Full text
(1 of 39), Page 1 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 1 of 39
No. 24-2355
IN THE
United States Court of Appeals for the Ninth Circuit
_________________________
PAYSERVICES BANK,
Plaintiff-Appellant,
v.
FEDERAL RESERVE BANK OF SAN FRANCISCO,
Defendant-Appellee.
_________________________
On Appeal from the United States District Court for the District of Idaho
Case No. 1:23-cv-00305-REP, Hon. Raymond E. Patricco, Jr.
_________________________
BRIEF FOR AMICI CURIAE INDEPENDENT COMMUNITY BANKERS
OF AMERICA AND CONSUMER BANKERS ASSOCIATION
IN SUPPORT OF APPELLEE AND AFFIRMANCE
_________________________
JENNA BURKE JONATHAN S. FRANKLIN
INDEPENDENT COMMUNITY NORTON ROSE FULBRIGHT US LLP
BANKERS OF AMERICA 799 9th Street NW, Suite 1000
1615 L Street, NW, Suite 900 Washington, DC 20001
Washington, DC 20036 (202) 662-0466
(202) 821-4380
CHARLOTTE KELLY
DAVID POMMEREHN NORTON ROSE FULBRIGHT US LLP
CONSUMER BANKERS ASSOCIATION Frost Tower
1225 I Street, N.W., #550 111 W. Houston Street, Suite 1800
Washington, D.C. 20005 San Antonio, TX 78205
(202) 552-6368 (210) 270-9329
August 5, 2024 Counsel for Amici Curiae
(2 of 39), Page 2 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 2 of 39
CORPORATE DISCLOSURE STATEMENT
Pursuant to Federal Rule of Appellate Procedure 26.1, amici curiae, by and
through their undersigned counsel, hereby certify the following:
1. The Independent Community Bankers of America certifies that it has
no parent corporation and that no publicly traded company owns 10% or more of
its stock.
2. The Consumer Bankers Association certifies that it has no parent
corporation and that no publicly traded company owns 10% or more of its stock.
Respectfully submitted,
/s/ Jonathan S. Franklin
Jonathan S. Franklin
NORTON ROSE FULBRIGHT US LLP
799 9th Street, N.W., Suite 1000
Washington, D.C. 20001
(202) 662-0466
Counsel for Amici Curiae
i
(3 of 39), Page 3 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 3 of 39
TABLE OF CONTENTS
CORPORATE DISCLOSURE STATEMENT .........................................................i
TABLE OF AUTHORITIES .................................................................................. iii
IDENTITY AND INTEREST OF AMICI CURIAE .................................................1
SUMMARY OF ARGUMENT ................................................................................3
ARGUMENT ............................................................................................................6
I. WHETHER TO GRANT OR DENY A MASTER ACCOUNT
IS WITHIN FEDERAL RESERVE BANKS’ STATUTORY
DISCRETION. .....................................................................................6
II. STRIPPING FEDERAL RESERVE BANKS OF THEIR
DISCRETION REGARDING MASTER ACCOUNTS
WOULD UNDERMINE THE SAFETY AND INTEGRITY
OF FEDERAL RESERVE SERVICES AND THE FEDERAL
RESERVE SYSTEM. ........................................................................11
A. Mandating The Provision Of Master Accounts To Every
“Novel” State-Chartered Institution Would Strip Reserve
Banks Of Their Ability To Ensure That Such Institutions
Do Not Pose A Threat To The Safety And Integrity Of
The Federal Banking System. ..................................................11
B. Novel State-Chartered Institutions Are Not Subject To
The Comprehensive Regulation Applicable To Federally
Regulated Banks. .....................................................................15
C. Allowing Automatic Access To Master Accounts Will
Undermine The Integrity And Carefully Crafted
Protections Of Our Financial System. .....................................21
CONCLUSION .......................................................................................................29
CERTIFICATE OF COMPLIANCE ......................................................................30
CERTIFICATE OF FILING AND SERVICE .......................................................31
(4 of 39), Page 4 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 4 of 39
TABLE OF AUTHORITIES
Page(s)
Cases:
Banco San Juan Internacional, Inc. v. Fed. Rsrv. Bank of N.Y., 700 F.
Supp. 3d 86 (S.D.N.Y. 2023)................................................................................ 9
Biden v. Texas, 597 U.S. 785 (2022) ......................................................................... 7
Farmers’ & Merchants’ Bank of Monroe v. Fed. Rsrv. Bank of
Richmond, 262 U.S. 649 (1923) ........................................................................... 7
Fourth Corner Credit Union v. Fed. Rsrv. Bank of Kansas City, 861
F.3d 1052 (10th Cir. 2017) ................................................................................. 10
Statutes, Regulations, and Rules:
12 C.F.R. § 3.1(a) ..................................................................................................... 24
12 C.F.R. § 3.10 ....................................................................................................... 24
12 C.F.R. § 4.6(a) ..................................................................................................... 16
12 C.F.R. § 4.6(c) ..................................................................................................... 16
12 C.F.R. §§ 6.1-.25 ................................................................................................. 24
12 C.F.R. § 21.11(a)................................................................................................. 26
12 C.F.R. § 21.11(c)................................................................................................. 26
12 C.F.R. § 21.21(c)................................................................................................. 25
12 C.F.R. §§ 30.1-.6 ................................................................................................. 26
12 C.F.R. § 50.10 ..................................................................................................... 23
12 C.F.R. § 50.40(a)................................................................................................. 23
12 C.F.R. § 50.40(c)................................................................................................. 23
12 C.F.R. § 208.3(d)(1) ............................................................................................ 26
-iii-
(5 of 39), Page 5 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 5 of 39
12 C.F.R. §§ 208.40-.45 ........................................................................................... 24
12 C.F.R. § 208.62(a)............................................................................................... 26
12 C.F.R. § 208.62(c)............................................................................................... 26
12 C.F.R. § 208.63(b) .............................................................................................. 25
12 C.F.R. § 208.64(a)............................................................................................... 18
12 C.F.R. § 211.24(j) ............................................................................................... 25
12 C.F.R. § 217.1(a)................................................................................................. 24
12 C.F.R. § 217.10 ................................................................................................... 24
12 C.F.R. § 225.4(f) ................................................................................................. 26
12 C.F.R. § 249.10 ................................................................................................... 23
12 C.F.R. § 249.40(a)............................................................................................... 23
12 C.F.R. § 249.40(c)............................................................................................... 23
12 C.F.R. § 324.1(a)................................................................................................. 24
12 C.F.R. § 324.10 ................................................................................................... 24
12 C.F.R. §§ 324.401-.405 ....................................................................................... 24
12 C.F.R. § 326.8(b) ................................................................................................ 25
12 C.F.R. § 329.10 ................................................................................................... 23
12 C.F.R. § 329.40(a)............................................................................................... 23
12 C.F.R. § 329.40(c)............................................................................................... 23
12 C.F.R. § 353.3(a)................................................................................................. 26
