After years of planning and discussion, many of the financial regulations that resulted from the 2008 financial crisis -- specifically, FATCA and elements of Dodd-Frank, such as the Volcker Rule -- are finally coming into effect.
Here are some important dates that financial institutions need to keep in mind over the next few months.
April 1, 2014 -- Effective date of the final interagency rule implementing the Volcker Rule.
The still-debated Volcker Rule, which prohibits Banking Entities from engaging in most proprietary trading and from acquiring or retaining an interest in Covered Funds, goes into effect on April 1. While the majority of Banking Entities will not need to comply until 2015, entities with trading assets and liabilities in excess of 50 billion dollars will need to start reporting on June 30, 2014.
Not surprisingly, the majority of the costs associated with compliance will be shouldered by the largest banks. The Office of the Comptroller of Currency estimates that costs -- including those associated with impact to market value of covered funds, compliance, reporting and increased supervision -- could reach as high as $4.5 billion. This estimate further supports claims by certain lawmakers, the U.S. Chamber of Commerce and others that U.S. regulators should have conducted an economic impact analysis of the regulations prior to implementation.
Despite allegations that regulators failed to meet their duties under federal laws such as the Unfunded Mandates Reform Act, only one legal challenge to the Volcker Rule has been filed. The suit by the American Bankers Association was driven by the fear that an earlier version of the rule would have a significant and unintended impact on community banks due to the prohibition on ownership of collateralized debt obligations ("CDO"). The suit was dropped when regulators amended the rule to exempt most bank investments in CDOs backed by trust preferred securities ("TruPS") from the Volker Rule's investment prohibitions.
April 25, 2014 -- Final date for a foreign financial institution ("FFI") to register under FATCA to ensure inclusion on the IRS' June 2014 FFI list.
By registering, the FFI agrees to comply with the FATCA requirements applicable to its particular status including considerations related to the country in which it operates. The registration process is voluntary, but FFIs that fail to register by April 25 and to obtain a Global Intermediary Identification Number ("GIIN") by June 30, 2014 may be subject to 30 percent withholding beginning on July 1.
June 1, 2014 -- Effective date of Federal Reserve Board final rule implementing certain enhanced prudential standards provisions under section 165 of the Dodd-Frank Act.
The final rule amending Regulation YY establishes enhanced prudential standards for large U.S. bank holding companies ("BHC") with total consolidated assets of $50 billion or more and foreign banking organizations ("FBO") with combined U.S. assets of $50 billion or more has a greater impact on FBO than on BHC. This is because many of the enhanced prudential standards under this rule are already in place under other regulatory regimes such as Basel III.
The final rule requires, among other things, that FBO with more than $50 billion in combined U.S. assets establish a holding company in the United States that will be subject to the full range of U.S. regulation and that FBO with between $10 billion and $50 billion in combined U.S. assets be subject U.S. asset maintenance requirements unless the FBO is already subject to acceptable stress testing in its home country. The final rule is less restrictive than the proposed rule under which the obligation to establish a US-based holding company would have been triggered at $10 billion. Although the rule is effective on June 1, compliance will be phased in over the next several years.
June 30, 2014 -- Foreign Financial Institution Agreements are effective under FATCA; FATCA withholding on fixed or determinable annual or periodic payments to non-participating FFIs and recalcitrant account holders begins with respect to new accounts
FATCA imposes reporting obligations on foreign financial institutions ("FFIs") to disclose certain information to the IRS pertaining to U.S. account holders. After June 30, 2014, the IRS will impose the 30 percent withholding tax on payments by payers of fixed, determinable, annual, periodical income payments to certain non-US entities that have not yet entered into an FFI agreement with the IRS. To avoid withholding requirements, payees that are FFIs or NFFEs for obligations that are not grandfathered under the rules are required to provide certification of their foreign status. This typically means that a W-8BEN will be furnished by the payee. Withholding agents may require that new certificates be provided at any time even if they have no knowledge of a change in circumstances. If it is suspected that a certificate is unreliable the withholding agent is required to review the payee's entire file for inconsistencies.
July 1, 2014 -- Existing obligations are grandfathered under FATCA
Grandfathering rules under FATCA eliminate withholding entirely for certain obligations outstanding on July 1st, 2014. However, a "material modification" to an instrument after this date will cause it to lose its grandfather protection. Previously, withholding agents were required to withhold under FATCA when they know or have reason to know that the agreement was modified however, that has been changed to an actual knowledge test.
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Christopher Cahn is the associate director for compliance at Clutch Group, a global provider of litigation, investigation, compliance, and other legal services for Fortune 500 companies.