On June 1, the SEC’s Division of Investment Management Staff (Staff) issued a no-action letter to the Investment Company Institute (ICI). The no-action letter closes a gap in investor protection created by the SEC’s approval of FINRA Rule 2165, which permits broker-dealers to place a temporary hold on disbursement requests upon reasonable belief of financial exploitation of Seniors and other “Specified Adults” (together, “Specified Adults”). FINRA’s Rule does not protect all Specified Adults because some mutual fund shareholder accounts are held directly with the mutual fund and serviced by the fund’s SEC-registered transfer agent. Under Section 22(e) of the Investment Company Act of 1940 (Act) a transfer agent (stepping into the shoes of a mutual fund) cannot lawfully delay the disbursement of redemption proceeds while it investigates whether financial exploitation is occurring.
Under the terms of the no-action letter, the Staff stated that it would not recommend enforcement action to the SEC against a mutual fund or its transfer agent under Section 22(e) of the Act if, in accordance with the conditions described in the ICI’s incoming letter, the transfer agent, acting on behalf of the mutual fund, temporarily delays for more than seven days the disbursement of redemption proceeds from the mutual fund account of Specified Adults held directly with the transfer agent based on a reasonable belief that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted. The conditions described in the ICI’s incoming letter correspond to the conditions imposed on broker-dealers under Rule 2165. For more information on FINRA Rule 2165, read the client alert issued by Goodwin’s Financial Industry practice.
On June 5, the SEC’s Division of Investment Management Staff updated its “Staff Responses to Questions About the Custody Rule” to provide additional guidance regarding specific questions relating to custody arising out of IM Guidance Update 2017-01 “Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority.” The new information is contained in Question II.11 and Question II.12 in the “Definition of Custody; Scope of the Rule” section of the FAQs. In its response to Question II.11, the Staff clarifies that an adviser that does not have a copy of a client's custodial agreement, and does not know, or have reason to know whether the agreement would give the adviser Inadvertent Custody, need not comply with the custody rule with respect to that client's account if Inadvertent Custody would be the sole basis for custody. Relief from complying with the custody rule is not available where the adviser recommended, requested, or required a client's custodian. In Question II.12, the Staff clarified its view on the application of the custody rule when an adviser has check-writing authority and the ability to deduct its advisory fee from client accounts.
On June 12, FinCEN issued an advisory to U.S. financial institutions to highlight the connection between corrupt senior foreign political figures (politically exposed persons) and their enabling of human rights abuses. The advisory describes a number of typologies used by politically exposed persons to access the U.S. financial system, obscure, and further their illicit activity. The advisory also identifies 14 “red flags” that may assist financial institutions in identifying the methods used by politically exposed persons that contribute directly or indirectly to human rights abuses or other illicit activity, through the U.S. financial system. These red flags include:
- the use of third parties when that is not normal business practice or when it appears to shield a politically exposed person;
- the use of family members, close associates, or corporate vehicles as legal entity owners or to otherwise obscure ownership;
- declarations from the politically exposed person which are inconsistent with other publicly available information;
- access to state funds;
- the politically exposed person’s control over a transaction’s counterparty or correspondent;
- transactions involving government contracts in unrelated sectors that connect to shell companies or involve expropriated assets;
- seeking to use a financial institution “that would not normally cater to foreign or high-value clients.”
FinCEN will update these red flags and typologies as it continues investigating the methodologies associated with politically exposed persons and their financial facilitators. The advisory also reminds U.S. financial institutions of their due diligence and suspicious activity report (SAR) filing obligations related to such politically exposed persons and their financial facilitators.
FinCEN Customer Due Diligence Rule Becomes Effective
FinCEN’s customer due diligence rule (CDD rule), which requires covered financial institutions to, among other things, collect information on the significant beneficial owners of customers that are legal entities, became effective on May 11, 2018. For a quick refresher on the CDD rule’s requirements, please see our previous client alert, which discussed issues critical to understanding and complying with the rule, including due diligence requirements and procedures, the definition of account, the definition of legal entity customer, the identification of beneficial owners, reliance on the due diligence efforts of other financial institutions, and recordkeeping requirements. In addition, as reported in the April 4 edition of the Roundup, FinCEN issued FAQs concerning the CDD rule on April 3, 2018. The FAQs address some of the common questions that continue to arise as banks and other financial institutions implement the CDD rule, including the manner in which the rule applies to investment funds and other pooled investment vehicles and whether and how to look through investors to determine beneficial ownership.
