First-step analysis: fintech regulation in USA

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Financial regulation

Regulatory bodies

Which bodies regulate the provision of fintech products and services?

 

 

Agency

Regulated entities

Securities

Securities and Exchange Commission (SEC)

Broker-dealers, investment advisers, securities exchanges

Financial Industry Regulatory Authority (FINRA)

Broker-dealers

State securities administrators

Broker-dealers, investment advisers

Banking

Office of the Comptroller of the Currency

National banks

State banking regulators

State banks

Federal Deposit Insurance Corporation

State banks, national banks

Federal Reserve Board

State banks that elect to be a member of the Federal Reserve System, bank holding companies

Money Transmission

State banking regulators

Peer-to-peer (P2P) payment services, issuers of prepaid cards, cryptocurrency exchanges (in some states), others

Financial Crimes Enforcement Network (FinCEN)

P2P payment services, Issuers of prepaid cards, cryptocurrency exchanges, others

Non-bank Lending

State banking regulators

Non-bank lenders, including non-bank mortgage lenders

FinCEN

Non-bank mortgage lenders

Consumer protection

Consumer Financial Protection Bureau (CFPB)

Money transmitters, large banks, non-bank lenders, other financial service providers

Federal Trade Commission (FTC)

Money transmitters, non-bank lenders, other financial service providers

Regulated activities

Which activities trigger a licensing requirement in your jurisdiction?

 

Activity

Licensing requirement?

Type of regulated entity

Arranging or bringing about deals in investments that are securities

Yes

Broker-dealer

Making arrangements with a view to transactions in investments that are securities

Yes

Broker-dealer

Dealing in investments that are securities as principal or agent

Yes

Broker-dealer

Advising on investments in securities

Yes

Investment adviser

Lending

Yes

Bank, non-bank lender

Factoring

No

N/A

Invoice discounting

No

N/A

Secondary market loan trading

No

N/A

Deposit-taking

Yes

Bank

Foreign exchange trading

No

N/A

Payment services

Yes

Bank, money transmitter

Consumer lending

Is consumer lending regulated in your jurisdiction?

Consumer lending is regulated at both the federal and state level. 

At the federal level, all consumer loans are subject to the Truth in Lending Act (TILA), which requires creditors to provide certain disclosures to consumers regarding the loan, including repayment terms, fees, and interest. TILA imposes additional disclosure requirements on credit cards and mortgage loans secured by a consumer’s dwelling. TILA imposes substantive restrictions on mortgage loans. 

The Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act) mandates a nationwide licensing and registration system for companies that make mortgage loans and for individuals working for such companies.

At the state level, non-bank companies that make consumer loans are typically required to obtain lender licences. Licensing requirements vary by state and also by the terms of the loans offered to consumers; loans with higher interest rates are more likely to require the lender to obtain a state licence. 

Most states also have usury laws that prohibit lenders from charging interest higher than a specified amount. Usury limits vary by state and by type of loan.

Secondary market loan trading

Are there restrictions on trading loans in the secondary market in your jurisdiction?

There are no regulatory restrictions on trading loans in the secondary market in the United States, and trading loans is not subject to direct regulatory authority oversight. Trading or holding some loans may, however, be subject to regulation based on the industry, such as the gaming industry, and the trading of loans in those industries may be subject to governmental or regulatory approvals or other legal and regulatory requirements. Loan market participants such as investment advisers are subject to the Custody Rule under the Investment Advisors Act with respect to loans.

Collective investment schemes

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

An issuer’s compliance with applicable laws, rules and regulations will depend on the nature of the issuer’s collective investment scheme. Generally, an issuer may have to register a collective investment scheme involving investments in securities under the Investment Company Act of 1940, as amended (the 1940 Act), unless it qualifies for an exemption. Common exemptions from the 1940 Act registration requirements for private funds include sections 3(c)(1) and 3(c)(7), which exempt issuers that have no more than one hundred beneficial owners and whose beneficial securities are owned by qualified purchasers (as defined under the 1940 Act), respectively. 

Any person or entity engaged in the business of providing investment advice concerning securities, including those that provide investment advice to collective investment funds, must consider whether they are required to register with the SEC as a registered investment adviser under the Investment Advisers Act of 1940 (the Advisers Act). State investment adviser registration or other regulatory requirements may apply. 

An offering of securities, including shares in an investment company, may need to be registered with the SEC under the Securities Act of 1933. Regulation D under the Securities Act provides issuers an exemption from registration requirements if the offering meets the requirements of Regulation D, including limitations on the number or type of investor. 

Alternative investment funds

Are managers of alternative investment funds regulated?

In the United States, managers of alternative investment funds that invest in securities are ‘investment advisers’, and they are regulated by the SEC (under the Investment Advisers Act of 1940) or by state regulators. Managers of commodity pools (ie, funds that invest in commodity interests) are commodity pool operators and commodity trading advisers, which are regulated by the Commodity Futures Trading Commission (CFTC) (under the Commodity Exchange Act). 

Managers will need to register as investment advisers, commodity pool operators or commodity trading advisers, as appli
cable, unless an exception or exemption is available. Unregistered investment advisers, commodity pool operators and commodity trading advisers are still subject to certain requirements, which may include reporting requirements or notice filings, payment of fees or other requirements.

Peer-to-peer and marketplace lending

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

P2P and marketplace lending is regulated at both the federal and state levels. Consumers obtain both types of loans through a fintech provider that connects borrowers and lenders. Loans are either funded by notes sold to investors or by banks, with the loan then purchased by the fintech provider with funds generated by the sale of notes to investors. 

Laws that generally apply to all lenders also apply to P2P or marketplace lenders. For the purposes of both federal and state law, a fintech provider may be treated as the ‘true lender’ even if a bank originated the loan. Additionally, the funding of these loans by investors implicates the securities laws.

At the federal level, applicable lending laws include TILA, the Equal Credit Opportunity Act, privacy laws and advertising and marketing restrictions under the Federal Trade Commission Act. 

At the state level, non-bank fintech providers may require a lender licence, and interest rate restrictions will apply and vary by state. As such, certain P2P lenders may be limited in their activities in certain states. Prosper, for example, is not open to residents of West Virginia and Iowa. Meanwhile, residents of Massachusetts, Mississippi, Nebraska and Nevada are ineligible for Payoff, another prominent peer-to-peer lending platform. 

Notes sold to investors to fund P2P or marketplace loans are generally securities for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. Securities must either be registered with the SEC or be eligible for an exemption. Restrictions on the sales of such securities may also apply. 

Crowdfunding

Describe any specific regulation of crowdfunding in your jurisdiction.

At the federal level, the SEC regulates equity-based crowdfunding in the US, including which investors and issuers can participate and how portal operators should conduct business and adhere to…

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