate risk management framework
for the level of risk in their investment
portfolios. Failure to maintain an
adequate investment portfolio risk
management process, which includes
understanding key portfolio risks, is
considered an unsafe and unsound
practice.
Having a strong and robust risk
management framework appropriate for
the level of risk in an institution’s
investment portfolio is particularly
critical for managing portfolio credit
risk. A key role for management in the
oversight process is to translate the
4 On April 23, 1998, the FRB, FDIC, NCUA, OCC,
and OTS issued the ‘‘Supervisory Policy Statement
on Investment Securities and End-User Derivatives
Activities.’’ As issued by the OTS, the Policy
Statement applied to both state and Federal savings
associations.
5 Similar requirements also apply to Federal
savings associations as set forth in OTS
Examination Handbook Section 540, Investment
Securities (January 2010).
PO 00000
Frm 00018
Fmt 4700
Sfmt 4700
board of directors’ tolerance for risk into
a set of internal operating policies and
procedures that govern the institution’s
investment activities. Policies should be
consistent with the organization’s
broader business strategies, capital
adequacy, technical expertise, and risk
tolerance. Institutions should ensure
that they identify and measure the risks
associated with individual transactions
prior to acquisition and periodically
after purchase. This can be done at the
institutional, portfolio, or individual
instrument level. Investment policies
also should provide credit risk
concentration limits. Such limits may
apply to concentrations relating to a
single or related issuer, a geographical
area, and obligations with similar
characteristics. Safety and soundness
principles warrant effective
concentration risk management
programs to ensure that credit exposures
do not reach an excessive level.
The aforementioned risk management
policies, principles, and due diligence
processes should be commensurate with
the complexity of the investment
portfolio and the materiality of the
portfolio to the financial performance
and capital position of the institution.
Investment review processes, following
the pre-purchase analysis, may vary
from institution to institution based on
the individual characteristics of the
portfolio, the nature and level of risk
involved, and how that risk fits into the
overall risk profile and operation of the
institution. Investment portfolio reviews
may be risk-based and focus on material
positions or specific groups of
investments or stratifications to enable
analysis and review of similar risk
positions.
As with pre-purchase analytics, some
institutions may have the resources
necessary to do most or all of their
portfolio reviews internally. However,
some may choose to rely on third parties
for much of the analytical work. Third
party vendors offer risk analysis and
data benchmarks that could be
periodically reviewed against existing
portfolio holdings to assess credit
quality changes over time. Holdings
where current financial information or
other key analytical data is unavailable
should warrant more frequent analysis.
High quality investments generally will
not require the same level of review as
investments further down the credit
quality spectrum. However, any
material positions or concentrations
should be identified and assessed in
more depth and more frequently, and
any system should ensure an accurate
and timely risk assessment and
reporting process that informs the board
of material changes to the risk profile
E:\FR\FM\13JNR1.SGM
13JNR1
Federal Register / Vol. 77, No. 114 / Wednesday, June 13, 2012 / Rules and Regulations
and prompts action when needed.
National banks and Federal savings
associations should have investment
portfolio review processes that
effectively assess and manage the risks
in the portfolio and ensure compliance
with policies and risk limits.
Institutions should reference existing
regulatory guidance for additional
supervisory expectations for investment
portfolio risk management practices.
Dated: June 4, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012–14168 Filed 6–12–12; 8:45 am]
BILLING CODE 4810–33–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 275
[Release No. IA–3418; File No. S7–18–09]
RIN 3235–AK39
Political Contributions by Certain
Investment Advisers: Ban on ThirdParty Solicitation; Extension of
Compliance Date
Securities and Exchange
Commission.
ACTION: Final rule; extension of
compliance date.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
is extending the date by which advisers
must comply with the ban on thirdparty solicitation in rule 206(4)–5 under
the Investment Advisers Act of 1940,
the ‘‘pay to play’’ rule. The Commission
is extending the compliance date in
order to ensure an orderly transition for
advisers and third-party solicitors as
well as to provide additional time for
them to adjust compliance policies and
procedures after the transition.
DATES: Effective date: The effective date
for this release is June 11, 2012. The
effective date for the ban on third-party
solicitation under rule 206(4)–5 of the
Investment Advisers Act of 1940
remains September 13, 2010.
