On May 17, 2022, the FDIC board approved a final rule, effective July 5, 2022, addressing false advertising, misuse of the FDIC's name, and misrepresentations about deposit insurance, based on section 18(a)(4) of the Federal Deposit Insurance Act (FDIA). This section prohibits any person from engaging in false advertising by misusing the name or logo of the FDIC or from making knowing misrepresentations about the existence of or the extent or manner of deposit insurance.
Acting FDIC Chairman Martin Gruenberg observed that an increasing number of firms or individuals, including what he called "scammers[,] . . . have misused the FDIC's name or logo, or have made false or misleading representations about deposit insurance."
The final rule adds a new subpart B to 12 CFR part 328 , and it provides clarity about the FDIC's process for identifying and investigating conduct that may violate the statute, the standards under which such conduct will be evaluated, and the procedures that the FDIC will follow when taking formal and informal enforcement actions to address violations of the statute.
Below is a summary of the final rule's main points:
1. The FDIC's Independent Enforcement Authority
The FDIC has independent authority to investigate and take administrative enforcement actions, including the power to issue cease and desist orders and impose civil money penalties, against any person (including any nonbank or individual) who misuses the FDIC name or logo or makes misrepresentations about deposit insurance. This authority over nonbanks pursuant to 12 U.S.C. § 1828(a)(4)(E)(i) was granted to the FDIC in section 126 of the Emergency Economic Stabilization Act of 2008, the law that created the TARP program at the beginning of the financial crisis.
2. Where Nonbank Entities Make Unsubstantiated Claims
The final rule requires nonbanks, when highlighting the FDIC's name or logo or representing that cash held is insured by the FDIC, to support those claims and identify the bank or banks with which they have existing business relationships and into which consumers' deposits may be placed. This information can play a key role in enabling consumers, and the FDIC, to evaluate the accuracy of any nonbank claims about deposit insurance, including when interacting with nonbank crypto firms and FinTech companies.
Understanding the prominent role of online advertising, the FDIC provides some flexibility regarding how this information is provided to consumers. For example, the final rule states, "a non-bank entity [that] places deposits through a deposit network . . . may satisfy this requirement by identifying the deposit network and each insured depository institutions (IDI) in the deposit network or by providing a hyperlink to a current list of all the IDIs that are part of such a network."
3. Complaints and Investigations
The final rule creates a process by which institutions and members of the public can report suspected instances of false advertising, misuse, or misrepresentation regarding deposit insurance. Under 12 CFR 328.103 , any person who believes someone is, or may be, acting in violation of section 18(a)(4) or who has questions regarding the accuracy of deposit-related representations may make an inquiry or complaint to the FDIC.
The FDIC will then investigate any such inquiry or complaint to determine if there is a potential violation. After the investigation, a course of action will be decided depending on the findings.
- If no violation is found, the FDIC can choose not to pursue the matter further.
- If a violation is found but it falls within a different jurisdiction, the FDIC will refer the matter to the appropriate authority.
- If a violation is found within the FDIC's jurisdiction, the FDIC may pursue informal resolution or formal enforcement.
4. Informal Resolution
The final rule creates an informal resolution process, which generally codifies a process the FDIC had already been using in connection with enforcement of the false advertising statute. Under the informal process, the FDIC issues an advisory letter that gives the person an opportunity to correct the violation without any further negative consequences. If the FDIC issues an advisory letter, the recipient will be requested to:
- 1. Take appropriate actions to prevent future violations;
- 2. Commit in writing to refrain from future violations; and
- 3. Verify in writing that stated issues have been addressed and resolved.
The recipient of an advisory letter will be given the chance to submit supporting evidence to demonstrate there was no violation. The FDIC will give the recipient at least 15 days to either provide the requested information or submit a justification, so long as such a grace period would not be deemed harmful to consumers or IDIs.
If compliance and remediations concerning all of the above have been verified, the FDIC will usually take no further enforcement action against the recipient. If the recipient fails to reply or comply with the advisory letter, the FDIC is entitled to pursue all stated remedies.
The FDIC can skip or end the advisory letter process and proceed to formal enforcement action at any time to prevent harm to consumers or IDIs, or if the recipient has previously received a similar advisory letter from the FDIC.
5. Formal Enforcement
Formal enforcement actions under the final rule are conducted in accordance with the FDIC's administrative enforcement authority under 12 U.S.C. §1818(b), (c), and (i). The rules of practice and procedure for these actions are also the same as those for other enforcement actions, as provided in subparts A through C of 12 CFR part 308 . This means that persons who violate section 18(a)(4) of the FDIA , including the institution-affiliated parties of such persons, are potentially subject to civil money penalties.
The final rule is a first step in a broader effort to revise and clarify how banks represent their products and use the FDIC logo in their marketing. A complementary sign and advertising rulemaking, expected later this year, is anticipated to "enhance consumers' awareness of when they are doing business with an insured institution and when their money is insured."
More broadly, the final rule can be viewed, together with Acting Chairman Gruenberg's priorities for 2022 and an accompanying statement by Acting Comptroller and FDIC Board Member Michael Hsu, as way to highlight potentially misleading statements regarding the applicability of deposit insurance to digital assets.
According to the Acting Comptroller, the final rule is "especially important in light of the growth of nonbank crypto firms and fintechs and their relationships with banks [where the] potential for consumer confusion about the status of cash held at these firms is high." CFPB Director and FDIC Board Member Rohit Chopra also noted concern about "potential misconduct involving novel technologies, including so-called stablecoins and other crypto-assets. While new technologies may yield significant benefits for households, workers, and small businesses, they nonetheless pose risks to consumers who may be baited by misrepresentations or false advertisements about deposit insurance."
Nonbank crypto firms and FinTech companies should remain aware of the FDIC's focus and jurisdiction to investigate and assess civil money penalties on this issue, including consideration of all aspects of their online communications with consumers. DWT is assisting clients to review their compliance with the FDIC rules.