On June 24, 2020, the New York State Department of Financial Service (NYDFS) announced a series of virtual currency initiatives aimed at providing additional opportunities and clarity for BitLicense and limited-purpose trust company applicants and licensees. These initiatives include:
- A proposed framework for obtaining a conditional BitLicense when partnering with an existing licensee
- A proposed approach for NYDFS pre-approval of certain virtual currencies and a licensee’s ability to self-certify the use of new virtual currencies
- New procedures aimed at creating a more transparent and timely process for reviewing BitLicense applications
- A BitLicense FAQ page
The NYDFS’s press announcement stated that these initiatives were developed based on feedback from the industry to make it easier for virtual currency companies to successfully operate in New York. If the stated intent is achieved, these initiatives will be a welcome change for virtual currency businesses, which have often faced long timelines and a burdensome review process when submitting a BitLicense application or attempting to expand their approved activities. It remains to be seen, however, whether those objectives can be met.
The U.S. Office of the Comptroller of the Currency (OCC) has issued an Advance Notice of Proposed Rulemaking (ANPR)1 seeking input on how best to accommodate new technology and innovation in the business of banking, in connection with the OCC’s “comprehensive review” of its regulations at 12 C.F.R. part 7, subpart E (national banks), and part 155 (federal savings associations) (collectively, Rules). The ANPR offers industry participants an opportunity to shape future guidance and remove regulatory burdens to offering innovative new products, partnering with technology companies and enhancing operations through deployment of new technologies. The ANPR follows on the heels of regulators’ other efforts to address technological developments,2 with the caveat that the OCC is not seeking comment on authority to issue special purpose national bank charters.
On March 5, 2020, the Office of the Comptroller of the Currency (OCC) issued an updated set of answers to frequently asked questions (FAQs)1 regarding risk management in national bank relationships with third parties to further supplement its 2013 guidance, OCC Bulletin 2013-29 (the Bulletin),2 and its 2017 FAQs (Prior FAQs) on the topic.3 Twelve of the 27 FAQs are new and elaborate on a wide range of topics, including the broad intended scope of third-party risk management obligations, obligations of banks where negotiating power or access to information is limited, oversight of cloud computing providers and data aggregators and use of third parties in model development or delivery of alternative data for credit underwriting.
The California Department of Business Oversight (CDBO) recently concluded that the point of sale consumer financing programs offered by Sezzle, Inc., and another, unnamed party constituted making loans for purposes of the California Financing Law (CFL). A number of payment providers and technology companies have been developing innovative payment options, including consumer financing options, that are facilitated by advances in technology and mobile connectivity. Some market participants have structured their products such that a license should generally not be required under state law. The CDBO’s actions, however, may require companies to revisit that analysis and consider their licensing obligations.
On December 3, 2019, the five federal banking agencies1 issued a joint statement (the “Joint Statement”) regarding the use of alternative data for credit underwriting. The Agencies highlighted potential benefits that may arise from the use of alternative data, including the ability to make faster and more accurate credit determinations and the potential to provide credit at a lower rate or to individuals or small businesses that would otherwise be unable to access it. While the Agencies issued approving language regarding the use of certain types of alternative data, they also cautioned that the use of alternative data may have consumer protection implications, including fair lending, prohibitions against unfair, deceptive or abuse acts or practices and the Fair Credit Reporting Act.
On October 11, 2019, the leaders of the U.S. Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN) and the U.S. Securities and Exchange Commission (SEC) (together, the Agencies) issued a joint statement highlighting the application of anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA) to persons engaged in activities involving digital assets (Joint Statement). On the same day, the SEC filed an emergency action to halt a digital asset distribution, citing BSA/AML concerns.1
On July 31, 2018, the U.S. Office of the Comptroller of the Currency (OCC) announced its decision (the Fintech Charter Decision) to begin accepting applications from financial technology (fintech) companies for special purpose national bank charters.1 The OCC has indicated it will not grant a charter to a fintech company that wishes to accept deposits or engage in fiduciary activities (for business plans that involve purely fiduciary activities, a limited purpose trust charter may provide an alternative vehicle). The Fintech Charter Decision is discussed in greater detail in a prior Sidley Banking and Financial Services Update.2
On September 14, the New York State Department of Financial Services (DFS) filed a federal court complaint seeking to enjoin further actions by the OCC to implement the Fintech Charter Decision and related actions, arguing that such acts are lawless, ill-conceived and destabilizing of financial markets. DFS also argued that such acts are beyond the OCC’s statutory authority and in violation of the Tenth Amendment to the U.S. Constitution, alleging that the police power to regulate financial services and products delivered within a state’s own geographical jurisdiction is among a state’s fundamental sovereign powers.3 (more…)
On May 24, 2018, President Donald Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). The Act is effective immediately except as otherwise stated in certain provisions.
The Act makes many significant modifications to the postcrisis financial regulatory framework, although it leaves the core of that framework intact.
One major consequence of the Act may be an increased potential for mergers, acquisitions and organic growth among regional and midsize banks, as well as community banks, because of provisions that increase the thresholds that must be met before various financial regulatory requirements apply.
On April 3, 2018, the Financial Crimes Enforcement Network (FinCEN) issued new frequently asked questions (FAQs) regarding its customer due diligence rule (CDD Rule).
The CDD Rule applies to banks, broker-dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities (collectively, covered financial institutions or CFIs).
The CDD Rule includes four core elements of customer due diligence, each of which should be included in the anti-money-laundering (AML) program of a CFI: (1) customer identification and verification, (2) beneficial ownership identification and verification, (3) understanding the nature and purpose of customer relationships to develop a customer risk profile and (4) ongoing monitoring for reporting of suspicious transactions and, on a risk basis, maintaining and updating customer information. The second element — the beneficial ownership requirement — is new. FinCEN has described the other elements as preexisting AML program requirements for CFIs, although the third and fourth prongs were, at most, implicit requirements.
FinCEN issued new FAQs on the CDD Rule on July 19, 2016. These FAQs are timely because the May 11, 2018 compliance date for the CDD rule is fast approaching.
Here, we summarize several key takeaways regarding the beneficial owner requirement from the new FAQs.