The Federal Deposit Insurance Corporation (FDIC) issued guidance on FDIC insurance and crypto assets – August 2022 #2 | Goodwin

EDITOR’S NOTE

In this edition. The Federal Deposit Insurance Corporation (FDIC) has taken action against false or misleading statements related to crypto; The Board of Governors of the Federal Reserve System (the Federal Reserve) has issued an oversight and regulatory letter regarding the risks associated with crypto-assets; The FDIC issued supervisory guidance on multiple resubmission fees without sufficient funds; The Market Participant Division of the Commodity Futures Trading Commission (CFTC) announced that it has issued an interim no-action letter with respect to the capital and financial statements of certain non-U.S. non-bank swap dealers (NBSDs); and the US Securities and Exchange Commission’s (SEC) Division of Investment Management observe differences in how registered investment companies (funds) that invest in TIPS calculate their standardized returns. These developments are discussed in more detail below.

Development of the regulatory framework

The FDIC is taking action against false or misleading crypto-related statements

On August 19, the FDIC issued letters (the letters) to five companies requesting that they cease and desist from making false and misleading statements about the FDIC and take immediate action to correct and address such statements. The letters are part of the FDIC’s efforts to educate the public about the scope of the FDIC’s deposit insurance coverage and to protect the public from confusion related to crypto companies making false claims of protection. In July 2022, the FDIC published a fact sheet explaining that crypto companies are not backed by FDIC deposit insurance despite claims of such coverage by some crypto companies. The letters stemmed from evidence gathered by the FDIC showing false misstatements on the companies’ websites and social media suggesting that certain crypto products were insured by the FDIC. The Federal Deposit Insurance Act (FDI Act) “prohibits any person from representing or implying that an uninsured product is insured by the FDIC or knowingly misrepresenting the extent and manner of deposit insurance.”

“The FDI Act further prohibits companies from implying that their companies are insured by the FDIC by using ‘FDIC’ in the company name, advertisements or other documents.”
– FDIC

The Federal Reserve provides additional information for banking organizations that engage in or wish to engage in activities related to crypto-assets

On August 16, the Federal Reserve published an oversight and regulatory letter regarding the risks associated with cryptoassets. This letter provides that a Federal Reserve-regulated banking organization engaged in or seeking to engage in activities related to cryptoassets must notify its lead point of contact at the Federal Reserve. The Federal Reserve is closely monitoring related developments and the involvement of banking organizations in activities related to cryptoassets. While the emerging crypto-asset sector presents many opportunities for banking organizations, it also presents increased and new risks. Activities related to cryptoassets may pose risks related to safety and soundness, consumer protection and financial stability, including technology and operations, terrorist financing, consumer protection, compliance and financial stability. Before commencing any activity related to cryptoassets, a supervised banking organization must satisfy itself that such activity is legally permissible and determine whether filings are required under applicable federal or state laws, and supervised banking organizations must have adequate risk management and control systems to carry out such activities in a safe and sound manner in accordance with all applicable laws, including applicable consumer protection laws and regulations.

The FDIC issues supervisory guidance on NSF fees for multiple resubmissions

On August 18, the FDIC issued guidance to FDIC-supervised institutions that charging additional shortfall funds (NSF) fees after the first presentation of a particular transaction exposes financial institutions to various risks, including: (1) violations of section 5 of the The Federal Trade Commission, prohibiting unfair or deceptive acts or practices; (2) third-party master processors responsible for identifying and tracking resubmitted items and providing systems for determining when NSF fees are assessed; and (3) class actions or other litigation. The FDIC encourages institutions to use risk mitigation strategies to reduce potential harm to consumers and avoid potential legal violations, such as (1) eliminating NSF fees; (2) refusing to charge more than one NSF fee for a given transaction; (3) reevaluating policies, procedures, and practices; (4) disclosing to customers details of how the institution charges NSF fees; or (5) ensuring that customers are notified of NSF transactions so that they can take action to avoid additional charges.

CFTC Staff Extends Temporary No-Action Letter Regarding Capital and Financial Statements for Certain Non-U.S. Non-Bank Swap Dealers

On August 17, the CFTC’s Division of Market Participants announced that it issued an interim no-action letter expanding the scope of CFTC Staff Letter No. 21-20 (Letter 21-20), issued on September 30, 2021, so that includes NBSDs that are established in a foreign jurisdiction and are subject to an upcoming review by the CFTC to determine comparability. The standstill position is also extended to temporarily registered NBSDs established in Japan, Mexico, the United Kingdom and the European Union, with the requirement that they remain in compliance with existing home country capital and financial reporting requirements and submit certain financial reporting information to CFTC.

The suspension letter is in response to a multi-party request from the Securities Industry and Financial Markets Association, the Institute of International Bankers and the International Swaps and Derivatives Association on behalf of NBSD members. The no-action position will expire on October 1, 2024, earlier, or if the CFTC issues a final Capital Comparability Determination with respect to each jurisdiction.

The SEC’s Division of Investment Management publishes the ADI with respect to TIPS-related investment companies and the SEC’s yield

On August 17, the SEC’s Division of Investment Management Disclosure Review and Accounting Office recently released an Accounting and Disclosure Information (ADI) regarding funds that both invest heavily in TIPS and advertise their standardized yield (the SEC yield). ADIs are publications that summarize staff views on federal securities laws.

In this recent ADI, the staff raised concerns about TIPS funds reporting potentially misleading returns to the SEC during periods of volatile inflation. In particular, the inflation protection features of TIPS may cause the Funds to post exceptionally high SEC yields during periods of rising inflation. As a result, the staff strongly encourages TIPS funds that choose to advertise their SEC yield to carefully consider their calculation methodology and the adequacy of their disclosures, such as using personalized and timely explanations, to make any statements about their SEC yield to are not misleading.

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