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SEC Denies Application for Bitcoin ETF Due to Lack of Regulation, Potential for Manipulation
On March 10, 2017, the SEC issued an Order disapproving of a proposed rule change by the BATS BZX Exchange (“the Proposal”), which proposed to list and trade “commodity-based trust shares” issued by the Winklevoss Bitcoin Trust. The Proposal, if approved, would have established a bitcoin exchange-traded fund (“ETF”) that market participants could invest in through the BATS BZX Exchange platform. Specifically, in rejecting the Proposal, the Commission emphasized the lack of regulation in the bitcoin market, noting both (i) that the BATS BZX Exchange platform “would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares”; and (ii) that bitcoin regulation, at present, would leave a bitcoin ETF more susceptible to manipulation than an ETF comprised of other commodities, such as gold and silver. Ultimately, the Commission concluded that, “[a]bsent the ability to detect and deter manipulation of the Shares—through surveillance sharing with significant, regulated markets related to the underlying asset—the [Commission] does not believe that a national securities exchange can meet its” regulatory obligations.
Comments submitted in response to the original BATS BZX Exchange proposed rule change can be accessed here.
9th Circuit Panel Reverses and Remands Dismissal of Pro Se Plaintiff’s Breach of Contract Claim in Connection with Bank’s Trial Loan Modification Process
In an opinion filed on March 13, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court’s dismissal of a homeowner-plaintiff’s breach of contract claim against a major bank for damages allegedly suffered when she unsuccessfully attempted to modify her home loan over a two-year period. Oskoui v. J.P. Morgan Chase Bank, N.A., [Dkt No. 47-1] Case No. 15-55457 (9th Cir. Mar. 13, 2017) (Trott, S.). The court also remanded with instructions to permit the pro-se plaintiff to amend her complaint to allege a right to rescind in connection with her previously-dismissed TILA claim in light of the Supreme Court’s January 2015 decision in Jesinoski v. Countrywide Home Loans, Inc. And, finally, the panel affirmed the district court’s ruling that the facts alleged demonstrated a claim under California’s Unfair Competition Law (“UCL”) because, among other reasons, the factual record supported a determination that the bank knew or should have known that the homeowner was plainly ineligible for a loan modification; yet, the bank encouraged her to apply for modifications (which she did), and collected payments pursuant to trial modification plans.
In reversing and remanding the district court’s ruling dismissing the breach of contract claim, the Ninth Circuit pointed to the styling on the first-page of the complaint—“BREACH OF CONTRACT”—along with allegations about the explicit offer language contained in the bank’s trial modification documents. The Ninth Circuit relied on the Seventh Circuit’s opinion in Wigod v. Wells Fargo, which it identified as the “leading federal appellate decision on this issue of contract,” to “illuminate the viability” of plaintiff’s breach of contract claim in connection with trial plan documents. 673 F.3d 547 (7th Cir. 2012). The Ninth Circuit remanded the claim with instructions to permit the plaintiff to amend if necessary in order to move forward with her breach of contract claim.
Governor’s Proposed NY State Executive Budget Includes More Online Lending Supervision; State Assembly Budget “Rejects” Proposed Change
Article 7 of the New York State Constitution requires the Governor to submit an executive budget each year, which contains, among other things, recommendations as to proposed legislation. On February 16, New York Governor Andrew Cuomo released a proposed 2017-18 Executive Budget that includes a proposed amendment to the New York Banking Law that would provide the New York Department of Financial Services (“NYDFS” or “DFS”) expanded licensing authority over online and marketplace lenders. (See Part EE (at pages 243-44) of the Transportation, Economic Development and Environmental Conservation Bill portion of the Executive Budget).[1]
According to a Memorandum in Support of the Governor’s Budget, the proposed amendment would (i) address “[g]aps in the State’s current regulatory authority [that] create opportunities for predatory online lending,” and (ii) “ensure that all types of online lenders are appropriately regulated,” by (a) “increase[ing] DFS’ enforcement capabilities,” and (b) “expand[ing] the definition of ‘making loans’ in New York to not only apply to online lenders who solicit loans, but also online lenders who arrange or otherwise facilitate funding of loans, and making, acquisition or facilitation of the loan to individuals in New York.” If enacted, the NYDFS’s new authority would, under the Governor’s current proposal, become effective January 1, 2018.
This proposal in the Governor’s Executive Budget has, however, been challenged by the New York State Legislature. On March 13, after several hearings on the Governor’s proposed budget, the New York State Assembly released its own 2017-18 Assembly Budget Proposal (“Assembly Budget”), which, among other things, expressly rejected the aforementioned proposed amendment to the banking law found in “Part EE.” The Senate is now expected to release its own budget proposal shortly. And, once it is released, the two house of the State Legislature will reconcile the two bills in committees and pass legislation that stakes out the House’s position on the Governor’s proposals. From there, negotiations will begin in earnest between the Legislature and the Executive, with the goal of reaching a budget agreement on or before March 31, 2017.