COMPLIANCE DATE: The compliance date
for the ban on third-party solicitation is
extended until nine months after the
compliance date of a final rule adopted
by the Commission by which municipal
advisor firms must register under the
Securities Exchange Act of 1934. Once
such final rule is adopted, we will issue
the new compliance date for the ban on
third-party solicitation in a notice in the
Federal Register.
FOR FURTHER INFORMATION CONTACT:
Vanessa M. Meeks, Attorney-Adviser, or
erowe on DSK2VPTVN1PROD with RULES
SUMMARY:
VerDate Mar<15>2010
12:20 Jun 12, 2012
Jkt 226001
Melissa A. Roverts, Branch Chief, at
(202) 551–6787 or IArules@sec.gov,
Office of Investment Adviser
Regulation, Division of Investment
Management, U.S. Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–8549.
SUPPLEMENTARY INFORMATION: On July 1,
2010, the Commission adopted rule
206(4)–5 [17 CFR 275.206(4)–5] (the
‘‘Pay to Play Rule’’) under the
Investment Advisers Act of 1940 [15
USC 80b] (‘‘Advisers Act’’) to prohibit
an investment adviser from providing
advisory services for compensation to a
government client for two years after the
adviser or certain of its executives or
employees (‘‘covered associates’’) make
a contribution to certain elected officials
or candidates.1 As adopted, rule 206(4)–
5 also prohibited an adviser and its
covered associates from providing or
agreeing to provide, directly or
indirectly, payment to any third-party
for a solicitation of advisory business
from any government entity on behalf of
such adviser, unless such third-party
was an SEC-registered investment
adviser or a registered broker or dealer
subject to pay to play restrictions
adopted by a registered national
securities association (the ‘‘third-party
solicitor ban’’).2 Rule 206(4)–5 became
effective on September 13, 2010, and, as
adopted, the third-party solicitor ban’s
compliance date was September 13,
2011. This compliance date was
intended to provide advisers and thirdparty solicitors with sufficient time to
conform their business practices to the
rule, and to revise their compliance
policies and procedures to prevent a
violation. In addition, the transition
period was intended to provide an
opportunity for a registered national
securities association to adopt a pay to
play rule and for the Commission to
assess whether that rule met the
requirements of rule 206(4)–
5(f)(9)(ii)(B).3 It was our understanding
at the time, and it still is, that FINRA
is planning to propose a rule that would
meet those requirements, but we also
suggested that we may need to take
further action to ensure an orderly
transition.4
Not long after the Pay to Play Rule
was adopted, Congress created a new
category of Commission registrants
called ‘‘municipal advisors’’ in the
Dodd-Frank Act. The statutory
definition of municipal advisor includes
persons that undertake ‘‘a solicitation of
a municipal entity.’’ 5 These solicitors
would be registered with us and also
subject to regulation by the Municipal
Securities Rulemaking Board (‘‘MSRB’’).
In September 2010, we adopted an
interim final rule establishing a
temporary means for municipal advisors
to satisfy the registration requirement.6
In December 2010, we proposed
permanent rules and forms that would
interpret the term ‘‘municipal advisor’’
and create a new process by which
municipal advisors must register with
the SEC.7 On January 14, 2011, the
MSRB requested comment on a draft
proposal to establish a number of rules
applicable to municipal advisors,
including a pay to play rule.8 In
December 2011, we extended the
expiration date of the interim final rule
to September 30, 2012.9
With the understanding that
municipal advisors would be subject to
permanent registration requirements
with the Commission and could be
subject to an MSRB pay to play rule, on
June 22, 2011, we amended the Pay to
Play Rule to add municipal advisors to
the categories of registered entities—
referred to as ‘‘regulated persons’’—
excepted from the rule’s third-party
solicitor ban.10 For a municipal advisor
to qualify as a ‘‘regulated person,’’ it
must be registered with us as such and
subject to a pay to play rule adopted by
the MSRB. In addition, the Commission
4 See
id. at Section III.B.
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010) at section 975.
6 The Dodd-Frank Act required municipal
advisors to be registered with the Commission by
October 2010. See section 975 of the Dodd-Frank
Act.
7 See Registration of Municipal Advisors,
Exchange Act Release No. 63576 (Dec. 20, 2010) [76
FR 824, (Jan. 6, 2011)].
