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GAO urges Fed to address outstanding recommendations
On June 3, GAO released a letter addressed to Fed Chair, Jerome Powell, to provide an update on the Fed's implementation of past GAO recommendations. As of May, GAO noted 13 open recommendations under the Fed. The Fed recently implemented two of the GAO’s four 2023 priority recommendations: one on stress test capital ratio estimates, and the other pertaining to risk tolerance articulation. GAO did not add any new priority recommendations for the Fed, but instead emphasized the importance of addressing the remaining two items: one related to blockchain technology and the other on financial technology.
Regarding the blockchain recommendation, GAO urged the Fed to work with other regulators to create a formal mechanism for identifying risks associated with this technology. GAO observed that the Fed had stated in April that it would participate in the Digital Asset Working Group to work with other agencies to address blockchain risks, but GAO recommended that the working group must include a “planning process for identifying and addressing” blockchain risks. Regarding the fintech partnerships recommendation, and in coordination with other federal financial regulators, GAO recommended clear communication on the appropriate use of alternative data in the underwriting process since fintech lenders “may analyze large amounts of alternative data on borrower characteristics … when determining borrowers’ creditworthiness.”
GAO’s letter also emphasized the importance of Congressional oversight to implement recommendations, suggesting strategies such as legislative incorporation and oversight hearings.
FHFA enhances Fannie and Freddie flex modification policies
Recently, the FHFA announced that Fannie Mae and Freddie Mac will update their Flex Modification policies to help struggling borrowers reduce their mortgage payments. Flex Modification would be for eligible borrowers experiencing a permanent hardship and cannot make regular monthly mortgage payments. According to the FHFA, the enhanced policies will aim to decrease a borrower’s monthly payments by up to 20 percent through three incremental steps: (i) interest rate reduction; (ii) extending the loan term; and (iii) principal forbearance for those with loan-to-value ratios above 50 percent. These updates were built on the Servicing Alignment Initiative started in 2011 and have been aimed at better resolving mortgage payment delinquencies. The new Flex Modification policies will take effect on December 1.
SEC provides companies the opportunity to review their diversity policies
On June 5, the SEC began its biennial collection of Diversity Self-Assessment Submissions from regulated entities. Regulated entities included, among others, brokers and dealers, investment advisers, and transfer agents. Notably, publicly-traded companies were not included. The Commission will provide organizations the opportunity to review their own diversity and inclusion policies for strengths, opportunities, and risks as part of the voluntary self-assessment. The data collection supported an interagency policy statement issued in 2015 which established joint standards for assessing regulated entities diversity policies and practices. The SEC used data from the submissions to assess and report on progress and trends in regulated entity diversity-related activities. Participation will be voluntary and will not be part of any examination process. Regulated entities may use the Diversity Self-Assessment Tool or submit self-assessments in another format.
NYDFS pens guidance for virtual currency companies on customer service
On May 30, NYDFS issued an industry guidance letter for all virtual currency businesses licensed under 23 NYCRR Part 200 and others. The guidance was created in the hopes to foster a more transparent and responsive environment for customers engaging with virtual currency businesses. The guidance emphasized the need for virtual currency businesses to address customer inquiries and complaints in a "timely and fair manner." NYDFS provided specific recommendations for maintaining effective communication channels, including using phone lines and electronic text communication staffed by trained representatives during normal business hours. Additionally, the guidance emphasized the importance of monitoring and responding to customer inquiries outside of regular business hours.
While the guidance saw the value in employing AI tools for customer service, it stressed the importance of informing customers when they are interacting with AI. It also required that customers should always have the option to escalate to a human customer service representative. Rigorous testing and monitoring of AI tools were recommended to ensure the accuracy of information provided to customers.
To assess the effectiveness of their customer service practices, virtual currency businesses were advised to track and analyze key metrics such as the volume of inquiries, response times, and customer feedback. Finally, the guidance mandated that businesses submit quarterly reports to the regulator detailing the number of customer inquiries, complaint topics, and average resolution times. The guidance will go into effect on November 1, and businesses will be expected to have all recommended practices in place by then.
SEC’s Division of Examinations provides guidance on broker-dealer examination process
On June 5, the SEC’s Division of Examinations issued a risk alert to help broker-dealers prepare for an examination by the Division. The alert highlighted: (1) information that may be considered when selecting firms to examine; (2) areas of focus for the examination; and (3) types of information and documents that may form part of an initial exam request. The alert noted various reasons why the Division staff may consider firms for examination, including:
- A firm’s examination history
- Supervisory and disciplinary concerns
- Tips or complaints on the firm
- The length of time since the firm’s last examination
- Customer base of the firm
- Products and services offered by the firm
- Any signals of financial stress the firm may experience
- New reports on the firm
- Filings by the firm with the SEC
- If the firm holds cash or securities
The alert also included a sample request list of information and documents that Division staff would request. Although the list was not necessarily meant to be exhaustive, the sample request list was grouped into the following categories:
- General Information: Organizational Information; Business and Operations: Financial Information; Legal and Disciplinary.
