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SEC alleges whistleblower protection violations in customer gag clauses
On September 4, the SEC announced it had settled charges against three affiliated registrants (the respondents) accused of violating the whistleblower protection rule. According to the SEC order, from May 2021 through February 2024, the respondents required collectively eleven retail clients to sign confidentiality agreements that hindered them from reporting potential securities law violations to the SEC. Specifically, some agreements included provisions that restricted clients from disclosing information unless an inquiry was initiated by a regulator and required clients to represent that they had not reported and would not report the underlying dispute to any securities regulator.
The SEC found that respondents willfully violated Rule 21F-17(a) under the Securities Exchange Act, which prohibits taking any action to impede an individual from communicating with the SEC about possible securities law violations. The respondents agreed to the settlement without admitting or denying the findings.
Respondents are ordered to cease and desist from future violations of the whistleblower protection rule and are required to pay civil monetary penalties: the Commission-registered investment adviser will pay $160,000, the Commission-registered broker-dealer will pay $70,000, and the state-registered investment adviser will pay $10,000. The SEC noted that it considered the respondents’ cooperation and remedial efforts in determining the penalties and that penalties were apportioned based on the relative size and financial condition of the entities involved.
SEC charges company for defrauding customers for $6M via false IPO
On August 26, the SEC filed a complaint and demand for a jury trial against a South Dakota corporation, its China-based investment adviser, and their CEO for allegedly defrauding investors out of millions of dollars in violation of several securities laws. The SEC alleges the defendants made false statements about guaranteed returns, the safety of client investments, the investment adviser’s business relationships, and the status of an IPO — which never occurred. According to the complaint, the defendants stopped communicating with investors and the website used to access funds was taken down.
The SEC seeks several forms of relief in its complaint, including a permanent injunction preventing the defendants from continuing their alleged fraudulent activities, disgorgement of funds, and civil penalties. Additionally, the SEC requested that the CEO be barred from serving as an officer or director of a public company.
District Court dismisses FINRA challenge for lack of subject matter jurisdiction
On September 4, the U.S. District Court for the Eastern District of Pennsylvania dismissed a plaintiff’s attempt to enjoin FINRA from proceeding with a disciplinary hearing against the plaintiff. The plaintiff’s disciplinary issues stemmed from a complaint filed against him in December 2023, alleging violations of FINRA rules during his employment at a financial group. As previously covered by InfoBytes, the plaintiff had asked the court for a temporary restraining order and a preliminary injunction to enjoin FINRA from proceeding with the hearing. The plaintiff argued that FINRA’s proceedings violated his Seventh Amendment right to a jury trial, referencing the U.S. Supreme Court’s decision in SEC v. Jarkesy, which held that a respondent to an enforcement action requires a jury trial for civil penalties. However, the district court held that the plaintiff’s claims must appeal to FINRA’s Office of Hearing Officers (OHO) or to an appellate court.
FINRA argued that under the standard set forth in Thunder Basin Coal Co. v. Reich, a 1994 U.S. Supreme Court decision, the court lacked subject matter jurisdiction. The court agreed, holding that: (i) denial of the district court’s jurisdiction would not foreclose meaningful judicial review; (ii) the claim is not wholly collateral to the Securities Exchange Act’s review; and (iii) the claim is within the SEC’s expertise. The plaintiff’s case will now proceed through the administrative channels like the OHO, with the potential for further appeals.
U.K.’s Financial Conduct Authority charges individual operating crypto ATMs
On September 10, the U.K. Financial Conduct Authority (FCA) announced that it charged an individual with, among other things, unlawfully operating a network of unregistered crypto-asset ATMs. Allegedly, the individual managed ATMs that processed 2.6 million pounds ($3.4 million) in crypto-asset transactions from December 2021 to September 2023. This is the FCA’s first criminal prosecution related to unregistered crypto-asset activities under the U.K. Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
The FCA has been working in partnership with law enforcement agencies to disrupt crypto-asset ATMs operating illegally across the U.K. In 2023, the FCA disrupted 26 machines that were operating unlawfully. The FCA stated that there are no legal crypto-asset ATM operators in the U.K. and continues to tell consumers that crypto-assets are unregulated and considered high-risk.
California’s CPPA issues advisory on “dark patterns”
On September 4, the California Privacy Protection Agency (“CPPA”) issued an enforcement advisory warning businesses against using “dark patterns” in their user interfaces. “Dark patterns” are choices a company makes regarding its user interface design, which the CPPA argued can impair consumer autonomy and decision-making. The advisory emphasized that the effect of these interfaces, not the intent behind them, may violate the CPPA. The advisory provides examples of non-compliant interfaces, such as processes for opting out of a data sale that are more cumbersome than opting in, and cookie choices that only include “yes” or “ask me later” options were contrasted with compliant interfaces, such as banners offering clear “Accept All” and “Decline All” options. The agency reminded businesses to review their practices to ensure that their user interfaces are compliant by offering symmetrical choices and using clear and understandable language, particularly when obtaining consumer consent.
California attorney general settles with crypto-asset company
On September 4, California Attorney General (AG) Rob Bonta announced a settlement with a cryptocurrency trading platform for allegedly failing to comply with state cryptocurrency laws. According to the settlement, the company failed to allow customers to withdraw cryptocurrency from accounts and failed to disclose certain aspects of its trading and order handling procedures. Under the terms of the settlement, the company has agreed, among other things, to (i) permit customers to withdraw their cryptocurrency assets to external wallets in accordance with applicable law; (ii) ensure the accuracy of written representations to customers about trading and order handling practices; and (iii) update its customer agreement to address potential delays in transaction settlements.
