Recent action by the Consumer Financial Protection Bureau (CFPB) may bring some relief to fintech developers and the broader financial services industry as new products run into otherwise insurmountable regulatory hurdles that do not take into account or adapt to new technologies.

In a recent announcement by the CFPB’s Office of Innovation, its director has proposed the creation of a “Disclosure Sandbox” to encourage trial disclosure programs.

The greatest concern for many new developers and possible funding sources for those developers is that a new and innovative product may not be able to provide disclosures in the same way that traditional products have done, simply because consumer device sizes are shrinking while the amount of information regulators are requiring to be displayed without “clicking through” many screens is increasing. This poses a conundrum for the developer, which must reconcile competing issues and demands, including the size of a device screen, the limits of human eyesight—and patience!—and the demands of regulators.

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The Financial Industry Regulatory Authority (FINRA) has once more filed a rule change with the US Securities and Exchange Commission (SEC) to further delay the effective date of certain changes to its maintenance margin rule for covered agency transactions (e.g., to-be-announced transactions, specified pool transactions, transactions in collateralized mortgage obligations) until March 25, 2020. Final implementation of the rule’s requirements to collect margin on covered agency transactions was scheduled for March 25, 2019, which itself was a delay from a previous compliance date of June 25, 2018. As with the other delays, the new postponement was filed for immediate effectiveness and FINRA, in delaying the rule changes, said that it “is considering, in consultation with industry participants and other regulators, potential amendments to the requirements of [amended Rule 4210].” FINRA further states that it “believes that this is appropriate in the interest of avoiding unnecessary disruption to the Covered Agency Transaction market. Of note, the risk limit determinations of amended Rule 4210 that became effective on December 15, 2016, are not affected by the proposal.” In considering further changes to the Rule 4210 margin collection requirements, FINRA appears to be reacting to industry concerns regarding the competitiveness of certain FINRA members in this market.

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The Joint Committee of the European Supervisory Authorities (the ESAs) issued a report on 7 January 2019 on the status of regulatory sandboxes and innovation hubs following consultations with national regulators across the European Union.

The report compares the innovation hubs and regulatory sandboxes established in 21 EU member states and three EEA states, flagging too that Hungary and Spain are in the process of establishing regulatory sandboxes.

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Two years ago, we wondered in our blog post whether the staff of the US Securities and Exchange Commission (SEC) would have to further extend no-action relief to permit a broker-dealer to rely on an SEC registered investment adviser (RIA) to perform the broker-dealer’s customer identification program (CIP) requirements. And . . . here we are.

On December 12, the SEC staff issued the latest in a series of letters to the Securities Industry and Financial Markets Association (SIFMA). The letters conditionally extend no-action relief to allow a broker-dealer to rely on RIAs to perform some or all of the broker-dealer’s CIP requirements as well as the broker-dealer’s obligations under beneficial ownership requirements that went into full effect in May 2018.

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The US Senate has confirmed Kathy Kraninger to serve as the second director of the Bureau of Consumer Financial Protection (BCFP). She will serve a five-year term ending in December 2023, unless she is terminated for cause by the president. Thus, Kraninger will lead the agency through at least the first two years of the next presidential term.

Kraninger is currently an associate director of the Office of Management and Budget (OMB) where she reports to Mick Mulvaney, the OMB director and also the current acting director of the BCFP. She has previously served in other noncareer (political) positions in the Senate, the US Department of Homeland Security, and the US Department of Transportation.

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The staff of the Securities and Exchange Commission’s (SEC) Division of Trading and Markets (Staff) issued a no-action letter on October 29 to the Financial Industry Regulatory Authority (FINRA), which, in effect extends the effective date of recent changes to FOCUS reporting by registered broker-dealers. In August 2018, the SEC adopted amendments regarding, among other things, broker-dealer reporting with respect to reporting of extraordinary gains, the cumulative effect of changes in accounting principles, and comprehensive income reported on broker-dealer annual reports (i.e., Rule 17a-5). The amendments are scheduled to become effective for all filings made on and after November 5, 2018.

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The ongoing and accelerating pace of developments in the realm of cryptoassets in multiple jurisdictions warrants continual review and monitoring. In a report issued earlier this month on the implications of cryptoassets, the international Financial Stability Board (FSB) stated that, while cryptoassets do not currently pose a material risk to global financial stability, vigilant monitoring is needed in light of the speed of market developments. The FSB believes that due to risks such as low liquidity and the use of leverage, market risks from volatility, and operational risks, cryptoassets lack the key attributes of sovereign currencies and do not serve as a stable store of value or a mainstream unit of account. The financial stability implications of these cryptoasset characteristics include an impact on confidence in, and reputational risk to, financial institutions and regulators; risks arising from financial institutions’ exposures to cryptoassets; and risks arising if cryptoassets were to become widely used in payments and settlement. Therefore, regulators are encouraged to “keep an eye on things” as cryptoassets continue to spread throughout the world economy.

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As readers of our blog are aware, courts and regulators are playing catch-up when it comes to cryptocurrencies, and to interpreting existing laws and regulations as applied to these new and innovative offerings. One of these many important questions relates to whether virtual currencies are “commodities” within the meaning of the Commodity Exchange Act (CEA) and subject to regulation by the Commodity Futures Trading Commission (CFTC). A recent ruling by a US district court in Massachusetts held that a virtual currency (My Big Coin) is a commodity within the meaning of the CEA and is therefore subject to the anti-fraud authority of the CFTC, even though there currently is no futures contract on My Big Coin. My Big Coin is a Las Vegas-based creator of software that purportedly allows for the anonymous exchange of currency.

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On October 11, 2018, the Securities and Exchange Commission (SEC) will have an open meeting to consider whether to reopen the comment period and request additional comments (including potential modifications to proposed rule language) regarding the following:

(1) Capital, margin, and segregation requirements for security-based swap (SBS) dealers and major SBS participants, and amendments to Rule 15c3-1 for broker-dealers that were proposed in October 2012 (Financial Responsibility Proposal)

(2) Amendments proposed in May 2013 that would establish the cross-border treatment of SBS capital, margin, and segregation requirements (Cross-Border Proposal)

(3) An amendment proposed in April 2014 that would establish an additional capital requirement for SBS dealers that do not have a prudential regulator (Prudential Regulator Proposal)

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The five federal banking agencies (Federal Reserve, Bureau of Consumer Financial Protection, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency – collectively Agencies) have issued a joint statement on the role of supervisory guidance.

The statement says that supervisory guidance does not have the force and effect of law, and that the Agencies do not take enforcement actions based on supervisory guidance. However, the Agencies state that supervisory guidance outlines the Agencies’ “supervisory expectations or priorities and articulates the [A]gencies’ general views regarding appropriate practices for a given area.” For example, supervisory guidance often contains examples of practices that the Agencies “generally consider consistent with safety-and-soundness standards or other applicable laws and regulations.”

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