A brief discussion of a few interesting developments from the past week.
A Revised Version of the Close the ILC Loophole Act
Next Tuesday the House Committee on Financial Services will mark up various bills, including the Close the ILC Loophole Act, which has been discussed here previously. Notably, the Committee will consider an amendment in the nature of a substitute offered by the bill’s sponsor, Rep. Jesús Garcia.1
Recall that, under the first iteration of the bill, the FDIC would have been required to disapprove a change in control of an ILC, unless one of four exceptions applied. The amendment generally retains those exceptions as originally proposed.2 It also, however, adds a new subsection permitting the FDIC to approve a commercial company’s acquisition of control of an ILC even if no exception would apply, but only if the following conditions are satisfied:
The Financial Stability Oversight Council determines that the change of control will not increase threats to the financial stability of the United States, erode consumer or investor protection, reduce competition, or otherwise undermine the separation of banking and commerce. To approve such an application,
The Chairperson of the FSOC would need to affirmatively vote to approve the application; and
At least two-thirds of the FSOC’s voting members would need to affirmatively vote, on a non-delegable basis, to approve the application.
After the change of control the ILC:
does not engage in any activity or offer any product or service other than those lawfully engaged in or offered and sold by the ILC on or before September 23, 2021;
complies with cross-marketing restrictions3;
does not permit or incur “an overdraft (including an intraday overdraft) in a Federal Reserve bank account” on behalf of an affiliate, other than certain permitted overdrafts4;
beginning one year after the change of control, does not increase its total assets or revenue at an annual rate of more than 5% in any 12-month period; and
submits annual reports to the FDIC enabling the FDIC to monitor the ILC’s compliance with the limitations set out above.
A failure to remain in compliance with the requirements of the exception as described above would result in an ILC’s parent company being given one year to either become a bank holding company or divest its ILC.
I am horrible prognosticator, but I would assume the bill, as modified by this proposed amendment, would not have been included in the agenda for Tuesday’s markup if there were not the votes to advance it. There are lots of weird things in the language to pick at from multiple directions, however, and I don’t think the lobbying on this is anywhere close to over.
Does the OCC Have a Looming Vacancies Act Issue?
Last Thursday senior House Financial Services Committee Republicans sent a letter to Acting Comptroller of the Currency Michael Hsu asserting that Acting Comptroller Hsu may be ineligible to serve as Acting Comptroller beyond July 5, 2022:
It is further problematic that your actions against former Chair McWilliams occurred while you maintain the status of Acting Comptroller, a role in which you have served for more than one year. On May 10, 2021, the Secretary of the Treasury appointed you First Deputy Comptroller and acting Comptroller pursuant to 12 U.S.C. § 4, but the statute does not address whether you may exceed the limitations on acting service prescribed in the Vacancies Act. Under the Vacancies Act, you would be ineligible to serve as Acting Comptroller beyond July 5, 2022. If you continue to serve as Acting Comptroller after that date, you expose the agency to legal challenges from regulated entities based on 5 U.S.C. § 3348(d), which states that actions by persons ineligible to serve in an acting capacity “shall have no force or effect.”
With apologies to the actual administrative law experts, my high-level understanding is that the relevant background is as follows:
The Federal Vacancies Reform Act of 1998 (the Vacancies Act) establishes rules governing the circumstances in which - and for how long - a person may serve in an acting capacity in a position that would otherwise require the advice-and-consent of the Senate.5
The Vacancies Act is “the exclusive means” of authorizing an acting official to perform the duties of a vacant office unless another statute “expressly” “(A) authorizes the President, a court, or the head of an Executive department, to designate an officer or employee to perform the functions and duties of a specified office temporarily in an acting capacity; or (B) designates an officer or employee to perform the functions and duties of a specified office temporarily in an acting capacity.”6
Separately, 12 USC 4 permits the Secretary of the Treasury to appoint no more than four Deputy Comptrollers, one of which is to be designated as the First Deputy Comptroller. Further, “[d]uring a vacancy in the office or during the absence or disability of the Comptroller, each Deputy Comptroller shall possess the power and perform the duties attached by law to the office of the Comptroller under such order of succession following the First Deputy Comptroller as the Comptroller shall direct.” And, crucially, unlike the Vacancies Act, 12 USC 4 does not specify a time limit on the duration of the First Deputy Comptroller’s service as Acting Comptroller.
