Weekly RoundUp
June 8, 2023

Agencies Issue Final Guidance on Third-Party Risk Management

In this Weekly Roundup Issue. The Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued final guidance on third-party risk management; the OCC introduced a revised policies and procedures manual for bank enforcement actions and related matters and also issued the updated Liquidity booklet of the Comptroller’s Handbook; the Consumer Financial Protection Bureau (CFPB) issued a warning on use of artificial intelligence chatbots in banking and issued a consumer advisory to payment app customers to transfer funds to insured banks and credit unions; six federal regulatory agencies proposed a rule on quality control standards for automated valuation models; and the Commodity Futures Trading Commission (CFTC) is seeking public comment on the risk management program requirements for swap dealers and futures commission merchants. These and other developments are discussed in more detail below.

Regulatory Developments

Agencies Issue Final Guidance on Third-Party Risk Management

On June 6, the Federal Reserve, FDIC, and OCC issued final joint guidance (the Guidance) pertaining to banking organizations’ risk management of third-party relationships, including relationships with financial technology companies. The Guidance reflects streamlined language and improved clarity based on the agencies’ consideration of public comments on the proposed guidance released in July 2021.

The Guidance covers risk management practices for all stages in the life cycle of third-party relationships: planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination. The Guidance provides examples to help banking organizations, particularly community banks, align their risk management practices with the nature and risk profile of their third-party relationships. The Guidance replaces each agency’s existing general third-party guidance.

OCC Enforcement Actions: Revised Policies and Procedures Manual for Bank Enforcement Actions and Related Matters

On May 25, the OCC released OCC Bulletin 2023-16, introducing the revised “Bank Enforcement Actions and Related Matters,” Policies and Procedures Manual (Manual) for bank enforcement actions and related matters. The Manual introduces a new Appendix C that discusses persistent weaknesses exhibited by banks which could warrant further action(s) by the OCC and the types of actions, requirements and restrictions that may be appropriate to address such persistent weaknesses. In addition to the above, the Manual incorporates updated legal and regulatory citations.

Liquidity: Updated Comptroller’s Handbook Booklet and Rescissions

On May 25, the OCC issued OCC Bulletin 2023-15, updating the Liquidity booklet (Booklet) of the Comptroller’s Handbook used by OCC examiners for the examination and supervision of banks. The Booklet provides guidance to OCC examiners when evaluating the “quantity of a bank’s liquidity risk and quality of liquidity risk management.” The update summarizes risks associated with liquidity, sets forth changes in regulations since the Booklet was last updated and clarifies edits pertaining to supervisory guidance and sound risk management practices.

CFPB Issues Warning on Use of “Artificial Intelligence” Chatbots in Banking

On June 6, the CFPB released a new issue spotlight warning that financial institutions should avoid using chatbots as their primary customer service delivery channel when it is reasonably clear that the chatbot is unable to meet customer needs. Noting complaints received by consumers, the CFPB identified several risks in using chatbots, including inaccurate responses that could lead a consumer to selecting a product or service that does not fit their needs or to incur fees or other penalties, failure of the chatbot to protect consumer privacy or data or recognize that the consumer is invoking certain rights, and diminishing confidence and trust in the financial institution. The CFPB advised that federal consumer financial protection laws require financial institutions to, among other things, respond to consumer disputes or questions and competently interact with customers about financial products or services and that the CFPB is actively monitoring the market to ensure that financial institutions’ use of chatbots is not in conflict with their customer and legal obligations.

“A poorly deployed chatbot can lead to customer frustration, reduced trust, and even violations of the law.”
- Director Rohit Chopra, CFPB

CFPB Advises Payment App Customers to Transfer Funds to Insured Banks and Credit Unions

On June 1, the CFPB released an issue spotlight and consumer advisory cautioning customers of nonbank digital payment apps that funds stored on these apps may not be safe in the event of financial distress, since the funds may not be held in accounts with federal deposit insurance coverage. The CFPB advised customers of these apps to transfer their balances to insured banks and credit unions. The CFPB also suggested that digital payment app user agreements should include (1) where funds are being held or invested, (2) whether and under what conditions such funds may be insured, and (3) what would happen if the company or entity holding the funds were to fail. CFPB Director Rohit Chopra warned that the CFPB, in coordination with other state and federal regulators, is sharpening its focus on digital payment apps that sidestep safeguards traditionally used by local banks and credit unions.

Six Federal Regulatory Agencies Propose Rule on QC Standards for Automated Valuation Models

On June 1, in recognition of the risks posed by algorithmic appraisals and automated systems and models, sometimes marketed as artificial intelligence, the Department of the Treasury, Federal Reserve, FDIC, National Credit Union Administration, CFPB and Federal Housing Finance Agency issued a proposed rule that would establish quality control standards for automated valuation models (AVMs) used by mortgage originators and secondary market issuers in valuing real estate collateral securing mortgage loans. The rule would also require institutions that engage in covered transactions to adopt policies, practices, procedures, and control systems to avoid conflicts of interest, to conduct random sample testing and reviews, to comply with applicable nondiscrimination laws, and to ensure that AVMs adhere to quality control standards that ensure the credibility and integrity of valuations.

Comments to the proposed rule must be received within 60 days of the proposed rule’s publication in the Federal Register.

CFTC Seeks Public Comment on the Risk Management Program Requirements for Swap Dealers and Futures Commission Merchants

On June 1, the CFTC published an advanced notice of proposed rulemaking seeking input on risk management programs rules that apply to swap dealers and futures commission merchants. The input received from the notice of proposed rulemaking will inform future changes to the risk management programs regulations. The regulations currently require swap dealers and futures commissions merchants to develop and implement an independent risk management program and specifically list certain risks that a risk management program must address. In addition, the regulations impose a reporting requirement. The CFTC seeks input on several areas of the regulations, including governance and structure, the enumerated risks that must be monitored and managed, reporting requirements, and the specific risk considerations that must be taken into account.

Comments must be received within 60 days of the advanced notice of proposed rulemaking’s publication in the Federal Register.

FINRA Asks How to Improve Capital Formation Rules; Public Companies and Fund Managers May Have Ideas

In Regulatory Notice 23-09, FINRA provides an update on actions it currently has under way to promote capital formation and the capital-raising process. FINRA also requests comment regarding whether there are other changes to FINRA rules, operations, or administrative processes that would similarly improve capital formation. The request for comment is general in nature, inviting observations on five topics, described below. Of particular interest to fund managers and placement agents who sell fund interests are proposed changes to the prohibition in Rule 2210 on the use of forecasts and projections in sales material.

Read more about Regulatory Notice 23-09 in a recent client alert.

ILPA Publishes Guidance on Continuation Funds

The Institutional Limited Partners Association (ILPA) has recently issued new guidance on continuation funds for the private funds industry, following its 2019 guidance on GP-led Secondary Fund Restructurings.

Read more on the ILPA new guidance here.

Check Out Goodwin’s Latest Industry Insights

Goodwin Insight: “Regulation by Enforcement” in the Digital Asset Industry: A Lagging Response to Stale Facts

Reliance on enforcement as the principal tool for regulation is beset by fundamental limitations as a means of policymaking and setting regulatory expectations for a nascent and rapidly evolving technology and industry.

Read more about this Goodwin Insight into enforcement trends in the digital asset industry here.

Final Days to RSVP: 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

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.

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William McCurdy

Josh Burlingham
Nico Ramos