InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FTC orders companies and individuals to turn over millions
On January 17, the FTC announced two proposed settlements against an independent sales organization and its owners (collectively, “defendants”) for allegedly participating in deceptive and unfair acts and practices. The FTC alleges the defendants violated FTC Act, the Business Opportunity Rule, the Cooling-Off Rule, and the Consumer Review Fairness Act by targeting Spanish-speaking consumers with “false or unfounded earnings claims and other deceptive promises,” relating to business opportunities. According to the complaint, defendants sold business opportunities to Spanish-speaking consumers that used unsubstantiated earnings claims to convince consumers to pay thousands of dollars for its products and services. The complaint also alleged that although defendants’ marketing and sales were conducted largely in Spanish, the company’s purchase agreements that outline the cancellation policy were often provided exclusively in English. Additionally, the complaint alleged that defendants frequently rejected consumers’ refund requests as untimely, and when consumers reported the defendants to law enforcement or the Better Business Bureau, defendants offered partial refunds to those consumers contingent upon their withdrawal of their complaints and agreement to refrain from posting negative reviews about defendants.
The proposed stipulated order, among other things, would (i) permanently ban the defendants from offering any business coaching on ecommerce or real estate; (ii) require the defendants to support their claims about how much consumers can earn using any product or service that the defendants market or sell; (iii) prohibit the defendants from repeating the unlawful practices that formed the basis for the complaint; (iv) require defendants to pay $29,175,000 and surrender all funds and assets of the receivership entities and those additionally listed; and (v) identify repayment obligations of various financial institutions and require the identified financial institution to remit the balance of each identified account to the Commission. The defendants neither admitted nor denied any of the allegations in the complaint.
Bank to pay $18 million for violating a whistleblower protection rule
On January 16, the SEC accepted a global financial services firm’s offer of settlement to resolve allegations of violations of the whistleblower protection rule, which prohibits any action that might impede an individual from communicating with the SEC about securities law violations. According to the SEC, from March 2020 through July 2023, the firm asked clients to sign a confidential release if they were issued a credit or settlement from the firm of more than $1,000. The release required clients to “promise[] not to sue or solicit others to institute any action or proceeding against [respondent] arising out of events concerning the [a]ccount.” The SEC claimed that at least 362 clients have signed the release since 2020. In connection with the settlement, the firm agreed to be censured, to cease and desist further violations of the rule, and to pay an $18 million civil money penalty.
FINRA report finds 70 percent of broker-dealer communications potentially violate crypto-asset rule.
On January 23, FINRA published a report which found 70 percent of broker-dealer communications with retail customers showed potential violations of crypto-asset communications as part of a targeted exam. The potential violations fall under FINRA Rule 2210, which require that broker-dealer communications are fair, balanced, based in fact, and do not omit any material facts. With these rules in mind, FINRA reviewed more than 500 retail communications on crypto-assets made by broker-dealers consisting of podcasts, commercials, correspondences, and retail and institutional communications. FINRA’s exam uncovered numerous potential violations of Rule 2210, including the failure to clearly differentiate whether crypto-assets were offered by the member or by a third-party (especially on mobile apps); false statements that crypto-assets function like cash; comparisons of crypto-assets with other assets without providing a comparison of their features and risks; unclear and misleading explanations of how crypto-assets actually work; the failure to include key explanations of how crypto-assets are issued or held; misrepresenting the federal protections that apply to crypto-assets; and making misleading statements. Last, FINRA published a list of questions for broker-dealers to consider when reviewing and supervising their retail communications about crypto-assets.
NYDFS and Fed order bank to pay fines for BSA/AML non-compliance
On January 19, the Federal Reserve Board and NYDFS each issued separate enforcement actions against one of the largest banks in the world for alleged compliance deficiencies and violations under BSA/AML. The Fed issued its cease and desist order and ordered the bank to pay a civil money penalty of $2.4 million. The NYDFS also issued a similar consent order with a monetary penalty of $30 million.
