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New Jersey appellate court finds arbitration provision ambiguous and unenforceable
On December 18, the Appellate Division of the Superior Court of New Jersey reversed a lower court’s order compelling arbitration, concluding the arbitration provision of the plaintiff’s auto lease agreement did not clearly and unambiguously inform the reader that arbitration was the exclusive dispute remedy. According to the opinion, the plaintiff filed a complaint against an auto dealer after allegedly being charged a $75 dollar fee associated with the loan payoff of his trade-in vehicle for which the plaintiff never received an explanation of its purpose, in violation of the New Jersey Consumer Fraud Act and Truth in Consumer Contract, Warranty and Notice Act. The auto dealer moved to compel arbitration under the lease contract’s arbitration notice, which included the statement, “[e]ither you or Lessor/Finance Company/Holder […] may choose at any time, including after a lawsuit is filed, to have any Claim related to this contract decided by arbitration.” The lower court determined that the arbitration provision was not “ambiguous or vague in any way” and ordered arbitration. The plaintiff appealed, arguing the clause is vague because it states the parties “may” arbitrate. On appeal, the appellate court concluded that the arbitration provision was not clear and unambiguous due to the use of a passive “may” when referring to the ability to opt into arbitration. Moreover, the appellate court determined the arbitration provision to be unenforceable because it lacked language that would affirmatively inform the plaintiff that “he could not pursue his statutory rights in court.”
Illinois amends Residential Mortgage License Act
On December 19, the Illinois governor signed HB 5542, which amends the state’s Residential Mortgage License Act of 1987 (the Act) to make various changes to state licensing requirements. Among other things, the amended Act (i) clarifies the definition of a “bona fide nonprofit organization”; (ii) provides a list of prohibited acts and practices; (iii) stipulates that a licensee filing a Mortgage Call Report is not required to file an annual report with the Secretary of Financial and Professional Regulation (Secretary) disclosing applicable annual activities; (iv) repeals a provision requiring the Secretary to obtain loan delinquency data from HUD as part of an examination of each licensee; (v) clarifies that the notice of change in loan terms disclosure requirements do not apply to any licensee providing notices of changes in loan terms pursuant to the CFPB’s Know Before You Owe mortgage disclosure procedure under TILA and RESPA, while removing the provision that previously excluded licensees limited to soliciting residential mortgage loan applications as approved by the Secretary from the requirements to provide disclosure of changes in loan terms; (vi) removes certain criteria concerning the operability date for submitting licensing information to the Nationwide Multistate Licensing System; and (vii) makes other technical and conforming changes. The amendments are effective immediately.
Massachusetts Attorney General settles with payment processor over data breach claims
On December 19, the Massachusetts Attorney General announced a $155,000 settlement with a California-based payment processor resolving allegations that the company exposed consumers’ personal information online in violation of consumer protection and data security laws. According to the announcement, the company employees accidently removed password protections from public-facing websites, which exposed consumers’ personal data, such as bank account and social security numbers, addresses, and driver’s license numbers. The Attorney General’s investigation claims that company employees appeared to know of the vulnerability for a year before fixing it. Under the terms of the settlement, the company has agreed to comply with Massachusetts laws and is required to (i) maintain a chief information security officer; (ii) conduct employee training on data security; and (iii) “assess and update information security policies relating to changes to its systems and to external vulnerabilities.”
OFAC issues temporary extension of Ukraine-related General Licenses
On December 20, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced the issuance of Ukraine-related General Licenses (GL) 13I and 15D, which extend the expiration date of previous Ukrainian-based general licenses to March 7, 2019 for wind-down transactions for certain companies that otherwise would be prohibited by Ukraine-Related Sanctions Regulations.
GL 13I supersedes GL 13H and authorizes, among other things, activities and transactions “ordinarily incident and necessary” for (i) the divestiture of the holdings of specified blocked persons to a non-U.S. person; and (ii) the facilitation of transfers of debt, equity, or other holdings involving specified blocked persons to a non-U.S. person. GL 15D, which supersedes GL 15C, relates to permissible activities with the designated company and its subsidiaries, and applies to the maintenance and wind-down of operations, contracts, and agreements that were effective prior to April 6.
