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FDIC issues NPR to revise Federal Deposit Insurance Act regulations on Section 19
On October 24, FDIC announced a proposed rule to implement the Fair Hiring in Banking Act (FHB Act). The proposed rule amends 2 C.F.R. part 303, subpart L, and part 308, subpart M. The Federal Deposit Insurance Act (FDI Act) prohibits a person from participating in the affairs of an FDIC-insured institution if he or she has been convicted of an offense involving dishonesty, breach of trust, or money laundering, or has entered a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC, among other provisions. The proposed rule would incorporate several statutory changes to the FDI Act, such as:
- Excluding certain offenses from the scope of the FHB Act based on the amount of time that has passed since the offense occurred or since the individual was released from incarceration;
- Clarifying that the FHB Act does not apply to the following offenses, if one year or more has passed since the applicable conviction or program entry: using fake identification, shoplifting, trespassing, fare evasion, and driving with an expired license or tag;
- Excluding certain offenses from the definition of “criminal offenses involving dishonesty,” including “an offense involving the possession of controlled substances”;
- Excluding certain convictions from the scope of the FHB Act that have been expunged, sealed, or dismissed. While existing FDIC regulations already exclude most of those offenses, the proposed rule would modestly broaden the statutory language concerning such offenses to harmonize the FDIC’s current regulations concerning expunged and sealed records with the statutory language; and
- Prescribing standards for the FDIC’s review of applications submitted under the FHB Act.
The proposed rule also provides interpretive language that addresses, among other topics, when an offense “occurs” under the FHB Act, whether otherwise-covered offenses that occurred in foreign jurisdictions are covered by the FDI Act, and offenses that involve controlled substances.
Comments will be accepted for 60 days after publication in the Federal Register.
FDIC seeks comments on proposed and stricter governance guidelines for regional banks
On October 11, the FDIC published a request for comment on proposed corporate governance and risk management guidelines that would apply to all insured state nonmember banks, state-licensed insured branches of foreign banks, and insured state savings associations that are subject to Section 39 of the Federal Deposit Insurance Act (FDI Act), with total consolidated assets of $10 billion or more on or after the effective date of the final guidelines.
The proposed guidelines cover board of director’s obligations, composition, duties, and committee structure that must be met to meet the standard of good corporate governance. The proposed guidelines state that the board will ultimately be responsible for the affairs of the covered institution and each individual member must abide by certain legal duties. Under the proposed guidelines, the board of directors must, among other things: (i) evaluate and approve a strategic plan covering at least a three-year period; (ii) establish policies and procedures by which the covered institution operates; (iii) establish a code of ethics covering legal requirements, such as insider information, disclosure, and self-dealing; (iv) provide active oversight of management; (v) exercise independent judgement; and (vi) select and appoint qualified executive officers. Additionally, the board will be required to maintain a majority of independent directors on the board and should consider diversity of demographic representation, opinion, experience, and ownership level when choosing its board members. The proposed guidelines would also require that the board have an audit committee, a compensation committee, a trust committee (if the covered institution has trust powers), and a risk committee.
Comments must be received by the FDIC by December 11, 2023.
FDIC orders entities to stop making fraudulent deposit insurance representations
On February 15, the FDIC sent letters to four entities demanding that they stop making false or misleading representations about FDIC deposit insurance. Letters were sent to a cryptocurrency exchange and to a nonbank financial services provider demanding that the entities cease and desist from making false and misleading statements about FDIC deposit insurance and take immediate corrective action to address these statements. The FDIC also sent letters to two websites ordering them to remove similar false and misleading statements claiming that the crypto exchange and the nonbank financial services provider are FDIC-insured and that FDIC insurance will protect customers’ cryptocurrency or protect customers in the event of the nonbank’s failure. Under the Federal Deposit Insurance Act, persons are prohibited “from representing or implying that an uninsured product is FDIC-insured or from knowingly misrepresenting the extent and manner of deposit insurance.”
FDIC issues CDO against five crypto companies
On August 19, the FDIC issued letters (see here, here, here, here, and here) to five companies demanding that they cease and desist from making crypto-related false and misleading statements regarding their FDIC deposit insurance status and take immediate corrective action to address these false statements. The FDIC noted that “each of these companies made false representations—including on their websites and social media accounts—stating or suggesting that certain crypto-related products are FDIC-insured or that stocks held in brokerage accounts are FDIC-insured.” Specifically, the FDIC noted that “a company offering a so-called cryptocurrency also registered a domain name that suggests affiliation with or endorsement by the FDIC,” calling such representations “false and misleading.” The FDIC said that the companies’ actions violated the FDI Act, which “prohibits any person from representing or implying that an uninsured product is FDIC–insured or from knowingly misrepresenting the extent and manner of deposit insurance,” and “further prohibits companies from implying that their products are FDIC–insured by using ‘FDIC’ in the company’s name, advertisements, or other documents.” The FDI Act authorizes the FDIC to enforce this prohibition against any person. The FDIC demanded that the companies take corrective actions by removing the misrepresentations or false statements and providing written confirmation to the FDIC that they have fully complied with the removal request.
