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Financial Services Law Insights and Observations

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  • SEC announces final rule for filing fee disclosure and payment methods modernization

    Securities

    On October 13, the SEC announced a final rule to adopt amendments to modernize filing fee disclosure and payment methods, which is intended to improve filing fee preparation and payment processing. Operating companies and investment companies (funds) pay filing fees when participating in some transactions, which include registered securities offerings, tender offers, and mergers and acquisitions. According to the SEC, the amendments revise most fee-bearing forms, schedules, and associated rules to require that companies and funds include all required information for filing fee calculation in a structured format. The amendments also create new options for ACH and debit and credit card payment of filing fees and remove options for filing fee payment by paper checks and money orders that are infrequently used. According to a statement by SEC Chair Gary Gensler, these amendments, “will make the filing process faster, less expensive, and more efficient for SEC staff and market participants.” The final rule is effective January 31, 2022, except for certain amendments that are effective May 31, 2022.

    Securities SEC Fees ACH Payments Agency Rule-Making & Guidance

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  • Fed to adopt Fedwire message format, asks for comments on expedited adoption

    Agency Rule-Making & Guidance

    On October 4, the Federal Reserve Board announced that it will adopt the International Organization for Standardization’s (ISO) 20022 message format for its Fedwire Funds Service—a real-time gross settlement system owned and operated by the Federal Reserve Banks that enables businesses and financial institutions to quickly and securely transfer funds. This change will enable “enhanced efficiency of both domestic and cross-border payments, and a richer set of payment data that may help banks and other entities comply with sanctions and anti-money laundering requirements,” the Fed stated. Additionally, the Fed requested public comments on a revised plan (targeted for no earlier than November 2023) to implement the ISO 20022 message format on a single day rather than in three separate phases, as originally proposed. According to the Fed, the adoption of ISO 20022 is part of the agency’s initiative to enhance its payment services. Comments must be received 90 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Reserve Board Federal Issues Payments Payment Systems Depository Institution Federal Reserve Banks

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  • 5th Circuit holds global payment services company is not a “bank”

    Courts

    On June 1, the U.S. Court of Appeals for the Fifth Circuit determined that a “global payment services company” does not qualify as a bank under U.S. tax code, 26 U.S.C. § 581. According to the opinion, the company described its activities to the IRS in 2008 as “banking” while referring to its products as “financial services” despite making no meaningful changes to its business from prior years when it described itself as a “nondepository credit intermediation” business and its services as “money/wire transfers.” Because companies who claim bank status receive certain significant tax benefits, the company—which had invested billions of dollars in asset-backed securities, including mortgage-backed securities—deducted losses it incurred during the Great Recession against ordinary income. However, according to the opinion, nonbanks are only permitted “to deduct losses on securities to the extent they offset capital gains, which [the company] did not have during the relevant years.” The IRS disagreed with the company’s deductions, determined it was not a bank, and assessed tens of millions of dollars in tax deficiencies. The company unsuccessfully challenged the IRS in tax court, and, following a first appeal resulting in a remand, the tax court again concluded that the company was not a bank “because it neither accepts deposits nor makes loans.”

    On appeal, the 5th Circuit affirmed the tax court’s decision, stating that it only needed to address the “deposit” requirement and holding that because customers do not deposit money with the company for safekeeping “the most basic feature of a bank is missing.” The appellate court explained that therefore, under the tax code, the company was not entitled to deduct from its taxes “large losses it incurred in writing off mortgage-backed securities during the Great Recession.”

    Courts Appellate Fifth Circuit Money Service / Money Transmitters Payments Securities Non-Depository Institution

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  • Fed amends Reg. D, invites comments on FedNow transfers

    Agency Rule-Making & Guidance

    On June 2, the Federal Reserve Board announced the approval of a final rule amending Regulation D, which eliminates “references to an interest on required reserves” rate and “to an interest on excess reserves” rate and replaces them with a reference to “a single interest on reserve balances” rate. The final rule also simplifies “the formula used to calculate the amount of interest paid on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks.” The final rule is effective July 29.

