Complex Structured Finance Activities

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

[Docket No. 04–12]

Office of Thrift Supervision

[No. 2004–27]

FEDERAL RESERVE SYSTEM

[Docket No. OP–1189]

FEDERAL DEPOSIT INSURANCE

CORPORATION

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–49695; File No. S7–22–04]

Interagency Statement on Sound

Practices Concerning Complex

Structured Finance Activities

AGENCIES: Office of the Comptroller of

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).

ACTION: Notice of interagency statement

with request for public comment.

SUMMARY: The OCC, OTS, Board, FDIC,

and SEC (collectively, the Agencies) are

requesting public comment on a

proposed interagency statement

concerning the complex structured

finance activities of financial

institutions (national and state banks;

bank holding companies; federal and

state savings associations; savings and

loan holding companies; and SEC-

registered broker-dealers and

investment advisors) supervised by the

Agencies. As recent events have

highlighted, a financial institution may

assume substantial reputational and

legal risk if the institution enters into a

complex structured finance transaction

with a customer and the customer uses

the transaction to circumvent regulatory

or financial reporting requirements,

evade tax liabilities, or further other

illegal or improper behavior. The

proposed interagency statement

(Statement) describes the types of

internal controls and risk management

procedures that the Agencies believe are

particularly effective in assisting

financial institutions to identify and

address the reputational, legal, and

other risks associated with complex

structured finance transactions

x liabilities, or further other

illegal or improper behavior. The

proposed interagency statement

(Statement) describes the types of

internal controls and risk management

procedures that the Agencies believe are

particularly effective in assisting

financial institutions to identify and

address the reputational, legal, and

other risks associated with complex

structured finance transactions. The

Statement, among other things, provides

that financial institutions should have

effective policies and procedures in

place to identify those complex

structured finance transactions that may

involve heightened reputational and

legal risk, to ensure that these

transactions receive enhanced scrutiny

by the institution, and to ensure that the

institution does not participate in illegal

or inappropriate transactions.

DATES: Comments regarding the

Statement should be received on or

before June 18, 2004. Comments

regarding the information collections

contained in the Statement should be

received on or before July 19, 2004.

ADDRESSES:

OCC: You may submit comments,

identified by Docket number 04–12 by

any of the following methods:

E-mail address: http://

www.regs.comments@occ.treas.gov.

Fax: (202) 874–4448.

Mail: Office of the Comptroller of the

Currency, 250 E Street, SW., Public

Reference Room, Mail Stop 1–5,

Washington, DC 20219.

Hand Delivery/Courier: 250 E Street,

SW., Attn: Public Reference Room,

MailStop 1–5, Washington, DC 20219.

You may review the comments received

by the OCC and other related materials

by any of the following methods:

Viewing Comments Personally: You

may personally inspect and photocopy

comments received at the OCC’s Public

Reference 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 copies of comments

received for a particular docket via e-

mail or CD-ROM by contacting the

OCC’s Public Reference Room at

http://www.foia-pa@occ.treas.gov

inspect and photocopy

comments received at the OCC’s Public

Reference 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 copies of comments

received for a particular docket via e-

mail or CD-ROM by contacting the

OCC’s Public Reference Room at

http://www.foia-pa@occ.treas.gov.

OTS: You may submit comments,

identified by No. 2004–27, 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. 2004–27 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.

2004–27.

• 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. 2004–27.

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

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–1189, 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.

• 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,

except as necessary 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

ntact 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

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Federal Register / Vol. 69, No. 97 / Wednesday, May 19, 2004 / Notices

Building (located on F Street), on

business days between 7:00 a.m. and

5:00 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:

Electronic comments:

• Use the Commission’s Internet

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

rules/policy); or

• Send an e-mail to rule-

comments@sec.gov. Please include File

Number S7–22–04 on the subject line;

or

• Use the Federal eRulemaking Portal

(http://www.regulations.gov). Follow the

instructions for submitting comments.

Paper comments:

• Send paper comments in triplicate

to Jonathan G. Katz, Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549–0609.

All submissions should refer to File

Number S7–22–04. 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)

ommission,

450 Fifth Street, NW., Washington, DC

20549–0609.

All submissions should refer to File

Number S7–22–04. 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).

Comments are also available for public

inspection and copying in the

Commission’s Public Reference Room,

450 Fifth Street, NW., 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, (202) 874–4660, Risk

Evaluation, Grace E. Dailey, Deputy

Comptroller, (202) 874–4610, Large

Bank Supervision, Ellen Broadman,

Director, (202) 874–5210, Securities and

Corporate Practices Division, Office of

the Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219.

OTS: John C. Price, Jr., Director,

Supervision Policy, Examinations and

Supervision Policy, (202) 906–5745;

Debbie Merkle, Project Manager, Credit

Risk, Supervision Policy, (202) 906–

5688; David A. Permut, Senior Attorney,

Business Transactions Division, (202)

906–7505, Office of Thrift Supervision,

1700 G Street, NW., Washington, DC

20552.

Board: Michael G. Martinson, Senior

Adviser (202–452–3640), Walt H. Miles,

Assistant Director (202) 452–5264, or

Sabeth I. Siddique, Manager (202) 452–

3861, Division of Banking Supervision

and Regulation; or Kieran J. Fallon,

Managing Senior Counsel (202) 452–

5270, 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: William A

) 452–5264, or

Sabeth I. Siddique, Manager (202) 452–

3861, Division of Banking Supervision

and Regulation; or Kieran J. Fallon,

Managing Senior Counsel (202) 452–

5270, 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: William A. Stark, Associate

Director, Capital Markets Branch, (202)

898–6972, Jason C. Cave, Chief, Policy

Section, Capital Markets Branch, (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, or Juanita Bishop, Supervisory

Accountant at (202) 942–7400, Office of

Compliance Inspections and

Examinations, or Catherine McGuire,

Chief Counsel, Linda Stamp Sundberg,

Attorney Fellow, or Randall W. Roy,

Special Counsel, at (202) 942–0073,

Division of Market Regulation,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549–1001.

SUPPLEMENTARY INFORMATION:

I. Background

Financial markets have grown rapidly

over the past decade and innovations in

financial instruments have facilitated

the structuring of cash flows and the

allocation of risk among borrowers and

investors in more efficient ways. This

innovation has led to the development

of a wide array of structured finance

products, including financial

derivatives for market and credit risk,

asset-backed securities with customized

cash flow features, and specialized

financial conduits that manage pools of

purchased assets.

National and state banks, bank

holding companies, and SEC-registered

broker-dealers and investment advisers

have played an active and important

role in the development of structured

finance products and markets

cial

derivatives for market and credit risk,

asset-backed securities with customized

cash flow features, and specialized

financial conduits that manage pools of

purchased assets.

National and state banks, bank

holding companies, and SEC-registered

broker-dealers and investment advisers

have played an active and important

role in the development of structured

finance products and markets. In this

regard, financial institutions often play

an important role in structuring,

arranging or participating in complex

structured finance transactions for their

own use and to facilitate the needs of

customers.

As financial intermediaries, financial

institutions play a critical role in

ensuring the integrity of financial

markets and maintaining the trust and

public confidence essential to the

proper functioning of the capital

markets. In the vast majority of cases,

structured finance products and the role

played by financial institutions with

respect to these products have served

the legitimate business purposes of

customers. This has allowed structured

finance products to become an essential

part of U.S. and international capital

markets.

The more complex variations of

structured finance products, however,

have placed pressure on the

interpretations of accounting and tax

rules, and, in turn, have given rise to

significant concerns about the legality

and appropriateness of certain

individual transactions. Importantly, a

limited number of complex structured

finance transactions appear to have been

used to alter the appearance of a

customer’s public financial statements

in ways that are not consistent with the

economic reality of the transactions or

to inappropriately reduce a customer’s

tax liabilities. In the most extreme cases,

structured finance transactions appear

to have been used in fraudulent

schemes to misrepresent the financial

condition of public companies or evade

taxes

used to alter the appearance of a

customer’s public financial statements

in ways that are not consistent with the

economic reality of the transactions or

to inappropriately reduce a customer’s

tax liabilities. In the most extreme cases,

structured finance transactions appear

to have been used in fraudulent

schemes to misrepresent the financial

condition of public companies or evade

taxes.

Financial institutions must conduct

their operations in compliance with

applicable law and regulations, and

institutions that do not may be subject

to enforcement actions by the Agencies

and lawsuits by private parties. As

recent events have highlighted, financial

institutions may face substantial legal

risk to the extent they participate in

complex structured finance transactions

that are used by customers to

circumvent regulatory or financial

reporting requirements, evade tax

liabilities, or further other illegal or

improper behavior by the customer.