FDIC, Fed issue CDO against crypto brokerage firm
On July 28, the FDIC and the Federal Reserve Board issued a joint letter demanding that a crypto brokerage firm cease and desist from making false and misleading statements regarding the company’s FDIC deposit insurance status and take immediate corrective action to address these false statements. The agencies claimed that the firm made false and misleading representations online, including on its website, stating or suggesting that: (i) it is FDIC–insured; (ii) customers who invested with the firm’s cryptocurrency platform would receive FDIC insurance coverage for all funds provided to, and held by, the firm; and (iii) the FDIC would insure customers against the failure of the firm. The FDIC noted that the false and misleading statements Violate the FDIC Act. The FDIC demanded that the firm take corrective actions by removing the misrepresentations or false statements and provide written confirmation to the FDIC and Board of Governors that it has fully complied with the removal request within two days.
FDIC updates its enforcement actions manual
On July 25, the FDIC announced that it updated chapters its Formal and Informal Enforcement Actions Manual, entitled Overview and Administrative Matters and Cease-and-Desist Actions, respectively, regarding the agency’s minimum standards for terminating cease and desist and consent orders issued under Section 8(b) of the FDI Act. According to the FDIC, “the manual provides direction for professional staff related to the work necessary to pursue formal and informal enforcement actions,” and is “intended to support the work of the field, regional, and Washington office’s staff involved in processing and monitoring enforcement actions.” The FDIC is authorized to issue a cease-and-desist order if an insured depository institution has engaged, or is about to engage, in “an unsafe or unsound practice in conducting the business of the institution, or [a] violation of a law and/or regulation, written agreement with the FDIC, or written condition imposed by the FDIC in connection with the granting of any application or other request.” The updates, among other things, clarify that cease-and-desist or consent orders may be terminated if: (i) the institution is in full compliance with all provisions of the order and has fully corrected legal violations, unsafe or unsound practices, or other conditions that led to the issuance of the order; (ii) any provisions deemed “not in compliance” have become outdated or irrelevant; or (iii) deterioration or any provisions deemed “not in compliance” leads to issuance of a new or revised formal action.
FDIC rule seeks to thwart misrepresentations about deposit insurance
On May 17, the FDIC approved a final rule implementing its authority to prohibit any person or organization from making misrepresentations about FDIC deposit insurance or misusing the FDIC’s name or logo. According to the FDIC, the final rule responds to the “increasing number of instances where individuals or entities have misused the FDIC’s name or logo, or have made false or misleading representations about deposit insurance.” To promote transparency on the FDIC’s processes for investigating and enforcing potential breaches of prohibitions under Section 18(a)(4) of the Federal Deposit Insurance Act, the final rule clarifies the agency’s procedures for identifying, investigating, and where necessary, taking formal and informal action to address potential violations, and establishes a primary point-of-contact for receiving complaints and inquiries about potential misrepresentations regarding deposit insurance. The final rule takes effect 30 days after publication in the Federal Register.
In response, the CFPB released Consumer Financial Protection Circular 2022-02 to provide that covered firms are likely in violation of the CFPA’s prohibition on deceptive acts or practices “if they misuse the name or logo of the FDIC or engage in false advertising or make material misrepresentations to the public about deposit insurance, regardless of whether such conduct (including the misrepresentation of insured status) is engaged in knowingly.” As previously covered by InfoBytes, the newly introduced circulars serve as policy statements for other agencies with consumer financial protection responsibilities. Specifically, the Bureau warned that (i) “[m]isrepresenting the FDIC logo or name will typically be a material misrepresentation”; (ii) claiming “financial products or services are ‘regulated’ by the FDIC or ‘insured’ or ‘eligible for’ FDIC insurance are likely deceptive if those claims expressly or implicitly indicate that the product or service is FDIC-insured when that is not in fact the case” (e.g. emerging financial products and services including digital assets and crypto-assets); and (iii) misusing the FDIC’s name or logo creates harm for firms that engage in honest advertising and marketing. CFPB Director Rohit Chopra, as an FDIC board member, announced the Bureau’s support for the final rule. “Misrepresentation claims about deposit insurance are particularly relevant today,” Chopra noted. “FDIC staff has noted an uptick in potential violations in recent years. We are especially concerned about potential misconduct involving novel technologies, including so-called stablecoins and other crypto-assets. While new technologies may yield significant benefits for households, workers, and small businesses, they nonetheless pose risks to consumers who may be baited by misrepresentations or false advertisements about deposit insurance.”
