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On June 7, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, Senator Sherrod Brown sent a letter to Treasury Secretary Janet Yellen requesting that the Financial Stability Oversight Council conduct a review on the effect of the collection and sale of consumer data by financial institutions to determine whether such activities pose a systemic threat to U.S. financial stability and security. The letter raised concerns that such data could be used for nefarious purposes including "glean[ing] consumers’ tolerance for price hikes, or using certain people’s spending patterns to target them for blackmail or ransomware.”
On March 9, President Biden issued an Executive Order (E.O.) on digital assets outlining the first “whole-of-government” strategy to coordinate a comprehensive approach for ensuring responsible innovation in digital assets policy. (See also White House fact sheet here.) The White House highlighted that “non-state issued digital assets reached a combined market capitalization of $3 trillion” last November (up from $14 billion five years ago) and noted that many countries are currently exploring, or in certain cases introducing, central bank digital currencies (CBDC). The Executive Order on Ensuring Responsible Development of Digital Assets stressed that “we must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections,” and mitigate “illicit finance and national security risks posed by misuse of digital assets,” including money laundering, cybercrime and ransomware, terrorism and proliferation financing, and sanctions evasion. The E.O. cautioned that future digital assets systems must also promote high standards for transparency, privacy, and security.
The E.O. outlined several principal policy objectives, including that:
- Federal agencies are directed to coordinate policy recommendations to address the growth in the digital asset sector.
- Federal agencies are directed to explore the need for a potential U.S. CBDC. Treasury, along with heads of other relevant agencies, are ordered to submit “a report on the future of money and payment systems, including the conditions that drive broad adoption of digital assets; the extent to which technological innovation may influence these outcomes; and the implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security.” The Federal Reserve Board is also encouraged to continue researching, developing, and assessing efforts for a CBDC, including developing a broad government action plan for a potential launch. The E.O. also directed an assessment of whether legislative changes would be necessary in order to issue a CBDC.
- The Secretary of the Treasury will work with relevant agencies to produce a report on the future of money and payment systems, which will include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence these areas. The approach to digital asset innovation must also address the risk of disparate impact, the E.O. stressed, adding that any approach should ensure equitable access to safe and affordable financial services.
- The Attorney General, FTC, and CFPB are “encouraged to consider what, if any, effects the growth of digital assets could have on competition policy.” The agencies are also “encouraged to consider the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed.” Additional federal agencies are also encouraged to consider the need for investor and market protections.
- The Financial Stability Oversight Council and Treasury are directed to identify and mitigate systemic financial risks posed by digital assets and develop policy recommendations to fill any regulatory gaps.
- Federal agencies are directed to work with allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks posed by the illicit use of digital assets. Agencies should also explore “the extent to which technological innovation may impact such activities,” and explore “opportunities to mitigate these risks through regulation, supervision, public‑private engagement, oversight, and law enforcement.”
- Federal agencies are directed to establish a framework for interagency international engagement with foreign counterparts to adopt global principles and standards for how digital assets are used and transacted, and to promote digital asset and CBDC technology development.
CFPB Director Rohit Chopra and Treasury Secretary Janet Yellen issued statements following Biden’s announcement. “Today’s Executive Order recognizes that the dramatic growth in digital asset markets has created profound implications for financial stability, consumer protection, national security, and energy demand,” Chopra said. “The [CFPB] is committed to working to promote competition and innovation, while also reducing the risks that digital assets could pose to our safety and security. We must make sure Americans in all financial markets are protected against errors, theft, or fraud.” Yellen stated that in addition to partnering with interagency colleagues to produce a report on the future of money and payment systems, Treasury will also work with international partners to promote robust cross-border standards and a level playing field. “As we take on this important work, we’ll be guided by consumer and investor protection groups, market participants, and other leading experts. Treasury will work to promote a fairer, more inclusive, and more efficient financial system, while building on our ongoing work to counter illicit finance, and prevent risks to financial stability and national security,” she said.
Treasury also recently announced that the Financial Literacy and Education Commission (led by Yellen and Chopra and comprised of the heads of 21 federal agencies and entities, including the OCC, Fed, FDIC, SEC, FTC, and HUD, among others) is forming a new subgroup on digital asset financial education to analyze the impact of digital assets on consumer and investor protections. “History has shown that, without adequate safeguards, forms of private money have the potential to pose risks to consumers and the financial system,” U.S. Under Secretary of the Treasury for Domestic Finance Nellie Liang said.