Involvement in such transactions also

may damage an institution’s reputation

and franchise value. Reputational risk

poses a major threat to financial

institutions because the nature of their

business requires maintaining the

confidence of customers, creditors, and

the general marketplace. Importantly,

reputational risks may arise even where

the transactions involved are structured

to technically comply with existing laws

and regulations.

The events associated with Enron

Corp. demonstrate the potential for the

abusive use of complex structured

finance transactions, as well as the

substantial legal and reputational risks

that financial institutions face when

they participate in complex structured

finance transactions that are designed or

used for improper purposes. After

conducting investigations, the OCC,

Federal Reserve System, and the SEC

took strong and coordinated civil and

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tational risks

that financial institutions face when

they participate in complex structured

finance transactions that are designed or

used for improper purposes. After

conducting investigations, the OCC,

Federal Reserve System, and the SEC

took strong and coordinated civil and

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1 See 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

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.).

2 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).

3 For institutions supervised by the Board, the

OCC, the OTS, and the FDIC the statement will

represent supervisory guidance. For institutions

registered with the SEC, the statement will

represent a policy statement.

administrative enforcement actions

against certain financial institutions that

participated in complex structured

finance transactions with Enron Corp

, S. Rpt.

107–82 (2003).

3 For institutions supervised by the Board, the

OCC, the OTS, and the FDIC the statement will

represent supervisory guidance. For institutions

registered with the SEC, the statement will

represent a policy statement.

administrative enforcement actions

against certain financial institutions that

participated in complex structured

finance transactions with Enron Corp.

that appeared to have been designed or

used to shield the company’s true

financial health from the public.1 These

actions involved significant financial

penalties on the institutions and

required the institutions to take several

measures to strengthen their risk

management practices for complex

structured finance activities. The

structured finance relationships

between some financial institutions and

Enron Corp. also sparked an

investigation by the Permanent

Subcommittee on Investigations of the

U.S. Senate Committee on

Governmental Affairs,2 as well as

numerous lawsuits by private litigants.

The Agencies have long expected

financial institutions to develop and

maintain robust control infrastructures

enabling them fully to identify, evaluate

and control all dimensions of risk

associated with their business activities.

In the area of complex structured

finance transactions, it is critical that

financial institutions have effective risk

management and internal controls to

ensure that the institutions’ activities

comply with the law and that all of the

risks associated with a transaction—

including legal and reputational risks—

are identified and appropriately

addressed.

In light of recent events, the OCC,

Board, and SEC conducted special

reviews of several banking and

securities firms that are significant

participants in the market for complex

structured finance products

e institutions’ activities

comply with the law and that all of the

risks associated with a transaction—

including legal and reputational risks—

are identified and appropriately

addressed.

In light of recent events, the OCC,

Board, and SEC conducted special

reviews of several banking and

securities firms that are significant

participants in the market for complex

structured finance products. These

reviews were designed to evaluate the

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 complex structured finance

transactions. These assessments

indicated that many financial

institutions have already taken

meaningful steps to improve their

control infrastructures relating to

complex structured finance products in

light of the control weaknesses

evidenced by recent events. The

Agencies also have focused attention on

the complex structured finance

activities of financial institutions in the

normal course of our supervisory

process.

II. Proposed Statement on Sound

Practices Concerning the Complex

Structured Finance Activities of

Financial Institutions

In order to help ensure that financial

institutions have and maintain adequate

control infrastructures for complex

structured finance transactions, the

Agencies have developed, and are

seeking public comment on, the

attached Statement included at the end

of this notice.3 The Statement describes

a number of internal controls and risk

management procedures that the

Agencies believe are particularly useful

in assisting financial institutions to

ensure that their complex structured

financial activities are conducted in

accordance with applicable law and that

institutions effectively manage the full

range of risks associated with these

activities, including legal and

reputational risks

umber of internal controls and risk

management procedures that the

Agencies believe are particularly useful

in assisting financial institutions to

ensure that their complex structured

financial activities are conducted in

accordance with applicable law and that

institutions effectively manage the full

range of risks associated with these

activities, including legal and

reputational risks. The Statement

reflects the ‘‘lessons learned’’ from

recent events, as well as what the

Agencies believe to be sound practices

in this area based on supervisory

reviews and experience. Financial

institutions should consider the

Statement in developing and evaluating

the institution’s risk controls for

complex structured finance activities.

The following provides a brief overview

of the key aspects of the Statement.

As a general matter, the Statement

indicates that financial institutions

offering complex structured finance

transactions should maintain a

comprehensive set of formal, firm-wide

policies and procedures that provide for

the identification, documentation,

evaluation, and control of the full range

of credit, market, operational, legal, and

reputational risks that may be associated

with these transactions. These policies

and procedures should be designed to

ensure that the financial institution

consistently and appropriately manages

its complex structured finance activities

on both a per transaction and

relationship basis, with all customers

(including corporate entities,

government entities, and individuals)

and in all jurisdictions where the

financial institution operates.

The board of directors of a financial

institution has ultimate responsibility

for establishing the institution’s risk

tolerances for complex structured

finance transactions and ensuring that a

sufficiently strong risk control

framework is in place to guide the

actions of the financial institution’s

personnel

individuals)

and in all jurisdictions where the

financial institution operates.

The board of directors of a financial

institution has ultimate responsibility

for establishing the institution’s risk

tolerances for complex structured

finance transactions and ensuring that a

sufficiently strong risk control

framework is in place to guide the

actions of the financial institution’s

personnel. The board of directors and

senior management also should send a

strong message to others in the financial

institution about the importance of

integrity, compliance with the law, and

overall good business ethics, which may

be implemented through a Code of

Professional Conduct.

• As described further in the

Statement, an institution’s policies and

procedures should define what

constitutes a complex structured finance

transaction and should, among other

things—

• Define the process that financial

institution personnel must follow to

obtain approval for complex structured

finance transactions;

• Establish a control process for the

approval of all new complex structured

finance products;

• Ensure that the reputational and

legal risks associated with a complex

structured finance transaction, or series

of transactions, are identified and

evaluated in both the transaction and

new product approval process and

appropriately managed by the

institution;

• Ensure that financial institution

staff appropriately reviews and

documents the customers’ proposed

accounting treatment of complex

structured finance transactions,

financial disclosures relating to the

transactions, and business objectives for

entering into the transactions;

• Provide for the generation,

collection and retention of appropriate

documentation relating to all complex

structured finance transactions;

• Ensure that senior management and

the board of directors of the institution

receive appropriate and timely reports

concerning the institution s complex

structured finance activities;

• Provide for periodic independent

revi

g into the transactions;

• Provide for the generation,

collection and retention of appropriate

documentation relating to all complex

structured finance transactions;

• Ensure that senior management and

the board of directors of the institution

receive appropriate and timely reports

concerning the institution s complex

structured finance activities;

• Provide for periodic independent

reviews of the institution’s complex

structured finance activities to ensure

that the institution’s policies and

controls are being implemented

effectively and to identify potential

compliance issues;

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Federal Register / Vol. 69, No. 97 / Wednesday, May 19, 2004 / Notices

• Ensure effective internal audit

coverage of the institution’s complex

structured finance activities; and

• Ensure that financial institution

personnel receive appropriate training

concerning the institution’s policies and

procedures governing its complex

structured finance activities.

An institution should establish a clear

process for identifying those complex

structured finance transactions that

involve heightened legal and

reputational risks. Once a transaction is

identified as involving potentially

heightened legal or reputational risk, the

institution should ensure that these

transactions receive an elevated and

thorough review. If, after conducting

this review, the financial institution

determines that a proposed transaction

may result in the customer filing

materially misleading financial

statements, the financial institution

should decline to participate in the

transaction, condition its participation

upon the customer making express and

accurate disclosures regarding the

nature and financial impact of the

transaction on the customer’s financial

condition, or take other steps to ensure

that the financial institution does not

participate in an inappropriate

transaction

l

statements, the financial institution

should decline to participate in the

transaction, condition its participation

upon the customer making express and

accurate disclosures regarding the

nature and financial impact of the

transaction on the customer’s financial

condition, or take other steps to ensure

that the financial institution does not

participate in an inappropriate

transaction.

The Statement includes examples of

characteristics that may indicate that a

transaction or series of transactions

involves elevated levels of legal or

reputational risk and, thus, should be

subject to heightened review by the

institution. The examples included in

the Statement are not exclusive and

institutions may differ in the sets of

characteristics they use in identifying

transactions that may involve

heightened risks. Institutions, however,

should be conservative when

establishing these characteristics and

the ultimate goals of all institutions

should remain the same—to identify

those transactions that require

additional scrutiny at inception and to

ensure that transactions receive a level

of review that is commensurate with the

legal and reputational risks associated

with the transaction.

