Financial Services Regulatory Reform - SUMMER SPOTLIGHT EDITION July 13, 2021 - Davis Polk
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Financial Services Regulatory Reform SUMMER SPOTLIGHT EDITION July 13, 2021 Davis Polk & Wardwell LLP
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Table of Contents
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Privileged and Confidential
The Evolving Landscape
The Road Ahead: On the Agenda Climate Change Consumer Financial Protection
Slides 3 - 5 Slides 6 - 12 Slides 13 - 16
Disparate Impact Underbanked and Basic Access Cannabis-Related Banking and Marijuana Legalization
Slides 17 – 19 Slides 20 - 23 Slides 24 - 28
Capital and Stress Testing Securities Market Structure Reforms to Short-Term Funding Markets
Slides 29 - 34 Slides 35 - 36 Slides 37 - 41
BSA / AML Community Reinvestment Act Competition Order
Slides 42 – 45 Slides 46 – 47 Slide 48
Digital Transformation and Fintech Competition
Digital Assets Central Bank Digital Currency FedNow
Slides 49 – 51 Slides 52 – 55 Slides 56 - 58
Bank Charters Open Banking and Data Access
Slides 59 – 63 Slides 64 – 65
On the Docket
Valid-When-Made True Lender CFPB Task Force / Advisory Committee
Slides 66 - 67 Slides 68 - 69 Slides 70 - 71
Interchange Fees Litigation
Slides 72 - 74
These slides are designed to be a reference tool for the financial regulatory reform landscape. They gather in one place the state of play on a number of topics and set forth our
views on the general outlook. They will be updated from time to time. To stay up to date on all topics related to financial regulatory reform, we invite you to visit our one-stop
website at www.davispolk.com/capabilities/practice/financial-institutions/insights.The Evolving Landscape
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The Road Ahead: On the Agenda
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Social and Antitrust Policy at the Forefront: The Biden Administration is focused on activity at the
intersection of financial regulation and social policy, including climate change and expanding financial inclusion
and diversity. This intersection is also a key goal of House Financial Services Committee (HFSC) Chairwoman
Waters and Senate Banking Committee (SBC) Chairman Brown. In addition, the White House is focused on
“revitalizing” antitrust policy in the banking sector as part of its larger policy goals to enhance antitrust
regulation and enforcement across all sectors of the economy.
Congressional Legislative Priorities: Financial regulatory legislation has not emerged as a top priority for
this Congress and significant legislative changes are unlikely. The Democratic majority in both houses
nonetheless keeps open the possibility of incremental legislative action. Chairman Brown, in particular, has
several bills pending, which we highlight in the slides that follow.
Oversight and Regulation: We expect aggressive oversight of both the financial sector and the financial
regulatory agencies through hearings in both chambers.
─ Congressional hearings have been and will continue to be active, with pointed questions to both regulators
and private sector actors.
─ Statements by some that virtually all changes that happened in the Trump Administration should be
reversed have gone nowhere. The limited reversals are described in the following slides.
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The Road Ahead: On the Agenda
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Executive Orders: Given the sharply divided Congress, President Biden has already begun to rely heavily on
Executive Orders which encourage the independent agencies to follow his policy goals, such as in climate
change and antitrust, and which take a whole-of-the government approach. These Executive Orders will
influence independent agency regulatory agendas and actions but will not dictate them.
On Deck: In addition to the topics covered on the following slides, we expect to see Congressional and
regulatory attention turn to areas including nonbanks and FSOC activities regulation, source of strength,
overdraft fees, artificial intelligence, cross-border payments, fiduciary standards under the purview of the SEC
and the Department of Labor and executive accountability and compensation. Following the encouragement
of the Executive Order on Promoting Competition in the American Economy issued by President Biden on July
9, 2021 (the Competition Order), we expect that the Department of Justice and the banking agencies will
review the standards for mergers and acquisitions in the banking sector. See slide 48 below for more on the
Competition Order.
Regulatory Change and Leadership: There has been little concrete regulatory action thus far. Such change
is heavily influenced by the leadership of the federal prudential and market regulators, and a number of the
financial regulatory leadership posts still do not have Senate-confirmed appointees, while the pace of
nominations is slow. We expect the pace of regulatory change to accelerate late this year and into next year.
For the current status of financial regulatory leadership, see the next slide.
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Financial Regulatory Leadership as of July 13, 2021
Treasury Federal Reserve FDIC
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Secretary Deputy Secretary Chair Powell Vice Chair Vice Chair for Chairman Vice Chairman Director
Yellen Adeyemo Clarida Supervision Quarles McWilliams Gruenberg
Under Secretary Under Secretary Under Secretary Governor Governor Governor Governor CFPB Director Acting CFPB OCC Acting OCC
for International for Terrorism and for Domestic Brainard Waller Bowman Nominee Director Comptroller Comptroller
Affairs Financial Intelligence Finance Rohit Chopra* Dave Uejio** Michael Hsu***
Brian Eddie Nelson Nellie Liang
SEC CFTC
CFPB OCC
Chairman Commissioner Commissioner Acting Chairman Commissioner Commissioner
Gensler Lee Roisman Behnam Quintenz Stump
CFPB Director Acting CFPB OCC Acting OCC
Nominee Director Comptroller Comptroller
Rohit Chopra* Dave Uejio** Michael Hsu***
* The nomination of Rohit Chopra has been reported out of the SBC and is
awaiting confirmation by the full Senate.
** President Biden has nominated Dave Uejio to serve as Assistant Secretary for
Fair Housing and Equal Opportunity at the Department of Housing and Urban
Commissioner Commissioner Development. Commissioner Commissioner
Crenshaw Peirce *** President Biden has not yet submitted a nominee for permanent Comptroller. BerkovitzThe Evolving Landscape
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Climate Change
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General Outlook: Addressing climate change is one of the highest priorities of the Biden Administration and
financial regulators continue to increase their attention on climate-related issues.
