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  • FDIC issues CDO against five crypto companies

    On August 19, the FDIC issued letters (see here, here, here, here, and here) to five companies demanding that they cease and desist from making crypto-related false and misleading statements regarding their FDIC deposit insurance status and take immediate corrective action to address these false statements. The FDIC noted that “each of these companies made false representations—including on their websites and social media accounts—stating or suggesting that certain crypto-related products are FDIC-insured or that stocks held in brokerage accounts are FDIC-insured.” Specifically, the FDIC noted that “a company offering a so-called cryptocurrency also registered a domain name that suggests affiliation with or endorsement by the FDIC,” calling such representations “false and misleading.” The FDIC said that the companies’ actions violated the FDI Act, which “prohibits any person from representing or implying that an uninsured product is FDIC–insured or from knowingly misrepresenting the extent and manner of deposit insurance,” and “further prohibits companies from implying that their products are FDIC–insured by using ‘FDIC’ in the company’s name, advertisements, or other documents.” The FDI Act authorizes the FDIC to enforce this prohibition against any person. The FDIC demanded that the companies take corrective actions by removing the misrepresentations or false statements and providing written confirmation to the FDIC that they have fully complied with the removal request.

    Bank Regulatory Federal Issues Digital Assets Cryptocurrency FDI Act FDIC Deposit Insurance

  • SEC files charges against investment scheme targeting seniors

    Securities

    On August 17, the SEC filed a complaint against an consulting company and its owner (collectively, “defendants”) in the U.S. District Court for the District of New Jersey for allegedly making materially false and misleading statements and omitting material facts regarding a fraudulent investment scheme. According to the SEC, between February 2017 to May 2022, the owner offered and sold securities in the form of promissory notes issued by the company to at least eleven investors, ages 64 to 82, raising at least $1.2 million while promising interest rates ranging from 50 percent to 175 percent. The owner allegedly “falsely represented to at least certain of the investors that, among other things, the money they invested in the [company] would be used to make loans to other businesses, which would generate the profits used to repay the [company].” As part of the scheme, the owner is alleged to have provided conflicting explanations of the company’s business and convinced investors “to roll-over their notes into new notes combining unpaid amounts with new investments.” The SEC further alleged that instead the owner withdrew over $486,000 from the company’s bank account and used it to fund his lifestyle and pay for personal expenses. The SEC’s complaint alleges violations of the antifraud provisions of the federal securities laws, specifically, the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks a permanent injunction against the defendants, disgorgement of ill-gotten gains, plus interest, penalties, bars, and other equitable relief.

    Securities Enforcement SEC Elder Financial Exploitation Securities Act Securities Exchange Act

  • District Court rules email can be a signed, written instrument for purposes of amending a partnership agreement

    Courts

    On August 15, the U.S. District Court for the Southern District of New York granted defendants’ motion for summary judgment, ruling in part that an email could constitute a “written instrument” for purposes of amending a partnership agreement. The plaintiff is one of 33 limited partners in a funding entity formed to pool investments into a fund for litigation-related financing ventures. The plaintiff sued the defendants (the partnership’s general partner and asset manager) asserting four causes of action tied to their alleged failure to dissolve the partnership by a deadline established in the partnership agreement. Cross-motions for summary judgment were filed by the parties, in which the court reviewed plaintiff’s claims as to whether there was a valid amendment extending the term of the partnership, whether the limited partners received notice of this proposed amendment, and whether the limited partners approved the amendment or failed to raise objections within 25 days.

    While the defendants argued that an August 2019 email constitutes a valid amendment of the partnership term, the plaintiff countered that the email “is not a written instrument, is not signed, and does not specify the duration of the extension.” The court first reviewed the text of the partnership agreement, which stated that it “may be amended ‘only by a written instrument signed by the General Partner.’” While the agreement does not define what constitutes a “written instrument,” the court wrote, it “provides that ‘[a]ll notices, requests and other communications to any party hereunder shall be in writing (including electronic means or similar writing).’” As such, the court concluded that an email could constitute a “written instrument” for the purposes of amending the agreement.

    With respect to whether the email was “signed,” the court discussed the federal Electronic Signatures in Global and National Commerce Act (E-SIGN Act), which provides that “a signature . . . may not be denied legal effect . . . solely because it is in electronic form,” and pointed to several court decisions that similarly determined that the “law demands only demonstration of a person’s intent to authenticate a document as her own in order for the document to be signed [and that] [m]any symbols may demonstrate this intent.” In the present action, the court determined that “the e-mail speaks in the plural using ‘we’ and refers to the senders in third person as ‘your General Partners.’” Moreover, the court held that the plaintiff’s “unsubstantiated assertion” that the email is unsigned “is insufficient to create a genuine issue of fact with respect to [managing members’] intent to sign the e-mail.” The court also rejected the plaintiff’s argument that that the email is not a valid amendment because it did not specify the duration of the extension, pointing to language in the email stating that the fund will be extended until 2021. The court further disagreed with the plaintiff’s assertion that the amendment was not approved, noting that unrebutted statements provided by one of the managing members demonstrated that none of the limited partners aside from the plaintiff objected to the proposed extension.