Visit here for additional InfoBytes coverage on Ukraine sanctions.
OECD study finds that government officials punished in only one-fifth of bribery cases
On December 11, the Organization for Economic Cooperation and Development (OECD) published a study examining the consequences faced by public officials who allegedly accepted bribes. The study analyzed 55 foreign-bribery cases concluded between 2008 and 2013 in which companies based in OECD countries had been sanctioned for bribery. It found that government officials were criminally sanctioned in only one-fifth of the 55 cases studied. An additional 11 actions were still pending at either the investigative or prosecutorial stages. The study also found that none of the countries in which bribes were paid, the demand-side countries, detected that their public officials demanded a bribe. Instead, the study found that the “media plays a major role in international information flow.”
Former officer of Venezuela oil company pleads guilty to obstruction
On December 10, a former procurement officer of a Venezuela’s state-owned and state-controlled energy company, pleaded guilty to one count of obstructing an investigation into bribes paid by the owner of U.S.-based companies to Venezuelan government officials in exchange for securing additional business with the company and payment priority on outstanding issues. The former procurement officer, who previously worked for the company in Houston, Texas, pleaded guilty to one count of conspiracy to obstruct an official proceeding.
The charge stems from a guilty plea he entered on December 10, 2015, to one count of conspiracy to launder money and one count of making false statements on his federal income tax return. Under the terms of a plea agreement in that case, he agreed to cooperate with the investigation by being interviewed by the United States, and to providing “truthful, complete and accurate information” to government agents and attorneys. In the latest plea, though, he admitted that after his earlier plea, he concealed facts about bribes paid to the company by a target of the investigation, referred to as Co-Conspirator 1 in the indictment. Additionally, he informed Co-Conspirator 1 that U.S. government authorities were investigating Co-Conspirator 1, and provided Co-Conspirator 1 with information about the investigation, including the topics discussed in his meetings with the government. Consequently, Co-Conspirator 1 destroyed evidence and attempted to flee the country in July 2018. He is scheduled to be sentenced on Feb. 19, 2019.
Global investment bank settles SEC allegations of mishandled American Depositary Receipts
On December 17, the SEC announced a settlement with a global investment bank to resolve allegations that the bank mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the bank improperly provided thousands of pre-released ADRs where neither the broker nor its customers beneficially owned the required shares. According to the SEC’s order, the bank’s alleged practice of allowing pre-released ADRs that were in many instances not backed by ordinary shares violated the Securities Act of 1933. The bank has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $29.3 million in disgorgement, roughly $4.2 million in prejudgment interest, and a $20.5 million penalty. The SEC’s order further acknowledges the bank’s cooperation in the investigation and implementation of remedial measures.
FDIC publishes ANPR seeking feedback on brokered deposits and interest rate caps
On December 19, the FDIC announced an advance notice of proposed rulemaking (ANPR) requesting comments on the agency's brokered deposit and interest rate cap regulations. (See also FDIC FIL-87-2018.) These regulations were originally implemented in the late 1980s and early 1990s, and apply to less than well-capitalized insured depository institutions. According to the FDIC, there have been “significant changes in technology, business models, the economic environment, and products since the regulations were adopted.” Currently, Section 29 of the Federal Deposit Insurance Act restricts less than well-capitalized insured depository institutions from accepting brokered deposits, and places restrictions on interest rates that these insured depository institutions can offer. The ANPR includes a series of questions seeking feedback on a number of issues, including (i) ways in which the FDIC can improve the implementation of Section 29 “while continuing to protect the safety and soundness of the banking system;” (ii) whether the definition of a brokered deposit is too narrow or too broad; (iii) whether there have been specific changes within the financial services industry since the regulations were adopted that should be considered; (iv) whether there should be changes to the agency’s national rate calculation; and (v) how rates offered by internet or electronic-based financial institutions should be calculated.