8 See MSRB, Request for Comment on Pay to Play
Rule for Municipal Advisors, MSRB Notice 2011–
04 (Jan. 14, 2011) available at https://www.msrb.org/
Rules-and-Interpretations/Regulatory-Notices/2011/
2011-04.aspx?n=1.
9 Extension of Temporary Registration of
Municipal Advisors, Exchange Act Release No.
66020 (Dec. 21, 2011) [76 FR 80733 (Dec. 27, 2011)].
10 Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment
Advisers Act Rel. No. 3221 (June 22, 2011) [76 FR
42950 (July 19, 2011)] (‘‘Implementing Release’’).
5 See
1 Political
Contributions by Certain Investment
Advisers, Investment Advisers Act Rel. No. 3043
(July 1, 2010) [75 FR 41018 (July 14, 2010)] (‘‘Pay
to Play Release’’).
2 See id. at Section II.B.2.(b). The Commission
must find, by order, that those restrictions: (i)
Impose substantially equivalent or more stringent
restrictions on broker-dealers than the Pay to Play
Rule imposes on investment advisers; and (ii) are
consistent with the objectives of the Pay to Play
Rule.
3 See note 2. While rule 206(4)–5 applies to any
registered national securities association, the
Financial Industry Regulatory Authority, or FINRA,
is currently the only registered national securities
association under section 19(a) of the Securities
Exchange Act of 1934 [15 U.S.C. 78s(b)]. As such,
for convenience, we will refer directly to FINRA in
this Release when describing the exception for
certain broker-dealers from the third-party solicitor
ban.
PO 00000
Frm 00019
Fmt 4700
Sfmt 4700
35263
E:\FR\FM\13JNR1.SGM
13JNR1
Agencies
[Federal Register Volume 77, Number 114 (Wednesday, June 13, 2012)]
[Rules and Regulations]
[Pages 35259-35263]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14168]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1 and 160
[Docket ID OCC-2012-0006]
RIN 1557-AD36
Guidance on Due Diligence Requirements in Determining Whether
Securities Are Eligible for Investment
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Final guidance.
-----------------------------------------------------------------------
SUMMARY: On November 29, 2011, the Office of the Comptroller of the
Currency (OCC) proposed guidance to assist national banks and Federal
savings associations in meeting due diligence requirements in assessing
credit risk for portfolio investments. Today, the OCC is issuing final
guidance that clarifies regulatory expectations with respect to
investment purchase decisions and ongoing portfolio due diligence
processes.
DATES: This guidance is effective January 1, 2013.
FOR FURTHER INFORMATION CONTACT: Kerri Corn, Director for Market Risk,
or Michael Drennan, Senior Advisor, Credit and Market Risk Division,
(202) 874-4660; or Carl Kaminski, Senior Attorney, or Kevin
Korzeniewski, Attorney, Legislative and Regulatory Activities Division,
(202) 874-5090; or Eugene H. Cantor, Counsel, Securities and Corporate
Practices Division, (202) 874-5202, Office of the Comptroller of the
Currency, 250 E Street SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION: Section 939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act \1\ requires each Federal agency,
within one year of enactment, to review: (1) Any regulations that
require the use of an assessment of the creditworthiness of a security
or money market instrument and (2) any references to or requirements in
those regulations regarding credit ratings. Section 939A then requires
the Federal agencies to modify the regulations identified during the
review to substitute any references to or requirements of reliance on
credit ratings with such standards of creditworthiness that each agency
determines to be appropriate. The statute provides that the agencies
shall seek to establish, to the extent feasible, uniform standards of
creditworthiness, taking into account the entities the agencies
regulate and the purposes for which those entities would rely on such
standards.
---------------------------------------------------------------------------
\1\ Public Law 111-203, 939A (July 21, 2010) (Dodd-Frank Act).
---------------------------------------------------------------------------
On November 29, 2011 (76 FR 73777), the OCC issued proposed
guidance together with a notice of proposed rulemaking (NPRM) to remove
references to credit ratings in the OCC's non-capital regulations. In
particular, the OCC proposed to amend the definition of ``investment
grade'' in 12 CFR part 1 to no longer reference credit ratings.