- Supervisory and Compliance Structure: Books and Records, and Compliance and Oversight Processes; Branch Office Oversight; Information Processing, Reporting, and Protection.
- Regulatory Requirements (Select Topics): Sales Practices, Regulation Best Interest, and Form CRS; Anti-Money Laundering; Net Capital and Customer Protection
CFTC reports on success of whistleblower policy by citing recent $4.5 mil. award
On June 3, the CFTC awarded over $4.5 million to an anonymous whistleblower who provided information and industry expertise as part of an enforcement action. The CFTC noted that the award highlighted the pivotal role whistleblowers play in maintaining the integrity of the futures markets. Ian McGinley, the CFTC's Director of Enforcement, commended the whistleblower for their extensive cooperation with the enforcement staff. Additionally, Brian Young, who leads the CFTC's Whistleblower Office, emphasized that the award program is open to individuals from diverse backgrounds.
The CFTC noted this award solidified the CFTC Whistleblower Program's impact since its inception in 2014. With approximately $370 million awarded to date, the program has been instrumental in numerous enforcement actions that have resulted in over $3.2 billion in sanctions. The program was funded entirely by monetary sanctions paid by violators of the Commodity Exchange Act, ensuring no funds are taken from harmed customers.
FSB’s Liang speaks on AI in finance
On June 4, the U.S. Under Secretary for Domestic Finance, Nellie Liang, delivered a speech at the OECD-FSB Roundtable on Artificial Intelligence (AI) in Paris. Liang noted that while AI has been around for many years, the recent advances of generative AI will be evolving and will have the potential to transform the financial sector even more. The latest advancements in AI models can process vast amounts of data, generate content, and automate decision-making, welcoming new opportunities and challenges for financial institutions and regulators. The biggest takeaway was that AI holds transformative potential for the financial sector by enhancing efficiency and innovation, yet it also posed challenges such as model risk and privacy issues, necessitating vigilant evolution of regulatory frameworks to ensure safety and fairness.
On AI uses, Liang highlighted that financial institutions have explored AI applications to reduce costs, increase productivity, and develop new products. For instance, AI can be used to automate back-office functions, enhance customer service through chatbots, and inform trading strategies. AI’s expertise will be its abilities to process large volumes and types of information that would be otherwise impractical or impossible to analyze. Concerning risks, Liang pinpointed model risk as a prime issue, contending that robust data governance and careful design can counteract potential pitfalls. AI may also introduce or amplify interconnections among financial firms, leading to potential financial stability risks. Furthermore, Liang focused on the increased use of AI in financial services and the concerns it raised about data privacy, surveillance, and potential biases in AI-driven decision-making.
Liang noted how addressing these AI risks through existing regulatory frameworks, such as principles of model risk management, third-party risk management, and consumer protection laws would be possible. However, she noted, regulators need to assess whether AI will introduce new risks that require adjustments to the regulatory framework. Additionally, policymakers will be exploring the use of AI for identifying data anomalies, countering illicit finance and fraud, and improving fraud detection through comprehensive databases.
5th Circuit vacates SEC private fund adviser rule
On June 5, the U.S. Court of Appeals for the Fifth Circuit vacated an SEC rule that represented a significant change in how private funds and their fund advisers are regulated. As it stands, the decision will spare private funds and their advisers from what would have been a material increase in regulatory burden. Prior to the 5th Circuit’s ruling, the rule expanded the scope of disclosure, reporting, and other obligations for private funds and their advisers.
You can read more about the court’s decision here as an Orrick Insight.
Connecticut amends provisions of its Emergency Mortgage Assistance Payment program
On May 28, the Governor of Connecticut signed SB 283 (the “Act”) into law, introducing amendments to the Connecticut Housing Finance Authority’s (CHFA) Emergency Mortgage Assistance Payment (EMAP) program. This law will extend benefits to homeowners who are in foreclosure and forbearance. Under the new legislation, homeowners must enter into a repayment agreement directly with the CHFA, which will now receive the monthly payments previously made to the loan originator.
The Act will modify the criteria for financial hardship eligibility, remove utility and heating expenses from the total housing expense calculation, and grant the CHFA authority to factor in equity in determining a homeowner’s ability to repay timely. Additionally, the CHFA will provide greater flexibility regarding the repayment agreement terms, along with several other amendments. The Act’s provisions will go into effect on October 1.
Georgia bans CBDCs for government use
Recently, Georgia enacted HB 1053 (the “Act”) which will prohibit government agencies from engaging with central bank digital currencies (CBDCs). Specifically, the legislation will prevent state government agencies from accepting CBDCs as a form of payment or from participating in any pilot programs involving CBDCs. Georgia representatives banned CBDCs within government operations citing potential “privacy and security concerns” for individuals and businesses, called them an “unacceptable expansion” of federal authority, and were concerned that a CBDC could disrupt the current banking systems and “diminish” community bank and credit unions’ roles in the financial system. The ban will go into effect on July 1.