On January 18, the CFTC filed a proposed rule amendment relating to recordkeeping in response to a petition filed by the Managed Funds Association, Investment Adviser Association and Alternative Investment Management Association and a second petition filed by the Investment Company Institute. The amendments are designed to bring the regulatory requirements for recordkeeping up to date with current technology and to provide greater flexibility by replacing some prescriptive rules with principles-based rules for document retention. In particular, entities subject to regulation (defined as “records entities”) would no longer be required to maintain electronic records in native file format and in write once, read many (WORM) format. As the CFTC explained, the requirement to retain data in native file format can be burdensome to records entities that upgrade to new programs but must keep copies of obsolete programs for older records. WORM technology, based on file storage on optical disks or CD-ROMs, is also outdated. The proposed rule would, instead, require records entities to maintain regulatory records in a way that will ensure the retention of both data and metadata relating to the records, “including, without limitation, data that describes how, when, and, if relevant, by whom such electronically stored information was collected, created, accessed, modified, or formatted,” as well as data necessary to access, search, or display the records. Comments are due by March 20. Comments may be made and viewed here.
On January 18, the Financial Industry Regulatory Authority (FINRA) issued a report regarding the use and implications of blockchain in the securities industry. More formally known as distributed ledger technology (DLT), blockchain has received a high degree of attention from the securities industry with many financial institutions continuing to explore the technology and its applications. Given the growth potential in digital currencies such as Bitcoin (which utilizes DLT as an integral part of its internal self-regulatory structure), market participants are increasingly asking for some form of engagement by the traditional financial regulators. In response, the FINRA paper also asks for comments as FINRA (and other regulators) attempt to understand the challenges associated with DLT. The report, authored by FINRA’s Office of Emerging Regulatory Issues, provides an overview of the technology, highlights key applications, and discusses implementation and regulatory considerations for broker-dealers. The report states that “FINRA has actively engaged with market participants to monitor developments related to DLT and its potential impact in the securities industry,” and that FINRA believes this collaboration “will allow the industry to reap the benefits of the technology, while ensuring protection of investors and maintenance of market integrity.”
On January 17, the OCC deployed the first phase of a new Central Application Tracking System (CATS) designed to help national banks, federal savings associations, and federal branches and agencies draft, submit, and track their licensing and public welfare investment applications and notices. The roll out of CATS will occur in three phases to help institutions with their transition from the e-Corp and CD-1 Invest platforms. This first phase includes frequent electronic filers, and OCC staff are expected to notify other institutions before their assigned phase’s launch date.
On January 18, the Federal Reserve Board (Board) announced through a final rule that it had adjusted its maximum civil money penalties as of January 15, 2017. The Federal Civil Penalties Inflation Adjustment Act of 1990 and the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 require federal agencies to adjust annually the amount of their civil money penalties based on changes in the Consumer Price Index. The Board noted in the final rule that the new civil money penalty upper limits do not require in any specific case that the Board actually assess the maximum amounts. The Board may apply the newly adjusted civil money penalties only to penalties assessed on or after January 15, 2017, if the associated violations occurred on or after November 2, 2015. The adjusted figures are listed in the final rule.
On January 17, the NYDFS announced that it had approved Coinbase, Inc.’s application for a virtual currency and money transmitter license. Coinbase, which will continue to be supervised by the NYDFS, offers services to its clients for purchasing, trading, sending, receiving and storing bitcoin. This move comes in the wake of the NYDFS approving similar licenses for four other entities, as the regulator attempts to keep up with the rapid pace of growth by virtual currency companies.
Many are expecting 2017 to be a great year for blockchain technology. As 2017 began, the price of Bitcoin, one of the most-recognized digital currencies using blockchain technology, rose to over $1,000 in the wake of market uncertainty surrounding Brexit, the U.S. election, and other global events. Moreover, while banks and other investors have already invested significant amounts of money in the blockchain technology that underlies Bitcoin and other digital currencies, large financial institutions such as State Street are also testing other blockchain tools. View the Digital Currency Perspectives blog post.
As required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act), on January 19, the Federal Trade Commission (FTC) released its annual adjustments to the reporting thresholds. The key number to remember is now $80.8 million. Generally, transactions valued above $80.8 million must be reported and cleared by the federal antitrust authorities before the transaction may close. The adjustments will become effective 30 days after imminent publication in the Federal Register. The anticipated effective date is therefore on or about February 18, 2017. View the client alert issued by Goodwin’s Antitrust and Competition Practice.
Enforcement & Litigation
On January 3, the Central District of California issued an order in CFPB v. CashCall, Inc., No. 2:15-cv-07522 (C.D. Cal.) allowing the defendants to request an interlocutory appeal of its August 31, 2016, decision granting partial summary judgment in favor of the Consumer Financial Protection Bureau (CFPB). The court’s decision to certify the interlocutory appeal potentially sets the stage for the Ninth Circuit to weigh in on the “true lender” issue for the first time; if the Ninth Circuit grants review in the case, it would be the first time a circuit court has considered the issue since the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, No. 14-2131 (2d Cir. May 22, 2015). View the LenderLaw Watch blog post.