According to the Fed’s order, an investigation into the bank’s practices determined that the New York branch lacked any formal policies or training on confidential supervisory information (CSI). Additionally, the order required the bank to submit a written plan to enhance internal compliance controls to the Fed, including designation of a CSI officer, among other requirements. According to NYDFS’s order, the bank previously entered into a 2018 cease and desist order with the Fed to address “significant deficiencies” in its compliance with BSA/AML requirements and OFAC regulations. NYDFS conducted an examination in 2022 and found that deficiencies cited in the 2018 order persisted for several more years. A subsequent examination in 2023 found that the bank had made significant efforts toward enhancing its compliance programs and successfully remediated prior deficiencies. Per this most recent order, NYDFS found that the bank’s BSA/AML program was not in compliance for several years; the bank failed to maintain appropriate accounting records; and the bank failed to submit a report after discovering the occurrence of “embezzlement, misapplication, larceny, forgery, fraud, [or] dishonesty[.]” The consent order stipulated several remediation requirements, including a status report to NYDFS on the bank’s BSA/AML compliance.
Texas resolves securities fraud case with decentralized finance lending platform
Recently, a decentralized finance crypto lending platform and its owners (respondents) entered into a settlement agreement with a Texas regulatory agency, resolving an emergency cease-and-desist action brought in June 2023. The Texas State Securities Board alleged that respondents committed securities fraud in connection with the offers and sales of investments, falsely denied the platform’s impending bankruptcy, and “secretly” transferred customer funds to a crypto exchange, as well as offered unregistered securities. Under the terms of the settlement, respondents have agreed to, among other things, (i) inform clients of its plan for asset return within seven days of the settlement and provide a seven-day window for clients to withdraw assets through the app; (ii) continue to provide customer support to prior customers; (iii) pay an administrative fine; and (iv) cease-and-desist from selling unregistered securities in the state without admitting or denying the allegations. Texas also agreed to dismiss its emergency cease-and-desist order as part of the settlement.
Colorado Attorney General fines debt collector $500,000 for collecting on illegal loans
On January 16, the Colorado State Attorney General (AG) reached a settlement agreement with a third-party debt collection company that is ordered to pay $500,000 to the State. The company previously contracted to collect debt from consumers on behalf of unlicensed lending entities associated with Native American tribes, or Tribal Lending Entities (TLEs). According to the settlement agreement, none of the TLEs were licensed Colorado lenders and all of their loan agreements with consumers contained finance charge terms that exceeded the Uniform Consumer Credit Code’s 12 percent finance charge cap on unlicensed lenders—with most having interest rates that exceeded 500 percent APR and some up to 900 percent APR. The AG alleged that, between 2017 and 2022, the company violated the Colorado Fair Debt Collection Practices Act by using “unfair or unconscionable means” to collect on defaulted TLE-issued loans by representing to consumers that the entire loan balance was owed to the TLEs, that the company was legally authorized to collect the payments, and that consumers were legally obligated to pay the full amount. The company denies that its conduct violated any state law and otherwise denies all allegations of wrongdoing. Along with the penalty, the company will be barred from collecting on any debt where the loan’s APR exceeded the 12 percent cap and will provide the State with a list of affected consumers within 30 days.
Illinois proposes rule to evaluate mortgage community reinvestment
Recently, the Illinois Department of Financial and Professional Regulation issued a proposed rule pursuant to the Illinois Community Reinvestment Act (ILCRA). The ILCRA is modeled off the Community Reinvestment Act but expands its scope of covered financial institutions to include credit unions and licensed entities. The proposed rule will help the Department administer and enforce the ILCRA in an equitable manner. The rule establishes a framework and criteria by which the Department will evaluate a covered mortgage licensee’s record of helping to meet the mortgage credit needs of Illinois, including low- and moderate-income neighborhoods and individuals, through different tests and performance standards depending on the number of loans made by a covered mortgage licensee. Tests and considerations for evaluating licensees’ record include a lending test, service test, performance record, data collection and reporting, and content and recordkeeping of information received from the public.
