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Financial Services Law Insights and Observations


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  • SEC proposes rules for addressing conflicts of interest raised by predictive data analytics

    Agency Rule-Making & Guidance

    On July 26, the SEC issued proposed rules under the Securities Exchange Act of 1924 and the Investment Advisors Act of 1940 to address certain conflicts of interest associated with the use of predictive data analytics, including artificial intelligence (AI) and similar technologies, “that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes.” The SEC explained that broker-dealers and investment advisors (collectively, “firms”) are increasingly using AI to improve efficiency and returns but cautioned that, due to the scalability of these technologies and the potential for firms to quickly reach a large audience, any resulting conflicts of interest could result in harm to investors that is more pronounced and on a broader scale than previously possible.

    Based on existing legal standards, the proposed rules generally would require a firm to identify and eliminate, or neutralize, the effects of conflicts of interest that result in the firm’s (or associated persons) interests being placed ahead of investors’ interests. Firms, however, would be permitted to employ tools that they believe would address such risks and that are specific to the particular technology being used. Firms that use covered technology for investor interactions would also be required to have written policies and procedures in place to ensure compliance with the proposed rules, the SEC said. These policies and procedures must include a process for evaluating the use of covered technology in investor interactions and addressing any conflicts of interest that may arise. Firms must also maintain books and records related to these requirements. Comments on the proposed rules are due 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Issues Securities SEC Third-Party Risk Management Artificial Intelligence Securities Exchange Act Investment Advisers Act

  • OCC warns banks to “guard against complacency” in risk management

    On June 14, the OCC released its Semiannual Risk Perspective for Spring 2023, which reports on key risks threatening the safety and soundness of national banks, federal savings associations, and federal branches and agencies. The agency reported that the overall strength of the federal banking system is sound but warned banks to remain diligent and maintain effective risk management practices over critical functions in order to withstand current and future economic and financial challenges.

    The OCC highlighted liquidity, operational, credit, and compliance risk as key risk themes in the report. Observations include: (i) in response to recent bank failures and investment portfolio depreciation, liquidity levels have been strengthened; (ii) credit risk remains moderate, however in certain commercial real estate segments, signs of stress are increasing (high inflation and rising interest rates are also causing credit conditions to deteriorate); (iii) operational risk, including persistent cyber threats, is elevated, while opportunities and risks are created by banks’ increased use of third parties and the digitalization of banking products and service; and (iv) compliance risk remains heightened as banks continue to navigate a dynamic environment where compliance management systems try to keep pace with evolving products, services, and delivery channel offerings.

    The report also discussed challenges banks face when trying to manage climate-related financial risks, as well as the importance of investing and aligning technology with banks’ business goals. Acting Comptroller of the Currency Michael Hsu urged banks “to ‘be on the balls of their feet’ with regards to risk management” and “guard against complacency.”

    Bank Regulatory Federal Issues OCC Risk Management Compliance Third-Party Risk Management Privacy Climate-Related Financial Risks

  • Agencies finalize guidance on managing third parties

    Federal Issues

    On June 6, the OCC, Federal Reserve Board, and FDIC issued interagency guidance to aid banking organizations in managing risks related to third-party relationships, including relationships with financial technology-focused entities. (See also FDIC FIL-29-2023 and Federal Reserve Board memo here.) The joint guidance, final as of June 6, replaces each agency’s existing general guidance on third-party risk management and is directed to all supervised banking organizations. Designed to streamline government guidance on mitigating risks when working with third parties, the final guidance establishes principles for banking organizations to consider when implementing risks management practices. Banking organizations are advised to consider and account for the level of risk, complexity, and size of the institution, as well as the nature of the third-party relationship, when conducting sound risk management.

    After considering public comments received on proposed guidance issued in July 2021 (covered by InfoBytes here), the final guidance provides directions and expectations for oversight at all stages in the life cycle of a third-party relationship, including topics relating to planning, due diligence and third-party selection, contract negotiations, ongoing monitoring, and termination. Guidance on conducting independent reviews, maintaining documentation, and reporting is also included. The agencies advised banking organizations, particularly community banks, to review illustrative examples to help align risk management practices with the scope and risk profile of their third-party relationships. Additionally, banking organizations should maintain a complete inventory of their third-party relationships, identify higher-risk and critical activities, periodically conduct reviews to determine whether risks have changed over time, and update risk management practices accordingly, the agencies said.

    The final guidance emphasizes that the agencies will review a banking organization’s third-party risk management practices as part of the standard supervisory process. When assessing whether activities are conducted in a safe and sound manner and in compliance with applicable laws and regulations, examiners will, among other things, (i) evaluate a banking organization’s ability to oversee and manage third party relationships; (ii) assess the effects of those relationships on a banking organization’s risk profile and operational performance; (iii) perform transaction testing to evaluate whether activities performed by a third party comply with applicable laws and regulations; (iv) conduct conversations relating to any identified material risks and deficiencies with senior management and board of directors; (v) review how a banking organization remediates any deficiencies; and (vi) consider supervisory findings when rating a banking organization.

