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FINRA accepts placement agent’s AWC
On September 16, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) from a member firm, settling alleged rule violations made during its participation as a placement agent in a contingency offering.
The firm allegedly failed to promptly return customer funds when the minimum contingency for the offering was lowered — a material change in the offering’s terms that required prompt return of the funds — and therefore violated Section 10(b) of the Securities Exchange Act, Rule 10b-9 and FINRA Rule 2010. Additionally, FINRA alleged the firm’s supervisory system and written supervisory procedures “were not reasonably designed to achieve compliance” with the rules.
To resolve FINRA’s allegations, the firm consented to, among other things, a censure, a $20,000 fine, and remediating the identified issues within 60 days.
CFPB to ban servicer from federal student loan servicing and pay $120M
On November 12, the CFPB filed a proposed stipulated final judgment and order against a student loan servicer (the defendant) for alleged violations of the CFPA, the FCRA and the FDCPA. As previously covered by InfoBytes, the CFPB filed a complaint against the defendant in 2017 alleging that it “systematically and illegally” created “obstacles to repayment” and “cheated” many borrowers out of their rights to lower repayments, which the Bureau alleged had borrowers paying significantly more for their student loans.
According to the proposed stipulated final judgment and order, the defendants would be required to pay $100 million in consumer redress and a $20 million civil money penalty. If entered by the court, the proposed order would also permanently ban the defendants from servicing federal Direct Loans, with limited exceptions, and would restrain the company permanently from directly or indirectly servicing most loans under the Federal Family Education Loan Program. The stipulated order also set forth extensive and detailed requirements for servicing the existing book of all federal and private student loans, including, among other things, payment allocation and payment crediting procedures, acceptance of borrower instructions for crediting and processing payments, prohibition of certain fees (such as fees for forbearance or to process payments), required information on billing statements, required written and oral communications, and mandatory training of “repayment specialists” for borrowers.
DOJ, HUD resolve redlining claims with New Jersey-based bank
On September 17, the DOJ and HUD announced a settlement with a New Jersey-based bank to resolve “redlining” lending discrimination allegations. The DOJ’s complaint claimed that from 2018 through at least 2022, the bank failed to provide mortgage lending services to predominantly Black, Hispanic, and Asian neighborhoods in certain counties, and discouraged people seeking credit in those communities from obtaining home loans. The DOJ alleged the bank disproportionately concentrated its outreach to, and advertising efforts and presence in, majority-white neighborhoods.
To resolve the DOJ’s claims, the bank entered into a proposed consent order with HUD. Under the terms of the order, the bank is required to: (i) invest at least $14 million in a loan subsidy fund to enhance access to home mortgage, home improvement, and refinance loans for residents of majority-Black, Hispanic, and Asian neighborhoods in Middlesex, Monmouth, and Ocean Counties; (ii) spend $400,000 on community partnerships for credit, financial education, homeownership, and foreclosure prevention services; (iii) spend $700,000 on advertising, outreach, financial education, and credit counseling in these neighborhoods; (iv) open a loan production office, maintain a full-service branch in these areas, and assign at least one mortgage loan officer to each location. Finally, the bank will be required to conduct a community credit needs assessment, evaluate its fair lending compliance systems, conduct staff training on fair lending, and hire a director of community lending to oversee mortgage lending development in communities of color. The DOJ acknowledged the bank's cooperation in resolving the issues.
SEC alleges whistleblower protection violations in customer gag clauses
On September 4, the SEC announced it had settled charges against three affiliated registrants (the respondents) accused of violating the whistleblower protection rule. According to the SEC order, from May 2021 through February 2024, the respondents required collectively eleven retail clients to sign confidentiality agreements that hindered them from reporting potential securities law violations to the SEC. Specifically, some agreements included provisions that restricted clients from disclosing information unless an inquiry was initiated by a regulator and required clients to represent that they had not reported and would not report the underlying dispute to any securities regulator.
The SEC found that respondents willfully violated Rule 21F-17(a) under the Securities Exchange Act, which prohibits taking any action to impede an individual from communicating with the SEC about possible securities law violations. The respondents agreed to the settlement without admitting or denying the findings.
Respondents are ordered to cease and desist from future violations of the whistleblower protection rule and are required to pay civil monetary penalties: the Commission-registered investment adviser will pay $160,000, the Commission-registered broker-dealer will pay $70,000, and the state-registered investment adviser will pay $10,000. The SEC noted that it considered the respondents’ cooperation and remedial efforts in determining the penalties and that penalties were apportioned based on the relative size and financial condition of the entities involved.
California attorney general settles with crypto-asset company
On September 4, California Attorney General (AG) Rob Bonta announced a settlement with a cryptocurrency trading platform for allegedly failing to comply with state cryptocurrency laws. According to the settlement, the company failed to allow customers to withdraw cryptocurrency from accounts and failed to disclose certain aspects of its trading and order handling procedures. Under the terms of the settlement, the company has agreed, among other things, to (i) permit customers to withdraw their cryptocurrency assets to external wallets in accordance with applicable law; (ii) ensure the accuracy of written representations to customers about trading and order handling practices; and (iii) update its customer agreement to address potential delays in transaction settlements.
Additionally, the company has agreed to pay $3.9 million allocated to: (i) fees and costs incurred by the AG in connection with the investigation; (ii) fees and costs to be incurred in connection with monitoring and enforcing the settlement agreement; (iii) any litigation relating to monitoring and enforcing the settlement; and (iv) all potential claims to be released by the AG under the settlement.