Because the Statement discusses

sound practices related to complex

structured finance activities—activities

that typically are conducted only by

larger financial institutions—the

Statement would not be relevant and,

therefore, would not apply to most

small institutions. Moreover, an

institution’s policies and procedures

concerning complex structured finance

activities should be tailored to, and

appropriate in light of, the institution’s

size and the nature, scope, and risk of

its complex structured finance

activities.

The Agencies request comment on all

aspects of the Statement and will revise

the Statement as appropriate after a

review of public comments.

III

an

institution’s policies and procedures

concerning complex structured finance

activities should be tailored to, and

appropriate in light of, the institution’s

size and the nature, scope, and risk of

its complex structured finance

activities.

The Agencies request comment on all

aspects of the Statement and will revise

the Statement as appropriate after a

review of public comments.

III. Paperwork Reduction Act

The Board, the FDIC, the OTS, and

the OCC have determined that the

Statement, which will represent

supervisory guidance for institutions

supervised by the Board, the FDIC, the

OTS, and the OCC, contains collections

of information for purposes of the

Paperwork Reduction Act of 1995 (44

U.S.C. Ch. 35). The OCC, the FDIC, the

OTS, and Board request public

comment on all aspects of the

collections of information contained in

the Statement. Also, the OCC, FDIC,

OTS, and Board request comment on

whether institutions involved in

complex structured finance transactions

currently are in compliance with the

Statement and the information

collections therein.

The OCC, FDIC, OTS, and Board also

invite comment on:

(1) Whether the collections of

information contained in the Statement

are necessary for the proper

performance of each agency’s functions,

including whether the information has

practical utility;

(2) The accuracy of each agency’s

estimate of the burden of the proposed

information collections;

(3) Ways to enhance the quality,

utility, and clarity of the information to

be collected;

(4) Ways to minimize the burden of

the information collections on

respondents, including the use of

automated collection techniques or

other forms of information technology;

and

s

practical utility;

(2) The accuracy of each agency’s

estimate of the burden of the proposed

information collections;

(3) Ways to enhance the quality,

utility, and clarity of the information to

be collected;

(4) Ways to minimize the burden of

the information collections on

respondents, including the use of

automated collection techniques or

other forms of information technology;

and

(5) Estimates of capital or start-up

costs and costs of operation,

maintenance, and purchases of services

to provide information.

Respondents/record keepers are not

required to respond to these collections

of information unless the Board, the

FDIC, the OTS, and OCC display a

currently valid Office of Management

and Budget (OMB) control number. The

OCC, FDIC, and OTS currently are

requesting approval of these information

collections from OMB, and the Board is

processing this collection under its

delegated authority.

The OCC, FDIC, OTS, and Board

estimates of the total annual burden of

the collections of information contained

in the Statement on the financial

institutions they supervise follow.

OCC: The collection of information

requirements contained in the

Statement will be submitted to the OMB

in accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. Ch.

35). The OCC will use any comments

received to evaluate the collections and

verify its burden estimates. The OCC

believes that only the largest national

banks and U.S. branches of foreign

banks are involved in these activities.

Further, as a matter of usual and

customary business practice and in light

of recent events, involved institutions

already have installed policies and

procedures similar to those envisioned

in the Statement. However, institutions

will have to verify and update their

policies and procedures periodically to

ensure that they are adequate and

current

banks are involved in these activities.

Further, as a matter of usual and

customary business practice and in light

of recent events, involved institutions

already have installed policies and

procedures similar to those envisioned

in the Statement. However, institutions

will have to verify and update their

policies and procedures periodically to

ensure that they are adequate and

current.

Comments on the collections of

information should be sent to John

Ference or Camille Dixon, Office of the

Comptroller of the Currency, 250 E

Street, SW., Mail Stop 8–4, Attention:

Docket Number 04–12 (1557–CSFA),

Washington, DC 20219. You may also

send comments by electronic mail to

camille.dixon@occ.treas.gov. You

should also send a copy of your

comments to OMB Desk Officer, Mark

Menchik, Office of Information and

Regulatory Affairs, Office of

Management and Budget, Paperwork

Reduction Project (1557–CSFA),

Washington, DC 20503. Alternatively,

you may e-mail your comments to

mmenchik@omb.eop.gov, or fax them to

(202) 395–6974.

The potential respondents are the

largest national banks and U.S. branches

of foreign banks.

Estimated number of respondents: 21.

Estimated average annual burden

hours per respondent: 100 hours.

Estimated total annual burden: 2,100

burden hours.

FDIC: The collection of information

requirements contained in the

Statement will be submitted to the OMB

in accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. Ch.

35). The FDIC will use any comments

received to evaluate the collections and

verify its burden estimates. The FDIC

believes that only the largest state

nonmember banks are involved in these

activities. Further, as a matter of usual

and customary business practice and in

light of recent events, involved

institutions already have installed

policies and procedures similar to those

envisioned in the Statement

use any comments

received to evaluate the collections and

verify its burden estimates. The FDIC

believes that only the largest state

nonmember banks are involved in these

activities. Further, as a matter of usual

and customary business practice and in

light of recent events, involved

institutions already have installed

policies and procedures similar to those

envisioned in the Statement. However,

institutions will have to verify and

update their policies and procedures

periodically to ensure that they are

adequate and current.

Comments on the collections of

information should be sent to Thomas

Nixon, Legal Division, Federal Deposit

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Federal Register / Vol. 69, No. 97 / Wednesday, May 19, 2004 / Notices

Insurance Corporation, 550 17th Street

NW., Washington, DC 20429. 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.

Comments should also be submitted to

the OMB desk officer for the FDIC: Mark

Menchik, Office of Information and

Regulatory Affairs, Office of

Management and Budget, New

Executive Office Building, Washington,

DC 20503. Alternatively, you may e-

mail your comments to

mmenchik@omb.eop.gov, or fax them to

(202) 395–6974.

The potential respondents are the

largest state nonmember banks.

Estimated number of respondents: 5.

Estimated average annual burden

hours per respondent: 100 hours.

Estimated total annual burden: 500

burden hours.

OTS: The collection of information

requirements contained in the

Statement will be submitted to OMB in

accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. Ch.

35). OTS will use any comments

received to evaluate the collections and

verify its burden estimates

: 5.

Estimated average annual burden

hours per respondent: 100 hours.

Estimated total annual burden: 500

burden hours.

OTS: The collection of information

requirements contained in the

Statement will be submitted to OMB in

accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. Ch.

35). OTS will use any comments

received to evaluate the collections and

verify its burden estimates. The OTS

assumes that only the largest savings

associations and savings and loan

holding companies could be involved in

these activities. Further, as a matter of

usual and customary business practice

and in light of recent events, involved

institutions already have installed

policies and procedures similar to those

envisioned in the Statement. However,

institutions will have to verify and

update their policies and procedures

periodically to ensure that they are

adequate and current.

Send comments, referring to the

collection by title of the proposal, to

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

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

publicinfo@ots.treas.gov, or send a

facsimile transmission to (202) 906–

7755. You should also send a copy of

your comments to OMB Desk Officer,

Mark Menchik, Office of Information

and Regulatory Affairs, Office of

Management and Budget, Paperwork

Reduction Project (1550–NEW),

Washington, DC 20503. Alternatively,

you may e-mail your comments to

mmenchik@omb.eop.gov, or fax them to

il to

publicinfo@ots.treas.gov, or send a

facsimile transmission to (202) 906–

7755. You should also send a copy of

your comments to OMB Desk Officer,

Mark Menchik, Office of Information

and Regulatory Affairs, Office of

Management and Budget, Paperwork

Reduction Project (1550–NEW),

Washington, DC 20503. Alternatively,

you may e-mail your comments to

mmenchik@omb.eop.gov, or fax them to

(202) 395–6974.

The potential respondents are the

largest savings associations and savings

and loan holding companies.

Estimated number of respondents: 5.

Estimated average annual burden

hours per respondent: 100 hours.

Estimated total annual burden: 500

burden hours.

Board: In accordance with section

3506 of the Paperwork Reduction Act of

1995 (44 U.S.C. Ch. 35; 5 CFR 1320,

appendix A.1), the Board reviewed the

Statement under the authority delegated

to the Board by the OMB. The Board

believes that only the largest state

member banks, bank holding

companies, and U.S. branches and

agencies of foreign banks are involved

in complex structured finance activities.