12 C.F.R. §§ 364.100-.101 ....................................................................................... 26
31 C.F.R. § 1010.100(r) ........................................................................................... 26
31 C.F.R. § 1020.210(b) .......................................................................................... 26
-iv-
(6 of 39), Page 6 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 6 of 39
12 U.S.C. § 222 ........................................................................................................ 16
12 U.S.C. § 248a(c) .................................................................................................... 9
12 U.S.C. § 248a(c)(2) ......................................................................................passim
12 U.S.C. § 248c(a)(3)(A) ......................................................................................... 8
12 U.S.C. § 248c(b)(1)(B)(ii) ........................................................................3, 10, 13
12 U.S.C. § 321 ........................................................................................................ 17
12 U.S.C. § 325 ........................................................................................................ 18
12 U.S.C. § 342 .................................................................................................passim
12 U.S.C. § 481 ........................................................................................................ 16
12 U.S.C. § 1813(a)(1) ............................................................................................. 11
12 U.S.C. § 1813(c)(1) ............................................................................................. 11
12 U.S.C. § 1818 ...................................................................................................... 27
12 U.S.C. § 1820(d) ...........................................................................................16, 17
12 U.S.C. § 1831o .................................................................................................... 24
12 U.S.C. § 1831o(h)(3) .......................................................................................... 27
12 U.S.C. § 1831p-1................................................................................................. 26
12 U.S.C. § 1841(c)(1) ............................................................................................. 20
12 U.S.C. § 1844(c)(2)(A)(ii) .................................................................................. 19
15 U.S.C. § 6801(b) ................................................................................................. 26
15 U.S.C. § 6805 ...................................................................................................... 26
31 U.S.C. § 5311(2) ................................................................................................. 25
31 U.S.C. § 5318(g) ................................................................................................. 26
Federal Reserve Act, 38 Stat. 251 (1913) .................................................................. 7
-v-
(7 of 39), Page 7 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 7 of 39
Fed. R. App. P. 29(a)(4)(E)........................................................................................ 1
Monetary Control Act of 1980, 94 Stat. 132 (1980).................................................. 7
Other Authorities:
Bank Pol’y Inst., Fed Account Access for Nonbanks: An Analysis of
the Policy Implications and Potential Risks to the U.S. Financial
System (June 2021) (https://tinyurl.com/yzr9arau) ............................................. 26
Bank Pol’y Inst., FinTech Access to Fed Accounts and the Nation’s
Payments Systems: A Primer (May 11, 2021)
(https://tinyurl.com/y85tchje) ............................................................................... 4
Bd. of Govs. of Fed. Rsrv. Sys., Bank Holding Company Supervision
Manual (Feb. 2023) ............................................................................................ 27
Bd. of Govs. of Fed. Rsrv. Sys., Commercial Bank Examination
Manual (Oct. 2023)............................................................................................. 27
Bd. of Govs. of Fed. Rsrv. Sys. et al., Joint Statement on Risk-
Focused Bank Secrecy Act/Anti-Money Laundering Supervision
(July 22, 2019) (https://tinyurl.com/mr4692nn) ................................................. 25
FDIC, Basic Examination Concepts and Guidelines (Mar. 2022) .......................... 18
FDIC, Formal and Informal Enforcement Actions Manual (July 2022) ................. 27
Fed. Rsrv. Banks, Operating Circular No. 1 (Account Relationships)
(eff. Sept. 1, 2023) .............................................................................................. 13
Fed. Rsrv. Board, New Account Structure Will Support Interstate
Branching (May 2, 1996) (https://tinyurl.com/5n6z9d72) ................................... 8
Fed. Rsrv. Sys., The Fed Explained: What the Central Bank Does
(Aug. 2021) (https://tinyurl.com/pnxbzn2x) ................................................18, 19
Raj Gnanarajah, Cong. Rsch. Serv., IF10055, Bank Failures and the
FDIC (Mar. 23, 2023) ...................................................................................22, 23
Guidelines for Evaluating Account and Services Requests, 87 Fed.
Reg. 51,099 (Aug. 19, 2022) .......................................................................passim
-vi-
(8 of 39), Page 8 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 8 of 39
Michael J. Hsu, Acting Comptroller of the Currency, Preventing the
Next Great Blurring (Feb. 21, 2024) (https://tinyurl.com/dujxzw76) ................ 20
Marc Labonte, Cong. Rsch. Serv., IN12031, Federal Reserve: Master
Accounts and the Payment System (Dec. 8, 2022) ............................................. 12
Marc Labonte & David W. Perkins, Cong. Rsch. Serv., IF11055,
Introduction to Bank Regulation: Supervision (2018) ....................................... 15
Marc Labonte, Cong. Rsch. Serv., R44918, Who Regulates Whom? An
Overview of the U.S. Financial Regulatory Framework (2023) ............16, 17, 19
Adam J. Levitin, Consumer Finance: Markets and Regulation (2018) ................... 18
Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, 79
Fed. Reg. 61,440 (Oct. 10, 2014) ....................................................................... 23
OCC, Comptroller’s Handbook, Examination Process, Bank
Supervision Process (Sept. 2019) (https://tinyurl.com/ydmderuk) ..............16, 27
OCC, Comptroller’s Handbook, Safety and Soundness, Liquidity
(May 25, 2023) (https://tinyurl.com/yckysd9m) ................................................ 22
OCC, PPM 5310-3, Bank Enforcement Actions and Related Matters
(May 25, 2023) (https://tinyurl.com/2jwvv9m4).......................................... 17, 27
Christopher K. Odinet, Predatory Fintech and the Politics of Banking,
106 Iowa L. Rev. 1739 (2021) ......................................................................17, 18
David W. Perkins, Cong. Rsch. Serv., IF10809, Introduction to Bank
Regulation: Leverage and Capital Ratio Requirements (2019) ......................... 23
David W. Perkins, Cong. Rsch. Serv., R46648, Bank Supervision by
Federal Regulators: Overview and Policy Issues (Dec. 28, 2020) ...................... 2
Andrew P. Scott, Cong. Rsch. Serv., R47014, An Analysis of Bank
Charters and Selected Policy Issues (2022) .................................................16, 17
-vii-
(9 of 39), Page 9 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 9 of 39
IDENTITY AND INTEREST OF AMICI CURIAE
The Independent Community Bankers of America (“ICBA”) has one
mission: to create and promote an environment where community banks flourish.
ICBA is a national trade association that powers the potential of the nation’s
community banks through effective advocacy, education, and innovation. As local
and trusted sources of credit, America’s community banks leverage their
relationship-based business model and innovative offerings to channel deposits
into the neighborhoods they serve, creating jobs, fostering economic prosperity,
and fueling their customers’ financial goals and dreams.1
The Consumer Bankers Association (“CBA”) is the only national financial
trade group focused exclusively on retail banking and personal financial services—
banking services geared toward consumers and small businesses. As the
recognized voice on retail banking issues, CBA provides leadership, education,
research, and federal representation for its members. CBA members include the
nation’s largest bank holding companies as well as regional and super-community
banks that collectively hold two-thirds of the total assets of depository institutions.
