Five US supervisory bodies have proposed guidelines for institutional investors to use as a road map in identifying and containing risks inherent in complex structured finance activities.
The Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Office of Thrift Supervision, and the Securities and Exchange Commission released a joint statement asking for public comment from bond firms and other institutions likely to invest in such structures within the next 30 days.
“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,” their joint statement said on May 14.
The interagency statement describes the types of internal controls and risk management procedures that should help financial institutions effectively manage and address the risks associated with their complex structured finance activities and operate in accordance with applicable law.
The statement, among other things, provides that financial institutions engaged in complex structured finance activities 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.
The statement also emphasizes the critical role of an institution’s board of directors and senior management in establishing a corporate-wide culture that fosters integrity, compliance with the law, and overall good business ethics.
The five regulatory bodies said the statement represents “supervisory guidance” for institutions supervised by the four banking agencies and a “policy statement” for institutions supervised by the Securities and Exchange Commission