Further, as a matter of usual and

customary business practice and in light

of recent events, involved institutions

already have adopted policies and

procedures similar to those envisioned

in the Statement. However, the

institutions will have to verify and

update their policies and procedures

periodically to ensure that they are

adequate and current.

Comments on the collections of

information should be sent to Michelle

Long, Acting Federal Reserve Board

Clearance Officer, Division of Research

and Statistics, Mail Stop 41, Board of

Governors of the Federal Reserve

System, Washington, DC 20551. You

should also send a copy of your

comments to OMB Desk Officer, Mark

Menchik, Office of Information and

Regulatory Affairs, Office of

Management and Budget, Paperwork

Reduction Project (1557—To Be

Determined), Washington, DC 20503

Reserve Board

Clearance Officer, Division of Research

and Statistics, Mail Stop 41, Board of

Governors of the Federal Reserve

System, Washington, DC 20551. You

should also send a copy of your

comments to OMB Desk Officer, Mark

Menchik, Office of Information and

Regulatory Affairs, Office of

Management and Budget, Paperwork

Reduction Project (1557—To Be

Determined), Washington, DC 20503.

Alternatively, you may e-mail your

comments to mmenchik@omb.eop.gov,

or fax them to (202) 395–6974.

The potential respondents are the

largest state member banks, bank

holding companies, and U. S. branches

and agencies of foreign banks.

Estimated number of respondents: 20.

Estimated average annual burden

hours per respondent: 100 hours.

Estimated total annual burden: 2,000

hours.

The proposed Statement follows.

Interagency Statement on Sound

Practices Concerning 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 purchased assets,

along with other structured transactions

have usually served the legitimate

business purposes of the customers of

financial institutions and are an

essential part of U.S. and international

capital markets.

Financial institutions have played an

active and important role in the

development of structured finance

products and markets. Structured

finance transactions are often employed

to manage risk or for other legitimate

business purposes, such as diversifying

risks, allocating cash flows, and

reducing cost of capital

ions and are an

essential part of U.S. and international

capital markets.

Financial institutions have played an

active and important role in the

development of structured finance

products and markets. Structured

finance transactions are often employed

to manage risk or for other legitimate

business purposes, such as diversifying

risks, allocating cash flows, and

reducing cost of capital. The more

complex variations of selected

structured finance transactions have,

however, placed pressure on the

interpretations of accounting and tax

rules, and this has given rise to

significant concerns about the risks

associated with certain individual

transactions. More so, a limited number

of transactions appear to have been used

primarily to alter the appearance of a

customer’s public financial statements

in ways that are not consistent with the

economic reality of the transactions or

to inappropriately reduce a customer’s

tax liabilities. In the most extreme cases,

structured finance transactions appear

to have been used in fraudulent

schemes primarily to misrepresent the

financial condition of public companies

or evade taxes. Some financial

institutions have been subject to

criminal sanctions, and civil and

administrative enforcement actions by

the regulatory agencies, for participating

in complex structured finance

transactions used by a public company

in reporting false or misleading

financial statements.

Financial institutions are in a unique

position given their role in structuring,

arranging or participating in complex

structured finance transactions for their

own use and to facilitate the needs of

their customers. When a financial

institution provides advice on, arranges

or actively participates in a complex

structured finance transaction, it

assumes the usual market, credit, and

operational risks and also may assume

substantial reputational and legal risk to

the extent that an end-user enters into

the transaction for improper purposes

their

own use and to facilitate the needs of

their customers. When a financial

institution provides advice on, arranges

or actively participates in a complex

structured finance transaction, it

assumes the usual market, credit, and

operational risks and also may assume

substantial reputational and legal risk to

the extent that an end-user enters into

the transaction for improper purposes.

Considering the inherent complexity of

many structured finance transactions

and the many risks associated with

these transactions, it is critical that

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Federal Register / Vol. 69, No. 97 / Wednesday, May 19, 2004 / Notices

1 These institutions are 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 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 Federal

Reserve Board, the Office of the Comptroller, and

the Federal Deposit Insurance Corporation also are

considered to be financial institutions for purposes

of this guidance.

2 For additional guidance concerning when a

financial institution’s participation in a complex

structured finance transaction may violate the

Federal securities laws, and the bases for such

potential liability, 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)

ed finance transaction may violate the

Federal securities laws, and the bases for such

potential liability, 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).

financial institutions have effective risk

management and internal controls

relating to these products to ensure

compliance with the law and to

effectively monitor and control the risks

associated with these transactions.

Financial institutions may not engage in

complex structured finance transactions

in violation of the law and institutions

that violate the law may be subject to

enforcement action and civil or criminal

penalties.

The regulatory agencies have long

expected financial institutions to

develop and maintain robust control

infrastructures enabling them to fully

identify, evaluate and control all

dimensions of risk associated with their

business activities. In the wake of recent

developments, the Office of the

Comptroller of the Currency, the Office

of Thrift Supervision, the Board of

Governors of the Federal Reserve

System, the Federal Deposit Insurance

Corporation, and the U.S. Securities and

Exchange Commission are issuing this

guidance to financial institutions that

we supervise (‘‘financial institutions’’ or

‘‘institutions’’)1 to describe a number of

internal controls and risk management

procedures that we believe are useful to

effectively manage the risks associated

with complex structured finance

transactions

ral Deposit Insurance

Corporation, and the U.S. Securities and

Exchange Commission are issuing this

guidance to financial institutions that

we supervise (‘‘financial institutions’’ or

‘‘institutions’’)1 to describe a number of

internal controls and risk management

procedures that we believe are useful to

effectively manage the risks associated

with complex structured finance

transactions.

Because many of the core elements of

an effective control infrastructure are

the same regardless of the business line

involved, this guidance draws heavily

on controls and procedures that our

agencies previously have found to be

effective in managing and controlling

risks and identifies ways in which these

controls and procedures can effectively

be applied to the institution’s complex

structured finance activities. Financial

institutions should consider this

guidance in developing, or evaluating

existing, risk controls for complex

structured finance activities. These risk

controls should supplement the

financial institution’s more general

internal controls and risk management

systems, as appropriate.

II. Definition and Key Risks of Complex

Structured Finance Transactions

Structured finance transactions

encompass a broad array of products

with varying levels of complexity. This

guidance addresses complex structured

finance transactions, which usually

share several common characteristics.

First, they typically result in a final

product that is often non-standard and

structured to meet the specific financial

objectives of a customer. Second, they

often involve professionals from

multiple disciplines within the financial

institution and may have significant fees

or high returns in relation to the market

and credit risks associated with the

transaction

ommon characteristics.

First, they typically result in a final

product that is often non-standard and

structured to meet the specific financial

objectives of a customer. Second, they

often involve professionals from

multiple disciplines within the financial

institution and may have significant fees

or high returns in relation to the market

and credit risks associated with the

transaction. Third, they may be

associated with the creation or use of

one or more special purpose entities

(SPEs) designed to address the

economic, legal, tax or accounting

objectives of the customer and/or the

combination of cash and derivative

products. Finally, and perhaps most

importantly, they may expose the

financial institution to elevated levels of

market, credit, operational, legal or

reputational risks. These criteria are not

exclusive and institutions should

supplement or modify these criteria as

appropriate to reflect the institution’s

business activities and changes in the

marketplace.

Financial risks include, among other

things, market and credit risks. Due to

their inherent complexity, financial

institutions participating in complex

structured finance transactions also may

face heightened reputational or legal

risk. Financial institutions have been

sued due to their involvement in

complex structured finance transactions

that allegedly facilitated the deceptive

accounting or financial reporting

practices of certain public companies.

Legal risk also may arise in other

situations if the financial institution is

involved in transactions that are used by

customers to circumvent regulatory or

financial reporting requirements, evade

tax liabilities, or further other illegal or

improper behavior by the customer. 2

Besides creating legal risks, these

transactions may create substantial

reputational risk for the institution

Legal risk also may arise in other

situations if the financial institution is

involved in transactions that are used by

customers to circumvent regulatory or

financial reporting requirements, evade

tax liabilities, or further other illegal or

improper behavior by the customer. 2

Besides creating legal risks, these

transactions may create substantial

reputational risk for the institution.

Reputational risk poses a major threat to

financial institutions because the nature

of their business requires maintaining

the confidence of customers, creditors

and the general marketplace.

Importantly, reputational risks may

arise even where the transactions

involved are structured to technically

comply with existing laws and

regulations and accounting standards.

Accordingly, financial institutions

need to have strong controls to ensure

that their actions with respect to

complex structured finance

transactions—including structuring,

marketing, sales, funding and trading

activities—are conducted in accordance

with applicable laws and regulations,

and to ensure that the institution

identifies and appropriately addresses

the potential reputational risks involved

in these transactions. As discussed

further under ‘‘Reputational and Legal

Risk,’’ an institution’s policies and

procedures should identify those

complex structured finance transactions

that may warrant enhanced scrutiny due

to factors related specifically to

reputational and legal risk.

