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SEC charges broker-dealer with failure to file suspicious activity reports
On August 29, the SEC announced that it had brought charges against a Chicago-based broker-dealer. The SEC alleged that between August 2012 and September 2020 the broker-dealer failed to file over 400 hundred legally required suspicious financial transaction reports related to over-the-counter securities transactions executed in the broker-dealer’s alternative trading system (ATS). According to the SEC’s order, it was found that the broker-dealer did not establish an anti-money laundering surveillance program until September 2020, despite having thousands of high-risk microcap and penny stock securities transactions executed daily on its ATS.
Daniel R. Gregus, Director of the SEC’s Chicago Regional Office, stated, “All SEC-registered broker-dealers have the responsibility to comply with the requirements of the Bank Secrecy Act, including the obligation to file SARs.”
Without admitting or denying that it violated Section 17(a) of the Securities Exchange Act and Rule 17a-8, the broker-dealer agreed to a censure and a cease-and-desist order, along with a $1.5 million penalty.
FDIC releases July enforcement actions, including breaches of fiduciary duty and FDPA violations
On August 25, the FDIC announced a list of administrative enforcement actions taken against banks and individuals in July. The 10 orders include “two orders that combined a prohibition order and order to pay CMP; one combined personal consent order and order to pay CMP; four prohibition orders; one order modifying a prohibition order; one order of termination of deposit insurance; and one order to pay CMP for pattern or practice violations of the Flood Disaster Protection Act.” The FDIC assessed a civil money penalty against a North Dakota-based bank for alleged violations of the Flood Disaster Protection Act and the National Flood Insurance Act including providing or extending loans secured by a building or mobile home situated in or intended for placement within an area with a recognized risk of flooding, without promptly notifying the borrower and/or the servicer about the availability of flood insurance for the asset.
Fed issues enforcement action against state bank and its holding company
On August 17, the Fed announced an enforcement action against a state bank and its holding company for failing to comply with conditions imposed during the approval process for the bank to become a member of the Federal Reserve System and subsequent application for acquisition. Namely, the order provides that, among other conditions and limitations, the bank was required to provide advance notice of any change in its business plan, and was found to have changed the business plan without the requisite prior written approval. As part of the order, the bank will wind down its operations as part of a purchase agreement where it will sell its assets to a third-party bank and it will ensure the conservation of capital, preservation of cash assets, and will limit its business activities to only those necessary to consummate the purchase agreement.
SEC charges fintech investment adviser for misleading advertising
On August 21, the SEC announced charges against a New York-based fintech investment adviser for using hypothetical performance metrics in misleading advertisements, compliance failures that led to misleading disclosures, and failure to adopt policies concerning crypto asset trading by employees, among other things. These charges mark the first violation of the SEC’s amended marketing rule.
According to the order, the fintech investment adviser made misleading statements on its website by failing to include material information, and without having adopted and implemented required policies and procedures under the SEC’s marketing rule. The SEC also found that the company made conflicting disclosures regarding crypto assets custody and failed to adopt policies related to employee personal trading in crypto assets.
The company consented to the order finding that it violated the Advisers Act and without admitting or denying the SEC’s findings, entered into a cease-and-desist order, a censure, and agreed to pay $192,454 in disgorgement, prejudgment interest and an $850,000 civil penalty that will be distributed to affected clients.
OCC releases enforcement actions and terminations
On August 17, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. The new enforcement actions include civil money penalty orders, formal agreements, and prohibition orders, each issued with the consent of the parties. The OCC also announced a termination of an existing enforcement action against a bank. Included in the release is a formal agreement entered into with a Minnesota-based bank on June 27 in connection with OCC findings of alleged unsafe or unsound practices relating to, among other things, consumer compliance and third party risk management. In connection to violations of certain Flood Disaster Protection Act rules, the agreement requires the bank to (i) establish a compliance committee to monitor the bank’s progress in complying with the agreement’s provisions; (ii) report such progress to the bank’s board of directors on a quarterly basis; and (iii) implement a written consumer compliance program. This program must also include procedures and guidance for compliance with all consumer protection laws, rules, and regulations to which the bank should adhere, an independent audit program, a comprehensive training program for bank personnel in the consumer protection laws, rules, and regulations as appropriate, and policies to manage risks in the credit process. It also separately requires revisions to the third-party risk management program addressing due diligence and monitoring of third parties, including monitoring for compliance with consumer protection-related laws and regulations.
