Federal Register / Vol. 71, No. 94 / Tuesday, May 16, 2006 / Notices

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Federal Register / Vol. 71, No. 94 / Tuesday, May 16, 2006 / Notices

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

[Docket No. 06–06]

Office of Thrift Supervision

[No. 2006–20]

FEDERAL RESERVE SYSTEM

[Docket No. OP–1254]

FEDERAL DEPOSIT INSURANCE

CORPORATION

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–53773; File No. S7–08–06]

Interagency Statement on Sound

Practices Concerning Elevated Risk

Complex Structured Finance Activities

AGENCIES: Office of the Comptroller of

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the Currency, Treasury (OCC); Office of

Thrift Supervision, Treasury (OTS);

Board of Governors of the Federal

Reserve System (Board); Federal Deposit

Insurance Corporation (FDIC); and

Securities and Exchange Commission

(SEC) (collectively, the Agencies).

ACTION: Notice of revised interagency

statement with request for public

comment.

SUMMARY: On May 19, 2004, the

Agencies issued and requested comment

on a proposed Interagency Statement on

Sound Practices Concerning Complex

Structured Finance Activities (‘‘Initial

Statement’’) of national banks, state

banks, bank holding companies, Federal

and state savings associations, savings

and loan holding companies, U.S.

branches and agencies of foreign banks,

and SEC registered broker-dealers and

investment advisers (collectively,

‘‘financial institutions’’ or

‘‘institutions’’). The Initial Statement

described some of the internal controls

and risk management procedures that

may help financial institutions identify,

manage, and address the heightened

reputational and legal risks that may

arise from certain complex structured

finance transactions (‘‘CSFTs’’). After

reviewing the comments received on the

Initial Statement, the Agencies are

requesting comment on a revised

proposed interagency statement

(‘‘Revised Statement’’). The Revised

Statement has been modified in

numerous respects to address issues and

concerns raised by commenters, clarify

the purpose, scope and effect of the

statement, and make the statement more

principles-based. These changes include

reorganizing and streamlining the

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document to reduce redundancies and

to focus the statement on those CSFTs

that may pose heightened levels of legal

or reputational risk to the relevant

institution (referred to as ‘‘elevated risk

CSFTs’’). In addition, the Agencies have

modified the examples of transactions

that may present elevated risk to make

these examples more risk-focused, and

have recognized more explicitly that an

institution’s review and approval

process for elevated risk CSFTs should

be commensurate with, and focus on,

the potential risks presented by the

transaction to the institution. As

discussed below, the Revised Statement

will not affect or apply to the vast

majority of small financial institutions,

nor does it create any private rights of

action.

DATES: Comments on the Revised

Statement should be received on or

before June 15, 2006.

ADDRESSES:

OCC: You should include OCC and

Docket Number 06–06 in your comment.

You may submit comments by any of

the following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• OCC Web site: http://

www.occ.treas.gov. Click on ‘‘Contact

the OCC,’’ scroll down and click on

‘‘Comments on Proposed Regulations.’’

• E-mail address:

regs.comments@occ.treas.gov.

• Fax: (202) 874–4448.

• Mail: Office of the Comptroller of

the Currency, 250 E Street, SW., Mail

Stop 1–5, Washington, DC 20219.

• Hand Delivery/Courier: 250 E

Street, SW., Attn: Public Information

Room, Mail Stop 1–5, Washington, DC

20219.

Instructions: All submissions received

must include the agency name (OCC)

and docket number or Regulatory

Information Number (RIN) for this

notice of proposed rulemaking. In

general, OCC will enter all comments

received into the docket without

change, including any business or

personal information that you provide.

You may review comments and other

related materials by any of the following

methods:

• Viewing Comments Personally: You

may personally inspect and photocopy

comments at the OCC’s Public

Information Room, 250 E Street, SW.,

Washington, DC. You can make an

appointment to inspect comments by

calling (202) 874–5043.

• Viewing Comments Electronically:

You may request e-mail or CD–ROM

copies of comments that the OCC has

received by contacting the OCC’s Public

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Information Room at:

regs.comments@occ.treas.gov.

• Docket: You may also request

available background documents and

project summaries using the methods

described above.

OTS: You may submit comments,

identified by No. 2006–20 by any of the

following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• E-mail:

regs.comments@ots.treas.gov. Please

include No. 2006–20 in the subject line

of the message, and include your name

and telephone number in the message.

• Fax: (202) 906–6518.

• Mail: Regulation Comments, Chief

Counsel’s Office, Office of Thrift

Supervision, 1700 G Street, NW.,

Washington, DC 20552, Attention: No.

2006–20.

• Hand Delivery/Courier: Guard’s

Desk, East Lobby Entrance, 1700 G

Street, NW., from 9 a.m. to 4 p.m. on

business days, Attention: Regulation

Comments, Chief Counsel’s Office,

Attention: No. 2006–20.

Instructions: All submissions received

must include the agency name and

document number. All comments

received will be posted without change

to http://www.ots.treas.gov/

pagehtml.cfm?catNumber=67&an=1,

including any personal information

provided.

Docket: For access to the docket to

read background documents or

comments received, go to http://

www.ots.treas.gov/

pagehtml.cfm?catNumber=67&an=1. In

addition, you may inspect comments at

the Public Reading Room, 1700 G Street,

NW., by appointment. To make an

appointment for access, call (202) 906–

5922, send an e-mail to

public.info@ots.treas.gov, or send a

facsimile transmission to (202) 906–

7755. (Prior notice identifying the

materials you will be requesting will

assist us in serving you.) We schedule

appointments on business days between

10 a.m. and 4 p.m. In most cases,

appointments will be available the next

business day following the date we

receive a request.

Board: You may submit comments,

identified by Docket No. OP–1254, by

any of the following methods:

• Board’s Web site: http://

www.federalreserve.gov. Follow the

instructions for submitting comments at

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm.

• Federal eRulemaking Portal: http//

www.regulations.gov. Follow the

instructions for submitting comments.

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• E-mail:

regs.comments@federalreserve.gov.

Include docket number in the subject

line of the message.

• Fax: (202) 452–3819 or (202) 452–

3102.

• Mail: Jennifer J. Johnson, Secretary,

Board of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue, NW., Washington,

DC 20551.

All public comments are available

from the Board’s Web site at http://

www.federalreserve.gov/generalinfo/

foia/ProposedRegs.cfm as submitted,

unless modified for technical reasons.

Accordingly, your comments will not be

edited to remove any identifying or

contact information. Public comments

also may be viewed electronically or in

paper form in Room MP–500 of the

Board’s Martin Building (C and 20th

Streets, NW.) between 9 a.m. and 5 p.m.

on weekdays.