    Courts E-SIGN Act E-Signature

  • D.C. reaches $2.54 million settlement with online delivery company

    Courts

    On August 17, the Superior Court of the District of Columbia issued a consent order and judgment against an online delivery company resolving claims that it charged consumers millions of dollars in deceptive service fees. According to a press release issued by the D.C. AG, from 2016 until 2018, the company allegedly misled consumers into believing that service fees charged on their orders were tips that went to delivery workers. Instead, these fees went to the company to subsidize operating expenses. Without admitting any wrongdoing, the company agreed to pay $1.8 million to the district to go towards restitution and cover litigation costs. The company also agreed it will not seek refunds of $739,057 in previously disputed sales tax payments and will collect and remit sales tax on the total amount of the sales price it charges consumers going forward. Additionally, the company will cease making any misrepresentations about the nature of fees on consumer orders.

    Courts State Issues Consumer Finance Fees District of Columbia Settlement

  • OCC requests comments on various Volcker Rule requirements

    On August 23, the OCC published in the Federal Register a request to renew its information collection titled “Reporting, Recordkeeping, and Disclosure Requirements Associated with Proprietary Trading and Certain Interests in and Relationships with Covered Funds.” Section 13 of the Bank Holding Company Act “generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exceptions . . . that allow certain types of permissible trading and covered fund activities.” As previously covered by InfoBytes, in 2019, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule amending the Volcker Rule to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds.

    The OCC is seeking comments specifically related to the reporting, disclosure, documentation and information collection requirements under the rule, including: (i) whether the information collections are necessary for the proper function of the agency and if the information has practical utility; (ii) whether the OCC’s estimates of the burden of the information collections are accurate and the methodology and assumptions used are valid; (iii) measures to enhance the quality, utility, and clarity of the information to be collected; (iv) ways to minimize the burden of information collections on respondents, such as using automated collection techniques or other forms of information technology; and (v) capital or start-up cost estimates, as well as costs of operation, maintenance, and purchase of services to provide information. Comments are due October 24.

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance Volcker Rule Federal Register Bank Holding Company Act

  • CFPB reports on credit card interest rates

    Federal Issues

    On August 12, the CFPB released a blog post analyzing factors affecting high credit card interest rates. According to the Bureau, over 175 million Americans have at least one credit card and nearly half of active credit card accounts carry a balance. The Bureau noted that reforms in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) “advanced competition and saved consumers billions of dollars by restricting harmful back-end or hidden pricing practices,” however, “after the market adjusted to these changes, credit card interest rates have increased despite falling charge-off rates, a stable share of subprime cardholders, and a historically low prime rate.” The Bureau further noted that credit card interest rates increased following the Great Recession, even though several industry indicators suggested the risk of credit card lending has fallen to an all-time low. Regarding subprime accounts, since 2015, the share of credit card holders with subprime scores has remained stable, representing less than one-fifth of total accounts. Therefore, high rates persist even though presumably riskier subprime loans have not increased. Regarding prime accounts, the Bureau noted that “[c]ompared to other lending products, credit card pricing appears to be less responsive to macroeconomic trends like changes in the cost of funds – a measure of how much banks spend to acquire money to lend to consumers – as represented by the prime rate.” As for credit card profitability, the Bureau suggested that the apparent mismatch between credit card interest rates and the risk and cost of lending may explain part of the market’s profits. The Bureau further explained that in 2021, large credit card banks reported an annualized return on assets of near seven percent, which was the highest level since at least 2000, and “[w]hile credit card portfolios have higher rates of defaults than other consumer lending products, it is unclear whether these factors fully account for revenue from high interest rates.” The Bureau also noted that because six credit card issuers account for more than two-thirds of total balances every year since 2005, the CFPB plans to assess whether this is the result of “trends, like increasing rewards and high switching costs, or the result of anti-competitive practices.”

    Federal Issues CFPB Consumer Finance Credit Cards Interest CARD Act

  • CFPB announces plans to modernize credit card data collection

    Federal Issues

    On August 19, the CFPB published a blog post announcing plans to update how credit card data is collected. Current methods for collecting and publishing credit card data make it challenging for consumers to shop for credit cards or compare interest rates, the Bureau said, explaining for example that “card issuers do not have to disclose realistic rates based on someone’s creditworthiness and instead report the midpoints of broad ranges that are often meaningless to people trying to compare cards.” The Bureau said it hopes to address the lack of transparency in credit card terms and conditions to spur competition and to give consumers power to choose the best credit card for their needs. 

    The Bureau explained that twice a year, at least 150 issuers send the agency information on their largest credit card plans, including data on interest rates and fees through the Terms of Credit Card Plans (TCCP) Survey. To update this process, the Bureau announced it is considering modernizing the survey to make it a more useful resource on credit card price and availability for consumers. Potential changes include: (i) collecting median APR rates by credit score tiers; (ii) gathering information on credit cards available to specific communities or groups to help expand access; (iii) requiring the top 25 credit card issuers to submit data on each of their general purpose credit cards (currently these issuers only submit information on their product with the largest number of accounts); and (iv) enabling a broader range of institutions to volunteer to participate in the survey. Comments on the proposed changes, which were published in the Federal Register, are due October 17.