    The agencies stressed that they may take corrective measures, including enforcement actions, to address identified violations or unsafe or unsound banking practices by the banking organization or its third party. The agencies further announced that they plan to immediately engage with community banks and will develop additional resources in the future to help these organizations manage relevant third-party risks.

    Federal Issues Agency Rule-Making & Guidance Third-Party Risk Management Risk Management Vendor Management FDIC Federal Reserve OCC Supervision

  • G7 Cyber Expert Group releases reports on ransomware and third-party risk

    Privacy, Cyber Risk & Data Security

    On December 8, the G7 Cyber Expert Group (CEG) – co-chaired by the Bank of England and the U.S. Treasury Department’s Office of Cybersecurity and Critical Infrastructure – released two reports addressing ransomware and third-party risk in the financial sector. According to the announcement, the reports “are intended to help financial sector entities better understand cybersecurity topics as agreed upon by a multilateral consensus.”

    The Fundamental Elements of Ransomware Resilience for the Financial Sector provides financial entities with high-level building blocks for addressing ransomware threats. The “non-prescriptive and non-binding” report is meant to guide public and private financial institutions for their own internal ransomware mitigation activities and “provide[s] an overview of the current policy approaches, industry guidance, and best practices in place throughout the G7.”

    The Fundamental Elements of Third-Party Risk Management for the Financial Sector updates a previous version published in 2018. According to the announcement, the updated report was necessary due to the increase in use of service providers by financial institutions in their central operational functions and subsequent vulnerabilities as a result of such reliance. The update includes explicit recommendations for monitoring risks along the supply chain and identifying systemically important third-party providers and concentration risks.

    Privacy, Cyber Risk & Data Security Of Interest to Non-US Persons Ransomware Third-Party Risk Management Department of Treasury

  • OCC warns of crypto-asset and cybersecurity risks facing the federal banking system

    On December 8, the OCC released its Semiannual Risk Perspective for Fall 2022, which reports on key risks threatening the safety and soundness of national banks, federal savings associations, and federal branches and agencies. The OCC reported that, in the aggregate, banks “remain well capitalized” and have “ample liquidity and sound credit quality, although macroeconomic headwinds are a concern.” The OCC highlighted interest rate, operational, compliance, and credit risks as key risk themes. Observations include: (i) the rising rate environment has adversely impacted bank investment portfolios; (ii) operational risk, including evolving cyber risk, is elevated, with “threat actors continuing to target the financial services industry with ransomware and other attacks”; (iii) compliance risk remains heightened as banks navigate significant regulatory changes; and (iv) credit risk in commercial and retail loan portfolios remains moderate and demonstrates resiliency, “but signs of potential weakening in some segments warrant careful monitoring.”

    The report discussed emerging risks related to innovation and the adoption of new products and services, including crypto-assets. Highlighting risks arising from banks’ expansion into digital offerings and the “heightened” threat of fraud risk associated with innovative peer-to-peer payment platforms, the OCC noted that banks should be “clearly communicating risks, educating customers on potential scams, and enhancing internal fraud monitoring capabilities” to mitigate threats and protect consumers. The report noted that “[b]anks may require additional or different controls to safeguard against fraud, financial crimes, violations of Bank Secrecy Act, anti-money laundering, and Office of Foreign Assets Control (BSA/AML/OFAC) requirements, and consumer protection or fair lending laws, or operational errors,” and should “maintain comprehensive operational resilience frameworks commensurate with the size and complexity of products, services, and operations being supported.”

    The OCC reiterated the importance of taking a “careful and cautious approach” toward banks’ engagement with the crypto-related firms. Recent events in the crypto market have also “revealed a high degree of interconnectedness between certain crypto participants through a variety of opaque lending and investing arrangements,” which has led to “a high risk of contagion among connected parties.” The report noted that national banks and federal savings associations interested in engaging in crypto-asset activities should discuss the activities with their supervisory office before engaging the activities. Some activities may require a supervisory non-objection under OCC Interpretive Letter #1179.

    The report cited risks related to cybersecurity and partnerships with fintech and other third parties. The OCC said it is applying a “heightened supervisory focus” to its scrutiny of banks’ oversight of third-party relationships and flagged an upward trend in ransomware attacks targeting banks’ service providers and other third parties. Partnering with fintechs to support operations or provide opportunities for customers to enter the digital asset market can “increase the risk of unfair or deceptive acts or practices because of the coordination, communication, and disclosure challenges involved in these partnerships,” the report said, adding that “[u]nclear or arbitrary partnership agreements may result in implementation breakdowns, untimely resolution of issues, or failure to deliver products or services as intended, and may result in significant customer remediation.” The OCC cautioned that banks must “conduct appropriate due diligence” before entering a partnership with a third party. “The scope and depth of due diligence, as well as ongoing monitoring and oversight of the third party’s performance, should be commensurate with the nature and criticality of the proposed activity.”