─ In May 2021, President Biden released an Executive Order on Climate-Related Financial Risk, which,
among other things, directs the FSOC to consider engaging in a comprehensive assessment of climate and
financial stability, information sharing among its member agencies, issuance of a report to the President
within 180 days and inclusion of climate in its annual report to Congress. Please see this Davis Polk client
memorandum for more detail.
─ As part of his American Jobs Plan, President Biden has proposed a $27 billion “Clean Energy and
Sustainability Accelerator,” a public green bank intended to “mobilize private investment” for clean energy
projects. Legislation related to this proposal and promotion of green banks is discussed below on slide 12.
─ In June 2021, the G7 Finance Ministers & Central Governors released a communiqué that included
discussions of climate-relate financial disclosures and the risks climate change poses to financial
institutions, demonstrating that these issues are high on the international financial regulatory agenda.
─ In April 2021, Treasury created a Climate Hub, led by inaugural Climate Counselor John E. Morton, to
coordinate work on climate transition finance, climate-related economic and tax policy and climate-related
financial risks.
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Climate Change
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SEC: The SEC has been active in the climate change area in the first quarter of 2021:
─ Then-Acting Chair Lee directed staff to evaluate the SEC’s disclosure rules “with an eye toward facilitating
the disclosure of consistent, comparable, and reliable information on climate change,” and requested public
input to facilitate the staff’s assessment. Comments were due June 13, 2021 and are summarized in our
client update available here.
Based on the Spring 2021 Unified Agenda of Federal Regulatory and Deregulatory Agenda (Spring 2021
Unified Regulatory Agenda), as well as a June speech by Chair Gensler noting commenters’ “call for
enhanced disclosures” and that he has asked staff to develop climate disclosure recommendations, the
SEC is expected to issue a notice of proposed rulemaking on climate disclosure in October 2021. We
expect feedback on the request for public input to inform this rulemaking.
─ The Division of Examination announced that its 2021 examination priorities would include a greater focus on
climate-related risks and the SEC announced the creation of a Climate and ESG Task Force in the Division
of Enforcement, which will be led by Acting Deputy Director of Enforcement Kelly L. Gibson.
In response to these initiatives, two Republican leaders from HFSC in April 2021 issued a letter to Chair Gensler
shortly after his confirmation arguing that SEC action on climate should be grounded in the SEC’s historical
materiality standard and be implemented through a process consistent with the Administrative Procedure Act.
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Climate Change
CFTC: In March 2021, building on past work, Acting CFTC Chairman Behnam announced the creation of a
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Climate Risk Unit to focus on the role of derivatives in understanding, pricing and addressing climate-related
risk and transitioning to a low-carbon economy.
FDIC: In written HFSC testimony in May 2021, Chairman McWilliams noted that “the FDIC expects financial
institutions to consider and appropriately address potential climate risks.” She also noted that the FDIC will
continue to monitor the impact of climate risks and engage with other domestic and international regulators.
Federal Reserve: In testimony before the HFSC in March 2021, Chair Powell stated that the Federal Reserve
is “at a very early stage of understanding the risks to regulated financial institutions from climate change” and
emphasized that the Federal Reserve’s policy is not to mandate which businesses banks may or may not lend
to.
Vice Chair for Supervision Quarles echoed similar sentiment in testimony before each of the HFSC and SBC in
May 2021, stating that it is incumbent upon financial regulators to explore potential risks to the financial system,
including climate risks, but that it is not the Federal Reserve’s role to advance a particular view of climate policy.
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Climate Change
Fed Regulatory Agenda: While Federal Reserve examination of climate change risks is at an early stage,
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materials and commentary suggest the regulatory agenda could include:
─ Climate-related scenario analysis
The Network for Greening the Financial System (NGFS), a group of central banks and supervisors that
the Federal Reserve joined in December 2020, in June 2021 released its second iteration of climate
scenarios. The next day, the Bank of England published its own scenarios for use in its exploratory
analysis, with results expected in March 2022.
─ Supervisory focus on climate-related risk management practices
─ Evaluation of concentration risks and underwriting standards in lending to non-green sectors (e.g., fossil
fuels)
─ Potential incentives to encourage environmental efforts such as classifying investments in local disaster
recovery as Community Reinvestment Act-eligible activities
For further discussion on the Community Reinvestment Act, see slides 46 and 47.
Others have expressed skepticism about the Federal Reserve’s authority to regulate climate change, including
Republican members of the Senate Banking Committee in a March 2021 letter to Chair Powell, available here.
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Climate Change
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OCC: On his first day in office, Acting Comptroller Hsu acknowledged the risks climate change poses to banks,
stating that the OCC needs to make sure banks “understand those risks and are capable of managing them.”
─ In May 2021 HFSC testimony, he stated that “we must act on climate change,” proposing a two-pronged
approach:
Exploring the OCC joining the NGFS; and
Supporting effective climate risk management practices at banks
─ In a May 2021 Politico interview, he stated that the OCC is “catching up” to the Fed and Bank of England on
climate scenario analysis, noting it is “really hard” and will take some time to develop.
Treasury: Secretary Yellen stated in March 2021 HFSC testimony that climate change is a “top priority” of the
Biden administration. Treasury’s initiatives include:
─ Like Federal Reserve Chair Powell, Secretary Yellen has clarified that Treasury’s climate efforts should not
be read as suggesting the government should dictate lending decisions.