[1] See also N.Y. Banking Law § 340; N.Y. Gen. Oblig. Law § 5-501(1); N.Y. Banking Law § 14-a(1); N.Y. Gen. Oblig. Law § 5-521(3); N.Y. Ltd. Liab. Co. Law § 1104(a).
OCC Releases Draft “Licensing Manual Supplement” to be Used for Evaluating Fintech Bank Charter Applications; Will Accept Comments Through April 14
On March 15, the OCC released both a Draft Licensing Manual Supplement for Evaluating Charter Applications From Financial Technology Companies (“Draft Fintech Supplement”) and a Summary of Comments and Explanatory Statement (“March 2017 Guidance Summary”) (together, “March 2017 Guidance Documents”) in which it provides additional detail concerning application of its existing licensing standards, regulations, and policies in the context of Fintech companies applying for special purpose national bank charters. The Draft Fintech Supplement is intended to supplement the agency’s existing Licensing Manual. The March 2017 Guidance Summary addresses key issues raised by commenters, offers further explanation as to the OCC’s decision to consider applications from Fintech companies for an Special Purpose National Bank (“SPNB”) charter, and provides guidance to Fintech companies that may one day wish to file a charter application.
The March 2017 Guidance Documents emphasize, among other things, certain “guid[ing]” principles including: (i) “[t]he OCC will not allow the inappropriate commingling of banking and commerce”; (ii) “[t]he OCC will not allow products with predatory features nor will it allow unfair or deceptive acts or practices”; and (iii) “[t]here will be no “light-touch” supervision of companies that have an SPNB charter. Any Fintech companies granted such charters will be held to the same high standards that all federally chartered banks must meet.” Through its commitment to (and alignment with) these principles, the OCC “believes that making SPNB charters available to qualified [FinTech] companies would be in the public interest.”
Notably, the OCC emphasized that its latest Fintech guidance “is consistent with its guiding principles published in March 2016” and “also reflects the agency’s careful consideration of comments received (covered by InfoBytes here) on its December 2016 paper discussing issues associated with chartering Fintech companies.” As covered in a recent InfoBytes Special Alert, the OCC has, over the past several months, taken a series of carefully calculated steps to position itself as a leading regulator of Fintech companies.
Finally, although it does not ordinarily solicit comments on procedural manuals or supplements, the OCC will be accepting comments on the aforementioned Fintech guidance through close of business April 14.
Credit Union Trade Association Submits Letter in Support of Proposed CFPB Exemption
On March 5, Credit Union National Association (CUNA) President Jim Nussle submitted a letter to Rep. Roger Williams (R-Texas), supporting his introduction of H.R. 1264—the Community Financial Institution Exemption Act. The bill, referred to the House Financial Services Committee on February 28, provides an exemption from rules and regulations of the CFPB for community financial institutions with under $50 billion in assets. “The rules are, in large part, implemented to address abuses perpetrated by the large institutions and other previously nonregulated providers, and not small institutions like credit unions and small banks,” Nussle wrote. “While we believe that the statute presently provides the CFPB authority to exempt credit unions under $50 billion from its rulemaking, the bureau has been unwilling to effectively use the exemption authority.”
Proposed FINRA Rule Would Streamline Securities Competency Exams for Industry Professionals
On March 8, the Financial Industry Regulatory Authority (FINRA) filed a proposed rule with the SEC to streamline its competency exams for professionals entering or re-entering the securities industry. Currently, only individuals associated with FINRA-regulated firms are eligible to take the qualification exam. The proposed rule would allow individuals with no prior securities industry experience to take FINRA’s Securities Industry Essentials exam, an “important first step to entering the industry,” which would serve to “provide enhanced flexibility and efficiency in [the] qualifications programs, while maintaining important standards and investor protections.” While these individuals would also be required to pass a more specialized knowledge exam—and must be associated with, and sponsored by, a firm—the proposed change would potentially expand the pool of qualified candidates for positions. Further, under this proposal, individuals who transfer to a financial services affiliate of a FINRA-regulated firm may qualify for a waiver that allows their credentials to be reinstated without re-taking their qualification exams, should they return to the industry within a seven-year period and meet the requirements of the waiver program. Currently, a registered individual who transfers for two or more years must re-take an exam to be re-qualified. The proposed rule is under review with the SEC.
