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Nutter Bank Report, January 2018

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  1. Attorney General Rescinds Federal Marijuana Enforcement Priorities
  2. Guidance Issued on Accounting and Reporting Changes Resulting from New Tax Law
  3. CFPB Finalizes Amendments to Prepaid Accounts Rule
  4. SEC and CFTC Are Considering the Regulation of Cryptocurrency Markets
  5. Other Developments: Fintech and Call Reports

1. Attorney General Rescinds Federal Marijuana Enforcement Priorities

U.S. Attorney General Jeff Sessions has rescinded all nationwide guidance previously issued by the Department of Justice ("DOJ") to federal prosecutors that is specific to federal marijuana enforcement priorities, including the 2013 guidance commonly known as the “Cole Memo” that clarified whether and to what extent the DOJ intended to enforce federal law prohibiting the possession, production, processing, use, and sale of marijuana where such activities are permissible under state law. In his January 4 memorandum to all U.S. Attorneys, the Attorney General instructed instead that, “[i]n deciding which marijuana activities to prosecute under [federal drug] laws with the Department’s finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions.” The rescission of the federal marijuana enforcement priorities described in the Cole Memo calls into question the relevance of the guidance issued to banks in 2014 by FinCEN on Bank Secrecy Act expectations related to state-licensed marijuana-related businesses, which was predicated on the Cole Memo. Presumably, the Suspicious Activity Report filing instructions in FinCEN’s guidance will remain effective until FinCEN rescinds or modifies them. However, the due diligence recommendations in FinCEN’s guidance for banks that provide services to state-licensed marijuana-related businesses are predicated on the Cole Memo’s federal marijuana enforcement priorities. In the absence of the Cole Memo guidance, federal marijuana enforcement decisions will be made by the individual U.S. Attorneys appointed to the DOJ’s 94 districts. Click here for a copy of the Attorney General’s January 4 memorandum.

     Nutter Notes: FinCEN published FIN-2014-G001 on February 14, 2014 to “enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses,” based on the federal marijuana enforcement priorities announced in the Cole Memo. In a January 8 public statement, Andrew E. Lelling, the U.S. Attorney for the District of Massachusetts, did not provide assurances that he would continue to follow the marijuana enforcement priorities described by the Cole Memo or that state-licensed marijuana-related businesses would not be subject to federal prosecution. The rescission of the Cole Memo and the statement by the U.S. Attorney may represent increased risk for Massachusetts banks with customers engaged, directly or indirectly, in state-licensed marijuana-related businesses. The Rohrabacher-Blumenauer amendment, which is a part of the DOJ’s budget authorization and prohibits the Department from spending funds to interfere with the implementation of state laws concerning medical marijuana, remains an impediment to federal prosecution of certain state-licensed marijuana activity, at least until the current continuing resolution expires on February 8.

2. Guidance Issued on Accounting and Reporting Changes Resulting from New Tax Law

The federal banking agencies have jointly issued guidance to banking organizations on certain accounting and reporting implications of the new tax law, which was enacted on December 22, 2017. According to the guidance published on January 18, titled Interagency Statement on Accounting and Reporting Implications of the New Tax Law, the changes to federal tax law are relevant to the preparation of financial statements and regulatory reports (e.g., Call Reports) for periods ending on December 31, 2017. The guidance reminds institutions that FASB’s Accounting Standards Codification ("ASC") Topic 740 requires that the effect of changes in tax laws or rates be recognized in the period in which the legislation is enacted. According to the guidance, since the new tax law was enacted before December 31, 2017, institutions should record the effects of the new tax law in their December 31, 2017 regulatory reports. For example, changes in deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) resulting from the new tax law’s lower corporate income tax rate and other applicable provisions of the law should be reflected in an institution’s income tax expense in the period of enactment, according to ASC Topic 740. Click here for a copy of the federal banking agencies’ guidance.

     Nutter Notes: According to the federal banking agencies’ guidance, an institution’s DTAs and DTLs must be remeasured at the tax rates expected to apply when these assets and liabilities are expected to be realized or settled for Call Report purposes as of December 31, 2017. Because the impact of the remeasurement of the deferred tax effects of items reported in accumulated other comprehensive income (“AOCI”) is recorded through income tax expense, this creates a disproportionate tax effect in AOCI as the recorded DTA or DTL related to an item reported in AOCI no longer equals the tax effect included in AOCI for that item, according to the guidance. The guidance also points out that the FASB has proposed to allow reclassification of this disproportionate tax effect from AOCI to retained earnings. According to the guidance, the banking agencies will allow institutions to apply the FASB’s proposed reclassification guidance for Call Report purposes as of December 31, 2017.

3. CFPB Finalizes Amendments to Prepaid Accounts Rule

The CFPB has finalized amendments to its 2016 prepaid accounts rule under the Electronic Fund Transfers Act implemented by Regulation E and related disclosure requirements under the Truth in Lending Act implemented by Regulation Z. The changes announced on January 25 affect several aspects of the CFPB’s 2016 prepaid accounts rule, including error resolution and limitations on liability for prepaid accounts where the financial institution has not successfully completed its consumer identification and verification process, application of the rule’s credit related provisions to digital wallets that are capable of storing funds, and an extension of the overall effective date from April 1, 2018 to April 1, 2019. For example, the original prepaid accounts rule would have required that consumers that register their accounts (e.g., prepaid cards) with the issuing financial institution receive fraud and error protection benefits, such as the right to dispute charges and have stolen money restored, that extend retroactively to suspected thefts or disputes occurring before registration is completed. The amendments to the rule now provide that the error resolution and liability limitation protections will apply only prospectively, after a consumer has registered and the consumer’s identity has been verified. Click here for the text of the amendments.

