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


In this issue. The Federal Deposit Insurance Corporation (FDIC) took action against crypto-related false or misleading representations; The Board of Governors of the Federal Reserve System (Federal Reserve) issued an oversight letter and regulations regarding the risks associated with crypto-assets; FDIC issued supervisory guidance on insufficient funds re-submission fees; The Commodity Futures Trading Commission’s (CFTC) Division of Market Participants announced that it has issued an interim take-no-action letter regarding capital and financial reporting to certain non-US non-bank swap dealers (NBSDs); and the U.S. Securities and Exchange Commission’s (SEC) Division of Investment Management observed changes in how registered investment companies (Funds) that invest in Treasury Inflation-Protected Securities (TIPS) calculate their standardized yield. These developments are discussed in more detail below.

Regulatory Developments

The FDIC takes action against crypto-related false or misleading representations

On August 19, the FDIC issued letters (Letters) to five companies requiring them to cease and desist from making false and misleading statements to the FDIC and to take immediate action to correct and address allegations of such. The letters are part of an effort by the FDIC to educate the public about the scope of FDIC deposit insurance coverage and to protect the public from confusion about crypto companies making false claims about the protection. In July 2022, the FDIC issued 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 stem from evidence collected by the FDIC showing false misrepresentations on company websites and social media suggesting that some crypto products are 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’s name, advertisements or other documents.”

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

On August 16, the Federal Reserve issued an oversight and regulation letter regarding the risks associated with crypto-assets. This letter provides that a Federal Reserve-supervised banking organization that engages or seeks to engage in crypto-asset-related activities must notify its lead supervisory point of contact at the Federal Reserve. The Federal Reserve is closely monitoring related developments and the participation of banking organizations in activities related to crypto-assets. While the emerging crypto-asset sector presents many opportunities for banking organizations, it also presents increased and new risks. Activities related to crypto-assets may present risks related to safety and soundness, consumer protection and financial stability, including technology and operations, terrorist financing, consumer protection, compliance and financial stability. Before engaging in any activities related to crypto-assets, a supervised banking organization must ensure that such activity is legally permissible and determine whether any filings are required under applicable federal or state laws, and banking organizations of supervised entities must have adequate systems, risk management and controls to conduct such activities in a safe and sound manner in accordance with all applicable laws, including applicable consumer protection statutes and regulations.

FDIC issues supervisory guidance on NSF fees for multiple resubmissions

On August 18, the FDIC issued guidance to FDIC-supervised institutions that charging additional non-sufficient funds (NSF) fees after the first submission of a particular transaction exposes financial institutions to a number of risks, including: (1) violation of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices; (2) primary third-party processors responsible for identifying and tracking resubmitted items and providing systems to determine when NSF fees are assessed; and (3) class action or other litigation. The FDIC encourages institutions to use risk mitigation strategies to reduce potential consumer harm 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) re-evaluating policies, procedures and practices; (4) detailed disclosure to customers of how the institution charges NSF fees; or (5) ensuring customers are alerted to NSF transactions so they can take action to avoid further charges.

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

On August 17, the CFTC Market Participants Division announced that it has issued an interim no-action letter extending CFTC Staff Letter No. 21-20 (Letter 21-20), issued on September 30, 2021, to now include NBSDs that are domiciled in a foreign jurisdiction and are subject to a pending CFTC review of comparability determinations. A no-action position is also being extended to provisionally registered NBSDs domiciled in Japan, Mexico, the United Kingdom and the European Union, requiring them to remain compliant with the country’s existing capital and financial reporting requirements and to submit certain financial reporting information to the CFTC.

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

The SEC’s Division of Investment Management published ADIs about investment companies with respect to TIPS and the SEC’s Yield

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

In this latest ADI, staff expressed concerns about TIPS funds reporting potentially misleading yields to the SEC during periods of volatile inflation. In particular, the inflation-hedging features of TIPS can result in the funds experiencing unusually high SEC yields during periods of rising inflation. As a result, the staff strongly encourages TIPS Funds that choose to advertise their SEC Returns to carefully consider their calculation methodology and the adequacy of their disclosures, such as use adequate and timely explanations to make any statements related to their SEC Returns that are not misleading.

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