Securities-Related Bills Advanced Through Committees in Both Senate and House
On March 9, the Senate Banking Committee and the House Financial Services Committee introduced and advanced five securities-related bills out of committee. The bills—listed below—now await scheduling for consideration by each chamber in full.
- S. 327 / H.R. 910 - Fair Access to Investment Research Act of 2017. This legislation will direct the SEC to provide a safe harbor for certain investment fund research reports.
- S. 444 / H.R. 1219 - Supporting America’s Innovators Act of 2017. This legislation will amend the Investment Company Act of 1940 by expanding “the limit on the number of individuals who can invest in certain venture capital funds before those funds must register with the SEC as ‘investment companies.’”
- S. 462 / H.R. 1257 - Securities and Exchange Commission Overpayment Credit Act. This legislation will require the SEC to refund or credit excess payments made to the Commission under a 10-year statute of limitations.
- S. 484 / H.R. 1366 - U.S. Territories Investor Protection Act of 2017. This legislation will amend the Investment Company Act of 1940 to terminate an exemption for companies located in Puerto Rico, the Virgin Islands, and any other possession of the United States.
- S. 488 / H.R. 1343 - Encouraging Employee Ownership Act. This legislation will increase the threshold for disclosures required by the SEC relating to compensatory benefit plans.
H.R. 1312 - The Small Business Capital Formation Enhancement Act. The House Financial Services Committee also approved a sixth bill, which seeks to amend the Small Business Investment Inventive Act of 1980 to require an annual review by the SEC of any findings set forth in the annual government-business forum on capital formation.
FDIC Releases Winter 2016 “Supervisory Insights”
On March 7, the FDIC released its Winter 2016 Supervisory Insights, which contains articles discussing credit risk trends and balance sheet growth, emphasizes the importance of strong risk management practices, and provides a roundup of recently released regulatory and supervisory guidance. Doreen Eberley, Director of the FDIC’s Division of Risk Management Supervision, stated in the release that “[h]istorically, financial institutions that have prudently managed loan growth have been better positioned to withstand periods of stress and continue to serve the credit needs of their local communities.” Her statement goes on to “encourage bankers to identify and correct loan underwriting and administration problems before they adversely affect the bottom line.” The Supervisory Insights note that nearly 80 percent of insured institutions grew their loan portfolios during the third quarter of 2016, which is “a figure not far from the peak of nearly 83 percent of institutions that grew their portfolios in 2005.” While this edition focused primarily on lending in the following sectors—commercial real estate, agriculture, and oil and gas—it also stressed the need for managing loan concentrations through strong, forward-looking risk management practices that allow for early intervention.
DOJ Enters $45 Million Settlement with California Technology Company in False Claims Act Matter
On March 10, the Department of Justice (the “Government”) announced that a California-based technology company agreed to settle the Government’s allegations that it violated the False Claims Act by making false statements and claims in its negotiation and administration of a General Services Administration (“GSA”) contract. According to the Government’s press release announcing the settlement, the settlement resolved allegations that the company failed to “fully and accurately disclose its discounting practices to GSA contracting officers.” More specifically, the Government had alleged that the company provided false information about customer discounts in connection with the contract negotiations, and violated the price reduction clause in the contract by not providing government customers with additional discounts when commercial discounts improved. The company agreed to pay $45 million to resolve the allegations, which were first made in a whistleblower lawsuit filed under the False Claims Act. $10.195 million of the total settlement will be paid to the whistleblower, as the rules under the False Claims Act provide that private individuals may to sue on behalf of the government and share in a portion of the recovery.
House Bill Focuses on Collection of Debts Owed to Federal Agencies
In February, Rep. Mia Love (R-Utah) introduced the Stop Debt Collection Abuse Act of 2017 (H.R. 864)—legislation seeking to extend the scope of the Fair Debt Collection Practices Act (“FDCPA”) to cover the activities of private debt collectors working on behalf of federal government agencies. Specifically, the proposed bill expands the definition of debt subject to the FDCPA to cover obligations—including loans, overpayments, fines, past-due penalties, and late fees—owed to a federal agency. Under the proposed new law, a debt collector includes any person who regularly collects debts currently or originally owed or allegedly owed to a federal agency. Moreover, the bill also requires that any fees charged by private debt collectors seeking to collect debt owed to a federal agency are limited to: (i) reasonable amounts in relation to the actual costs of the collection; (ii) fees authorized by a contract between the debt collector and the federal agency; and (iii) amounts not greater than 10 percent of the amount collected by the debt collector. H.R. 864, which is currently pending before the House committee on Financial Services, is co-sponsored by Keith Ellison (D-Minn.), French Hill (R-Ark.), and Emanuel Cleaver II (D-Mo.).