Weekly RoundUp June 10, 2015

Financial Services Weekly News

Editor's Note

States Make Waves in Virtual Currency Regulation: New York and California have taken important steps to regulate virtual currencies, and have adopted slightly different philosophies as to the scope of their laws. New York State Department of Financial Services (NYDFS) Superintendent Benjamin Lawsky on June 3, 2015 announced the final version of the long-awaited BitLicense regulation. This rule makes New York the first state to regulate virtual currencies with a comprehensive regime. The BitLicense requires companies engaging in “virtual currency business activity” to obtain a license and comply with rules regarding cybersecurity, consumer protection, anti-money laundering, financial reporting, and minimum capital maintenance, among other requirements. As reported in last week’s Roundup, Superintendent Lawsky clarified a few key issues relating to the manner in which NYDFS will apply the BitLicense framework. First, companies under BitLicense regime will be able to make standard updates to their protocols without seeking approval from NYDFS. Such companies will still have to obtain approval for material business changes. Second, companies do not have to submit duplicate applications for a money transmitter license and a BitLicense. Third, companies filing suspicious activity reports with the federal government do not have to duplicate those filings with NYDFS. Finally, Superintendent Lawsky noted that a “control person” does not necessarily include officers and directors of a company.

Meanwhile, California’s State Assembly last week approved bill AB-1326 by a 55-22 vote. The law similarly requires companies operating a “virtual currency business” to obtain a license and maintain sufficient capital, submit to examinations, properly maintain records, provide consumer disclosures and other consumer protections, and comply with other rules. The bill has already been read once in the California State Senate, and must be read at least two more times prior to a vote in that house. The New York and California regulatory regimes differ slightly in their scope. However, New York has a broader definition for “virtual currency business activity” that includes five potential lines of business – (1) receiving virtual currency for transmission or transmission of virtual currency, (2) storing, holding or maintaining virtual currency for custodial purposes, (3) buying and selling virtual currency as a customer business, (4) acting as a virtual currency exchange as a customer business and (5) controlling, administering or issuing a virtual currency. California includes two potential lines of business in its definition – (1) maintaining full custody or control of virtual currency on behalf of others and (2) providing conversion or exchange services. As an example of the difference in scope, the New York rules would require a business built on multi-signature technology to obtain a license, while it appears such a business in California may not need to obtain a virtual currency license if AB-1326 becomes law in its current form. The New York rules, however, contain an on-ramp for younger companies in the form of a conditional licensing provision, which permits startups to operate without a full license until they can bring their operations in line with the full requirements of the BitLicense. Even though the legislation in California has not yet become law, we expect the language in New York’s BitLicense and in California’s AB-1326 to serve as models for other states considering the adoption of laws or regulations to regulate virtual currencies.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

SEC Chair Highlights Recent Accomplishments

In a June 4, 2015 speech, SEC Chair Mary Jo White highlighted recent activities of the SEC and identified work to be done in the near future. Among the SEC’s accomplishments highlighted by Chair White were: (1) completing the rulemaking efforts mandated by Congress under the JOBS Act and other rulemakings in response to the financial crisis, including rules related to money market reform, asset backed securities and credit rating agencies; and (2) strengthening the impact and message of the enforcement program in a manner that may result in greater public accountability, including changing the no admit-no deny settlement protocol in certain cases. Looking ahead, Chair White stated that, among other things, the SEC is: (1) focusing on risk oversight of the asset management industry by developing a broad set of new initiatives to address the increasingly complex portfolios and operations of the asset management industry in new ways; (2) raising the standard of care for all investment advice to retail investors through, among other things, applying a uniform fiduciary standard of conduct for broker-dealers and investment advisers; and (3) addressing the complex issues raised by the market structure of the equity and fixed income markets through new rulemakings and initiatives, including the formation of the Equity Market Structure Advisory Committee.

FINRA Requests SEC Approval of Amendments to Communications Rules to Require a BrokerCheck Hyperlink on Member Websites

FINRA has filed a proposed amendment to FINRA Rule 2210 to require each of a member’s websites to include a readily apparent reference and hyperlink to the member’s BrokerCheck record on: (1) the initial webpage that the member intends to be viewed by retail investors; and (2) any other webpage that includes a professional profile of one or more registered persons who conduct business with retail investors. As proposed the requirement will only apply to members that provide products or services to retail investors.

Federal Agencies Issue Standards for Assessing Diversity Policies and Practices

The Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Bureau of Consumer Financial Protection, and the Securities and Exchange Commission have issued a final interagency policy statement establishing joint standards for assessing the diversity policies and practices of the entities they regulate. Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required each of these agencies to establish an Office of Minority and Women Inclusion (OMWI) to be responsible for all matters relating to diversity in management, employment, and business activities. The Dodd-Frank Act also instructed each OMWI director to develop standards for assessing the diversity policies and practices of regulated entities.

Enforcement & Litigation

Second Circuit Denies National Bank Act Preemption to Debt Purchaser

On May 22, 2015, the United States Court of Appeals for the Second Circuit, in Madden v. Midland Funding, LLCheld that an assignee of a national bank did not obtain the benefit of preemption under Section 85 of the National Bank Act, which permits a national bank to charge interest at the rate permitted for the most favored lender under the law of the state where the bank is located. As a result, the court concluded that the National Bank Act did not preempt the application of a state usury law to a loan purchased from the bank. In this case, a national bank charged off credit card debt of the Plaintiff-Appellant and sold the debt to a third-party debt purchaser, Midland Funding (Midland). Midland charged an interest rate of 27%, usurious in New York, the state where the borrower resided, but permissible in Delaware, where the national bank was located. Midland claimed the National Bank Act preempted state law and permitted it, as an assignee of a national bank, to charge interest at the rate permitted by the state where the assignor national bank was located. However, the Second Circuit held that, because the debt purchaser was neither a national bank, nor a subsidiary, agent, or entity acting on behalf of one, and because the state law’s application would not significantly interfere with any national bank’s ability to exercise its powers under the National Bank Act, the assignee could not obtain the benefit of preemption. The court did not reach the question whether the choice of Delaware law in the agreement governing the credit card account was enforceable. Counsel for Midland submitted an unopposed motion to extend time to submit a petition for rehearing en banc, extending the deadline for the petition to June 19.

SEC Freezes Profits from Scheme to Manipulate Avon Stock

The SEC announced that it has taken action to freeze the assets of two U.S. brokerage accounts connected to schemes to manipulate Avon and other stocks. According to a complaint filed in federal court in Manhattan, the SEC has tracked a filing on its EDGAR system since last month about a false tender offer of Avon stock that originated from an IP address in Bulgaria. The SEC’s complaint alleges that the defendants were able to sell existing positions in Avon issued contracts-for-difference (CFDs) at inflated prices after the EDGAR filing led to a 20 percent increase in the value of the CFDs. The SEC’s complaint charges Strategic Capital Partners Muster Ltd. and Strategic Wealth Investments Inc., which are said to each own one of the brokerage accounts, PTG Capital Partners LTD, which is alleged to have made the EDGAR filing containing the purported Avon tender offer, and Nedko Nedev, a trader in Bulgaria said to have control over at least one of the two frozen accounts, with violating antifraud provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933, Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14e-8. The defendants have also been charged with a similar scheme in 2015 involving Tower Group International Ltd., which involved an alleged false press release instead of an EDGAR filing.