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Bipartisan Senate legislation would offer stronger ISA protections
On January 31, Senators Mark Warner (D-VA), Todd Young (R-IN), Marco Rubio (R-FL), and Chris Coons (D-DE) reintroduced legislation to strengthen protections for students who enter into income share agreements (ISAs). The senators explained that ISAs are an innovative way for students to finance postsecondary education and serve as an alternative to high-interest student loans. Under an ISA, students agree to pay a percentage of their income over an agreed upon time period in exchange for tuition payments from nongovernmental sources. When the time period ends, students stop payments regardless of whether they have paid back the full amount.
The ISA Student Protection Act of 2023 would, among other things, (i) prevent ISA providers from requiring payments higher than 20 percent of a student’s income; (ii) exempt students from making payments towards their ISA should their income fall below an affordability threshold; (iii) establish a maximum number of payments and limit payment obligations to the end of a fixed window; (iv) set a minimum number of voluntary payment relief pauses; (v) require ISA providers to give detailed payment disclosures to students who may be considering entering into an ISA (including how payments under an ISA compare to payments under a comparable loan); (vi) provide strong bankruptcy protections for students who enter into an ISA “by omitting the higher ‘undue hardship’ standard for discharge required under private loans”; (vii) prevent funders from accelerating defaulted ISAs; (viii) ensure that ISA obligations end in the event of death or total and permanent disability; (ix) ensure that ISAs fall under federal consumer protection laws, including the FCRA, FDCPA, MLA, SCRA, and ECOA; (x) grant regulatory authority over ISAs to the CFPB; and (xi) clarify how ISA contributions should be treated for tax purposes for both funders and recipients.
Senators exploring bank’s dealings with collapsed crypto exchange
On January 30, Senators Elizabeth Warren (D-MA), John Kennedy (R-LA), and Roger Marshall (R-KS) sent a follow-up letter to a California-based bank asking for additional responses to questions related to the bank’s relationship with several cryptocurrency firms founded by the CEO of a now-collapsed crypto exchange. As previously covered by InfoBytes, the senators pressed the CEO for an explanation for why the bank failed to monitor for and report suspicious transactions to the Financial Crimes Enforcement Network, and asked for information about how deposits it was holding on behalf of the collapsed exchange and related firm were being handled. The senators stressed that the bank has a legal responsibility under the Bank Secrecy Act to maintain an effective anti-money laundering program that may have flagged suspicious activity.
In the letter, the senators accused the bank of evading their previous questions in its December response, writing that while the bank’s answers confirm the extent of its failure to monitor and report suspicious financial activity, it failed “to provide key information needed by Congress to understand why and how these failures occurred.” The bank’s “repeated reference to ‘confidential supervisory information’” as a justification for its refusal to provide the requested information “is simply not an acceptable rationale,” the senators said. They also noted that the bank’s recent advance from the Federal Home Loan Bank of San Francisco—intended “to ‘stave off a further run on deposits’”—has introduced additional crypto market risks into the traditional banking system, especially should the bank fail. The bank was asked to explain how it plans to use the $4.3 billion it received.
The senators further commented that additional findings have revealed that neither the Federal Reserve nor the bank’s independent auditors were able to identify the “extraordinary gaps” in the bank’s due diligence process. The senators asked the bank to provide responses to questions related to its risk management policies, as well as how many safety and soundness exams were conducted, and whether any of the bank’s executives were “held accountable” for the failures related to the collapsed exchange, among other things.
Warren, Wyden urge PCAOB to crack down on crypto auditors
On January 25, Senators Elizabeth Warren (D-MA) and Ron Wyden (D-OR) sent a letter to the chair of the Public Company Accounting Oversight Board (PCAOB) urging the board to make sure it was taking sufficient measures to hold registered audit firms accountable for their work with cryptocurrency clients. The letter highlighted the recent turmoil in the crypto market following the collapse of a major crypto exchange last November, and inquired about “the role that auditors may have played in misleading the public about the financial soundness and safety of crypto companies.” Referring to reports of “scandalous accounting practices” within the industry, the senators urged the PCAOB to take action to ensure accountability. “When PCAOB-registered auditors perform sham audits—even for firms that may lay outside of the PCAOB’s jurisdiction—they tarnish the credibility of the PCAOB and undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions,” the senators wrote, adding that “misleading financial reports shake our confidence in the entire auditing industry.”