In March 2021, Secretary Yellen testified before the HFSC that “financial regulators should be assessing
the risks to financial institutions through stress testing and other techniques, and…investors need
disclosure of risk, but have no plan to regulate what lending or investments can be done.”
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Climate Change
In testimony before the SBC the next day, Secretary Yellen stated that it is appropriate for the government
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to encourage banks, financial institutions and other lenders to think about potential adverse impacts of
their investments.
FSOC: The FSOC discussed climate and financial stability at its March 31, 2021 meeting, with Secretary Yellen
describing climate change as posing “a tremendous risk to our country’s financial stability.”
─ The FSOC also received at its June 11, 2021 meeting an update from Treasury staff regarding progress on
climate change.
─ Based on President Biden’s May 2021 Executive Order, we expect FSOC will continue to play a key
coordination role on climate.
Basel Committee: In February 2020, the Basel Committee created the Task Force on Climate-related
Financial Risks, co-chaired by Kevin Stiroh, former head of the FRBNY’s Supervision Group.
─ In April 2021, the Basel Committee released two reports discussing transmission channels and
measurement methodologies of climate-related financial risks.
─ The Basel Committee has stated that it will next investigate the extent to which the existing Basel
Framework can address climate-related financial risks, identify potential gaps and consider possible
measures to address them.
─ For additional information on potential changes to bank capital requirements, see slide 32.
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Climate Change
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Legislative Initiatives: Various bills have been introduced in Congress in the first half of 2021, including:
─ The Addressing Climate Financial Risk Act could accelerate gathering of data and bolster emerging efforts to
embed climate risks into actions taken by financial regulators and would, among other things:
Establish an FSOC committee dedicated to assessing and providing recommendations to federal and
state financial regulatory agencies and Congress about climate risk and the financial system, including
through publication of an annual report
Require federal bank regulatory agencies to update applicable supervisory guidance to include climate risk
Require the FSOC to update its guidance regarding nonbank SIFI designations to reflect climate risk
─ The Climate Risk Disclosure Act would direct the SEC to issue rules requiring public companies to make
climate-related disclosures.
─ The Climate Change Financial Risk Act, would direct the Federal Reserve to develop climate scenarios and
conduct biennial scenario analyses.
─ Among other bills with similar goals, the CLEAN Future Act and the National Climate Bank Act would promote
the creation of “green banks” and, in the case of the latter, also establish a “National Climate Bank.”
─ The Greater Supervision In Banking (GSIB) Act, approved by the HFSC in June 2021, would require GSIBs
to issue annual reports including, among other things, information on their actions taken in relation to climate
risk and contribution to climate change.
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Consumer Financial Protection
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General Outlook: In the Spring 2021 Unified Regulatory Agenda, the CFPB identified a number of
administrative actions that it intends to tackle and, notably, backed off from previous plans to potentially design
new disclosures for payday loan borrowers—a project that began last fall under former Director Kathleen
Kraninger to conduct consumer testing of payday loan disclosure options for a possible rulemaking on the
subject was scrapped from the agenda. The CFPB did note that Acting Director Uejio's decision to withdraw or
table any given rulemaking project should not necessarily be read as a "substantive decision on the merits.”
─ The Spring 2021 Unified Regulatory Agenda further elaborated that the agency will prioritize issuing a final
Libor transition rule for consumer products, completing its pandemic-related mortgage servicing rule
proposed in April 2021, finalizing data-reporting requirements on small-business lending and finalizing
consumer financial data-sharing rules. For more information on the data-sharing rules, see the Open
Banking and Data Access section at slide 64.
─ Additionally, the Spring 2021 Unified Regulatory Agenda emphasized that “[the CFPB’s] new director, when
confirmed, will assess further what regulatory actions the bureau should prioritize to best further our
consumer protection mission and mandate, particularly in light of the ongoing pandemic and resulting
economic crisis and the bureau's commitment to promoting racial equity.”
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Consumer Financial Protection
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We expect the CFPB to focus on topics beyond what was identified in the Spring 2021 Unified Regulatory
Agenda, including:
─ Increased enforcement efforts, which would build on the recent upward trend, with a reinvigorated Office of
Fair Lending and Equal Opportunity empowered to target lenders found to engage in discriminatory
practices
─ Use of the disparate impact standard to hold “major financial institutions accountable for discriminatory
lending practices,” discussed on slides 17 - 19 in the Disparate Impact section
─ Enhanced scrutiny of higher education lenders, servicers and debt collectors and forbearance of federal
student loans
─ Establishment of a federal standard for appraisals and appraiser training requirements to address racial
biases that contribute to persistent undervaluation of properties in communities of color
─ Small dollar lending practices and underwriting standards, and the establishment of a federal usury limit,
though this would require Congress to act
─ Bolstering protections against abusive debt collection practices, with a particular focus on overdraft fees
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Consumer Financial Protection
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Competition and UDAAP: In addition, the Competition Order provides the CFPB a stronger role at the White
House Council than the prudential banking agencies and encourages the CFPB to broadly read its jurisdiction
unfair, deceptive, or abusive acts or practices (UDAAP) authority so as to ensure competitive markets for
consumer financial products and services.
Enforcement: Acting Director Uejio has also said that the CFPB is “planning to rescind public statements
conveying a relaxed approach to enforcements of the laws in our care.” Consistent with this statement, on
March 11, 2021, the CFPB rescinded self-imposed restrictions on its ability to collect civil penalties and
disgorgement from banks and financial companies for abusive acts and practices. Additionally, in the Spring
2021 Unified Regulatory Agenda, the CFPB downgraded a project exploring how to use its rulemaking
authority to set more boundaries on what it considers abusive conduct from a longer-term initiative to inactive
status.