1 Amici curiae state that no counsel for a party authored this brief in whole or
in part and that no person other than amici, their members, or their counsel has
made any monetary contributions intended to fund the preparation or submission of
this brief. See Fed. R. App. P. 29(a)(4)(E).
1
(10 of 39), Page 10 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 10 of 39
Amici have a strong interest in this case, which asks whether Federal
Reserve Banks have discretion to consider the safety or soundness of a depository
institution before providing that entity a “master account” that effectively gives it
direct access to the Nation’s banking system. Amici believe that Reserve Banks
have the statutory discretion to evaluate any applicant’s business model and
financial soundness and security before providing master account access. The
banks amici represent are subject to a plethora of federal regulation and oversight
that, under the guidelines promulgated by the Federal Reserve System (the “Fed”),
facilitate a more streamlined master account application process. See Guidelines
for Evaluating Account and Services Requests, 87 Fed. Reg. 51,099, 51,100 (Aug.
19, 2022). But institutions like appellant, which are not federally insured and not
subject to the supervision of a “federal prudential regulator,”2 are not generally
subject to that extensive regulation and oversight. As a result, appellant’s
argument that it—and any depository institution chartered under any state law—is
automatically entitled to a master account on a no-questions-asked basis would, in
amici’s view and that of the Fed, potentially subject the federal banking system to
undue risk, and negate the purpose of an application process or “access request,”
2 The federal prudential regulators are the Fed, the Office of the Comptroller
of the Currency (“OCC”), and the Federal Deposit Insurance Corporation
(“FDIC”). David W. Perkins, Cong. Rsch. Serv., R46648, Bank Supervision by
Federal Regulators: Overview and Policy Issues 1 (Dec. 28, 2020).
2
(11 of 39), Page 11 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 11 of 39
12 U.S.C. § 248c(b)(1)(B)(ii), which is to petition a Federal Reserve Bank to
review the request.
SUMMARY OF ARGUMENT
The U.S. federal banking system is the largest, most reliable, and most
trusted financial system in the world. Businesses and individuals alike depend on
that system each day to safely and efficiently hold trillions of dollars in assets and
process billions of dollars’ worth of transactions. In turn, the reliability, safety and
soundness of that banking system is preserved by an vast overlapping web of
federal laws, regulation, and agency oversight. The “master accounts” at issue
here are a critical part of that network, as they are the way banks and other
depository institutions are able to directly access the myriad financial services that
allow the federal banking system to operate. Access to such accounts is controlled
by the twelve Federal Reserve Banks under guidelines issued by the Fed of which
they form a part, which is controlled by its Board of Governors (“Board”). The
Reserve Banks seek to ensure that such accounts are given only to institutions that
are found, on an ongoing basis, to have the financial and operational ability to
safely and securely have direct access to the federal banking network.
Amici are pre-eminent banking associations whose thousands of members—
including both federally and state-chartered institutions—are subject to that
extensive federal regulation and oversight because of their charters, federal deposit
3
(12 of 39), Page 12 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 12 of 39
insurance coverage, holding company structure, or other reasons. Appellant
PayServices, Inc. (“PayServices”), by contrast, is subject to no direct federal
prudential examination or oversight. It is a “novel” depository institution—
meaning an institution whose charter “authorizes [it] to engage in some, but
typically not all, of the[] core banking activities” of deposit-taking, lending, and
payments3—chartered by the State of Idaho that is not federally insured and has no
federal agency overseeing its structure, operations, finances, or soundness.
Amici take no position on whether appellee the Federal Reserve Bank of San
Francisco (“FRBSF”) correctly exercised its discretion to deny PayServices’
application for a master account, or whether other novel institutions should or
should not receive such access depending on their individual characteristics, which
are not issues presented in this appeal. But amici believe, as the district court
correctly held, that the Reserve Banks have statutory discretion to grant or deny
master account access and are not mandated to automatically grant such access—
no-questions-asked—to any novel, state-chartered depository institution that
applies for one. Not only does the statutory language unambiguously preserve
such discretion, but the soundness of the Nation’s unparalleled banking system
would be compromised if PayServices’ contrary view were accepted. Under the
3 Bank Pol’y Inst., FinTech Access to Fed Accounts and the Nation’s
Payments Systems: A Primer at 1 (May 11, 2021) (https://tinyurl.com/y85tchje).
4
(13 of 39), Page 13 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 13 of 39
Fed’s guidelines, no institution is automatically entitled to master account access.
Federally insured and regulated banks, such as amici’s members, are subject to a
streamlined application process because the comprehensive, ongoing, and in some
cases continuous federal regulation and oversight to which they are subject gives
the Fed assurance that these banks will not compromise the safety or integrity of
the federal banking system. But with novel institutions such as PayServices, the
Fed has no such assurance, and its Reserve Banks must therefore be able to
carefully scrutinize such institutions’ business models, along with their underlying
soundness, safety, and security, before effectively giving them the keys to the
palace that is our banking system.
If PayServices desires a more streamlined process for master account access,
it can become a federally-insured bank (as amici’s members have done) and accept
the accompanying comprehensive federal regulatory oversight. But until
PayServices does so, the Federal Reserve Banks must have the discretion to ensure
the safety and soundness of PayServices and other “novel” institutions before
giving them the benefits of being a full-service bank. For these reasons, amici urge
the Court to affirm the well-reasoned decision of the district court that FRBSF was
5
(14 of 39), Page 14 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 14 of 39
not statutorily mandated to provide PayServices with automatic access to a master
account on a no-questions-asked basis.4
ARGUMENT
I. WHETHER TO GRANT OR DENY A MASTER ACCOUNT IS
WITHIN FEDERAL RESERVE BANKS’ STATUTORY
DISCRETION.
The district court correctly determined that Federal Reserve Banks are under
no statutory obligation to “grant master accounts to an otherwise eligible
depository institution regardless of its risk profile,” ER-22, and that FRBSF had
discretion to deny PayServices a master account, ER-31.
At issue in this case are two provisions of the Federal Reserve Act (“FRA”).
The first provides that “[a]ny Federal reserve bank may receive from any of its
member banks, or other depository institutions, . . . deposits of current funds in
lawful money[.]” 12 U.S.C. § 342 (“Section 342”) (emphasis added). The second
provides that “[a]ll Federal Reserve bank services” covered by a Board-created fee
schedule “shall be available to nonmember depository institutions,” and, subject to
certain exceptions, “such services shall be priced at the same fee schedule
applicable to member banks.” 12 U.S.C. § 248a(c)(2).
4 Amici do not address whether the FRBSF is a federal “agency.” See
Appellant’s Br. 23-32.
6
(15 of 39), Page 15 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 15 of 39
Section 342 makes clear that Federal Reserve Banks have the discretion—
not obligation—to issue master accounts. Under that section, a Federal Reserve
Bank “may receive” deposits. 12 U.S.C. § 342 (emphasis added). It is well-
established that “the word may clearly connotes discretion.” Biden v. Texas, 597
U.S. 785, 802 (2022) (internal quotation marks and citation omitted). And, as the
Supreme Court explained in Farmers’ & Merchants’ Bank of Monroe v. Federal
Reserve Bank of Richmond, 262 U.S. 649, 662 (1923) (“FMBM”), Section 342
does not “impose[] upon reserve banks any obligation to receive checks for
collection” but “merely confers authority to do so.”
