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SEC publishes amendments on disclosures failures
On August 25, the SEC announced proposed amendments to its rules requiring registrants to disclose information reflecting the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance. According to the final rule, registrants would be required to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. In regard to the measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income, and a financial performance measure chosen by the registrant. Using the information presented in the table, registrants will be required to disclose the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. Specifically, large companies would be required to disclose details on executive compensation for the past five fiscal years, and small companies would be required to report the past three fiscal years. Additionally, small companies would be exempt from disclosing details on pensions and peer groups. They also are exempt from new language requiring companies to list the three to seven most important measures linking executive compensation to company performance. Emerging growth companies, registered investment companies, and foreign private issuers are not required to provide the disclosure. The final rules are effective 30 days after publication in the Federal Register, and registrants must comply with the new disclosure requirements in proxy and information statements that are required for fiscal years ending on or after December 16. The same day, the SEC published a fact sheet clarifying, among other things, the final rules implementing the pay versus performance requirement as required by Congress in the Dodd-Frank Act.
OFAC issues updated Iran general license and related FAQ
On August 25, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued Iran General License (GL) M-2, “Authorizing the Exportation of Certain Graduate Level Educational Services and Software,” which authorizes accredited graduate and undergraduate degree-granting academic institutions in the U.S. to engage with Iranian students in online educational services and exploration of software through September 1, 2023, provided certain criteria are met. OFAC also published an updated FAQ related to GL M-2. Effective August 25, GL M-2 supersedes and replaces GL M-1.
Treasury announces MOU with Israel
On August 25, the U.S. Treasury Department announced a bilateral Memorandum of Understanding (MOU) on Cybersecurity Cooperation with the Ministry of Finance of the State of Israel (MOF). According to Treasury, the MOU “builds on U.S. Deputy Secretary of the Treasury Wally Adeyemo’s visit to Israel in November 2021 that established a bilateral partnership to protect critical infrastructure in the financial sector and recognized the importance of deepening cooperation on cybersecurity to protect the integrity of the international financial system.” While noting that Treasury has a “long-standing cybersecurity information sharing relationship” with MOF, the announcement stated that the MOU “formalizes and strengthens the close partnership between both agencies.” Specifically, the MOU enhanced collaboration in: (i) information sharing relating to the financial sector including cybersecurity information on incidents and threats; (ii) staff training and study visits to promote cooperation in the area of cybersecurity; and (iii) competency-building activities such as the conduct of cross-border cybersecurity exercises.
D.C. Department of Insurance, Securities and Banking says certain Bitcoin activity subject to money transmission laws
Recently, the District of Columbia’s Department of Insurance, Securities and Banking (DISB) issued a bulletin informing industry participants engaging in or planning to engage in money transmission involving Bitcoin or other virtual currency “used as a medium of exchange, method of payment or store of value in the District” that such transactions require a money transmitter license. Specifically, the bulletin noted that DISB considers Bitcoin to be money for money transmission purposes. Relying on United States v. Larry Dean Harmon, DISB stated that while “money transmission is vaguely defined in DC Code,” the court’s decision “relied on the common use of the term “money” to mean a “medium of exchange, method of payment or store of value,” and that therefore Bitcoin functions like money. The bulletin also noted that the court found that while the D.C. Money Transmitters Act of 2000 specifically defined certain banking and financial terms, it did not define “money,” thereby reasoning “that the goal of the MTA is to regulate all kinds of transfers of funds, whether fiat currency, virtual currency or cryptocurrencies.”
Additionally, DISB noted that “engaging in the business of ‘money transmission’” includes “transactions where entities receive for transmission, store, and/or take custody, of Bitcoin and other virtual currencies from consumers via kiosks (aka BTMs), mobile applications and/or online transactions.” However, transactions where entities propose to sell and buy Bitcoin and other virtual currencies from consumers in exchange for cash payments via kiosks and/or online transactions are not considered to be money transmission. Entities that plan to engage in covered activities are subject to money transmission licensing requirements, DISB stated, explaining that whether an entity is required to obtain a money transmitter license depends on the individual facts and circumstances of each applicant, which include but are not limited to an applicant’s proposed business plan and flow of funds, as well as an applicant’s business model.
