Our Take: financial services regulatory update – February 20, 2026

February 20, 2026

Change remains a constant in financial services regulation

Read "our take" on the latest developments and what they mean.

Vice Chair Bowman speaks on capital and supervision

What happened? This week, Fed Vice Chair for Supervision Michelle Bowman delivered two speeches on past and upcoming actions – one on February 16^th at the American Bankers Association Conference for Community Bankers and one on February 19^th at the Federal Reserve Bank of Atlanta.

What did Bowman say? The two speeches provided new insights across two key topics:

Basel III endgame. Bowman confirmed that the Fed is still targeting the release of a re-proposed Basel III endgame by the end of this quarter and signaled that it will differ meaningfully from the original 2023 proposal. She emphasized the need to align capital requirements more closely with measurable financial risks and reconsider elements that may have overstated risk or duplicated existing constraints. Within this context, she focused her first speech on capital requirements that could constrain bank participation in mortgage lending and highlighted two planned reforms, and in her second speech she reinforced that the changes to those requirements would apply to banks of all sizes:
- Mortgage servicing rights (MSRs). Bowman explained that MSRs, which represent the value of the servicing income stream of mortgage loans, are currently among the most capital-intensive assets on bank balance sheets. MSR holdings above certain thresholds must be deducted from common equity Tier 1 capital and assigned a 250% risk weight. To address this, she said the Fed would propose eliminating the capital deduction while retaining the 250% risk weight, but also seek comment on whether that risk weight should be recalibrated. Bowman indicated that this change would better align capital treatment with the risk of servicing assets and could encourage continued bank participation in the mortgage servicing market.
- Mortgage risk weights. She also stated that the Fed is evaluating whether the current capital framework sufficiently distinguishes among mortgage loans. Loan-to-value (LTV) ratios – which measure the relationship between the outstanding loan balance and the value of the property – might be further used to differentiate risk weights, particularly for low LTV loans.
Review of supervisory findings. In her second speech, Bowman revealed that the Fed has begun a review of outstanding safety and soundness matters requiring attention (MRAs) to check them for alignment with the Fed’s updated supervisory operating principles directing examiners to focus MRAs on core financial risks rather immaterial policy and documentation issues. She indicated that outstanding MRAs that do not meet the new standard would be downgraded to nonbinding supervisory observations. Bowman said the Fed aimed to complete the review by the end of June.

Our Take

Refocusing bank capital around credit and market function

With confirmation that a Basel III endgame re-proposal is coming soon, Bowman’s remarks provide the clearest preview yet of its direction. The previewed changes to MSRs and mortgage risk weights suggests that the Fed is targeting areas of the original 2023 proposal that drew substantial pushback on the grounds that they would have constrained consumer access to credit and further accelerated the migration of assets and activities to nonbanks. The early focus on these areas also reflects the Administration’s broader efforts to encourage mortgage lending and housing affordability. The Fed’s willingness to revisit the 250% MSR risk weight indicates that well-supported evidence showing it overstates risk and suppresses bank participation in mortgage lending could materially influence calibration. Similarly, introducing LTV-based differentiation would refine standardized mortgage treatment in a way that may make bank mortgage lending more economically viable, particularly for lower-LTV exposures. If that approach relies on current LTV, including amortized loans, it would represent a departure from the prior proposal’s reliance on origination LTV as well as from the 2017 Basel framework.

Notably, Bowman’s speeches clarify that these mortgage-related changes will not just apply to larger banks subject to Basel III endgame, but to smaller banks as well – which may come through a separate proposal. In that respect it is worth noting that the FDIC and OCC (the other agencies involved in the Basel III endgame rulemaking and other interagency capital rules) have sent separate proposals to the Office of Information and Regulatory Affairs (OIRA) as a preliminary stage to proposal. While the details of these proposals remain to be seen, it is clear that the agencies are targeting capital requirements that more closely align to actual portfolio risk and encourage further bank participation in credit markets.

