The Financial Crimes Enforcement Network (FinCEN) recently issued guidance consolidating current FinCEN regulations, rulings, and guidance about cryptocurrencies and money services businesses (MSBs) under the Bank Secrecy Act (BSA). Along with the May 9 guidance, FinCEN issued an advisory to assist financial institutions in identifying and reporting suspicious activity or criminal use of cryptocurrencies.
In a recently published statement, the Basel Committee on Banking Supervision (BCBS) has raised concerns relating to the risks that crypto-assets pose to the global financial system. While it acknowledges that banks do not currently have significant exposure to crypto-assets, it warns that these assets are increasingly becoming a threat to financial stability.
These concerns are founded on the volatility, constant evolution, and lack of standardization of crypto-assets, which the BCBS believes exposes banks to liquidity, credit, operational, money laundering, legal, and reputational risks. It considers that crypto-assets should not be referred to as “cryptocurrencies,” given that they fall short of being currencies that are safe mediums of exchange.
In separate remarks delivered before the annual Washington meeting of the Institute for International Bankers on March 11, FDIC Chair Jelena McWilliams and Comptroller of the Currency Joseph Otting both said that the federal financial regulatory agencies are actively considering revisions to the Volcker Rule regulations, including a reconfiguration of the interagency Volcker Rule regulatory proposals published in June 2018. Ms. McWilliams, among other things, indicated that “all options are on the table," and stated that the federal agencies “need to right size the rule's extraterritorial scope while also minimizing competitive inequities between U.S. banking entities and their foreign counterparts…” with a particular focus on foreign funds.
The staff of the Securities and Exchange Commission’s (SEC) Division of Trading and Markets (Staff) issued a no-action letter on October 29 to the Financial Industry Regulatory Authority (FINRA), which, in effect extends the effective date of recent changes to FOCUS reporting by registered broker-dealers. In August 2018, the SEC adopted amendments regarding, among other things, broker-dealer reporting with respect to reporting of extraordinary gains, the cumulative effect of changes in accounting principles, and comprehensive income reported on broker-dealer annual reports (i.e., Rule 17a-5). The amendments are scheduled to become effective for all filings made on and after November 5, 2018.
On July 6, the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (together, the Agencies) issued an interagency statement (Statement) regarding the impact of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (the tongue-tying EGRRCPA), which we previously summarized. The new law amended the Dodd-Frank Act to streamline certain of its systemic regulation requirements, and provide a modest level of relief for midsized banks and community banking institutions. The Statement addressed some of the immediate impacts of EGRRCPA and the Agencies’ responses to those provisions that took effect immediately. The Federal Reserve Board also issued a separate conforming statement addressing the impact of EGRRCPA on bank holding companies subject to its supervision (FRB Statement).
Among other things, EGRRCPA increases the Dodd-Frank Act enhanced prudential supervision threshold for bank holding companies with $50 billion in total consolidated assets by exempting bank holding companies with total consolidated assets of less than $100 billion immediately upon enactment (May 24, 2018), and raising this threshold to $250 billion 18 months after the date of enactment (November 25, 2019). EGRRCPA also allows the application of any enhanced prudential standard to bank holding companies with between $100 billion and $250 billion in total consolidated assets.
Since taking on the role in November 2017, Comptroller of the Currency Joseph Otting has been relatively circumspect regarding his views on the banking industry, bank regulation, and bank regulatory reform. In testimony on June 14 before the Senate Committee on Banking, Housing, and Urban Affairs, Comptroller Otting provided the clearest insight to date about his views on the federal banking system and the role of bank regulation.
In his testimony, Comptroller Otting first discussed risk in the banking system and the OCC’s “supervision by risk” approach, noting the following areas of heightened risk:
- Elevated credit risk due to eased credit underwriting, increased commercial real estate concentration limits, and policy exceptions that create a higher level of concern
- Elevated operational risk created by cybersecurity threats and third-party relationships, including risks created by consolidation in the fintech industry, which has led to a limited number of providers servicing large segments of the banking industry
- Elevated compliance risk due to Bank Secrecy Act (BSA) requirements, the new FinCEN beneficial ownership rules, and new technologies that attempt to increase customer convenience and access to financial products and services, and the need for banks to better manage implementation of regulatory changes in consumer laws
Just over two months after the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S 2155), the House voted 258-159 (with 33 Democrats voting “yea”) to pass S 2155 without amendments. S 2155 was quickly signed into law by President Donald Trump.
Until recently, S 2155 faced an uncertain future in the House. In June 2017, the House had passed its version of financial regulatory reform (HR 10, better known as the Financial CHOICE Act of 2017 (CHOICE Act). The CHOICE Act was a relatively comprehensive effort to reform the Dodd-Frank Act. Because it included a large number of provisions that would not attract broad bipartisan support, however, the CHOICE Act never was seen as having much, if any, chance of passing the Senate.
When S 2155 was passed, House Financial Services Committee Chairman Jeb Hensarling (R-TX) signaled that the House was not inclined to pass it without incorporating at least some elements of the CHOICE Act. In the interim, however, Mr. Hensarling and other Republicans were persuaded to allow a vote on S 2155 without further amendment, with the promise that additional provisions of the CHOICE Act could be brought as a separate bill or bills, which resulted in House passage of the bill.
We usually don’t blog about financial regulatory nonevents, but sometimes it is useful simply to point out when something is just that. Our “nonevent event” example of the day is the April 30 dismissal (read the accompanying order here) by the US District Court for the District of Columbia of the Conference of State Bank Supervisors (CSBS) lawsuit against the Office of the Comptroller of the Currency (OCC), where the CSBS challenged the OCC’s authority to issue national bank nondepository fintech charters. The court dismissed the lawsuit in part for lack of “ripeness,” which is administrative lawspeak for “there’s nothing to challenge here.” Put simply, the OCC has not chartered any fintech banks and has not even issued final guidance on the chartering process, and the court therefore found itself without anything to review or decide. Administrative law aficionados therefore should not be at all surprised by that aspect of the court’s decision and reasoning. As the court trenchantly stated, “Indeed, there may ultimately be no case to decide at all if the OCC does not charter a Fintech.” A similar lawsuit against the OCC that was filed by the New York State Department of Financial Services was dismissed last year on similar grounds, and we surmised at that time that the CSBS suit might suffer the same procedural fate.
Arizona has become the first state in the United States to enact a law to create a “Fintech Sandbox” – a safe zone for fintech startups to test new applications and financial services otherwise subject to state money transmitter, banking, and similar licensing requirements without having to obtain a state license. Although other countries, such as the United Kingdom, Singapore, and Australia, have created similar fintech sandboxes, similar legislation or regulations thus far have not been adopted in the United States at the federal or state level.
The Fintech Sandbox idea was promoted by the Arizona attorney general and will be administered by the Arizona Office of the Attorney General (AZ OAG). However, the Fintech Sandbox does not mean that fintech companies will be unregulated in Arizona. There will be a substantive application and oversight process.
In a rare bipartisan vote, 16 Democrats and one Independent who caucuses with the Democrats joined with 50 Republicans to pass Senate Bill 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Senate Bill). The Senate Bill is the most comprehensive reform to the Dodd-Frank Act that has passed the Senate, although it is more limited in scope than HR 10, better known as the Financial CHOICE Act of 2017, the Dodd-Frank Act reform bill passed by the House of Representatives in June 2017.
There are a number of notable provisions in the Senate Bill.