The argument by the Republicans, then, seems to be that although 12 USC 4 permits the designation of an Acting Comptroller (and thus renders the Vacancies Act’s exclusivity provision ineffective in that respect), 12 USC 4 does not render the Vacancies Act’s time limits ineffective, given that 12 USC 4 does not itself specify any time limits.
I am far from certain the Republicans’ argument about the interaction of 12 USC 4 and the Vacancies Act is correct, but if you are interested in this sort of thing this Congressional Research Service report is an enlightening read,7 particularly the discussion beginning on page 20 concerning the Vacancies Act’s exclusivity provision.8
I would just add two OCC-specific points of interest.
First, if this becomes a live controversy, I expect to see those arguing the Vacancies Act does not apply to make claims similar to the one made in this article: “John Walsh was acting Comptroller of the Currency from 2010 until 2012—longer than the 210 day maximum in the Vacancies Act.”
Maybe, but I think the situation with Walsh is more complicated than the article lays out.9 It is indeed the case that Walsh became Acting Comptroller on August 16, 2010 and stayed in that role until Thomas Curry was confirmed by the Senate as Comptroller on March 29, 2012. The tricky thing, though, is that President Obama’s nomination of Curry in July 2011 meant that, even if the Vacancies Act did apply, Walsh could continue to serve during the pendency of the nomination regardless of how long the nomination was pending, and regardless of whether the 210-day period following the initial vacancy had run out.10 There are nuances upon nuances in the Vacancies Act, some of which I have surely left out here, but the point is just that you cannot simply count the days between August 2010 and March 2012, get a number higher than 210, and conclude the Vacancies Act did not apply.
Second, the OCC itself under Acting Comptroller Brooks adopted the following analysis of the Vacancies Act:
One commenter asserted that the Acting Comptroller would be issuing the final rule after the time provided for him to serve in an acting capacity under the Federal Vacancies Reform Act (FVRA). While the FVRA is generally the exclusive means for temporarily authorizing an acting official to perform the functions and duties of an Executive agency office for which Presidential appointment and Senate confirmation is required, the FVRA and its time restrictions do not apply if another statute—in this case, 12 U.S.C. 4 (Section 4)— expressly designates an officer to perform the functions and duties of a specified office in an acting capacity. On April 1, 2020, pursuant to Section 4, the Secretary of the U.S. Department of the Treasury appointed Mr. Brooks as First Deputy Comptroller of the Currency. Mr. Brooks’s authority to exercise the powers of the Comptroller of the Currency thus derives from Section 4 and not from the FVRA. In accordance with Section 4, upon the May 29, 2020 departure of then-Comptroller Joseph Otting, Mr. Brooks began serving as the Acting Comptroller.
You can read the comment letter in question, which came from an environmental group, here.
From what I can tell, this is the only time the OCC has offered an interpretation of the interaction between 12 USC 4 and the Vacancies Act. I would assume the OCC’s position under Acting Comptroller Hsu will be quite similar to its position under Acting Comptroller Brooks.
Cryptocurrency Activities
A 10-Q filed this week11 by SoFi Technologies, Inc. included the following disclosure:
In connection with our approval as a bank holding company, the Federal Reserve determined that certain activities of SoFi Digital Assets, LLC in providing members with the ability to buy or sell various digital currencies through SoFi Digital Assets, LLC's omnibus account with a third-party custodian is not a permissible activity under the Bank Holding Company Act and Regulation Y. However, under Section 4 of the Bank Holding Company Act, the Federal Reserve has permitted us to continue our current digital assets related offering for a two-year conformance period from the date we became a bank holding company, with the possibility for three one-year extensions, provided that we do not expand our impermissible activities, except as authorized by the Bank Holding Company Act and Regulation Y, or increase our established risk limits for total customer digital assets maintained in wallets that are accessible online, referred to as “hot wallets”, or held on balance sheet.
