June’s Top Regulatory Change

  • June 9, 2022
  • Quantivate

Each month, Quantivate provides our blog readers with access to the top attorney-generated compliance alert our customers receive. While there were 25 alerts and advisories in June, the largest to be aware of is that the Federal Reserve Board (FRB) issued a final rule on the collection of checks and fund transfers through Fedwire that will take effect in the first quarter following its publication in the Federal Register.

Executive Summary

On May 19, 2022, the FRB finalized amendments to Regulation J that govern funds transfers over the Federal Reserve Banks’ FedNow Service. The Final Rule is substantially similar to the proposal from last year, with a few clarifications in response to comments.

The FedNow Service is a new 24x7x365 interbank settlement service with clearing functionality to support instant payments in the United States and is expected to be available in 2023.

The Final Rule provides a comprehensive set of rules governing funds transfers over the FedNow Service and provides legal certainty and clarity on the rights and obligations of parties to a transfer over the FedNow Service.

The Final Rule will take effect in the first quarter following its publication in the Federal Register (expected around September).

Key Issues of Regulatory Action

Overview of Reg J Subpart C

Regulation J provides the legal framework for the collection and return of checks through the Federal Reserve System (subpart A) and specifies terms and conditions governing funds transfers over the Fedwire Funds Service (subpart B). The Reserve Banks are developing a new interbank 24x7x365 real-time gross settlement service with integrated clearing functionality, called the FedNow Service, to support instant payments in the United States. In the Final Rule, the FRB is establishing a new subpart C of Regulation J to govern funds transfers made through the FedNow Service. The new subpart C of Regulation J specifies the terms and conditions under which Reserve Banks will process funds transfers over the FedNow Service. Subpart C also grants the Reserve Banks authority to issue an operating circular for the FedNow Service, which would detail more specific terms and conditions governing the FedNow Service consistent with Reg J. Organization of Subpart C. Subpart C‚ÄĒFunds Transfers Through The FedNow Service is organized with the following provisions:

  • 210.40 Authority, purpose, and scope.
  • 210.41 Definitions.
  • 210.42 Reliance on identifying number.
  • 210.43 Agreement of sender.
  • 210.44 Agreement of receiving bank.
  • 210.45 Payment orders.
  • 210.46 Payment by a Reserve Bank to a receiving bank or beneficiary.
  • 210.47 Federal Reserve Bank liability; payment of compensation.

Key Issues

Application of UCC Article 4A to All Transfers over the FedNow Service.

Reg J subpart C incorporates those provisions of the Uniform Commercial Code (UCC) Article 4A that are not inconsistent with the provisions set forth expressly in the subpart. UCC Article 4A, which has been adopted in all 50 states, provides comprehensive rules governing the rights and responsibilities of the parties to funds transfers. Subpart C provides that the provisions of UCC Article 4A apply to all transfers over the FedNow Service, even those that might meet the definition of an ‚Äúelectronic fund transfer‚ÄĚ under the EFTA. However, in the event of an inconsistency between the provisions of subpart C and the EFTA, the EFTA would prevail to the extent of the inconsistency. For example, a funds transfer may be initiated from a consumer‚Äôs account at a depository institution, and the depository institution may execute that payment order by sending a conforming payment order to a Reserve Bank through the FedNow Service. If that transfer is subject to the EFTA, then the depository institution would be required to comply with the EFTA and the applicable provisions of the EFTA would govern the institution‚Äôs obligations to its customer.

Immediate Funds Availability.

The FedNow Service is designed for the end-to-end transfer to be completed in a matter of seconds. This means that the beneficiary‚Äôs bank would agree, as provided in subpart C, that it will make funds available to the beneficiary immediately after it has accepted the payment order. With respect to this funds availability requirement, the FRB established the requirement in Regulation J that a beneficiary‚Äôs bank using the FedNow Service must make funds available ‚Äúimmediately‚ÄĚ, thus the need to make funds available in real-time.

Additional Time to Determine Whether to Accept a Payment Order.

The Final Rule accommodates a feature of the FedNow Service under which the beneficiary’s bank may notify its Reserve Bank that it requires additional time to determine whether to accept the payment order because it has reasonable cause to believe that the beneficiary is not entitled or permitted to receive payment. The FRB provided a commentary example clarifying when a FedNow participant may have additional time to determine whether to accept a payment order, generally allowed only when the participant has reasonable cause to believe the beneficiary is not entitled or permitted to receive payment. The example explains that such reasonable cause could exist where a particular payment order may be related to fraudulent activity.

Financial Institution Impacts

Operations/Procedures

  1. Review and update payment procedures for new FedNow Payments
  2. Review and update customer agreements for new FedNow Payments

Training

  1. Review FedNow payment rules for training on processing and implementing FedNow payments service.

Relevant Links

The final rule can be found below.
Federal Reserve Notice – Final Rule

Navigate Compliance Change Management with Ease

In June, Quantivate Compliance Management Services customers were made aware of 25 compliance alerts and advisories that will impact banks soon. In partnership with business law firm Farleigh Wada Witt, Quantivate customers can access integrated regulatory change alerts featuring executive summaries, in-depth documentation, and action plans.

Quantivate’s software and content partners take the headache out of regulatory change management so compliance teams can focus on more important tasks.

As the leader in governance, risk management, and compliance for banks and credit unions, Quantivate provides an integrated approach to compliance management through:

  1. A fully configurable platform that adapts to even the most unique compliance processes.
  2. Templates, workflows, and configurable notifications/alerts designed for banks and credit unions
  3. Data integration with our Enterprise Risk Management, Internal Audit, Policy & Document, and Business Continuity applications to create a comprehensive view of your compliance program.

Looking to mature your compliance program and simplify regulatory change management? Learn more about Quantivate Compliance Management.

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