Fed issues cease and desist against bank
On September 4, the Fed and the Texas Department of Banking published a cease and desist order alleging deficiencies identified in a Texas-based bank’s corporate governance, risk management and compliance with BSA/AML laws. Under the order, the bank’s board of directors will be required to submit a plan to strengthen oversight of compliance with BSA/AML requirements and Office of Foreign Assets Control (OFAC) regulations. The plan must include actions to maintain effective control, contain measures to track and escalate noncompliance, and ensure adequate resources and expertise.
The board must submit a corporate governance plan addressing the findings of an independent third-party report. The bank must also submit a revised BSA/AML compliance program, which should address third-party report findings, enhance internal controls, conduct comprehensive risk assessments, and ensure independent testing and effective training.
In addition, the bank must submit quarterly progress reports detailing actions taken to comply with the order. The bank’s board of directors consented to the order and waived any rights to challenge its terms.
CFTC fines bank $3M for recordkeeping failures and more
On August 14, the CFTC issued an order simultaneously filing and settling charges against a swap dealer (the respondent) for allegedly violating the Commodity Exchange Act and related regulations. The order stated the bank self-reported these violations based during an internal audit. Specifically, from December 2019 to the present, the respondent failed to maintain required records, used unapproved communication methods, and inadequately supervised its swap dealer activities. Furthermore, the respondent’s employees (including senior personnel) used personal text messages and other unapproved methods of communication for business purposes, and such communications were not preserved or monitored (as required by the CFTC). This failure to maintain records and supervise employees specifically led to violations of Sections 4s(f)(1)(C), 4s(g)(1) and (3), and 4s(h)(1)(B) of the Commodity Exchange Act, among others.
The offer of settlement, which the CFTC accepted, included the respondent admitting to the violations, agreeing to pay a civil monetary penalty of $3 million, and committing to cease and desist from further violations. Additionally, the respondent will conduct a review of its supervisory and compliance policies related to electronic communications and will implement changes to ensure future compliance.
Suit against FDIC argues the agency is “unconstitutional” and violates Jarkesy
Recently, the U.S. District Court for the District of Columbia received a complaint from an individual plaintiff suing the FDIC, its heads, board members and an administrative law judge (ALJ) for allegedly subjecting the plaintiff to an “endless and unlawful administrative process.” The lawsuit comes in the backdrop of a prior FDIC enforcement action in which plaintiff was named as a respondent and listed as an institution-affiliated party, despite the plaintiff claiming he was not a “director, shareholder, member, or employee” of the bank. Under this action, the FDIC required the plaintiff to pay $74,000 as part of a larger assessment of civil money penalties.
As covered previously by InfoBytes, the U.S. Supreme Court held in SEC v. Jarkesy that if an executive agency issues an enforcement action in-house (and not through a court) and involves civil money penalties, then the defendants would be entitled to a jury trial, and the case’s venue must be in a federal Article III court.
The plaintiff argued in this case that the FDIC’s enforcement action was unconstitutional because of the following: (i) the FDIC’s board is unconstitutional since the President cannot remove a majority of its board members except for good cause, violating the ruling in Seila Law LLC v. CFPB (covered by an Orrick Insight here); (ii) the FDIC’s ALJs are unconstitutionally shielded from removal due to their “double for-cause” removal protections; and (iii) the enforcement proceeding violated the Seventh Amendment by depriving the plaintiff of his right to a jury trial and his due process rights. Among other relief, the plaintiff prayed the court enjoin the FDIC from continuing proceedings against him.
FDIC releases seven enforcement actions for June and July 2024
On August 30, the FDIC released a list of seven administrative enforcement actions taken against banks and individuals in June and July. The public orders comprised six safety and soundness orders, two of which were consent orders or orders to cease and desist, and four of which were actions against institution-affiliated parties. A Vermont-based bank was subject to one modified notice of charges and a hearing before an administrative law judge. The charges in the June order alleged the bank engaged in unsafe and unsound practices and violated the Bank Secrecy Act.
CFPB granted default judgment against auto loan servicer
On August 28, the U.S. District Court for the Northern District of Georgia entered an order and opinion granting the CFPB a default judgment in a case against an auto loan servicer (the defendant).
The CFPB alleged the defendant engaged in several unfair and deceptive practices in violation of the CFPA, including wrongful activation of starter-interruption devices (SIDs), mishandling Guaranteed Asset Protection (GAP) premiums, double billing for collateral-protection insurance, misapplying consumer payments, and wrongful repossessions. The defendant filed for Chapter 7 bankruptcy not long after the CFPB filed its complaint, and the courts merged this case with other affiliated debtors. Although the defendant requested a stay pending its bankruptcy filing, the court found that the CFPB’s enforcement action fell under the “police power” exception from the automatic stay, allowing the case to proceed. The court also granted the CFPB’s motion for default judgment regarding liability, finding that the defendant’s practices “caused substantial injury to consumers, which was not reasonably avoidable.” The court agreed to issue injunctive relief to prevent future violations of the CFPA, which was requested by the CFPB.
The CFPB sought restitution for unearned GAP premiums, damages for wrongful SID activations and repossessions, and a civil monetary penalty. The court, however, found the CFPB’s damage estimates flawed and directed the CFPB to supplement its calculations with more expert evidence. On timing, the court directed the Bureau to provide additional evidence within 35 days to support its damages claims. The court granted the motion regarding liability and injunctive relief, and it will require additional information concerning damages.