Weekly RoundUp
June 27, 2018

Financial Services Weekly News

SEC Administrative Law Judge Appointments Are Subject to the Appointments Clause. On June 21, in a majority opinion in Lucia v. SEC delivered by Justice Elena Kagan, the United States Supreme Court held that U.S. Securities and Exchange Commission (SEC) administrative law judges (ALJs) are “Officers of the United States” subject to the Constitution’s Appointments Clause. Under the Appointments Clause, only the President, “Courts of Law,” or “Heads of Departments” can appoint “Officers.” Historically, the SEC took the position that ALJs were merely employees, and ALJs were selected by other SEC staff members.

The case began when the SEC charged petitioner Raymond Lucia with violating certain securities laws and assigned ALJ Cameron Elliot to adjudicate the case. Judge Elliot issued an initial decision concluding that Lucia had violated the law and imposed sanctions. On appeal to the SEC, Lucia argued that the administrative proceeding was invalid because Judge Elliot had not been constitutionally appointed. Applying the “significant authority” test set forth in Freytag v. Commissioner, 501 U.S. 868 (1991), the Court concluded that ALJs are officers subject to the Appointment Clause and that Lucia had made a timely challenge to the constitutional validity of the appointment of an officer who adjudicated his case and was therefore entitled to relief – that is, a new “hearing before a properly appointed” official. The Court stated that, in this case, that official cannot be Judge Elliot and that another ALJ or the SEC itself must hold a new hearing.

The SEC is reviewing the opinion. It is unclear how the SEC will handle cases that are remanded back to it in light of the Court’s decision. The decision also could have broad ramifications for other federal agencies that employ in-house judges.

Also this week, the SEC released its draft strategic plan through the 2022 fiscal year for comment, amended its regulations under the Freedom of Information Act, and named a new Chief Counsel for the Division of Investment Management. These and other recent developments are discussed below.

Please note: The Roundup will be on hiatus next week due to the July 4 holiday. We will resume publication on July 11.

Regulatory Developments

SEC Releases Draft Strategic Plan

On June 19, the SEC published a draft strategic plan through the 2022 fiscal year focusing on three primary goals, including focusing on the long-term interests of Main Street investors, recognizing significant developments and trends in evolving capital markets and adjusting the SEC’s efforts to ensure effective allocation of resources, and elevating the SEC’s performance by enhancing its analytical capabilities and human capital development. The plan incorporates the use and monitoring of technology, including addressing cybersecurity concerns within the SEC and using technological tools to uncover potential risks to the markets and consumers. It also addresses the need to adapt to changes in the markets and calls for a reassessment of the regulations and tools employed to benefit the long-term interests of Main Street investors. These strategies aim to further the SEC’s efforts in maintaining strong and resilient capital markets. The draft plan was prepared in accordance with the Government Performance and Results Modernization Act of 2010, which requires federal agencies to outline their missions, planned initiatives, and strategic goals for a four-year period. Comments on the draft plan will be accepted for 30 days after publication in the Federal Register.

SEC Amends Regulations Under FOIA

On June 25, the SEC adopted amendments to its regulations under the Freedom of Information Act (FOIA). Amendments to the SEC’s FOIA regulations, which make certain SEC records available to the public, are designed to (a) conform to the FOIA Improvement Act of 2016; (b) clarify the procedures for submitting FOIA requests and administrative appeals; (c) revise the fee procedures and schedule; and (d) eliminate repetitive provisions that merely restate provisions from the FOIA statute. Four comment letters were submitted in regard to the proposed rulemaking. In response to some of those comments, the fee-related definitions of “educational institution” and “representative of the news media” or “news media requester” were amended to clarify and broaden the definitions. The final rule will become effective 30 days after publication in the Federal Register.

SEC Names Chief Counsel of the Division of Investment Management

On June 21, the SEC announced that Paul G. Cellupica has been named Chief Counsel of the Division of Investment Management (Division), succeeding Doug Scheidt, who retired from the SEC in September 2017. Mr. Cellupica served in a number of capacities in the Division and the Division of Enforcement from 1996 to 2004, and rejoined the Commission as Deputy Director of the Division in November 2017. He will continue serving as the Division’s Deputy Director. In his role leading the Division’s Chief Counsel’s Office, Mr. Cellupica and his staff will be responsible for, among other things, responding to requests for legal and policy guidance, evaluating applications for exemptive relief, and overseeing the Division’s enforcement liaison program.

