The Federal Deposit Insurance Corporation (FDIC) recently issued a notice of proposed rulemaking (NPR) and request for information (RFI) addressing “False Advertising, Misrepresentation of Insured Status and Misuse of the FDIC’s Name or Logo.”

Under this NPR, the title of 12 CFR Part 328, currently “Advertisement of Membership” would be changed to “Advertisement of Membership, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo.” The current official sign and advertising rules set forth in 12 CFR §§ 328.0 through 328.4 would be redesignated as subpart A, to be entitled “Advertisement of Membership”. Proposed 12 CFR §§ 328.100 through 328.108 (the “Proposed Rule”) would be added as a new subpart B to 12 CFR Part 328 to implement Section 18(a)(4) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(a)(4), entitled “False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo.”

The policy objectives to be served by the Proposed Rule are set forth in the Supplementary Information provided in the NPR:

“Section 18(a)(4) of the Federal Deposit Insurance Act, 12 U.S.C. 1828(a)(4),(Section 18(a)(4)) prohibits any person from misusing the name or logo of the Federal Deposit Insurance Corporation (FDIC) or from engaging in false advertising or making knowing misrepresentations about deposit insurance. The FDIC has observed an increasing number of instances where financial services providers or other entities or individuals have misused the FDIC’s name or logo or have made false or misleading representations that would suggest to the public that these providers’ products are FDIC-insured…, the FDIC is proposing to adopt regulations to further clarify its procedures for identifying, investigating, and where necessary taking formal and informal action to address potential violations of Section 18(a)(4)…. Although the FDIC is not required to promulgate regulations to implement section 18(a)(4), the FDIC nonetheless believes that the proposed rule, if adopted, would establish a more transparent process that will benefit all parties and would promote stability and confidence in FDIC deposit insurance and the nation’s financial system.”

The Supplementary Information also notes that “Under Federal law, it is a criminal offense to misuse the FDIC name or make false representations regarding deposit insurance, citing 18 U.S.C. §709.

Proposed 12 CFR §328.102 states its prohibitions in broad terms, mandating that no person may represent or imply that any “Uninsured Financial Product” is insured or guaranteed by the FDIC by using “FDIC-Associated Terms” as part of a business name, or by using FDIC-Associated Terms or “FDIC Associated Images” in an advertisement, solicitation, or other publication or dissemination, and that no person may knowingly make false or misleading representations about deposit insurance. A statement is deemed to be a statement regarding deposit insurance if it includes any FDIC-Associated Images or FDIC-Associated Terms, or meets other conditions. The Proposed Rule adopts the test established under Section 5 of the Federal Trade Commission Act to determine whether a statement regarding deposit insurance violates the regulation. As the FDIC explains in the Supplementary Information:

“While Section 18(a)(4) is separate from Section 5, it prohibits similar conduct— deception in connection with commerce. The standards governing deception under Section 5 have been consistently accepted by courts, and used by the FTC and other agencies, including the FDIC, which enforces prohibitions of Section 5 against the institutions it supervises…the FDIC believes it is appropriate to use similar standards to determine if a representation about deposit insurance violates Section 18(a)(4).”

The Proposed Rule provides examples of offending conduct, but the FDIC warns in the Supplementary Information that “These examples are not meant to be an exhaustive list…”, a caveat borne out in the language of the Proposed Rule.

Foreshadowing the Proposed Rule, over the past several months the FDIC has expressed heightened concerns about potential consumer confusion as to FDIC insurance coverage, particularly in connection with some activities of fintechs and other non-FDIC insured entities, and indicated its intention to issue rules to address misrepresentations in this area.

In February 2020, the agency issued a Request for Information on FDIC Sign and Advertising Requirements and Potential Technological Solutions. In that issuance, the agency pointed out that “It is illegal to misuse the FDIC name or make false representations regarding deposit insurance, and expressed concern about “nonbanks (such as fintechs…)” displaying the FDIC name or logo on a website to “convey legitimacy.” The agency noted that in 2019, the FDIC requested that internet service providers take down over 65 such websites. The FDIC sought input in that RFI on how to address potential misrepresentations by nonbanks about deposit insurance: “The FDIC has not issued specific regulations regarding false representations related to FDIC insurance. The FDIC seeks information regarding misrepresentations in this area, including the following specific questions…What changes can be made to the FDIC sign and advertising statement requirements that could deal with preventing misrepresentations regarding FDIC deposit insurance?”

The comment period for the 2020 RFI was extended, and in April 2020, the FDIC announced that it was temporarily postponing its efforts to modify its official sign and advertising requirements, but noted “the agency remains committed to modernizing these rules at a future date….”

On April 9, 2021, the FDIC issued an RFI entitled “Request for Information on FDIC Official Sign and Advertising Requirements and Potential Technological Solutions”. This RFI was “substantially similar” to the RFI published in February 2020, except that it did not deal with the issue of misrepresentations about deposit insurance, which the agency said would be dealt with in a separate NPR:

“On an ongoing basis, pursuant to its statutory authority, the FDIC actively seeks to protect depositors by ensuring the FDIC’s name, seal and logo are appropriately used and limited to being associated with insured depository institutions. In light of an increasing number of instances where people or entities have misused the FDIC’s name or logo or have made misrepresentations that would falsely suggest to the public that their products are FDIC-insured, the FDIC expects to issue a notice of proposed rulemaking seeking comment on a proposed rule regarding misrepresentations about deposit insurance and misuse of the FDIC’s name or logo. The FDIC intends to engage in its efforts to modernize the FDIC official sign and advertising requirements and its rulemaking regarding misrepresentations about deposit insurance in tandem and on a coordinated basis.”

Shortly thereafter, on April 22, 2021, the Proposed Rule was issued, and was published in the Federal Register on May 10, 2021. Comments on the Proposed Rule are due on or before July 9, 2021.

We believe several clarifications will be required in order to address certain possibly conflicting, or at least confusing, elements of the Proposed Rule. We are hopeful that stakeholders will review the Proposed Rule and related RFIs carefully and provide thoughtful input to be considered by the FDIC.

The FDIC describes the Proposed Rule’s expected effects as follows: “The proposed rule, if adopted, would primarily affect non-bank entities and individuals who are potentially misusing the FDIC’s name or logo or are making false or misleading representations about deposit insurance. The FDIC currently insures 5,042 depository institutions that could also be affected; however in practice, the proposed rule would primarily affect non-bank entities and private individuals.” We would submit that not only fintechs and other non-banks, but also banks, including but not limited to those involved in marketplace lending programs and other arrangements with non-banks, must carefully analyze and consider the potentially significant effects of the Proposed Rule, and should provide comments to the FDIC to point out areas of concern. And, it would be prudent for all financial services providers, banks and non-banks alike, to take note of the increasing intensity of the FDIC’s focus on potentially deceptive uses of the FDIC name and logo.