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  • OCC releases bank supervision operating plan for FY 2024

    On September 28, the OCC’s Committee on Bank Supervision released its bank supervision operating plan for fiscal year 2024. The plan outlines the agency’s supervision priorities and highlights several supervisory focus areas including: (i) asset and liability management; (ii) credit; (iii) allowances for credit losses; (iv) cybersecurity; (v) operations; (vi) digital ledger technology activities; (vii) change in management; (viii) payments; (ix) Bank Secrecy Act/AML compliance; (x) consumer compliance; (xi) Community Reinvestment Act; (xii) fair lending; and (xiii) climate-related financial risks.

    Two of the top areas of focus are asset and liability management and credit risk. In its operating plan the OCC says that “Examiners should determine whether banks are managing interest rate and liquidity risks through use of effective asset and liability risk management policies and practices, including stress testing across a sufficient range of scenarios, sensitivity analyses of key model assumptions and liquidity sources, and appropriate contingency planning.” With respect to credit risk, the OCC says that “Examiners should evaluate banks’ stress testing of adverse economic scenarios and potential implications to capital” and “focus on concentrations risk management, including for vulnerable commercial real estate and other higher-risk portfolios, risk rating accuracy, portfolios of highest growth, and new products.”

    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

  • NYDFS updates criteria for virtual currency regulation

    State Issues

    Adrienne Harris, Superintendent of the New York State Department of Financial Services (“DFS”) issued an update on the VOLT initiative, an ongoing project to enhance DFS’s role as a virtual currency regulator. Superintendent Harris published proposed guidance adopting enhanced criteria for procedures to list and de-list virtual currencies as well as updated guidance for designating virtual currencies to the DFS “Greenlist.”

    The new General Framework for Greenlisted Coins sets (i) heightened risk assessment standards for coin-listing policies and enhances requirements for consumer-facing products; and (ii) new requirements associated with coin-delisting policies. Under the new guidance, a virtual currency entity that seeks to self-certify coins must create a coin-listing policy and may not self-certify any coins until such possibly has a written approval from DFS. A coin-listing policy must contain and be based on a robust governance structure; comprehensive risk assessment; consideration of factors to identify and mitigate risks involved in each coin and its uses; and policies and procedures to conduct continued monitoring of the coin to ensure consistent safety and soundness compliance.

    The new framework does not require prior approval from the DFS to list coins included on the Greenlist, but does require virtual currency entities that choose to list such coins to (i) provide advance notification to DFS and (ii) have a DFS-approved coin-delisting policy.

    State Issues Fintech NYDFS Digital Assets Cryptocurrency Risk Management

  • FDIC’s CRA evaluation rates fintech bank “needs to improve” for alleged FTC Act violations

    On September 5, the FDIC released the list of nonmember banks examined for compliance with the Community Reinvestment Act (CRA), which is intended to “encourage insured banks and thrifts to meet local credit needs.” Included in the list was a fintech bank that the FDIC rated as “Needs to Improve” for reasons involving its overall record of helping meet the credit needs of underserved communities. According to the FDIC’s CRA performance evaluation of the Utah-based bank, the FDIC adjusted the CRA rating from “Satisfactory” to “Needs to Improve” due to illegal credit practices that resulted in violations of Section 5 of the FTC Act, Unfair or Deceptive Acts or Practices that were present during the time of the evaluation period. The FDIC found that the bank’s actions impacted a significant number of customers across the bank’s fuel card programs, and that the practices were sustained for multiple years. The FDIC also noted that, after the bank was notified of the violations, it implemented corrective measures, including customer restitution.

     

    Bank Regulatory CRA FDIC Fintech Compliance FTC Act Unfair Deceptive

  • D.C. Circuit overturns SEC rejection of an investment company’s Bitcoin ETF

    Courts

    On August 29, the D.C. Circuit overturned the SEC’s denial of a company’s application to convert its bitcoin trust into an exchange-traded fund (ETF). In October 2021, the company applied to convert its bitcoin trust to an ETF pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 19b-4 thereunder, a proposed rule change to list and trade shares. In June 2022, the SEC denied the company’s application on the basis that the burden under the Exchange Act and the SEC’s Rules of Practice, which requires among other things, that the rules of national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”

    The company promptly appealed, alleging that the SEC “acted arbitrarily and capriciously by denying the listing of [the company]’s proposed bitcoin ET[F] and approving the listing of materially similar bitcoin futures ET[F]s”. The three-judge panel held that the SEC “failed to provide the necessary “reasonable and coherent explanation” for its inconsistent treatment of similar products” and “in the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”

    This decision does not mean that the SEC must approve the company’s application. However, the SEC must review the application again.

