This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

Federal judge denies OCC’s authority to issue fintech charters. In a victory for state bank regulators, a federal district court has ruled that the OCC doesn’t have the legal authority to grant special-purpose national bank charters to financial technology companies that don’t take deposits. The final judgment, in favor of New York state’s financial regulator, by Judge Victor Marrero in the US District Court for the Southern District of New York, issued October 21, states that the National Bank Act’s “‘business of banking’ clause, read in the light of its plain language, history and legislative text, unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters from the OCC.” OCC, an independent bureau within the Treasury Department, first proposed the charter in 2015 as a way for firms in the emerging fintech sector to gain access to the nationwide financial system while avoiding the need to get separate licenses from every state in which they seek to operate. The New York State Department of Financial Services filed suit against the charter plan, arguing that OCC did not have the authority to establish the federal charter. A separate suit against OCC over the charter, filed by the Conference of State Bank Supervisors, was dismissed by a US District Court judge in DC last month. Given the legal challenges, no firms have yet applied to OCC for the charter, although Comptroller of the Currency Joseph Otting has indicated that the agency has received informal expressions of interest. OCC’s spokesperson has been quoted in media reports saying the agency plans to appeal the ruling.

House passes disclosure bill targeting shell companies. The House of Representatives on October 22 passed legislation requiring US corporations and LLCs, as well as applicants seeking to form such companies, to disclose on an annual basis a full list of beneficial owners to the Financial Crimes Enforcement Network, making it more difficult to use “shell companies” to conceal financial crimes. The legislation would also beef up staffing at FinCEN, encourage more coordination between FinCEN and Justice Department investigators, require the attorney general and Treasury secretary to consider raising the monetary threshold for banks filing suspicious activity reports, and update the definition of “coins and currency” to include cryptocurrencies. The Corporate Transparency Act of 2019 (HR 2513) passed the House on a 249-173 vote, with some bipartisan support. Its lead sponsors are Representatives Carolyn Maloney (D-NY), Chair of the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, and Peter King (R-NY), the second-ranking Republican on Financial Services.

  • HR 2513 incorporates the text of legislation known as the Coordinating Oversight, Upgrading and Innovating Technology and Examiner Reform (COUNTER) Act, a bipartisan measure that had passed out of the committee by a 55-0 vote earlier this year, representing the first major modifications to the Bank Secrecy Act’s anti-money laundering and combatting the financing of terrorism (AML-CFT) provisions since 2001. Other provisions include:
    • extending certain anti-money laundering detection and prevention practices and activities to commercial real estate transactions and the arts and antiquities industries;
    • increasing communication and collaboration between federal regulators, law enforcement, and financial institutions;
    • establishing a whistleblower rewards program to encourage the reporting of violations of the BSA and increasing penalties for BSA violations; and
    • promoting the use by financial institutions of innovative new technologies to detect and prevent money-laundering.
  • The White House signaled potential support for the legislation, but also called for changes. In a Statement of Administration Policy issued the day the bill passed the House, the Administration said that legislation would “help prevent malign actors from leveraging anonymity to exploit these entities for criminal gain,” and said “this legislation represents important progress in strengthening national security, supporting law enforcement and clarifying regulatory requirements.” But the White House said “certain steps must be taken to improve” the legislation, include aligning the definition of “beneficial owner” to FinCEN’s Due Diligence Final Rule, “protecting small businesses from unduly burdensome disclosure requirements,” and controlling access to information gathered under the proposed new disclosure regime.
  • Two similar measures with bipartisan support have been introduced in the Senate. The Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act (S 2563) was introduced in September by Senators Mark Warner (D-VA), Tom Cotton (R-AR) and other senators from both sides of the aisle. And a Senate version of the Corporate Transparency Act (S 1978) was introduced in June with Senators Ron Wyden (D-OR) and Marco Rubio (R-FL) as the lead sponsors. Both measures are awaiting action by the Senate Banking Committee.

IRS issues guidance and FAQs on cryptocurrencies. The Internal Revenue Service has issued additional guidance on the tax treatment of virtual currency and reporting obligations for taxpayers who engage in transactions involving virtual currency. The new guidance, announced October 9, includes Revenue Ruling 2019-24 and frequently asked questions (FAQs) from taxpayers and tax practitioners. It supplements the guidance the IRS issued on virtual currency in 2014, and the agency is also soliciting public input on additional guidance in this area. Virtual currency is treated as property and does not constitute currency, the revenue ruling reaffirms, and it differentiates virtual currencies from foreign currency, which, unlike virtual currency, is “legal tender, circulates and is customarily used and accepted as a medium of exchange in the country of issuance.” Two main questions are addressed in the revenue ruling. The first involves a “hard fork,” defined as “unique to distributed ledger technology” and occurring “when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger.” The second question addresses whether a taxpayer is deemed to have gross income under section 61 of the tax code as a result of an “airdrop” of a new cryptocurrency, “a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers.” Additionally, the FAQs address virtual currency topics like basis, gain or loss on the sale of exchange of virtual currency, and how to determine fair market value.

