Headlines
- New Federal Guidance Issued on Customer Due Diligence and Risk Management
- Fed Proposes Rule to Mandate LIBOR-Replacement Benchmark Rates in Contracts
- CFPB Clarifies Permissible Purposes for Furnishing, Using, and Obtaining Consumer Reports
- FDIC Issues Updated Guidance on Brokered Deposit Reporting Requirements
- Other Developments: Minority Depository Institutions and Cryptocurrency
1. New Federal Guidance Issued on Customer Due Diligence and Risk Management
The federal banking companies together with FinCEN and the NCUA have revealed a joint assertion on the risk-based method to assessing buyer relationships and conducting buyer due diligence. The joint steering launched on July 6 reinforces the companies’ stance that “no customer type presents a single level of uniform risk or a particular risk profile related to money laundering, terrorist financing, or other illicit financial activity.” The joint steering reminds banks that buyer relationships current various ranges of threat for illicit monetary exercise that rely on the presence or absence of quite a few components particular to every buyer. The companies confused that banks that successfully handle and mitigate the dangers particular to every buyer relationship in compliance with relevant BSA/AML necessities are usually not prohibited or discouraged from offering banking providers to any sort of buyer. According to the joint steering, the companies are encouraging banks to handle and mitigate dangers primarily based on buyer relationships, moderately than declining to supply banking providers to total classes of shoppers. Click here for a replica of the joint steering.
Nutter Notes: The federal banking companies’ joint steering references the FFEIC Bank Secrecy Act/Anti-Money Laundering Examination Manual, which incorporates data and concerns which will point out the necessity for financial institution insurance policies, procedures, and processes to handle potential dangers associated to sure kinds of clients, corresponding to impartial automated teller machine house owners or operators, nonresident aliens and overseas people, charities and nonprofit organizations, and money intensive companies. The joint steering clarifies that the inclusion within the examination guide of details about sure buyer varieties shouldn’t be supposed to sign that these buyer varieties needs to be thought-about uniformly larger threat. While not geared toward a specific sort of buyer, the federal banking companies’ joint steering is harking back to a 2014 coverage assertion issued by the Financial Crimes Enforcement Network (“FinCEN”), which suggested banks to not terminate the accounts of cash transmitters indiscriminately in an effort to adjust to BSA/AML necessities. According to that 2014 coverage assertion, which was issued in response to considerations that banks then had been denying providers to cash transmitters as a category, banks had been reminded to evaluate the chance of serving a cash providers enterprise primarily based on buyer due diligence opinions performed to ascertain the chance that every potential buyer poses.
2. Fed Proposes Rule to Mandate LIBOR-Replacement Benchmark Rates in Contracts
The Federal Reserve has revealed for remark a proposed rule that would supply benchmark replacements for contracts ruled by U.S. regulation that reference the in a single day and one-, three-, six-, and 12-month tenors of LIBOR. The proposed rule launched on July 19 would apply to contracts that would not have phrases that present for using a clearly outlined and practicable substitute benchmark fee for LIBOR, which will probably be discontinued after June 30, 2023. In a press release accompanying the proposed rule, the Federal Reserve mentioned that, regardless of efforts to organize for the discontinuation of LIBOR, there are a major variety of present contracts that reference LIBOR and can’t be simply amended. The proposed rule would supply for separate substitute charges for derivatives transactions, contracts the place a government-sponsored enterprise is a celebration, and all different affected contracts. Each proposed substitute fee is predicated on the Secured Overnight Financing Rate (SOFR). Click here for a replica of the proposed rule.
Nutter Notes: The proposed rule would implement the Adjustable Interest Rate (LIBOR) Act, enacted on March 15, 2022 as a part of the Consolidated Appropriations Act, 2022, which approved the Federal Reserve to ascertain a benchmark substitute fee that’s primarily based on SOFR to switch the in a single day and one-, three-, six-, and 12-month LIBOR charges in present contracts that don’t present for a LIBOR substitute. Consistent with the necessities of the LIBOR Act, the entire proposed benchmark substitute charges would incorporate unfold changes for every specified tenor of LIBOR. According to the Federal Reserve, the unfold changes are supposed to handle sure variations between SOFR and LIBOR, corresponding to “the fact that LIBOR is unsecured and therefore includes an element of bank credit risk which may cause it to be higher than SOFR.” In proposing totally different benchmark substitute charges for spinoff transactions and different transactions, the Federal Reserve adopted the view of the Alternative Reference Rates Committee (ARRC), a bunch of private-sector companies convened by the Federal Reserve Board and the Federal Reserve Bank of New York in 2014. ARRC beforehand recognized SOFR as its beneficial substitute for LIBOR and developed a plan to help the transition from LIBOR to SOFR.
3. CFPB Clarifies Permissible Purposes for Furnishing, Using, and Obtaining Consumer Reports
The CFPB has issued an advisory opinion warning that companies, together with banks, that use and share credit score reviews and background reviews should have a permissible function beneath the Fair Credit Reporting Act (FCRA), and that customers of credit score reviews have particular obligations to guard knowledge privateness. The advisory opinion launched on July 7 clarifies that the permissible functions listed in FCRA are particular to the patron who’s the topic of the report. The advisory opinion warns that inadequate matching procedures utilized by client reporting corporations or by customers of client reviews may cause a violation of FCRA in the event that they end result within the supply of details about the improper client to a consumer that didn’t have a permissible function to obtain details about that particular person. For instance, if a lender’s worker initiates a credit score utility for the improper client by incorrectly inputting client data into the lender’s utility system or by choosing the improper client from an inventory of attainable shoppers recognized within the system, the lender could obtain a credit score report a couple of client for whom the lender doesn’t have a permissible function beneath FCRA. The advisory opinion additionally warns that FCRA strictly prohibits a consumer of client reviews from acquiring credit score report details about a client and not using a permissible function, in order that the receipt of details about the improper client by the consumer of the credit score report might trigger the consumer to be in violation of FCRA. Click here for a replica of the advisory opinion.
