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Federal Reserve Board Chair Testifies On Enforcement Policy, Virtual Currency Oversight
On February 27, Federal Reserve Board Chairman Janet Yellen made her first appearance as Chair before the Senate Banking Committee. During the course of the question and answer session, Ms. Yellen responded to a recent letter from Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) that encouraged the Federal Reserve Board to play a larger role in major supervisory and enforcement decisions, as opposed to delegating most examination and settlement responsibilities to staff. Chairman Yellen generally agreed that the Board itself should play a larger part in supervision and enforcement and stated that she “fully expects” the Board to make changes to its policies. She added that with regard to legislation recently introduced by Senators Elizabeth Warren and Tom Coburn (R-OK) that would require greater transparency in federal settlements, the Federal Reserve Board intends to look carefully at what it discloses about enforcement actions and settlements and will try to provide more disclosure. Among the numerous other topics covered during the hearing, Chairman Yellen also addressed virtual currency issues, stating the Federal Reserve Board currently has no authority to oversee virtual currency. Her comments followed a letter sent on February 26, 2014 by Banking Committee member Joe Manchin (D-WV) to federal financial and enforcement authorities asking for a complete ban on Bitcoin in the United States. Ms. Yellen stated that while Congress should consider the appropriate legal framework for virtual currency, “there's no intersection at all in any way between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.”
State Regulators Form Emerging Payments Task Force
On February 20, the CSBS announced the formation of an Emerging Payments Task Force to study changes in payment systems—including virtual currencies and other innovations—to determine the potential impact on consumer protection, state law, and banks and nonbank entities chartered or licensed by the states. The Task Force is comprised of nine state regulators, including New York State Department of Financial Services Superintendent Lawsky who has recently indicated New York will seek to become the first state to directly address virtual currency through new regulations. The Task Force will be chaired by David Cotney, Commissioner of the Massachusetts Division of Banks, who testified on these issues on behalf of the CSBS last fall before the Senate Banking Committee. The CSBS stated that the Task Force will “take a comprehensive approach to studying the changing payment systems” by engaging with a broad range of federal, state, and industry stakeholders to understand how new entrants and technologies affect the stability of payment systems and the broader financial marketplace and “to develop ideas for connecting the emerging payments landscape to the financial regulatory fabric.”
New York DFS Identifies Potential Next Steps for Virtual Currency Regulation
On February 11, at an event on the future of virtual currency, New York DFS Superintendent Benjamin M. Lawsky reiterated his intention to move forward with a virtual currency rulemaking this year as the DFS is “increasingly coming to the conclusion that simply applying our existing money transmission regulations to virtual currency firms is not sufficient.” Mr. Lawsky’s remarks follow a recent two-day DFS hearing regarding the potential state regulation of virtual currency. According to his most recent remarks, the proposal may include a specifically tailored BitLicense that adapts existing money transmission rules to virtual currency. In addition, the proposed rules may, among other things, include “a strong set of specially tailored, model consumer disclosure rules” that could address, for example, the irreversible nature of most transactions, the need to keep private keys private, and potential volatility. The DFS proposal may also seek to address capital, collateral, net worth, and investment requirements. Mr. Lawsky explained that the DFS would like more input about whether it should require licensed firms to only use public ledgers and whether to ban or restrict the use of tumblers by licensed firms.
SDNY U.S. Attorney Details BSA/AML Enforcement Plans
On January 27, during a speech to certified AML compliance specialists, the U.S. Attorney for the Southern District of New York, Preet Bharara, stressed BSA/AML enforcement as a top priority for his office. Mr. Bharara focused on three issues: (i) the importance of holding institutions accountable for misconduct; (ii) the need for law enforcement to stay ahead of rapidly changing markets and technologies; and (iii) organizational changes within his office to bring the needed resources to bear. With regard to enforcement against institutions, the U.S. Attorney rebutted arguments that prosecutors should focus on individuals and described the full spectrum of tools available to hold institutions accountable—ranging from pursuing criminal prosecutions to seeking monetary fines and restitution through civil actions. He stressed the need to employ the full range of tools against institutions, especially in the AML context where many of the anti-money laundering laws and BSA provisions are specifically directed at institutions. The U.S. Attorney also announced that his office’s Criminal Division’s Asset Forfeiture Unit will be renamed the Money Laundering and Asset Forfeiture Unit to reflect his office’s commitment to dedicate more physical and human resources to addressing money laundering crimes and BSA violations.
