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CFPB reaches $2.6 billion settlement with credit repair telemarketers
On August 28, the CFPB announced a proposed settlement with Utah-based credit repair telemarketers and various affiliates (collectively, "defendants") for allegedly committing deceptive acts and practices in violation of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA) by collecting illegal advance fees. As previously covered by InfoBytes, in its initial lawsuit the CFPB alleged the defendants requested and received payment of “prohibited” upfront fees for telemarketed credit repair services when they signed up. In June, a district court ruling put a hold on the Bureau’s initial attempt to impose the settlement because of “outstanding issues of fact” which precluded it from entering the agency’s requested relief at that time (covered by InfoBytes here). The Bureau and defendants have now agreed to a new settlement which will, among other things, (i) impose over $2.7 billion in redress (understanding that the principal corporate defendant is in Chapter 11 bankruptcy proceedings); (ii) impose over $64 million in civil money penalties; (iii) ban defendants from telemarketing and from doing business with certain marketing affiliates for ten years; and (iv) require defendants to send a notice of the settlement to “any remaining enrolled customers who were previously signed up through telemarketing.”
The proposed settlement is subject to final approval by the court.
Bank enters into settlement agreement with SEC for charging advisory fees
On August 25, the SEC entered into a settlement agreement with a national bank that requires the bank to pay a $35 million civil penalty for overcharging more than 10,900 investment advisory accounts over $26.8 million in advisory fees. According to the order, the bank and its predecessors agreed to reduce standard advisory fee rates for certain clients when clients agreed to open accounts at the bank via handwritten or typed notes and changes on the clients’ standard investment advisory agreements; however, these reduced rates were not entered into the bank’s billing systems when setting up client accounts. As a result, the clients were overcharged advisory fees for years, because the bank also failed to adopt policies and procedures to prevent overbilling.
The agreement “underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection,” said the Director of the SEC’s Enforcement Division, Gurbir S. Grewel. He further noted that “[i]nvestment advisers must adopt and implement policies and procedures to ensure that they honor their agreements with all of their clients, including legacy clients of predecessor firms.”
In addition to the $35 million civil penalty, the bank also paid affected accountholders approximately $40 million to reimburse clients for the overcharging. The bank did not admit or deny the SEC’s charges set forth in the agreement.
D.C. Circuit overturns SEC rejection of an investment company’s Bitcoin ETF
On August 29, the D.C. Circuit overturned the SEC’s denial of a company’s application to convert its bitcoin trust into an exchange-traded fund (ETF). In October 2021, the company applied to convert its bitcoin trust to an ETF pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 19b-4 thereunder, a proposed rule change to list and trade shares. In June 2022, the SEC denied the company’s application on the basis that the burden under the Exchange Act and the SEC’s Rules of Practice, which requires among other things, that the rules of national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”
The company promptly appealed, alleging that the SEC “acted arbitrarily and capriciously by denying the listing of [the company]’s proposed bitcoin ET[F] and approving the listing of materially similar bitcoin futures ET[F]s”. The three-judge panel held that the SEC “failed to provide the necessary “reasonable and coherent explanation” for its inconsistent treatment of similar products” and “in the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”
This decision does not mean that the SEC must approve the company’s application. However, the SEC must review the application again.
SEC files brief in its Supreme Court appeal to reverse 5th Circuit ruling against use of adjudication powers and ALJs
On August 28, the SEC filed a brief in its appeal to the U.S. Supreme Court to reverse the decision of the U.S. Court of Appeals for the Fifth Circuit’s 2022 ruling that the commission’s in-house adjudication is unconstitutional. As previously covered by InfoBytes, the 5th Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. The brief argues that securities laws are “distinct from common law because they authorize the government to seek civil penalties even if no private person has yet suffered harm from the defendant’s violation (and therefore no person could obtain damages).” Moreover, the SEC argues that the Court has continually upheld the right of an agency to decide whether to enter an enforcement action through the civil or criminal process. The SEC referenced the 1985 Heckler v. Chaney case, which set the precedent that there is no constitutional difference between the power to decide whether to pursue an enforcement action and where to pursue an enforcement action, as they are both executive powers, supporting the claim that there is “a long and unbroken line of decisions that have relied on the public-rights doctrine in upholding such statutory schemes against Article III and Seventh Amendment challenges.” The SEC also reminded the Court that when it enforces securities laws through an administrative enforcement proceeding with a result that is not in favor of the respondent, the respondent may obtain a judicial review through the court of appeals. Finally, the commission contends that the 5th Circuit erred when it held that statutory removal restrictions for ALJs are unconstitutional, and that Congress has “acted permissibly in requiring agencies to establish cause for their removal of ALJs.”
DOJ announces international malware action, recovers $8.6 million in illicit profits
On August 29, the DOJ announced a multinational operation involving the U.S., France, Germany, the Netherlands, the UK, Romania, and Latvia to “disrupt” a malware’s infrastructure called Qakbot. Attorney General Merrick B. Garland stated that, “[t]ogether with our international partners, the Justice Department has hacked Qakbot’s infrastructure, launched an aggressive campaign to uninstall the malware from victim computers in the United States and around the world, and seized $8.6 million in extorted funds. ” The main method by which the Qakbot malware spreads to target computers is via spam emails that contain harmful attachments or links. Upon successfully infecting a target computer, the DOJ mentioned that Qakbot gains the capability to introduce other types of malware, such as ransomware. Over the past few years, many ransomware collectives have used Qakbot as an initial avenue for initiating infections and has caused hundreds of millions of dollars in damages. The DOJ highlighted that “[t]he action represents the largest U.S.-led financial and technical disruption of a botnet infrastructure leveraged by cybercriminals to commit ransomware, financial fraud, and other cyber-enabled criminal activity.”