FDIC: Written comments should be

addressed to Robert E. Feldman,

Executive Secretary, Attention:

Comments/OES, Federal Deposit

Insurance Corporation, 550 17th Street,

NW., Washington, DC 20429. Comments

may be hand delivered to the guard

station at the rear of the 550 17th Street

Building (located on F Street), on

business days between 7 a.m. and 5 p.m.

(Fax number: (202) 898–3838; Internet

address: comments@fdic.gov.)

Comments may be inspected and

photocopied in the FDIC Public

Information Center, Room 100, 801 17th

Street, NW., Washington, DC, between 9

a.m. and 4:30 p.m. on business days.

SEC: Comments may be submitted by

any of the following methods:

sroberts on PROD1PC70 with NOTICES

Electronic Comments

• Use the Commission’s Internet

comment form (http://www.sec.gov/

rules/policy.shtml;) or

• Send an e-mail to rulecomments@sec.gov. Please include File

Number S7–08–06 on the subject line.

Paper Comments

• Send paper comments in triplicate

to Nancy M. Morris, Secretary,

Securities and Exchange Commission,

100 F Street, NE., Washington, DC

20549–1090.

All submissions should refer to File

Number S7–08–06. This file number

should be included on the subject line

if e-mail is used. To help us process and

review your comments more efficiently,

please use only one method. The

Commission will post all comments on

the Commission’s Internet Web site

(http://www.sec.gov/rules/policy.shtml).

Comments are also available for public

inspection and copying in the

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Commission’s Public Reference Room,

100 F Street, NE., Washington, DC

20549. All comments received will be

posted without change; we do not edit

personal identifying information from

submissions. You should submit only

information that you wish to make

available publicly.

FOR FURTHER INFORMATION CONTACT:

OCC: Kathryn E. Dick, Deputy

Comptroller, Credit and Market Risk,

(202) 874–4660; Grace E. Dailey, Deputy

Comptroller, Large Bank Supervision,

(202) 874–4610; or Ellen Broadman,

Director, Securities and Corporate

Practices Division, (202) 874–5210,

Office of the Comptroller of the

Currency, 250 E Street, SW.,

Washington, DC 20219.

OTS: Fred J. Phillips-Patrick, Director,

Credit Policy, Examinations and

Supervision Policy, (202) 906–7295;

Deborah S. Merkle, Project Manager,

Credit Policy, Examinations and

Supervision Policy, (202) 906–5688; or

David A. Permut, Senior Attorney,

Business Transactions Division, (202)

906–7505, Office of Thrift Supervision,

1700 G Street, NW., Washington, DC

20552.

Board: Sabeth I. Siddique, Assistant

Director, (202) 452–3861, Virginia

Gibbs, Senior Supervisory Financial

Analyst, (202) 452–2521, Division of

Banking Supervision and Regulation; or

Kieran J. Fallon, Assistant General

Counsel, (202) 452–5270, Anne B. Zorc,

Attorney, (202) 452–3876, Legal

Division, Board of Governors of the

Federal Reserve System, 20th Street and

Constitution Avenue, NW., Washington,

DC 20551. Users of Telecommunication

Device for Deaf (TTD) only, call (202)

263–4869.

FDIC: Jason C. Cave, Associate

Director, (202) 898–3548; Division of

Supervision and Consumer Protection;

or Mark G. Flanigan, Counsel,

Supervision and Legislation Branch,

Legal Division, (202) 898–7426, Federal

Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429.

SEC: Mary Ann Gadziala, Associate

Director, Office of Compliance

Inspections and Examinations, (202)

551–6207; Catherine McGuire, Chief

Counsel, Linda Stamp Sundberg, Senior

Special Counsel (Banking and

Derivatives), or Randall W. Roy, Branch

Chief, Division of Market Regulation,

(202) 551–5550, Securities and

Exchange Commission, 100 F Street,

NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Background

Financial markets have grown rapidly

over the past decade, and innovations in

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financial instruments have facilitated

the structuring of cash flows and

allocation of risk among creditors,

borrowers and investors in more

efficient ways. Financial derivatives for

market and credit risk, asset-backed

securities with customized cash flow

features, specialized financial conduits

that manage pools of assets, and other

types of structured finance transactions

serve important purposes, such as

diversifying risks, allocating cash flows,

and reducing cost of capital. As a result,

structured finance transactions,

including the more complex variations

of these transactions, now are an

essential part of U.S. and international

capital markets.

When a financial institution

participates in a CSFT, it bears the usual

market, credit, and operational risks

associated with the transaction. In some

circumstances, a financial institution

also may face heightened legal or

reputational risks due to its involvement

in a CSFT. For example, a financial

institution involved in a CSFT may face

heightened risk if the customer’s

regulatory, tax or accounting treatment

for the CSFT, or disclosures concerning

the CSFT in its public filings or

financial statements, do not comply

with applicable laws, regulations or

accounting principles.

In some cases, certain CSFTs appear

to have been used in illegal schemes

that misrepresented the financial

condition of public companies to

investors and regulatory authorities.

Those cases highlight the substantial

legal and reputational risks that

financial institutions may face when

they participate in a CSFT that is used

by the institution’s customer to

circumvent regulatory or financial

reporting requirements or further other

illegal behavior.1 After conducting

investigations, the OCC, Federal Reserve

System and the SEC took strong and

coordinated civil and administrative

enforcement actions against certain

financial institutions that engaged in

CSFTs that appeared to have been

designed or used to shield their

customers’ true financial health from

the public. These actions involved

significant financial penalties on the

institutions and required the

institutions to take several measures to

strengthen their risk management

1 For a memorandum on the potential liability of

a financial institution for securities laws violations

arising from participation in a CSFT, see Letter from

Annette L. Nazareth, Director, Division of Market

Regulation, Securities and Exchange Commission,

to Richard Spillenkothen and Douglas W. Roeder,

dated December 4, 2003 (available at http://

www.federalreserve.gov/boarddocs/srletters/2004/

and http://www.occ.treas.gov).

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procedures for CSFTs.2 The complex

structured finance relationships

involving these financial institutions

also sparked an investigation by the

Permanent Subcommittee on

Governmental Affairs of the United

States Senate,3 as well as numerous

lawsuits by private litigants.

Following these investigations, the

OCC, Board and SEC also conducted

special reviews of several large banking

and securities firms that are significant

participants in the market for CSFTs.

These reviews were designed to

evaluate the new product approval,

transaction approval, and other internal

controls and processes used by these

institutions to identify and manage the

legal, reputational and other risks

associated with CSFTs. These

assessments indicated that many of the

large financial institutions engaged in

CSFTs already had taken meaningful

steps to improve their control

infrastructure relating to CSFTs. The

Agencies also focused attention on the

complex structured finance activities of

financial institutions in the normal

course of the supervisory process.