The senators asked the PCAOB to respond to several questions concerning alleged misleading auditing practices related to the exchange’s collapse, including whether the PCAOB is taking steps to mitigate risks facing retail investors, whether it was aware of any potential conflicts of interest or other concerning behavior, and whether it has “the authority to strip auditors of their PCAOB-registered status if they provide services or engage in conduct that fall short of PCAOB standards and rules, even if those actions are taken in relation to private, non-SEC registered companies.” The senators also asked the PCAOB to describe the standards that auditors must comply with “when evaluating the risk of exposure to crypto firms or validating the valuation of crypto investments.”
FCC chair asks Congress to act on robocalls
In December, FCC Chair Jessica Rosenworcel sent a letter to twelve senators in response to their June 2022 letter inquiring about combating robocalls. In the letter, Rosenworcel highlighted the FCC’s efforts to combat robocalls by discussing the agency’s “important” proposed rules, adopted in May, to ensure gateway providers that channel international call traffic comply with STIR/SHAKEN caller ID authentication protocols and validate the identity of the providers whose traffic they are routing to help weed out robocalls (covered by InfoBytes here). She also highlighted the FCC’s enforcement efforts, such as a December action where the FCC announced a nearly $300 million fine against an auto warranty scam robocall campaign for TCPA and Truth in Caller ID Act violations—“largest robocall operation the FCC has ever investigated” (covered by InfoBytes here).
Rosenworcel requested additional authority from Congress to combat robocalls and robotexts more effectively. Specifically, Rosenworcel asked the senators to “fix the definition of autodialer” – since robotexts are neither prerecorded nor artificial voice calls, the TCPA only provides consumers protection from robotexts if they are sent from autodialers. She further noted that the Supreme Court's decision in Facebook v. Duguid (covered by a Buckley Special Alert) narrowed the definition of autodialer under the TCPA, resulting in the law only covering equipment that generates numbers randomly and sequentially. She wrote that as a result, “equipment that simply uses lists to generate robotexts means that fewer robotexts may be subject to TCPA protections, and as a result, this decision may be responsible for the rise in robotexts.” Among other things, she also requested that Congress update the TCPA to permit for administrative subpoenas for all types of non-content customer records, and for Congress to grant the FCC the authority and resources to increase court enforcement of fines.
Senate confirms Gruenberg, FDIC board members
On December 19, the U.S. Senate confirmed Martin J. Gruenberg to be a board member and chairman of the FDIC. Gruenberg has served as acting chairman since former chair, Jelena McWilliams, resigned a year ago. Since joining the FDIC Board of Directors in 2005, Gruenberg has served as vice chairman, chairman, and acting chairman. Prior to joining the FDIC, Gruenberg served on the staff of the Senate Banking Committee as senior counsel of the full committee, and as staff director of the Subcommittee on International Finance and Monetary Policy. (Covered by InfoBytes here.)
The senators also voted to confirm Travis Hill as vice chairman and Jonathan McKernan as an FDIC board member. As previously covered by InfoBytes, during his tenure at the FDIC, Hill previously served as senior advisor to the chairman and deputy to the chairman for policy. Prior to that, Hill served as senior counsel at the Senate Banking Committee. Jonathan McKernan is a senior counsel at the FHFA and currently is on detail from the agency to the Senate Banking Committee where he is counsel on the minority staff. Previously, McKernan served as a senior policy advisor at the U.S. Treasury Department.
On January 5, Gruenberg was sworn in as the 22nd FDIC chairman. The same day, Hill was sworn in as vice chairman and McKernan as a board member.
Senate Banking holds hearing on crypto
On December 14, the Senate Banking Committee held a hearing to hear from witnesses about how customer and investor protections should apply to cryptocurrencies, among other topics. Committee Chairman Sherrod Brown (D-OH) opened the hearing by emphasizing that it is the committee’s job “to keep learning more about the collapses” of crypto firms, and that there should be collaboration with regulators to put consumers—not the crypto industry—first. Brown warned that crypto has “ushered in a whole new dimension of fraud and threats to national security.” Senator Elizabeth Warren (D-MA) expressed similar concerns, stating that the “dark underbelly of crypto is its critical link to financing terrorism and human trafficking and drug dealing and helping rogue nations like North Korea and Iran.” Warren went on to describe her bipartisan bill, the Digital Asset Anti-Money Laundering Act, noting that it “requires crypto to follow the same money laundering rules” that every bank and every broker are subjected to. Senator Cynthia Lummis (R-WY) also advocated for the regulation of digital asset trading, and providing consumers with adequate bankruptcy protection, disclosures, and stable coin regulation. Ranking Member Pat Toomey (R-PA) expressed openness to the possibility of regulations tailored to crypto, including more disclosure from issuers and oversight of secondary market trading. Toomey argued against pausing cryptocurrency before legislation. Additionally, some witnesses discussed drafting potential cryptocurrency legislation. One witness told the committee that when crypto assets are made from thin air, they can be “used to obscure financial realities.” Another witness said cryptocurrencies are “at best a vehicle for speculation, an exercise in a zero-sum game of chance, much like online poker,” but, “at worst, they are an instrument of crime.”