The ANPR further notes that the Economic Growth, Regulatory Relief, and Consumer Protection Act created an exception from brokered deposit consideration for some reciprocal deposits. (See previous InfoBytes coverage here.)
Global broker-dealer assessed $14.5 million penalty for anti-money laundering compliance failures
On December 17, the Financial Industry Regulatory Authority (FINRA), the Financial Crimes Enforcement Network (FinCEN), and the SEC announced separate settlements (see here, here, and here) with a global broker-dealer following investigations into the firm’s anti-money laundering (AML) programs. According to FINRA, the broker-dealer and its affiliated securities firm allegedly failed to establish and implement AML processes reasonably designed to detect and report potentially high-risk transactions, including foreign currency wire transfers to and from countries known to be at high risk for money laundering, as well as penny stock transactions processed through the use of an omnibus account on behalf of undisclosed customers. FINRA alleged that from January 2004 to April 2017, the broker-dealer “processed thousands of foreign currency wires for billions of dollars, without sufficient oversight.”
In a separate investigation conducted by FinCEN in conjunction with FINRA and the SEC, the broker-dealer reached a settlement over allegations that it failed to, among other things, (i) develop and implement a risk-based AML program that “adequately addressed the risks associated with accounts that included both traditional brokerage and banking-like services”; (ii) implement policies and procedures, which would ensure the detection and reporting of suspicious activity through all accounts, particularly for those accounts with little to no securities training; (iii) “implement an adequate due diligence program for foreign correspondent accounts”; and (iv) provide sufficient staffing, leading to a backlog of alerts and decreased ability to file suspicious activity reports (SARs).
According to the SEC's investigation, from at least 2011 to 2013, the broker-dealer allegedly failed to file SARs as required by the Bank Secrecy Act’s reporting requirements and Section 17(a) of the Securities Exchange Act of 1934. Among other things, the SEC also claimed that the broker-dealer (i) provided customers with other services, such as cross-border wires, internal transfers between accounts and check writing, which increased its susceptibility to risks of money laundering and other types of associated illicit financial activity; and (ii) “did not properly review suspicious transactions flagged by its internal monitoring systems and failed to detect suspicious transactions involving the movement of funds between certain accounts in suspicious long-term patterns.”
After factoring in remedial actions, the broker-dealer has been assessed total civil money penalties of $14.5 million, including a $500,000 fine against the securities firm.
FDIC, OCC issue notices of proposed rulemaking to raise asset threshold and reduce scope of stress testing requirements
On December 18, the FDIC issued a notice of proposed rulemaking (NPR) that would revise stress testing requirements for FDIC-supervised institutions, consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). In particular, the proposed rule will (i) change the minimum threshold for applicability from $10 billion to $250 billion; (ii) revise the frequency of required stress tests for most FDIC-supervised institutions from annual to biannual; and (iii) reduce the number of required stress testing scenarios from three to two. Among other things, the FDIC proposes that, in general, FDIC-supervised institutions that are covered banks as of December 31, 2019, will “be required to conduct, report, and publish a stress test once every two years, beginning on January 1, 2020, and continuing every even-numbered year thereafter.” The proposed rule will also add a new defined term, “reporting year,” which will be the year in which a covered bank must conduct, report, and publish its stress test. However, the proposed rule notes that certain covered banks will still be required to conduct annual stress tests, such as covered banks that are subsidiaries of global systemically important bank holding companies or bank holding companies that have $700 billion or more in total assets or cross-jurisdictional activity of $75 billion or more, under rules proposed by the Federal Reserve Board. Furthermore, the proposed rule will remove the “adverse” scenario—which the FDIC states has provided “limited incremental information”—and require stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios.
Separately the same day, the OCC also issued a NPR to amend the agency’s stress testing rule for covered financial institutions to be consistent with Section 401, which incorporates the revisions described in the FDIC’s NPR.
Comments on both NPRs are due by February 19, 2019.