On January 18, the CFPB filed a complaint in federal district court (M.D. PA) against a servicer of private and federal student loans and its debt collector subsidiary, alleging “abusive” acts and practices in connection with the servicing of private and federal student loans. The servicer is the largest student loan servicer in the country, servicing more than 12 million borrowers and $300 billion in student loans. The complaint alleges that the servicer steered distressed borrowers into forbearance, when the borrower could have applied for federal income-based payment plans, which would have lowered monthly payments and interest charges; that the servicer violated the Fair Credit Reporting Act and implemented Regulation V because it misreported information to consumer reporting agencies about disabled borrowers, making it appear as if those borrowers had defaulted on their student loans when they had not and damaging their credit in the process; that the servicer made omissions or misrepresentations about how it applies loan payments, and about its requirements for borrowers seeking to release their cosigner from responsibility for their private student loans, in violation of the Consumer Financial Protection Act; and that the servicer’s debt collector subsidiary violated the Fair Debt Collection Practices Act by misrepresenting a federal loan rehabilitation program to defaulted borrowers, falsely stating that, upon completing the program, adverse information about the defaulted loan would be removed from the borrower’s credit report, and collection fees would be forgiven. The complaint seeks (1) a permanent injunction from future violations of federal consumer protection laws, (2) restitution for harmed consumers, (3) other injunctive relief, (4) disgorgement of ill-gotten revenue, (5) civil penalties, (6) rescission of any contracts where necessary to redress consumers’ injuries, and (7) enforcement costs.
On January 18, the U.S. Attorney’s Office for the Southern District of New York (USAO) filed a lawsuit against a national bank, alleging that the bank had engaged in a years-long practice of racial discrimination in providing mortgage services. The parties reportedly have agreed to terms of a settlement to resolve the action. View the Enforcement Watch blog post.
On January 13, the Department of Justice (DOJ) announced that it had filed a lawsuit against a Minnesota bank, stemming from allegations that the bank engaged in illegal “redlining” of minority neighborhoods in the Minneapolis-St. Paul metropolitan area. View the Enforcement Watch blog post.
In a trend that is sure to continue no matter the policy leanings of the Trump administration, the Federal Trade Commission (FTC) announced on January 17 that it has obtained nearly $1 million in civil penalties for two violations of the Hart-Scott-Rodino Antitrust Improvements (HSR) Act. One involved shares that an investor’s spouse purchased in her own name in a public company in which the investor also held stock, while the other involved a fine against a hedge fund investor who was in violation of the HSR Act for just 17 days after making an HSR Act filing 1½ years earlier to acquire stock in the very same company. These actions make clear that failing to comply with the letter and spirit of the HSR Act is an invitation to penalties; care must be taken to assure compliance at every point, in every transaction. For more information, view the client alert issued by Goodwin’s Antitrust and Competition Practice.
At Goodwin’s recent Banking Symposium, David Gergen, a senior political analyst with CNN and an adviser to four presidents, shared his thoughts on what the industry can expect under the new administration. Goodwin attorneys also shared their insights on regulatory trends and challenges facing the financial services sector. To view the videos, click here.
Consumer financial services companies are facing unprecedented regulatory and enforcement scrutiny, mounting litigation and costly class actions, and there is no sign of change coming anytime soon. That is why it is essential that in-house and outside counsel have a mastery of new class action litigation and settlement trends, emerging theories of liability, the latest enforcement actions and regulatory initiatives, and the most effective defense and settlement strategies. It is with this in mind that American Conference Institute has developed its 27th National Conference on Consumer Finance Class Actions & Litigation with a brand new Miami location. Thomas Hefferon, partner and co-chair of Goodwin’s Financial Industry Practice, will serve as co-chair of this conference.
Tom Hefferon of Goodwin will be facilitating a CLE program titled, Implications of the Decision in PHH v. CFPB on Monday, January 30 from 11:45 a.m. - 1:30 p.m. at HSBC Bank, 452 Fifth Avenue, New York, NY. Goodwin is an accredited provider of CLE in New York and California. Credit in other states (such as North Carolina) is pending.
The CFPB finalized the Prepaid Accounts Rule on October 5, 2016. This Briefing will describe the Prepaid Account Rule’s amendments to Regulation E and Z, which extends consumer protections to prepaid cards and other prepaid accounts. Prior to account opening, consumers must receive “short form” and “long form” disclosures listing fees and other information. In addition, Regulation E's provisions related to unauthorized transactions will extend to prepaid accounts. Prepaid account issuers must provide periodic statements or, alternatively, provide access to an online account history. If overdraft or other credit features are linked to prepaid accounts, the credit card provisions of Regulation Z apply. Finally, the CFPB will require issuers to post agreements on their websites and submit account agreements to the CFPB for inclusion in a CFPB database. The briefing will discuss the types of products that are subject to the Prepaid Accounts Rule. This includes traditional general-purpose reloadable prepaid cards, whose primary purpose is conducting transactions with unaffiliated merchants for goods or services, or at ATMs or conducting person to person transactions, as well as virtual accounts that are not linked to a physical access device, but store funds electronically. Checking accounts and virtual currency accounts present gray areas, which this briefing will discuss. Associate Kim Holzel will lead this webinar.