FinCEN Releases Additional Guidance Related To Virtual Currency Mining, Software, And Investment Activity
On January 30, FinCEN issued two rulings related to virtual currency mining and virtual currency software development and investment activity. The guidance clarifies FinCEN’s previous convertible virtual currency guidance. In FIN-2014-R001, FinCEN explains that miners of Bitcoins, whether individuals or corporations, who are engaging in mining solely for the miner’s own personal purpose are “users” of virtual currency and not MSBs under FinCEN’s previous guidance. FinCEN found this to be the case even if the miner from time to time must convert the mined Bitcoins into real currency or another convertible virtual currency so long as the conversion is solely for the miner’s own purposes and not as a business service performed for the benefit of another. In FIN-2014-R002, FinCEN states that a company that develops its own software to purchase virtual currency for its own account and to resell the virtual currency at the company’s own discretion and based on the company’s own investment decisions also is not an MSB under FinCEN’s prior guidance.
New York DFS Hearing Considers Potential Regulation Of Virtual Currency
This week, New York State Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky presided over a two-day hearing regarding emerging virtual currencies and the appropriate role of regulation. The hearing was the next step in an inquiry announced last August, and was held as the NY DFS considers developing a state license specific to virtual currency that would subject operators to state oversight. The panels featured the views of private investors, virtual currency firms, regulatory experts, and law enforcement officials. From our view inside the room, the most prominent, theme to emerge is that regulators will need to strike a balance between protecting the public interest—both from a consumer protection standpoint and with regard to the potential for criminal activity—while allowing emerging virtual currency technologies to develop, evolve, and thrive.
Panelists agreed that bringing virtual currency activity into a regulatory framework is necessary, particularly with regard to ensure AML compliance. However, they added that recent criminal AML enforcement actions against virtual currency market participants suggested existing laws may be sufficient to meet the challenge. In general, they urged the NY DFS to apply existing laws and requirements and to otherwise “only regulate at the edges.” One panelist suggested implementing any new rules in tiered manner, allowing smaller players an “onramp” to compliance. All panelists stressed the potential economic benefits to allowing robust virtual currency markets to evolve domestically, and some panelists touted the potential broader positive impacts on ecommerce and the potential to reach individuals not served by the traditional banking sector.
Though cognizant of the potential economic benefits of allowing virtual currencies to take hold, NY DFS expressed concerns about too loose a regulatory structure, particularly with regard to the perceived risks of virtual currency to more easily facilitate money laundering and related illicit activity. In an interview between panels Mr. Lawsky stated: “It’s feeling more like little tweaks around the edges are not enough.” Federal and state law enforcement officials echoed those concerns. While they vowed to use existing laws to pursue wrongdoers, Deputy U.S. Attorney Richard Zabel and New York County District Attorney Cyrus Vance, Jr., challenged the assertion that enforcement of existing laws is sufficient to meet the challenges posed by virtual currencies.
Click here for links to written testimony and other hearing materials.
The hearing coincided with other events focused on virtual currency, including one co-hosted by BuckleySandler and Wells Fargo. Other industry experts discussed the rapidly emerging field of virtual currency. Panelists weighed-in on market trends, investment opportunities, compliance imperatives, and interoperability with traditional fiat currencies. Particular attention focused on regulatory compliance considerations, risk management, and policy frameworks.
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For additional information about the events above, or if you have questions about virtual currencies and other emerging financial services technologies, please contact any of the lawyers in our E-Commerce or Anti-Money Laundering practice areas, or any other BuckleySandler attorney with whom you have consulted in the past.
Special Alert: FHA Announces It Will Accept Electronically-Signed Mortgage Documents
On January 30, HUD issued Mortgagee Letter 2014-03, announcing that FHA will now treat electronic signatures as equivalent to handwritten signatures for certain mortgage documents. The announcement sets forth FHA’s first authorization of electronic signatures on mortgage documents (other than certain third party documents – see Mortgagee Letter 2010-14) and applies to FHA Single Family Title I and II forward mortgages and Home Equity Conversion Mortgages. The announcement is consistent with other government agency initiatives to promote a more streamlined and efficient mortgage process for consumers, particularly through the use of technology such as electronic signatures. Earlier this month, for example, the CFPB issued a request for information containing a questionnaire focused on improving the home loan closing process. “By extending our acceptance of electronic signatures on the majority of single family documents, we are bringing our requirements into alignment with common industry practices,” said FHA Commissioner Carol Galante. “This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss mitigation process.”