Instead, ``investment grade'' securities would be those where the
issuer has an adequate capacity to meet the financial commitments under
the security for the projected life of the investment. An issuer has an
adequate capacity to meet financial commitments if the risk of default
by the obligor is low and the full and timely repayment of principal
and interest is expected. Generally, securities with good to very
strong credit quality will meet this standard. National banks will have
to meet this new standard before purchasing investment securities. In
addition, national banks and Federal savings associations should
continue to maintain appropriate ongoing reviews of their investment
portfolios to verify that their portfolios meet safety and soundness
requirements that are appropriate for the institution's risk profile
and for the size and complexity of their portfolios.
The OCC received 11 comments on the proposed rules and guidance
from banks, bank trade groups, individuals, and bank service providers.
The majority of the commenters generally supported the proposed rules
and stated that the proposal presented a workable alternative to the
use of credit ratings.
[[Page 35260]]
A few commenters raised specific issues, which are addressed in more
detail in the preamble to the final rules published in today's Federal
Register.
Text of Final Supervisory Guidance
The text of the final supervisory guidance on due diligence that
national banks and Federal savings associations should conduct in
assessing credit risk for portfolio investments as required by 12 CFR
part 1 and 12 CFR part 160 (specifically, 12 CFR 1.5 and 12 CFR
160.1(b) and 160.40(c)) follows:
Purpose
The OCC has issued final rules to revise the definition of
``investment grade,'' as that term is used in 12 CFR parts 1 and 160 in
order to comply with section 939A of the Dodd-Frank Act. Institutions
have until January 1, 2013, to ensure that existing investments comply
with the revised ``investment grade'' standard, as applicable based on
investment type, and safety and soundness practices described in 12 CFR
1.5 and this guidance. This implementation period also will provide
management with time to evaluate and amend existing policies and
practices to ensure new purchases comply with the final rules and
guidance. National banks and Federal savings associations that have
established due diligence review processes as described in previous
guidance, and that have not relied exclusively on external credit
ratings, should not have difficulty establishing compliance with the
new standard.
The OCC is issuing this guidance (``Guidance'') to clarify steps
national banks ordinarily are expected to take to demonstrate they have
properly verified their investments meet the newly established credit
quality standards under 12 CFR Part 1 and steps national banks and
Federal savings associations are expected to take to demonstrate they
are in compliance with due diligence requirements when purchasing
investment securities and conducting ongoing reviews of their
investment portfolios. Federal savings associations will need to follow
FDIC requirements when that agency promulgates credit quality standards
under 12 U.S.C. 1831e. The standards below describe how national banks
may purchase, sell, deal in, underwrite, and hold securities consistent
with the authority contained in 12 U.S.C. 24(Seventh), and how Federal
saving associations may invest in, sell, or otherwise deal in
securities consistent with the authority contained in 12 U.S.C.
1464(c). The activities of national banks and Federal savings
associations also must be consistent with safe and sound banking
practices, and this Guidance reminds national banks and Federal savings
associations of the supervisory risk management expectations associated
with permissible investment portfolio holdings under Part 1 and Part
160.
Background
Parts 1 and 160 provide standards for determining whether
securities have appropriate credit quality and marketability
characteristics to be purchased and held by national banks or Federal
savings associations. These requirements also establish limits on the
amount of investment securities an institution may hold for its own
account. As defined in 12 CFR Part 1, an ``investment security'' must
be ``investment grade.'' For the purpose of Part 1, ``investment
grade'' securities are those where the issuer has an adequate capacity
to meet the financial commitments under the security for the projected
life of the investment. An issuer has an adequate capacity to meet
financial commitments if the risk of default by the obligor is low and
the full and timely repayment of principal and interest is expected.
Generally, securities with good to very strong credit quality will meet
this standard. In the case of a structured security (that is, a
security that relies primarily on the cash flows and performance of
underlying collateral for repayment, rather than the credit of the
entity that is the issuer), the determination that full and timely
repayment of principal and interest is expected may be influenced more
by the quality of the underlying collateral, the cash flow rules, and
the structure of the security itself than by the condition of the
issuer.
National banks and Federal savings associations must be able to
demonstrate that their investment securities meet applicable credit
quality standards. This Guidance provides criteria that national banks
can use in meeting Part 1 credit quality standards and that national
banks and Federal savings associations can use in meeting due diligence
requirements.