FTC temporarily halts unlawful business opportunity scheme
On August 22, the FTC announced that the U.S. District Court for the Southern District of California recently issued a temporary restraining order against a business opportunity operation for allegedly engaging in deceptive practices. According to the FTC’s complaint, the operation made claims in violation of the FTC Act, the FTC’s Business Opportunity Rule, and the Consumer Review Fairness Act of 2016 by, among other things; (i) making false claims that they offered a “venture capital-backed” and “artificial intelligence-integrated” e-commerce business opportunity for consumers to buy into; (ii) falsely promoting themselves as e-commerce experts and self-made millionaires who have assisted others in generating tens of millions of dollars; (iii) relying on false business projections, including that customers would make a “$4k-$6k consistently monthly net profit”; (iv) false claims about the use of AI tools to maximize revenues; and (v) false endorsements, including false claims of success on social media by an affiliate marketer. The court’s temporary restraining order prohibited the operation from conducting business, froze its assets, appointed a temporary receiver, and required the operation to turn over business records to the FTC. Beyond the temporary restraining order, the FTC is seeking preliminary and permanent injunctive relief, monetary relief, and additional relief as determined by the court. The FTC also highlighted that its ability to provide these refunds would not be possible if the action hadn't predated the 2021 Supreme Court ruling (covered by InfoBytes here) that the FTC lacks authority under Section 13(b) of the FTC Act to seek monetary relief in federal court. The FTC used the opportunity to encourage Congress to restore its ability to seek monetary relief in federal court.
District Court files temporary restraining order to stop scammers in FTC suit
On August 21, the FTC announced it has stopped California-based scammers (defendants) who allegedly preyed on students seeking debt relief by pretending to be affiliated with the Department of Education. According to the August 14 complaint, since at least 2019, the defendants allegedly targeted students and illegally collected $8.8 million in advance fees in exchange for student loan debt relief services that did not exist. The defendants allegedly misled consumers by charging them for services that are free through the Department of Education, claiming consumers needed to pay fees or make payments to access federal student loan forgiveness, using names like "Biden Loan Forgiveness," that does not correspond to any actual government program. For instance, one consumer was asked to pay $375 for a processing fee to have up to $20,000 in loans forgiven because of a Pell Grant. Another was told they would get a $10,000 reduction in their loan balance and a new repayment plan with six $250 monthly payments under the “student loan forgiveness program.” The FTC alleges violations of Section 5 of the FTC Act, which prohibits deceptive acts or practices, TCPA, and the Gramm-Leach-Bliley Act. The complaint also alleges that the defendants used such misrepresentations to illegally obtain consumers’ banking information, and typically collected hundreds of dollars in unlawful advance fees—sometimes through remotely created checks in violation of the Telemarketing Sales Rule. The U.S. District Court of the Central District of California filed a temporary restraining order, resulting in an asset freeze, among other things. The FTC seeks preliminary, and permanent injunctive relief, monetary relief, and other relief.
Key Takeaways from the CFPB’s First Public Enforcement Action Alleging Violations of RESPA Section 8 Since 2017
The Consumer Financial Protection Bureau (CFPB) has issued a consent order to a residential mortgage loan originator to resolve allegations that it provided illegal incentives to real estate brokers and agents in exchange for mortgage loan referrals. This is the CFPB’s first public enforcement action alleging violations of RESPA Section 8 since 2017.
The CFPB issued a parallel consent order against a real estate brokerage firm for accepting the incentives in exchange for referrals.
Allegations Against the Lender
The consent order against the lender alleges that the lender paid for several subscription services – for example, to a service that provided information concerning property reports, comparable sales and foreclosure data – and then provided free access to such services to real estate agents and brokers, which the CFPB determined to be a thing of value. According to the consent order, the agents and brokers who received access to the subscription services also referred mortgage business to the lender, which the CFPB alleges was in exchange for the free services and therefore violated RESPA Section 8(a).
The consent order also alleges that the lender hosted and subsidized events, including paying for food, beverages and entertainment, for the benefit of real estate agents and brokers. The consent order further alleges that the lender gave real estate agents and brokers free tickets to sporting events, charity galas and other events where the real estate agents and brokers would have otherwise needed to pay for their own admission, food, and alcohol. The CFPB alleges that these events frequently cost the lender several thousand dollars or more. The CFPB asserts that the lender’s contributions to these events constituted a thing of value to the real estate agents and brokers and were given to create, maintain and strengthen mortgage referral relationships, in violation of RESPA Section 8(a).
Finally, the CFPB alleges that the lender had marketing services agreements (“MSAs”) with numerous real estate brokerages, and that many of the compensable services were either performed by the lender itself rather than the brokerages or, based on the Bureau’s allegations against the broker, were not performed by the brokerages.
Also, the consent order noted that the MSAs required the real estate brokers to promote the lender to the broker’s own agents rather than to consumers. The lender also encouraged its MSA partners to use a third-party smartphone app. The real estate agents shared the app with their clients. The app featured a photo of the lender’s loan officer and the lender’s logo and included buttons where consumers could contact the lender’s loan officer for assistance. As a result, the CFPB alleges that the payments the lender made to the brokerages were structured and implemented to generate referrals, rather than to compensate the brokerages for any marketing services they actually performed.