Nutter Notes: The advisory opinion additionally clarifies that disclaimers won’t remedy a failure to take affordable steps to make sure that the knowledge contained in a credit score report is just concerning the particular person for whom the consumer has a permissible function. Credit reporting corporations could not present, and customers mustn’t settle for, reviews on a number of people the place the consumer solely has a permissible function to acquire a report on one particular person. Therefore, credit score reporting corporations could not present credit score reviews containing details about a number of folks as “possible matches.” The advisory opinion explains that FCRA requires credit score reporting corporations to have sufficient procedures to supply data solely about the one who is the topic of the consumer’s request.
4. FDIC Issues Updated Guidance on Brokered Deposit Reporting Requirements
The FDIC has up to date its steering in type of solutions to continuously requested questions (FAQs) on brokered deposits to make clear that deposits swept from broker-dealers with a main function exception to unaffiliated banks should be reported as brokered if there are any extra third events concerned that qualify as a deposit dealer. For instance, the FAQs up to date on July 15 clarify {that a} third get together concerned in a sweep that’s partaking in matchmaking actions would qualify as a deposit dealer, and subsequently the sweep deposits acquired from the related broker-dealer should be reported as brokered deposits on the financial institution’s quarterly name report, even when the broker-dealer has a main function exception for the related enterprise line. The FAQs embody examples of providers that represent matchmaking actions when supplied by a 3rd get together to a broker-dealer in an unaffiliated sweep program. Click here for a replica of the up to date FAQs.
Nutter Notes: The FDIC additionally defined that it’s going to not require a financial institution to refile name reviews that predate the issuance of the up to date FAQs if, after good religion efforts, sure deposits weren’t beforehand reported as brokered by the financial institution resulting from a misunderstanding of how the deposit dealer definition applies when extra third events are concerned. The FDIC additionally mentioned that decision report directions have been up to date accordingly. In 2020, the FDIC amended its brokered deposit laws to determine a number of particular enterprise relationships involving the position of a buyer’s funds on deposit at a financial institution by an agent of the client as assembly the first function exception—which applies to exclude a deposit from the definition of a brokered deposit when the first function of the agent’s enterprise relationship with its clients shouldn’t be the position of funds with banks. The amended laws acknowledge quite a lot of enterprise relationships, referred to as “designated exceptions,” as assembly the first function exception to the definition of a deposit dealer. A broker-dealer or futures fee service provider that locations buyer funds into deposit accounts in compliance with sure SEC necessities qualifies for one of many designated exceptions. Under the FDIC’s amended laws, an individual is engaged in “matchmaking activities,” and subsequently is engaged in brokering deposits, if the particular person “proposes deposit allocations at, or between, more than one bank based upon both the particular deposit objectives of a specific depositor or depositor’s agent, and the particular deposit objectives of specific banks, except in the case of deposits placed by a depositor’s agent with a bank affiliated with the depositor’s agent.”
5. Other Developments: Minority Depository Institutions and Cryptocurrency
OCC Publishes Updated Policy Statement on Minority Depository Institutions
The OCC has revised its coverage assertion for minority depository establishments (MDI) to replace and streamline descriptions of its insurance policies, procedures, and packages. The revised assertion issued on July 27 additionally describes the vary of packages the OCC has in place to protect and help MDIs. Click here for a replica of the revised coverage assertion.
Nutter Notes: Among the initiatives to help MDIs highlighted within the coverage assertion is the OCC’s Roundtable for Economic Access and Change (Project REACh). According to the OCC, Project REACh convenes leaders from banking, enterprise, know-how, and nationwide civil rights organizations to cut back particular obstacles that forestall full, equal, and truthful participation within the nation’s financial system.
Federal Reserve Board Member Calls for Regulation of Cryptocurrencies
In remarks on the Bank of England Conference on July 8, Federal Reserve Vice Chair Lael Brainard known as for regulation of cryptocurrencies and different digital property by monetary regulatory authorities. Vice Chair Brainard noticed that digital property are prone to the identical dangers that apply to different, conventional types of finance, together with leverage, settlement, opacity, and maturity and liquidity transformation. She additionally argued that regulation of cryptocurrencies and different digital property ought to replicate “the principle of same risk, same disclosure, same regulatory outcome.” Click here for a replica of Vice Chair Brainard’s remarks.
Nutter Notes: Vice Chair Brainard’s remarks align with these of quite a lot of monetary policymakers who’re calling for elevated regulation of digital property. In his July 25 remarks on the Brookings Institution Webcast on The Future of Crypto Regulation, CFTC Chairman Rostin Behnam voiced help for laws to control the digital asset financial system. In a July 27 letter to SEC Chairman Gary Gensler, the Ranking Member of the U.S. Senate Banking Committee, Pat Toomey, who would probably change into the chair of that committee if management of the Senate modifications events on account of the upcoming mid-term elections, criticized the SEC for what Senator Toomey characterised as “choosing to regulate by enforcement” and urged the SEC to supply “regulatory clarity” to companies engaged in actions involving cryptocurrencies and different digital property.