Determining Whether Securities Are Permissible Prior to Purchase
The OCC's elimination of references to credit ratings in its
regulations, in accordance with the Dodd-Frank Act, does not
substantively change the standards institutions should use when
deciding whether securities are eligible for purchase under Part 1. The
OCC's investment securities regulations generally require a national
bank or Federal savings association to determine whether or not a
security is ``investment grade'' in order to determine whether
purchasing the security is permissible. Investments are considered
``investment grade'' if they meet the regulatory standard for credit
quality. To meet this standard, a national bank must be able to
determine that the security has (1) low risk of default by the obligor,
and (2) the full and timely repayment of principal and interest is
expected over the expected life of the investment.\2\ A Federal savings
association must meet the same standard when purchasing certain
municipal revenue bonds pursuant to 12 CFR 160.24 and must meet the
standards in 12 U.S.C. 1831e when purchasing corporate debt securities.
---------------------------------------------------------------------------
\2\ Federal savings associations may invest in and hold
investment securities under section 5(c) of the Home Owners' Loan
Act (HOLA), to the extent specified in regulations of the OCC. While
OCC regulations imposing investment limitations generally apply to
Federal savings associations, the Federal Deposit Insurance Act
(FDIA), 12 U.S.C. 1831e(d)(1) also applies. Under this provision,
savings associations currently are prohibited from investing in
corporate debt securities unless they are rated ``investment
grade.'' However, the Dodd-Frank Act provides that on July 21, 2012,
this statutory requirement will be replaced by standards of
creditworthiness established by the FDIC. Pub. L. 111-203, Section
939(a)(2) (July 21, 2010).
---------------------------------------------------------------------------
For national banks, Type I securities, as defined in Part 1,
generally are government obligations and are not subject to investment
grade criteria for determining eligibility to purchase. Typical Type I
obligations include U.S. Treasuries, agencies, municipal government
general obligations, and for well-capitalized institutions, municipal
revenue bonds. While Type I obligations do not have to meet the
investment grade criteria to be eligible for purchase, all investment
activities should comply with safe and sound banking practices as
stated in 12 CFR 1.5 and in previous regulatory guidance. Under OCC
rules, Treasury and agency obligations do not require individual credit
analysis, but bank management should consider how those securities fit
into the overall purpose, plans, and risk and concentration limitations
of the investment policies established by the board of directors.
Municipal bonds should be subject to an initial credit assessment and
then ongoing review consistent with the risk characteristics of the
bonds and the overall risk of the portfolio.
Financial institutions should be well acquainted with fundamental
credit analysis as this is central to a well-managed loan portfolio.
The foundation of a fundamental credit analysis--character, capacity,
collateral, and covenants--applies to investment securities just as it
does to the loan portfolio. Accordingly, the OCC expects national banks
and Federal savings
[[Page 35261]]
associations to conduct an appropriate level of due diligence to
understand the inherent risks and determine that a security is a
permissible investment. The extent of the due diligence should be
sufficient to support the institution's conclusion that a security
meets the investment grade standards. This may include consideration of
internal analyses, third party research and analytics including
external credit ratings, internal risk ratings, default statistics, and
other sources of information as appropriate for the particular
security. Some institutions may have the resources to do most or all of
the analytical work internally. Some, however, may choose to rely on
third parties for much of the analytical work. While analytical support
may be delegated to third parties, management may not delegate its
responsibility for decision-making and should ensure that prospective
third parties are independent, reliable, and qualified. The board of
directors should oversee management to assure that an appropriate
decision-making process is in place.
The depth of the due diligence should be a function of the
security's credit quality, the complexity of the structure, and the
size of the investment. The more complex a security's structure, the
more credit-related due diligence an institution should perform, even
when the credit quality is perceived to be very high. Management should
ensure it understands the security's structure and how the security may
perform in different default environments, and should be particularly
diligent when purchasing structured securities.\3\ The OCC expects
national banks and Federal savings associations to consider a variety
of factors relevant to the particular security when determining whether
a security is a permissible and sound investment. The range and type of
specific factors an institution should consider will vary depending on
the particular type and nature of the securities. As a general matter,
a national bank or Federal savings association will have a greater
burden to support its determination if one factor is contradicted by a
finding under another factor.
---------------------------------------------------------------------------
\3\ For example, a national bank or Federal savings association
should be able to demonstrate an understanding of the effects on
cash flows of a structured security assuming varying default levels
in the underlying assets.
---------------------------------------------------------------------------
The following matrix provides examples of factors for national
banks and Federal savings associations to consider as part of a robust
credit risk assessment framework for designated types of instruments.