On February 4, the Financial Stability Oversight Council (FSOC) released a statement regarding nonbank financial intermediation. According to the statement, FSOC received updates on progress over the past year regarding three types of nonbank financial institutions (NBFIs), which include hedge funds, open-end funds, and money market funds (MMF). The statement noted that FSOC reestablished its Hedge Fund Working Group in 2021, with the primary objective of providing updates to FSOC’s “assessment of potential risks to U.S. financial stability from hedge funds, their activities, and their interconnections with other market participants.” FSOC “supports the Hedge Fund Working Group’s recommendation that the Office of Financial Research (OFR) consider ways to obtain better data on the uncleared bilateral repurchase agreement market, an important source of leverage for hedge funds.” In 2021, FSOC also established an interagency staff-level Open-end Fund Working Group, which assessed potential risks to U.S. financial stability arising from open-end funds. FSOC noted that it “supports the Open-end Fund Working Group’s continued analysis of the potential risks to financial stability that may arise from liquidity transformation at open-end funds.” In respect to MMF, FSOC noted that it supports the SEC’s efforts to reform MMFs and strengthen short-term funding markets.
On November 1, the U.S. Treasury Department announced that the President’s Working Group on Financial Markets (PWG), with the FDIC and the OCC (collectively, “agencies”), released a report on stablecoins, which are a kind of digital asset intended to maintain a stable value relative to the U.S. dollar. The report noted that stablecoins may be more widely used in the future as a means of payment, which Secretary of the Treasury Janet L. Yellen said could increase “risks to users and the broader system.” Additionally, Secretary Yellen considers current stablecoin oversight to be “inconsistent and fragmented.” Among other things, the report discussed gaps in regulatory authority to reduce these risks. The report recommended that Congress promptly enact legislation to address the risks of payment stablecoins and ensure that payment stablecoins and payment stablecoin arrangements are subject to consistent and comprehensive federal oversight and to “increase transparency into key aspects of stablecoin arrangements and to ensure that stablecoins function in both normal times and in stressed market conditions.” According to the announcement, “[s]uch legislation would complement existing authorities with respect to market integrity, investor protection, and illicit finance, and would address key concerns,” including: (i) risks to stablecoin users and stablecoin runs; (ii) payment system risk; and (iii) systemic risk and concentration of economic power.
While Congress examines legislation on stablecoin, the report recommended that the Financial Stability Oversight Council consider steps for addressing risks, such as “the designation of certain activities conducted within stablecoin arrangements as, or as likely to become, systemically important payment, clearing, and settlement (PCS) activities,” which would be subject to an examination and enforcement framework. The report also recommended that stablecoin issuers “comply with activities restrictions that limit affiliation with commercial entities,” to maintain the separation of banking and commerce. Additionally, the report discussed that, in addition to existing AML/CFT regulations, stablecoin arrangements and activities may implicate the jurisdiction of the SEC and/or CFTC. Therefore, to prevent misuse of stablecoins and other digital assets, the announcement noted that Treasury “will continue leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement international AML/CFT standards and pursue more resources to support supervision of domestic AML/CFT regulations.”
The same day, Treasury released a fact sheet on the PWG report, which clarified, among other things, the purpose of the report, risks posed by stablecoins, and the agencies’ recommendations. In a statement released by OCC acting Comptroller of the Currency Michael J. Hsu, he emphasized his support for the recommendations highlighted in the report pointing out that, “[s]tablecoins need federal prudential supervision to grow and evolve safely.” In a statement released by CFPB Director Rohit Chopra, he noted that though the CFPB was not a member of the PWG, the Bureau “will be taking several steps related to this market,” such as the CFPB’s orders to six large U.S. technology companies seeking information and data on their payment system business practices (covered by InfoBytes here), among other things.
On October 21, the Financial Stability Oversight Council (FSOC) released a new report in response to President Biden’s May executive order, which directed financial regulators to take steps to mitigate climate-related risk related to the financial system. The Report on Climate-Related Financial Risk (see also FSOC’s fact sheet) identified more than 30 specific recommendations for member agencies, including that members should: (i) expand capacity and efforts “to define, identify, measure, monitor, assess, and report on climate-related financial risks and their effects on financial stability,” including through “investments in staffing, training, expertise, data, analytic and modeling methodologies, and monitoring”; (ii) promptly conduct an internal inventory of currently available data and develop plans for acquiring necessary additional data to fill climate-related data and methodological gaps; (iii) review existing public disclosure requirements and consider updating public reporting requirements in a way that would build on the work of the Task Force on Climate-Related Financial Disclosures; and (iv) continue to assess and mitigate climate-related risks to financial stability, including through scenario analysis, and evaluate whether revised or new regulations or guidance is necessary to clarify expectations for regulated or supervised institutions. The report also called for enhanced coordination across member agencies, and said a Climate-related Financial Risk Committee will be formed to “identify priority areas for assessing and mitigating climate-related risks to the financial system and serve as a coordinating body to share information, facilitate the development of common approaches and standards, and foster communication across FSOC members.” A Climate-related Financial Risk Advisory Committee will also be formed to help gather information and analysis from stakeholders on climate-related financial risks. Treasury Secretary Janet Yellen warned that FSOC has a responsibility under the Dodd-Frank Act “to respond to emerging threats to the stability of the United States financial system” and to “ensure the resilience of the financial system to the future impacts of climate change.”