    Courts Fintech D.C. Circuit SEC Bitcoin Securities Exchange Act Appellate

  • SEC conducts its first-ever NFT enforcement again

    Fintech

    On August 28, the SEC entered an order against a Los Angeles-based media and entertainment company charging them with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs).  According to the order, the company offered and sold different tiers of NFTs to hundreds of investors between October and December of 2021, and ultimately raised approximately $30 million from the sales. The SEC alleged that the company encouraged potential investors to purchase the unregistered NFTs in return for an investment in the business, promising “tremendous value” to the purchasers if the company was successful in its attempts to “build the next Disney” and launch other creative projects. The order found that the NFTs were ultimately investment contracts and therefore securities, and that the company subsequently violated federal securities laws by offering and selling crypto assets in an unregistered securities offering that was not otherwise exempt from registration requirements.

    The SEC noted that all securities, in whatever form, are required to be registered and that when companies fail to register securities, “investors of all types are deprived of the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws.”  The company did not admit or deny the findings set forth in the order but agreed to cease-and-desist from violating registration provisions of the 1933 Act and pay a combined penalty of over $6.1 million in fees. The order also establishes a “Fair Fund” to return money to investors who paid to purchase NFTs.

    On the same day, the SEC released a statement from Republican commissioners, Hester M. Peirce and Mark T. Uyeda, underscoring the significance of the commission’s first NFT enforcement action. “People are experimenting with a lot of different uses of NFTs,” said the commissioners in their partial dissents. “Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty.” The commissioners further criticized the SEC’s failure to provide guidance on NFTs when they first started proliferating and raised several questions.

     

    Fintech Securities SEC Enforcement Cryptocurrency NFT Digital Assets

  • SEC charges fintech investment adviser for misleading advertising

    Securities

    On August 21, the SEC announced charges against a New York-based fintech investment adviser for using hypothetical performance metrics in misleading advertisements, compliance failures that led to misleading disclosures, and failure to adopt policies concerning crypto asset trading by employees, among other things. These charges mark the first violation of the SEC’s amended marketing rule.

    According to the order, the fintech investment adviser made misleading statements on its website by failing to include material information, and without having adopted and implemented required policies and procedures under the SEC’s marketing rule. The SEC also found that the company made conflicting disclosures regarding crypto assets custody and failed to adopt policies related to employee personal trading in crypto assets. 

    The company consented to the order finding that it violated the Advisers Act and without admitting or denying the SEC’s findings, entered into a cease-and-desist order, a censure, and agreed to pay $192,454 in disgorgement, prejudgment interest and an $850,000 civil penalty that will be distributed to affected clients.

    Securities Fintech Enforcement SEC Disclosures Cryptocurrency Cease and Desist

  • District Court splits order against crypto platform

    Courts

    On August 11, a split U.S District Court of the Southern District of New York partially granted and partially denied a crypto platform’s (defendant) motion to dismiss most charges for failure to state a claim upon which relief can be granted. Four months after plaintiff opened an account with defendant, a hacker siphoned approximately $5 million worth of Bitcoin from the account. Between the time the hacker accessed the account and withdrew the Bitcoin, plaintiff contacted the platform about being locked out of the account, to which defendant responded that the password change email could be in plaintiff’s spam folder. The complaint alleged that had the company locked the account, plaintiff would still have access to their Bitcoin, and that the platform has a duty to protect its customers’ assets and accounts. Among other things, the complaint also alleged that the platform violated the Electronic Fund Transfer Act (EFTA), the New York General Business Law, and the Michigan Consumer Protection Act.

    In its motion to dismiss, defendant argued that Regulation E does not apply to the platform because the EFTA language does not explicitly cover cryptocurrency and only references denominations of the U.S. dollar. Although a separate case against the same defendant determined EFTA did apply to the platform since the statute’s “funds” reference could reasonably cover cryptocurrency (covered by InfoBytes here), the judge’s order focused on, “electronic fund transfer”. The court more closely considered the purpose of the account, expressing uncertainty as to whether it was for personal, family, or household purposes. The court found that the definition of an “account” under EFTA does not include plaintiff’s electronic fund transfer account which was established for investment purposes. In the previous case against the same defendant, the court held that the defendant deceived the users regarding its security measures, but the judge presiding over this case disagreed. The court cut the claims of misrepresentation finding that plaintiff failed to allege that the statements were false at the time they were made. The order denies two claims: (i) that the defendant misrepresented its security level; and (ii) that the defendant failed to meet EFTA requirements and its implementing Regulation E, because investment purposes accounts are precluded from the statute’s protections. The court granted the other four counts.