Strengthen Fair Lending and Fair Housing: The Biden Administration has started to roll back regulatory
measures undertaken during the Trump Administration that are viewed as reducing the efficacy of fair housing
protections, such as reinstating the federal risk-sharing program to incentivize private sector funding of
affordable housing, and has signaled that strengthening fair lending and fair housing will be a CFPB priority.
For a deeper dive on the CFPB’s actions to strengthen fair lending and fair housing, see slides 17 - 19 in the
Disparate Impact section.
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Consumer Financial Protection
─ Reinstating the federal risk-sharing program to incentivize private sector funding of affordable housing
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─ On March 9, 2021, the CFPB issued an interpretive rule clarifying that the prohibition against sex
discrimination under the Equal Credit Opportunity Act and implementing Regulation B extends to
discrimination involving sexual orientation and gender identity.
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Disparate Impact
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Fair Lending: We expect an increase in fair lending enforcement actions by the CFPB, including based on
disparate impact.
─ Acting CFPB Director Uejio said that fair lending enforcement will be a top priority for the CFPB, with a focus
on racial equity, but that the CFPB will also “look more broadly, beyond fair lending, to identify and root out
unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”
─ Rohit Chopra, President Biden’s nominee for CFPB Director, affirmed his commitment to fair lending
enforcement in his confirmation hearing before the SBC.
─ The CFPB’s fair lending enforcement focus will not be limited to racial discrimination. The CFPB stated in a
March 2021 interpretive rule that the Equal Credit Opportunity Act (ECOA) and Regulation B prohibit
discrimination by lenders based on sexual orientation and gender identity.
─ The CFPB may issue a rule or guidance clarifying its approach to disparate impact analysis under the ECOA
and/or Regulation B, as the CFPB suggested in a July 2020 request for information.
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Disparate Impact
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AI and Alternative Data: The major financial regulators have issued a request for information on the use of AI
and alternative data. The request includes multiple questions on AI and fair lending, including on the risks that
AI can be biased and/or result in discrimination on prohibited bases.
─ The National Community Reinvestment Coalition and six fintech companies submitted a letter to the CFPB
requesting guidance on how the CFPB will apply ECOA and Regulation B to systems that use AI or
alternative data to make lending decisions. Among other things, the letter recommends that the CFPB align
Regulation B’s “legitimate business need” standard to HUD’s 2013 discriminatory effects rule.
─ For more detailed discussion and analysis of the major financial regulators’ focus on AI and
machine learning, our client memorandum is available here.
Federal Reserve Racial and Economic Equity Act: In April 2021, the HFSC passed a bill introduced by
Chairwoman Waters that would require the Federal Reserve to exercise all its duties and functions in a
manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment
income, wealth, and access to affordable credit. Senators Warren and Gillibrand introduced a Senate version.
OCC: Acting Comptroller Hsu has emphasized that under his leadership, addressing inequality will be a top
OCC priority. He has also emphasized the need to eliminate racial bias in home value appraisals and
indicated support for enforcement actions against banks that use discriminatory appraisals.
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Disparate Impact
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Fair Housing: HUD issued two rules in June 2021 following an Executive Order from President Biden
directing HUD to examine the effects of two Trump Administration rules.
─ An interim final rule repeals the Trump Administration’s 2020 Affirmatively Furthering Fair Housing (AFFH)
rule and restores certain definitions and certifications from the Obama Administration’s 2015 AFFH rule.
The interim final rule does not reinstate the standardized assessment that was required under the 2015
AFFH rule. HUD will issue a separate proposal on a new fair housing planning process and framework.
─ A proposed rule would repeal the Trump Administration’s 2020 rule on disparate impact standard under the
FHA and recodify the discriminatory effects standard from the Obama Administration’s 2013 rule.
The Trump Administration’s 2020 rule, which would have introduced more stringent pleading
requirements for plaintiffs making disparate impact claims, was due to go into effect in October 2020 but
was stayed by a Massachusetts federal district court ruling.
─ Like the CFPB, HUD announced in February 2021 that it will administer and enforce the FHA to prohibit
discrimination based on sexual orientation and gender identity.
─ In June 2021, the Biden Administration announced, as part of its strategy to address the racial wealth gap,
“a first-of-its-kind interagency effort to address inequity in home appraisals, and conduc[t] rulemaking to
aggressively combat housing discrimination.”
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Underbanked and Basic Access
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Banking Access: The following are some of the most prominent proposals to increase banking and financial
services access.
Banking for All Act: Chairman Brown continues to voice his support for the Banking for All Act, which would
require Federal Reserve member banks to offer direct digital U.S. dollar accounts to all U.S. individuals and
businesses.
─ Banks would be required to offer certain minimum banking services on terms no less favorable than those
that the bank offers for existing transaction accounts, provide a minimum interest rate and not charge
account fees or have minimum or maximum balance requirements.
─ In areas with limited access to Federal Reserve member banks, such banks would be required to partner
with U.S. Postal Service retail facilities to provide access to accounts.
─ As discussed on slides 52 - 55 in the Central Bank Digital Currency section, the Banking for All Act and two
other pending bills would also provide for direct digital dollar accounts for individual and businesses at
Federal Reserve Banks.
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Underbanked and Basic Access
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Postal Banking: Although we believe that postal banking is unlikely to gain traction, several Democrats in
both the Senate and the House are vocal proponents, including Senators Sanders and Warren. Short of full
postal banking, the U.S. Postal Service could be leveraged to facilitate access to other programs, as proposed
in the Banking for All Act. 33 House members voiced support for including postal non-bank financial services
pilot programs in the fiscal year 2022 Appropriations Bill.
