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Financial Services Law Insights and Observations

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  • Prudential regulators exploring how institutions use AI

    Agency Rule-Making & Guidance

    On March 29, the FDIC, Fed, OCC, CFPB, and NCUA issued a request for information (RFI) seeking input on financial institutions’ use of artificial intelligence (AI), which may include AI-based tools and models used for (i) fraud prevention to identify unusual transactions for Bank Secrecy Act/anti-money laundering investigations; (ii) personalization of customer services; (iii) credit underwriting; (iv) risk management; (v) textual analysis; and (vi) cybersecurity. The RFI also solicits information on challenges financial institutions face in developing, adopting, and managing AI, as well as on appropriate governance, risk management, and controls over AI when providing services to customers. Additionally, the agencies seek input on whether it would be helpful to provide additional clarification on using AI in a safe and sound manner and in compliance with applicable laws and regulations. According to FDIC FIL-20-2021, while the agencies support responsible innovation by financial institutions and believe that new technologies, including AI, have “the potential to augment decision-making and enhance services available to consumers and businesses, . . . identifying and managing risks are key.” Comments on the RFI are due 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Issues Artificial Intelligence Federal Reserve FDIC OCC CFPB NCUA Fintech

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  • Treasury issues emergency capital investment program FAQs

    Agency Rule-Making & Guidance

    On March 30, the U.S. Treasury Department issued frequently asked questions to provide timely guidance concerning all aspects of the Emergency Capital Investment Program (ECIP). The FAQs cover issues regarding:

    • The types of institutions eligible to participate in the ECIP;
    • Submission of an ECIP application and emergency investment lending plan;
    • How Treasury will decide allocation of the available capital among applicants that meet the thresholds for eligibility, including how well an applicant has responded to the needs of communities impacted by the Covid-19 pandemic;
    • Whether an institution can choose to issue preferred stock or subordinated debt in the ECIP; and
    • Compliance and reporting requirements.

    The ECIP was established by the Consolidated Appropriations Act of 2021 (covered by InfoBytes here), and will provide up to $9 billion in capital directly to Community Development Financial Institutions and minority depository institutions to provide, among other things, “loans, grants, and forbearance for small and minority businesses and consumers in low income communities” that may be disproportionately impacted by the Covid-19 pandemic. As previously covered in InfoBytes, on March 22, the OCC, Federal Reserve Board, and the FDIC published an interim final rule (IFR) to facilitate the implementation of the ECIP.

    Agency Rule-Making & Guidance ECIP OCC Federal Reserve Board FDIC Covid-19

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  • Fed sets resumption of share repurchases, dividends for July

    Agency Rule-Making & Guidance

    On March 25, the Federal Reserve Board announced that measures previously instituted to ensure that large banks maintain a high level of capital resilience in light of uncertainty introduced by the Covid-19 pandemic would expire for most banks after June 30. As previously covered by InfoBytes, the Fed’s measures prohibited large banks from making share repurchases and capped dividend payments. The Fed most recently advised that “[i]f a bank remains above all of its minimum risk-based capital requirements in this year’s stress test, the additional restrictions will end after June 30 and it will be subject to the [stress capital buffer]’s normal restrictions.” Banks whose capital levels fall below required levels in the stress tests will remain subject to the restrictions through September 30. Further, banks still below the capital required by the stress test at that time will face even stricter distribution limitations.

    Agency Rule-Making & Guidance Federal Reserve Covid-19 Stress Test

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  • FATF updates virtual assets and service provider guidance

    Agency Rule-Making & Guidance

    In March, the Financial Action Task Force (FATF) updated pre-existing guidance on its risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The draft updated guidance revises guidance originally released June 2019, wherein FATF members agreed to regulate and supervise virtual asset financial activities and related service providers (covered by InfoBytes here) and place anti-money laundering and countering the financing of terrorism (AML/CFT) obligations on VAs and VASPs. According to FATF, the revisions “aim to maintain a level playing field for VASPs, based on the financial services they provide in line with existing standards applicable to financial institutions and other AML/CFT-obliged entities, as well as minimizing the opportunity for regulatory arbitrage between sectors and countries.” The revisions provide updated guidance in six main areas intended to:

    • Clarify VA and VASP definitions to make it clear that these definitions are expansive and that “there should not be a case where a relevant financial asset is not covered by the FATF Standards (either as a VA or as a traditional financial asset)”;
    • Provide guidance on how FATF Standards apply to so-called stablecoins;
    • Provide further guidance on risks and potential risk mitigants for peer-to-peer transactions;
    • Provide updated guidance on VASP licensing and registration requirements;
    • Provide additional guidance for public and private sectors on the implementation of the “travel rule”; and
    • Include principles of information sharing and cooperation among VASP supervisors.

