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OCC proposes licensing policy changes
On March 5, the OCC announced a Notice of Proposed Rulemaking (NPR) and request for comment on proposed amendments that would update and clarify certain licensing policies and procedures and would revise its rules in 12 CFR part 5 to eliminate unnecessary requirements. Proposed changes include, among other things (i) allowing national and federal savings associations to “follow the procedures applicable to state banks or state savings associations…for certain business combinations”; (ii) expanding operating subsidiary notice and expedited review processes to include activities that are substantively the same as activities previously approved by the OCC; (iii) allowing “non-controlling investments and pass-through investments” in non-OCC supervised entities; (iv) creating procedures for citizenship and residency waivers for national bank directors; (v) redefining “troubled condition” in relation to director and senior executive officer changes; and (vi) adding chief risk officer to the list of positions for which a bank in troubled condition must provide notice when making a personnel change. Comments must be received by May 4.
Chinese nationals sanctioned and charged with laundering over $100 million in cryptocurrency from hacked exchange
On March 2, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Orders 13694, 13757, and 13722 against two Chinese nationals for allegedly laundering over $100 million in stolen cryptocurrency connected to a North Korean state-sponsored cyber group that hacked cryptocurrency exchanges in 2018. According to OFAC, the two individuals “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, a malicious cyber-enabled activity” or in support of the North Korean cyber group, which was designated by OFAC last September (covered by InfoBytes here). OFAC stated that it closely coordinated its action with the U.S. Attorney’s Office for the District of Columbia and the Internal Revenue Service’s Criminal Investigation Division. As a result of the sanctions, “all property and interests in property of these individuals that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC.” OFAC further noted that its regulations “generally prohibit all dealings by U.S. persons or within the United States (including transactions transiting the United States) that involve any property or interests in property of blocked or designated persons,” and warned foreign financial institutions that knowingly facilitating significant transactions or providing significant financial services to the designated individuals may subject them to U.S. correspondent account or payable-through sanctions.
On the same day, the DOJ unsealed a two-count indictment against the two individuals, charging them with money laundering conspiracy and operating an unlicensed money transmitting business. The indictment claims that the individuals converted virtual currency traceable to the hack of a cryptocurrency exchange into fiat currency or prepaid Apple iTunes gift cards through accounts in various exchanges linked to Chinese banks and then transferred the currency or gift cards to customers for a fee. According to the indictment, neither individual was registered as a money transmitting business with the Financial Crimes Enforcement Network, which is a federal felony offense. The complaint seeks forfeiture of 113 virtual currency accounts belonging to the individuals.
OCC updates FAQs on third-party risk management
On March 5, the OCC released Bulletin 2020-10, which provides answers to frequently asked questions (FAQs) concerning its existing guidance on management of third-party relationships, including relationships with fintech firms and data aggregators. This bulletin, issued to supplement Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance,” rescinds (but incorporates the substance of) OCC Bulletin 2017-21 (covered by InfoBytes here). Key topics addressed in the new FAQs include:
- clarifying the definition of “third-party relationships” and “business arrangements”;
- outlining expectations for banks that have third-party relationships with cloud computing providers or data aggregators;
- addressing a bank’s reliance on and use of third party-provided reports, certificates of compliance, and independent audits;
- discussing risk management when a third party—such as a less established fintech firm, start-up, or other small business—has limited ability to provide the same level of financial information or other due diligence-related information as a more established third party;
- suggesting approaches for due diligence and ongoing monitoring in instances where the bank has limited negotiating power;
- addressing ways banks can offer products or services to underbanked/underserved populations through fintech third-party relationships;
- discussing considerations for banks when entering into a marketplace lending arrangement with a nonbank entity; and
- outlining measures to address risk management when obtaining alternative data from a third party that may be used by or on behalf of a bank.
The bulletin also reiterates that banks are expected “to practice effective risk management regardless of whether the bank performs an activity internally or through a third party,” and that a “bank’s use of third parties does not diminish the bank’s responsibility to perform the activity in a safe and sound manner and in compliance with applicable laws and regulations.”
Fed finalizes simplified capital rules for large banks
On March 4, the Federal Reserve Board (Fed) released a final rule amending and simplifying the capital rules for large banks, as well as instructions for the 2020 Comprehensive Capital Analysis and Review (CCAR) cycle. The final rule, which is “broadly similar” to the Fed’s April 2018 proposal (covered by InfoBytes here), incorporates a simplified framework that integrates a “stress capital buffer” (SCB) requirement, which will use supervisory stress test results to establish the size of a firm’s stress capital buffer requirement. The stress test—one element of the annual CCAR—helps determine a firm’s capital requirements for the upcoming year. According to the Fed, “[b]y combining the Board’s stress tests—which project the capital needs of each firm under adverse economic conditions—with the Board’s non-stress capital requirements, large banks will now be subject to a single, forward-looking, and risk-sensitive capital framework.” The simplification would result in banks needing to meet eight capital requirements, instead of the current 13. Among other things, the final rule will also (i) increase capital requirements for global systemically important banks and decrease requirements for less complex banks; and (ii) continue to subject all banks to ongoing, non-stress leverage requirements.