    Courts Privacy, Cyber Risk & Data Security Fintech Digital Assets Cryptocurrency Bitcoin EFTA. New York Consumer Protection

  • Senators ask Treasury, White House for answers on North Korea’s crypo-crime funding

    Financial Crimes

    On August 4, Senators Elizabeth Warren (D-MA), Tim Kaine (D-VA), and Chris Van Hollen (D-MD) sent a letter to the White House National Security Advisor and the Treasury Department’s Under Secretary for Terrorism and Financial Intelligence regarding their concerns over North Korea’s use of cyberattacks and cryptocurrency theft to skirt international sanctions and embargos. The letter urges the Treasury to provide details on its plan to stop North Korea from using digital assets to evade sanctions and continue with the development of nuclear weapons and ballistic missiles. The senators noted that a UN report found that in 2016, “North Korea exhibited a ‘clear shift’ to attacking cryptocurrency exchanges for the purposes of ‘generating financial revenue’” that is difficult to trace and subject to less government oversight. The letter highlights the effects of the cyberattacks, including how they have generated about $2 billion, which is then used to fund the North Korean military.  The extent of the cybercrime and cryptocurrency thefts show its use is “key” to the regime’s survival, and notes that the regime has a workforce of thousands of IT workers who operate out of many different countries. The senators asked for a response to their five questions by August 16.

    Financial Crimes Fintech Cryptocurrency Digital Assets Bank Secrecy Act North Korea Department of Treasury

  • GAO calls for enhanced oversight of blockchain, alternative data

    Fintech

    On August 8, the U.S. Government Accountability Office (GAO) released letters sent to the OCC, SEC, FDIC and the Fed to provide an update on GAO’s “priority open recommendations” for each regulator. Priority open recommendations refer to suggestions from GAO to bank regulators that have the potential for cost savings, elimination of mismanagement, fraud, and abuse, or addressing high-risk or duplication issues. GAO suggested that all four agencies follow its recommendation to coordinate oversight of blockchain technology. GAO referenced recent “volatility, bankruptcies, and instances of fraud in the crypto asset markets” and underscored the dangers to consumers and investors without safeguards. GAO suggests regulators jointly establish a formal coordination method to promptly identify and address risks tied to blockchain.

    For the three banking regulators in particular—the OCC, FDIC, and Fed—GAO noted that in 2011 it recommended that the three banking regulators implement noncapital triggers for early regulatory intervention tied to risky banking practices, but that such triggers had not yet been implemented. GAO also suggested that banking regulators and the “communicate the appropriate use of alternative data in the underwriting process with banks that engage in third-party relationships with fintech lenders.”

    GAO’s letter to the Fed restated GAO’s 2016 recommendation that the Fed design “a process to communicate information about the uncertainty surrounding post-stress capital ratio estimates” and “articulate tolerance levels for key risks identified through sensitivity testing and for the degree of uncertainty in the projected capital ratios.” GAO also recommended that the Fed revisit its “prompt corrective action framework” by “adopting noncapital triggers that would require early and forceful regulatory actions tied to unsafe banking practices.”

    Fintech Blockchain Examination Congress CFPB Risk Management OCC SEC FDIC Federal Reserve GAO

  • Fed’s Barr raises concerns about AI redlining

    Federal Issues

    On July 18, Federal Reserve Vice Chair for Supervision Michael Barr delivered a speech on adjusting the Fair Housing Act and ECOA in response to the increasing relevance of artificial intelligence. Barr explained how the digital economy offers many great utilizations, such as accessing the creditworthiness of individuals without credit history and facilitating wider access to credit for those who may otherwise be excluded. Along with a digital economy, Barr cautioned, comes negative implications where technologies can potentially violate the fair lending laws and may perpetuate existing disparities and inaccuracies, among other things. Barr highlighted Special Purpose Credit Programs as a tool to address discrimination and bias in mortgage credit transactions. In addition, Barr highlighted two recent initiatives taken by the Fed to tackle appraisal discrimination and bias in housing mortgage credit transactions—one involved inviting public feedback on a proposed rule to uphold credibility and integrity in automated valuation models, and the other sought input on guidance addressing risks related to deficient home appraisals, emphasizing "reconsiderations of value" in the process. (Covered by InfoBytes here and here.) Barr also commented that through the Fed’s supervisory process, it is evaluating whether firms have proper risk management and controls, including with respect to these new technologies.

    Federal Issues Fintech Federal Reserve Fair Housing Act ECOA Artificial Intelligence Fair Lending Redlining Consumer Finance

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