    The report also discussed forthcoming climate risk management guidelines applicable to banks with more than $100 billion in total consolidated assets. As previously covered by InfoBytes, the OCC, Federal Reserve Board, and the FDIC announced they intend to issue final interagency guidance to promote consistency.

    Bank Regulatory Federal Issues Digital Assets Privacy, Cyber Risk & Data Security OCC Risk Management Cryptocurrency Supervision Third-Party Risk Management Fintech Financial Crimes Climate-Related Financial Risks

  • Republicans seek answers from OCC on bank-fintech partnerships

    Federal Issues

    On October 11, House Financial Services Committee Ranking Member Patrick McHenry (R-NC), joined by Republican members of the Task Force on Financial Technology, sent a letter to acting Comptroller of the Currency Michael J. Hsu asking for clarification on the OCC’s position regarding bank-fintech partnerships. The lawmakers asserted that the OCC previously “worked to provide banks and their customers with a clear understanding of the regulatory and supervisory expectations surrounding emerging products and services,” as well as how to properly assess risk, but contended that leadership under the current administration has not continued to do so. Citing the importance of innovation to the U.S. economy and the impact new financial products and services can have on costs, inclusion, and competition, the letter expressed concerns related to the potential for further uncertainty surrounding these partnerships and the resulting consequences for consumers. “Technological innovation fostered by fintech partnerships has enabled banks to reach segments of the population that may have been left behind and increase customer engagement,” the lawmakers wrote, expressing their belief that the benefits from these partnerships far outweigh the risks. “Much of this innovation has been driven by industry newcomers that have developed a novel product or business model. When properly regulated, these partnerships can provide greater financial inclusion, spur technological innovation, and foster competition that ultimately benefits consumers.”

    Referring to an action taken by President Biden in June 2021, which repealed the OCC’s “true lender” rule pursuant to the Congressional Review Act (covered by InfoBytes here), the lawmakers asked the OCC whether it anticipates fintech partnerships ending as a result of potential regulatory changes, and questioned how the agency plans to “ensure that examiners do not discourage innovation through fintech partnerships” or “impose unreasonable burdens on banks and fintechs.” The letter also asked the OCC to respond to a series of questions, including, among other things, how it plans to determine the acceptable terms for bank-fintech partnerships, how it intends to analyze fintechs that are helping to bring the banking business into the digital era, and how examiners will evaluate a bank’s assessments of third parties’ cybersecurity risk management and resilience capabilities and whether such evaluations will “be carefully tailored to the actual risk posed by the particular bank-fintech partnership.”

    Federal Issues Bank Regulatory House Financial Services Committee OCC Fintech Third-Party Risk Management

  • OCC releases bank supervision operating plan for FY 2023

    On October 6, the OCC’s Committee on Bank Supervision released its bank supervision operating plan for fiscal year 2023. The plan outlines the agency’s supervision priorities and highlights several supervisory focus areas including: (i) strategic and operational planning; (ii) operational resiliency; (iii) third-party oversight and risk management; (iv) credit risk management with a focus on new products, areas of highest growth, and portfolios representing concentrations; (v) allowances for credit losses (ACL), including instances where ACL processes use third-party modeling techniques; (vi) interest rate risk; (vii) liquidity risk management; (viii) consumer compliance management systems with a focus on how programs are disclosed in relation to UDAP and UDAAP statutes; (ix) Bank Secrecy Act/AML compliance; (x) fair lending risks; (xi) Community Reinvestment Act strategies and the potential for modernization rulemaking; (xii) new products and services in areas such as payments, fintech, and digital assets; and (xiii) climate-change risk management. The plan will be used by OCC staff to guide the development of supervisory strategies for individual national banks, federal savings associations, federal branches and agencies of foreign banking organizations, and certain identified third-party service providers subject to OCC examination.

    The OCC will provide updates about these priorities in its Semiannual Risk Perspective, as InfoBytes has previously covered here.