    Earlier, on June 1, the Fed also issued a proposed rule, which would create a new, comprehensive set of rules for governing funds transfers over the FedNow Service. Specifically, the proposed rule would amend Regulation J by establishing a new subpart C to specify terms and conditions for the processing of funds transfers by Reserve Banks. It would also grant Reserve Banks the authority to issue operating circulars for the FedNow Service, and would include, among other things, a requirement that a beneficiary’s bank agree to “make funds available to the beneficiary immediately after it has accepted the payment order.” The Fed is also proposing changes and clarifications to subpart B, which governs the Fedwire Funds Services, “to reflect the fact that the Reserve Banks will be operating a second funds transfer service in addition to the Fedwire Funds Service.” As previously covered by InfoBytes, the Fed intends to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024. Comments on the proposed rule are due 60 days after publication in the Federal Register.

     

    Agency Rule-Making & Guidance Federal Issues Federal Reserve Payments Payment Systems Regulation D Regulation J Depository Institution

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  • Fed proposes changes to its Policy on Payment System Risk governing intraday credit

    Agency Rule-Making & Guidance

    On May 28, the Federal Reserve Board issued a notice and request for comments on proposed changes to its Policy on Payments System Risk (PSR Policy) to expand access to collateralized intraday credit from Federal Reserve Banks (Reserve Banks) and clarify eligibility standards for accessing uncollateralized intraday credit from the Reserve Banks. Specifically, the Fed is proposing changes to part II of its PSR Policy, which was previously revised and implemented in 2011 to “improve intraday liquidity management and payment flows for the banking system while helping to mitigate the credit exposures of the Reserve Banks from daylight overdrafts.” The proposed changes would also align the Fed’s payments system risk and overnight overdraft policies with the deployment of the FedNow Service (covered by InfoBytes here) and the Fed’s 24x7x365 payment environment. Relatedly, the Fed noted it is also proposing to incorporate its policy on overnight overdrafts into the PSR Policy. Comments on the proposed changes are due 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Reserve Payments Payment Systems

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  • Fed shaping “novel institutions” guidelines

    Agency Rule-Making & Guidance

    On May 5, the Federal Reserve Board issued a notice and request for comments on proposed guidelines for evaluating account and service requests that would allow companies with “novel types of banking charters” to access the Fed’s payments system. Among other things, the notice outlines six proposed principals for Reserve Banks to consider when an institution requests access. These include:

    • Whether the institution is eligible under federal statute to maintain an account at a Federal Reserve Bank and has a “well-founded, clear, transparent, and enforceable legal basis for its operations.”
    • Whether the provision of an account and services to an institution would “present or create undue credit, operational, settlement, cyber or other risks to the Reserve Bank.”
    • Whether the provision of an account and services to an institution would “present or create undue credit, operational, settlement, cyber or other risks to the overall payment system.”
    • Whether the provision of an account and services to an institution would “create undue risk to the stability of the U.S. financial system.”
    • Whether the provision of an account and services to an institution would “create undue risk to the overall economy by facilitating activities such as money laundering, terrorism financing, fraud, cybercrimes, or other illicit activity.”
    • Whether the provision of an account and services to an institution would “adversely affect the Federal Reserve’s ability to implement monetary policy.”

    “With technology driving rapid change in the payments landscape, the proposed Account Access Guidelines would ensure requests for access to the Federal Reserve payments system from novel institutions are evaluated in a consistent and transparent manner that promotes a safe, efficient, inclusive, and innovative payment system, consumer protection, and the safety and soundness of the banking system,” Fed Governor Lael Brainard said in the announcement.

    If the Fed decides to grant an access request, “it may impose (at the time of account opening, granting access to service, or any time thereafter) obligations relating to, or conditions or limitations on, use of the account or services as necessary to limit operational, credit, legal, or other risks posed to the Reserve Banks, the payment system, financial stability or the implementation of monetary policy or to address other considerations,” the notice stated, adding that the “account-holding Reserve Bank may, at its discretion, decide to place additional risk management controls on the account and services, such as real-time monitoring of account balances, as it may deem necessary to mitigate risks.”

