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MoFo Reenforcement

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Senate Passes Financial Regulatory Reform Bill

Posted in Regulatory Developments

On March 14, 2018, the U.S. Senate passed S. 2155, the “Economic Growth, Regulatory Relief, and Consumer Protection Act.” If enacted into law, S. 2155 would provide modest regulatory relief to regional and community banks, among other things. The bill passed the Senate with bipartisan support through a vote of 67 to 31. In this Client Alert, we provide a general summary of some of the principal components of S. 2155.

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Financial Services Report – Spring 2018

Posted in Arbitration, CFPB, Credit Cards, Electronic Payments, Enforcement Actions, Fair Lending, Investigations, Mobile Payments, Mortgage, Payday Lending, Preemption, Privacy, Regulatory Developments, State Regulators

The 2018 Winter Olympics are over. We watched two 17-year-olds win gold medals in sports that didn’t exist when we were 17. The Garlic Girls, with nicknames from their favorite breakfasts, and the U.S. men’s team won medals in curling. No Miracle on Ice for the U.S. men’s hockey team, but the U.S. women’s team won gold. With almost 3,000 athletes representing 90 countries plus the Olympic Athletes of Russia, it was three weeks of kissing, cursing on national TV, stress knitting, and cheerleading.

Here at home, Acting CFPB Director Mick Mulvaney has lost no time in issuing a new mission statement and announcing a “call for evidence” about every aspect of the CFPB’s functions. Senator Elizabeth Warren and others are actively and loudly opposing these actions every step of the way. Fasten your seatbelts, we are in for a bumpy ride.

Read on for all the news on the CFPB, the other federal banking agencies, AML/BSA, FinTech, privacy, and the rest of our Reports.

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CFPB Requests Feedback on Rulemaking Process

Posted in CFPB

On March 7, 2018, the CFPB released a Request for Information regarding the Bureau’s rulemaking process, the seventh RFI in its initiative to reexamine the Bureau’s existing policies and procedures under Acting Director Mick Mulvaney’s leadership. Through this latest RFI, the Bureau seeks feedback “on all discretionary aspects of the Bureau’s [rulemaking] processes, including current practices, timelines, and potential improvements in each stage of these processes.”

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FDIC Enters Consent Order with Bank Regarding Prepaid Card Disclosures

Posted in Enforcement Actions

On March 7, 2018, the FDIC entered into a consent order with The Bancorp Bank for allegedly inaccurate disclosures concerning the amount of transaction fees assessed on cardholders. This consent order is the latest in a series of consent orders from federal agencies in recent years regarding allegedly inadequate or misleading account disclosures.

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SEC Breaks Silence on Certain Cryptocurrency Exchanges

Posted in Regulatory Developments

On March 7, 2018, the staff of the Divisions of Enforcement and Trading and Markets of the SEC issued a public statement regarding exchanges and other secondary trading platforms that list and/or facilitate the trading of coins and tokens online. The statement emphasizes that platforms offering the trading of digital assets that are securities, including many (if not all) coins and tokens issued through initial coin offerings (ICOs), must register with the SEC as a national securities exchange or operate under an exemption from such registration. The SEC statement addresses an apparently widespread misunderstanding that industry participants could operate such online coin or token exchanges without registering as an exchange, alternative trading system (ATS), or broker-dealer.

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CFPB Requests Feedback on Public Reporting of Consumer Complaints

Posted in CFPB

On March 1, 2018, the CFPB released its sixth Request for Information as part of its initiative to reexamine the Bureau’s existing policies and procedures under Acting Director Mick Mulvaney’s leadership. This RFI addresses how the Bureau analyzes and reports consumer complaint information. The RFI requests feedback to assist the Bureau in “assessing potential changes that can be implemented to the Bureau’s public reporting practices of consumer complaint information, consistent with law,” and solicits suggestions as to “whether any changes to the practices would be appropriate.”

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CFPB Requests Information on Supervision Processes

Posted in CFPB

On February 14, 2018, the CFPB issued a Request for Information seeking comments on improvements to the CFPB’s supervision program and “how best to achieve meaningful burden reduction.” The CFPB is seeking comments from “all interested members of the public,” including supervised entities, companies supervised by other agencies, consumer advocates, and regulators. The CFPB asks commenters to provide “as much detail as possible” without disclosing confidential supervisory information. This RFI is the fourth in a series of RFIs that the CFPB has issued under Acting Director Mick Mulvaney. According to the Bureau, it represents an attempt to “ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers.” As with the previous RFIs, this RFI presents an opportunity for commenters to provide specific suggestions for modifications to activities and functions of the CFPB.

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First State Charges Broker-Dealer in Connection with Violations of DOL Fiduciary Rule

Posted in Enforcement Actions

On February 15, 2018, the Enforcement Section of the Massachusetts Securities Division (the “Division”) of the Office of the Secretary of the Commonwealth charged a registered broker-dealer (the “Broker-Dealer”) that operated in Massachusetts with violating its own internal policies designed to ensure compliance with the U.S. Department of Labor’s (the “DOL”) Fiduciary Rule.

The DOL Fiduciary Rule

The DOL Fiduciary Rule significantly expands the scope of persons who will be deemed fiduciaries when dealing with retail retirement accounts.  Under the Rule, virtually any suggestion made by a financial intermediary to a retail retirement account regarding specific investments, investment strategies or investments advisers will result in the intermediary being deemed a fiduciary.  Certain communications with retail retirement investors will not trigger fiduciary status.  These communications include educational communications, and “hire me” communications that do not recommend a specific investment or investment strategy.

