Our Take: financial services regulatory update – March 21, 2025

• What happened? On March 20th, the OCC announced that it is removing references to reputation risk from examination handbooks and guidance documents. It also states that the agency will no longer examine for reputation risk.
• What else does the announcement say? The announcement explains that removing references to reputation risk will “improve transparency and confidence in the supervisory process.” It also notes that the agency will work with other agencies to remove references to reputation risk and reminds firms that the OCC expects that banks engage in sound risk management practices, operate in a safe and sound manner and comply with applicable laws and regulations.
• What’s next? The OCC will work with the Fed and OCC to remove references to reputation risk in joint agency documents. In addition, the FIRM Act, which passed out of the Senate Banking Committee last week, would officially direct the agencies to eliminate all references to reputation risk as a measure to determine safety and soundness; prevent the agencies from issuing new rules or guidance using reputation risk to supervise or regulate firms; and require the agencies to report to Congress on their elimination of reputation risk.

Our take

The Administration’s anti-reputation risk push continues. Ending “debanking” of certain customer segments and eliminating the lack of transparency associated with reputation risk expectations have been key Administration priorities, and the OCC has taken the most significant steps yet to advance these policies. While examiners will no longer consider reputational risk when evaluating bank risk management, they will nevertheless remain focused on whether banks are operating within their risk appetite and effectively mitigating customer-driven risk such as BSA/AML compliance, litigation risk, concentration risk and liquidity risk. Although the announcement is limited to eliminating reputation risk from examination handbooks and guidance, firms should also be aware that the Administration is likely to take a close look at decisions not to provide services to politically sensitive customers. As such, firms making such decisions will need to clearly document and justify decisions to decline or terminate services with policies that are applied consistently across customer segments. In the end, while banks will no longer receive comments around the process of reputation risk, the outcomes of their internal risk decisions still matter.

• What happened? On March 14th, President Trump issued an Executive Order (EO) directing the heads of several Federal government entities, including Treasury’s Community Development Financial Institutions Fund (CDFI Fund), to eliminate “non-statutory components” and reduce activities and personnel to the “minimum presence and function required by law”. The CDFI Fund provides capital to certified CDFI financial institutions in “distressed” communities. The CDFI Fund’s inclusion in the EO drew response from industry groups and legislators of both parties, including Senate CDFI Caucus Co-Chairs Mike Crapo (R-ID) and Mark Warner (D-VA) and House Financial Services Committee member Kim Young (R-CA).
• What does the EO do? The EO calls for CDFI Fund Director Pravina Raghavan, within 7 days of the EO, to:
  • Eliminate the “non-statutory components and functions… to the maximum extent consistent with applicable law, and… reduce the performance of… statutory functions and associated personnel to the minimum presence and function required by law.”
  • Submit a report to the Office of Management and Budget (OMB) explaining “which components or functions are statutorily required and to what extent” and confirming that CDFI Fund operations are reduced to the statutory minimum.
• What’s next? CDFI Fund wind-down of non-statutory components must be implemented and the report to OMB must be submitted March 21st.

Our take

CDFI Fund continues, at least in part. Since inception, CDFI Fund programs have been recognized as helping to draw capital to distressed and rural areas, including redevelopment following natural disasters. As the most significant of these activities and CDFI programs¹ are authorized by statutes, the EO’s call to eliminate non-statutory components and functions of the CFDI Fund is unlikely to have a significant direct impact. However, any cuts to staff who implement these programs could slow down the application and disbursement process. In addition, Director Raghavan’s or further Administration review could result in reduction in other direct assistance programs. While the CDFI is fully funded through 2025, Congress could also decide to reduce funding going forward. Firms should assess the impact of potential future program and funding cuts to existing or planned financing projects, participation in and coordination of tax credit programs, community development commitments, as well as to customers. Looking ahead, firms should also assess the availability of alternative funding sources for projects and customers as well as opportunities to engage with policymakers at the state and federal level.