Notably, Section 342’s discretionary language existed when the FRA was
enacted, see ch. 6, § 13, 38 Stat. 251, 263 (1913), and went untouched by Congress
even after the U.S. Supreme Court decided FMBM in 1923, see, e.g., Monetary
Control Act of 1980, § 105, 94 Stat. 132, 139-40 (1980). As the district court
correctly observed, “Congress can therefore be presumed to have ‘accepted and
ratified’ this same position within the [Monetary Control Act].” ER-23.
Even PayServices has acknowledged that, under Section 342, “[a] Federal
Reserve bank may reject every deposit that comes from a bank subject to the limits
in the [statute’s] language.” Appellant’s Br. 33 (emphasis added). Thus, under
PayServices’ interpretation, a Federal Reserve Bank is obligated to provide it with
a master account but may nevertheless reject any deposits into that account. That
7
(16 of 39), Page 16 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 16 of 39
interpretation makes no sense. The plain language of Section 342 provides Federal
Reserve Banks with the discretion to deny (or grant) master accounts and does not
require them to carry out their important mission of ensuring the security and
soundness of the federal banking system by attempting the impossible task of
individually scrutinizing every deposit made by every bank.
That Section 342 does not expressly mention “master accounts” is
immaterial. Cf. Appellant’s Br. 33. Master accounts did not exist when the FRA
was enacted,5 but they are the means through which Federal Reserve Banks
currently accept deposits, see, e.g., 12 U.S.C. § 248c(a)(3)(A); SER-15. Because,
as even PayServices acknowledges, Federal Reserve Banks have discretion
regarding whether to accept deposits, they must have discretion regarding issuance
of the master accounts through which those deposits are accepted.
The district court likewise correctly determined that Section 248a, an
anti-price discrimination provision directed at the Board, does not require Federal
Reserve Banks to issue master accounts to nonmember depository institutions. See
ER-27-31. PayServices insists that Section 248a “requires open access to Federal
Reserve services” for any entity that is an “eligible depository institution.”
5 See, e.g., Fed. Rsrv. Board, New Account Structure Will Support Interstate
Branching (May 2, 1996) (https://tinyurl.com/5n6z9d72) (discussing “new reserve
account structure” under which “depository institutions will be able to consolidate
their multiple reserve accounts into a single, master account”).
8
(17 of 39), Page 17 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 17 of 39
Appellant’s Br. 34. But Section 248a(c)(2) is “best read as a clause preventing
price discrimination in favor of banks that are members of the Federal Reserve
System.” Banco San Juan Internacional, Inc. v. Fed. Rsrv. Bank of N.Y., 700 F.
Supp. 3d 86, 99 (S.D.N.Y. 2023). It is also directed to the Board—not the Federal
Reserve Banks that control master account access. See id. at 100 (“If Congress
intended to require Federal reserve banks to provide specific services, the direction
would reasonably have been found in the section dealing with the duties and
powers of Federal reserve banks and not in the section dealing with fee schedules
set by the Board.”).
And unlike Section 342, which grants Reserve Banks discretion to deny
depository access to “any” institution—Section 248a(c)(2) nowhere says that “all”
or “any” depository institution must be allowed to access the listed services.
Rather, it merely states that those services will generally be “available” to
“nonmember depository institutions” under the “the same fee schedule applicable
to member banks.” 12 U.S.C. § 248a(c)(2). When read in context together with
Section 342, Section 248a(c)(2) merely states that nonmember entities that are
otherwise allowed to access the listed services through the discretionary authority
granted to Reserve Banks under Section 342 will be charged the same fees that
apply to member banks. And Section 248a(c)(2) is merely one of four “principles”
on which the Board’s fee schedule is based. See id. § 248a(c).
9
(18 of 39), Page 18 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 18 of 39
Further, in 2022, Congress amended the FRA to specifically require the Fed
to maintain a publicly searchable database of every institution that has submitted
an “access request” for a master account and whether that request was approved,
withdrawn or “rejected[.]” 12 U.S.C. § 248c(b)(1)(B)(ii). See ER-31; Appellee’s
Br. 33-35. These statutory terms run counter to PayServices’ automatic-access
interpretation, as Congress clearly contemplated that there must always be a
“request” for such access—which itself indicates discretion—and also that Reserve
Banks have the authority to deny such requests.
PayServices relies on the portion of Judge Bacharach’s non-binding opinion
in Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City, 861 F.3d
1052 (10th Cir. 2017), which was not joined by either of his colleagues in that
case, asserting that, because Section 248a(c)(2) “indicates that nonmember
depository institutions are entitled to purchase services from Federal Reserve
Banks,” and because a “master account is required” to purchase those services,
nonmember depository institutions must be entitled to master accounts on a
mandatory basis. Appellant’s Br. 35. But this interpretation overreads Section
248a(c)(2), which merely entitles nonmember institutions to purchase Federal
Reserve Bank services at the same price as that given to member banks. Further,
Judge Bacharach’s opinion predated (1) the Board’s August 19, 2022 “Guidelines
10
(19 of 39), Page 19 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 19 of 39
for Evaluating Account and Services Requests,” 87 Fed. Reg. at 51,099, and
(2) Congress’s December 2022 amendment to the FRA.
Accordingly, the Court should affirm the district court’s holding that Section
248a(c)(2) does not override the discretion expressly granted by Section 342 and
does not require Federal Reserve Banks to automatically grant master account
access to any depository institution on a no-questions-asked basis.
II. STRIPPING FEDERAL RESERVE BANKS OF THEIR DISCRETION
REGARDING MASTER ACCOUNTS WOULD UNDERMINE THE
SAFETY AND INTEGRITY OF FEDERAL RESERVE SERVICES
AND THE FEDERAL RESERVE SYSTEM.
A. Mandating The Provision Of Master Accounts To Every “Novel”
State-Chartered Institution Would Strip Reserve Banks Of Their
Ability To Ensure That Such Institutions Do Not Pose A Threat
To The Safety And Integrity Of The Federal Banking System.
Not only do Federal Reserve Banks have statutory discretion to grant or
deny master accounts, but there are sound policy reasons why this is so. If
PayServices’ argument is accepted, then every Federal Reserve Bank would be
obligated to automatically—without any prior review—grant master accounts to
any entity that any state has chartered as a “bank” that receives deposits, no matter
how novel its business and without any understanding or consideration given to its
safety or soundness. Cf. 12 U.S.C. § 1813(a)(1) (defining “bank”), (c)(1) (defining
“depository institution”). Under this view, despite its member Reserve Banks
being compelled to issue entities like PayServices a master account, the Fed and its
11
(20 of 39), Page 20 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 20 of 39
Reserve Banks would at no point have the ability to assess whether these entities
pose safety and soundness risks that threaten the nation’s financial system,
rendering an application process or “access request” moot. See, e.g., Marc
Labonte, Cong. Rsch. Serv., IN12031, Federal Reserve: Master Accounts and the
Payment System 2 (Dec. 8, 2022).