To mitigate the impact on small businesses, a licensee that has made less than 200 home mortgage loans in Illinois in the last calendar year will not be subject to the service test. Furthermore, licensees that made less than 100 home mortgage loans in Illinois in the previous calendar year will have less frequent examinations than those with more than 100. Based on the licensee’s performance under the lending and service tests, the proposed rule specifies that a licensee’s rating of “outstanding”; “satisfactory”; “needs to improve”; or “substantial noncompliance” will affect how frequent they are evaluated. Compliance with the proposed rule is required six months from its effective date, and comments are due by February 26.
District Court denies stay of CFPB case against lender
On January 12, the U.S. District Court for the Southern District of Florida denied a defendant-mortgage lender’s motion to stay a case filed by the CFPB. The defendant argued that judicial economy—the preservation of the court’s time and resources—favored the stay because the defendant’s pending motion to dismiss is premised on the same constitutional issue addressing the CFPB’s funding structure now before the Supreme Court (see continuing InfoBytes coverage here and here). In opposition, the CFPB argued that the Supreme Court may take months to issue a ruling, the public interest in enforcement of consumer protection laws, and the failure to show how an adverse ruling in the Supreme Court case would definitively result in dismissal of this case.
The District Court sided with the CFPB, stating that as of now, the CFPB “is a valid agency that is entitled to enforce the consumer financial laws.” With the stay denied, the court will now consider the defendant’s motion to dismiss.
OCC publishes bank guidance on shortening the standard settlement cycle following SEC final rule
On January 17, the OCC issued its OCC Bulletin 2024-3 which highlighted the actions banks should take to prepare for the upcoming changes to the standard settlement cycle. These new changes are designed to “reduce the credit, market, and liquidity risks” in securities transactions. According to the OCC Bulletin, these banking rules follow the SEC’s final rule that shortened the standard settlement cycle from the second business day after the trade (T+2) to the first business day after the trade (T+1). As previously covered in InfoBytes, the settlement cycle was last shortened from (T+3) days to (T+2) days in 2018. The OCC encouraged banks to prepare for the T+1 change since it will affect many banking activities; accordingly, the OCC listed many factors that a bank’s management should consider when identifying systems and changes to enhance.
This Bulletin replaces and rescinds OCC Bulletin 2017-22 and OCC Bulletin 2018-05, both related to the shortening of the settlement cycle. The rules will go into effect on May 28, 2024, and the OCC expects banks to be prepared by then.
NYDFS pens guidance for vetting key senior officials within financial institutions
On January 22, NYDFS issued an industry letter titled “Guidance on Assessment of the Character and Fitness of Directors, Senior Officers, and Managers” for banks and other financial institutions (Covered Institutions) to notify them of NYDFS’s expectations. The final guidance came after a review process conducted over the past year where twenty comments indicated the need for Covered Institutions to build “robust character and fitness” policies. NYDFS asked that these Covered Institutions develop and maintain a framework to vet senior officials’ character and fitness during onboarding and on a regular basis.
According to the guidance, each Covered Institution is expected to “define sensitive issues, warning signs, and other indicators” that would be cause for concern. The depth and nature of each Covered Institution’s assessment is tailored to each institution, and the guidance does not demand a defined period for the review, but NYDFS supplied a list of suggested questions for Covered Institutions to use as best practices for vetting key individuals. (These questions are not mandated, however.) NYDFS noted that Covered Institutions are expected to review materials related to the character and fitness assessment of key persons. The guidance’s appendix lists suggested questions, including whether the key person has reviewed and understood pertinent policies and whether the interviewee has ever been charged or convicted of a crime or has previously been sanctioned or censured by a securities regulator.