Although the foregoing (and this

document more generally) highlights

some of the most significant risks

associated with complex structured

finance transactions, it is not intended

to present a full exposition of the risks

associated with these transactions.

Financial institutions are encouraged to

refer to other supervisory information

prepared by the agencies for further

information concerning market, credit,

operational, legal and reputational risks.

III

ome of the most significant risks

associated with complex structured

finance transactions, it is not intended

to present a full exposition of the risks

associated with these transactions.

Financial institutions are encouraged to

refer to other supervisory information

prepared by the agencies for further

information concerning market, credit,

operational, legal and reputational risks.

III. Guidelines for Incorporating

Structured Finance Transactions Into

Existing Management Procedures,

Controls and Systems

Role of Board and Management

The board of directors (the Board) of

a financial institution is elected by and

accountable to shareholders, and is the

focal point of the corporate governance

system. Effective oversight by the boards

of directors of public institutions is

fundamental to preserving the integrity

of capital markets. The board of

directors, in its oversight role, is

ultimately responsible for the financial

well being of the institutions they

oversee, as well as ensuring that the

risks associated with the firm’s business

activities, including those activities

associated with the offering and

delivery of complex structured finance

transactions, are appropriately

identified, evaluated and controlled by

management. The Board should

establish the financial institution’s

threshold for the risks associated with

complex structured finance products

and ensure that a sufficiently strong risk

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structured finance

transactions, are appropriately

identified, evaluated and controlled by

management. The Board should

establish the financial institution’s

threshold for the risks associated with

complex structured finance products

and ensure that a sufficiently strong risk

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3 Financial institutions should ensure that the

control processes established for complex

structured finance activities comply with any

informational barriers established by the institution

to manage potential conflicts of interest, insider

trading or other concerns.

4 The agencies note that the Sarbanes-Oxley Act

of 2002 requires companies listed on a national

securities exchange or inter-dealer quotation system

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).

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

foreign banks, these policies should be coordinated

with the group-wide policies developed in

accordance with the rules of the foreign bank’s

home supervisor.

control framework is in place to guide

the actions of the financial institution’s

personnel. The Board should ensure

that the financial institution has a risk

control framework for complex

structured finance transactions that

includes comprehensive policies that

address the elements described below.

Using guidance provided by the

Board, senior management should

implement a risk control framework for

complex structured finance transactions

that includes comprehensive policies,

defined roles and responsibilities and

approval authorities, detailed

management reporting, required

documentation, and ongoing

independent monitoring and testing of

policy compliance

elements described below.

Using guidance provided by the

Board, senior management should

implement a risk control framework for

complex structured finance transactions

that includes comprehensive policies,

defined roles and responsibilities and

approval authorities, detailed

management reporting, required

documentation, and ongoing

independent monitoring and testing of

policy compliance. In order to manage

the risks associated with complex

structured finance transactions, some

institutions have established a senior

management committee that is designed

to ensure that all of the relevant control

functions within the financial

institution, including independent risk

management, accounting policy, legal,

and financial control, are involved in

the oversight of complex structured

finance transactions. The goal of such a

senior-level risk control committee is to

ensure that those complex structured

finance activities that may expose the

financial institution to higher levels of

financial, legal and reputational risk are

comprehensively and consistently

managed and controlled on a company-

wide basis. This senior management

committee regularly reviews trends in

new products and complex structured

transaction activity, including overall

risk exposures from such transactions,

and typically provides final approval of

the most complicated or controversial

complex structured finance

transactions. The agencies believe that

such a senior-level committee can serve

as an important part of an effective

control infrastructure for complex

structured finance activities.3

The Board and senior management

also should send a strong message to

others in the financial institution about

the importance of integrity, compliance

with the law, and overall good business

ethics, which may be implemented

through a Code of Professional Conduct

evel committee can serve

as an important part of an effective

control infrastructure for complex

structured finance activities.3

The Board and senior management

also should send a strong message to

others in the financial institution about

the importance of integrity, compliance

with the law, and overall good business

ethics, which may be implemented

through a Code of Professional Conduct.

The Board and senior management

should strive to create a firm-wide

corporate culture that is sensitive to

ethical issues as well as the potential

risks to the financial institution. The

financial institution’s culture and

procedures should encourage personnel

to elevate ethical concerns regarding a

complex structured finance transaction

or series of transactions to appropriate

levels of management. Establishing a

culture that encourages financial

institution personnel to elevate

concerns to appropriate levels of

management may require mechanisms

to protect personnel by permitting

confidential disclosure in appropriate

circumstances.4 Additionally, the Board

and senior management should ensure

that incentive plans are not structured

in a way that encourages transactors to

cross ethical boundaries when executing

complex structured finance

transactions.

Policies and Procedures

Financial institutions offering

complex structured finance transactions

should maintain a comprehensive set of

formal, firm-wide policies and

procedures that provide for the

identification, documentation,

evaluation, and control of the full range

of credit, market, operational, legal, and

reputational risks that may be associated

with these transactions

nsactions.

Policies and Procedures

Financial institutions offering

complex structured finance transactions

should maintain a comprehensive set of

formal, firm-wide policies and

procedures that provide for the

identification, documentation,

evaluation, and control of the full range

of credit, market, operational, legal, and

reputational risks that may be associated

with these transactions. These policies

should start with the financial

institution’s definition of what

constitutes a complex structured finance

transaction and be designed to ensure

that the financial institution

appropriately manages its complex

structured finance activities on both an

individual transaction and a

relationship basis, with all customers

(including corporate entities,

government entities and individuals)

and in all jurisdictions where the

financial institution operates.5 These

policies may be developed specifically

for complex structured finance

transactions or included in the set of

broader policies governing the

institution generally.

To be most effective, the institution’s

policies and procedures relating to

complex structured finance transactions

should specifically set forth the

particular responsibilities of the

personnel involved in the origination,

structuring, trading, review, approval,

documentation, verification, and

execution of these transactions.

Accordingly, these policies and

procedures should address

responsibilities of personnel from sales

and trading, relationship management,

market risk, credit risk, operations,

accounting, legal, compliance, audit and

senior line management. The financial

institution’s policies and procedures

should provide a clear framework for

the approval and monitoring of complex

structured finance transactions. Policies

for relevant personnel should describe

responsibilities for working with

relationship managers, advising and

counseling customers, disclosing

information to customers, and providing

relevant information to control areas

The financial

institution’s policies and procedures

should provide a clear framework for

the approval and monitoring of complex

structured finance transactions. Policies

for relevant personnel should describe

responsibilities for working with

relationship managers, advising and

counseling customers, disclosing

information to customers, and providing

relevant information to control areas.

The institution’s policies should

ensure that the market, credit, and

operational risk associated with

individual complex structured

transactions are appropriately

identified, aggregated, and managed. A

financial institution should, at a

minimum, also have procedures,

controls and systems for complex

structured finance activities that address

the following: (1) Transaction approval,

(2) new product approval, (3)

reputational and legal risk, (4)

accounting and disclosure by the

customer, (5) documentation, (6)

reporting, (7) independent monitoring,

analysis and compliance with internal

policies, (8) audit, and (9) training.

Transaction Approval

The policies and procedures of a

financial institution should define the

process that personnel must follow to

obtain approval for a complex

structured finance transaction. Policies

for approving complex structured

finance transactions should clearly

articulate the roles and responsibilities

of both transactors (e.g. personnel from

origination, structuring, execution, sales

and trading areas) and independent

control staff (e.g. personnel from risk

management, accounting policy, legal,

and financial control) in analyzing,

approving, and documenting proposed

transactions. Policies should guide front

office personnel in meeting their

responsibilities to provide information

on customer objectives and key risk

issues (including those described below)

to the appropriate approving personnel

pendent

control staff (e.g. personnel from risk

management, accounting policy, legal,

and financial control) in analyzing,

approving, and documenting proposed

transactions. Policies should guide front

office personnel in meeting their

responsibilities to provide information

on customer objectives and key risk

issues (including those described below)

to the appropriate approving personnel.

Furthermore, it is imperative that the

approving authority includes

representatives from appropriate control

areas that are independent of the

transactors. Approving personnel

should have appropriate experience and

stature in the financial institution to

ensure proper consideration of elements

or factors that may expose the

institution to higher levels of credit,

market, operational, legal or

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reputational risk. While acknowledging

its ultimate responsibility for the

approval of complex structured finance

transactions, the organization’s policies

also should clearly outline when third-

party legal professionals should be

engaged to review and opine on

transactions, and when third-party

accounting or tax professionals should

be engaged to consult on transactions.

