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Recently, the Financial Stability Board (FSB) issued a survey requesting stakeholder feedback on “how existing national and regional data frameworks interact with and affect the functioning, regulation and supervision of cross-border payment arrangements,” in addition to feedback on issues concerning the cross-border use of these data frameworks by national authorities and the private sector. Data frameworks within the survey’s scope include those concerning data access; data privacy, security, or storage; requirements for data retention; and multilateral or bilateral trade agreements covering the use and sharing of data across borders. Among other things, the survey seeks information on (i) ways data-specific national and regional data frameworks affect the costs and speed of delivering payments, as well as access and transparency; (ii) potential barriers to cross-border data use; (iii) areas of improvement for overcoming barriers in data frameworks; (iv) whether one jurisdiction’s data framework can impact the provision or supervision of cross-border payments services offered in other jurisdictions; and (v) whether there are particular payment corridors (especially related to emerging markets) that face specific challenges related to data frameworks. The survey also requests information on the implementation of international standards from the FSB and other standard-setting bodies, “if not included as part of formal, domestic data frameworks,” and “[o]ther international efforts, arrangements, or agreements that jurisdictions may implement in their domestic data frameworks or that may affect cross-border data flows.” The survey will close on January 14, 2022.
On November 5, the CFPB published a notice in the Federal Register seeking public comments on recently issued orders to six large U.S. technology companies requesting information and data on their payment system business practices (covered by InfoBytes here). According to the notice, the Bureau invites comments from “any interested parties, including consumers, small businesses, advocates, financial institutions, investors, and experts in privacy, technology, and national security.” The notice is “one of many efforts within the Federal Reserve System to plan for the future of realtime payments and to ensure a fair and competitive payments system in our country.” Comments are due by December 6.
On November 5, CFPB Deputy Director Zixta Martinez spoke before the Bureau’s Academic Research Council (ARC) meeting, in which she discussed recent research efforts taken to inform future rulemaking and identify root causes of challenges facing consumers. Martinez highlighted Section 1022 orders recently sent to several big tech payment platforms seeking information on their products, plans, and practices (covered by InfoBytes here). She noted that the evaluation of these companies’ payments platform data will help inform the Bureau on the future of the payments system as well as potential emerging risks, and will provide insights that may impact future rulemaking under Section 1033 concerning the disclosure of consumer data by regulated entities. Among other things, Martinez also discussed the importance of small business lending research to better understand whether these businesses provide fair and equitable access to credit and referred to the Bureau’s Section 1071 notice of proposed rulemaking issued in September (covered by a Buckley Special Alert). Martinez also noted that one of the Bureau’s priorities is ensuring access to fair and affordable credit for low-income, minority, or traditionally underserved communities, and said the Office of Research will solicit “suggestions and advice for ways to integrate racial and economic equity analyses into the CFPB’s research agenda.”
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 OCC issued Bulletin 2021-49 announcing the revision of the Payment Systems booklet of the Comptroller’s Handbook. The booklet rescinds the Payment Systems and Funds Transfer Activities booklet of the Comptroller’s Handbook (March 1990); the Office of Thrift Supervision Examination Handbook section 580, the Payments Systems Risk (January 1994); banking Circular 235, International Payments Systems Risks (May 10, 1989); and OCC Bulletin 1996-48, Stored Value Card Systems: Information for Bankers and Examiners (September 3, 1996). Among other things, the revised booklet: (i) provides information on payment systems, types of payments, risks associated with payment systems, and associated risk management practices; (ii) highlights the requirements of 12 CFR 7.1026 on payment systems memberships; and (iii) includes expanded examination procedures and “supplemental procedures for deeper review of certain payment activities.”
On October 21, the CFPB issued orders to six large U.S. technology companies seeking information and data on their payment system business practices. The Bureau stated that the information is intended to help the Bureau understand how these companies use personal payments data and manage data access to users. The Bureau issued the orders citing its authority under the CFPA, Section 1022(c)(4), which grants the agency “statutory authority to order participants in the payments market to turn over information to help the Bureau monitor for risks to consumers and to publish aggregated findings that are in the public interest.” The Bureau’s press release also noted it intends to study the payment system practices of two major Chinese tech companies.
The Bureau made available an example order that contains 55 requests seeking various information and data on several topics, including: (i) “[d]ata harvesting and monetization”; (ii) “[a]ccess restrictions and user choice”; and (iii) documents and information related to payment platforms and compliance with federal consumer protection laws, such as the EFTA and the Gramm-Leach-Bliley Act. Citing consumer data and privacy expectations, the Bureau explained that “[c]onsumers expect certain assurances when dealing with companies that move their money. They expect to be protected from fraud and payments made in error, for their data and privacy to be protected and not shared without their consent, to have responsive customer service, and to be treated equally under relevant law.”
Director Rohit Chopra issued a statement commenting on the purpose of the orders. He noted that the Bureau’s inquiry “is one of many efforts within the Federal Reserve System to plan for the future of real-time payments” and that it “will help to inform regulators and policymakers about the future of our payments system.”
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.
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.
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.”
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.