Fifth Third Bank 2014 Annual Report Download - page 178

`
176 Fifth Third Bancorp
The DFA requires stock exchanges to have rules prohibiting
their members from voting securities that they do not beneficially
own (unless they have received voting instructions from the
beneficial owner) with respect to the election of a member of the
board of directors (other than an uncontested election of directors
of an investment company registered under the Investment
Company Act of 1940), executive compensation or any other
significant matter, as determined by the SEC by rule.
Credit Ratings
The DFA includes a number of provisions that are targeted at
improving the reliability of credit ratings. In August of 2014 the
SEC adopted new requirements for credit rating agencies to
enhance governance, protect against conflicts of interest, and
increase transparency to improve the quality of credit rating
agency accountability.
Consumer Issues
The DFA created a new bureau, the CFPB, which has the
authority to implement regulations pursuant to numerous
consumer protection laws and has supervisory authority,
including the power to conduct examination and take enforcement
actions, with respect to depository institutions with more than $10
billion in consolidated assets. The CFPB also has authority, with
respect to consumer financial services to, among other things,
restrict unfair, deceptive or abusive acts or practices, enforce laws
that prohibit discrimination and unfair treatment and to require
certain consumer disclosures.
Debit Card Interchange Fees
The DFA provides for a set of new rules requiring that
interchange transaction fees for electric debit transactions be
“reasonable” and proportional to certain costs associated with
processing the transactions. The FRB was given authority to,
among other things, establish standards for assessing whether
interchange fees are reasonable and proportional. In June 2011,
the FRB issued a final rule establishing certain standards and
prohibitions pursuant to the DFA, including establishing
standards for debit card interchange fees and allowing for an
upward adjustment if the issuer develops and implements policies
and procedures reasonably designed to prevent fraud. The
provisions regarding debit card interchange fees and the fraud
adjustment became effective October 1, 2011. The rules impose
requirements on the Bancorp and its banking subsidiary and may
negatively impact our revenues and results of operations. On July
31, 2013, the U.S. District Court for the District of Columbia
issued an order granting summary judgment to the plaintiffs in a
case challenging certain provisions of the FRB’ s rule concerning
electronic debit card transaction fees and network exclusivity
arrangements (the “Current Rule”) that were adopted to
implement Section 1075 of the DFA, known as the Durbin
Amendment. The Court held that, in adopting the Current Rule,
the FRB violated the Durbin Amendment’ s provisions concerning
which costs are allowed to be taken into account for purposes of
setting fees that are reasonable and proportional to the costs
incurred by the issuer and therefore the Current Rule’ s maximum
permissible fees were too high. In addition, the Court held that the
Current Rule’ s network non-exclusivity provisions concerning
unaffiliated payment networks for debit cards also violated the
Durbin Amendment. The Court vacated the Current Rule, but
stayed its ruling to provide the FRB an opportunity to replace the
invalidated portions. The FRB appealed this decision and on
March 21, 2014, the D.C. Circuit Court of Appeals reversed the
District Court’ s grant of summary judgment and remanded the
case for further proceedings in accordance with its opinion. The
merchants have filed a petition for writ of certiorari to the U.S.
Supreme Court. However, on January 20, 2015, the U.S. Supreme
Court declined to hear an appeal of the Circuit Court reversal,
thereby largely upholding the Current Rule and substantially
reducing uncertainty surrounding debit card interchange fees the
Bancorp is permitted to charge. Refer to the Noninterest Income
subsection of the Statements of Income Analysis section of
MD&A for further information regarding the Bancorp’ s debit
card interchange revenue.
FDIC Matters and Resolution Planning
Title II of the DFA creates an orderly liquidation process that the
FDIC can employ for failing systemically important financial
companies. Additionally, the DFA also codifies many of the
temporary changes that had already been implemented, such as
permanently increasing the amount of deposit insurance to
$250,000.
In January 2012, the FDIC issued a final rule that requires an
insured depository institution with $50 billion or more in total
assets to submit periodic contingency plans to the FDIC for
resolution in the event of the institution’ s failure. The rule
became effective in January 2012; however, submission of plans
are staggered over a period of time. The Bancorp’ s banking
subsidiary is subject to this rule and submitted its most recent
resolution plan pursuant to this rule as of December 31, 2014.
In October 2011, the FRB and FDIC issued a final rule
implementing the resolution planning requirements of Section
165(d) of the DFA. The final rule requires BHCs with assets of
$50 billion or more and nonbank financial firms designated by
FSOC for supervision by the FRB to annually submit resolution
plans to the FDIC and FRB. Each plan shall describe the
company’ s strategy for rapid and orderly resolution in bankruptcy
during times of financial distress. Under the final rule,
companies must submit their initial resolution plans on a
staggered basis. The Bancorp submitted its most recent
resolution plan pursuant to this rule as of December 31, 2014.
Proprietary Trading and Investing in Certain Funds
The DFA sets forth new restrictions on banking organizations’
ability to engage in proprietary trading and sponsors of or invest
in private equity and hedge funds (the “Volcker Rule”). The final
regulations implementing the Volcker Rule (“Final Rules”) were
adopted on December 10, 2013. The Volcker Rule generally
prohibits any banking entity from (i) engaging in short-term
proprietary trading for its own account and (ii) sponsoring or
acquiring any ownership interest in a private equity or hedge
fund. The Volcker Rule and Final Rules contain a number of
exceptions. The Volcker Rule permits transactions in the
securities of the U.S. government and its agencies, certain
government-sponsored enterprises and states and their political
subdivisions, as well as certain investments in small business
investment companies. Transactions on behalf of customers and
in connection with certain underwriting and market making
activities, as well as risk-mitigating hedging activities and certain
foreign banking activities are also permitted. The Final Rules
exclude certain funds from the prohibition on fund ownership and
sponsorship including wholly-owned subsidiaries, joint ventures,
and acquisitions vehicles, as well as SEC registered investment
companies. De minimis ownership of private equity or hedge
funds is also permitted under the Final Rules. In addition to the
general prohibition on sponsorship and investment, the Volcker