II. Initial Statement

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To further assist financial institutions

in identifying, managing, and

addressing the risks that may be

associated with CSFTs, the Agencies

developed and requested public

comment on the Initial Statement.4 As

a general matter, the Initial Statement

provided that financial institutions

engaged in CSFTs should have and

maintain a comprehensive set of formal,

firm-wide policies and procedures that

are designed to allow the institution to

identify, document, evaluate, and

control the full range of credit, market,

operational, legal, and reputational risks

that may arise from CSFTs. The Initial

2 See, e.g. In the Matter of Citigroup, Inc.,

Securities Exchange Act Release No. 48230 (July 28,

2003), Written Agreement by and between Citibank,

N.A. and the Office of the Comptroller of the

Currency, No. 2003–77 (July 28, 2003) (pertaining

to transactions entered into by Citibank, N.A. with

Enron Corp.), and Written Agreement by and

between Citigroup, Inc. and the Federal Reserve

Bank of New York, dated July 28, 2003 (pertaining

to transactions involving Citigroup Inc. and its

subsidiaries and Enron Corp. and Dynegy Inc.); SEC

v. J.P. Morgan Chase, SEC Litigation Release No.

18252 (July 28, 2003) and Written Agreement by

and among J.P. Morgan Chase & Co., the Federal

Reserve Bank of New York, and the New York State

Banking Department, dated July 28, 2003

(pertaining to transactions involving J.P. Morgan

Chase & Co. and its subsidiaries and Enron Corp.).

3 See Fishtail, Bacchus, Sundance, and Slapshot:

Four Enron Transactions Funded and Facilitated by

U.S. Financial Institutions, Report Prepared by the

Permanent Subcomm. on Investigations, Comm. on

Governmental Affairs, United States Senate, S. Rpt.

107–82 (2003).

4 See 69 FR 28980, May 19, 2004.

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Statement also described the types of

policies and procedures that financial

institutions should have for CSFTs in

the following specific areas: (1)

Transaction approval; (2) approval of

new complex structured finance

products; (3) identification and

management of the potential

reputational and legal risk associated

with CSFTs; (4) review of the customer’s

proposed accounting and disclosures for

CSFTs; (5) documentation of CSFTs; (6)

management reporting for CSFTs; (7)

independent monitoring and analysis of

the institution’s compliance with its

internal policies regarding CSFTs; (8)

role of internal audit; and (9) training of

personnel involved in CSFTs.

Among other things, the Initial

Statement provided that financial

institutions should establish a clear

process for identifying those CSFTs that

may create heightened legal or

reputational risk for the institution, and

included a list of transaction

characteristics that may indicate that a

CSFT (or series of CSFTs) creates

elevated levels of legal or reputational

risk for the institution. The Initial

Statement also provided that an

institution should ensure that

transactions identified as being elevated

risk CSFTs are thoroughly reviewed by

the institution’s control functions and

management during the institution’s

transaction or new product approval

processes. As part of this review, the

Initial Statement indicated that the

institution should obtain and document

complete and accurate information

about the customer’s business objectives

for entering into the transaction, as well

as about the customer’s proposed

accounting treatment and financial

disclosures relating to the transaction.

III. Overview of Comments

The Agencies collectively received

comments on the Initial Statement from

more than 40 persons, although many

commenters submitted multiple

comments or submitted identical

comments to multiple Agencies.

Commenters included banking

organizations, trade associations,

investment banks, consulting firms,

public accounting firms, law firms, an

association of state officials, and

individuals. In addition to submitting

written comments, some commenters

also met with Agency representatives to

discuss their views of the Initial

Statement.

Commenters generally supported the

Agencies’ efforts to describe the types of

risk management procedures and

internal controls that may help financial

institutions identify and mitigate the

legal and reputational risks associated

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with CSFTs. In this regard, many

commenters recognized that financial

institutions need a robust risk

management and control framework to

help institutions avoid becoming

involved in CSFTs that are used for

illegal or abusive purposes and to

manage the risks associated with CSFTs.

Virtually all of the commenters,

however, recommended changes to the

Initial Statement. For example, many

commenters argued that the

characteristics of CSFTs in general and

of elevated risk CSFTs in particular

identified in the Initial Statement were

too broad and would encompass many

structured finance products that are not

novel or complex and that do not

present heightened legal or reputational

risks for participating financial

institutions. These commenters argued,

for example, that the Initial Statement

could be read as requiring financial

institutions to identify any structured

finance transaction that involves a

special purpose entity (‘‘SPE’’) or crossborder elements as an elevated risk

CSFT.

Many commenters also asserted that

the internal controls and risk

management processes described in the

Initial Statement for CSFTs and elevated

risk CSFTs were overly prescriptive and

burdensome. For example, many

commenters expressed concern that the

Initial Statement could be read as

requiring a financial institution to

conduct a detailed and extensive pretransaction review of all CSFTs

regardless of the role that the institution

played in the transaction, and regardless

of whether the transaction’s

characteristics suggested that it may

create significant legal, reputational or

other risks for the institution. Similarly,

many commenters argued that the Initial

Statement imposed new and

inappropriate obligations on financial

institutions to confirm the validity of a

customer’s financial disclosures or

accounting or tax treatment for a CSFT,

and would establish new and extensive

documentation requirements for CSFTs.

Commenters asserted that, in light of

these and other concerns, the Initial

Statement had the potential to increase

the legal risks faced by financial

institutions participating in CSFTs. In

addition, commenters argued that the

Initial Statement, if implemented,

would disrupt the market for legitimate

structured finance products and place

U.S. financial institutions at a

competitive disadvantage in the market

for CSFTs both in the United States and

abroad.

As a general matter, commenters

recommended that the Agencies modify

the Initial Statement to make it more

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principles-based and focused on

transactions that may create elevated

risks for a participating financial

institution. For example, many

commenters recommended that the

Agencies modify the list of

characteristics of elevated risk CSFTs to

focus on factors that are likely

indicators that a transaction may, in

fact, create heightened legal or

reputational risks for a participating

institution. In addition, commenters

recommended that the Agencies provide

financial institutions greater flexibility

to design internal controls and risk

management procedures for CSFTs that

are tailored to the size, activities and

general internal control framework of

the institution. Finally, many

commenters recommended that the

Agencies republish a revised statement

for a new round of public comment.

IV. Overview of Revised Statement

The Agencies have substantially

revised the Initial Statement in light of

the comments. In particular, the Revised

Statement has been shortened and

reorganized to be more principles-based

and to focus on elevated risk CSFTs.

Because these revisions are substantial,

and the Revised Statement is an

important explanation of the key

principles and best practices governing

CSFT activities, the Agencies invite

public comment on the Revised

Statement.