The final rule applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations with more than $100 billion in total consolidated assets, and will take effect 60 days after publication in the Federal Register, with a firm’s first stress capital buffer requirement, as determined under the final rule, effective October 1, 2020.
FTC reaches settlements with affiliate marketers
On March 5, the FTC announced settlements with four groups of affiliate marketers that, among other things, allegedly violated the FTC Act by using deceptive marketing tactics and earnings claims to persuade consumers to pay thousands of dollars each for business coaching and investment “mentoring” services. The FTC alleged in the first complaint that certain defendants sold membership packages for an online business coaching scheme, and then, when the business coaching scheme went out of business, created their own branded programs and systems that claimed consumers would be able to start their own online marketing businesses and earn substantial income. The defendants also allegedly encouraged consumers to open multiple credit lines to finance the purchases of these programs. The FTC claimed that the defendants “used straw signers and shell companies and provided banks and payment processors with ‘dummy’ websites to evade scrutiny by bank underwriters and obtain multiple merchant accounts to process credit card payments from consumers.” According to the FTC’s second complaint, the other defendants made deceptive earnings claims in order to recruit consumers into the now-defunct business coaching scheme and earned millions of dollars as a reward. In both complaints, the FTC claimed that most consumers who purchased the products suffered large losses and mounting debts.
Under the terms of the settlements, each of the defendants is permanently banned from selling or marketing any business coaching programs or money-making methods, and must pay judgments of (i) $3.35 million to be paid in full for potential consumer redress (order here); and (ii) monetary judgments totaling $38.1 million, which will be partially suspended due to the defendants’ inability to pay (orders here, here, and here).
Washington regulator advises credit unions that virtual annual meetings are permitted
On March 6, the Washington Department of Financial Institutions, Division of Credit Unions notified credit unions that they are permitted to conduct annual meetings virtually, although any virtual meetings would need to be authorized by the institution’s bylaws and the meeting must otherwise be conducted under board-approved rules of procedure.
SEC’s disgorgement authority examined during Supreme Court oral arguments
On March 3, the U.S. Supreme Court heard oral arguments in Liu v. SEC. As previously covered by InfoBytes, the principal question at issue in this case is whether the SEC’s authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. Petitioners—a couple found to have defrauded investors and ordered to disgorge $26.7 million by a California federal court—argued that disgorgement is not a form of “equitable relief” available to the SEC. Respondent SEC contended that Congress enacted several statutes that anticipated the SEC’s use of disgorgement, including the Securities Exchange Act and the Sarbanes-Oxley Act, and that historically, disgorgement has been used as an equitable remedy to deny wrongdoers of their ill-gotten gains.
Counsel for the petitioners made three primary arguments before the Court: (i) the SEC is only authorized to use the powers conferred upon it by Congress and disgorgement is not one of them; (ii) though the statute allows the SEC to seek equitable relief, disgorgement as the SEC has used it is akin to a penalty and “penalties are not equitable relief.”; and (iii) “Congressional silence…does not give an agency any authority to act, much less the authority to punish” in a manner that exceeds its existing statutory authority
Petitioners’ counsel fielded questions from Justices Ginsburg, Alito, and others that probed the limits of the petitioners’ position. The justices asked, among other things, whether disgorgement could ever be ordered by the SEC; whether it could be ordered if the profits are paid out to injured parties; and whether the Court’s holding in Kokesh v SEC, that disgorgement as a penalty should be controlling only when determining the applicable statute of limitations, which was the issue presented in that case. Petitioner’s counsel stated that “the rule should be, if you’re giving the money back to the investors, then [the SEC] can take it and not otherwise, because…then it’s just a punishment.”
Respondent’s counsel argued that the Court’s ruling in Kokesh was limited to determining the applicability of the statute of limitations. He also urged that “courts should continue to order disgorgement but compute it in accordance with traditional general equitable rules, not in accordance with any SEC-specific formula.” In response to a question from Justice Sotomayor regarding the proper recipient of disgorged funds, respondent’s counsel said that if the defrauded investors can be located, the SEC’s practice it to return disgorgement amounts to them. However, he noted that sometimes, such as in FCPA actions, there are no obvious victims to whom the money could be returned. Justice Kavanaugh asked if it would be proper for the Court to insist that the amounts received from a disgorgement order be returned to defrauded investors if at all possible. Respondent’s counsel conceded this would be within the Court’s authority, but added that the “core purposes of disgorgement are to prevent the wrongdoer from profiting from its own wrong and to deter future violations, and disgorgement can serve those traditional purposes, regardless of where the money ends up.”