Allegations Against the Real Estate Broker
The consent order against the broker alleges that the broker’s real estate agents and brokers accepted the subscription services and subsidized events. It also alleges that the broker received payments in connection with an MSA that was primarily focused on the lender getting referrals from the broker’s brokers and agents rather than the broker marketing the lender to the public, and that the broker failed to perform many of the marketing tasks required by the MSA but received payments anyway. For example, the consent order alleges that the MSA required the broker to send 15,000 marketing emails a month while allocating 50% of the content to the lender, display video advertisements for the lender at its physical locations and create a number of property websites displaying the lender’s content. However, the broker allegedly failed to perform any of these marketing services.
Takeaways
We note several key takeaways from these consent orders:
- Taken at face value, none of the conduct alleged to violate RESPA Section 8(a) is novel or particularly notable. The crux of the alleged violations involved paying for obvious things of value in exchange for referrals and entering into MSAs where the contemplated marketing services were either not provided or directed to potential referral sources and not consumers. The consent orders, therefore, are largely consistent with prior RESPA enforcement actions involving lenders and real estate brokers.
- This is the first public CFPB enforcement action alleging violations of RESPA Section 8 since 2017, which makes clear that although the CFPB’s focus on RESPA Section 8 may have waned somewhat from the Cordray era, it is still monitoring for RESPA Section 8 violations and will bring public enforcement actions when violations are discovered. Coupled with February’s Advisory Opinion on Digital Mortgage Comparison Shopping Platforms, the CFPB is clearly still engaged in RESPA compliance.
- The reference to the mobile app with a loan officer’s photo and the lender’s logo, and the ability for the consumer to reach out to the lender directly, is in accord with longstanding CFPB and HUD guidance that exclusivity is indicative of a referral to the extent that it “affirmatively influences” a consumer to select a particular provider of settlement services. This viewpoint was recently espoused in the CFPB’s Advisory Opinion on Digital Mortgage Comparison Shopping Platforms, and it appears that the CFPB views this principle as generally applicable.
Penalties
In addition to agreeing to cease engaging in the conduct alleged, the lender was ordered to pay a civil monetary penalty of $1.75 million and also agreed to implement a compliance program designed to prevent any future violations should the lender resume retail mortgage operations. The lender also agreed to meet certain recordkeeping and reporting requirements.
In addition to agreeing to cease engaging in the conduct alleged, the broker was ordered to pay a civil monetary penalty of $200,000 and meet certain recordkeeping and reporting requirements.
In agreeing to enter into the consent orders, the lender and broker did not admit or deny any findings of fact or conclusions of law related to the violations alleged by the CFPB.
Read the lender’s consent order.
Read the broker’s consent order.
Read the CFPB’s press release.
Want to learn more? Contact John Kromer or Steve vonBerg.
DFPI launches actions against crypto scams, initiates education campaign
On August 9, the California Department of Financial Protection and Innovation (DFPI) announced that it issued cease and desist orders against three entities (orders here, here, and here) for allegedly offering and selling unqualified securities, and making material misrepresentations and omissions to investor related to cryptocurrency investments. The entities allegedly created high-yield investment programs (HYIPs), which DFPI characterizes as “investment frauds that typically promise high returns with low risk, promise overly consistent returns, provide little details about the people running the HYIP, use vague language to describe how the HYIP makes money, offer referral bonuses, facilitate deposits and withdrawals with crypto assets, and use social media to gain attention and attract investors.”
The cease and desist orders are just one of the tools DFPI employs to address investment scams involving crypto assets, also using enforcement actions, social media, and a Crypto Scam Tracker. DFPI has posted videos to its social media accounts that are directed towards the same group of individuals targeted by the crypto community in order to educate investors about its enforcement actions and violations of law. The Crypto Scam Tracker was launched earlier this year to help Californian’s identify and avoid scams involving cryptocurrency. (Covered by InfoBytes here).
SEC awards whistleblowers more than $104 million
On August 4, the SEC announced awards totaling more than $104 million to seven whistleblowers whose information and assistance led to a successful SEC enforcement action, as well as two related actions brought by another agency. According to the Press Release, “the seven whistleblowers were composed of two sets of joint claimants and three single claimants, and each provided information that either prompted the opening of or significantly contributed to an SEC investigation.” The seven claimants contributed assistance including providing documentation to support the allegations, identifying potential witnesses, and sitting for interviews. According to the redacted order, Claimants 1 and 2, both foreign nationals, provided information that in part caused the SEC to open the investigation that led to the charges. The whistleblowers also provided substantial ongoing assistance, including providing multiple written submissions, communications, and interviews, the SEC said, finding also that the whistleblower satisfied the requirements under Rules 21-F-3(b) for related actions awards as the related successful enforcement actions were partly based on the same information provided to the Commission. However, in the same order, the SEC affirmed the denial of two other claimants’ award claims after determining, among other things, that the individuals did not submit information leading to the successful enforcement of the covered action.