The announcement indicates that, effective immediately, FHA will accept electronic signatures on (i) any documents associated with servicing or loss mitigation; (ii) any documents associated with the filing of a claim for FHA insurance benefits; (iii) the HUD Real Estate Owned Sales Contract and related addenda; and (iv) all documents included in the case binder for mortgage insurance except the Note. FHA will begin accepting electronic signatures on the Note for forward mortgages, but not Home Equity Conversion Mortgages, on December 31, 2014. FHA already allows electronic signatures on documents originated and signed outside of the lender’s control, such as the sales contract.
FHA requires lenders that accept electronic signatures to comply with the ESIGN Act (15 U.S.C. §§ 7001-7006). The ESIGN Act mandates that the signer be presented the document before the electronic signature is obtained, that the document is true and correct at the time it is signed, and that the signature is attached to, or logically associated with, the documents being electronically signed. Lenders must also take steps to confirm the identity of the signer as a party to the transaction and to establish that the signature may be attributed to the purported signer. Lenders must have systems in place to ensure that information generated to confirm the identity of signers is secure and that electronically signed documents cannot be altered without detection.
In addition to citing the requirements of ESIGN, FHA sets some more specific requirements for certain elements of the signing process. These include requirements for establishing attribution of the signature and authentication of the signer. FHA also sets requirements for maintaining audit logs, computer systems, controls and documentation, and making them available for FHA inspection.
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Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Electronic Signatures and Records practice, or to any other BuckleySandler attorney with whom you have consulted in the past.
Ninth Circuit Affirms Dismissal Of Credit Card Fee Constitutional Challenge
On January 21, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a constitutional challenge to certain credit card fees. In re Late Fee and Over-Limit Fee Litig., No. 08-15218, 2014 WL 211729 (9th Cir. Jan. 21, 2014). A group of credit card holders filed a class action suit claiming that credit card overlimit fees and late fees are analogous to punitive damages imposed in the tort context, and therefore such fees are subject to substantive due process limits. The card holders asserted that because banks are compensated through high penalty interest rates for the lost time value and collection costs associated with any breach of the credit contract, the other charges are duplicative and therefore punitive. The court explained that its decision hinged on the similarities and differences between liquidated damages and punitive damages, and determined that the penalty clauses at issue originate from the parties’ private credit card contracts, and are distinct from the jury-determined punitive damages awards. The court held, therefore, that the “jurisprudence developed to limit punitive damages in the tort context does not apply to contractual penalties, such as the credit card fees at issue in this case.”
FTC Announces Settlement Over In-App Purchases By Minors
On January 15, the FTC announced that a major mobile technology company agreed to resolve allegations that it violated Section 5 of the FTC Act by failing to inform account holders that entering their password on their mobile device would open a 15-minute window in which children could incur unlimited charges within certain mobile applications with no further action from the account holder (in-app purchases). The settlement is open to public comment through February 14, 2014. Once finalized, the proposed settlement will require the company to refund at least $32.5 million to consumers who allegedly were billed for accidental or unauthorized in-app purchases by minors. The company will manage the remuneration process, including by providing notice to consumers and providing refunds promptly upon consumer request. Any funds remaining after 12 months of the final agreement must be remitted to the FTC. The company also must alter its billing practices to ensure it obtains express, informed consent before charging accountholders for in-app purchases.
Federal Reserve Board Seeks Comment On Designated Utilities' Risk Management Standards, Payment System Risk Policy
On January 10, the Federal Reserve Board proposed revisions to the Regulation HH risk-management standards for certain financial market utilities that have been designated as systemically important by the Financial Stability Oversight Council, and for which the Federal Reserve Board is the Supervisory Agency pursuant to Title VIII of the Dodd-Frank Act. The Board also requested comment on related revisions to part I of the Federal Reserve Policy on Payment System Risk (PSR policy), which applies to financial market infrastructures more generally, including those operated by the Federal Reserve Banks. The Federal Reserve states that both sets of proposed changes are based on and generally are consistent with the April 2012 Principles for Financial Market Infrastructures developed jointly by the international standard-setting bodies, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions. Among other things, the revisions: (i) establish separate standards to address credit risk and liquidity risk, (ii) add a standard on general business risk, and (iii) heighten requirements on transparency and disclosure. Comments on both proposals must be submitted by March 31, 2014.