SEC conducts its first-ever NFT enforcement again
On August 28, the SEC entered an order against a Los Angeles-based media and entertainment company charging them with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). According to the order, the company offered and sold different tiers of NFTs to hundreds of investors between October and December of 2021, and ultimately raised approximately $30 million from the sales. The SEC alleged that the company encouraged potential investors to purchase the unregistered NFTs in return for an investment in the business, promising “tremendous value” to the purchasers if the company was successful in its attempts to “build the next Disney” and launch other creative projects. The order found that the NFTs were ultimately investment contracts and therefore securities, and that the company subsequently violated federal securities laws by offering and selling crypto assets in an unregistered securities offering that was not otherwise exempt from registration requirements.
The SEC noted that all securities, in whatever form, are required to be registered and that when companies fail to register securities, “investors of all types are deprived of the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws.” The company did not admit or deny the findings set forth in the order but agreed to cease-and-desist from violating registration provisions of the 1933 Act and pay a combined penalty of over $6.1 million in fees. The order also establishes a “Fair Fund” to return money to investors who paid to purchase NFTs.
On the same day, the SEC released a statement from Republican commissioners, Hester M. Peirce and Mark T. Uyeda, underscoring the significance of the commission’s first NFT enforcement action. “People are experimenting with a lot of different uses of NFTs,” said the commissioners in their partial dissents. “Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty.” The commissioners further criticized the SEC’s failure to provide guidance on NFTs when they first started proliferating and raised several questions.
SEC awards whistleblower more than $18 million
On August 25, the SEC announced a whistleblower award of $18 million to a whistleblower who provided new information and assistance that led to a successful SEC enforcement action. According to the redacted order, the whistleblower provided additional helpful information and substantial, continuing assistance that helped the SEC staff saved f time and resources during the investigation. In the same order, the Commission affirmed the denial of a second claimant’s award claims after claimant 2 argued that they were the source of the original information that led to the opening of the investigation. The SEC determined that they had insufficient evidence to support their claims and that the Commission’s staff used claimant 1’s information, not claimant 2’s. Moreover, the claimant 2 did not satisfy “Rule 21F-4(c)(3), as Claimant 2 did not submit information to the Commission within 120 days of reporting it to the Company. Claimant 2 submitted information to the Commission after the Covered Action was filed and settled.”
SEC charges broker-dealer with failure to file suspicious activity reports
On August 29, the SEC announced that it had brought charges against a Chicago-based broker-dealer. The SEC alleged that between August 2012 and September 2020 the broker-dealer failed to file over 400 hundred legally required suspicious financial transaction reports related to over-the-counter securities transactions executed in the broker-dealer’s alternative trading system (ATS). According to the SEC’s order, it was found that the broker-dealer did not establish an anti-money laundering surveillance program until September 2020, despite having thousands of high-risk microcap and penny stock securities transactions executed daily on its ATS.
Daniel R. Gregus, Director of the SEC’s Chicago Regional Office, stated, “All SEC-registered broker-dealers have the responsibility to comply with the requirements of the Bank Secrecy Act, including the obligation to file SARs.”
Without admitting or denying that it violated Section 17(a) of the Securities Exchange Act and Rule 17a-8, the broker-dealer agreed to a censure and a cease-and-desist order, along with a $1.5 million penalty.
FDIC, Fed issue new rules and guidance aimed to strengthen resolution planning at large banks
On August 29, the FDIC and the Federal Reserve Board issued a joint press release inviting public comment on proposed guidance that serves to toughen requirements for non-G-SIB large bank holding companies’ resolution plans, or “living wills” that set forth strategies for rapid and orderly resolution under bankruptcy in the event of financial distress or failure. The proposed guidance, which includes guidance for both domestic triennial full filers and guidance for foreign triennial full filers, will generally apply to certain bank holding companies and foreign banking associations with between $250 billion and $700 billion in total assets. This guidance is separate from the guidance previously issued to the largest and most complex companies, which is already in place. The guidance (i) is organized around key areas of potential vulnerability, such as capital, liquidity, and operational capabilities; (ii) provides agency expectations for both single point of entry and multiple point of entry strategy needs; and (iii) proposes that foreign banking organizations develop U.S. resolution strategies that complement their global resolution plans. The proposed guidance will be published in the Federal Register, with comments due by November 30, 2023.
Separately on August 29, the FDIC approved a notice of proposed rulemaking to enhance resolution planning for insured depository institutions (IDIs) with at least $100 billion in total assets. The proposed rule would strengthen existing IDI resolution planning requirements under 12 CFR § 360.10 and would require a resolution submission from covered IDIs every two years, with limited filings in between. Covered IDIs would be required to submit comprehensive resolution plans that would “enhance current IDI resolution planning requirements by incorporating useful elements of existing guidance and important lessons learned from past plan reviews and from past large bank resolutions, including those earlier this year.” Additionally, IDIs with total assets of at least $50 billion but less than $100 billion would submit more limited informational filings and would not be required to develop a resolution strategy. Comments on the proposed rule are due by November 30, 2023.
OCC allows institutions in Florida affected by Hurricane Idalia to temporarily close
On August 29, the OCC issued a proclamation permitting OCC-regulated institutions, at their discretion, to close offices in areas of Florida affected by Hurricane Idalia “for as long as deemed necessary for bank operation or public safety.” In issuing the proclamation, the OCC noted that only bank offices directly affected by potentially unsafe conditions should close, and that banks should make every effort to reopen as quickly as possible to address customers’ banking needs. The proclamation directs institutions to OCC Bulletin 2012-28 for further guidance on natural disasters and other emergency conditions.
Find continuing InfoBytes coverage on disaster relief here.