Connecticut fines collection agency $100,000 and revokes license
On August 18, the Connecticut Banking Commissioner revoked a consumer collection agency’s license after finding that it failed to provide requested information during an examination. Following an examination in May, the commissioner issued a “Notice of Automatic Suspension, Notice of Intent to Revoke Consumer Collection Agency License, Notice of Intent to Issue Order to Cease and Desist, Notice of Intent to Impose Civil Penalty and Notice of Right to Hearing” to the collection agency warning that if it failed to request a hearing within 14 days “the allegations would be deemed admitted.” According to the order, due to the collection agency’s failure to respond to the notices, the commissioner was “unable to determine that the financial responsibility, character, reputation, integrity and general fitness of Respondent are such to warrant belief that the business will be operated soundly and efficiently.” The collection agency also allegedly failed to maintain a surety bond that ran in accordance with its consumer collection agency license. The commissioner revoked the collection agency’s license to operate in the state, ordered it to cease and desist from violating Section 36a-17(e) of the 2022 Supplement to the General Statutes which requires it to make its records available, and imposed a $100,000 civil penalty.
California issues remote work guidance to CFL licensees
On August 26, the California governor signed AB 2001, which amends the California Financing Law (CFL) regarding remote work. According to the bill, a licensee would be authorized “under the CFL to designate an employee, when acting within the scope of employment, to perform work on the licensee’s behalf at a remote location, as defined, if the licensee takes certain actions, including that the licensee prohibits a consumer’s personal information from being physically stored at a remote location except for storage on an encrypted device or encrypted media.” Currently, the CFL provides that a licensee cannot engage in loan business or administer a PACE program in any office, room, or place of business that any other business is solicited or engaged in, or in association or conjunction therewith, under certain circumstances. Additionally, “a finance lender, broker, mortgage loan originator, or program administrator licensee shall not transact the business licensed or make any loan or administer any PACE program provided for by this division under any other name or at any other place of business than that named in the license except pursuant to a currently effective written order of the commissioner authorizing the other name or other place of business.”
9th Circuit affirms $20.8 million disgorgement award
On August 24, the U.S. Court of Appeals for the Ninth Circuit affirmed a $20.8 million disgorgement award and agreed with a district court’s decision to hold the defendants jointly and severally liable. The defendants appealed the district court’s 2021 final judgment of disgorgement, which ordered them to disgorge more than $20.8 million in an action concerning money that was collected from investors for a cancer treatment center that was never built. As previously covered by InfoBytes, the district court’s order followed a 2020 U.S. Supreme Court ruling (covered by InfoBytes here), in which the high court examined whether the SEC’s statutory authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. The Supreme Court ultimately held that the SEC may continue to collect disgorgement in civil proceedings in federal court as long as the award does not exceed a wrongdoer’s net profits, and that such awards for victims of the wrongdoing are equitable relief permissible under § 78u(d)(5). The Supreme Court vacated the original $26.7 million judgment and remanded to the lower court to examine the disgorgement amount in light of its opinion. Of the nearly $27 million raised, the SEC alleged the defendants misappropriated approximately $20 million of the funds through payments to overseas marketing companies and to salaries. To calculate the final disgorgement award, the court subtracted what it determined were “legitimate expenses,” including $2.2 million in administrative expenses and $3.1 million in business development expenses, from the nearly $27 million raised.
On appeal, the 9th Circuit reviewed the proper method of calculating disgorgement as an equitable remedy in an SEC enforcement action and found “no error with the district court’s factual findings as to the illegitimate expenses or with the district court’s disgorgement award.” In so finding, the 9th Circuit explicitly rejected appellants argument that disgorgement was improper because the venture resulted in “no revenues and no profit,” finding that such a result “would not produce an equitable remedy.” The appellate court also determined that because the common law “permit[s] liability for partners engaged in concerted wrongdoing,” the district court did not err in holding both defendants jointly and severally liable where there was evidence the appellant in question “played an integral role” in the fraudulent scheme.