Concrete steps towards a more focused supervisory framework

The announced review of outstanding MRAs is a logical extension of the Fed’s recent supervisory principles memorandum and its stated intention to refocus supervision on material financial risk. For institutions, this shift creates both opportunity and responsibility. While the Fed proceeds with this review, firms have the opportunity to proactively assess their outstanding MRAs to determine not only which may be downgraded to supervisory observations but which are substantively remediated (as supported by internal audit validation) and may be closed. If the findings remain as supervisory observations, firms should evaluate, prioritize, and integrate this feedback into governance structures, including centralized issue-management systems, enterprise risk management, and control enhancement efforts.

OCC proposes new supervisory appeals framework

What happened? On February 17^th, the OCC issued a proposal to revise its process for bank appeals of material supervisory determinations. This follows the FDIC’s finalization of a rule establishing its new Office of Supervisory Appeals (OSA) on January 22^nd.

What is in the proposal and how does it differ from the FDIC’s? The OCC’s proposal would create a similar framework to the FDIC’s OSA, with a few key differences:

Board structure. The proposal would establish a three-member Appeals Board composed of the chief national bank examiner and two external term appointees serving one-year, non-renewable terms. In contrast, the members of the FDIC’s OSA would all be external, without explicitly stipulated terms or renewability.
Governance. The Board would report directly to the Comptroller, who would retain authority to overturn Appeals Board decisions. The Appeals Board would report directly to the Comptroller, who would retain authority to overturn Appeals Board decisions. Institutions would also have the option to first appeal to the appropriate Deputy Comptroller and then to the Appeals Board if they disagree with the Deputy Comptroller’s decision. The FDIC’s OSA does not have similar provisions.
Standard and scope of review. Both the OCC’s Appeals Board and the FDIC’s OSA would have a de novo standard or review, under which they consider the full supervisory record without deferring to supervisory staff’s prior conclusions. They would also both allow institutions to appeal examination findings and underlying supervisory determinations before a formal enforcement action is initiated.
Stays and expedited review. The OCC proposal establishes defined criteria for granting a stay of a supervisory determination pending appeal, including consideration of cost burden, immediate safety and soundness risk, and the public interest. The proposal also introduces “expedited appeals” for determinations that could cause an institution to become critically undercapitalized, requiring a shortened decision timeline. The FDIC also permits institutions to request stays and expedited review in certain circumstances, but does not prescribe structured criteria.
Ombudsman role: Under the OCC’s current framework, the Ombudsman serves as the final decisionmaker on supervisory appeals. The proposal would remove that adjudicatory role and instead position the Ombudsman as a neutral liaison and retaliation monitor similar to the FDIC’s model.

What’s next? The OCC will accept comments on the proposal until April 20^th.

Our Take

Creating a durable appeals architecture

The OCC’s proposal reflects a broader effort to respond to longstanding concerns about the fairness and transparency of the supervisory process. Like the FDIC’s OSA, the move toward explicit de novo review signals that appeals are meant to function as a more meaningful check on supervisory judgment rather than a narrow review of policy consistency. At the same time, the OCC’s approach reveals a distinct governance philosophy. By keeping senior supervisory leadership directly embedded in the adjudicatory structure and preserving ultimate authority at the Comptroller level, the agency appears to view appeals as an internal discipline mechanism as much as an external safeguard. That design may promote consistency and institutional continuity, but it stops short of the fully standalone model the FDIC adopted.

However, given the agency’s evolving supervisory posture, there may be fewer determinations that institutions feel compelled to appeal in the near term. But by codifying a structured appeals framework now, the OCC is establishing guardrails that will persist into future leadership cycles and different supervisory philosophies.

Prediction markets preemption battle continues as CFTC weighs in

What happened? On February 17^th, the Ninth Circuit Appeals Court denied a petition to pause Nevada regulators’ efforts to block the offering of certain event-based contracts. Following the decision, the Nevada Gaming Control Board filed a lawsuit seeking to prohibit a major prediction market platform from operating within the state.

The following day, the CFTC filed an amicus brief arguing that it has exclusive jurisdiction over prediction markets and its authority preempts that of state law and regulations.

What does the Nevada Gaming Control Board lawsuit say? It argues that event contracts meet the definition of “game” and are therefore subject to its jurisdiction, comparing it to sports betting which is regulated by the state Board. It also states that by operating without a Nevada gaming license, prediction markets platforms are not subject to safeguards necessary to promote fairness and consumer protection.