On May 20, President Biden ordered financial regulators to take steps to mitigate climate-related risk related to the financial system. The executive order, among other things, directs the Secretary of the Treasury to work with Financial Stability Oversight Council (FSOC) members to consider “assessing, in a detailed and comprehensive manner, the climate-related financial risk . . . to the financial stability of the federal government and the stability of the U.S. financial system,” and to facilitate climate-related risk information sharing between FSOC member agencies and other federal departments and agencies. Under the executive order, Treasury is also required to issue a report to the president within 180 days on current efforts taken by FSOC members to incorporate climate-related financial risk into their policies and programs. The executive order directs the report to include recommendations on (i) “actions to enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk”; (ii) current approaches for incorporating climate-related financial risk considerations into regulatory and supervisory activities, as well as a discussion of any impediments faced when adopting these approaches; (iii) processes for identifying climate-related financial risks; and (iv) how “identified climate-related financial risks can be mitigated, including through new or revised regulatory standards as appropriate.” The executive order also states, among other things, that federal financial management and reporting should be modernized to incorporate climate-related financial risk, especially risk related to federal lending programs.
On December 3, the Financial Stability Oversight Council (FSOC) released its 2020 annual report. The report reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. The report also highlights the impact of Covid-19 on the economy and the financial system. The report notes that although “policy actions to minimize the effects of the pandemic have been effective at improving market conditions, risks to U.S. financial stability remain elevated compared to last year” and that “the global outlook for economic recovery is uncertain, depending on the severity and the duration of the ongoing pandemic.” Highlights include:
- Nonbank mortgage origination and servicing. FSOC notes that disruptions in mortgage payments due to the pandemic have focused attention on the nonbank sector. In particular, FSOC states that due to a surge in refinancing due to low rates, nonbank servicers have an additional source of liquidity to help sustain operations. However, FSOC cautions that “an increase in forbearance and default rates . . . has the potential to impose significant strains on nonbank servicers.” FSOC recommends federal and state regulators coordinate and share data and information, identify and address potential risks, and strengthen oversight of nonbank companies originating and servicing residential mortgages.
- Alternative Reference Rates. FSOC recommends that the Alternative Reference Rates Committee continue to work to facilitate an orderly transition to alternative reference rates following the anticipated cessation of LIBOR at the end of 2021, and encourages federal and state regulators to “determine whether further guidance or regulatory relief is required to encourage market participants to address legacy LIBOR portfolios.”
- Cybersecurity. FSOC “recommends that federal and state agencies continue to monitor cybersecurity risks and conduct cybersecurity examinations of financial institutions and financial infrastructures to ensure, among other things, robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic.” FSOC also supports “efforts to increase the efficiency and effectiveness of cybersecurity examinations across the regulatory authorities.”
- Large bank holding companies. FSOC recommends that financial regulators “continue to monitor and assess the impact of rules on financial institutions and financial markets—including, for example, on market liquidity and capital—and ensure that [bank holding companies] are appropriately monitored based on their size, risk, concentration of activities, and offerings of new products and services.”
Additional topics also addressed include short-term wholesale funding markets, nonfinancial business borrowing, and commercial real estate asset valuations.
On March 10, CFPB Director Kathy Kraninger testified at a Senate Banking Committee hearing regarding the Bureau’s Semi-Annual Report to Congress. The hearing examined the report (covered by InfoBytes here), which outlines the Bureau’s work from April 1, 2019, through September 30, 2019.
In her opening remarks, Kraninger pointed to the newly announced measures that the Bureau has initiated to carry out the CFPB’s mission to prevent consumer harm, including the advisory opinion program, the updated Responsible Business Conduct bulletin, and proposed legislation to begin a whistleblower award program. (Covered by InfoBytes here.) In response to questions about the constitutionality of the CFPB’s structure, Kraninger stated that she was “incredibly encouraged” when the Supreme Court granted certiorari in Seila Law as it should provide “certainty and clarity.” Kraninger also addressed the Bureau’s COVID-19 preparedness by saying that the financial regulators are in “routine contact with the institutions we regulate” and that they maintain a steady flow of information with the Treasury Department, as well as with OPM, CDC, and FEMA to ensure coordinated operations. A number of Senators asked about the effects of COVID-19 on the economy, including with respect to new scams designed to take advantage of panicked consumers, consumers losing pay and benefits due to employer shut downs, and whether financial institutions are making accommodations for consumers during this time. Kraninger responded that financial institutions will have “supervisory flexibility” to help consumers and ensured that the CFPB is taking steps such as encouraging the public to attend the Bureau’s events via webcast. She also confirmed that the Financial Stability Oversight Council, of which she is a member, will meet this month. Other covered topics included small dollar loans and payday lending, supervision and enforcement, and the timeline for rulemaking on amendments to the qualified mortgage and ability to repay requirements. (Covered by InfoBytes here.)