Enforcement & Litigation

BlackRock Summary Judgment Decision

On June 13, in a case closely watched by the mutual fund industry, the U.S. District Court for the District of New Jersey issued a decision denying summary judgment of a consolidated case brought under Section 36(b) of the Investment Company Act of 1940, as amended, that alleged that affiliates of BlackRock had violated their fiduciary duties by charging excessive advisory fees to two eponymous mutual funds. As with a previous 36(b) case (i.e., Kasilag v. Hartford Investment Financial Services), the court granted summary judgement with respect to the board of directors’ decision to approve the adviser’s fees and ruled that the board’s approval is entitled to substantial deference. Still, the court held that material factual disputes existed regarding comparative fees, economies of scale, and profitability and, as such, summary judgment was not warranted. A trial date has been set for August 20, 2018. Like Kasilag v. Hartford Investment Financial Services and Sivolella v. AXA Equitable Life Insurance—two similar 36(b) cases that went to trial—the BlackRock case is before a judge in the U.S. District Court for the District of New Jersey. A different judge has presided over each of the three cases. For more information on the previously decided cases, read the client alerts (AXA Equitable and Hartford) prepared by Goodwin’s Financial Industry practice.

CFPB Settles With South Carolina Companies Over Improper Debt Collection Practices

On June 13, the Consumer Financial Protection Bureau (CFPB) announced its settlement with a South Carolina corporation and its subsidiaries over allegations that the companies engaged in improper debt collection and credit furnishing practices. According to the consent order, the CFPB found that the companies made improper in-person and telephonic collection attempts on consumer installment loans and retail sales installment contracts in violation of the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531, 5536(a). View the Enforcement Watch blog post.

Goodwin News

Western Bankers Association 2018 Fintech Symposium – July 11

Western Bankers Association, in partnership with the Federal Home Loan Bank of San Francisco and The Silicon Valley Center for Innovation, will hold their 2018 Fintech Symposium on July 11, 2018. Goodwin will host this event. Mike Whalen, partner and Co-Chair of Goodwin’s Fintech practice, Mitzi Chang, partner in Goodwin’s Technology Companies, Life Sciences, and Digital Currency and Blockchain Technology practices, and Bill Growney, partner in Goodwin’s Technology and Life Sciences practice, will participate on the panel.

Breakfast and Blockchain: A Discussion on ICOs, Global Crypto Innovation and Regulation – July 13

Despite increased regulatory activity, blockchain application development and the use of digital token offerings to fund blockchain and digital currency-related projects continues to be on the rise. During just the first half of 2018, 765 initial coin offerings (ICOs) have raised $4.8 billion, nearly eclipsing the total number of offerings and money raised in 2017. We invite you to join us in London for an interactive discussion on the current state of the blockchain and crypto ecosystem. Our panel will include Ryan Jesperson, President of The Tezos Foundation, a leading platform for smart contracts and decentralized applications; David McHenry, Head of Global Treasury and Payments Advisory - EMEA at Silicon Valley Bank; Stan Stalnaker, Founder & Chief Strategy Officer of Hub Culture, a global social network service operating Ven digital currency, and other related, blockchain-based platforms; and Grant Fondo, Chair of Goodwin’s global Digital Currency and Blockchain Technology practice and a former Assistant U.S. Attorney. Discussion topics will include blockchain technology and its applications; current international landscape for cryptocurrencies and ICOs; recent U.S. and U.K. regulatory developments; and international “safe harbor” jurisdictions.

ACI’s 30th National Forum on Consumer Finance Class Actions and Government Enforcement – July 16-17

ACI’s 30th National Forum on Consumer Finance Class Actions and Government Enforcement gathers industry decision-makers, counsel and executives to discuss the latest developments and expert strategies for navigating class actions, litigation and government enforcement activity in the consumer financial services arena. Sabrina Rose-Smith, partner in Goodwin’s Financial Industry and Consumer Financial Services Litigation practices, will serve as co-chair of the forum. Brooks Brown, partner in Goodwin’s Financial Industry group and co-chair of its Banking and Consumer Financial Services practice, will be a speaker on the panel, “The Telephone Consumer Protection (TCPA) Litigation Bubble: Evolving Technology, Record-Breaking Settlements and Uncertain Legal Precedent.” For more information, please visit the event website.

This week’s Roundup contributors: Iyanna Draper, Will Lane, Tierney Smith, Briana Whinnie.