    FATF intends to consult private sector stakeholders before finalizing the revisions, and is separately considering implementing revised FATF Standards on VAs and VASPs—as well as whether further updates are necessary—through a second 12-month review.

    Agency Rule-Making & Guidance FATF Virtual Currency Of Interest to Non-US Persons Anti-Money Laundering Combating the Financing of Terrorism Financial Crimes

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  • FTC restructures rulemaking as justices debate its limits on consumer redress

    Federal Issues

    On March 25, FTC acting Chairwoman Rebecca Kelly Slaughter announced a new rulemaking group within the FTC’s Office of the General Counsel created to streamline and strengthen the Commission’s rulemaking process and coordinate rulemaking among various units. The FTC’s current rulemaking process is decentralized, according to Slaughter, with individual bureaus and divisions responsible for particular rules. “The new structure will aid the planning, development, and execution of rulemaking,” she said, noting that with the “new group in place, the FTC is poised to strengthen existing rules and to undertake new rulemakings to prohibit unfair or deceptive practices and unfair methods of competition.” Slaughter also emphasized the critical importance of effective rulemaking “given the risk that the Supreme Court substantially curtails the FTC’s ability to seek consumer redress under Section 13(b)” through enforcement actions.

    As previously covered by InfoBytes, last year the Court granted review in two cases that had reached different conclusions regarding the availability of restitution under Section 13(b) of the FTC Act: (i) the 9th Circuit’s decision in FTC v. AMG Capital Management (covered by InfoBytes here), which upheld a $1.3 billion judgment against the petitioners for allegedly operating a deceptive payday lending scheme and concluded that a district court may grant any ancillary relief under the FTC Act, including restitution; and (ii) the 7th Circuit’s ruling in FTC v. Credit Bureau Center (covered by InfoBytes here), which held that Section 13(b) does not give the FTC power to order restitution. The Court consolidated the two cases and will decide whether the FTC can demand equitable monetary relief in civil enforcement actions under Section 13(b) of the FTC Act.

    The same day, Acting Chairwoman Slaughter released the FTC’s 2020 Annual Highlights. Among other things, it discusses the Commission’s response to the Covid-19 pandemic and efforts to educate consumers about Covid-19-related scams, as well as businesses’ responsibilities concerning honest advertising.

    Federal Issues FTC Agency Rule-Making & Guidance U.S. Supreme Court Enforcement Consumer Redress

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  • FinCEN announces upcoming rulemaking on beneficial ownership reporting requirements

    Financial Crimes

    On March 22, FinCEN Director Kenneth A. Blanco spoke at the Florida International Bankers Association AML Compliance Conference,  and discussed the upcoming advance notice of proposed rulemaking (ANPRM) concerning new beneficial ownership reporting requirements of the Anti-Money Laundering Act of 2021 (AML Act). As previously covered by InfoBytes, the AML Act was enacted in January as part of the National Defense Authorization Act for Fiscal Year 2021, and made significant changes to BSA and AML laws. Included within the AML Act is the Corporate Transparency Act (CTA), which defines a beneficial owner as an entity or individual “who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise. . .exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity,” with limited exceptions. Blanco did not provide a timeline for when the ANPRM would be issued, but emphasized that implementing the AML Act is FinCEN’s “number one priority.” Blanco also noted, among other things, that FinCEN is taking steps to develop a secure database to house collected beneficial ownership information, and is currently in the process of developing the use and confidentiality protocols that will control access to the database.