     Nutter Notes: The amendments to the prepaid accounts rule also affect so-called digital wallets, which provide consumers with electronic access to their debit and credit cards. If a digital wallet can be used to store and access funds directly, then it is considered a prepaid account under the CFPB’s rule. The amendments to the prepaid accounts rule create a limited exception to the credit-related provisions of the rule for certain business arrangements between prepaid account issuers and credit card issuers that offer traditional credit card products. The new exception applies to digital wallets that can store funds that are linked to credit card accounts where the credit card accounts are already subject to Regulation Z’s open-end credit card rules to ensure that consumers continue to receive full federal credit card protections on their traditional credit card accounts while making it easier to link those accounts to digital wallets that can store funds. The amendments also expand the situations in which prepaid account issuers are permitted to allow consumers to have negative balances on prepaid accounts under certain circumstances. 

4. SEC and CFTC Are Considering the Regulation of Cryptocurrency Markets

SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo announced in a joint statement that their respective agencies plan to consider adopting regulations that would apply to so-called cryptocurrencies, such as Bitcoin. In the joint statement published on January 25, the two agency heads said that while the direct participation by U.S. investors in cryptocurrency markets—in which collective market capitalization recently topped $700 billion—is significant and the associated investment risks are high, many of the cryptocurrency and other digital payment platforms are based offshore and none are registered with the SEC or CFTC. The statement noted that historically the regulation of currency transactions, such as check-cashing and money-transmission, are primarily state-regulated, and that many of the Internet-based cryptocurrency trading platforms have registered with states as payment services, though they are not subject to direct oversight by the SEC or the CFTC. The agency heads said that they would support efforts to revisit traditional regulatory frameworks that would apply to cryptocurrencies as currency transaction platforms to ensure such frameworks are “effective and efficient for the digital era.” Click here for access to the joint statement.

     Nutter Notes: Cryptocurrencies use distributed ledger technology (“DLT”) to allow for real-time electronic payments between participants in a particular cryptocurrency market. DLT is a digital system for recording the transfer of cryptocurrency units (or other assets) in which the transactions and their details are recorded by multiple participants (called nodes) of networked computers at the same time, with no central data storage or administration. The most common form of DLT, and that on which most cryptocurrencies rely, is known as blockchain. Blockchain allows each node in a computer network to update its copy of a shared record independently, with the most popular version of the shared record becoming the official record in place of a central, master record. While cryptocurrencies have been nominally developed to provide for real-time electronic payments, some products that are labeled cryptocurrencies have characteristics that make them securities, according to the two agency heads. The offer, sale, and trading of cryptocurrencies must be carried out in compliance with the securities laws, according to the joint statement. According to the joint statement, the SEC intends to enforce current registration, disclosure, and antifraud requirements of the securities laws applicable to those who issue or deal in cryptocurrencies.

5. Other Developments: Fintech and Call Reports

  • Federal Judge in New York Dismisses State’s Case Against OCC Fintech Charter

A federal district court in New York has dismissed a lawsuit brought by the New York Department of Financial Services (“DFS”) against the OCC claiming that the OCC does not have the authority to create a special purpose national bank charter for financial technology (or fintech) companies. The court explained in its December 12, 2017 ruling that it did not have jurisdiction because the OCC has not yet reached a final decision about whether to issue special purpose fintech charters.

     Nutter Notes: The lawsuit was dismissed without prejudice, meaning that the DFS may bring its claim against the OCC again when and if the OCC makes a final decision to issue special purpose fintech charters. In fact, the court suggested that the OCC should notify the DFS as soon as it reaches a final decision because the DFS has stated its intention to pursue its claims against the OCC and potential charter applicants’ interests would be served by the timely resolution of legal challenges. Click here for a copy of the court’s ruling.

  • FFIEC Announces Revisions for the March and June 2018 Call Reports

The FFIEC announced on January 3 that the federal banking agencies have finalized revisions that will be made to all versions of the Call Report effective as of June 30, 2018. The changes include removing, raising the reporting threshold for, or reducing the reporting frequency of a number of data items on the Call Report, particularly for small banks (those with domestic offices only and total assets of less than $1 billion).

     Nutter Notes: For example, Schedule RI-E to the Call Report form FFIEC 051 used by small banks has been revised to reduce the reporting frequency of the data items for components of “other noninterest income” and “other noninterest expense” from quarterly to annual, and in all versions of the Call Report the percentage threshold for reporting those components has been increased. All changes will be effective as of June 30, 2018, and certain changes related to the accounting for equity securities will be effective as of March 31, 2018. Click here for a copy of the FFIEC’s notice.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry

Tel: (617) 439-2087

Kenneth F. Ehrlich
Tel: (617) 439-2989

Michael K. Krebs

Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising. 

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