The CFPB announced that it has begun transforming its Stakeholder Outreach and Engagement work after receiving public feedback on its external engagements. The CFPB will continue the Consumer Advisory Board and continue forums for the Community Bank Advisory Council and Credit Union Advisory Council. Current advisory groups will be reconstituted and made smaller through the 2018 application and selection process. Alongside the restructuring, the CFPB intends to increase its strategic outreach including regional town halls, roundtable discussions at CFPB headquarters, and regular national calls. The first town hall meeting took place in Topeka, Kansas on June 8, 2018, to discuss Fighting Elder Financial Exploitation in the Kansas Community presented by the Kansas Attorney General.
On June 1, the OCC and the FDIC announced a final rule to shorten the standard settlement cycle for securities transactions (purchases and sales) by institutions supervised by the OCC and FDIC. Effective October 1, 2018, FDIC- and OCC-supervised institutions will be required to settle most securities transactions within two business days of trade date (“T+2”). Currently, OCC- and FDIC-supervised institutions are required to settle security transactions within three business days of trade date. The T+2 settlement cycle is the standard settlement cycle currently followed by registered broker dealers. The new rule is intended to reduce settlement exposure and to align OCC- and FDIC-supervised institutions’ settlement practices with other market participants.
Enforcement & Litigation
On June 7, the CFPB issued an order dismissing administrative proceedings against PHH Corp. The dismissal follows a January 31, 2018, opinion by the U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit) reinstating the court’s prior interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA). According to the order, the CFPB determined that further agency proceedings were unnecessary given that the D.C. Circuit’s interpretation “is now the law of this case” and therefore “PHH did not violate RESPA.” The order brings an end to the long-running enforcement action. View the Enforcement Watch blog post.
On March 16, the D.C. Circuit issued a long-awaited ruling in ACA Int’l v. FCC, which struck down the Federal Communications Commissions’ (FCC’s) expansive interpretation of the Telephone Consumer Protection Act’s (TCPA’s) “automatic telephone dialing system” (ATDS) definition. As LenderLaw Watch analyzed more fully here, the D.C. Circuit focused on (a) whether the equipment has the “capacity” to perform the enumerated statutory functions of an ATDS (i.e., storing or producing telephone numbers “using a random or sequential number generator” and dialing such numbers) and, if so, (b) whether that capacity was used to make the challenged call. Four district court decisions have come down since, which have all followed ACA Intl. View the LenderLaw Watch blog post.
On May 31, the Federal Trade Commission (FTC) announced that it settled claims against a student loan debt relief company as part of a coordinated federal-state enforcement initiative to target deceptive student loan debt relief scams, called “Game of Loans.” The FTC settled allegations that a student loan debt relief company violated the FTC Act, Telemarketing Sales Rule, and Credit Repair Organizations Act by allegedly charging unlawful advance fees and making false promises to enroll consumers in loan forgiveness programs and provide credit repair services. View the Enforcement Watch blog post.
On May 31, the FTC announced that it settled claims against a loan debt relief company in connection with its coordinated federal-state enforcement initiative to target deceptive student loan debt relief scams, called “Game of Loans.” The FTC settled claims that the company violated the FTC Act, Telemarketing Sales Rule, and Credit Repair Organizations Act. The company allegedly participated in a debt relief operation that preyed on consumers with student loan debt by claiming to be associated with the Department of Education and offering loan forgiveness programs. View the Enforcement Watch blog post.
Yahoo Finance is holding its fourth All Markets Summit live event on Thursday, June 14 in partnership with TechCrunch at the Nasdaq Entrepreneurial Center in downtown San Francisco. The event, similar to its February 2018 counterpart in New York, will focus entirely on cryptocurrency. Grant Fondo, partner and chair of Goodwin’s Digital Currency & Blockchain Technology practice, will be a featured speaker for a session titled “Rules and Regulations in Crypto.”
Western Bankers Association, in partnership with FHLB-SF 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 & Blockchain Technology practices, and Bill Growney, partner in Goodwin’s Technology & Life Sciences practice, will participate on the panel.
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.