Weekly RoundUp June 07, 2017

Financial Services Weekly News

Editor's Note

Supreme Court Limits SEC’s Disgorgement PowersOn June 5, the United States Supreme Court ruled unanimously in Kokesh v. Securities and Exchange Commission that disgorgement in a Securities and Exchange Commission (SEC) case is subject to the five-year statute of limitations for civil monetary penalties set forth in 28 U.S.C. § 2462. Before Kokesh, the SEC had argued for decades, largely successfully, that the five-year limitations period applies only to its claims for civil penalties and certain other remedies – but that its claims for disgorgement of ill-gotten gains are not subject to any statute of limitations. In Kokesh, the Supreme Court held that disgorgement is punitive and therefore subject to the same five-year limitations period as monetary penalties, slashing the disgorgement and interest award in the case and limiting the scope of the disgorgement remedy going forward.

The direct result of the Supreme Court’s Kokesh decision is that companies and individuals facing enforcement actions may only be liable for disgorgement to the extent the claim is brought within five years of the claimed violation. In some cases, like Kokesh, a defendant’s financial exposure will be sharply decreased. In others, where all of the conduct occurred more than five years before the date of suit, the SEC will be unlikely to bring an enforcement claim at all given the inability to recover either disgorgement or civil penalties. The decision may also limit the disgorgement remedy in cases brought by other government agencies.

More broadly, the unanimous ruling appears to signal the current Supreme Court’s strong skepticism of the discretion exercised by the SEC and other federal agencies. For example, at oral argument in Kokesh, five of the Justices questioned the government on whether the SEC has authority to pursue disgorgement remedies at all – calling into question decades of settled SEC practice and law. In its opinion, the Court expressly chose not to address that question. And Kokesh follows on the heels of the Court’s recent decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in which the Court held that § 2462’s five-year statute of limitations for SEC civil monetary penalties begins to run when the alleged violation occurs, not on a later date when the SEC may “discover” the violation. The Court’s recent rulings suggest that, in coming years, it can be expected to show little deference to executive agency practice and discretion on these and other subjects.  For more information, view the client alert issued by Goodwin’s Securities Litigation + White Collar Defense Group.

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

President Trump to Nominate New Comptroller of the Currency

On June 5, President Trump announced his intention to nominate Joseph Otting to be the new Comptroller of the Currency. Mr. Otting previously served as President and CEO of OneWest Bank N.A and Vice Chairman of U.S. Bancorp. If confirmed by the Senate, Mr. Otting will replace Keith Noreika, a former banking industry attorney who became acting Comptroller upon the resignation of Thomas J. Curry in May. Mr. Otting is expected to support the Trump administration’s financial regulatory reform efforts.

Fed Finalizes Reg CC Amendments on Check Clearing Rules, Proposes New Liability Amendments

On May 31, the Board of Governors of the Federal Reserve System (Federal Reserve Board) announced the final version of its amendments to Regulation CC (Reg CC) in order to update its check clearing rules in light of the nearly ubiquitous use of electronic in today’s financial system. Subpart C of Reg CC, which regulates the collection and return of checks, was also amended to cover electronic checks. The amendments defined the term “electronic check” and extended several paper check warranties to electronic checks. The amendments also:

  • Require any bank transferring an electronically created item to indemnify each transferee bank against any loss resulting from the fact that the image was not created from a paper check; and 
  • Require a bank accepting a check via remote deposit capture to indemnify a bank that subsequently deposited the underlying original paper check, so long as the latter bank did not deposit the check in a manner inconsistent with any restrictive indorsements, such as “for mobile deposit only.”

The Reg CC amendments are also intended to encourage banks to use electronic check returns by changing notice requirements and the liability structure for when banks fail to return checks expeditiously. Under the amendments:

  • Paying banks’ notice requirements for decisions to return unpaid checks must be given so that the notice would be received by 2 p.m. (rather than 4 p.m.) of the second business day after the banking day that the paying bank received the check. And the threshold for notification was raised to $5,000 (from $2,500).
  • Paying and returning banks can only be liable to a depository bank for failing to return a check expeditiously if the depository bank can accept electronic returned checks by “commercially reasonable means.” The burden of proof falls on the depository bank to show that its arrangements for accepting electronic returned checks are commercially reasonable.

The amendments will become effective on July 1, 2018.

On the same day, the Federal Reserve Board also proposed new amendments to Reg CC to address disputes over whether a check was altered or forged and the original paper check is unavailable. Currently, the UCC places liability on depositary banks for altered checks and paying banks for forged checks. The proposed Reg CC amendment would adopt a presumption of alteration — thus placing liability on depositary banks — when there is a dispute over whether a dollar amount on a check was altered or forged. The Federal Reserve Board requested comment on that proposal, and also on whether the presumption of alteration should apply (1) if the bank claiming the presumption received and destroyed the original paper check and (2) a date was altered or forged. Comments on the proposed liability provisions are due on August 1, 2017.

Federal Banking Regulators Issue Advisory on Appraiser Availability

On May 31, responding to concern over the limited availability of state-certified and -licensed appraisers, particularly in rural areas, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency (OCC) issued an advisory that highlights options to help insured depository institutions and bank holding companies facilitate the timely consideration of loan applications. The advisory provides for (1) temporary practice permits, which allow appraisers credentialed in one state to provide their services on a temporary basis in another state experiencing a shortage of appraisers, subject to state law; and (2) temporary waivers, which set aside requirements relating to the certification or licensing of individuals to perform appraisals under Title XI of FIRREA in states or geographic political subdivisions where certain conditions are met. Temporary waivers may be granted when it is determined that there is a scarcity of state-certified or -licensed appraisers leading to significant delays in obtaining an appraisal. The advisory also discusses the possibility of states permitting reciprocity, which would allow appraisers that are certified or licensed in one state to obtain certification or licensing in another state without having to meet all of the second state’s certification or licensing standards.

