Weekly Fintech Focus
- A regulatory freeze imposed by the new administration puts controversial rulemakings on ice.
- The CFPB finalizes its rule clarifying the role of supervisory guidance.
- Federal banking regulators issue FAQs on SAR filing obligations.
- The Federal Reserve continues to support the development of AI in financial services.
- OCC Issues Ruling Permitting National Banks to Use Certain Blockchain Technologies
- California issues proposed rules for sharing data on marijuana-related businesses to promote due diligence and KYC efforts.
Federal Regulation Actions Frozen Pending Review from New Administration
On January 20, 2021, newly inaugurated President Joe Biden issued a memorandum to the Heads of Executive Departments and Agencies asking current agency leaders to freeze implementation of all new or pending rules to allow the President’s appointees or designees to have an opportunity to review any new or pending rules. In the memo, the new administration asks that no new rules be implemented until a department or agency head appointed or designated by President Biden reviews and approves the rule—with the exception of emergency situations relating to health, safety, environmental, financial, or national security matters. Rules that have been sent to the Office of the Federal Register (“OFR”), but not yet published, should be immediately withdrawn pending this review. For rules that have been issued, but have not taken effect, the memo asks agency heads to consider postponing the rules’ effective dates for 60 days from the date of the memo.
The President’s memo may be accessed here.
This memo could affect the status of the Financial Crimes Enforcement Network’s (“FinCEN”) proposed rule regarding crypto wallets. FinCEN announced last week that it was extending the comment period for this proposed rule and then extended it again for an additional period of 60 days.
The OCC’s Fair Access to Financial Services final rule that we discussed in our blog last week was never submitted to the Federal Register despite the announcement by the OCC that the final rule had been issued. The OCC is an independent agency of the Department of the Treasury. Although the administration’s memo does not specify that independent agencies are subject to its requirements, it is likely that independent agencies like the OCC will comply, resulting in the withdrawal of this final rule.
CFPB Finalizes Rule on the Role of Supervisory Guidance
On January 19, 2021, the CFPB issued a final rule codifying a statement the CFPB made in concert with other federal financial regulatory agencies in September 2018 that clarified the difference between regulations and supervisory guidance. The rule states that supervisory guidance does not have the force and effect of law and that the CFPB will not take enforcement actions or issue supervisory criticisms based on non-compliance with supervisory guidance. Supervisory guidance should be used as guidance about the CFPB’s priorities and expectations or for understanding acceptable practices in different covered areas.
Federal Banking Regulators Issue FAQs on Suspicious Activity Report Filing Obligations
The federal banking regulators and the Financial Crimes Enforcement Network (FinCEN) issued a set of FAQs providing clarity on certain suspicious activity report (SAR) and other anti-money laundering (AML) obligations. The FAQs do not alter any existing obligations under the Bank Secrecy Act or AML regulations.
The FAQs address the following:
- The FAQs address multiple situations where a covered entity receives a grand jury subpoena, law enforcement request or other negative news related to a customer. The FAQs remind covered entities that in these situations they are not required to file a SAR. An entity can review and factor into its evaluation of a customer or a transaction the information it receives from the request or news item and make a determination about filing a SAR, but it is not required.
- The FAQs also address the maintenance or termination of accounts under different scenarios. For example, an entity need not maintain a customer account after filing a SAR, even if the entity has received a “keep open” request from law enforcement. An entity also is not required to terminate an account solely because it has filed SARs on a particular customer. Rather, an entity should make its decisions about maintaining or terminating a customer account based on its risk-based policies and procedures.
- The FAQs also address SAR narratives. The FAQs emphasize that narratives should be clear and concise. Information need not be repeated if already captured in other data fields of the SAR. If a narrative runs over the character limit in the SAR, the entity should work to write more concisely so that the relevant information fits on one SAR rather than filing multiple SARs to complete a narrative.
The Federal Reserve Continues to Support Efforts to Develop AI in Financial Services
Federal Reserve Board Director Lael Brainard gave a speech at the Federal Reserve’s AI Academic Symposium discussing the responsible use of AI in financial services. Ms. Brainard noted the many benefits that AI and machine learning processes offer to financial services, particularly the potential to extend services to “credit invisibles” that may not have existing credit data under traditional credit scoring methods. However, she also cautioned against some of the risks associated with AI and machine learning processes including challenges in explainability for black box algorithms. She notes that the Federal Reserve is committed to supporting efforts to develop and use AI responsibly to promote a safe, fair, and transparent financial services marketplace, and will explore whether additional supervisory clarity is needed to facilitate the responsible adoption of AI processes.
OCC Issues Ruling Permitting National Banks to Use Certain Blockchain Technologies
Earlier this month, the Office of the Comptroller of the Currency (“OCC”) issued an Interpretive Letter allowing national banks and federal savings associations to use stablecoin to conduct payments and other permitted bank activities and to participate in independent node verification networks (“INVN”). The move is supported by precedent concluding that banks should evolve and adapt to changes as they occur. In the letter, the OCC concludes that validating, sorting, and recording payment transactions by serving as an INVN node, using stablecoin, or exchanging stablecoin for fiat are all permissible bank-payment activities.
This OCC Interpretive Letter is available here.
California Marijuana Regulators Propose Disclosure Rules
In October 2020, California enacted AB 1525, which made it easier for businesses legally engaged in or servicing the cannabis industry in the state to access financial services and provided new information-sharing mechanisms to facilitate the relationship between cannabis businesses and financial institutions. This week, the California Bureau of Cannabis Control issued proposed regulations that address the information-sharing mechanism in the law. The proposed rule provides the manner in which marijuana-related businesses may authorize regulators to release non-public information to financial institutions for those institutions’ due diligence and know-your-customer purposes.