The Agencies continue to believe that

it is important for a financial institution

engaged in CSFTs to have policies and

procedures that are designed to allow

the institution to effectively manage and

address the risks associated with its

CSFT activities. These policies and

procedures should, among other things,

be designed to allow the institution to

identify during its transaction and new

product approval processes those CSFTs

that may present elevated legal or

reputational risks to the institution. In

addition, an institution’s policies and

procedures should provide that CSFTs

identified as potentially having elevated

legal or reputational risks are reviewed

by appropriate levels of control and

management personnel at the

institution, including personnel from

control areas that are independent of the

business line(s) involved in the

transaction. The level and amount of

due diligence conducted by an

institution for an elevated risk CSFT

should be commensurate with the

transaction’s potential risk to the

institution. In conducting this due

diligence, the institution may find it

useful or necessary to obtain additional

information from the customer or to

obtain specialized advice from qualified

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in-house or outside accounting, tax,

legal or other professionals.

If, after evaluating an elevated risk

CSFT, a financial institution determines

that its participation in the CSFT would

create significant legal or reputational

risks for the institution, the financial

institution should take appropriate steps

to manage and address these risks. Such

steps may include modifying the

transaction or conditioning the

institution’s participation in the

transaction upon the receipt of

representations or assurances from the

customer that reasonably address the

heightened risks presented by the

transaction. A financial institution

should decline to participate in an

elevated risk CSFT if, after conducting

appropriate due diligence and taking

appropriate steps to address the risks

from the transaction, the institution

determines that the transaction presents

unacceptable risks to the institution or

would result in a violation of applicable

laws, regulations or accounting

principles.

With these broad principles in mind,

the Agencies have made a number of

changes to the Initial Statement to

address the issues and concerns raised

by commenters, to clarify the purpose,

scope and effect of the Revised

Statement, and to make the document

more risk-focused. The Agencies believe

that, with these changes, the Revised

Statement promotes sound risk

management principles while providing

an individual financial institution

greater flexibility to develop

implementing policies, procedures and

systems that are appropriately tailored

to the nature, scope, complexity and

risks of its CSFT activities and to the

institution’s general internal control

framework. In particular, the Agencies

have, among other things:

• Focused the statement more clearly

on those CSFTs that may present

heightened legal or reputational risks to

a participating institution;

• Clarified that the statement does not

apply to structured finance transactions,

such as standard public mortgagebacked securities transactions, that are

familiar to participants in the financial

markets and have well-established track

records and, for this reason, will not

affect or apply to the vast majority of

small financial institutions;

• Modified the examples of CSFTs

that may warrant additional scrutiny by

an institution to focus on transactions

that are more likely to present elevated

levels of legal or reputational risk to an

institution (e.g., transactions that raise

concerns that the client will report or

disclose the transaction in its public

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filings or financial statements in a

manner that is materially misleading);

• Clarified that the due diligence

conducted by a financial institution for

an elevated risk CSFT should focus on

those issues identified by the institution

as potentially creating heightened levels

of legal or reputational risk for the

institution;

• Recognized that the role a financial

institution plays in a CSFT may affect

both the amount of information it has

concerning the transaction and the level

of legal or reputational risks presented

by the transaction to the institution;

• Streamlined and modified the

documentation and general control

portions of the statement to focus on the

proper goals of an institution s policies

and procedures in these areas; and

• Provided that a financial institution

operating in foreign jurisdictions may

tailor its policies and procedures as

appropriate to account for, and comply

with, the applicable laws, regulations

and standards of those foreign

jurisdictions.

Because many of the core elements of

an effective control infrastructure are

the same regardless of the business line

involved, the Revised Statement

continues to draw heavily on controls

and procedures that the Agencies

previously have found to be effective in

assisting a financial institution to

manage and control risks and identifies

ways in which these controls and

procedures can be applied effectively to

elevated risk CSFTs. Moreover, as noted

above, many of the large financial

institutions that are actively involved in

CSFT-related activities have taken steps

in recent years to bolster and improve

their risk management and internal

control processes for CSFTs. Based on

the Agencies’ supervisory experience,

the Agencies believe that the Revised

Statement generally is consistent with

the controls and processes used by large

financial institutions to manage the

risks arising from their CSFT activities.

The Agencies propose to adopt the

Revised Statement as supervisory

guidance (in the case of the Federal

banking agencies) or a policy statement

(in the case of the SEC) and to use the

Revised Statement in reviewing the

internal controls and risk management

systems of those financial institutions

that are engaged in CSFTs as part of the

Agencies’ supervisory processes.

Accordingly, the Revised Statement

does not create any private rights of

action, nor does it alter or expand the

legal duties and obligations that a

financial institution may have to a

customer, its shareholders or other third

parties under applicable law. The

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Agencies have added a statement to this

effect in the Revised Statement.

The Agencies request comment on all

aspects of the Revised Statement.

sroberts on PROD1PC70 with NOTICES

V. Paperwork Reduction Act

The Agencies have determined that

certain provisions of the Revised

Statement contain collection of

information requirements as defined in

the Paperwork Reduction Act of 1995

(44 U.S.C. 3501 et seq.) (PRA). An

Agency may not conduct or sponsor,

and a respondent is not required to

respond to, an information collection

unless it displays a currently valid

Office of Management and Budget

(OMB) control number.

OMB has reviewed and approved the

proposed information collections for the

FDIC, OTS, and OCC; the SEC is

submitting their proposed information

collection to OMB for review and

approval; and the Board has reviewed

the Revised Statement under the

authority delegated to the Board by

OMB (5 CFR 1320, appendix A.1).

OMB control numbers:

OCC: 1557–0229.

OTS: 1550–0111.

FRB: 7100–0311.

FDIC: 3064–0148.

SEC: 3235–0xxx (to be assigned).

Comment was requested on the

proposed information collections

contained in the Initial Statement

published for comment on May 19,

2004. As discussed above, many

commenters asserted that the Initial

Statement in general, and its

documentation provisions in particular,

were unduly burdensome and

prescriptive. For this reason, some

commenters asserted that the estimates

of the burden (100 hours per

respondent) were too low.

In light of this and the modifications

made to the Initial Statement, the

Agencies have reconsidered the burden

estimates previously published and are

once again requesting comment before

finalizing this statement. In response to

the comments, the Agencies have made

significant modifications to make the

Revised Statement more principlesbased and risk-focused than the Initial

Statement, and to provide an individual

institution greater flexibility in

developing policies, procedures, and

systems that are appropriate and

tailored to the nature of the institution’s

CSFT activities and general internal

control framework. The Agencies

believe that the information collection

requirements contained in the Revised

Statement, as discussed earlier in the

notice, are generally consistent with the

types of policies and procedures that the

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large financial institutions actively

involved in CSFTs have already

developed and implemented as a matter

of usual and customary business

practices. Therefore, the information

collections contained in the Revised

Statement are significantly less

burdensome than those estimated in the

Initial Statement and, thus, the Agencies

have revised the hourly estimate down

from 100 hours per response to an

average of 25 hours per response.

