All Things FinReg

In the depth of a crypto winter, the New York State Department of Financial Services (DFS) issued guidance (the Guidance) on custodial standards for those with a BitLicense or that are registered as New York state limited purpose trust companies that engage in virtual currency (VC) business activity (VC Trust Companies and, together with BitLicensees, VC Custodians). In addition to providing customer segregation and compliance standards, DFS also announced in the Guidance its position that a VC Custodian that enters into a sub-custody arrangement must obtain prior DFS approval before the arrangement’s implementation.

The New York Department of Financial Services (NYDFS) promulgated its long-awaited final rule regarding commercial financing disclosures, which applies to transactions of $2.5 million or less, on February 1, 2023. The state’s Commercial Finance Disclosure Law (CFDL) took effect January 1, 2022 and requires a TILA-like cost-of-credit disclosure to small businesses when they shop for commercial financing.

The Consumer Financial Protection Bureau (CFPB) recently issued a notice of proposed rulemaking to amend Regulation Z (the Proposal), which implements the Truth in Lending Act (TILA), to better ensure that late fees charged on credit card accounts are “reasonable and proportional” to late payments as required under the Credit Card Accountability and Disclosure Act of 2009 (Card Act).

The US District Court for the Northern District of California ruled on December 20, 2022, that the Commodity Futures Trading Commission (CFTC) properly served the defendant, Ooki DAO, by posting summons documents in Ooki DAO’s online discussion forum and in its help chat box. Commodity Futures Trading Comm'n v. Ooki DAO, No. 3:22-cv-05416-WHO, 2022 BL 454541, 2022 U.S. Dist. Lexis 228820 (N.D. Cal. Dec. 20, 2022), Court Opinion (the Order).

The FDIC Board of Directors issued a proposal on December 13 amending and updating the rules regarding the use of the official FDIC sign and advertising statements to better reflect the modern consumer banking landscape. As noted in a memorandum from the FDIC staff, the update is also meant to address the growth of the fintech sector and partnerships between banks and fintechs. The proposed rule also seeks to clarify instances when FDIC deposit insurance coverage is being misrepresented to consumers.

On December 14, 2022, the US Securities and Exchange Commission (SEC) proposed a fundamental restructuring of the US equity markets in the form of two rule amendments and one new rule proposal (the Equity Market Proposals). In addition, the SEC proposed new Regulation Best Execution (Proposed Regulation Best Ex) under the Securities Exchange Act of 1934 (Exchange Act). The comment period for each rule proposal will remain open until the later of March 31, 2023, or 60 days after the applicable proposing release is published in the Federal Register.

Just shy of a month since FTX declared bankruptcy, the US Securities and Exchange Commission’s (SEC’s) Division of Corporation Finance (Division or staff) published informal guidance on how public companies could be asked to address the possible impact of financial distress in the cryptoasset market. The guidance includes a “sample” crypto-specific comment letter focused on disclosure that public companies should consider providing in filings made under the Securities Act of 1933 (Securities Act) and Securities Exchange Act of 1934 (Exchange Act), as applicable.

FINRA has announced that it is conducting a targeted examination of broker-dealer practices related to retail communications about “crypto asset” products and services. As part of this sweep, FINRA is asking broker-dealers for all retail communications that were distributed or made available by a broker-dealer or its affiliates on behalf of the broker-dealer that refer or relate to crypto assets or services involving crypto transactions or the holding of cryptocurrency during the period of July 1, 2022, to September 30, 2022.

The Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury issued a final rule on September 29, 2022, implementing the bipartisan Corporate Transparency Act’s beneficial ownership information reporting provisions. What’s noteworthy is that FinCEN used this as an opportunity to expand the definition of beneficial ownership to include any individual who exercises substantial control over the reporting company.

New cryptocurrency legislation awaits California Governor Gavin Newsom’s signature after passing the California Assembly on August 30, 2022. If signed into law, California’s Digital Financial Assets Law would create sweeping requirements that, among other things, would mandate that digital asset exchanges and crypto companies obtain licenses to operate within the State of California, but not until January 2025, as described in more detail below. Many observers have compared the new California legislation to New York State’s BitLicense regulation, which was adopted in 2015.