What does the CFTC’s amicus brief say? It argues that event contracts are “commodity derivatives” as they allow for hedging of event-driven risks, enable investors to manage portfolio exposure, and provide the public with information about the likely outcome of future events. It also states that the CFTC has exclusive jurisdiction over commodity derivatives and therefore should preempt the Nevada Gaming Control Board’s regulatory authority.

What’s next? Oral arguments will be heard on April 16^th, 2026.

Our Take

The CFTC weighs in as courts continue to split on prediction markets preemption

CFTC Chair Mike Selig, less than two months into his tenure, is delivering on his stated focus of encouraging “entirely new products, platforms and business models” by throwing the agency’s weight at the issue of prediction markets preemption, which has thus far resulted in split decisions among courts. Whether its amicus brief will ultimately influence Nevada’s decision remains to be seen, but it nevertheless lays the groundwork for prediction markets platforms’ legal arguments as state-by-state lawsuits continue.

It remains unclear whether the Supreme Court will ultimately weigh in on this matter and settle the split decisions by lower courts. In the meantime, there remains significant uncertainty for both prediction markets platforms and firms providing enabling services for such platforms (e.g., banking, payments, onboarding/KYC, technology) as to regulatory jurisdiction and compliance expectations.

In response, prediction markets platforms should:

Build a rapid regulatory response playbook. Platforms will need to track and respond to state actions, establish roles and responsibilities for those responses; and plan for consumer, partner and third-party communications.
Update jurisdictional controls. As the permissibility of conducting certain activities may shift, platforms should be able to validate geofencing and residency controls and define escalation triggers for pausing onboarding and transaction processing when state actions arise.
Strengthen third-party governance and contracting. Platforms should evaluate whether to strengthen contracts to include change-in-law provisions, compliance attestations and rapid suspension/termination rights.

Enabling service providers should:

Promote Board and senior management visibility. Given the volatility in the prediction market space, firms should ensure that Board and senior management have clear, timely line-of-sight into the risk position and decision rationale.
Re-emphasize financial crimes controls for prediction-market exposure. This includes refreshing due diligence programs to capture the customer’s regulatory footprint, ownership, control, third-party reliance, and funds-flow model. In parallel, firms should ensure that transaction monitoring is tuned to expected typologies and that investigations/suspicious activity report escalation triggers are clear for suspected illicit activity or jurisdictional red flags.

For more on prediction markets regulation and what firms should do now, see our newly-released paper Prediction markets and event derivatives: The new crossroads of gaming and finance.

FinCEN expands whistleblower program and grants beneficial ownership relief

What happened? On February 13^th, FinCEN issued two related actions that collectively signal a push toward (1) more actionable leads for enforcement and (2) reduced check-the-box friction in customer due diligence:

Whistleblower intake expansion. FinCEN launched a dedicated webpage to confidentially accept whistleblower tips on fraud, money laundering, and sanctions violations, encouraging early submission with detailed supporting documentation.
CDD “exceptive relief” order. FinCEN issued an order granting relief from the customer due diligence (CDD) rule’s requirement to identify and verify beneficial owners of a legal entity customer each time that customer opens a new account.

What does the whistleblower intake webpage contain? The webpage standardizes and streamlines tip submission, including specific instructions to include “who/what/where/when/why,” how the whistleblower learned of the conduct and the location of any corroborating evidence. It notes that awards may be available when a tip leads to a successful action with penalties exceeding one million dollars but indicates that it will issue a regulation to fully implement the awards process before beginning to pay awards.

What does the exceptive relief order say? While the order exempts firms from identifying and verifying beneficial owners each time the customer opens a new account, they still must do so (1) when the customer first opens an account; (2) when the firm discovers facts calling reliability into question; and (3) as needed based on the firm’s risk-based CDD procedures.

Our Take

FinCEN prioritizes quality over quantity

By standardizing whistleblower reporting and re-focusing beneficial ownership collection requirements, FinCEN is emphasizing better quality data over bureaucratic processes. The whistleblower portal increases the chance that employees report issues externally, which can compress the timeline for institutions to investigate and respond. As a result, firms face increased risk if they choose to “remediate quietly” and an insider tips FinCEN first, shifting the institution from proactive to reactive.