New Estimates

OCC

Number of Respondents: 21.

Estimated Time per Response: 25

hours.

Total Estimated Annual Burden: 525

hours.

OTS

Number of Respondents: 5.

Estimated Time per Response: 25

hours.

Total Estimated Annual Burden: 125

hours.

Board

Number of Respondents: 20.

Estimated Time per Response: 25

hours.

Total Estimated Annual Burden: 500

hours.

FDIC

Number of Respondents: 5.

Estimated Time per Response: 25

hours.

Total Estimated Annual Burden: 125

hours.

SEC

Number of Respondents: 5.

Estimated Time per Response: 25

hours.

Total Estimated Annual Burden: 125

hours.

Comments continue to be invited on:

(a) Whether the collections of

information contained in the Revised

Statement are necessary for the proper

performance of the Agencies’ functions,

including whether the information has

practical utility;

(b) The accuracy of the estimates of

the burden of the information

collection, including the validity of the

methodology and assumptions used;

(c) Ways to enhance the quality,

utility, and clarity of the information to

be collected;

(d) Ways to minimize the burden of

the information collection on

respondents, including through the use

of automated collection techniques or

other forms of information technology;

and

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(e) Estimates of capital or start up

costs and costs of operation,

maintenance, and purchase of services

to provide information.

Comments on the information

collections contained in the Revised

Statement should be addressed to:

OCC: You should direct your

comments to:

Communications Division, Office of

the Comptroller of the Currency, Public

Information Room, Mailstop 1–5,

Attention: 1557–0229, 250 E Street,

SW., Washington, DC 20219. In

addition, comments may be sent by fax

to (202) 874–4448, or by electronic mail

to regs.comments@occ.treas.gov. You

can inspect and photocopy the

comments at the OCC’s Public

Information Room, 250 E Street, SW.,

Washington, DC 20219. You can make

an appointment to inspect the

comments by calling (202) 874–5043.

Additionally, you should send a copy of

your comments to OCC Desk Officer,

1557–0229, by mail to U.S. Office of

Management and Budget, 725, 17th

Street, NW., #10235, Washington, DC

20503, or by fax to (202) 395–6974.

You can request additional

information or a copy of the collection

from Mary Gottlieb, OCC Clearance

Officer, or Camille Dickerson, (202)

874–5090, Legislative and Regulatory

Activities Division, Office of the

Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219.

OTS: Information Collection

Comments, Chief Counsel’s Office,

Office of Thrift Supervision, 1700 G

Street, NW., Washington, DC 20552;

send a facsimile transmission to (202)

906–6518; or send an e-mail to

infocollection.comments@ots.treas.gov.

OTS will post comments and the related

index on the OTS Internet site at http://

www.ots.treas.gov. In addition,

interested persons may inspect the

comments at the Public Reading Room,

1700 G Street, NW., by appointment. To

make an appointment, call (202) 906–

5922, send an e-mail to

public.info@ots.treas.gov, or send a

facsimile transmission to (202) 906–

7755.

To obtain a copy of the submission to

OMB, contact Marilyn K. Burton at

marilyn.burton@ots.treas.gov, (202)

906–6467, or fax number (202) 906–

6518, Chief Counsel’s Office, Office of

Thrift Supervision, 1700 G Street, NW.,

Washington, DC 20552.

Board: You may submit comments,

identified by Docket No. OP–1254, by

any of the following methods:

• Agency Web site: http://

www.federalreserve.gov. Follow the

instructions for submitting comments at

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Federal Register / Vol. 71, No. 94 / Tuesday, May 16, 2006 / Notices

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm.

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• E-mail:

regs.comments@federalreserve.gov.

Include docket number in the subject

line of the message.

• Fax: (202) 452–3819 or (202) 452–

3102.

• Mail: Michelle Long, Federal

Reserve Board Clearance Officer (202)

452–3829, Division of Research and

Statistics, Board of Governors of the

Federal Reserve System, Washington,

DC 20551. Telecommunications Device

for the Deaf (TDD) users may contact

(202) 263–4869, Board of Governors of

the Federal Reserve System,

Washington, DC 20551.

All public comments are available

from the Board’s Web site at http://

www.federalreserve.gov/generalinfo/

foia/ProposedRegs.cfm as submitted,

unless modified for technical reasons.

Accordingly, your comments will not be

edited to remove any identifying or

contact information. Public comments

may also be viewed electronically or in

paper in Room MP–500 of the Board’s

Martin Building (20th and C Streets,

NW.) between 9 a.m. and 5 p.m. on

weekdays.

FDIC: Interested parties are invited to

submit written comments to the FDIC

concerning the Paperwork Reduction

Act implications of this proposal. Such

comments should refer to ‘‘Complex

Structured Financial Transactions,

3064–0148.’’ Comments may be

submitted by any of the following

methods:

• http://www.FDIC.gov/regulations/

laws/federal/propose.html.

• E-mail: comments@FDIC.gov.

Include Complex Structured Financial

Transactions, 3064–0148 in the subject

line of the message.

• Mail: Steven F. Hanft (202) 898–

3907, Federal Deposit Insurance

Corporation, 550 17th Street, NW.,

Washington, DC 20429.

• Hand Delivery: Comments may be

hand-delivered to the guard station at

the rear of the 17th Street Building

(located on F Street), on business days

between 7 a.m. and 5 p.m.

SEC: You should direct your

comments to: Office of Management and

Budget, Attention Desk Officer of the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Room 10102, New Executive

Office Building, Washington, DC 20503,

with a copy sent to Nancy M. Morris,

Secretary, Securities and Exchange

Commission, 100 F Street, NE.,

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Washington, DC 20549–1090 with

reference to File No. S7–08–06.

The proposed Revised Statement

follows:

Interagency Statement on Sound

Practices Concerning Elevated Risk

Complex Structured Finance Activities

I. Introduction

Financial markets have grown rapidly

over the past decade, and innovations in

financial instruments have facilitated

the structuring of cash flows and

allocation of risk among creditors,

borrowers and investors in more

efficient ways. Financial derivatives for

market and credit risk, asset-backed

securities with customized cash flow

features, specialized financial conduits

that manage pools of assets and other

types of structured finance transactions

serve important business purposes, such

as diversifying risks, allocating cash

flows, and reducing cost of capital. As

a result, structured finance transactions

now are an essential part of U.S. and

international capital markets. Financial

institutions have played and continue to

play an active and important role in the

development of structured finance

products and markets, including the

market for the more complex variations

of structured finance products.