On December 4, the Financial Stability Oversight Council (FSOC) issued final interpretive guidance to revise and update 2012 guidance concerning nonbank financial company designations. According to Treasury Secretary Steven T. Mnuchin, the guidance “enhances [FSOC’s] ability to identify, assess, and respond to potential risks to U.S. financial stability. . . by promoting careful analysis and creating a more streamlined process.” Among other things, the guidance (i) implements an activities-based approach for identifying, assessing, and addressing potential risks and threats to financial stability in the U.S., allowing FSOC to work with federal and state financial regulators to implement appropriate actions when a potential risk is identified; (ii) enhances the analytic framework for potential nonbank financial company designations, which includes a cost-benefit analysis and a review of the likelihood of a company’s material financial distress determined by its vulnerability to a range of factors; and (iii) enhances the efficiency and effectiveness of the nonbank financial company designation process by condensing the process into two stages and increasing “engagement with and transparency to” companies under review, as well as their regulators, through the creation of pre- and post-designation off ramps.
FSOC also released its 2019 annual report to Congress, which reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. Key highlights include:
- Cybersecurity. FSOC states that “[g]reater reliance on technology, particularly across a broader array of interconnected platforms, increases the risk that a cybersecurity event will have severe consequences for financial institutions.” Among other things, FSOC recommends continued robust, comprehensive cybersecurity monitoring, and supports the development of public and private partnerships to “increase coordination of cybersecurity examinations across regulatory authorities.”
- Nonbank Mortgage Origination and Servicing. The report adds the increasing share of mortgages held by nonbank mortgage companies to its list of concerns. FSOC notes that of the 25 largest originators and servicers, nonbanks originate roughly 51 percent of mortgages and service approximately 47 percent—a notable increase from 2009 where nonbanks only originated 10 percent of mortgages and serviced just 6 percent. FSOC states that risks in nonbank origination and servicing arise because most nonbanks have limited liquidity as compared to banks and rely more on short-term funding, among other things. FSOC recommends that federal and state regulators continue to coordinate efforts to collect data, identify risks, and strengthen oversight of nonbanks in this space.
- Financial Innovation. The report discusses the benefits of new financial products and practices, but cautions that these may also create new risks and vulnerabilities. FSOC recommends that these products and services—particularly digital assets and distributed ledger technology—should be continually monitored and analyzed to understand their effects on consumers, regulated entities, and financial markets.
On August 22, two members of the U.S. House of Representatives, Katie Porter (D-Calif.) and Nydia Velázquez (D-N.Y.), sent a letter to the U.S. Department of Treasury requesting that the Financial Stability Oversight Council (FSOC) consider designating the three leading providers of cloud-based storage systems for the financial industry as systemically important financial market utilities. The letter is in response to the recent data breach announcement by a national bank (covered by InfoBytes here), where an alleged former employee of the bank’s cloud-based storage system gained unauthorized access to the personal information of credit card customers and people who had applied for credit card products. According to the Congresswomen, 57 percent of the cloud services market is “cornered by” three main providers, and “a lack of substitutability for the services provided by these very few firms creates systemic risk.” The letter argues that cloud services are not currently subject to an enforced regulatory regime and, “[w]ithout a dedicated regulatory regime proportional and tailored to their very unique structure and risks, cloud comparing companies will continue to evade supervision.”
- Kathryn L. Ryan to host the affiliate members meeting at AARMR’s 2022 Annual Regulatory Conference & Training
- Kathryn L. Ryan and Jedd R. Bellman to discuss “Risk and compliance management: Are you covered?” at a Mortgage Bankers Association webinar
- Melissa Klimkiewicz and Daniel A. Bellovin to discuss “Things to know about flood insurance” at a NAFCU webinar
- Hank Asbill to discuss “Ethical issues at sentencing” at the 31st Annual National Seminar on Federal Sentencing
- Max Bonici will moderate a panel on “Enforcement risk and other regulatory and compliance issues related to crypto and digital assets” at the American Bar Association’s 2022 Annual Meeting
- John R. Coleman to provide a “CFPB Update” at MBA’s 2022 Regulatory Compliance Conference
- Amanda R. Lawrence to discuss “The shifting data privacy and data protection landscape” at MBA’s 2022 Regulatory Compliance Conference
- Benjamin W. Hutten to discuss “Fundamentals of financial crime compliance” at the Practicing Law Institute
- Benjamin W. Hutten to discuss “Ongoing CDD: Operational considerations” at NAFCU’s Regulatory Compliance & BSA Seminar