This position is contrary not only to the governing statute, but also to the
fundamental policies that underlie the entire system of federal banking regulation.
Our Nation’s federal banking system is the largest and most trusted in the world
because federal law and supervisory agencies carefully regulate, on an ongoing
basis, every institution that has access to that system to ensure that it does not, and
will not, pose any appreciable threat to the soundness, safety, and integrity of a
financial system that must efficiently and reliably process billions of transactions
every day. Master accounts are critical to that system, as they are the means
through which entities holding them are able to access all of the Fed’s services,
including electronic payments. E.g., ER-16.
Under the Fed’s guidelines, no institution is automatically entitled to or
guaranteed master account access. See 87 Fed. Reg. at 51,106-07. Institutions
supervised by federal agencies under federal law—such as amici’s members—
generally receive a streamlined review because the comprehensive federal
regulations and oversight that they are subject to assures the Fed that they will not
12
(21 of 39), Page 21 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 21 of 39
pose an undue threat to the safety or integrity of the banking system. See id. at
51,109. Most state-chartered banks fall into that category as well, as they are
subject to federal regulation by virtue of their participation in the federal deposit
insurance system or for other reasons. See id. (“Tier 1” banks, which consist of
“federally insured” banks, are subject to “a less intensive and more streamlined”
master-account review because they are “already subject to a standard, strict, and
comprehensive set of federal banking regulations,” and “detailed regulatory and
financial information would in most cases be readily available”).
Like every other company in the country, PayServices can efficiently access
the Nation’s banking system through an intermediary, or “correspondent” bank that
itself has master account access. See, e.g., Fed. Rsrv. Banks, Operating Circular
No. 1 (Account Relationships) § 2.7 (eff. Sept. 1, 2023). Alternatively,
PayServices can submit an application or “access request” for a master account,
see 12 U.S.C. § 248c(b)(1)(B)(ii)—which it unsuccessfully did—a process that
inherently and, under an ordinary meaning of these words, involves a review to
determine whether the application should be granted or denied. Yet PayServices
now argues that it must automatically be granted direct access to a master account
merely because it has convinced a state (Idaho) to give it a “novel” charter. Cf.
Appellant’s Br. 17 (PayServices noting its ability to garner “political intervention”
to advance its interests). That cannot be sufficient. PayServices may have
13
(22 of 39), Page 22 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 22 of 39
received “preliminary approval” from a single state for a “novel” state charter,
ER-19, but it is not otherwise subject to any direct, ongoing, or continuous federal
prudential regulation, supervision or oversight. And because institutions like
PayServices are not subject to such federal prudential oversight, the Fed and its
Reserve Banks cannot have the confidence, without evaluating their business
models and fundamental soundness, that they will not pose risks to the world’s
largest and most trusted banking system. As the Fed has explained, these “Tier 3”
institutions, which “are not federally insured and not subject to prudential
supervision by a federal banking agency” may have “a supervisory or regulatory
framework that is substantially different from, and possibly weaker than, the
supervisory and regulatory framework that applies to federally-insured institutions,
and as a result may pose the highest level of risk.” 87 Fed. Reg. at 51,101. Indeed,
“[d]etailed regulatory and financial information regarding Tier 3 institutions may
not exist or may be unavailable.” Id. Accordingly, these institutions “will
generally receive the strictest level of review.” Id. at 51,110.
While amici take no position on whether Federal Reserve Banks should or
should not grant PayServices, or any other novel state-chartered depository
institution, a master account, amici believe that the Reserve Banks must have the
ability to scrutinize such institutions before granting such access, and must have
the ability to deny it to institutions that they believe pose undue risk to the financial
14
(23 of 39), Page 23 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 23 of 39
system. If these less regulated companies are to have the same direct access to the
federal banking system that amici’s prudentially regulated and federally insured
members have, then they should demonstrate, through an application and review
process, that they do not pose undue risk to the financial system or the thousands
of banks operating in it that are subject to the full panoply of federal prudential
regulation and supervision. Granting every such institution automatic, no-
questions-asked access would pose intolerable risks to the entire banking system
upon which all of us rely every day and render the purpose of an application or
“access request” meaningless, as no petition or review would ever be necessary to
gain access to the Nation’s unparalleled payments system.
B. Novel State-Chartered Institutions Are Not Subject To The
Comprehensive Regulation Applicable To Federally Regulated
Banks.
PayServices’ desired outcome would leave the carefully constructed banking
regulatory system at the mercy of novel institutions that have little to no federal
oversight. “Banks are supervised by a primary regulator, which is determined by a
bank’s charter type and whether the bank is a member of the Federal Reserve
System.” Marc Labonte & David W. Perkins, Cong. Rsch. Serv., IF11055,
Introduction to Bank Regulation: Supervision 1 (2018). For federally insured
banks, the primary regulators are: (1) the Fed; (2) the OCC; and (3) the FDIC. Id.
15
(24 of 39), Page 24 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 24 of 39
Under our “dual banking system,” the regulation a depository institution
(such as a bank) is subject to depends on whether the institution is state or federally
chartered. See Marc Labonte, Cong. Rsch. Serv., R44918, Who Regulates Whom?
An Overview of the U.S. Financial Regulatory Framework 12-13 (2023). Banks
chartered under federal law (specifically, the National Bank Act of 1864) are
“national banks.” Andrew P. Scott, Cong. Rsch. Serv., R47014, An Analysis of
Bank Charters and Selected Policy Issues 3 & n.4 (2022). National banks are
regulated and supervised by the OCC, id. at 3, and they must become members of
the Federal Reserve System, id.; see also 12 U.S.C. § 222 (“Every national bank in
any State shall . . . become a member bank of the Federal Reserve System . . . .”).
National banks’ deposits generally must be FDIC-insured. Scott, supra, at 3.
For OCC-supervised banks, the OCC must conduct a “full-scope, on-site
examination of every national bank . . . at least once during each 12-month
period,” but it can conduct more frequent examinations if necessary. 12 C.F.R.
§ 4.6(a), (c); see also 12 U.S.C. §§ 481 (requiring Comptroller of Currency to
appoint examiners of national banks), 1820(d) (requiring examinations of insured
depository institutions). This 12-month period (or 18-month period, in some cases)
is referred to as a “supervisory cycle.” OCC, Comptroller’s Handbook,
Examination Process, Bank Supervision Process at 12 (Sept. 2019)
(https://tinyurl.com/ydmderuk) (“Bank Supervision Process”). Examinations of
16
(25 of 39), Page 25 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 25 of 39
“specialty areas,” including, inter alia, IT, asset management, the Bank Secrecy
Act, anti-money laundering, and the Community Reinvestment Act, are “integrated
within supervisory cycles of all banks.” Id. at 16; see also id. at 16-21 (discussing
specialty areas). The OCC uses “matters requiring attention,” or MRAs, to
“communicate concerns about a bank’s deficient practices.” Id. at 46.