     

    Financial Crimes Agency Rule-Making & Guidance FinCEN Of Interest to Non-US Persons Anti-Money Laundering Act of 2020 Bank Secrecy Act Anti-Money Laundering Beneficial Ownership

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  • Agencies issue rulemaking to facilitate Emergency Capital Investment Program for CDFIs and MDIs

    Agency Rule-Making & Guidance

    On March 22, the OCC, Federal Reserve Board, and the FDIC published an interim final rule (IFR) to facilitate the implementation of the Emergency Capital Investment Program (ECIP). As previously covered by InfoBytes, the ECIP was established by the Consolidated Appropriations Act of 2021, and will provide up to $9 billion in capital directly to Community Development Financial Institutions and minority depository institutions to provide, among other things, “loans, grants, and forbearance for small and minority businesses and consumers in low income communities” that may be disproportionately impacted by the Covid-19 pandemic. The IFR outlines capital designations and investment eligibility criteria, and specifically notes that the agencies have revised “the capital rule to clarify that senior preferred stock will qualify as additional tier 1 capital and subordinated debt will qualify as tier 2 capital.” The ECIP will expire six months after the date on which the national Covid-19 emergency ends.

    Agency Rule-Making & Guidance Federal Reserve OCC FDIC CDFI Minority Depository Institution Covid-19

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  • Agencies to allow supplementary leverage ratio flexibility to expire

    Agency Rule-Making & Guidance

    On March 19, the OCC, FDIC, and Federal Reserve Board announced that the temporary changes to the supplementary leverage ratio (SLR) for depository institutions will expire as scheduled on March 31. As previously covered by InfoBytes, the federal banking agencies issued an interim final rule last May, which temporarily permitted depository institutions to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the SLR, enabling depository institutions to expand their balance sheets to provide additional credit to households and businesses in light of the Covid-19 pandemic. In connection with announcing its decision to allow the temporary SLR changes to expire, the Fed noted that due to “recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability.” The Fed noted it intends to “shortly seek comments on measures to adjust the SLR” and “will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements.”

    Agency Rule-Making & Guidance Federal Reserve FDIC OCC Covid-19

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  • CFPB rescinds abusiveness policy statement

    Federal Issues

    On March 11, the CFPB announced it has rescinded its January 2020 policy statement, which addressed prohibitions on abusive acts or practices. As previously covered by InfoBytes, the Bureau issued the policy statement to provide a “common-sense framework” for how it planned to apply the “abusiveness” standard in supervision and enforcement matters as authorized under Dodd-Frank. Under the 2020 policy statement, the Bureau stated it would only cite or challenge conduct as abusive if the agency “concludes that the harms to consumers from the conduct outweigh its benefits to consumers.” The Bureau also stated it would generally avoid challenging conduct as abusive if it relies on all, or nearly all, of the same facts alleged to be unfair or deceptive, and that it would decline to seek civil money penalties and disgorgement for certain abusive acts or practices, absent unusual circumstances.

    The Bureau now states that it is rescinding the 2020 policy statement after reaching the conclusion that the principles set forth do not actually provide clarity to regulated entities. Among other things, the Bureau notes that the 2020 policy statement is counterproductive, “afford[s] the Bureau considerable discretion in its application,” and adds uncertainty to market participants. Moreover, the Bureau claims that after reviewing and applying the 2020 policy statement, it has had “the opposite effect on preventing harm.” Going forward, the Bureau states it intends to “exercise the full scope of its supervisory and enforcement authority to identify and remediate abusive acts and practices” as established by Congress.

    Federal Issues CFPB Abusive Agency Rule-Making & Guidance Dodd-Frank UDAAP

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  • FinCEN issues antiquities and art warning

    Federal Issues

    On March 9, the Financial Crimes Enforcement Network (FinCEN) issued an advisory notice alerting financial institutions with existing Bank Secrecy Act (BSA) obligations about illicit activity associated with trade in antiquities and art. As previously covered by InfoBytes, the Anti-Money Laundering Act of 2020 (AML Act) was enacted in January as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021, and made significant changes to BSA and AML laws, including amending the definition of “financial institution” under the BSA to include persons “engaged in the trade of antiquities.” Among other things, FinCEN’s advisory notice updates financial institutions on AML Act measures related to the regulation of antiquities, noting in particular that the Department of Treasury, in coordination with the FBI, the U.S. Attorney General, and Homeland Security, “will perform a study of the facilitation of money laundering and the financing of terrorism through the trade in works of art.” The notice further warns financial institutions that crimes related to the trade of antiquities “may involve their institution” and could include the “sale of stolen or counterfeit objects,” as well as money laundering and sanctions violations. The advisory notice also provides suspicious activity report filing instructions related to trade in antiquities and art.

    Federal Issues Agency Rule-Making & Guidance FinCEN Financial Crimes Anti-Money Laundering Bank Secrecy Act Of Interest to Non-US Persons Anti-Money Laundering Act of 2020

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