Wilson Sonsini Goodrich & Rosati is pleased to present the April 2017 issue of the WSGR Fintech Update. This latest edition includes an article addressing guidance recently published by the Office of the Comptroller of the Currency regarding whether fintech companies may be able to obtain special purpose national bank (SPNB) charters, as well as an article on the SEC’s recent refusal to authorize for public trading two exchange-traded products that would track the price of a bitcoin.
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So Long, Multi-State Regulation? OCC Issues Further Guidance on Whether Fintech Companies May Obtain Special Purpose National Bank Charters
Financial technology (fintech) companies that engage in certain banking activities (e.g.,taking deposits, lending, and/or facilitating payments) may be able to apply in the future for a special purpose national bank (SPNB) charter from the Office of the Comptroller of the Currency (OCC). A SPNB charter likely would subject a fintech company to federal licensing and regulation, rather than to the current system of multi-state licensing and regulatory compliance.
In December 2016, the OCC published a paper for public comment in which it explored issues related to offering SPNB charters to fintech companies.1 The OCC then published in March 2017 a summary of—and its reaction to—comments received (the "OCC Summary").2 The following highlights several key points from the OCC Summary.
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Engaging in Core Banking Functions. The OCC intends to charter a fintech SPNB so long as the applicant engages in one of three core banking functions: taking deposits, lending, or facilitating payments.3
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Extent of Oversight. The OCC affirmed that fintech SPNBs would be subject to the same oversight as other national banks, but noted that the OCC's supervisory strategy for such SPNBs would be tailored to a bank's business model and would include on- and off-site supervision by an examination team.
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Application Process. The OCC intends to make the application process transparent and clear, and indicated that applicants will be able to ask questions about conditions for approval at multiple pre-filing meetings with OCC staff. It confirmed that it may require that, as a condition for approval, an applicant enter into an operating agreement, which may impose safeguards relating to an applicant's capital and liquidity. The OCC stated that it would generally approve applications from applicants that have a reasonable chance of success, will provide fair access to financial services, will ensure compliance with applicable regulations, and will promote fair treatment of customers and foster healthy competition.
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Deviations from Approved Business Plan. Notwithstanding commenters' objections, the OCC noted that fintech SPNBs must receive an OCC non-objection letter before making significant deviations from its OCC-approved business plan, as other new banks are required to do. Fintech SPNBs, however, would be able to test—on a limited basis—new products and services without receiving such a letter, provided that the SPNB institutes appropriate internal controls and protections for affected customers.
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Compliance and Risk Management. The OCC would expect fintech SPNBs to have strong compliance and risk management programs that address, among others, anti-money laundering and the Bank Secrecy Act, consumer protection, third-party risk management, and data and information security. The risk management program should include risk identification, risk measurement, risk monitoring, and risk control mechanisms.
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Financial Inclusion. The OCC noted its expectation that a fintech SPNB engaging in lending activities or providing financial services to consumers or small businesses submit in its application a financial inclusion plan as part of its business plan. It agreed with commenters that there are many different activities that could constitute financial inclusion, and offered the examples of developing innovative products or services designed to address the needs of low- and moderate-income individuals and communities, participating in programs that provide financial literacy and credit counseling services that improve individuals' understanding of financial products and services that could meet their needs, and investing in certain funds or organizations.
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Responsibilities Regarding Small Business Borrowers. The OCC stated that it would look favorably at an applicant's commitment to educate small business borrowers about their rights and responsibilities, but did not indicate that it would specifically require an applicant to institute any measures designed to address the needs of small business owners (other than general measures that would be applicable to all customers, such as compliance with the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the FTC Act).
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Safety, Soundness, and Fairness Standards. The OCC confirmed that fintech SPNBs would be held to the same standards of safety, soundness, and fairness as other federally chartered banks, but that it would tailor these requirements to an applicant's size, complexity, and risk.
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Leverage and Capital Requirements. The OCC also stated that fintech SPNBs would be subject to leverage and risk-based capital requirements, noting that it would likely tailor these requirements for fintech SPNBs, since existing standards may not be adequate. To help in its evaluation of capital adequacy, the OCC would examine, among others, the risks and complexities of an applicant's proposed products and services in conjunction with its proposed activities, quality of management, stability of sources of funds, and asset composition (e.g., on- and off-balance sheet composition, credit risk, concentration, and market risk).