    Federal Issues CFPB Credit Cards Consumer Finance Federal Register

  • CFTC commissioner seeks increased digital assets oversight

    Federal Issues

    On August 19, CFTC Commissioner Kristin N. Johnson delivered remarks discussing digital asset policy, innovation, legislation, and regulation before a roundtable at the CFTC. In her prepared remarks, Johnson highlighted the “increasingly diverse crypto-investing community,” including historically underserved groups who are drawn to digital asset markets by “promises of financial inclusion” and opportunities to “increase income, wealth, and resources – a promise that, if realized, may enable them to transition from fragile financial circumstances to achieving the American dream.” Johnson noted, however, that instability in these markets have led the CFTC to examine closely “the specific implications of crypto-investing for diverse communities and the potential benefits of well-tailored, carefully crafted regulation.” Johnson referenced Treasury Secretary Janet Yellen’s April 7, 2022 remarks at American University’s Kogod School of Business Center for Innovation, which said that while regulations should be “tech-neutral,” they should also ensure that innovation does not cause disparate harm or exacerbate inequities.

    Johnson also discussed President Biden’s March 9 Executive Order (covered by InfoBytes here), Ensuring Responsible Development of Digital Assets, which stressed the need for “steps to reduce the risks that digital assets could pose to consumers, investors, and business protections” and mitigate “illicit finance and national security risks posed by misuse of digital assets,” including money laundering, cybercrime and ransomware, terrorism and proliferation financing, and sanctions evasion. While the E.O. “marked an important step towards greater cooperation and coordination among cabinet-level agencies, market regulators and prudential regulators,” Johnson called for an “increase [in] investor education and outreach to empower consumers and contemporaneously combat illicit activity and safeguard the integrity and stability of our financial markets.”

    Johnson also discussed pending legislation intended “to better protect consumers and enhance market structure and market integrity in digital assets and cryptocurrency markets,” such as the Digital Commodities Consumer Protection Act of 2022 (DCCPA), which “seeks to give the CFTC jurisdiction over digital asset spot market transactions by expanding the definition of ‘commodity’ in the CEA to include ‘digital commodities.’” She further explained that the DCCPA, among other things, “would require the CFTC to conduct a study on the impact of digital assets on diverse communities.” Johnson also mentioned the Responsible Financial Innovation Act, calling it “a comprehensive reform measure that introduces the concept of ‘ancillary assets’ as a pathway for clearly defining oversight of digital assets and cryptocurrencies as securities or commodities.” Johnson emphasized that market participants have expressed heightened cybersecurity concerns regarding attacks on cryptocurrency exchanges or trading platforms, and stressed that “[i]t is vital for the U.S. to bolster its role as a leader in the global financial system by developing a strong regulatory framework for digital assets[.]”

    Federal Issues Digital Assets CFTC Cryptocurrency Fintech

  • OFAC issues new Russia-related general licenses

    Financial Crimes

    On August 19, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued Russia-related General License (GL) 38A and GL 50. GL 38A authorizes transactions related to pension payments to U.S. persons or non-U.S. persons not located in the Russian Federation that are normally prohibited by Executive Order (E.O.) 14024 “provided that the only involvement of blocked persons is the processing of funds by financial institutions blocked pursuant to E.O. 14024.” GL 50 authorizes “the closing of an account of an individual, wherever located, who is not a blocked person” held at financial institutions blocked pursuant to E.O. 14024. GL 50 also permits “the unblocking and lump sum transfer of all remaining funds and other assets in the account to the account holder, including to an account of the account holder held at a non-blocked financial institution.”

    Financial Crimes Department of Treasury OFAC OFAC Sanctions OFAC Designations Russia Of Interest to Non-US Persons

  • States sue installment lender for hidden add-on products

    State Issues

    On August 16, a multistate lawsuit led by the Pennsylvania attorney general was filed against a subprime installment lender for allegedly charging consumers for hidden add-on products without their consent. According to the Pennsylvania AG’s press release, consumers believed they had entered into agreements to borrow and repay, over time, a fixed loan amount when allegedly the lender “added hundreds to thousands of dollars to the total amount a consumer owed.” Among other things, the complaint claimed the lender’s alleged “aggressive, high-pressure sales tactics” were “dictated by a profit-driven model,” and that its loans and aggressive sales tactics targeted the most vulnerable borrowers (often subprime and deep subprime borrowers that already carry significant credit card, installment loan, and/or student loan debt) by offering them “small dollar personal loans with high interest costs.” Additionally, the complaint contended that the lender’s corporate policies and practices resulted in employees charging consumers for add-on products they did not know about and did not consent to buy, and that employees were encouraged to perpetrate the unlawful conduct by being rewarded for maximizing add-on charges. The complaint seeks restitution, repayment of unlawfully obtained profits, civil penalties, rescission or reformation of all contracts or loan agreements between the lender and affected consumers, and injunctive relief.

    State Issues State Attorney General Enforcement Consumer Finance Predatory Lending Add-On Products Installment Loans

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