─ Chair Powell has expressed skepticism toward the Federal Reserve holding customer deposits, replying in
the negative when asked, at a hearing before the SBC on March 24, whether the Federal Reserve is
equipped to service individual retail and commercial accounts. He went on to underscore that “that has
never been our role and it's really not been the role of other major central banks. It would be quite a
dramatic change in our role in the economy and one that I think should require very careful thought.”
Public Banking: Today, only one state-owned bank exists, in North Dakota, but there has been a movement
by some on the progressive left to expand state and locally owned and operated public banks.
─ In 2019, California passed legislation that allows California counties and cities to create public banks, and in
late March 2021, introduced a bill for the California Public Banking Option Act, with the goal of providing a
“zero-fee, zero-penalty public option for basic financial services.” Several California counties are exploring
a partnership to jointly open a “Central Coast” public bank.
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Underbanked and Basic Access
─ Several other states have also introduced bills to permit chartering of public banks. At the federal level,
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Representatives Tlaib and Ocasio-Cortez introduced a bill for the Public Banking Act, which would promote
the chartering of state and local public banks.
Fintech and Innovation: The Chief Innovation Officers at both the OCC and CFTC have stated that their
agencies will be thinking about how technological innovations can help the underbanked and unbanked, as
well as address other structural issues that present barriers to expanded financial inclusion. The FDIC is
similarly focused, announcing in June 2021 a technology-focused challenge that encourages banks,
nonprofits, academic institutions and others to identify better resources to help underbanked Americans.
Government-Owned Credit Reporting Bureau: While no legislation has been introduced to date, the Biden
Administration may seek to create a government-owned credit reporting bureau to compete with, or eventually
replace, the three major private-sector credit reporting bureaus, Equifax, TransUnion and Experian. The
current credit reporting framework has been identified as a barrier to financial inclusion of certain groups,
including with respect to access to financial services such as mortgages.
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Underbanked and Basic Access
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FDIC #GetBanked Campaign: The FDIC has launched a public awareness campaign about the benefits of
opening a traditional bank account. Focusing on U.S. households without a bank account, the campaign is
initially focusing on the Houston and Atlanta areas, but will likely be extended nation-wide if successful.
─ The FDIC campaign should be seen a sister campaign to the national Bank On program that began in New
York and San Francisco in 2006, which has proven successful and led to calls for policymakers to extend
efforts to publicize and encourage broader usage of bank accounts
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Cannabis-Related Banking and Marijuana Legalization
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General Outlook
─ The direction of the federal regulatory and enforcement framework for financial institutions providing
services to U.S. cannabis-related businesses has been unclear, with most banking organizations finding the
provision of banking services to such businesses too perilous. In March 2021, FinCEN reported that as of
2Q 2021, there were only 684 financial institutions providing banking services to cannabis-related
businesses.
─ A March 2021 cease and desist order issued by the NCUA is the first enforcement action against a financial
institution for non-compliance with FinCEN requirements for servicing marijuana-related businesses.
─ Statements by members of the Biden Administration and the Democrat-controlled Congress have signaled
support for policy changes at the federal level regarding cannabis or cannabis-related banking.
“We will move forward. [President Biden] said he's studying the issue, so [I] obviously want to give him a
little time to study it. I want to make my arguments to him, as many other advocates will. But at some
point we're going to move forward, period.”
—Senate Majority Leader Schumer in an April 3, 2021 interview
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Cannabis-Related Banking and Marijuana Legalization
“We will decriminalize marijuana, and we will expunge the records of those who have been convicted of
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marijuana.”
—Vice President Harris, at her October 7, 2020 debate with then-Vice President Pence
“It does not seem to me a useful use of the limited resources that we have to be pursuing prosecutions in
states that have legalized and that are regulating the use of marijuana, either medically or otherwise.”
—Attorney General Garland at his confirmation hearing (speaking of the Cole Memorandum)
─ Other notable figures have also commented on the contradictions of the Federal government’s policy on
cannabis.
“Once comprehensive, the Federal Government’s current approach is a half-in, half-out regime that
simultaneously tolerates and forbids local use of marijuana. This contradictory and unstable state of
affairs strains basic principles of federalism and conceals traps for the unwary.”
— Justice Thomas, in a statement respecting petition for writ of certiorari for Standing Akimbo, LLC v.
U.S.
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Cannabis-Related Banking and Marijuana Legalization
─ Despite Democratic control of the White House and both chambers of Congress, competing legislative
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priorities leave a narrow path for legalization before the 2022 midterm elections.
“At the highest level, we believe Senate Democrats will prioritize a comprehensive reform package that
will burn a fair amount of Congressional clock without attracting sufficient GOP support in the Senate. We
could envision a narrower legislative package covering banking and certain restorative justice issues
passing in 2022, but we believe the next year in cannabis policy on Capitol Hill will be defined by an
unsuccessful attempt at comprehensive reform.”
—Isaac Boltansky, CompassPoint Research & Trading, LLC
“Senators on the more cautious end of the cannabis spectrum argue that the Senate should vote on a
narrower bill first, in the hopes of getting something passed, and avoiding the legislative quagmire that
may come with a more broad-sweeping bill. Opponents of this incremental approach argue that a
narrow bill won’t get the job done, and that the industry, the victims of the War on Drugs, and the public at
large want (and deserve) something bolder.... For now, both sides are locked in an attritive war of
strategic ideas, while the industry and its millions of enthusiastic supporters wait to see who blinks first.”
—Feuerstein Kulick LLP
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Cannabis-Related Banking and Marijuana Legalization
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Different Legislative Approaches
─ The Secure and Fair Enforcement Banking Act (SAFE Banking Act) would create protections for
financial institutions to provide financial services to cannabis-related businesses that comply with state
laws.