New Product Policies

Complex structured finance

transactions also should be incorporated

into a financial institution’s new

product policies. In this regard, a

financial institution’s policies should

include a definition of what constitutes

a ‘‘new’’ complex structured finance

product and should establish a control

process for the approval of each new

product

to consult on transactions.

New Product Policies

Complex structured finance

transactions also should be incorporated

into a financial institution’s new

product policies. In this regard, a

financial institution’s policies should

include a definition of what constitutes

a ‘‘new’’ complex structured finance

product and should establish a control

process for the approval of each new

product. In determining whether or not

a complex structured finance

transaction is ‘‘new,’’ a financial

institution should consider a variety of

factors, including any structural

variations from existing products,

whether the product is targeted at a new

class of customers, pricing variations

from existing products, whether the

product raises additional or new legal,

compliance or regulatory issues, and

deviations from standard market

practices. When in doubt as to whether

a complex structured finance

transaction requires vetting through the

new product approval process, financial

institution personnel should err on the

side of conservatism and route the

proposed product through the process

dictated in the new product approval

policy. The new product policies for

complex structured finance activities

should address the roles and

responsibilities of all relevant parties,

including the front office, credit risk,

market risk, operations, accounting,

legal, compliance, audit and senior line

management. In addition, it is

imperative that the institution’s policies

require that new products receive the

approval of all relevant control areas

that are independent of the profit center

before the product is offered to

customers.

A financial institution also should

have in place controls that are designed

to ensure that new complex structured

finance products are, in fact, subjected

to the institution’s established approval

process

stitution’s policies

require that new products receive the

approval of all relevant control areas

that are independent of the profit center

before the product is offered to

customers.

A financial institution also should

have in place controls that are designed

to ensure that new complex structured

finance products are, in fact, subjected

to the institution’s established approval

process. Moreover, subsequent to the

new product approval, the financial

institution should monitor new complex

structured finance products to ensure

that they are effectively incorporated

into the institution’s risk control

systems.

Reputational and Legal Risk

The policies and procedures

established by a financial institution for

complex structured finance activities

should ensure that the legal and

reputational risks associated with a

transaction, or series of transactions, are

identified and evaluated in both the

transaction and new product approval

processes and effectively and

appropriately managed by the

institution. A financial institution

should have effective policies,

procedures and controls for assessing

the customer’s business objectives for

entering into a transaction or series of

transactions and the economic

substance of the transaction(s),

evaluating the appropriateness of the

transaction(s), and preventing the

financial institution from participating

in inappropriate transactions.

Policies should ensure that the

customer understands the risk and

return profile of the transaction. In

instances where the financial institution

is designing the transaction and

advising the customer, the disclosures

to the customer should include an

adequate description of the risks in the

complex structured finance transaction

as well as disclosure of any conflicts of

interest associated with the financial

institution’s participation in the

transaction

urn profile of the transaction. In

instances where the financial institution

is designing the transaction and

advising the customer, the disclosures

to the customer should include an

adequate description of the risks in the

complex structured finance transaction

as well as disclosure of any conflicts of

interest associated with the financial

institution’s participation in the

transaction. Policies should also

articulate when a proposed transaction

requires acknowledgement by the

customer that the transaction has been

reviewed and approved by higher levels

of the customer’s management.

Notwithstanding a customer’s

sophistication and structure of a

complex structured finance transaction,

the financial institution should evaluate

the impact a transaction may have on

the financial institution’s reputation or

franchise value.

Policies should outline

responsibilities of the sales force, front

office, credit and other risk control

personnel for analyzing and

documenting the customer’s objectives

and customer-related accounting,

regulatory, or tax issues. In addition, a

financial institution’s policies and

procedures should establish criteria or

factors for when concerns related to a

particular structured finance transaction

will necessitate a comprehensive

evaluation of the institution’s entire

relationship with a customer.

Policies should ensure that complex

structured finance transactions are

reviewed on a consistent basis by the

financial institution’s legal department

and, where appropriate, by independent

outside counsel. In general, the financial

institution’s legal department should

review complex structured finance

transactions as part of the approval

process. Legal personnel may be

assigned to business units or areas

where complex structured transactions

originate to ensure the legal

department’s involvement throughout

the transaction’s development, or

financial institutions may assign

specific legal personnel to each complex

structured finance transaction

should

review complex structured finance

transactions as part of the approval

process. Legal personnel may be

assigned to business units or areas

where complex structured transactions

originate to ensure the legal

department’s involvement throughout

the transaction’s development, or

financial institutions may assign

specific legal personnel to each complex

structured finance transaction.

Independent monitoring by a risk

control group or compliance unit should

ensure that all complex structured

transactions receive appropriate legal

review, including review by outside

counsel where appropriate.

Areas for legal review include

financial institution permissibility,

disclosure by the customer, regulatory

capital requirements, the enforceability

of any netting and collateral agreements

associated with the transaction,

suitability or appropriateness

assessments, customer assurances,

insurance considerations and tax issues.

Because transactions may involve

multiple counterparties located in

different jurisdictions, the financial

institution should establish review and

documentation procedures that are

designed to ensure that each

counterparty has the authority to enter

into the transaction and that each

counterparty’s obligations are reduced

to legally enforceable contracts.

Financial institutions should ensure

that any legal reviews are conducted by

qualified in-house or outside counsel

and that these professionals are

provided the documentation and other

information needed to properly evaluate

the transaction.

Careful evaluations of the

consequences of a transaction are

particularly important when the

transaction is designed to achieve a

customer’s financial reporting or

complex tax objectives. Policies should

clearly define the types of

circumstances where the approval of

transactions or patterns of transactions

should be elevated to higher levels of

financial institution management for

reasons specific to legal or reputational

risk

a transaction are

particularly important when the

transaction is designed to achieve a

customer’s financial reporting or

complex tax objectives. Policies should

clearly define the types of

circumstances where the approval of

transactions or patterns of transactions

should be elevated to higher levels of

financial institution management for

reasons specific to legal or reputational

risk. In creating procedures for elevating

certain transactions to higher levels,

financial institutions should identify the

characteristics of those transactions, or

series of transactions, that increase

reputational and legal risk. Institutions

should be conservative when

identifying these characteristics. While

institutions may differ in the sets of

characteristics they identify, the goals

should remain the same—to identify the

transactions that require additional

scrutiny at inception and to ensure that

transactions receive a level of review

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6 This item is not intended to include traditional,

non-binding ‘‘comfort’’ letters 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 subsidiary) is an integral

and important part of the parent’s operations.

7 Of course, financial institutions also should

ensure that the institution’s own accounting for

that is commensurate with the legal and

reputational risks associated with the

transaction

ncial

institutions in the loan process where, for example,

the parent of a loan customer states that the

customer (i.e., the parent subsidiary) is an integral

and important part of the parent’s operations.

7 Of course, financial institutions also should

ensure that the institution’s own accounting for

that is commensurate with the legal and

reputational risks associated with the

transaction. Examples of characteristics

that should be considered in

determining whether or not a

transaction or series of transactions

might need additional scrutiny include:

• Transactions with questionable

economic substance or business purpose

or designed primarily to exploit

accounting, regulatory or tax

guidelines), (particularly when executed

at year end or at the end of a reporting

period);

• Transactions that require an equity

capital commitment from the financial

institution;

• Transactions with terms

inconsistent with market norms (e.g.,

deep ‘‘in the money’’ options, non-

standard settlement dates, non-standard

forward-rate rolls);

• Transactions using non-standard

legal agreements (e.g., customer insists

on using its own documents that deviate

from market norms);

• Transactions involving multiple

obligors or otherwise lacking

transparency (e.g., use of SPEs or

limited partnerships);

• Transactions with unusual profits

or losses or transactions that give rise to

compensation that appears

disproportionate to the services

provided or to the risk assumed by the

institution;

• Transactions that raise concerns

about how the client will report or

disclose the transaction (e.g., derivatives

with a funding component,

restructuring trades with mark to market

losses);

• Transactions with unusually short

time horizons or potentially circular

transfers of risk (either between the

financial institution and customer or

between the customer and other related

parties);

• Transactions with oral or

undocumented agreements, which, if

documented, could have material legal,

reputational, finan

unding component,

restructuring trades with mark to market

losses);

• Transactions with unusually short

time horizons or potentially circular

transfers of risk (either between the

financial institution and customer or

between the customer and other related

parties);

• Transactions with oral or

undocumented agreements, which, if

documented, could have material legal,

reputational, financial accounting,

financial disclosure, or tax

implications; 6

• Transactions that cross multiple

geographic or regulatory jurisdictions,

making processing and oversight

difficult;

• Transactions that cannot be

processed via established operations

systems; and

• Transactions with significant

leverage.