The types of securities included in the matrix require a credit-focused
pre-purchase analysis to meet the investment grade standard or safety
and soundness standards. Again, the matrix is provided as a guide to
better inform the credit risk assessment process. Individual purchases
may require more or less analysis dependent on the security's risk
characteristics, as previously described.
----------------------------------------------------------------------------------------------------------------
Municipal
government Structured
Key factors Corporate bonds general Revenue bonds securities
obligations
----------------------------------------------------------------------------------------------------------------
Confirm spread to U.S. Treasuries is X X X X
consistent with bonds of similar credit
quality....................................
Confirm risk of default is low and X X X X
consistent with bonds of similar credit
quality....................................
Confirm capacity to pay and assess operating X X X X
and financial performance levels and trends
through internal credit analysis and/or
other third party analytics, as appropriate
for the particular security................
Evaluate the soundness of a municipal's ............... X ............... ...............
budgetary position and stability of its tax
revenues. Consider debt profile and level
of unfunded liabilities, diversity of
revenue sources, taxing authority, and
management experience......................
Understand local demographics/economics. ............... X X ...............
Consider unemployment data, local
employers, income indices, and home values.
Assess the source and strength of revenue ............... ............... X ...............
structure for municipal authorities.
Consider obligor's financial condition and
reserve levels, annual debt service and
debt coverage ratio, credit enhancement,
legal covenants, and nature of project.....
Understand the class or tranche and its ............... ............... ............... X
relative position in the securitization
structure..................................
Assess the position in the cash flow ............... ............... ............... X
waterfall..................................
Understand loss allocation rules, specific ............... ............... ............... X
definition of default, the potential impact
of performance and market value triggers,
and support provided by credit and/or
liquidity enhancements.....................
Evaluate and understand the quality of the ............... ............... ............... X
underwriting of the underlying collateral
as well as any risk concentrations.........
Determine whether current underwriting is ............... ............... ............... X
consistent with the original underwriting
underlying the historical performance of
the collateral and consider the affect of
any changes................................
Assess the structural subordination and ............... ............... ............... X
determine if adequate given current
underwriting standards.....................
Analyze and understand the impact of ............... ............... ............... X
collateral deterioration on tranche
performance and potential credit losses
under adverse economic conditions..........
----------------------------------------------------------------------------------------------------------------
[[Page 35262]]
Additional Guidance on Structured Securities Analysis
The creditworthiness assessment for an investment security that
relies on the cash flows and collateral of the underlying assets for
repayment (i.e., a structured security) is inherently different from a
security that relies on the financial capacity of the issuer for
repayment. Therefore, a financial institution should demonstrate an
understanding of the features of a structured security that would
materially affect its performance and that its risk of loss is low even
under adverse economic conditions. Management's assessment of key
factors, such as those provided in this guidance, will be considered a
critical component of any structured security evaluation. Existing OCC
guidance, including OCC Bulletin 2002-19, ``Supplemental Guidance,
Unsafe and Unsound Investment Portfolio Practices,'' states that it is
unsafe and unsound to purchase a complex high-yield security without an
understanding of the security's structure and performing a scenario
analysis that evaluates how the security will perform in different
default environments. Policies that specifically permit this type of
investment should establish appropriate limits, and pre-purchase due
diligence processes should consider the impact of such purchases on
capital and earnings under a variety of possible scenarios. The OCC
expects institutions to understand the effect economic stresses may
have on an investment's cash flows. Various factors can be used to
define the stress scenarios. For example, an institution could evaluate
the potential impact of changes in economic growth, stock market
movements, unemployment, and home values on default and recovery rates.
Some institutions have the resources to perform this type of analytical
work internally. Generally, analyses of the application of various
stress scenarios to a structured security's cash flow are widely
available from third parties. Many of these analyses evaluate the
performance of the security in a base case and a moderate and severe
stress case environment. Even under severe stress conditions, the
stress scenario analysis should determine that the risk of loss is low
and full and timely repayment of principal and interest is expected.