GAO says Fed guidance subject to Congressional review. Speaking of guidance, the Government Accountability Office has determined that three guidance documents issued by the Federal Reserve regarding large bank supervision should have been issued as rules subject to the Congressional Review Act. Five Republican senators, led by Senator Thom Tillis (R-NC) and including Banking Committee Chairman Mike Crapo (R-ID), asked the GAO in a February 22 letter to assess whether three Fed guidance letters imposing the framework for consolidated supervision of large financial institutions qualified as rules under the CRA. Tillis subsequently wrote to GAO about another Fed guidance letter. In response GAO sent two letters, both dated October 22. In the first letter, GAO informed the five senators that Supervision Regulation Letter 12-17, providing a new framework for supervision of large financial institutions, and SR Letter 14-8, addressing actions banks should take for recovery planning to return to solid financial condition, are both rules under CRA, requiring that they be submitted to Congress for review. But GAO’s legal opinion is that SR 15-7, setting forth the roles and responsibilities of the governance structure of the supervisory program, is not a rule under the CRA. GAO’s second letter, addressed only to Tillis, indicates that SR 11-7, “Supervisory Guidance on Model Risk Management,” is also a rule for purposes of the CRA. Congress has 60 legislative days to overturn the guidance, though many of the provisions of the guidance documents – which date back to 2011-2014 – have been superseded by other actions from the Fed. “I applaud the GAO for holding the Federal Reserve to the same standard as all government agencies and ensuring they abide by the Administrative Procedure Act to remain transparent and accountable to Congress,” said Senator Tillis. “Federal regulatory agencies should not be using rules improperly to place unnecessary regulations on financial institutions, and I will continue to work with my colleagues to hold regulatory agencies accountable.”

Presidential guidance on guidance. In another development relating to the use of guidance documents, President Trump has signed two executive orders meant to limit the use of this approach, which the Administration and many Congressional Republicans see as a means of circumventing the federal rulemaking process and denying the public an opportunity to provide input. The executive orders, both signed October 9, require that agencies seek comment on major federal guidance and provide fuller clarification to the public. The first executive order, Promoting the Rule of Law Through Improved Agency Guidance Documents, directs the Office of Management Budget to implement new policies for executive agencies to provide for notice and comment before finalizing significant guidance and more accessible databases with links to guidance documents. The second order, Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication, mandates that “agencies shall act transparently and fairly with respect to all affected parties … when engaged in civil administrative enforcement or adjudication,” requires prior public notice of the enforcing agency’s jurisdiction and legal standards, and calls for more public-private sector cooperation. Federal guidance has long been used by administrations to explain how federal policies are interpreted and implemented, and has the advantage of being a more expedited process than federal rulemaking, which can often take months or years.

Community bankers vs. credit unions. The Independent Community Bankers of America is mounting an offensive against what it called “the risky practices, costly tax subsidies and irresponsibly lax oversight of the nation’s credit unions.” In an October 21 announcement, ICBA urged Washington policymakers and the public to “wake up to the risks of aggressive, growth-obsessed credit unions and the costs of their taxpayer-funded subsidies.” ICBA’s “wake up” campaign will feature legislative and regulatory proposals, research, grassroots advocacy campaigns and other actions to review “credit unions’ US$2 billion taxpayer-funded annual subsidy” and challenge “the disturbing trend of large credit unions using their tax subsidy to buy smaller, taxpaying community banks … and furthering credit unions’ unbridled encroachment into full-service banking.” The two major credit union organizations are pushing back. Ryan Donovan, chief advocacy officer at the Credit Union National Association, and Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, were both quoted in media reports denouncing ICBA’s new campaign. Donovan decried the “unwarranted attacks on a movement that prides itself on providing value and financial benefit to American consumers,” while Berger called the ICBA campaign “strangely misaligned and not pointed at their real problem – the big banks are eating the community banking industry’s lunch.”

Fed, FDIC seek feedback on CAMELS rating. The Fed and the FDIC are soliciting public comment on their use of the Uniform Financial Institutions Rating System, commonly known as CAMELS ratings. The Request for Information, issued October 18, seeks comments on the consistency of ratings assigned under the CAMELS system, and how they can use CAMELS ratings in enforcement actions and in reviewing bank applications. CAMELS is an acronym of the six evaluation components: capital, asset quality, management, earnings, liquidity and sensitivity to market risk. In addition, the CAMELS rating system contains an overall composite rating. Because comments will be made public, the agencies advise submitters not to include confidential rating and examination information. Comments will be accepted for 60 days after publication of the request for information in the Federal Register.

Supreme Court to hear challenge to CFPB structure. The Supreme Court has announced that it will take up a case challenging the constitutionality of the CFPB. In an October 18 document granting certiorari (review of a lower court decision), the high court agreed to hear a case filed by Seila Law challenging the CFPB’s single-director structure. The CFPB last month joined the Justice Department in asking the court to determine whether the bureau’s leadership structure violates the president’s authority to remove executive branch officials from their posts. Under Dodd-Frank, the CFPB director can only be removed “for cause.” The DC Circuit Court of Appeals issued an en banc decision in 2016 that the agency’s structure is constitutional, reversing a decision made by a smaller panel of the court. A decision is likely by the end of June.

CFPB to host symposium on Dodd Frank small business provision. The CFPB will host a symposium on Section 1071 of the Dodd-Frank Act on November 6 at 9:30 a.m. ET. Section 1071 requires the CFPB to centralize the collection of small business lending data and make that data public. It also requires new data including the race, ethnicity and gender of the small business owner to be reported. The purpose of this section is to “facilitate the enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” CFPB said the symposium will provide a public forum for the bureau and the public to hear various perspectives on the small business lending marketplace and the bureau’s upcoming implementation of Section 1071. The symposium – which will be webcast on the CFPB website – is the third in a series “to explore consumer protections in today’s dynamic financial services marketplace,” the bureau said.