Acting Comptroller of the Currency Michael J. Hsu specifically called out the timeliness of the final rule in light of changes in the marketplace, technological developments, and rapidly evolving consumer behaviors. The final rule “is especially important in light of the growth of nonbank crypto firms and fintechs and their relationships with banks,” Hsu stated. “The potential for consumer confusion about the status of cash held at these firms is high and this final rule will help provide clarity.”
FDIC releases March enforcement actions
On April 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in March. During the month, the FDIC issued 13 orders consisting of “six orders terminating consent order, one order to pay civil money penalty, five Section 19 orders, and one order of termination of insurance.” Among the orders is a civil money penalty imposed against a Kentucky-based bank related to alleged violations of the Federal Deposit Insurance Act for allegedly “deceptively advertising interest rates and fees for residential mortgage loans as the lowest on the market, with a promise of a ‘best rate guarantee,’ comparative shopping for such rates, and lower rates due to the bank’s fee structure.” The order requires the payment of a $425,000 civil money penalty.
FDIC issues RFI on bank mergers
On March 25, the FDIC issued a request for information (RFI) seeking public comments on bank mergers, including mergers between an insured depository institution and a noninsured institution, to aid the agency’s understanding of and any potential policymaking in this area. Specifically, the RFI seeks input related to the effectiveness of the existing framework in meeting the requirements of Section 18(c) of the Federal Deposit Insurance Act (known as the Bank Merger Act). According to the FDIC, “[s]ignificant changes over the past several decades in the banking industry and financial system warrant a review of the regulatory framework.”
Among the questions posed by the RFI are topics concerning (i) whether additional requirements or criteria (including quantitative measures) should be added to the existing regulatory framework to address financial stability risks that may arise from bank mergers (e.g. “[s]hould the FDIC presume that any merger transaction that results in a financial institution that exceeds a predetermined asset size threshold, for example $100 billion in total consolidated assets, poses a systemic risk concern?”); (ii) the extent to which prudential factors should be considered when acting on a merger application, and whether bright line minimum standards for these factors should be established; (iii) whether agencies should rethink the way they consider whether a merger might affect the convenience and needs factor of a community, and to “what extent should the CFPB be consulted by the FDIC when considering the convenience and needs factor and should that consultation be formalized”; (iv) whether the existing merger review framework creates “an implicit presumption of approval” or requires “an appropriate burden of proof” on bank applicants to prove they have met the criteria of the Bank Merger Act; (v) to what extent has the Bank Merger Act exception “proven beneficial or detrimental to the bank resolution process and to financial stability”; and (vi) to what extent would responses to the questions differ if the merger transaction involves a small insured depository institution.
Comments on the RFI are due 60 days after publication in the Federal Register.
CSBS reminds Senate that FDIC Board must include a member with state bank supervisory experience
On January 31, the Conference of State Bank Supervisors (CSBS) sent a letter to Senators Charles Schumer (D-NY) and Mitch McConnell (R-KY), asking Congress to “uphold its commitment to the dual banking system” and confirm a member of the FDIC Board with state bank supervisory experience as required by Congress’ 1996 amendment to the Federal Deposit Insurance Act (FDI Act). CSBS explained that “the spirit of the law” and legislative history “indicate that this requirement is only met by a person who has worked in state government as a supervisor of state-chartered banks.” This requirement, CSBS pointed out, has not been met since former Massachusetts State Bank Commissioner Thomas Curry finished his term in 2012, thus leading to a nine-year period in which no one on the Board has had the legally mandated state regulatory experience. CSBS published a blog post the same day outlining three points for consideration: (i) the FDI Act’s legislative history shows Congress’s clear intent to include on the Board an individual (not including the Comptroller of the Currency or the CFPB director) with state government experience supervising state banks; (ii) an individual with “[e]xperience working for the FDIC or the Federal Reserve System does not meet the FDI Act’s requirement of an independent director with ‘state bank supervisory experience’”; and (iii) additional FDI Act provisions concerning state bank supervision reinforce that “‘state bank supervisory experience’ clearly refers only to service as a state government official with bank supervisory responsibilities.’” The letter added that “[a]s regulators of both banks and fintechs, state regulators have unique insight into emerging technologies and their impact on the financial services ecosystem. The FDIC Board would benefit tremendously from state regulators’ practical, real-life experience with innovation.”