_{¹ Examples of such programs are the New Markets Tax Credit Fund, Capital Magnet Fund, Small Dollar Loan Program, and the CDFI Bond Guarantee Program.}

• What happened? On March 11th, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a geographic targeting order (GTO) requiring that all money services businesses (MSBs) located in 30 specific ZIP codes near the southwest border file Currency Transaction Reports (CTRs) for all cash transactions above $200.
• What does the GTO require? For cash transactions above $200, MSBs are required to file CTRs that include the total amount of the transaction, the currency used, identification details of the individuals involved, and the nature and purpose of the transaction. The GTO also requires that MSBs verify the identity of persons engaging in such transactions and retain records of the transaction. It also encourages the voluntary filing of Suspicious Activity Reports (SARs) to report transactions conducted to evade the $200 threshold. MSBs must continue to file CTRs for all transactions above $10,000.
• What’s next? The GTO will take effect on April 14th, 2025 and ends on September 9th, 2025. Following this period, FinCEN may extend or expand the order to address emerging threats.

Our take

A low CTR threshold, a high operational lift. For MSBs operating in the 30 ZIP codes impacted by the GTO, the short 30-day runway to prepare for the significant increase in CTR filings will be challenging. These firms should promptly begin training customer-facing staff on the new threshold and information collection requirements and consider additional oversight of these activities. As staffing in both the first and second lines of defense may not be adequate to handle a large increase in the volume of reports, they should also determine whether hiring additional staff – or making technological upgrades to more efficiently file reports – is necessary while ensuring that they maintain the quality and timeliness of CTR filings. Further, as the GTO encourages SAR filings of transactions conducted to evade the $200 threshold, MSBs will likely have to either implement interim monitoring procedures and/or make sure that their systems (i.e., detection scenarios) are modified to identify currency transactions that are just under the revised threshold, as well as multiple transactions by the same customer that aggregate above the new $200 threshold.

Firms beyond the GTO’s scope will feel its impact. MSBs in areas bordering the GTO’s geographical scope may experience an uptick in customers attempting to circumvent the order and conceal illicit activity. These firms should adjust their customer due diligence and know-your-customer programs to capture red flags related to this activity, including customers that reside within a ZIP code targeted by the GTO but traveled outside of that area to transact with the MSB. Meanwhile, banks that conduct business with MSBs should understand which clients are impacted by the GTO and determine whether updates are needed to their customer due diligence or AML compliance programs. Considering the Administration’s focus on AML initiatives related to drug cartels, all firms located in high risk jurisdictions should anticipate increased scrutiny – potentially through similar GTOs – going forward.

These notable developments hit our radar recently:

SEC holds first crypto task force roundtable. On March 21st, the SEC’s Crypto Task Force held the first of its series of roundtables to discuss key areas of interest in the regulation of crypto assets. The inaugural roundtable was titled “How We Got Here and How We Get Out – Defining Security Status,” and discussion focused mainly on how securities laws might apply to digital assets.

SEC staff issues new FAQs on Advisers Act compliance. On March 19th, SEC staff updated its FAQ regarding compliance with Rule 206(4) under the Advisers Act, also known as the “Marketing Rule.” This rule regulates the marketing communications of investment advisors. The updated responses indicate the agency is relaxing the requirements relating to the use of net performance and provide investment advisers with additional flexibility to illustrate portfolio characteristics, so long as certain other requirements are met.

Nomination hearing scheduled for SEC chair and more. On March 27th, the Senate banking committee will conduct a hearing to consider multiple of the Trump Administration’s nominations for certain financial services agency appointments. Currently, those scheduled to appear are, Paul Atkins, nominee to lead the Securities and Exchange Commission; Jonathan Gould, to be Comptroller of the Currency, Department of the Treasury; and Mr. Luke Pettit, to be an Assistant Secretary of the Treasury, Department of the Treasury.

CFTC issues new advisory on fraud using generative AI. On March 19th, the CFTC’s Office of Customer Education and Outreach (OCOE) issued a new advisory stating that generative AI is making it increasingly easier for fraudsters to create convincing scams. The advisory provides specific actions people should take to protect themselves, including strengthening social media account privacy settings and keeping personal, sensitive or financial information private.

New FHFA lead overhauls boards of Fannie and Freddie. The newly confirmed Director of the Federal Housing Finance Agency (FHFA), Bill Pulte, has named himself chairman of the Fannie Mae and Freddie Mac boards. According to regulatory filings submitted on March 17th, Pulte also fired 14 members of Fannie and Freddie’s boards of directors and added seven new members. These leadership changes come as the administration weighs privatizing the giant firms.