On May 17, 2022, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule (“Rule”) setting forth its procedures for investigating and enforcing false advertising, false or misleading representations about deposit insurance, or misuse of the FDIC’s logo. A central target of the Rule are issuers of digital “stablecoins,”1 some of which have made claims about the availability of FDIC insurance on bank deposits they hold at FDIC-insured banks to back the coins. The Rule will also affect broker-dealers, banks and other entities offering bank deposit “sweep” programs, brokered CD programs, or other deposit placement programs relying on “pass-through” deposit insurance (i.e., insurance that passes through a fiduciary to an underlying depositor).
Because of its impact on programs like these, the Rule has broader implications than appear on the surface. Pursuant to the Rule, all persons or entities making claims about FDIC insurance – regardless of whether they are insured depository institutions – must have a basis for those claims. Critically, the Rule deems it a “material omission” for a non-bank entity not to identify banks at which depositor funds may be placed when making claims about the availability of pass-through deposit insurance.
Although identifying the names of the banks receiving deposits on a pass-through basis is consistent with existing FDIC guidance on pass-through deposit insurance, the new requirement applies to any “statement regarding deposit insurance.” An entity offering a sweep program could, in many cases, maintain a bank list on a website and include a link to that list in their disclosure document concerning the program, but the language used in the Rule — “statement” — could be read by the FDIC to apply much more broadly, to many other documents and communications. Further, pass-through deposit insurance remains available only when customers establish a bona fide agency relationship with the third party placing deposits and when the deposit accounts satisfy applicable titling requirements. That is, compliance with the Rule is not sufficient on its own in order for deposits to qualify for pass-through treatment.
The Rule was published in the Federal Register on June 2, 2022, and it will go into effect on July 2, 2022.2
The Rule implements Section 18(a)(4) of the Federal Deposit Insurance Act (“FDIA”), added in 2008, which granted the FDIC broad authority to take formal or informal action against any person making false or misleading representations about deposit insurance.3 From 2008 through the adoption of the Rule, the FDIC issued only one enforcement action under Section 18(a)(4).4 But in 2019 and 2020 alone the FDIC “reached informal resolutions” regarding misuse of the FDIC logo or misrepresentations regarding deposit insurance “in at least 165 instances.”5
The Rule applies to any person – including individuals, SEC-registered firms, state licensed firms, and unregistered firms – who:
- falsely represents, expressly or by implication, that any deposit liability, obligation, certificate, or share is FDIC-insured by using the FDIC’s name or logo;
- knowingly misrepresents, expressly or by implication, that any deposit liability, obligation, certificate, or share is insured by the FDIC if such an item is not so insured;
- knowingly misrepresents, expressly or by implication, the extent to which or the manner in which any deposit liability, obligation, certificate, or share is insured by the FDIC, if such an item is not insured to the extent or manner represented; or
- aids or abets another in any of the foregoing.
Violations include “material” representations “which would have the tendency or capacity to mislead a reasonable consumer” or “omissions of material information that would be necessary to prevent a reasonable consumer from being misled.”
Further, it is a “material omission” for a person to represent or imply that a product is insured by the FDIC without identifying the banks “with which the representing party has a direct or indirect business relationship for the placement of deposits and into which the consumer’s deposit may be placed.” Publication of the list of banks is sufficient to meet this requirement.6
Consequences of the Rule’s bank list requirement
There are many potential consequences of the Rule that are unrelated to the stablecoin issuers that appear to be its main targets. For example, the “bank list” requirement will affect entities offering deposit sweep programs. So, if a broker-dealer, bank, stablecoin issuer or other “FinTech” platform makes a statement about the availability of FDIC insurance, the Rule implies that such statements must include a bank list (or a link to a bank list on a website).
Lack of clarity regarding the definition of “statement”
Importantly, the “bank list” requirement appears to apply to all “statements” regarding FDIC-insured products, not just disclosure documents. The Rule indicates that any “statement” that “makes any representation, suggestion, or implication about the existence of FDIC insurance or the extent or manner of coverage” is a “statement regarding deposit insurance” covered by the Rule.7 But “statement” is not a defined term in the Rule.
Unlike “statement,” the Rule defines “Advertisement” in a manner consistent with the pre-existing definition of “Advertisement” in the FDIC’s regulations and, generally, with other definitions of “Advertisement” in the federal banking laws, including in regulations under the Truth in Savings Act (“TISA”).8 But in the Rule, the term “Advertisement” only applies to provisions of the Rule relating to misuse of the FDIC’s name or logo. The prohibitions on misrepresentations relating to deposit insurance apply to “statements,” not to “Advertisements.” And while existing interpretations of “Advertisement” as used in TISA interpret the term broadly, a plain-language reading of “statement” could be even more broad. It could mean any communication of any kind, oral or in writing.