The Federal Reserve Board’s approval earlier this year of SoFi’s application to become a bank holding company was done under delegated authority, without a public order from the Board analyzing the proposal or setting out any conditions on the approval, so SoFi’s description is all we have to go on in terms of details.12
I don’t think the above provides enough detail to definitively reach any conclusions, but it might permit us to form at least a few half-baked ones. For example, note that SoFi has successfully elected to become a financial holding company, meaning that this is not just a case of the Board concluding that these are not permissible activities under Section 4(c)(8) of the BHC Act. The Board must necessarily have concluded that the activities (whatever they are exactly) are also impermissible under Section 4(k) of the BHC Act. If that is the case, should we draw any conclusions about the FSOC’s designation authority (or lack thereof) with respect to such activities?
The discussion that follows is not intended to be a complete description of changes the amendment would make to the bill.
The danger of default exception, however, would get a new condition: the exception would only be available if the “acquirer is an entity whose gross revenues as well as those of its affiliates from activities that are financial in nature (as defined in section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)) and, if applicable, from the ownership or control of one or more insured depository institutions, represent no less than 85 percent of the consolidated gross annual revenues of the acquiring entity.”
Specifically, (1) the ILC could not offer or market products or services of an affiliate that are not permissible for a BHC to offer or market under Section 4(k) of the BHC Act and (2) the ILC’s affiliates (other than an affiliate that engages only in activities permissible for BHCs under Section 4(k) of the BHC Act), could not market products or services of the ILC, unless such products or services were being offered or marketed on or before September 23, 2021, and then only in the same manner in which they were being offered or marketed before such date.
The permitted overdraft provisions would apply only to certain overdrafts permitted or incurred on behalf of an affiliate that is a primary dealer. See Section 4(c)(2) of the proposed bill.
This time period is generally 210 days beginning on the date the vacancy occurs, but the time period can be reset or extended under certain circumstances. See the discussion beginning on page 13 of this Congressional Research Service report.
See 5 USC 3347.
I should warn the reader, though, that it includes a discussion of the great CFPB succession controversy of Thanksgiving 2017, for those still getting over that one.
For example, if footnote 218’s summary of the case law is accurate, federal district courts appear to have reached different conclusions as to whether the Vacancies Act’s timing provisions apply to a person who assumed an acting position not under the Vacancies Act but under an agency-specific statute.
The legislative history cited earlier in the report is also interesting. A Senate Report from 1998 states that “the bill retains existing statutes that are in effect on the date of enactment of the Vacancies Act of 1998 that expressly authorize the President, or the head of an executive department to designate an officer to perform the functions and duties of a specified office temporarily in an acting capacity, as well as statutes that expressly provide for the temporary performance of the functions and duties of an office by a particular officer or employee. . . . The Committee is aware of the existence of statutes specifically governing a vacancy in 41 specific offices, 40 of which would be retained by this bill.” The report goes on to name the 40 statutes the Committee staff had identified, but for whatever reason, 12 USC 4 is not on the list. Just an oversight by the Committee staff, or something else?
To be clear and to be fair to the author of the article, this was written months ago in the context of arguing that President Biden should bypass the Senate confirmation process and appoint Saule Omarova as Acting Comptroller, and so (I assume) should not be taken as the author’s complete analysis of the current situation with Acting Comptroller Hsu.
See 5 USC 3346 and the discussion on page 14 of the CRS report linked to above.
This was also disclosed in SoFi’s 10-K filed in early March, meaning I am badly stretching the definition of “in the news week” for purposes of this post. But I had missed this in the 10-K, so it was news to me at least.
Note that this conclusion by the Federal Reserve Board is separate and apart from the restrictions related to crypto activities imposed by the OCC in approving SoFi’s separate bank merger application.