On rebuttal, petitioner’s counsel asserted that “the scope of disgorgement has grown over time in part because it is not grounded in statutory text.” He contended that “there is no precedent for using an accounting to compel funds to be paid to the Treasury.” Justice Ginsburg pressed petitioner’s counsel regarding statutes that appear to be predicated on disgorgement being available. Petitioner’s counsel suggested those statutes might show that Congress was aware that courts were ordering disgorgement, but that was “not an authorization, and authorization is what’s needed…to inflict a penalty.” He closed by asking the Court to reverse the case, saying that the petitioners were already responsible to pay their entire gains from the fraud, and “anything more would go beyond the equitable principle that no individual should be permitted to profit from his or her own wrong.”
Senate Democrats ask Office of Civil Rights to address student lending racial disparities
On February 27, Senators Elizabeth Warren (D-MA), Kamala Harris (D-CA), and Cory Booker (D-NJ) sent a letter to the Department of Education’s Office of Civil Rights (OCR) asking how the office plans to address reports of racial disparities within the federal student loan industry. The letter discusses OCR’s responsibility for enforcing civil rights laws that prohibit discrimination in Department-funded programs and activities, including student aid funding, and notes that OCR also bears the responsibility for examining the role federal student loan contractors may play in racial disparities faced by students of color after they leave their institution of higher learning. The Senators claim that for-profit colleges “disproportionately target students of color and often leave them deep in debt while providing little education value in return.” The Senators also cite new Department data, which shows that “despite using [income-driven repayments] at a much higher rate than other borrowers with the same level of education, Black student borrowers continued to have a higher default rate than their peers, regardless of the type of institution they attended.” Latino and Native student borrowers are also affected by these racial disparities, the letter notes.
Among other things, the Senators request the following from OCR by March 26:
- Provide a summary of all current and ongoing actions, including enforcement actions, that OCR has taken since January 2017 to address racial disparities in student loan borrowing and outcomes;
- Conduct a comprehensive investigation into the ways predatory colleges and the student loan industry contribute to racial disparities, such as through servicing and debt collection practices, access to repayment plans, and debt cancellation options for borrowers of color; and
- Develop a plan to address racial disparities in the student loan industry, including legislative recommendations and new policy guidance to entities involved in the industry.
5th Circuit: CFPB structure is constitutional
On March 3, the same day the U.S. Supreme Court heard oral arguments in Seila Law LLC v. CFPB (covered by InfoBytes here), a divided U.S. Court of Appeals for the Fifth Circuit held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the Consumer Financial Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices. In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question, and subsequently, the payday lenders filed an unchallenged petition requesting an initial hearing en banc. (Covered by InfoBytes here.)
On appeal, the majority upheld the district court’s decision that the Bureau is not unconstitutional based on its single-director structure. “The payday lenders argue that the structure of the CFPB denies the Executive Branch its due because the Bureau is led by a single director removable by the President only for cause,” the majority wrote. “We find no support for this argument in constitutional text or in Supreme Court decisions and uphold the constitutionality of the CFPB’s structure, as did the D.C. and Ninth [C]ircuits.” The majority compared the case to the D.C. Circuit’s en banc decision in PHH v. CFPB (covered by a Buckley Special Alert) and the 9th Circuit’s decision in CFPB v. Seila Law LLC (covered by InfoBytes here), both of which upheld the Bureau’s structure. The majority also distinguished a 2018 ruling from the 5th Circuit sitting en banc, which held the FHFA’s single-director structure unconstitutional (covered by InfoBytes here). This provoked a strong dissent charging that the majority had “suddenly discover[ed] that stare decisis is for suckers.”
South Dakota amends real estate licensing provisions
On March 2, the South Dakota governor signed SB 28, which amends certain statutory provisions related to real estate licensing in the state. Among other things, SB 28 outlines reasons why an application for a license may be denied, including if an applicant “has been disciplined by a regulatory agency in relation to activities as a real estate salesperson or broker, broker associate, firm, appraiser, mortgage broker, or any other regulated licensee, including insurance, securities, law and commodities trading.” SB 28 also stipulates that the state’s real estate commission may issue restricted broker’s licenses, as well as administer and enforce outlined provisions. Licensure exemptions are also set forth. The amendments take effect July 1.