When a financial institution

participates in a complex structured

finance transaction (‘‘CSFT’’), it bears

the usual market, credit, and operational

risks associated with the transaction. In

some circumstances, a financial

institution also may face heightened

legal or reputational risks due to its

involvement in a CSFT. For example, in

some circumstances, a financial

institution may face heightened legal or

reputational risk if a customer’s

regulatory, tax or accounting treatment

for a CSFT, or disclosures concerning

the CSFT in its public filings or

financial statements, do not comply

with applicable laws, regulations or

accounting principles. Indeed, some

financial institutions have incurred

significant legal costs and liability and

suffered reputational harm due to their

role in certain transactions that were

used by customers to misrepresent the

customers’ financial condition to

investors, regulatory authorities or

others. Reputational risk poses a

significant threat to financial

institutions because the nature of their

business requires them to maintain the

confidence of customers, creditors and

the general marketplace.

The Office of the Comptroller of the

Currency, the Office of Thrift

Supervision, the Board of Governors of

the Federal Reserve System, the Federal

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Deposit Insurance Corporation, and the

Securities and Exchange Commission

(the regulatory Agencies) have long

expected financial institutions to

develop and maintain robust control

infrastructures that enable them to

identify, evaluate and address the risks

associated with their business activities.

Financial institutions also must conduct

their activities in accordance with

applicable statutes and regulations.

II. Scope and Purpose of Statement

The regulatory Agencies are issuing

this Statement to describe the types of

risk management principles that we

believe may help a financial institution

to identify CSFTs that may pose

heightened legal or reputational risks to

the institution (‘‘elevated risk CSFTs’’)

and to evaluate, manage and address

these risks within the institution’s

internal control framework.5

Structured finance transactions

encompass a broad array of products

with varying levels of complexity. Most

structured finance transactions, such as

standard public mortgage-backed

securities transactions, public

securitizations of retail credit cards,

asset-backed commercial paper conduit

transactions, and hedging-type

transactions involving ‘‘plain vanilla’’

derivatives and collateralized loan

obligations, are familiar to participants

in the financial markets, and these

vehicles have a well-established track

record. These transactions typically

would not be considered CSFTs for the

purpose of this Statement.

Because this Statement focuses on

sound practices related to CSFTs that

may create heightened legal or

reputational risks—transactions that

typically are conducted by a limited

number of large financial institutions—

it will not affect or apply to the vast

majority of financial institutions,

including most small institutions. As in

all cases, a financial institution should

tailor its internal controls so that they

are appropriate in light of the nature,

scope, complexity and risks of its

5 As used in this Statement, the term ‘‘financial

institution’’ or ‘‘institution’’ refers to national banks

in the case of the Office of the Comptroller of the

Currency; federal and state savings associations and

savings and loan holding companies in the case of

the Office of Thrift Supervision; state member

banks and bank holding companies (other than

foreign banking organizations) in the case of the

Federal Reserve Board; state nonmember banks in

the case of the Federal Deposit Insurance

Corporation; and registered broker-dealers and

investment advisers in the case of the Securities

and Exchange Commission. The U.S. branches and

agencies of foreign banks supervised by the Office

of the Comptroller, the Federal Reserve Board and

the Federal Deposit Insurance Corporation also are

considered to be financial institutions for purposes

of this Statement.

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activities. Thus, for example, an

institution that is actively involved in

structuring and offering CSFTs that may

create heightened legal or reputational

risk for the institution should have a

more formalized and detailed control

framework than an institution that

participates in these types of

transactions less frequently. The

internal controls and procedures

discussed in this Statement are not all

inclusive, and, in appropriate

circumstances, an institution may find

that other controls, policies, or

procedures are appropriate in light of its

particular CSFT activities.

Because many of the core elements of

an effective control infrastructure are

the same regardless of the business line

involved, this Statement draws heavily

on controls and procedures that the

Agencies previously have found to be

effective in assisting a financial

institution to manage and control risks

and identifies ways in which these

controls and procedures can be

effectively applied to elevated risk

CSFTs. Although this Statement

highlights some of the most significant

risks associated with elevated risk

CSFTs, it is not intended to present a

full exposition of all risks associated

with these transactions. Financial

institutions are encouraged to refer to

other supervisory guidance prepared by

the Agencies for further information

concerning market, credit, operational,

legal and reputational risks as well as

internal audit and other appropriate

internal controls.

This Statement does not create any

private rights of action, and does not

alter or expand the legal duties and

obligations that a financial institution

may have to a customer, its shareholders

or other third parties under applicable

law. At the same time, adherence to the

principles discussed in this Statement

would not necessarily insulate a

financial institution from regulatory

action or any liability the institution

may have to third parties under

applicable law.

III. Identification and Review of

Elevated Risk Complex Structured

Finance Transactions

A financial institution that engages in

CSFTs should maintain a set of formal,

firm-wide policies and procedures that

are designed to allow the institution to

identify, evaluate, assess, document,

and control the full range of credit,

market, operational, legal and

reputational risks associated with these

transactions. These policies may be

developed specifically for CSFTs, or

included in the set of broader policies

governing the institution generally. A

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financial institution operating in foreign

jurisdictions may tailor its policies and

procedures as appropriate to account

for, and comply with, the applicable

laws, regulations and standards of those

jurisdictions.6

A financial institution’s policies and

procedures should establish a clear

framework for the review and approval

of individual CSFTs. These policies and

procedures should set forth the

responsibilities of the personnel

involved in the origination, structuring,

trading, review, approval,

documentation, verification, and

execution of CSFTs. Financial

institutions may find it helpful to

incorporate the review of new CSFTs

into their existing new product policies.

In this regard, a financial institution

should define what constitutes a ‘‘new’’

complex structured finance product and

establish a control process for the

approval of such new products. In

determining whether a CSFT is new, a

financial institution may consider a

variety of factors, including whether it

contains structural or pricing variations

from existing products, whether the

product is targeted at a new class of

customers, whether it is designed to

address a new need of customers,

whether it raises significant new legal,

compliance or regulatory issues, and

whether it or the manner in which it

would be offered would materially

deviate from standard market practices.

An institution’s policies should require

new complex structured finance

products to receive the approval of all

relevant control areas that are

independent of the profit center before

the product is offered to customers.

A. Identifying Elevated Risk CSFTs

As part of its transaction and new

product approval controls, a financial

institution should establish and

maintain policies, procedures and

systems to identify elevated risk CSFTs.

Because of the potential risks they

present to the institution, transactions

or new products identified as elevated

risk CSFTs should be subject to

heightened reviews during the

institution’s transaction or new product

approval processes. Examples of

transactions that an institution may

6 In the case of U.S. branches and agencies of

foreign banks, the institution should coordinate

these policies with the foreign bank’s group-wide

policies developed in accordance with the rules of

the foreign bank’s home country supervisor. In

addition, the U.S. branches and agencies of foreign

banks should implement a control infrastructure for

CSFTs, including management, review and

approval requirements, that is consistent with the

institution’s overall corporate and management

structure as well as its framework for risk

management and internal controls.