─ The Marijuana Opportunity Reinvestment and Expungement Act (MORE Act) would deschedule
cannabis on a nationwide basis while accomplishing social justice goals, such as expunging criminal
records related to non-violent marijuana offenses, granting pardons and imposing a social equity tax.
─ The Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act) would amend
the Controlled Substances Act to render inapplicable its prohibitions on cannabis-related conduct that
complies with state law.
─ The SAFE Banking Act and STATES Act have received bipartisan sponsorship, which has largely been
absent for the MORE Act.
Upcoming Legislative Slate
─ On March 18, the SAFE Banking Act was reintroduced in the House, which passed the bill on April 20,
2021 by a vote of 321-101.
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Cannabis-Related Banking and Marijuana Legalization
A companion Act was reintroduced in the Senate on March 23. To date, Senate Majority Leader Schumer
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has not committed to either combining the SAFE Banking Act with his forthcoming cannabis reform
legislation or separately putting the SAFE Banking Act up for vote on the Senate floor.
─ The Clarifying Law Around Insurance of Marijuana Act (CLAIM Act), introduced by Senator Menendez
on March 18, would prohibit:
Penalizing or discouraging an insurer from providing coverage to legal cannabis businesses or associated
businesses
The termination or limitation of an insurer's policies solely because it has worked with a cannabis-related
business
─ On February 1, Senate Majority Leader Schumer and Senators Booker and Wyden released a statement on
forthcoming cannabis reform legislation. Although the text of the bill has not been released, it will likely
incorporate elements of the MORE Act, and reportedly end the federal cannabis prohibition and focus on
restorative justice, expungement of convictions, community reinvestment and public health. Although, on
May 11, Senate Majority Leader Schumer confirmed that he would be introducing a cannabis bill “shortly,” no
text has yet been released.
─ On May 28, the MORE Act was introduced in the House.
Our visual memorandum analyzing the SAFE Banking Act, MORE Act, and STATES Act is available here.
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Capital and Stress Testing
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Federal Reserve Developments on Pandemic Changes: The Federal Reserve continues to give attention
to bank capital requirements, including capital actions taken in response to the pandemic. Recent
developments include:
─ Termination of exclusion of reserves held at the Federal Reserve and U.S. Treasury securities from total
leverage exposure of the supplementary leverage ration (SLR)
On March 30, 2021, the SLR relief expired. The Federal Reserve also announced on March 19, 2021
that it would “soon” seek comment on measures to adjust the SLR, which would “not erode the overall
strength of bank capital requirements.”
─ At a Federal Open Market Committee meeting on June 16, 2021, Federal Reserve Chair Powell
stated, “Because of the substantial increase in reserves, treasuries, and other safe assets in the
banking system, the SLR is rapidly ceasing to be the intended backstop for big firms that we want it to
be. So we do think it’s appropriate to consider ways to adapt it to this new high reserves environment,
and we’re looking hard at the issue.”
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Capital and Stress Testing
One option that the Federal Reserve could consider is a permanent exclusion from the SLR denominator
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for reserves and potentially U.S. Treasury securities, along with adjusting the SLR minimum and buffer
requirements.
─ A similar proposal has been floated by some, including President Biden’s nominee for undersecretary
for domestic finance at the Treasury Department.*
─ Termination of supervisory limitations on dividends and share repurchases for banking organizations
subject to the stress capital buffer
On June 30, 2021, the Federal Reserve’s temporary supervisory limitations on dividends and share
repurchases for banking organizations subject to the stress capital buffer, which were put in place during
the pandemic, expired.
─ Large firms will remain subject to the normal restrictions imposed by the capital regulatory framework,
including the stress capital buffer.
* Nellie Liang & Patrick Parkinson, Enhancing the Liquidity of U.S. Treasury Markets Under Stress, Brookings Institute (Dec. 16, 2020)
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Capital and Stress Testing
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Tailoring: Both Chairwoman Waters and Chairman Brown have expressed support for changes to the
application of the SLR, LCR and NSFR requirements and reinstating the CCAR qualitative objection, all of
which would require amendments to the relevant final rules.
─ While legislative change is unlikely, Chairwoman Waters and Chairman Brown may pressure the U.S.
banking agencies to amend the regulatory thresholds and criteria for application of certain prudential
requirements above the statutory thresholds.
Stress Testing and Capital Planning: Changes to stress-testing and capital planning requirements might
include:
─ More severe stress scenarios, which could have the effect of increasing firms’ stress capital buffers
─ Possible return of the formal qualitative objection to capital plans
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Capital and Stress Testing
Climate Change Initiatives: There are a number of ways that the Biden Administration’s emphasis on
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climate change could make its way into capital requirements. These include:
─ Incorporating a climate change scenario either into supervisory stress testing or otherwise
─ Increasing risk weights for exposure to fossil fuel companies and decreasing risk weights for exposures to
clean energy companies, bringing social goals into what has, until now, been largely a credit risk and
market risk analysis
As discussed on slide 11, on April 14, 2021, the Basel Committee published two reports on the
transmission channels and measurement methodologies of climate-related risks to the banking system,
and stated that they would “investigate the extent to which climate-related financial risks can be
addressed within the existing Basel Framework, identify potential gaps in the current framework and
consider possible measures to address them.”
When asked before the HFSC in May 2021 whether prudential regulators should require financial
institutions to increase capital to protect against the risk of climate change, FDIC Chairman McWilliams
responded that it is “premature to make any conclusions in this space.”
