PNC Bank 2015 Annual Report Download - page 31

advisers are registered as investment advisers to private equity
funds under rules adopted under Dodd-Frank.
Broker-dealer subsidiaries are registered with the SEC and
subject to the requirements of the Securities Exchange Act of
1934 and related regulations. The Financial Industry
Regulatory Authority (FINRA) is the primary self-regulatory
organization (SRO) for our registered broker-dealer
subsidiaries. Investment adviser subsidiaries are subject to the
requirements of the Investment Advisers Act of 1940 and
related regulations. Our investment adviser subsidiary that
serves as adviser to registered investment companies is also
subject to the requirements of the Investment Company Act of
1940 and related regulations. Our broker-dealer and
investment adviser subsidiaries also are subject to additional
regulation by states or local jurisdictions.
Over the past several years, the SEC and other regulatory
agencies have increased their focus on the asset management,
mutual fund and broker-dealer industries. Congress and the
SEC have adopted regulatory reforms and are considering
additional reforms that have increased, and are likely to
continue to increase, the extent of regulation of the mutual
fund, investment adviser and broker-dealer industries and
impose additional compliance obligations and costs on our
subsidiaries involved with those industries. Under provisions
of the federal securities laws applicable to broker-dealers,
investment advisers and registered investment companies and
their service providers, a determination by a court or
regulatory agency that certain violations have occurred at a
company or its affiliates can result in fines, restitution, a
limitation on permitted activities, disqualification to continue
to conduct certain activities and an inability to rely on certain
favorable exemptions. Certain types of infractions and
violations can also affect a public company in its ability to
expeditiously issue new securities into the capital markets. In
addition, certain changes in the activities of a broker-dealer
require approval from FINRA, and FINRA takes into account
a variety of considerations in acting upon applications for such
approval, including internal controls, capital levels,
management experience and quality, prior enforcement and
disciplinary history and supervisory concerns.
Title VII of Dodd-Frank imposes new comprehensive and
significant regulations on the activities of financial institutions
that are active in the U.S. over-the-counter derivatives and
foreign exchange markets. Title VII was enacted to (i) address
systemic risk issues, (ii) bring greater transparency to the
derivatives markets, (iii) provide enhanced disclosures and
protection to customers, and (iv) promote market integrity.
Among other things, Title VII: (i) requires the registration of
both “swap dealers” and “major swap participants” with one
or both of the CFTC (in the case of non security-based swaps)
and the SEC (in the case of security-based swaps);
(ii) requires that most standardized swaps be centrally cleared
through a regulated clearing house and traded on a centralized
exchange or swap execution facility; (iii) subjects swap
dealers and major swap participants to capital and margin
requirements in excess of historical practice; (iv) subjects
swap dealers and major swap participants to comprehensive
new recordkeeping and real-time public reporting
requirements; (v) subjects swap dealers and major swap
participants to new business conduct requirements, including
the provision of daily marks to counterparties and disclosing
to counterparties (pre-execution) the material risks, material
incentives, and any conflicts of interest associated with their
swap; and (vi) imposes special duties on swap dealers and
major swap participants when transacting a swap with a
“special entity” (e.g., governmental agency (federal, state or
local) or political subdivision thereof, pension plan or
endowment).
Based on the definition of a “swap dealer” under Title VII,
PNC Bank registered with the CFTC as a swap dealer on
January 31, 2013. As a result, PNC Bank is subject to the
regulations and requirements imposed on registered swap
dealers, and the CFTC (and for certain delegated
responsibilities, the National Futures Association) will have a
meaningful supervisory role with respect to PNC Bank’s
derivatives and foreign exchange businesses. Because of the
limited volume of our security-based swap activities, PNC
Bank has not registered with the SEC as a security-based swap
dealer. The regulations and requirements applicable to swap
dealers will collectively impose implementation and ongoing
compliance burdens on PNC Bank and will introduce
additional legal risks (including as a result of newly applicable
antifraud and anti-manipulation provisions and private rights
of action).
As originally enacted, the so-called “swap push-out”
provisions of Section 716 of Dodd-Frank required an insured
depository institution that is a “swaps entity” (defined to
include a registered swap dealer like PNC Bank) to cease
engaging in certain types of swaps by July 16, 2013, although
the institution’s appropriate Federal banking agency could
extend this transition period. In 2013, PNC Bank received
such an extension of the transition period to July 16, 2015
from its appropriate Federal banking agency. In December
2014, the U.S. Congress significantly narrowed the “push-out”
restrictions of Section 716. These amendments generally
allow insured depository institutions that are a swaps entity to
engage in all types of swaps other than structured finance
swaps (defined as a swap that references either an asset-
backed security or a group or index primarily comprised of
asset-backed securities). However, an insured depository
institution is permitted to engage in structured finance swaps
for hedging or other risk mitigating purposes. An insured
depository institution that fails to comply with the restrictions
in Section 716 could face restrictions on the institution’s
access to the Federal Reserve’s discount window or FDIC
deposit insurance or guarantees. These provisions, as
amended, do not prohibit PNC Bank from engaging in its
current swap activities.
The PNC Financial Services Group, Inc. – Form 10-K 13