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determine warrant this additional

scrutiny are those that (either

individually or collectively) appear to

the institution during the ordinary

course of its transaction approval or

new product approval process to:

• Lack economic substance or

business purpose;

• Be designed or used primarily for

questionable accounting, regulatory, or

tax objectives, particularly when the

transactions are executed at year end or

at the end of a reporting period for the

customer;

• Raise concerns that the client will

report or disclose the transaction in its

public filings or financial statements in

a manner that is materially misleading

or inconsistent with the substance of the

transaction or applicable regulatory or

accounting requirements;

• Involve circular transfers of risk

(either between the financial institution

and the customer or between the

customer and other related parties) that

lack economic substance or business

purpose;

• Involve oral or undocumented

agreements that, when taken into

account, would have a material impact

on the regulatory, tax, or accounting

treatment of the related transaction, or

the client s disclosure obligations; 7

• Have material economic terms that

are inconsistent with market norms

(e.g., deep in the money options or

historic rate rollovers); or

• Provide the financial institution

with compensation that appears

substantially disproportionate to the

services provided or investment made

by the financial institution or to the

credit, market or operational risk

assumed by the institution.

The examples listed previously are

provided for illustrative purposes only,

and the policies and procedures

established by financial institutions may

differ in how they seek to identify

elevated risk CSFTs. The goal of each

institution’s policies and procedures,

however, should remain the same—to

identify those CSFTs that warrant

additional scrutiny in the transaction or

new product approval process due to

concerns regarding legal or reputational

risks.

Financial institutions that structure or

market, act as an advisor to a customer

regarding, or otherwise play a

substantial role in a transaction may

have more information concerning the

7 This item is not intended to include traditional,

non-binding ‘‘comfort’’ letters or assurances

provided to financial institutions in the loan

process where, for example, the parent of a loan

customer states that the customer (i.e., the parent’s

subsidiary) is an integral and important part of the

parent’s operations.

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customer’s business purpose for the

transaction and any special accounting,

tax or financial disclosure issues raised

by the transaction than institutions that

play a more limited role. Thus, the

ability of a financial institution to

identify the risks associated with an

elevated risk CSFT may differ

depending on its role.

B. Due Diligence, Approval and

Documentation Process for Elevated

Risk CSFTs

Having developed a process to

identify elevated risk CSFTs, a financial

institution should implement policies

and procedures to conduct a heightened

level of due diligence for these

transactions. The financial institution

should design these policies and

procedures to allow personnel at an

appropriate level to understand and

evaluate the potential legal or

reputational risks presented by the

transaction to the institution and to

manage and address any heightened

legal or reputational risks ultimately

found to exist with the transaction.

Due Diligence. If a CSFT is identified

as an elevated risk CSFT, the institution

should carefully evaluate and take

appropriate steps to address the risks

presented by the transaction with a

particular focus on those issues

identified as potentially creating

heightened levels of legal or

reputational risk for the institution. In

general, a financial institution should

conduct the level and amount of due

diligence for an elevated risk CSFT that

is commensurate with the level of risks

identified. A financial institution that

structures or markets an elevated risk

CSFT to a customer, or that acts as an

advisor to a customer or investors

concerning an elevated risk CSFT, may

have additional responsibilities under

the federal securities laws, the Internal

Revenue Code, state fiduciary laws or

other laws or regulations and, thus, may

have greater legal and reputational risk

exposure with respect to an elevated

risk CSFT than a financial institution

that acts only as a counterparty for the

transaction. Accordingly, a financial

institution may need to exercise a

higher degree of care in conducting its

due diligence when the institution

structures or markets an elevated risk

CSFT or acts as an advisor concerning

such a transaction than when the

institution plays a more limited role in

the transaction.

To appropriately understand and

evaluate the potential legal and

reputational risks associated with an

elevated risk CSFT that a financial

institution has identified, the institution

may find it useful or necessary to obtain

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additional information from the

customer or to obtain specialized advice

from qualified in-house or outside

accounting, tax, legal, or other

professionals. As with any transaction,

an institution should obtain satisfactory

responses to its material questions and

concerns prior to consummation of a

transaction.8

In conducting its due diligence for an

elevated risk CSFT, a financial

institution should independently

analyze the potential risks to the

institution from both the transaction

and the institution’s overall relationship

with the customer. Institutions should

not conclude that a transaction

identified as being an elevated risk

CSFT involves minimal or manageable

risks solely because another financial

institution will participate in the

transaction or because of the size or

sophistication of the customer or

counterparty. Moreover, a financial

institution should carefully consider

whether it would be appropriate to rely

on opinions or analyses prepared by or

for the customer concerning any

significant accounting, tax or legal

issues associated with an elevated risk

CSFT.

Approval Process. A financial

institution’s policies and procedures

should provide that CSFTs identified as

having elevated legal or reputational

risk are reviewed and approved by

appropriate levels of control and

management personnel. The designated

approval process for such CSFTs should

include representatives from the

relevant business line(s) and/or client

management, as well as from

appropriate control areas that are

independent of the business line(s)

involved in the transaction. The

personnel responsible for approving an

elevated risk CSFT on behalf of a

financial institution should have

sufficient experience, training and

stature within the organization to

evaluate the legal and reputational risks,

as well as the credit, market and

operational risks to the institution.

The institution’s control framework

should have procedures to deliver the

necessary or appropriate information to

the personnel responsible for reviewing

or approving an elevated risk CSFT to

allow them to properly perform their

duties. Such information may include,

for example, the material terms of the

transaction, a summary of the

institution’s relationship with the

customer, and a discussion of the

8 Of course, financial institutions also should

ensure that their own accounting for transactions

complies with applicable accounting standards,

consistently applied.

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significant legal, reputational, credit,

market and operational risks presented

by the transaction.

Some institutions have established a

senior management committee that is

designed to involve experienced

business executives and senior

representatives from all of the relevant

control functions within the financial

institution, including such groups as

independent risk management,

accounting, policy, legal, compliance,

and financial control, in the oversight

and approval of CSFTs identified as

having elevated risks. While this type of

management committee may not be

appropriate for all financial institutions,

a financial institution should establish

processes that assist the institution in

consistently managing its elevated risk

CSFTs on a firm-wide basis.9

If, after evaluating an elevated risk

CSFT, the financial institution

determines that its participation in the

CSFT would create significant legal or

reputational risks for the institution, the

institution should take appropriate steps

to address those risks. Such actions may

include declining to participate in the

transaction, or conditioning its

participation upon the receipt of

representations or assurances from the

customer that reasonably address the

heightened legal or reputational risks

presented by the transaction. Any

representations or assurances provided

by a customer should be obtained before

a transaction is executed and be

received from, or approved by, an

appropriate level of the customer’s

management. A financial institution

should decline to participate in an

elevated risk CSFT if, after conducting

appropriate due diligence and taking

appropriate steps to address the risks

from the transaction, the institution

determines that the transaction presents

unacceptable risk to the institution or

would result in a violation of applicable

laws, regulations or accounting

principles.