Additionally, the OCC “uses enforcement actions to require a bank’s board and
management to take timely actions to correct a bank’s deficiencies.” Id. at 49; see
also, e.g., OCC, PPM 5310-3, Bank Enforcement Actions and Related Matters at
4-6, 18-24 (May 25, 2023) (https://tinyurl.com/2jwvv9m4) (setting forth formal
and informal bank enforcement actions).
A state-chartered bank is, as its name suggests, a bank chartered under an
individual state’s law. See Scott, supra, at 2-3. State-chartered banks may apply
to become members of the Federal Reserve System, but they are not required to do
so. See 12 U.S.C. § 321; Labonte, Who Regulates Whom?, supra, at 16.
State-chartered, FDIC-insured banks that are not members of the Federal Reserve
System are primarily regulated by the FDIC. Christopher K. Odinet, Predatory
Fintech and the Politics of Banking, 106 Iowa L. Rev. 1739, 1767 (2021). As with
national banks, and state-chartered Federal Reserve member banks, state-chartered,
FDIC-insured nonmember banks are subject to rigorous—and in some cases,
continuous—examinations. See, e.g., 12 U.S.C. § 1820(d); see also FDIC, Basic
17
(26 of 39), Page 26 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 26 of 39
Examination Concepts and Guidelines 1.1-6 (Mar. 2022) (describing requirements
of a full-scope examination). An FDIC-insured, state-chartered bank that is a
Federal Reserve System member is also subject to examination by the Fed. See
Odinet, 106 Iowa L. Rev. at 1767; 12 U.S.C. § 325; 12 C.F.R. § 208.64(a) (Fed
must “conduct a full-scope, on-site examination of every insured member bank at
least once during each 12-month period.”). But a state-chartered bank that is
neither a Federal Reserve System member nor FDIC-insured is a “novel” entity
regulated only by the relevant state authority, with no direct federal prudential
oversight. Cf. Odinet, 106 Iowa L. Rev. at 1767 (“For a state bank that is a
member of neither [the Fed nor the FDIC], the state regulator is the uncontested
primary regulator.”) (citing Adam J. Levitin, Consumer Finance: Markets and
Regulation 133-36 (2018)).
Finally, “[b]anks are often owned or controlled by another company, called a
bank holding company (BHC).” Fed. Rsrv. Sys., The Fed Explained: What the
Central Bank Does at 64 (Aug. 2021) (https://tinyurl.com/pnxbzn2x). And “[t]he
Federal Reserve has supervisory and regulatory authority for all BHCs, regardless
of whether subsidiary banks of the holding company are national banks, state
‘member’ banks, or state ‘nonmember banks.” Id. Pursuant to this authority, the
Board may “make examinations” of BHCs and their subsidiaries in order to, inter
18
(27 of 39), Page 27 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 27 of 39
alia, “monitor the compliance of the [BHC] and the subsidiary with” the relevant
laws. 12 U.S.C. § 1844(c)(2)(A)(ii).
Accordingly, regardless of whether a bank is state or federally chartered,
there is normally extensive federal prudential regulation and supervision by one or
multiple federal prudential regulators. This makes sense, given that these
regulatory and supervisory systems are essential to the stability and safety of the
financial system as a whole. See, e.g., Labonte, Who Regulates Whom?, supra, at
14 (“Banks also play a central role in the payment system, the financial system,
and the broader economy. As a result, banks are subject to safety and soundness
(prudential) regulation that most other financial firms are not subject to at the
federal level.”). Indeed, the Fed “was created in 1913 to promote greater financial
stability and help avoid banking panics, such as those that had plunged the country
into deep economic contractions in the late nineteenth and early twentieth
centuries.” The Fed Explained, supra, at 47.
But some institutions—such as PayServices—utilize “novel” state charters
that allow them to elude federal prudential supervision entirely. See, e.g., Michael
J. Hsu, Acting Comptroller of the Currency, Preventing the Next Great Blurring at
13-14 (Feb. 21, 2024) (https://tinyurl.com/dujxzw76). These “novel” institutions
(of which there are only a few) are not subject to the same federal prudential
oversight required of thousands of other national or state chartered banks because
19
(28 of 39), Page 28 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 28 of 39
they are neither insured depository institutions nor uninsured institutions that are
part of a bank holding company and are not “banks” for purposes of the Bank
Holding Company Act. See 12 U.S.C. § 1841(c)(1). Though these novel
institutions may be subject to state regulations, the fact that they fall outside the
purview of federal prudential supervision makes their safety and soundness
effectively unknown to the Fed and its Reserve Banks where, as here, the novel
institution seeks a master account in order to directly access the Nation’s banking
system. And, irrespective of whether the applicable state regulations are
comparable to federal ones, it also remains the case that, despite the novel
institution seeking access to the Nation’s federal banking system, the Nation’s
federal banking system will have no control over the novel institution’s use of that
system—making the application or “access request” review necessary to
understand short and long-term risks the institution may pose.6
6 Below, PayServices asserted that when the Idaho Department of Finance
(“IDF”) gave its “preliminary approval” of PayServices’ application to establish a
state-chartered bank, it also provided that “PayServices must adhere to all federal
regulations applicable to FDIC-insured financial institutions, unless the Director
[of the IDF] explicitly waives this requirement for specific regulations that are not
consistent with PayServices’ business model.” ER-64. But even if this were the
case, PayServices would ultimately be responsible to the IDF—not the FDIC.
20
(29 of 39), Page 29 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 29 of 39
C. Allowing Automatic Access To Master Accounts Will Undermine
The Integrity And Carefully Crafted Protections Of Our
Financial System.
As noted above, the federal examination process involves rigorous, and in
some cases, continuous, measuring and monitoring of the risks associated with a
particular bank and, if necessary, remedial enforcement to minimize or remove
those risks. Under PayServices’ interpretation of the FRA, however, a Federal
Reserve Bank would have to automatically issue a master account, without any
prior review, to an institution regardless of the risks (such as insolvency or lack of
security) that may be inherent in that institution. Cf. Appellant’s Br. at 36; see also
ER-22. This interpretation ignores the critical role the Federal Reserve Banks have
in protecting the integrity of the nation’s financial system.
Under the Fed’s guidelines for master accounts, Federal Reserve Banks’
analysis of an application for a master account is governed by six fundamental
principles: (1) whether the applicant has “a well-founded, clear, transparent, and
enforceable legal basis for its operations,” and if it does, that provision of a master
account and associated services should not create (2) “undue credit, operational,
settlement, cyber or other risks to the Reserve Bank,” (3) “undue credit, liquidity,
operational, settlement, cyber or other risks to the overall payment system,”
(4) “undue risk to the stability of the U.S. financial system,” (5) “undue risk to the
overall economy by facilitating activities such as money laundering, terrorism
21
(30 of 39), Page 30 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 30 of 39
financing, fraud, cybercrimes, economic or trade sanctions violations, or other
illicit activity,” or (6) “adversely affect the Federal Reserve’s ability to implement
monetary policy.” 87 Fed. Reg. at 51,107-09. Yet if PayServices’ position were
adopted, the Reserve Banks would be forced to provide a master account to a
novel, state-chartered institution without evaluating any of these concerns. They
would therefore be unable to assess, inter alia, (1) whether the novel institution
could manage “liquidity, credit, and other risks that may arise in times of financial
or economic stress”; (2) whether “liquidity or other strains at the institution [could]
be transmitted to other segments of the financial system”; and (3) whether allowing
that institution access to a master account and Fed services “could affect deposit
balances across U.S. financial institutions more broadly and whether any resulting
movements in deposit balances could have a deleterious effect on U.S. financial
stability.” See 87 Fed. Reg. at 51,108.