    Comments on the proposal are due 60 days following publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Reserve Fintech Payments

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  • OCC: Banks may use independent node verification networks and stablecoins for payment activities

    Agency Rule-Making & Guidance

    On January 4, the OCC published an interpretive letter addressing the legal permissibility of certain payment-related activities involving the use of new technologies, including using independent node verification networks (INVN) and related stablecoins to conduct payment activities and other bank-permissible functions. Specifically, the letter clarifies that a national bank or federal savings association “may validate, store, and record payments transactions by serving as a node on an INVN,” and may also “use INVNs and related stablecoins to carry out other permissible payment activities” provided the bank or federal savings association complies with applicable laws and safe, sound, and fair banking practices. Due to the decentralized nature of INVNs—which not only “allows a comparatively large number of nodes to verify transactions in a trusted manner” but also “limits tampering or adding inaccurate information to the database because information is only added to the network after consensus is reached among the nodes validating the information”—the OCC believes that INVNs may enhance payment activities’ efficiency, effectiveness, and stability within the federal banking system. The letter also outlines potential risks associated with INVN-related activities, such as operational and compliance risks and fraud related to the possibility of money laundering and terrorist financing, and warns banks and federal savings associations to expand their programs to ensure compliance with Bank Secrecy Act reporting and recordkeeping requirements and to address cryptocurrency transaction risks.

    Agency Rule-Making & Guidance OCC Stablecoins Payments Fintech Bank Secrecy Act Anti-Money Laundering

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  • Fed announces new details of the FedNow Service

    Federal Issues

    On August 6, the Federal Reserve Board (Board) announced details of its new payment clearing system, the FedNow Service, which the Board plans to implement through a phased approach with a target launch date sometime in 2023 or 2024. As previously covered by InfoBytes, in August 2019, the Board issued a request for information on a “round-the-clock real-time payment and settlement service,” seeking feedback on how the service might be designed in order to support payment system stakeholders and the general functioning of the U.S. payment system. The Board notes that the newly released details are based on the input received from stakeholders. The Federal Register notice discusses the phased released approach, noting that the “approach will ensure the core features and functionality are delivered as quickly as possible,” even if “certain desirable features” are not available in the initial release. Highlights of the core features of the “24x7x365” FedNow Service include, among other things, (i) a payment flow where the receiver’s bank has an opportunity to confirm that it holds a valid account for the receiver and intends to accept the payment message, before interbank settlement occurs; (ii) the use of the “widely accepted ISO 20022 standard and adopt other industry best practices” for payment message format; (iii) a transaction limit that will be “consistent with market practices and needs at the time” of the launch of service; and (iv) a liquidity-management tool that will allow participants to transfer funds to each other to support the liquidity needs of instant payments. After the initial launch, the Board intends to offer additional features related to fraud prevention, error resolution and case management. 

    Federal Issues Federal Reserve Payments Payment Systems Federal Register

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  • Fed holds line on 2021 payment services

    Federal Issues

    On July 21, the Federal Reserve Board announced that due to the uncertainties created by the Covid-19 pandemic, it will retain the current schedule of prices for most of its payment services to depository institutions in 2021. The Board notes that the pricing information is normally conveyed later in the year and that the Federal Register notice containing the final fee schedules will be released later in 2020. However, in order to “support the business planning of users and providers of payment services,” it wanted to provide early notice of “its intent to keep most 2021 prices flat.”

    Federal Issues Federal Reserve Covid-19 Payments

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  • Fed announces tools to help payments industry classify fraud

    Federal Issues

    On June 18, the Federal Reserve Board (Fed) released a set of tools and materials to provide a consistent way for organizations to classify and better understand fraudulent activity occurring across the payments industry. The FraudClassifier model was developed by the Fraud Definitions Work Group (comprised of Fed and payment industry fraud experts), and will allow organizations to classify fraud independently of payment type, payment channel, or other payment characteristics by presenting a series of questions, beginning with who initiated the payment to differentiate payments initiated by authorized or unauthorized parties. This will “help ensure greater internal consistency in fraud classification across an organization. . .and allow for improved information and fraud tracking.” Each of the classifications is supported by definitions that allow the FraudClassifier model to be consistently applied across the industry.

    Federal Issues Federal Reserve Fraud Payments

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