Nutter Bank Report: October 2021 | Nutter McClennen & Fish LLP

Headlines

  1. Federal and State Financial Regulators Publish New Guidance on LIBOR Transition
  2. CFTC Fines Two Cryptocurrency Firms for Violations of Commodities Trading Laws
  3. FinCEN Reports on Ransomware Trends Involving Insured Depository Institutions
  4. CFPB Publishes FAQs on New Debt Collection Communication Rules
  5. Other Developments: Dividends and COVID-19

1. Federal and State Financial Regulators Publish New Guidance on LIBOR Transition

The federal banking agencies, the NCUA and the CFPB, in conjunction with the state bank and state credit union regulators, have issued joint guidance on supervisory expectations for the transition by banks and other regulated institutions away from the London Interbank Offered Rate (LIBOR) as a reference rate. The joint guidance released on October 20 includes clarification about new LIBOR contracts and certain issues an institution should consider when assessing alternative reference rates. The joint guidance discourages regulated institutions from entering into new contracts that use LIBOR as a reference rate after December 31, 2021, because it would create safety and soundness risks, including litigation, operational, and consumer protection risks. The joint guidance clarifies that examiners will consider any agreement that creates additional LIBOR exposure for a regulated institution or that extends the term of an existing LIBOR contract to be a new LIBOR contract. Examiners will also expect a regulated institution to conduct due diligence when selecting an alternative reference rate to ensure that the alternative rate is appropriate for the “institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities.” The joint guidance also encourages regulated institutions to include fallback language in new or updated contracts that provides for the selection of a clearly defined fallback rate if the initially selected reference rate is discontinued. Click here for a copy of the joint guidance.

Nutter Notes:  According to the joint guidance, the agencies expect regulated institutions with LIBOR exposure to continue to prepare for LIBOR’s discontinuance. The joint guidance reminds banking institutions that the Federal Reserve, the OCC, and the FDIC have previously issued a joint statement encouraging banking institutions to stop entering into new contracts that use LIBOR as a reference rate as soon as practicable, but no later than December 31, 2021. The joint guidance encourages regulated institutions to develop a transition plan for communicating with customers and counterparties, and to ensure that systems and operations are prepared for transition to a replacement reference rate after LIBOR’s discontinuation. The OCC has separately issued an updated self-assessment tool for national banks and federal savings associations to evaluate their preparedness for the LIBOR transition. The updated LIBOR self-assessment tool released on October 18 replaces the LIBOR self-assessment tool that the OCC published on February 10, 2021. Click here to access the OCC’s updated LIBOR self-assessment tool.

2. CFTC Fines Two Cryptocurrency Firms for Violations of Commodities Trading Laws

The Commodity Futures Trading Commission (CFTC) has brought regulatory enforcement actions against two cryptocurrency firms resulting in $42.5 million in fines for violations of federal commodities trading laws and regulations. The CFTC announced on October 15 that it had ordered Tether Holdings Limited (Tether) and certain of its affiliates to pay a $41 million civil monetary penalty for making untrue or misleading statements and omissions of material fact in connection with its U.S. dollar token stablecoin. The order also requires Tether to cease and desist from any further violations of the Commodity Exchange Act (CEA) and CFTC regulations. The regulatory enforcement action against Tether marks the first time the CFTC has applied the CEA’s definition of a commodity to a stablecoin. The CFTC separately ordered iFinex Inc. and certain of its affiliates that do business under the name “Bitfinex” to pay a $1.5 million civil monetary penalty in connection with the Bitfinex cryptocurrency trading platform for operating as a futures commission merchant without registering with the CFTC, as required, and for other violations of the CEA and CFTC regulations. Click here for the CFTC’s announcement.

Nutter Notes:  The CFTC explained that Tether has represented to customers that the tether token “is a stablecoin with its value pegged to fiat currency and 100% backed by corresponding fiat assets, including U.S. dollars and euros.” However, according to the CFTC, Tether misrepresented to customers that Tether maintained sufficient U.S. dollar reserves to back every tether token in circulation with the equivalent amount of corresponding fiat currency held by Tether. The CFTC found that Tether’s reserves were sufficient to back U.S. dollar tether tokens in circulation for less than one-third “of the days in a 26-month sample time period from 2016 through 2018, and that Tether failed to disclose that it included unsecured receivables and non-fiat assets in its reserves.” The CFTC found that, while Tether represented to customers that it held all U.S. dollar tether token reserves in U.S. dollars, Tether actually relied on other third-parties to hold funds comprising the reserves, comingled reserves with Bitfinex’s operational and customer funds, and held reserves in non-fiat financial products. The CFTC also found that “Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract,” among other findings.