Documentation. The documentation

that financial institutions use to support

CSFTs is often highly customized for

individual transactions and negotiated

with the customer. Careful generation,

collection and retention of documents

associated with elevated risk CSFTs are

important control mechanisms that may

help an institution monitor and manage

the legal, reputational, operational,

market, and credit risks associated with

the transaction. In addition, sound

9 The control processes that a financial institution

establishes for CSFTs should take account of, and

be consistent with, any informational barriers

established by the institution to manager potential

conflicts of interests, insider trading or other

concerns.

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documentation practices may help

reduce unwarranted exposure to the

financial institution’s reputation.

A financial institution should create

and collect sufficient documentation to

allow the institution to:

• Document the material terms of the

transaction;

• Enforce the material obligations of

the counterparties;

• Confirm that customers have

received any required disclosures

concerning the transaction; and

• Verify that the institution s policies

and procedures are being followed and

allow the internal audit function to

monitor compliance with those policies

and procedures.

When an institution’s policies and

procedures require an elevated risk

CSFT to be submitted for approval to

senior management, the institution

should maintain the transaction-related

documentation provided to senior

management as well as other

documentation that reflect

management’s approval (or disapproval)

of the transaction, any conditions

imposed by senior management, and the

reasons for such action. The institution

should retain documents created for

elevated risk CSFTs in accordance with

its record retention policies and

procedures as well as applicable statutes

and regulations.

sroberts on PROD1PC70 with NOTICES

C. Other Risk Management Principles

for Elevated Risk CSFTs

General Business Ethics. The board

and senior management of a financial

institution also should establish a ‘‘tone

at the top’’ through both actions and

formalized policies that sends a strong

message throughout the financial

institution about the importance of

compliance with the law and overall

good business ethics. The board and

senior management should strive to

create a firm-wide corporate culture that

is sensitive to ethical or legal issues as

well as the potential risks to the

financial institution that may arise from

unethical or illegal behavior. This kind

of culture coupled with appropriate

procedures should reinforce businessline ownership of risk identification,

and encourage personnel to move

ethical or legal concerns regarding

elevated risk CSFTs to appropriate

levels of management. In appropriate

circumstances, financial institutions

may also need to consider implementing

mechanisms to protect personnel by

permitting the confidential disclosure of

concerns.10 As in other areas of

10 The agencies note that the Sarbanes-Oxley Act

of 2002 requires companies listed on a national

securities exchange or inter-dealer quotation system

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16:06 May 15, 2006

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financial institution management,

compensation and incentive plans

should be structured, in the context of

elevated risk CSFTs, so that they

provide personnel with appropriate

incentives to have due regard for the

legal, ethical and reputational risk

interests of the institution.

Monitoring Compliance with Internal

Policies and Procedures. The events of

recent years evidence the need for an

effective oversight and review program

for elevated risk CSFTs. Financial

institutions should conduct periodic

independent reviews of their CSFT

activities to verify that their policies and

controls relating to elevated risk CSFTs

are being implemented effectively and

that elevated risk CSFTs are accurately

identified and receive proper approvals.

Such monitoring may include more

frequent assessments of the risk arising

from elevated risk CSFTs, both

individually and within the context of

the overall customer relationship, and

the results of this monitoring should be

provided to an appropriate level of

management in the financial institution.

Training. An institution should

identify relevant personnel who may

need specialized training regarding

CSFTs to be able to effectively perform

their oversight and review

responsibilities. Appropriate training on

the financial institution’s policies and

procedures for handling elevated risk

CSFTs is critical. Financial institution

personnel involved in CSFTs should be

familiar with the institution’s policies

and procedures concerning elevated risk

CSFTs, including the processes

established by the institution for

identification and approval of elevated

risk CSFTs and new complex structured

finance products and for the elevation of

concerns regarding transactions or

products to appropriate levels of

management. Financial institution

personnel should be trained to identify

and properly handle elevated risk

CSFTs that may result in a violation of

law.

Audit. The internal audit department

of any financial institution is integral to

its defense against fraud, unauthorized

risk taking and damage to the financial

institution’s reputation. The internal

audit department of a financial

institution should regularly audit the

financial institution’s adherence to its

own control procedures relating to

elevated risk CSFTs, and further assess

the adequacy of its policies and

procedures related to elevated risk

of a national securities association to establish

procedures that enable employees to submit

concerns regarding questionable accounting or

auditing matters on a confidential, anonymous

basis. See 15 U.S.C. 78j–1(m).

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CSFTs. Internal audit should

periodically validate that business lines

and individual employees are

complying with the financial

institution’s standards for elevated risk

CSFTs and appropriately identifying

any exceptions. This validation should

include transaction testing for elevated

risk CSFTs.

Reporting. A financial institution’s

policies and procedures should provide

for the appropriate levels of

management and the board of directors

to receive sufficient information and

reports concerning the institution’s

elevated risk CSFTs to perform their

oversight functions.

IV. Conclusion

Structured finance products have

become an essential and important part

of the U.S. and international capital

markets, and financial institutions have

played an important role in the

development of structured finance

markets. In some instances, however,

CSFTs have been used to misrepresent

a customer’s financial condition to

investors and others, and financial

institutions involved in these

transactions have sustained significant

legal and reputational harm. In light of

the potential legal and reputational risks

associated with CSFTs, a financial

institution should have effective risk

management and internal control

systems that are designed to allow the

institution to identify elevated risk

CSFTs, to evaluate, manage and address

the risks arising from such transactions,

and to conduct those activities in

compliance with applicable law.

Dated: May 4, 2006.

John C. Dugan,

Comptroller of the Currency.

Dated: May 8, 2006.

By the Office of Thrift Supervision.

John M. Reich,

Director.

By order of the Board of Governors of the

Federal Reserve System, May 9, 2006.

Jennifer J. Johnson,

Secretary of the Board.

Dated at Washington, DC, the 9th day of

May, 2006.

By order of the Federal Deposit Insurance

Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: May 9, 2006.

By the Securities and Exchange

Commission.

Nancy M. Morris,

Secretary.

[FR Doc. 06–4510 Filed 5–15–06; 8:45 am]

BILLING CODE 4810–33–P, 6720–01–P, 6210–01–P,

6714–10–P, 8010–01–P

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