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Capital and Stress Testing
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GSIB Requirements: Changes to the regulations applicable to GSIBs could include:
─ Adjustments to the factors underlying GSIB surcharge scores, including further emphasis on the short-term
wholesale funding factor and the possibility of a more graduated surcharge structure (i.e., reducing cliff
effects)
─ Increased external TLAC requirements
─ New internal TLAC requirements
Other Initiatives: There are a number of pending rulemaking initiatives on the banking agencies’ agenda,
including:
─ Finalization of the implementation of Basel III, including significant amendments to the market risk capital
rule (Fundamental Review of the Trading Book)
On May 25, 2021, Federal Reserve Vice Chair for Supervision Quarles said that “tailoring the regulatory
framework will remain a principle that we have in mind as we come out with proposals to implement the
final pieces of Basel III.”
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Capital and Stress Testing
─ Potential deployment of the countercyclical capital buffer (CCyB) in BAU as a means of stimulating lending
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in stress:
On June 3, 2021, Federal Reserve Vice Chair for Supervision Quarles stated, “The Federal Reserve
should only turn on the CCyB in times of significant irrational exuberance; for example, in the face of a
self-reinforcing cycle of borrowing and asset prices of the kind we saw in 2004–06. Yet, in my view, our
through-the-cycle capital levels...in the United States have been set so high, that our CCyB is effectively
already ‘on.’”
On March 1, 2021, Federal Reserve Governor Brainard stated a different view: “Over a longer horizon,
changes in the economic environment associated with low equilibrium interest rates, persistently below-
target trend inflation, and low sensitivity of inflation to resource utilization could be expected to contribute
to a low-for-long interest rate environment and reach-for-yield behavior. In these kinds of environments, it
is valuable to deploy macroprudential tools, such as the countercyclical capital buffer, to mitigate potential
increases in financial imbalances.”
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Securities Market Structure
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General Outlook: Regulatory change to securities market structure and practices is a high priority for the SEC
under Chair Gensler, especially for retail public equity trading and U.S. Treasury markets.
Equity Market Reforms: In light of the significant uptick in stock trading by retail investors in 2020 and 2021,
particularly in “meme” stocks, SEC Chair Gensler has expressed concerns over broker-dealers’ compliance with
their best execution obligations and concentration of order flow within a small number of market makers,
particularly given current payment for order flow practices and off-exchange equity trading.
─ In June 2021, Chair Gensler stated that he has asked SEC staff to consider whether the current equity
market structure best promotes efficiency and competition and has indicated that rulemaking in this area
would be on the horizon.
─ Potential rulemaking could involve further SEC rules or guidance on payment for order flow, best execution,
and how the national best bid and offer is calculated.
Treasury Market Reforms: In March 2020, the onset of the COVID-19 pandemic triggered a significant pricing
disruption in the U.S. Treasury market as many investors sought to liquidate holdings of Treasuries faster than
Treasury dealers were willing and able to accommodate.
─ Several potential Treasury market reforms have been suggested, including:
Increased central clearing in Treasury cash and repo markets
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Securities Market Structure
A standing Federal Reserve facility that could provide backstop repurchases during periods of stress
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Enhanced data collection and availability to improve Treasury market transparency
─ In a June 2021 speech, SEC Chair Gensler stated that he has asked the SEC staff to work closely with the
U.S. Department of the Treasury, Federal Reserve and CFTC to determine whether they can “bring greater
transparency and resiliency to [Treasury] markets” and to consider the potential benefits of central clearing.
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Reforms to Short-Term Funding Markets
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More Work to be Done: In the aftermath of the Financial Crisis, regulators sought to decrease reliance on the
use of short-term wholesale funding (including money market funds (MMFs), repo and commercial paper), and
to enhance the stability of short-term funding markets. The COVID-19 shock in the spring of 2020 again
revealed vulnerabilities in short-term funding markets, making clear that the post-2008 reforms had not fully
achieved their aims and that more needs to be done. There has been bipartisan focus on further reforms,
particularly as they relate to MMFs, but no consensus on what reforms in this area of interconnectedness
between the banking and nonbanking sectors might look like.
Reform Ideas: In December 2020, the President’s Working Group on Financial Markets released a report
(PWG Report) offering several MMF reform ideas:
─ Removing the tie between MMF liquidity and fee in an MMF would be available for redemption
and gate thresholds only on a delayed basis
─ Reforming conditions for imposing redemption ─ New or modified liquidity management
gates requirements, including new categories of
─ Minimum balance at risk (MBR) rules, meaning liquidity requirements or additional Weekly
that a portion of a shareholder’s recent balances Liquid Assets (WLAs) thresholds to augment
current liquidity buffers
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Reforms to Short-Term Funding Markets
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─ Countercyclical WLA requirements, under ─ Swing pricing rules, meaning that when a
which minimum WLA requirements could be fund’s NAV “swings” down, redeeming
calibrated such that they would automatically investors would receive less for their shares,
decline in certain circumstances, including thus imposing costs stemming from
when net redemptions are large redemptions directly on redeeming investors,
─ Floating net asset value (NAV) requirements rather than on other investors in the fund
for all prime and tax-exempt MMFs ─ New requirements governing sponsor support
─ Capital buffer requirements that would clarify who bears MMF risks by
establishing clear rules for when a sponsor
─ Requiring prime and tax-exempt MMFs to be
would be required to provide support
members of a private liquidity exchange bank
The PWG Report, which was released while President Trump was still in office, was careful to note that it is
not at this time endorsing any given measure listed above. The SEC later requested comment on the reform
ideas in the PWG Report.
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Reforms to Short-Term Funding Markets
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Reform Ideas
In a March 2021 speech, Federal Reserve Governor Brainard noted the need for further short-term funding
market reforms and referenced the PWG Report and the SEC’s related request for comment.
─ In particular, Governor Brainard highlighted three MMF reform ideas: swing pricing, MBR rules and capital
buffers.