Additionally, the company has agreed to pay $3.9 million allocated to: (i) fees and costs incurred by the AG in connection with the investigation; (ii) fees and costs to be incurred in connection with monitoring and enforcing the settlement agreement; (iii) any litigation relating to monitoring and enforcing the settlement; and (iv) all potential claims to be released by the AG under the settlement.
NYC issues new rules for debt collectors
On August 12, the New York City Department of Consumer and Worker Protection (DCWP) issued a Notice of Adoption regarding amendments to debt collection rules. According to the DCWP, the amendments, effective December 1, will enhance consumer protections and align with changes in federal regulations and industry practices.
Among other things, the amendments will include requirements for debt collectors to provide specific disclosures when collecting on time-barred debt, to maintain comprehensive records of communications, consumer complaints, and other relevant documents, and to obtain consumer consent for electronic communications and provide clear opt-out options. The amendments will also impose restrictions on the frequency and methods of communication with consumers, including the use of email and social media. There will also be enhanced procedure requirements for verifying disputed debts and responding to consumer disputes. The DCWP will also establish specific rules for collecting medical debt, such as prohibiting the reporting of medical debt to consumer reporting agencies.
The notice stated feedback was garnered from public hearings and comments from various stakeholders, including industry associations, consumer advocacy groups, and legal services organizations were reflected in the rules. The DCWP also issued Corresponding FAQs.
Court upholds California’s daily transaction limit for crypto asset kiosks
On August 30, the Superior Court for the State of California dismissed a lawsuit challenging the California Digital Financial Asset Law’s (DFAL) $1,000 daily transaction limit. The plaintiff, an alliance for cryptocurrency terminals, argued that the daily transaction limit was unreasonable and exceeded legislative authority, but the court found it to be a reasonable measure to prevent fraud.
The DFAL, signed into law by the Governor on October 13, 2023, requires companies to be licensed by the California DFPI to engage in digital financial asset business activity in California and is effective starting July 1, 2025. Besides the daily transaction limit, the DFAL imposes several other requirements on kiosk operators. From January 1, kiosk operators had to provide the DFPI with a list of all kiosk locations and adhere to a $1,000 daily transaction limit per customer. By January 1, 2025, kiosk operators must also provide pre-transaction disclosures to customers and limit fees based on the transaction’s dollar equivalent.
The court’s decision reinforced the DFPI’s authority to implement and enforce the DFAL, ensuring that the regulatory framework is in place to protect consumers from fraudulent transactions and illicit activities.
Bank faces class action over its overdraft fee practices
Recently, a bank customer and his business filed a class action complaint in the Stamford-Norwalk Judicial District Superior Court against a Connecticut-based bank alleging that bank engaged in unlawful business practices to maximize its fees. According to the complaint, the bank allegedly assessed $37 overdraft fees on “Authorize Positive, Settle Negative Transactions” (APSN Transactions) and accounts that were not actually overdrawn and charged multiple NSF or overdraft fees on a single item. The complaint claims the bank’s practices breached the bank’s consumer and business contracts with the plaintiffs, including the covenant of good faith and fair dealing, and violated the Connecticut Unfair Trade Practices Act.
The complaint details specific instances where the plaintiffs were charged fees they allege were improper and argues that the bank’s practices were deceptive, unfair, and designed to maximize fee revenue at the expense of customers. The complaint references numerous federal agencies and their criticisms of the practices at issue in the complaint. The plaintiffs seek to represent three classes of affected customers: (i) the APSN class; (ii) the overdraft/NSF fee on positive balance class; and (iii) the multiple NSF fee class. The plaintiffs request actual and punitive damages, restitution, pre-judgment interest and attorneys’ fees.
CFPB faces new constitutionality challenge under funding mechanism
Recently, a Texas-based payday lender (the defendant) filed a motion to dismiss in the U.S. District Court for the Northern District of Dallas, challenging the legality of the CFPB’s funding structure. As previously covered by InfoBytes, in July 2022, the CFPB filed a complaint against the defendant for allegedly engaging in illegal debt collection practices; the Bureau alleged the respondent generated $240 million in reborrowing fees from borrowers who were eligible for free repayment plans in violation of the CFPA.
While this case was not the first challenge to the CFPB’s funding structure, the defendant’s argument hinges on the U.S. Supreme Court’s recent ruling (covered by InfoBytes here) that the CFPB’s funding structure was deemed constitutional since it came from the surplus funds of the Fed that would otherwise be deposited into the general fund of the Treasury. The motion emphasized that the Fed has been operating at a deficit since 2022, accumulating a deferred asset of $184.4 billion, which the defendant argued this deficit would prevent making any surplus available for the CFPB — yet the CFPB continues to receive hundreds of millions of dollars. Furthermore, the defendant argued the CFPB’s funding from sources other than the Fed’s combined earnings violates both the Dodd-Frank Act and the Appropriations Clause of the U.S. Constitution.
The defendant urged the court to dismiss the action on the basis that the CFPB’s method of funding violates the Appropriations Clause and the statutory limitations set by Congress, rendering the CFPB’s actions, including the prosecution of the current lawsuit, invalid.