Senators ask federal agencies about banks’ ties to crypto firms
On December 7, Senators Elizabeth Warren (D-MA) and Tina Smith (D-MN) sent letters to the heads of the Federal Reserve Board, FDIC, and OCC seeking information on how the agencies assess risks associated with banks’ relationships with cryptocurrency firms. The senators expressed concerns related to recent revelations that “crypto may be more integrated into the banking system than regulators are aware.” The senators asked the agencies a series of questions, including (i) whether the regulators plan to conduct a review of crypto firms’ relationships with banks; (ii) the names of regulated banks engaged in crypto-related activities, such as providing crypto custody services and acting as nodes to verify customer payments; and (iii) the estimated total dollar volume for each specific activity per bank. The responses were requested by December 21.
Senators request information from California bank on its relationship with collapsed crypto exchange
On December 5, Senators Elizabeth Warren (D-MA), John Kennedy (R-LA), and Roger Marshall (R-KS) asked the CEO of a California-based bank for information regarding its relationship with several cryptocurrency firms founded by the CEO of a now-collapsed crypto exchange. In their letter, the senators pressed the CEO for an explanation for why the bank failed to monitor for and report suspicious transactions to the Financial Crimes Enforcement Network, and asked for information about how deposits it was holding on behalf of the collapsed exchange and related firm were being handled. The senators stressed that the bank has a legal responsibility under the Bank Secrecy Act to maintain an effective anti-money laundering program that may have flagged suspicious activity. “Your bank's involvement in the transfer of [the collapsed exchange’s] customer funds to [the related firm] reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients,” the letter said. The senators asked the bank to respond to a series of questions by December 19.
Brown urges Yellen to coordinate efforts to combat crypto risks
On November 30, Senator Sherrod Brown (D-OH) sent a letter urging Treasury Secretary Janet Yellen to join forces on drafting legislation that will “create authorities for regulators to have visibility into, and otherwise supervise, the activities of the affiliates and subsidiaries of crypto asset entities.” Recognizing the “troubling risks” within the crypto asset markets and pointing to the recent collapse of a major crypto exchange, Brown suggested that Treasury develop a broad framework for all crypto assets to ensure risks “are contained and do not spillover into traditional financial markets and institutions.” Copying the heads of the SEC, CFTC, Federal Reserve Board, NCUA, CFPB, FDIC, and OCC, Brown encouraged the agencies to enforce existing laws as well as supervisory and regulatory authorities in order to “take on the significant noncompliance with current law among crypto asset firms and minimize, if not eliminate, the opportunities for regulatory arbitrage.” Brown further asked the regulators to “assess the impact of vertical integration in crypto asset markets,” and to coordinate efforts to improve entity and crypto-asset disclosures, market integrity, and transparency.
Senator launches inquiry into crypto exchanges’ consumer protection measures
On November 28, Senator Ron Wyden (D-OR) sent letters to the six largest cryptocurrency exchanges requesting information about their finances, internal controls, and how customers’ funds are used. The inquiry follows the recent bankruptcy of a major crypto exchange accused of engaging in widespread mismanagement and misusing customers’ funds. Wyden asked the exchanges to respond to a series of questions related to, among other things, (i) the number of subsidiaries that fall under an exchange’s umbrella; (ii) whether customer assets are segregated from corporate or institutional assets; (iii) the treatment of customers’ funds; (iv) safeguards for preventing market manipulation; (v) the use of customer data for proprietary trading purposes; (vi) debt-to-asset and debt-to equity ratios, balance sheets, reserves, and audit procedures; (vii) insurance coverage; and (viii) steps taken by the exchanges to work with other crypto companies to develop protections for investors and customers. Senator Wyden further announced, “As Congress considers much-needed regulations for the crypto industry, I will focus on the clear need for consumer protections along the lines of the assurances that have long existed for customers of banks, credit unions and securities brokers.”