Maintaining an Appropriate and Effective Portfolio Risk Management
Framework
The OCC has had a long-standing expectation that national banks
implement a risk management process to ensure credit risk, including
credit risk in the investment portfolio, is effectively identified,
measured, monitored, and controlled. The 1998 Interagency Supervisory
Policy Statement on Investment Securities and End-User Derivatives
Activities (Policy Statement) contains risk management standards for
the investment activities of banks and savings associations.\4\ The
Policy Statement emphasizes the importance of establishing and
maintaining risk processes to manage the market, credit, liquidity,
legal, operational, and other risks of investment securities. Other
previously issued guidance that supplements OCC investment standards
are OCC 2009-15, ``Risk Management and Lessons Learned'' (which
highlights lessons learned during the market disruption and re-
emphasizes the key principles discussed in previously issued OCC
guidance on portfolio risk management); OCC 2004-25, ``Uniform
Agreement on the Classification of Securities'' (which describes the
importance of management's credit risk analysis and its use in examiner
decisions concerning investment security risk ratings and
classifications); and OCC 2002-19, ``Supplemental Guidance, Unsafe and
Unsound Investment Portfolio Practices'' (which alerts banks to the
potential risk to future earnings and capital from poor investment
decisions made during periods of low levels of interest rates and
emphasizes the importance of maintaining prudent credit, interest rate,
and liquidity risk management practices to control risk in the
investment portfolio).\5\
---------------------------------------------------------------------------
\4\ On April 23, 1998, the FRB, FDIC, NCUA, OCC, and OTS issued
the ``Supervisory Policy Statement on Investment Securities and End-
User Derivatives Activities.'' As issued by the OTS, the Policy
Statement applied to both state and Federal savings associations.
\5\ Similar requirements also apply to Federal savings
associations as set forth in OTS Examination Handbook Section 540,
Investment Securities (January 2010).
---------------------------------------------------------------------------
National banks and Federal savings associations must have in place
an appropriate risk management framework for the level of risk in their
investment portfolios. Failure to maintain an adequate investment
portfolio risk management process, which includes understanding key
portfolio risks, is considered an unsafe and unsound practice.
Having a strong and robust risk management framework appropriate
for the level of risk in an institution's investment portfolio is
particularly critical for managing portfolio credit risk. A key role
for management in the oversight process is to translate the board of
directors' tolerance for risk into a set of internal operating policies
and procedures that govern the institution's investment activities.
Policies should be consistent with the organization's broader business
strategies, capital adequacy, technical expertise, and risk tolerance.
Institutions should ensure that they identify and measure the risks
associated with individual transactions prior to acquisition and
periodically after purchase. This can be done at the institutional,
portfolio, or individual instrument level. Investment policies also
should provide credit risk concentration limits. Such limits may apply
to concentrations relating to a single or related issuer, a
geographical area, and obligations with similar characteristics. Safety
and soundness principles warrant effective concentration risk
management programs to ensure that credit exposures do not reach an
excessive level.
The aforementioned risk management policies, principles, and due
diligence processes should be commensurate with the complexity of the
investment portfolio and the materiality of the portfolio to the
financial performance and capital position of the institution.
Investment review processes, following the pre-purchase analysis, may
vary from institution to institution based on the individual
characteristics of the portfolio, the nature and level of risk
involved, and how that risk fits into the overall risk profile and
operation of the institution. Investment portfolio reviews may be risk-
based and focus on material positions or specific groups of investments
or stratifications to enable analysis and review of similar risk
positions.
As with pre-purchase analytics, some institutions may have the
resources necessary to do most or all of their portfolio reviews
internally. However, some may choose to rely on third parties for much
of the analytical work. Third party vendors offer risk analysis and
data benchmarks that could be periodically reviewed against existing
portfolio holdings to assess credit quality changes over time. Holdings
where current financial information or other key analytical data is
unavailable should warrant more frequent analysis. High quality
investments generally will not require the same level of review as
investments further down the credit quality spectrum. However, any
material positions or concentrations should be identified and assessed
in more depth and more frequently, and any system should ensure an
accurate and timely risk assessment and reporting process that informs
the board of material changes to the risk profile
[[Page 35263]]
and prompts action when needed. National banks and Federal savings
associations should have investment portfolio review processes that
effectively assess and manage the risks in the portfolio and ensure
compliance with policies and risk limits. Institutions should reference
existing regulatory guidance for additional supervisory expectations
for investment portfolio risk management practices.
Dated: June 4, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-14168 Filed 6-12-12; 8:45 am]
BILLING CODE 4810-33-P