Most bank failures “trace back to the management of bank resources,
resulting in a bank’s inability to meet liquidity or capital requirements.” Raj
Gnanarajah, Cong. Rsch. Serv., IF10055, Bank Failures and the FDIC 1 (Mar. 23,
2023). “Liquidity is the ability of a bank to meet cash flow needs, including
deposit withdrawals by its customers.” Id. Because the “repercussions of
inadequate liquidity risk management can be immediate and dire,” see OCC,
Comptroller’s Handbook, Safety and Soundness, Liquidity at 3 (May 25, 2023)
22
(31 of 39), Page 31 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 31 of 39
(https://tinyurl.com/yckysd9m), there are numerous federal prudential regulations
governing liquidity management—none of which directly apply to PayServices.
For example, the OCC, Board, and FDIC have adopted “liquidity coverage
ratio” (“LCR”) requirements for certain institutions within their purview. See
Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, 79 Fed. Reg.
61,440 (Oct. 10, 2014); see also, e.g., 12 C.F.R. §§ 50.10 (LCR for OCC-regulated
institutions), 249.10 (LCR for Board-regulated institutions), 329.10 (LCR for
FDIC-regulated institutions). These institutions must notify their governing
authority if the LCR falls short of the minimum requirement, 12 C.F.R.
§§ 50.40(a), 249.40(a), 329.40(a), and the OCC, FDIC, and Board have the ability
to “take additional supervisory or enforcement actions to address noncompliance,”
id. §§ 50.40(c), 249.40(c), 329.40(c).
Another area subject to comprehensive federal regulation is capital. “Capital
(equity) is the difference between assets and liabilities.” Gnanarajah, supra, at 1.
Because capital instruments “generally do not require payment of a specified
amount of money at a specified time[,] . . . capital gives the bank the ability to
absorb losses while continuing to meet its rigid obligations on liabilities and avoid
failure.” David W. Perkins, Cong. Rsch. Serv., IF10809, Introduction to Bank
Regulation: Leverage and Capital Ratio Requirements 1 (2019). The OCC, Board,
and FDIC require certain institutions to satisfy “minimum capital requirements and
23
(32 of 39), Page 32 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 32 of 39
overall capital adequacy standards.” 12 C.F.R. §§ 3.1(a), 3.10 (OCC), 217.1(a),
217.10 (Board), 324.1(a), 324.10 (FDIC). FDIC-insured banks are also subject to
the “prompt corrective action” (“PCA”) framework, which essentially increases
restrictions on a bank’s activities as the bank’s capital level decreases. See 12
U.S.C. § 1831o; see also 12 C.F.R. §§ 6.1-.25 (OCC-regulated institutions),
208.40-.45 (Board-regulated institutions), 324.401-.405 (FDIC-regulated
institutions).
Yet under PayServices’ interpretation, Federal Reserve Banks would be
statutorily mandated to bypass the application and “access” process that numerous
other banks have navigated to date and instead provide master accounts to novel
state-chartered entities without the ability to even inquire about any of these issues
and then take action to deny access to institutions that pose undue risks. The
potential risks to the Nation’s banking system of such an interpretation are
palpable. An institution that is not subject to capital requirements (as federally
insured institutions are and all of amici’s members are) could “more easily expand
its balance sheet during times of stress,” which would create a “particularly large”
“potential for sudden and significant deposit inflows into that institution.” 87 Fed.
Reg. at 51,109. This, in turn, “could disintermediate other parts of the financial
system, greatly amplifying stress.” Id. Federal Reserve Banks manage risks like
these by individually assessing applicants for them and rejecting applications from
24
(33 of 39), Page 33 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 33 of 39
high-risk entities. Requiring the Federal Reserve Banks to issue master accounts to
any eligible institution, regardless of an institution’s solvency, security, safety, or
illicit-finance risk management, would deprive Reserve Banks of their ability to
protect themselves, the payment systems they operate, the U.S. financial system,
and the U.S. economy from undue risks posed by otherwise-eligible institutions.
Additionally, this would allow a single state, like Idaho, to dictate the federal
policies that govern access to the Nation’s banking system. Fortunately, as
explained above, Congress did not impose any such statutory requirement.
Further, because it is unclear what reporting obligations, if any, these novel
entities are held to, the risk of illicit financing (or pursuing a novel charter
specifically to evade anti-money laundering laws) increases. See 87 Fed. Reg. at
51,109. For example, to carry out the Bank Secrecy Act (“BSA’s”) objective of
“prevent[ing] the laundering of money and the financing of terrorism,” 31 U.S.C.
§ 5311(2), banks are required to establish and maintain BSA compliance programs,
12 C.F.R. §§ 21.21(c) (OCC-regulated institutions), 208.63(b) (Board-regulated
institutions), 211.24(j) (Board-supervised U.S. branch offices of foreign banks),
326.8(b) (FDIC-regulated institutions).7 Banks and BHCs are also required to file
7 These compliance programs are also reviewed during examinations. See,
e.g., Board of Govs. of Fed. Rsrv. Sys. et al., Joint Statement on Risk-Focused
Bank Secrecy Act/Anti-Money Laundering Supervision at 1 (July 22, 2019)
(https://tinyurl.com/mr4692nn).
25
(34 of 39), Page 34 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 34 of 39
a “Suspicious Activity Report,” or SAR, upon detecting a known or suspected
violation of federal law, or a suspicious transaction related to a money laundering
activity or violation of the BSA. 31 U.S.C. § 5318(g); 12 C.F.R. §§ 21.11(a), (c)
(OCC-regulated institutions), 208.62(a), (c) (Board-regulated institutions), 353.3(a)
(FDIC-regulated institutions), 225.4(f) (BHCs).8
Banks also must adhere to data privacy and information security standards,
see 15 U.S.C. §§ 6801(b), 6805, and are required to comply with certain “safety
and soundness” standards, see 12 U.S.C. § 1831p-1; see also 12 C.F.R. §§ 30.1-.6,
364.100-.101, 208.3(d)(1). The safety and soundness standards address internal
controls and information systems, internal audits, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings,
compensation, fees and benefits. Without supervision and regulation regarding IT
systems and cybersecurity, it could be possible for bad actors to “disrupt the
payment system either by denying service or destroying or disrupting data.” Bank
Pol’y Inst., Fed Account Access for Nonbanks: An Analysis of the Policy
Implications and Potential Risks to the U.S. Financial System 7 (June 2021)
8 Banks without a “federal functional regulator” like the OCC, Board, or
FDIC (see 31 C.F.R. § 1010.100(r)) also must comply with certain anti-money
laundering program requirements. See 31 C.F.R. § 1020.210(b). Even if
PayServices were subject to these minimum requirements, however, it would not
be subject to the same supervision, examination, and enforcement framework as
federally supervised banks.