Governor Brainard’s speech also noted other areas of structural vulnerability in short-term funding markets,
observing that the COVID-19 shock also highlighted the vulnerabilities associated with investment vehicles
that offer daily liquidity while investing in less-liquid assets, such as corporate bonds, bank loans, and
municipal debt. Here, Governor Brainard again suggested that swing pricing could be helpful in reducing run
risk.
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Reforms to Short-Term Funding Markets
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Reforms in the United States
─ In June 2021, the FSOC received a briefing from SEC staff on comments received in response to the
SEC’s request for comment on the PWG Report. The FSOC then released a statement noting that it was
“encouraged” by the SEC’s engagement on the issue.
The FSOC went on to state that it intends to “continue to monitor this initiative in the broader context of
efforts by financial regulators to strengthen short-term funding markets and support orderly market
functioning, including during periods of heightened market stress.”
─ The Spring 2021 Unified Regulatory Agenda, in regard to the SEC, lists MMF reform as being in the
proposed rule stage, with a notice of proposed rulemaking expected by April 2022.
Reforms on the Global Agenda
MMF reforms are also, unsurprisingly, in focus outside of the United States.
─ At the global level, the FSB has created a steering group of public and private individuals to study the role
of nonbank financial institutions at the beginning of the pandemic, including their role in the short-term
funding markets.
In late June 2021, the FSB released a consultation report on policy proposals to enhance MMF
resilience (FSB Consultation), with a final report due by October 2021.
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Reforms to Short-Term Funding Markets
The FSB Consultation groups potential mechanisms for addressing MMF vulnerabilities into four broad
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categories (along with representative policy options in each category):
─ imposing on redeeming investors the cost of their redemptions (swing pricing);
─ absorbing losses (MBR rules; capital buffer requirements);
─ reducing threshold effects (removing ties between liquidity and imposition of fees and gates; requiring
funds to have a floating NAV); and
─ reducing liquidity transformation (limits on eligible assets; additional liquidity requirements; required
escalation procedures before an MMF could impose gates).
The FSB Consultation also notes that MMF-specific policy changes intended to enhance the resilience of
MMFs could also be accompanied by broader policy changes that would (1) make it easier for fund
managers and authorities to manage and monitor risk and (2) improve the functioning of underlying
short-term funding markets.
Like the PWG Report in the US, the FSB Consultation does not endorse a specific set of reforms, and
instead notes that in any given jurisdiction the optimal combination of policy measures should take into
account jurisdiction-specific circumstances, as well as cross-border considerations like the potential for
regulatory arbitrage and spillover effects.
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BSA / AML
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General Outlook: Regulatory change to the Bank Secrecy Act (BSA)/anti-money laundering (AML) regime
remains a high priority.
Legislative and Regulatory Changes: The Anti-Money Laundering Act of 2020 (AMLA) is the most
important BSA/AML legislation in years and could have a significant impact on AML compliance and
supervision once it is fully implemented.
─ The legislation's ultimate impact will be determined by implementing regulations to be issued by the
Treasury Department and other government stakeholders and which are not expected in the near term.
─ Once implemented, AMLA will affect banks' and other financial institutions' AML compliance obligations and
the way they are evaluated through:
Issuance of national AML and countering the financing of terrorism (CFT) priorities
The creation of a national beneficial ownership registry maintained by FinCEN
Pared back beneficial ownership requirements applicable to banks and other covered institutions
Streamlined Suspicious Activity Reports
Codification of the BSA's applicability to virtual currency
Our visual memorandum on AMLA is available here.
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BSA / AML
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Continuation of Ongoing AML/CFT Reform Efforts: Initiatives begun in 2020, such as FinCEN's ANPR on
Program Effectiveness and significant changes to the Travel and Recordkeeping Rules, are continuing despite
new Treasury leadership. FinCEN, pursuant to AMLA, released the first national priorities for AML/CFT policy
(the Priorities) on June 30, 2021. FinCEN must issue implementing regulations within 180 days of the
establishment of the Priorities. Included in the Priorities are:
─ Corruption ─ Transnational criminal organization activity
─ Cybercrime, including relevant cybersecurity and ─ Drug trafficking organization activity
virtual currency considerations ─ Human trafficking and human smuggling
─ Terrorist financing ─ Proliferation financing
─ Fraud
Even though banks are not required to incorporate the Priorities into their risk-based BSA compliance
programs until the effective date of the final implementing regulations, in an interagency statement released
with the announcement of the Priorities, regulators suggested that financial institutions begin preparing for
changes and to start considering how they will incorporate the Priorities into their risk-based BSA compliance
programs.
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BSA / AML
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No-Action Letter Process: On June 30, 2021, FinCEN also issued a report (the No-Action Report) on its
assessment of whether it should establish a no-action letter process to respond to inquiries concerning the
application of the BSA and other AML laws and regulations to specific conduct. While FinCEN concluded that a
no-action letter process would complement its current forms of regulatory guidance and relief, the independent
authority of other Federal functional regulators to enforce the BSA may limit the usefulness of no-action letters
issued by FinCEN.
Our client update on the Priorities and the No-Action Report is available here.
Beneficial Ownership Registry: On April 5, 2021 FinCen published an ANPR to begin the rulemaking
process to implement the beneficial ownership reporting provisions of the Corporate Transparency Act (CTA).
The CTA discourages the use of shell corporations to disguise and move illicit funds, therefore it requires legal
entities to report beneficial ownership information at the time of formation or registration. FinCEN will maintain
this information in the Beneficial Ownership Registry (the Registry). The ANPR invited comments on 48
questions, including the reporting requirements of the CTA, the establishment and maintenance of the
Registry, and the disclosure of beneficial ownership information, with the comment period closing on May 5,
2021. FinCEN must finalize the rule by January 2022.
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