FDIC releases July enforcement actions
On August 26, the FDIC released a list of administrative enforcement actions taken against banks and individuals in July. During the month, the FDIC issued seven orders consisting of “two orders of prohibition, two orders to pay civil money penalty, two section 19 orders, and one order terminating consent order.” Among the actions is an order to pay a civil money penalty imposed against an Iowa-based bank related to alleged violations of the Flood Disaster Protection Act (FDPA) and the National Flood Insurance Act of 1968. Among other things, the FDIC claimed that the bank: (i) “made, increased, extended, or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance”; (ii) “made, increased, extended or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without providing timely notice to the borrower as to whether flood insurance was available for the collateral”; and (iii) “failed to comply with proper procedures for force-placing flood insurance in instances where the collateral was not covered by flood insurance at some time during the term of the loan.” The order requires the payment of a $2,500 civil money penalty. The actions also include a civil money penalty imposed against a Texas-based bank related to six alleged violations of the FDPA for “failure to obtain flood insurance or obtain an adequate amount of insurance coverage, at or before loan origination, for all structures in a flood zone, including multiple structures,” among other alleged violations. The order requires the payment of a $6,000 civil money penalty.
FDIC examines effects of insurance premiums on bank lending
Recently, the FDIC’s Center for Financial Research released a working paper examining the procyclical effects of FDIC insurance premiums on bank lending. Using confidential FDIC data from the 2008-2009 financial crisis, the FDIC analyzed procyclical deposit insurance premium schedules and bank lending. Among other things, the study found that the lending growth rate decreased 1.6 percent in the quarter after a seven basis-point increase in deposit insurance premiums. The study also found that this effect was exaggerated for banks with less than $100 million in assets who experienced a 2 percent decrease in lending growth rates. According to the FDIC, the working paper “suggest[ed] that deposit insurance premiums, which have been relatively overlooked in the procyclicality discussion, can be a significant driver of bank credit procyclicality.” The FDIC also noted that “changes in deposit insurance premiums can influence the real economy through the bank lending channel,” and suggested that “there may be costs to raising deposit insurance premiums that should be considered, particularly during a crisis.” The working paper highlighted that throughout its long history, “the FDIC has adapted its approach to setting deposit insurance premiums in response to an evolving banking system” and has recently implemented changes that address some procyclicality concerns. These changes include the use of scorecards for large banks to determine assessment rates derived from data showing how each institution fared during the financial crisis, updating of the pricing structure for established small banks, and the indefinite suspension of dividends under the Deposit Insurance Fund management plan “to increase the probability that the reserve ratio will reach a level sufficient to withstand a future crisis.” The working paper concludes that “[t]hese efforts will likely reduce the risk of major assessment-rate increases during future economic downturns.”
Federal government directs agencies to eliminate medical debt as an indicator of creditworthiness
On August 25, the Director of the Office of Management and Budget (OMB) issued a memo directing “agencies with direct loan and loan guarantee programs that focus on consumer loans or small and medium businesses where a consumer’s credit history is a factor, to whenever possible and consistent with the law take actions to reduce the impact of medical debt in the underwriting of Federal credit programs.” Although OMB recognized that some agencies such as the Department Veterans Affairs and the CFPB have already taken some steps to lessen medical debt burdens, it found that these prior efforts have been insufficient. Instead, the memo stresses that “[t]he collective efforts of the Federal Government, working with the private sector” are necessary to “remedy the impact of the issue of medical debt as an indicator for creditworthiness.” The memo outlines guidance for agencies to develop a plan to eliminate medical debt as a factor for underwriting in credit programs. These steps include (i) “[i]dentifying any statutory, regulatory, or administrative changes that would be required to modify criteria and consideration factors, exclude medical debt, or otherwise lessen the impact of medical debt consideration or underwriting in Federal lending programs”; (ii) conducting an “[i]nitial qualitative assessment and cost-benefit analysis of any statutory or regulatory changes” or any anticipated changes; (iii) conducting an “[a]ssessment of whether model updates are required for FCRA cost estimation, especially if the exclusion of medical debt would explicitly or implicitly affect particular underwriting requirements such as debt-to-income ratios, etc.”; and (iv) incorporating stakeholder input and assessing known risks that may impact an agency’s goal of achieving its plan.