Having developed a process to

identify transactions that may pose

higher levels of legal and reputational

risk, financial institutions should

implement procedures to address these

risks. These procedures should, among

other things:

• Ensure that staff approving each

transaction fully understands the scope

of the institution’s relationship with the

customer and has evaluated and

documented the customer’s business

objectives for entering into the

transaction, the economic substance of

the transaction, and the potential legal

and reputational risks to the financial

institution;

• Ensure a thorough review and

evaluation of whether credit exceptions,

accounting issues, rating agency

disclosures, law suits against the

customer, or other factors expose the

financial institution to unwarranted

legal or reputational risks;

• Develop and implement effective

internal communication procedures to

ensure that all financial institution

personnel responsible for transaction

approval and monitoring receive, and

document in a timely manner, complete

and accurate information about the

transaction, the customer’s purpose(s)

for entering into the particular

transaction, and the materiality of the

transaction to the customer;

• Ensure sufficient time is allowed for

a detailed, thorough review of the

all financial institution

personnel responsible for transaction

approval and monitoring receive, and

document in a timely manner, complete

and accurate information about the

transaction, the customer’s purpose(s)

for entering into the particular

transaction, and the materiality of the

transaction to the customer;

• Ensure sufficient time is allowed for

a detailed, thorough review of the

transaction by the relevant personnel;

• Ensure that complex structured

finance transactions identified as having

heightened risks receive a thorough

review by senior management for an

evaluation of credit, market, operation,

legal and reputational risks to the

financial institution;

• Ensure that complex structured

finance transactions that are determined

to present unacceptable risk to the

financial institution are declined;

• Ensure that the Board and senior

management periodically assess the

financial institution’s tolerance for risks

associated with complex structured

finance transactions; and

• Ensure that the institution provides

the customer with appropriate

information concerning the structure

and risks of the transaction, and

articulate when a proposed transaction

requires acknowledgement of review by

higher levels of a customer’s

management.

Accounting and Disclosure by

Customers

As noted above, transactions designed

primarily to achieve financial reporting

or complex tax objectives may require

greater scrutiny due to possible legal

and reputational risk implications. For

transactions identified as involving

elevated risks, the financial institution’s

procedures should ensure that staff

approving the transactions obtain and

document complete and accurate

information about the customer’s

proposed accounting treatment of the

transaction, financial disclosures

relating to the transaction, as well as the

customer’s objectives for entering into

the transaction

transactions identified as involving

elevated risks, the financial institution’s

procedures should ensure that staff

approving the transactions obtain and

document complete and accurate

information about the customer’s

proposed accounting treatment of the

transaction, financial disclosures

relating to the transaction, as well as the

customer’s objectives for entering into

the transaction. The institution’s

policies should ensure that this

information is assessed by appropriate

personnel in the approval process and

that these personnel consider the

information in light of financial,

accounting, rating agency disclosure, or

other information associated with the

transaction that may raise legal or

reputational risks for the financial

institution.

The financial institution’s policies

also should address when third party

accounting professionals should be

engaged to review transactions.

Moreover, there may be circumstances

where the financial institution or the

third-party accounting professionals it

engages will wish to communicate

directly with the customer’s

independent auditors to discuss the

transaction. Independent monitoring of

the approval process (discussed below)

should ensure that personnel adhere to

established requirements for obtaining a

review by third party accountants or

communicating with the customer’s

independent auditor.

In any instance where the financial

institution determines that a proposed

transaction may result in the customer

filing materially misleading financial

statements, the financial institution

should take appropriate actions. Such

actions may include declining to

participate in the transaction or

conditioning its participation upon the

customer making express and accurate

disclosures regarding the nature and

financial impact of the transaction on

the customer’s financial condition. The

ultimate objective is to take steps to

ensure that the financial institution does

not participate in an inappropriate

transaction

actions may include declining to

participate in the transaction or

conditioning its participation upon the

customer making express and accurate

disclosures regarding the nature and

financial impact of the transaction on

the customer’s financial condition. The

ultimate objective is to take steps to

ensure that the financial institution does

not participate in an inappropriate

transaction. As part of this process,

financial institutions should consider

seeking representations and warranties

from the customer stating the purpose of

the transaction, how the customer will

account for the transaction, and that the

customer will account for the

transaction in accordance with

applicable accounting standards,

consistently applied.7

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transactions complies with applicable accounting

standards, consistently applied.

8 Of course, financial institutions must continue

to comply with all applicable laws and regulations

governing the making and keeping of records and

reports.

The financial institution also should

develop procedures to address the

creation, acquisition, and use of

institution and client-sponsored SPEs.

When a structured transaction requires

the establishment of such an entity, the

financial institution should implement

an SPE approval process that permits

the risk control groups to evaluate the

accounting, legal, and tax issues.

Effective review may protect the

financial institution against accounting,

legal, tax, and reputational risks.

Financial institutions should also

monitor the use of SPEs by providing

periodic updates to executive

management and maintaining a database

of all SPEs created to facilitate

structured finance transactions

he risk control groups to evaluate the

accounting, legal, and tax issues.

Effective review may protect the

financial institution against accounting,

legal, tax, and reputational risks.

Financial institutions should also

monitor the use of SPEs by providing

periodic updates to executive

management and maintaining a database

of all SPEs created to facilitate

structured finance transactions.

Documentation Standards

The documentation that financial

institutions use to support complex

structured finance transactions is often

highly customized and negotiated.

Careful generation, collection and

retention of documents associated with

complex structured finance transactions

are important control mechanisms in

minimizing legal and credit risks, as

well as reducing unwarranted exposures

to the financial institution’s reputation.

Policies and procedures should ensure

that transaction documentation is

appropriately detailed and transparent

for review by all control or approval

functions. When in doubt, financial

institutions should err on the side of

conservatism and retain documents

associated with transaction due

diligence, approval and monitoring.

Financial institutions should maintain

comprehensive documentation for all

transactions approved, as well as

disapproved transactions with

controversial elements (e.g., denied in

the final stages of approval or due to

customer requests for particular terms

requiring additional scrutiny).

The documentation policies of a

financial institution should seek to

ensure that all counterparty obligations

are reduced to legally enforceable

written contracts. This would include

the use of term sheets, confirmations,

master agreements, netting agreements,

and collateral agreements or comparable

documents. An institution should have

systems in place to track the status of

documentation on a deal-by-deal basis

to ensure that counterparties execute

and return all necessary contractual

documents

re reduced to legally enforceable

written contracts. This would include

the use of term sheets, confirmations,

master agreements, netting agreements,

and collateral agreements or comparable

documents. An institution should have

systems in place to track the status of

documentation on a deal-by-deal basis

to ensure that counterparties execute

and return all necessary contractual

documents. The responsibility for

drafting transaction documents, or

selecting appropriate templates, should

be assigned to personnel who can

identify legal issues (e.g., enforcing

collateral or netting agreements in

foreign jurisdictions), and have been

given guidance on when to escalate

issues involving the drafting process to

higher level legal staff or management.

Financial institutions that engage in a

significant number of complex

structured finance transactions may find

it beneficial to establish a specialized

documentation unit.

The financial institution’s

documentation standards also should

clearly assign accountability and strive

for transparency in the approval process

and ongoing monitoring of exposures

associated with complex structured

finance transactions. Such standards

should include appropriate guidance

on: 8

• Generation, distribution and

retention of documents associated with

individual transactions. In addition to

standard legal documents, such

documentation should include, as

appropriate:

—Deal summary, including a list of deal

terms

—Analysis or opinions (both formal and

informal), prepared internally or by

third parties, regarding legal

considerations, tax and accounting

treatments, market viability and

regulatory capital requirements for

any and all parties

—Marketing materials and other key

documents provided to the customer

—Internal and external correspondence,

including electronic communications,

regarding transaction development

and due diligence

—Transaction and credit approvals

(including any documentation of

actions taken to mitigate initial

concerns,

s, market viability and

regulatory capital requirements for

any and all parties

—Marketing materials and other key

documents provided to the customer

—Internal and external correspondence,

including electronic communications,

regarding transaction development

and due diligence

—Transaction and credit approvals

(including any documentation of

actions taken to mitigate initial

concerns, such as providing

additional client disclosures or

changing deal structures)

—Minutes of critical meetings with the

client

—Disclosures provided to the customer

(including side letters or other

documents addressing terms or

conditions of the transactions),

including disclosures of all conflicts

of interest and descriptions of the

terms of the complex structured

finance transactions

—Acknowledgements received from the

customer concerning the accounting,

tax, or regulatory implications

associated with the transaction

• Generation, distribution and

retention of documents such as minutes

of meetings of committees and control

groups prepared in sufficient detail to

indicate issues raised, approval or

rejection of a transaction, rationale or

factors considered in approving or

rejecting a transaction and

contingencies or items to be resolved

pending final approval. It may be

practical to assign a specific coordinator

or central location for the maintenance

of committee and control group

minutes.

