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Supreme Court hears oral argument in case challenging SEC ALJ use
On November 29, the Supreme Court heard oral argument in the SEC’s request to appeal the 5th Circuit’s decision in Securities and Exchange Commission v. Jarkesy. 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. At oral argument, Justice Kavanaugh stated in his questioning of Principal Deputy Solicitor General Brian Fletcher (representing the SEC) that given the severity of the potential outcome of cases, the SEC’s decision-making process fully being carried out in-house could be “problematic,” and that it “doesn’t seem like a neutral process.” Meanwhile, Fletcher mentioned that the boundaries and “outer edges” of the public rights doctrine can be “fuzzy.” Justices’ questions also centered around Atlas Roofing v. Occupational Safety and Health Review Commission—a Supreme Court case that held that “Congress does not violate the Seventh Amendment when it authorizes an agency to impose civil penalties in administrative proceedings to enforce a federal statute.”
DFPI opens comment period for the Digital Financial Assets Law
On November 20, DFPI announced it is seeking public comment before it begins its formal rulemaking process on its Digital Financial Assets Law (DFAL), which was enacted on October 13. As previously covered by InfoBytes, DFAL created a licensing requirement for businesses engaging in digital financial asset business activity and is effective on July 1, 2025.
For comments that recommend rules, DFPI encourages comments that “propose specific rule language and provide an estimate, with justification, of the potential economic impact on business and individuals that would be affected by the language.” Additionally, DFPI requests metrics, applicable information about economic impacts, or quantitative analysis to support comments. Among other topics, DFPI especially asks for comments related to (i) application fees and potential fee adjustments based on application complexity; (ii) surety bond or trust account factors; (iii) if capital minimums should vary by the type of activity requiring licensure; and (iv) its stablecoin approval process.
Comments must be received by January 12, 2024. On January 8, 2024, DFPI will host a Virtual Informal Listening Session with stakeholders to discuss feedback on this informal invitation for comments.
DFPI shares trends in consumer crypto complaints
DFPI recently published a report on consumer crypto-related complaints collected through its new online complaint portal. According to the third-quarter 2023 CSO report, some of the most common complaints include (i) consumers being scammed into transferring digital assets from a legitimate crypto account to a fraudulent platform; (ii) consumers losing access to funds after transferring to an unknown wallet; (iii) consumers who invest in sham crypto investments by sending US dollars to a scammer’s platform, wallet, or bank; (iv) consumers making additional investments to scammers after receiving the first and only return; (v) consumers with concerns regarding their account activity on legitimate crypto platforms; and (vi) consumers approached by scammers via text message and social media. DFPI shared tips on how consumers can protect themselves against scams as well, noting that “[i]f it seems too good to be true, it probably is.”
DFPI orders desist and refrain against investment firm
On November 16, under California Corporations Code § 25532, the California Division of Financial Protection and Innovation (DFPI) issued a desist and refrain order against a securities investment platform for allegedly making false representations and material omissions to investors.
The DFPI alleges the investment platform sold securities in California on its website and the platform referred to them as “certificates.” The platform claimed that the certificates paid investors returns ranging from 2.5 percent to five percent in addition to guaranteed monthly returns. To solicit investors, the platform allegedly engaged in a multi-level marketing (MLM) structure that would have investors influence others to send money. DFPI alleged that the certificates were not qualified under the California Corporate Securities Law. DFPI also alleged that the platform omitted material information to investors, which included (i) falsely representing that the platform was partnered with a particular forex broker; (ii) representing that it was a licensed bank (while omitting that the “license” was granted by a “fictitious regulator”); (iii) using the terms “bank” and “banking” while omitting that it was not authorized to engage in the business of banking in California; (iv) misrepresenting profits and risk of loss; and (v) failing to disclose that its securities were not qualified in California.
FDIC issues final rule on special assessment, moves to collect $16.3 billion
On November 16, the FDIC approved a final rule to implement a special assessment to recover Deposit Insurance Fund (DIF) losses from protecting uninsured depositors, following the failure of two banks earlier this year. According to the fact sheet, banks that benefited most from assistance provided under systemic risk determination will pay to recover the losses. The FDIC aims to collect $16.3 billion from 114 financial institutions at a quarterly rate of 3.36 basis points over eight quarterly assessment periods, and an annual rate of 13.4 basis points “an increase from the 12.5 basis point annual rate in the [May] proposal.”
The FDIC stated that if enough funds were collected to cover actual or estimated losses, it could cease collection efforts early. Alternatively, if losses surpass the collected amount within the initial eight-quarter collection period, the collection period can be extended for additional quarters. The FDIC also added that if actual losses exceed the collected amounts after the receiverships for both banks end, it can impose a one-time final shortfall assessment.
The special assessment does not apply to any financial institution with less than $5 billion in total assets. The final rule will be effective April 1, 2024, and the first collection for the special assessment is due June 28, 2024.