26
(35 of 39), Page 35 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 35 of 39
(https://tinyurl.com/yzr9arau); see also Bank Supervision Process at 16 (explaining
governing sources for IT examinations of certain types of banks).
Finally, federal banking regulators have broad enforcement authority
regarding the institutions they supervise. This authority includes the ability to:
(1) issue matters requiring attention (“MRAs”); (2) issue matters requiring
immediate attention (“MRIAs”); (3) issue cease-and-desist orders; (4) suspend,
remove, and prohibit personnel; (5) assess civil money penalties; (6) suspend or
terminate federal deposit insurance; (7) initiate civil litigation; and (8) initiate
conservatorship and receivership. See 12 U.S.C. §§ 1818, 1831o(h)(3); see also,
e.g., OCC, PPM 5310-3 at 3-6, 18-24 (discussing MRAs and setting forth formal
and informal bank enforcement actions by the OCC); FDIC, Formal and Informal
Enforcement Actions Manual 1-5-6 (July 2022) (setting forth formal and informal
enforcement actions by the FDIC); Bd. of Govs. of Fed. Rsrv. Sys., Bank Holding
Company Supervision Manual §§ 1075.0.1-.7 (Feb. 2023) (setting forth corrective
actions available to the Board for BHCs); Bd. of Govs. of Fed. Rsrv. Sys.,
Commercial Bank Examination Manual §§ 1001.1, 1050.1 (Oct. 2023) (discussing
MRAs, MRIAs, and formal and informal supervisory actions) . Yet under
PayServices’ interpretation, Federal Reserve Banks would be required to provide
any state-chartered, non-federally-insured institution automatic master account
27
(36 of 39), Page 36 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 36 of 39
access without even being able to assess that applicant institution’s risk or protect
the system by denying high-risk applications.
PayServices contends that such concerns are overblown because, under its
particular business model (according to its allegations) it poses no liquidity risk
because it retains 100% of depositor funds and does not make loans. Appellant’s
Br. 3-4. But that is no answer. First, under PayServices’ interpretation, Federal
Reserve Banks would be unable to even verify an applicant’s business model
before providing master account access. Second, and more broadly, PayServices’
no-questions-asked interpretation would apply to every institution seeking a master
account, including those that pose different and more concerning liquidity risks.
And third, as explained above, the classic “run on the bank” is far from the only
risk that the Fed and other federal bank supervisors are concerned with. Under
PayServices’ interpretation, Federal Reserve Banks would be precluded from even
inquiring about any of those risks, including those relating to solvency, money
laundering, and data privacy, before granting master account access.
Finally, PayServices alludes to “America’s dual banking system, that shares
power between the federal government and the states.” Appellant’s Br. 2-3. But
as the Fed has cogently explained, where—as with PayServices—a state-chartered
entity is not federally-insured and not otherwise subject to federal regulation or
oversight, the mere fact that it may have some form of state regulation is
28
(37 of 39), Page 37 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 37 of 39
insufficient because it may have “a supervisory or regulatory framework that is
substantially different from, and possibly weaker than, the supervisory and
regulatory framework that applies to federally-insured institutions, and as a result
may pose the highest level of risk.” 87 Fed. Reg. at 51,101. Thus, while it might
be theoretically possible for a state, by itself, to provide the sort of robust
regulatory oversight akin to the comprehensive federal regulation to which amici’s
members are subject, Federal Reserve Banks must have the ability to ensure that
that is so before providing direct access to the federal banking system. Yet under
PayServices’ mandatory-access interpretation, that critical inquiry cannot occur.
CONCLUSION
For the foregoing reasons, the judgment below should be affirmed.
Respectfully submitted,
/s/ Jonathan S. Franklin
Jenna Burke Jonathan S. Franklin
INDEPENDENT COMMUNITY NORTON ROSE FULBRIGHT US LLP
BANKERS OF AMERICA 799 9th Street, N.W., Suite 1000
1615 L Street, NW, Suite 900 Washington, D.C. 20001
Washington, DC 20036 (202) 662-0466
(202) 821-4380 jonathan.franklin@nortonrosefulbright.com
David Pommerehn Charlotte Kelly
CONSUMER BANKERS NORTON ROSE FULBRIGHT US LLP
ASSOCIATION Frost Tower
1225 I Street, N.W., #550 111 W. Houston Street, Suite 1800
Washington, D.C. 20005 San Antonio, TX 78205
(202) 552-6368 (210) 270-9329
August 5, 2024 Counsel for Amici Curiae
29
(38 of 39), Page 38 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 38 of 39
CERTIFICATE OF COMPLIANCE
9th Cir. Case Number: 24-2355
I am the attorney or self-represented party.
This brief contains 6486 words, excluding the items exempted by Fed. R.
App. P. 32(f). The brief’s type size and typeface comply with Fed. R. App. P.
32(a)(5) and (6).
I certify that this brief (select only one):
[ ] complies with the word limit of Cir. R. 32-1.
[ ] is a cross-appeal brief and complies with the word limit of Cir. R. 28.1-1.
[X] is an amicus brief and complies with the word limit of Fed. R. App. P. 29(a)(5),
Cir. R. 29-2(c)(2), or Cir. R. 29-2(c)(3).
[ ] is for a death penalty case and complies with the word limit of Cir. R. 32-4.
[ ] complies with the longer length limit permitted by Cir. R. 32-2(b) because (select
only one):
[ ] it is a joint brief submitted by separately represented parties;
[ ] a party or parties are filing a single brief in response to multiple briefs; or
[ ] a party or parties are filing a single brief in response to a longer joint brief.
[ ] complies with the length limit designated by court order dated _____________.
[ ] is accompanied by a motion to file a longer brief pursuant to Cir. R. 32-2(a).
Signature /s/ Jonathan S. Franklin Date August 5, 2024
30
(39 of 39), Page 39 of 39 Case: 24-2355, 08/05/2024, DktEntry: 22.2, Page 39 of 39
CERTIFICATE OF FILING AND SERVICE
I hereby certify that on this 5th day of August, 2024, I electronically filed
the foregoing with the Clerk of Court for the United States Court of Appeals for
the Ninth Circuit by using the appellate CM/ECF system, and caused a copy of the
foregoing to be electronically served on the following:
Jade A. Craig Jonathan K. Youngwood
Jade A. Craig, P.A. Meredith Karp
1048 S. Clearview Avenue, #3 Simpson Thacher & Bartlett LLP
Tampa, Florida 33629 425 Lexington Avenue
(813) 459-1309 New York, NY 10017
(212) 455-2000
Counsel for Plaintiff-Appellant Counsel for Defendant-Appellee
/s/ Jonathan S. Franklin
Jonathan S. Franklin
Counsel for Amici Curiae
31