Meanwhile, the exceptive relief order shifts the compliance focus towards risk-based ongoing CDD (changes in ownership/control, unusual activity, adverse information, sanctions exposure, etc.) rather than repeated collection events tied to internal product/account structuring. In response, firms should consider:

Reviewing CDD policies and triggers. Firms should consider revising account opening and ongoing due diligence policies to determine when a “reliability concern” is triggered and define additional as-needed customer identity collection and verification requirements.
Preparing for change in supervisory focus. Expect exam and audit attention to migrate from “did you re-collect at each opening?” to “can you demonstrate an effective risk-based framework that detects changes and escalates appropriately?”
Strengthening internal escalation and disclosure decisioning. Firms should consider refreshing whistleblower and complaints intake and case management to quickly triage credible AML/sanctions issues, preserve evidence and document disclosure decisions. The goal is to avoid being surprised by an external tip while the firm is still investigating or remediating the issue.

On our radar

Treasury launches public-private initiative to strengthen cybersecurity and AI risk management. On February 18^th, the Treasury Department announced the completion of a major public-private initiative focused on improving cybersecurity and risk management for artificial intelligence in the financial sector. Treasury will release six resources throughout February that provide practical tools for financial institutions to manage AI-specific cyber risks.

Treasury releases new AI governance resources for the financial sector. On February 19^th, Treasury issued two new tools to support responsible AI adoption in financial services: a shared Artificial Intelligence Lexicon and the Financial Services AI Risk Management Framework. Developed with industry and regulatory partners through the Artificial Intelligence Executive Oversight Group, the resources aim to standardize terminology, strengthen risk management practices, and improve operational resilience as institutions expand the use of AI in decision-making and customer operations. Treasury stated that the publications advance the President’s AI Action Plan.

Fed updates BHC Supervision Manual to remove reputational risk from exams. On February 17^th, the Fed published revisions to the Bank Holding Company Supervision Manual to implement its June 2025 decision to eliminate reputational risk as a component of supervisory examinations for banks and holding companies. The updated manual removes references to reputation or reputational risk across more than twenty sections, with changes summarized on page 16 of the release.

Agencies rescind public LCR FAQs. On February 10^th, the Fed, OCC, and FDIC announced that they have rescinded their publicly posted FAQs interpreting the Liquidity Coverage Ratio (LCR) rule but will keep the documents available on their websites. The agencies noted that the rescission does not change the LCR rule itself and that institutions may continue to rely on the FAQs for clarification. The agencies plan to seek public comment on the issues addressed in the FAQs and on potential regulatory changes in the future.

SEC Chair Atkins outlines priorities for state corporate law competition and Regulation S-K reform. On February 17^th, SEC Chairman Paul Atkins delivered remarks in which he previewed the SEC’s ongoing review of Regulation S-K, identifying priorities to rationalize, simplify, and modernize executive compensation and public company disclosure requirements, including potential changes to Item 402, related-party disclosures, and risk factor reporting.

SEC proposes amendments to reduce reporting burdens for fund portfolio filings. On February 18^th, the SEC proposed amendments to Form N-PORT including extending filing deadlines, streamlining reporting items, and reducing the frequency of public portfolio disclosures from monthly to quarterly. The proposal also removes certain “Names Rule” reporting requirements and adds new information for funds with ETF share classes. Separately, the SEC extended compliance dates for the Names Rule reporting requirements to November 17^th, 2027, for larger fund groups and May 18^th, 2028, for smaller fund groups.

SEC staff issues updated FAQs on broker-dealer, transfer agent, and trading obligations for crypto assets. On February 19th, the SEC Division of Trading and Markets released updated staff FAQs addressing how federal securities laws apply to crypto asset activities and distributed ledger technology. The guidance covers broker-dealer custody and capital treatment of crypto assets, including a new 2% net capital haircut for payment stablecoins, SIPC coverage limits, use of distributed ledgers by transfer agents, and compliance expectations for pairs trading of security and non-security crypto assets on exchanges and ATSs. The FAQs also clarify when crypto transfer agents must register and how ATS operators can integrate crypto trading into their existing Form ATS or ATS-N disclosures.