FFIEC Updates Cybersecurity Assessment Tool

On May 31, the Federal Financial Institutions Examination Council (FFIEC), on behalf of its members, released an update to the Cybersecurity Assessment Tool (Update). The Update addresses changes to the FFIEC IT Examination Handbook by providing a revised mapping in Appendix A to the updated Information Security and Management booklets. The Update also provides additional response options, allowing financial institution management to include supplementary or complementary behaviors, practices and processes that represent current practices of the institution in supporting its cybersecurity activity assessment.

Enforcement & Litigation

New York-Based Debt Collector Banned From Doing Business in Kansas

On May 26, Kansas Attorney General Derek Schmidt (Kansas AG) announced that a New York-based debt collector and its owner were banned from debt collection and enforcement in Kansas. Shawnee County District Court Judge Teresa Watson approved the consent judgment ordering the company to stop doing business in Kansas, dismissing the 140 lawsuits the company currently had pending in the state, and requiring the company to file Satisfactions of Judgment in collection lawsuits that it had won. The Court also ordered the company to pay $7,572 in restitution and $150,000 in civil penalties. The parties agreed to suspend the civil penalties, however, on the condition that the financial statements defendants provided in the course of negotiating the consent judgment are truthful and accurate. This suspension may be set aside if the defendants violate any term of the consent judgment. View the Enforcement Watch blog post.

Kentucky AG Announces Home Loan Protections in Connection With Settlement With Mortgage Recording Company

On May 25, Kentucky Attorney General Andy Beshear (Kentucky AG) announced steps being taken to provide guidance to Kentucky homeowners whose banks use online mortgage recording databases instead of traditional public land records to track land ownership. The Kentucky AG has provided county clerks with information to post in their offices to promote transparency with citizens seeking online home mortgage details. View the Enforcement Watch blog post.

FTC Files Suit Against Student Debt Relief and Credit Repair Scheme

On May 25, the Federal Trade Commission (FTC) announced that it filed a complaint in federal court in the United States District Court for the Southern District of Florida against a student loan debt relief and credit repair company, its affiliated companies, and owner. The complaint alleged that the defendants operated an unlawful debt relief enterprise that falsely promised consumers with student loans that they could reduce their loan payments or eliminate a portion of their debt through student loan forgiveness of income-based repayment plans. On May 26, U.S. District Judge William P. Dimitrouleas issued an asset freeze and temporary injunction against the defendants. View the Enforcement Watch blog post.

Massachusetts AG Obtains Judgment Against Online Auto Title Lender for Illegal Loans

On May 25, Massachusetts Attorney General Maura Healey (Massachusetts AG) announced a final judgment and permanent injunction entered in Suffolk Superior Court against an unlicensed online auto title lender, permanently banning the company from operating in Massachusetts and voiding over 200 loans made by the company to Massachusetts borrowers. The judgment also prohibits the title lender from repossessing any of the vehicles connected to the loans, and orders the company to pay $1.135 million in civil penalties and nearly $200,000 in restitution. View the Enforcement Watch blog post.

Fintech Flash: NY Bank Regulator Seconds Challenge to OCC FinTech Bank Charter

Trailing the Conference of State Bank Supervisors’ (CSBS) April lawsuit opposing the OCC’s proposed Fintech national bank charter, the New York Department of Financial Services (DFS) filed its own suit on May 12 challenging the OCC’s decision to grant bank charters to financial technology companies engaged in lending and payments-related activities. The key thrust of the DFS and CSBS legal arguments centers on the OCC’s authority to charter national banks that are engaged in the “business of banking.” For more information, view the Fintech Flash issued by Goodwin’s Fintech practice.

Goodwin News

Fintech Bank Charter Symposium – June 8

Join members of Goodwin’s Fintech and Banking groups at our New York office for a symposium on the OCC’s new Fintech bank charter. This seminar for tech-enabled lending and payments leaders will provide a deep dive on the ins and outs of the OCC’s bank charter for Fintech companies. Attendees will come away with a command of the advantages and challenges of the bank charter, empowering you to do your own reasoned cost-benefit analysis of this opportunity. To register for this event, RSVP here.

T. Rowe Price Webcast: The Great Myth: Passive Investing Eliminates Fiduciary Risk – June 8

Alison Douglass, partner in Goodwin's Financial Industry and ERISA Litigation practices, will be participating in a T. Rowe Price webcast regarding “The Great Myth: Passive Investing Eliminates Fiduciary Risk.”

T. Rowe Price Target Date Summit – June 8

Alison Douglass, partner in Goodwin’s Financial Industry and ERISA Litigation practices will be speaking at the T. Rowe Price Target Date Summit on “The Misperception of Fiduciary Risk and Active Management in DC Plans” panel.

Europe Money 20/20 – June 26 – 28

Money20/20 Europe is engineered to bring together all the stakeholders with a part to play in the commerce revolution: payments and financial services providers, banks and nonbanks, the mobile ecosystem, the retail industry (offline and online), marketing services and data companies, investors, advisory firms and government bodies. Money 20/20 Europe will again take place in Copenhagen. For more information, please visit the event website.

This week’s Roundup contributors: James An, Christina Hennecken