• Generation, distribution and

retention of information demonstrating

final resolution of items still pending at

time of transaction approval.

• Generation, distribution and

retention of key documents associated

with ongoing communications with the

customer.

• Generation, distribution and

retention of key documents showing the

financial institution’s monitoring of

exposures and periodic assessment of

reputational and legal risk

considerations

monstrating

final resolution of items still pending at

time of transaction approval.

• Generation, distribution and

retention of key documents associated

with ongoing communications with the

customer.

• Generation, distribution and

retention of key documents showing the

financial institution’s monitoring of

exposures and periodic assessment of

reputational and legal risk

considerations.

Reporting

Regardless of the approval structure,

the financial institution should define

the complex structured finance

transaction reporting requirements

appropriate for various levels of

management and the Board. Financial

institutions should develop and ensure

that reports summarizing pending and

contemplated complex structured

finance transactions are disseminated to

appropriate levels of management for

their review and further distribution. At

a minimum, the financial institution

should establish an independent risk

function that prepares a periodic

summary of trends in complex

structured finance transactions and a

brief summary of each deal determined

to involve heightened risks. In addition,

management should establish a process

for reporting transactions viewed as

possessing higher risk.

Independent Monitoring, Analysis, and

Compliance With Internal Policies

The events of recent years evidence

the need for a strong compliance

function in those financial institutions

engaged in complex structured finance

transactions. Financial institutions

should develop and enforce procedures

to conduct periodic independent

reviews of complex structured finance

business activity to ensure that policies

and controls are being implemented

effectively and to identify complex

structured transactions that may have

been executed without proper approvals

or which may indicate problematic

trends

tured finance

transactions. Financial institutions

should develop and enforce procedures

to conduct periodic independent

reviews of complex structured finance

business activity to ensure that policies

and controls are being implemented

effectively and to identify complex

structured transactions that may have

been executed without proper approvals

or which may indicate problematic

trends. These reviews should cover all

the processes involved in creating,

analyzing, offering and marketing

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complex structured finance products.

Procedures should identify departments

and personnel responsible for

conducting reviews and surveillance.

Generally, compliance management

oversees this monitoring and analysis,

with considerable assistance from

personnel in finance and operations.

The establishment of an independent

monitoring and analysis program often

requires considerable work, as unique

reports often need to be set up for

specialized products. Elevated

monitoring should be directed to those

transactions or relationships that the

financial institution has identified as

presenting heightened legal or

reputational risks, based on the factors

and considerations discussed above

under ‘‘Reputational and Legal Risks,’’

or where the transaction or patterns of

transactions pose greater credit or

market risk. Such monitoring may

include more frequent assessments of

customer exposures and elevation of

findings to a higher level of

management in the financial institution.

Compliance functions often are

organized along product lines, and this

structure may prove challenging when

offering complex structured finance

transactions that cross product lines

sactions pose greater credit or

market risk. Such monitoring may

include more frequent assessments of

customer exposures and elevation of

findings to a higher level of

management in the financial institution.

Compliance functions often are

organized along product lines, and this

structure may prove challenging when

offering complex structured finance

transactions that cross product lines.

Practices that may assist financial

institutions in establishing proactive

compliance functions include, but are

not limited to:

• Assigning onsite compliance

officers for each traded product or

business line and establishing a process

for communication across product lines,

legal entities, or regions

• Developing comprehensive

compliance programs that address

responsibilities for risk assessment,

identifying and managing conflicts of

interest, and require policy

implementation, training, monitoring

and testing

• Establishing clear policies that

govern product and transaction

approval, require the pre-approval of

higher risk transactions, and define

standards for marketing materials

• Conducting periodic reviews of

derivatives and complex structured

transaction documentation and policy

compliance

• Reviewing trading activity to

identify off market trades, synthetic

funding transactions, unusually

profitable trades and customer

relationships and trades that present

reputational concerns

• Conducting a periodic assessment

of the supervision of sales and trading

personnel and policy compliance.

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. These are all

areas of concern with respect to

complex structured finance activities.

The complexity and relative

profitability of these activities may add

to the difficulty of analysis and increase

the incentives for risk taking

department of any

financial institution is integral to its

defense against fraud, unauthorized risk

taking and damage to the financial

institution’s reputation. These are all

areas of concern with respect to

complex structured finance activities.

The complexity and relative

profitability of these activities may add

to the difficulty of analysis and increase

the incentives for risk taking. For these

reasons, the internal audit department

in conducting its review of complex

structured finance activities should

audit the financial institution’s

adherence to its own control

procedures, and further assess the

adequacy of its policies and procedures

given the nature of its complex

structured finance business.

Effective internal audit coverage of

complex structured finance transactions

requires a comprehensive independent

audit program that is staffed with

personnel that have the necessary skills

and experience to identify and report on

compliance with financial institution

policy and procedures. These necessary

skills and experience should include an

understanding of the nature and risks of

structured transactions, as well as a

detailed understanding of the

institution’s policies and procedures.

Internal audit should validate that all

business lines and individual desks are

complying with the financial

institution’s standards for complex

structured finance transactions and

appropriately identify any exceptions.

This validation should include

transaction testing that confirms policy

compliance, the existence of proper

approvals, the adequacy of

documentation, and the integrity of

management reporting. Internal audit

should have well-articulated procedures

for when to expand the scope of audit

activities. Further, internal audit should

have procedures for reporting audit

findings directly to the financial

institution’s audit committee and senior

management of the audited area

e, the existence of proper

approvals, the adequacy of

documentation, and the integrity of

management reporting. Internal audit

should have well-articulated procedures

for when to expand the scope of audit

activities. Further, internal audit should

have procedures for reporting audit

findings directly to the financial

institution’s audit committee and senior

management of the audited area.

Internal audit should implement follow-

up procedures to ensure that audit

findings have been resolved and the

business unit or department has

implemented audit recommendations in

a timely manner.

In addition, the complexity of the

structured finance activities may cause

financial institutions to retain outside

consultants, accountants, or lawyers to

review the structured product area. The

retention of such independent expertise

may be a prudent method to fully grasp

and control the overall risk resulting

from such activities. For example,

financial institutions may employ

external auditors to test the structured

transactions approval process and

ensure compliance with its policies and

procedures.

The resulting reports and memoranda

can provide valuable insight to the

financial institution in improving its

risk controls and oversight.

Training

Appropriate training on the financial

institution’s policies and procedures for

handling complex structured finance

transactions is critical. At the inception

of a complex structured finance

transaction, financial institution

personnel should be aware of the

required approval process needed for

transaction implementation. The

financial institution should retain

documentation to support the initial

and ongoing training of personnel

involved in complex structured finance

transactions.

Summary

Financial institutions play a critical

role in ensuring the integrity of our

financial markets

, financial institution

personnel should be aware of the

required approval process needed for

transaction implementation. The

financial institution should retain

documentation to support the initial

and ongoing training of personnel

involved in complex structured finance

transactions.

Summary

Financial institutions play a critical

role in ensuring the integrity of our

financial markets. The ability of

financial institutions to fulfill this role

and operate in a prudent manner

depends on a foundation built upon

trust and public confidence and

compliance with all applicable legal

requirements. The regulatory agencies

expect financial institutions involved in

structured finance transactions to build

and implement enhanced risk

management and internal controls

systems that effectively ensure

compliance with the law and control the

risks associated with complex

structured finance transactions.

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28991

Federal Register / Vol. 69, No. 97 / Wednesday, May 19, 2004 / Notices

Dated: May 13, 2004.

John D. Hawke, Jr.,

Comptroller of the Currency.

Dated: May 12, 2004.

By the Office of Thrift Supervision.

James E. Gilleran,

Director.

By order of the Board of Governors of the

Federal Reserve System.

Dated: May 13, 2004.

Jennifer J. Johnson,

Secretary of the Board.

Dated at Washington, DC, this 11th day of

May, 2004.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

By the Commission.

Dated: May 13, 2004.

Jonathan G. Katz,

Secretary.

[FR Doc. 04–11270 Filed 5–18–04; 8:45 am]

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

8010–01–P

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