It is unclear that the FDIC fully appreciates the impact of the Rule’s broad wording. Additional clarifying guidance from the FDIC staff would be beneficial for consumers and industry participants. Many questions are unanswered by the Rule.
Issues regarding presentations and oral statements
For example, broker-dealers offering sweep programs may give investor presentations that discuss sweep options eligible for FDIC insurance – the Rule implies that the broker must (somehow) provide a bank list in connection with the presentation. There is nothing in the Rule preventing the FDIC from deeming an oral statement in a presentation, or a poster at a conference, to be a “statement” subject to the Rule, if it refers to deposit insurance.
Issues regarding brokered CD programs
To give another example, broker-dealers commonly offer brokered CDs to their customers as placement agent for an issuing bank. Investors that purchase brokered CDs are making deposits at the banks that issue the CDs, and these deposits are generally eligible for pass-through deposit insurance if specified requirements are met. If a broker is on a telephone call with a client or potential client on which she mentions that pass-through deposit insurance is available on brokered CDs, does she then have to provide a bank list on the call? If so, which banks should she include: the ten that are offering the CDs that day? Or the 200 banks with whom the broker-dealer has a business relationship? Does a broker-dealer that is part of a larger selling group of broker-dealers have to disclose the identity of every bank offering CDs through each broker-dealer in the selling group? If so, having a fully up-to-date bank list may be operationally impossible. On the face of the Rule, these questions, and many others, remain open.
FDIC Enforcement Process
The Rule provides two separate processes by which the FDIC may investigate and address potential violations: an informal resolution process under which the FDIC will communicate concerns to a third party through an advisory letter, offering that person the opportunity to respond; and formal enforcement actions, including cease and desist orders and the imposition of civil money penalties. The Rule suggests that the FDIC intends to use its informal resolution process by issuing an advisory letter before commencing a formal enforcement action, but it retains the authority to move directly to enforcement proceedings if it believes that consumers or banks may be harmed by ongoing violations or if it has issued a similar advisory letter to the same party in the past.
For banks that have a federal banking regulator other than the FDIC, the FDIC will refer violations to the other regulator first, but also retains the authority to take enforcement action itself if the other regulator does not act.
Seward & Kissel LLP will continue to provide insight on developments regarding FDIC insurance.
1 Acting Comptroller Issues Statement on Misuse of FDIC Name, Logo, OCC News Rel. 2022-53 (May 17, 2022), available at https://www.occ.gov/news-issuances/news-releases/2022/nr-occ-2022-53.html. Statement of CFPB Director Rohit Chopra, FDIC Board Member, Final Rule Regarding False Advertising, Misrepresentations of Insured Status, and Misuse of the FDIC’s Name or Logo (May 17, 2022), available at https://www.consumerfinance.gov/about-us/newsroom/statement-of-cfpb-director-rohit-chopra-fdic-board-member-final-rule-regarding-false-advertising-misrepresentations-of-insured-status-and-misuse-of-the-fdics-name-or-logo/.
2 FDIC, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo, 87 Fed. Reg. 33415 (Jun. 2, 2022); see FIL-21-2022 (May 17, 2022).
3 The Rule does not apply to violations of 18 U.S.C. § 709, which makes specified types of false advertising and misuse of the FDIC’s name federal crimes, other than to state that investigations under the Rule which reveal violations of 18 U.S.C. § 709 may be referred to appropriate law enforcement authorities by the FDIC’s Office of Inspector General.
4 In the Matter of AL Amerilife First Financial LLC, a Delaware Limited Liability Company, FDIC-09-257b & FDIC-09-258k (Jun. 18, 2009).
5 Rule at 33418 (citing FDIC annual reports for 2019 and 2020).
6 As discussed in the Introduction, while publication of a complete list of program banks is sufficient to satisfy the requirements of the Rule, it is not sufficient on its own to satisfy other requirements relating to pass-through deposit insurance as set forth in Part 330 of the FDIC’s regulations and in FDIC guidance, or as required by the federal securities laws. See generally Paul T. Clark, Just Passing Through: A History and Critical Analysis of FDIC Insurance of Deposits Held by Brokers or Other Custodians, 32 B.U. Rev. of Banking and Financial Law 99 (2013).
7 The section on misrepresentations regarding deposit insurance applies to all “statements.”
8 12 C.F.R. §§ 1030.2(b); see Board of Governors of the Federal Reserve, Consumer Affairs Letter 09-14, “Regulation DD Background, Procedures, and Checklist” (Dec. 16, 2009).