    Bank Regulatory Federal Issues OCC Supervision Digital Assets Fintech Privacy, Cyber Risk & Data Security UDAP UDAAP Bank Secrecy Act Anti-Money Laundering Climate-Related Financial Risks Fair Lending Third-Party Risk Management Risk Management

  • OCC orders bank to improve oversight of fintech partnerships

    Recently, a national bank disclosed an agreement reached with the OCC that requires the bank to improve its oversight and management of third-party fintech partnerships. According to an SEC filing, the OCC found unsafe or unsound practices related to the bank’s third-party risk management, Bank Secrecy Act (BSA)/anti-money laundering risk management, suspicious activity reporting, and information technology control and risk governance. Under the terms of the agreement, the bank must, within 10 days of the agreement, appoint a compliance committee comprised mostly of members from outside the bank to meet at least quarterly and provide progress reports outlining the results and status of the mandated corrective actions. Within 60 days of the agreement, the bank must also adopt and implement guidelines for assessing risks posed by third-party fintech partnerships and address how the bank “identifies and assesses the inherent risks of the products, services, and activities performed by the third-parties, including but not limited to BSA, compliance, operational, liquidity, counterparty and credit risk as applicable.” Additionally, the bank must establish criteria for their board of directors' review and approval of third-party fintech relationship partners, as well as how it will assess “BSA risk for each third-party fintech relationship partner, including risk associated with money laundering, terrorist financing, and sanctions risk as well as the third-party’s processes for mitigating such risks and complying with applicable laws and regulations.” The agreement also requires due diligence, monitoring, and contingency plan measures.

    The agreement further stipulates that the bank’s board and management shall, within 90 days, (i) set up written BSA risk assessment guidelines; (ii) adopt an independent audit program; (iii) implement expanded risk-based policies, procedures, and processes to obtain and analyze appropriate customer due diligence, enhanced due diligence, and beneficial ownership information, including for fintech businesses; (iv) develop and adhere to a set of standards to ensure timely suspicious activity monitoring and reporting; and (v) establish a program to assess and manage the bank’s information technology activities, including those conducted by third-party partners. The bank must also conduct a suspicious activity review lookback within 30 days.

    Bank Regulatory Federal Issues Fintech OCC Third-Party Risk Management Bank Secrecy Act Anti-Money Laundering SARs Financial Crimes Customer Due Diligence

  • Fed urges banks to assess legality of crypto activities

    On August 16, the Federal Reserve Board issued supervisory letter SR 22-6 recommending steps that Fed-supervised banking organizations engaging or seeking to engage in crypto-asset-related activities should take. The Fed stressed that organizations must assess whether such activities are legally permissible and determine whether any regulatory filings are required under the federal banking laws. Organizations should also notify the regulator and “have in place adequate systems, risk management, and controls to conduct such activities in a safe and sound manner” prior to commencing such activities. Risk management controls should cover, among other things, “operational risk (for example, the risks of new, evolving technologies; the risk of hacking, fraud, and theft; and the risk of third-party relationships), financial risk, legal risk, compliance risk (including, but not limited to, compliance with the Bank Secrecy Act, anti-money laundering requirements, and sanctions requirements), and any other risk necessary to ensure the activities are conducted in a manner that is consistent with safe and sound banking and in compliance with applicable laws, including applicable consumer protection statutes and regulations,” the supervisory letter explained, adding that state member banks are also encouraged to contact their state regulator before engaging in any crypto-asset-related activity. Organizations already engaged in crypto activities should contact the Fed “promptly” if they have not already done so, the agency said, noting that supervisory staff will provide any relevant supervisory feedback in a timely manner.

    The supervisory letter follows an interagency statement released last November by the Fed, OCC, and FDIC (covered by InfoBytes here), which announced the regulators’ intention to provide greater clarity on whether certain crypto-asset-related activities conducted by banking organizations are legally permissible.

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance Digital Assets Federal Reserve Cryptocurrency Supervision Risk Management Third-Party Risk Management Financial Crimes Bank Secrecy Act Of Interest to Non-US Persons

  • FDIC issues advisory on crypto companies’ deposit insurance claims

    On July 29, the FDIC announced an advisory addressing certain misrepresentations about FDIC deposit insurance made by some crypto companies. The advisory, among other things, reminded insured banks that they must be aware of how FDIC insurance operates as well as the need to assess, manage, and control risks arising from third-party relationships, including those with crypto companies. The advisory noted that recently “some crypto companies have suspended withdrawals or halted operations," and that in certain cases, "these companies have represented to their customers that their products are eligible for FDIC deposit insurance coverage, which may lead customers to believe, mistakenly, that their money or investments are safe.” In dealing with crypto companies, the agency cautioned that “FDIC-insured banks should confirm and monitor that these companies do not misrepresent the availability of deposit insurance.” The FDIC also issued a Fact Sheet reminding the public that the FDIC only insures deposits held in insured banks and savings associations and only in the event of an insured bank’s failure. The FDIC does not insure assets issued by non-bank entities, such as crypto companies.

    Bank Regulatory FDIC Cryptocurrency Deposit Insurance Digital Assets Third-Party Risk Management Nonbank


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