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Liquidity. The OCC further established that it would evaluate an applicant's liquidity profile and may impose liquidity conditions on an applicant, such as entering into a liquidity maintenance agreement with an affiliate or maintaining a certain amount of high-quality liquid assets. It stated its expectations that applicants address their borrowing capacities under normal and adverse market conditions and establish comprehensive contingency funding plans.
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Role of State Law. Several commenters argued that providing fintech companies with national bank status would enable these companies to evade important state laws. The OCC disagreed, arguing that fintech SPNBs would be subject to comparable federal regulations (e.g., the Consumer Financial Protection Act and the Federal Trade Commission Act (the "FTC Act")). It also highlighted its public enforcement actions against national banks for unfair or deceptive acts and practices. The OCC emphasized that state laws generally would apply to an SPNB to the same extent as they apply to national banks (e.g., anti-discrimination, fair lending, debt collection, taxation, zoning, crime, and torts). It further stressed that state business conduct laws that address consumer protection concerns such as material misrepresentations and omissions about products and services in billing, disclosure, and marketing materials generally would apply to SPNBs.
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Role of Other Regulators. The OCC noted that it would collaborate with other regulators (e.g., state and other federal banking regulators) to promote a common framework of laws, regulations, and guidance applicable to fintech SPNBs and that fintech SPNBs may be subject to oversight by other regulators.
Proposed Supplement to the OCC's Licensing Manual and Request for Comments
Along with its publication of the OCC Summary (described above), the OCC also issued for public comment a draft supplement to the Comptroller's Licensing Manual, which describes the OCC's proposed approach to key aspects of the chartering process for fintech companies (the "Proposed Supplement").4 The Proposed Supplement generally covers the initial steps toward applying for an SPNB charter, the OCC's chartering standards, the applicant's submission of a business plan, and the OCC's chartering decision. The deadline for comments on the Proposed Supplement is April 14, 2017.
3 For purposes of these special charters, the OCC defines an SPNB as a national bank that engages in a limited range of banking activities, but does not take FDIC-insured deposits. If a fintech company were to propose taking FDIC-insured deposits, the company would apply for a different type of OCC charter.
SEC Not Yet Ready for Bitcoin-Related Exchange-Traded Products
The Securities and Exchange Commission (SEC) recently refused to authorize for public trading two exchange-traded products (ETPs) that would track the price of bitcoin: Winklevoss Bitcoin Trust and SolidX Bitcoin Trust, both of which are non-investment company trusts.1 Bitcoin is a digital currency that is transmitted through a decentralized peer-to-peer network.
In its denials, the SEC outlined its criteria for approving a rule change permitting the listing and trading of ETP shares relating to a commodity such as bitcoin: the requesting exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity, and those markets must be regulated. It noted in both cases its belief that the significant markets for bitcoin are unregulated and, as a result, the exchanges are unable to enter into surveillance-sharing agreements that would help address concerns about the potential for fraudulent or manipulative acts in the bitcoin markets.
However, the SEC suggested that if regulated bitcoin markets were to develop, it would reconsider approving the listing and trading of a bitcoin-related ETP. The Bats BZX Exchange, since receiving its denial, has submitted to the SEC a petition for review of the denial.2
The SEC denials do not limit the ability to offer bitcoin funds and similar products to accredited investors in private placements and do not prevent secondary transactions in bitcoin funds if those secondary transactions are conducted pursuant to one or more of the securities law provisions governing resales of private securities.
1 The SEC refusals took the form of denying rule changes that would enable the listing and trading of shares of these products on the respective Bats BZX Exchange and NYSE Arca. Order Disapproving a Proposed Rule Change Relating to Winklevoss Bitcoin Trust, Exchange Act Release No. 80206 (March 10, 2017) and Order Disapproving a Proposed Rule Change Relating to SolidX Bitcoin Trust, Exchange Act Release No. 80319 (March 28, 2017). The SEC is currently considering another rule change that would permit the listing and trading of another bitcoin-related ETP on NYSE Arca, and its decision is expected in May 2017. Notice of Designation of a Longer Period for Commission Action on Proposed Rule Change Relating to Bitcoin Investment Trust, Exchange Act Release No. 80297 (March 22, 2017).
