Weekly RoundUp
May 25, 2023

FinCEN and the U.S. Department of Commerce’s BIS Issues Supplemental Alert Urging Continued Vigilance for Potential Russian Export Control Evasion Attempts

In this Weekly Roundup Issue. The Financial Crimes Enforcement Network (FinCEN) and the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a supplemental alert urging continued vigilance for potential Russian export control evasion attempts; Director Chopra of the Consumer Financial Services Bureau (CFPB) published a blog post addressing the recent shift away from calculating the average prime offer rate (APOR) based on data from Freddie Mac; and the Commodity Futures Trading Commission’s (CFTC’s) Division of Clearing and Risk issued a staff advisory encouraging entities to examine their obligations to register as derivative clearing organizations (DCOs). These and other developments are discussed in more detail below.

The Financial Services Weekly Roundup will be on hiatus next week in observance of the Memorial Day Holiday.

Regulatory Developments

FinCEN and the U.S. Department of Commerce’s BIS Issues Supplemental Alert Urging Continued Vigilance for Potential Russian Export Control Evasion Attempts

On May 19, FinCEN and BIS issued an alert urging financial institutions to watch for attempts to evade export controls imposed on Russia. The alert focuses on ongoing federal initiatives to limit Russian access to technology and goods needed to replenish its military and defense industrial base. The Alert supplements a previous alert issued by FinCEN and BIS in June 2022 and provides information on new export control restrictions implemented since that time. The new restrictions were developed with international allies and aim to cut off Russia’s access to critical components used for aircraft and tanks, semiconductors, other items needed for advanced military applications, and low-technology consumer goods needed for Russia to sustain its war effort. These additional restrictions also target third countries, such as Iran and China, that have served as supply nodes to Russia. The Alert also details evasion typologies, introduces nine new high priority Harmonized System codes to inform U.S. financial institutions’ customer due diligence, and identifies additional transactional and behavioral red flags to assist in identifying suspicious transactions relating to possible export control evasion.

CFPB Director Endeavors to Find Permanent Solution for APOR Patch

On May 17, CFPB Director Rohit Chopra published a blog post addressing the CFPB’s recent shift away from calculating APOR based on data from Freddie Mac. In his post, Director Chopra observed that the need for the CFPB’s new methodology for calculating APOR highlights deficiencies in a system dependent on overly complicated benchmarks from single sources rather than more robust market-based measures that stand on their own. Director Chopra acknowledged that the CFPB’s shift to a new data provider for APOR is only a patch, as the CFPB continues to explore long-term solutions for system resilience, reaffirming his commitment to eliminating unnecessary complexity in Federal consumer financial laws.

“The CFPB’s shift to a new data provider is a patch that will allow us to continue providing required benchmarks. Moving forward, we will continue to explore long-term solutions to move away from single points of failure, ensure system resilience, and eliminate unnecessary complexity.”

- Director Rohit Chopra, CFPB

CFTC Issues Staff Advisory Relating to Prime Brokerage Arrangements and Derivatives Clearing Organization Registration

On May 17, the CFTC’s Division of Clearing and Risk (Division) issued a staff advisory encouraging entities to examine their obligations to register as DCOs. The Division has noticed registration issues among swap execution facilities that use prime brokerage arrangements, particularly when using single prime brokers to provide centralized credit substitution to all swap execution facility participants. 

Entities should review whether they fall within the definition of DCO under 7 U.S.C. § 1a(15). The Division noted that when it is reviewing whether an entity qualifies as a DCO, it pays particular focus to subparagraph (A)(i), which covers an entity “that, with respect to an agreement, contract, or transaction . . . enables each party to the agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the [DCO] for the credit of the parties.” Division staff consider the totality of the circumstances when making this determination. The Division encourages any entity considering similar market structures to contact the CFTC. 

Goodwin’s Comments on the SEC’s Proposed Safeguarding Rule

On February 16, Goodwin circulated a client alert, “SEC Proposes Radical Transformation of Custody Rule Into New Safeguarding Rule,” concerning the proposed significant transformation of Rule 206(4)-2 (the Custody Rule) under the Investment Advisers Act of 1940 (the Advisers Act) into a new Rule 223-1 under the Advisers Act (the Safeguarding Rule) that would be applicable to SEC-registered investment advisers. On May 8, Goodwin submitted a comment letter addressing a wide range of concerns with the proposal. 

Read more about the comment letter in a recent client alert.

Fintech Flash – UDAAP: You’re at Risk — 10 Essential Tips for Protecting Your Business

When a regulator identifies an act or practice it deems adverse to the common good and there is no specific violation of law to cite, the fallback position has traditionally been to declare that act or practice unfair, deceptive, or abusive. Section 5 of the Federal Trade Commission Act empowers the Federal Trade Commission to take action when unfair or deceptive acts or practices are discovered in or affecting commerce. The Dodd-Frank Act added the concept of “abusive” acts or practices, providing CFPB with rule-making and enforcement authority to prevent unfair, deceptive, or abusive acts or practices (UDAAPs) in connection with any consumer financial product or service.

Read more about the 10 areas of focus for mitigating your UDAAP risk in our latest Fintech Flash.

Check Out Goodwin’s Latest Industry Insights

New York Fintech Forum: Investment Trends and Regulatory Updates (June 13)

Goodwin’s Fintech group will host a premier gathering of fintech companies, financial institutions, and investors at our New York office on Tuesday, June 13, to discuss the latest fintech trends facing the industry. The program will host two panels, outlined below, and will conclude with a networking reception. For more information and to RSVP, click here.

Program Agenda:

  • 3:00 pm – 3:30 pm | Registration
  • 3:30 pm | Welcome
  • 3:45 pm – 4:35 pm | Panel: Banks and Fintechs Joining Forces
    How fintech-bank partnerships are navigating the times, leading the way to the future of financial services.
  • 4:45 pm – 5:45 pm | Trends in Fintech Investments
    How have fintech investments been affected by the current market environment in 2023? Hear from investors and companies as to what fintech investment trends may emerge in the second half of 2023.
  • 5:45 – 7:00 pm | Networking Reception 

Check Out Goodwin’s Latest Industry Insights

Bank Failure Knowledge Center
Timely updates on important developments following the March 2023 US bank failures.

2022 Consumer Financial Services Year in Review
This in-depth report summarizes major regulatory, litigation, and enforcement activity that impacted the consumer financial industry in 2022, and identifies the key trends for 2023.

Consumer Finance Insights (CFI) Blog
The latest on consumer finance regulation, litigation, and enforcement.

FinReg + Policy Watch Blog
Stay on top of developments affecting the financial services community. 

Digital Currency + Blockchain Perspectives Blog
Stay on top of digital currency industry news, regulatory developments and issues.

Nicole Griffin
Samantha M. Kirby
William McCurdy

Josh Burlingham
Brennan Meier
Madeline Fuller