FinCEN, IRS issue alert on Covid-19 employee retention credit fraud schemes
On November 22, FinCEN and the IRS issued an alert to financial institutions regarding Covid-19 Employee Retention Credit (ERC)-related fraud schemes. Authorized by the CARES Act, the ERC is a tax credit aimed at incentivizing businesses to retain employees on payroll during the Covid-19 pandemic, through which fraud and scams have been carried out, FinCEN explained. The alert offers insights into typologies linked to ERC fraud and scams, emphasizes specific warning signs to aid financial institutions in detecting and reporting suspicious activities, and reinforces these institutions' obligations to report under the Bank Secrecy Act (BSA).
According to the alert, “[d]uring the 2023 tax season, the IRS noted various scammers appeared throughout the [U.S.] using the false pretense of being tax credit experts to convince businesses to file for the ERC.” Third-party ERC promoters misled taxpayers about eligibility, aiming to profit from filing ERC claims without verifying qualifications, FinCEN added. As a result, the alert mentioned that victims risk claim denial or repayment, while scammers profit regardless of the claim's outcome, involving both willing and unaware businesses in these schemes. FinCEN added that businesses must meet specific ERC requirements, and those who received PPP loans cannot use the same wages counted in the PPP loan for the ERC application. Despite this, some may file amended tax returns misrepresenting their eligibility for the ERC by falsifying staff wages or claiming their operations were partially or fully suspended during the pandemic. FinCEN listed “red flags” indicative of ERC fraud that financial institutions should be cognizant of, including, among others, (i) a business account that receives multiple ERC check deposits over several days; (ii) small business accounts that receive ERC check deposits disproportionate to their size, employee count, and transaction volume; and (iii) a new account for an established business that only receives ERC deposits, suggesting possible identity theft using the business as a front for fraudulent claims. The alert also reminds financial institutions of their obligation to file suspicious activity reports and to keep a copy of the reports for five years from the date of the filing.
VA asks all mortgage servicers to pause all VA foreclosures, extends the Covid-19 Refund Modification program
On November 17, the U.S. Department of Veterans Affairs (VA) asked all mortgage servicers to pause any foreclosure proceedings of VA-guaranteed loans, as well as extended its Covid-19 Refund Modification program through May 2024. The VA acknowledges that the veteran community is struggling to make mortgage payments, despite VA-backed mortgages having some of the lowest foreclosure rates in the U.S. The VA’s extension of its Covid-19 Refund Modification program allows more veterans to get a zero-interest, deferred-payment loan to maintain affordable monthly payments. The VA wishes to delay any foreclosure proceedings so that it may continue to assist veterans before it launches its VA Servicing Purchase program, which will allow the VA to purchase defaulted VA loans, modify them, and create a direct loan so that veterans will have a chance at keeping their homes.
DOJ seizes $9 million in crypto from criminal scammers
On November 21, the DOJ seized nearly $9 million in stablecoins from cryptocurrency scammers after the criminals exploited over 70 victims. The DOJ seized stablecoins, a certain crypto asset pegged to a central bank’s currency, tied to the U.S. dollar. The scammers employed a long-con technique called “pig butchering” which is a tactic to build and exploit a victim’s trust over time by creating fake romantic enticements meant to swindle victims into handing over money. The criminals targeted and convinced victims to “make cryptocurrency deposits by fraudulently representing that the victims were making investments with trusted firms and cryptocurrency exchanges.”
The DOJ was able to trace the stolen funds based on the funds’ cryptocurrency addresses as part of a money laundering technique known as “chain hopping… used to ‘layer’ the proceeds of criminal activity into new cryptocurrency ecosystems, all to obfuscate the… ownership of those proceeds.” The DOJ worked with the U.S. Secret Service to trace the victim’s deposits, and it was originally alerted from victim reports made on the FBI’s Internet Crime Complaint Center and the FTC’s Consumer Sentinel Network.
FTC approves measures for compulsory process use for AI-related products and services
On November 21, the FTC approved an omnibus resolution in a 3-0 vote, allowing the use of compulsory processes in nonpublic inquiries involving products and services produced or claimed to be produced by artificial intelligence (AI). This resolution aims to streamline the FTC staff's issuance of civil investigative demands (CIDs), in AI-related investigations while maintaining the Commission's authority to decide when CIDs are necessary. This resolution remains valid for 10 years.
FHFA reports no internal control weaknesses FY 2023 performance report
On November 15, FHFA released its annual performance report, titled “FHFA FY 2023 Performance and Accountability Report” to detail how it regulated the FHLBank system, as well as Fannie Mae and Freddie Mac, during the past fiscal year. The report refers to its FY 2022-2026 Strategic Plan with the goals of securing the safety of regulated entities, fostering equitable housing finance markets, and stewarding FHFA’s infrastructure. For FY 2023, FHFA identified 35 performance targets to help guide it toward achieving its strategic goals. Of the 35 targets, the FHFA met 31 of them––an 89 percent success rate. Table 2 from page 15 of the report displays the goals and ones that have not been met, including (i) “Improve Time-to-Hire” within 80 days; and (ii) “Develop FHFA Information Technology Strategic Plan” by the time the report had been published.
Looking forward, FHFA wishes to implement an “Enterprise Fair Lending Rating System to annually assess each Enterprise’s compliance with fair lending and fair housing standards.” For fintech initiatives, FHFA will publish a summary on Velocity TechSprint, a problem-solving event with “mortgage industry leaders and fintech entrepreneurs to address mortgage market issues.”