3. FinCEN Reports on Ransomware Trends Involving Insured Depository Institutions

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has reported that its analysis of ransomware-related suspicious activity reports (SARs) filed by insured depository institutions and other financial institutions during the first half of 2021 indicates that ransomware is an increasing threat to the U.S. financial sector and the public. According to the report published on October 15, the number of ransomware-related SARs filed monthly has “grown rapidly,” with 635 SARs filed and 458 transactions reported between January 1, 2021 and June 30, 2021, as compared with the total of 487 SARs filed for the entire 2020 calendar year. FinCEN also reported that the total value of suspicious activity reported in ransomware-related SARs during the first six months of 2021 was $590 million, as compared with $416 million reported for the entirety of 2020. FinCEN’s report identified the cryptocurrency bitcoin as the most common ransomware-related payment method in transactions reported in SARs during the first six months of 2021. Click here for a copy of FinCEN’s report.

Nutter Notes: The trends identified in FinCEN’s report may reflect the increasing overall prevalence of ransomware-related attacks against banks and other financial institutions, as well as improvements made by covered financial institutions in detecting and reporting ransomware incidents. FinCEN indicated that this trend may also indicate increased awareness of reporting obligations related to ransomware and increased willingness to report. According to the report, the total U.S. dollar value of ransomware-related transactions reported in SARs filed during the first six months of 2021 exceeds that of any previous year since 2011. FinCEN reported that, if the current trend continues, SARs filed in 2021 would have a higher ransomware-related transaction value than SARs filed in the previous 10 years combined. Last year, FinCEN published an advisory to alert financial institutions to predominant trends and potential indicators of ransomware attacks and associated money laundering activities. Click here for a copy of FinCEN’s 2020 ransomware advisory.

4. CFPB Publishes FAQs on New Debt Collection Communication Rules

The CFPB has issued new regulatory compliance guidance in the form of answers to frequently asked questions (FAQs) about the CFPB’s rules on debt collection communications implementing the Fair Debt Collection Practices Act (FDCPA) that go into effect on November 30, 2021. The FAQs published on October 1 clarify restrictions on telephone communications under the new rules on debt collection communications, and provide examples demonstrating how the rules will apply. The CFPB’s new collection communications rules apply to collection agencies, but the federal banking agencies generally expect banks to take reasonable steps to ensure that their vendors, including collection agencies, comply with applicable consumer protection laws and rules. For example, the FAQs provide clarification about what constitutes a “limited-content message,” including the required and optional content that may be included in a limited-content message under the new collection communications rules. A limited-content message is a voicemail left for a consumer that contains certain restricted content that will not be deemed to violate the prohibition against communicating with a third party in connection with the collection of a debt under the CFPB’s new collection communications rules. Click here for a copy of the FAQs.

Nutter Notes:  The CFPB’s new debt collection communication rules that go into effect on November 30 give consumers more control over how, and how often, debt collectors can communicate with them regarding their debts. The rules amended the CFPB’s Regulation F, which implements the FDCPA. Under Regulation F, debt collectors generally may not communicate with a third party in connection with the collection of a debt. Under the new rules, a limited-content message is considered only an attempt to communicate – not a communication – under the rules. A debt collector who leaves only a limited-content message does not violate the prohibition against third-party communications. The FAQs explain that a limited-content message is a voicemail message for a consumer that includes a business name for the debt collector that does not indicate that the caller is in the business of collecting debts, a request that the consumer reply to the message, and the name and telephone number of a natural person whom the consumer can contact to reply to the debt collector. The FAQs also clarify certain optional content that may be included in a limited-content message, such as the date and time of the message or suggested dates and times for the consumer to reply. The FAQs also provide guidance on permitted telephone call frequency by debt collectors.

5. Other Developments: Dividends and COVID-19

Division of Banks Provides Guidance on Dividend Approval Requirements

The Massachusetts Division of Banks issued an industry letter on October 27 reminding banks that, under certain circumstances, a Massachusetts bank must request approval from the Division before paying a dividend to stockholders. The industry letter provides examples of situations in which Division approval would, or would not, be required for dividends, and lists the information that should be submitted with a request to the Division for approval of a dividend.

Nutter Notes:  Under Massachusetts law, the Division’s approval of a proposed dividend is required if the bank’s year-to-date dividends would exceed the prior two years’ retained earnings plus net profit in the current period, less transfers to surplus or retirement of preferred stock. Among other things, a request for approval of a dividend should include capital planning information addressing the pro forma effect of the dividend on the bank for the following three years, any stress testing conducted that includes dividends, and a pro-forma balance sheet and income statement for the bank that accounts for the dividend. Click here for a copy of the industry letter.

Guidance Issued on Federal COVID-19 Vaccination Mandate for Government Contractors

The Safer Federal Workforce Task Force released guidance on September 24 on the requirement that employees of all federal contractors and subcontractors must receive a COVID-19 vaccination. The federal COVID-19 vaccination requirement applies to certain banks that conduct business with agencies of the federal government or that have branches on military bases or other federal property.

Nutter Notes:  On September 9, President Biden signed an executive order directing executive departments and agencies to include in contracts a clause requiring the contractor and any subcontractors to comply with all guidance published by the Safer Federal Workforce Task Force. The guidance clarifies, among other things, that an individual working on a covered federal contract from home must comply with the vaccination requirement for covered contractor employees even if the employee never works at the contractor’s workplace or at a government workplace. Click here for a copy of the guidance.


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