As a fiduciary, a financial intermediary is required to act in the best interest of its customer, without regard to the interests of the intermediary.  A fiduciary is also prohibited from receiving commissions and other forms of transaction-based compensation, and the fiduciary may not act as a principal in transactions effected with its client.  These prohibitions are particularly problematic for the broker-dealer industry, which was built on transaction-based compensation and often effects transactions on a principal basis.  Recognizing these problems, the DOL adopted two new prohibited transaction exemptions that, subject to numerous conditions, would permit the receipt of commissions or engaging in principal transactions.

The DOL is continuing to evaluate the Fiduciary Rule and has delayed full implementation of the Rule and related prohibited transaction exemptions until July 1, 2019.  However, on June 9, 2017, the basic requirements of the DOL Fiduciary Rule became applicable, as did the new Impartial Conduct Standards that must be met in order to receive commissions or other transaction-based compensation.  In connection with the delay in full implementation, the DOL and IRS indicated they would refrain from bringing enforcement actions against firms that were in good faith attempting to implement the new standards.

Impartial Conduct Standards

The Impartial Conduct Standards require broker-dealers and other intermediaries who advise retirement accounts and receive transaction-based compensation to: (i) act in the “best interest” of the retirement investor, considering such investor’s investment objectives, risk tolerance, financial circumstances and needs; (ii) avoid receiving unreasonable compensation; and (iii) ensure that disclosure about compensation, conflicts of interest and other matters relevant to an investor’s decision is not misleading.

The Massachusetts Complaint

The Broker-Dealer in the Massachusetts case prepared to comply with the DOL Fiduciary Rule by including provisions in its brokerage and investment advisor compliance manuals, which stated that “the firm does not use or rely on quotas . . . contests, special awards or incentives that are intended or reasonably expected to cause associates to make recommendations that are not in the best interest of [r]etirement [a]ccount clients or prospective [clients].”  The Division alleges that the Broker-Dealer failed to implement and enforce its own policy by running sales contests that rewarded associates for generating new net assets, including retirement assets.  While the Division alleges a variety of “aggressive sales practices,” the Complaint mainly discusses the use of such practices to gather assets, without necessarily specifying any instances where such sales practices influenced specific investment recommendations made to retirement investors.  The Division also alleges that the Broker-Dealer failed to inform the customers of the conflicts arising from the sales contests.  As a result, the Broker-Dealer was charged with violating the relevant provisions of the Massachusetts Uniform Securities Act.

In its Complaint, the Division seeks, among other things, a cease and desist order, disgorgement of illicit profits and an unspecified administrative fine.  The Broker-Dealer has not yet responded to the Complaint.

Our Take-Aways

The Massachusetts action is a timely reminder that the basic requirements of the DOL Fiduciary Rule are in effect, and broker-dealers as well as other financial intermediaries need to ensure that their practices comply with these new standards.  While the DOL may refrain from active enforcement prior to July 1, 2019, enforcement actions by state regulators and private civil actions may be predicated on violations of the fiduciary standards imposed by the DOL Fiduciary Rule.

In order to comply with the new standards, broker-dealers and other financial intermediaries need to review their internal compensation systems to eliminate any arrangements or practices that could reasonably be expected to incentivize brokers or other financial advisers to make recommendations that are not in the best interest of the retail retirement investor.  Sales contests or quotas that reward brokers for pushing specific products or strategies that may not be in the best interest of a retail retirement investor are problematic and should not be utilized.

That said, the Massachusetts Complaint appears to focus on sales contests that were designed to reward brokers for bringing in new assets.  Sales efforts focused on bringing in new accounts could fall within the “hire me” exception.  The Complaint is not clear about the extent to which the “aggressive sales practices” included contests or other compensation arrangements that rewarded brokers for recommending specific products or for generating transaction-based commissions. In that sense, the Complaint reflects in large measure the regulator’s view that broker-dealers who are now deemed fiduciaries under the DOL Fiduciary Rule may be charged with violations under the Massachusetts state securities laws to the extent that the broker-dealers fail to enforce policies adopted to comply with the new fiduciary standards.

In any event, to better ensure compliance with the DOL Fiduciary Rule, broker-dealers should implement the following measures:

  • meet with retail retirement investors on a regular basis and make sure they have an adequate understanding of the client’s current circumstances an objectives;
  • conduct thorough diligence on all investment products offered to retail retirement investors;
  • document the basis for the agent’s conclusion that a particular investment product is in the best interest of the customer;
  • evaluate internal compensation arrangements to ensure that they do not improperly incentivize sales agents to recommend products or strategies that are not in the best interest of the client;
  • train all sales agents and supervisors to comply with the new requirements and internal policies;
  • monitor account activity with a view to detecting potential deviations from the new best interest standard;
  • establish procedures for documenting the reasonableness of compensation received from transactions with retail retirement accounts;
  • establish and enforce procedures to identify, manage and disclose conflicts of interest; and
  • revisit distribution arrangements for new issues to ensure they comply with the new standards.

OCIE Announces Its 2018 Examination Priorities

Posted in Regulatory Developments

The SEC’s Office of Compliance Inspections and Examinations (OCIE) has published its 2018 examination priorities. Not surprisingly, it will continue to focus on the protection of retail investors and ensuring that registrants are appropriately disclosing or resolving conflicts of interest. In addition, OCIE will pay particular attention to developments in cryptocurrencies and initial coin offerings (ICOs). OCIE also identified its oversight of FINRA and the MSRB as an area of focus, which should be of particular interest to broker-dealers and municipal securities dealers.

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CFPB’s Third Request for Information Broadly Seeks Feedback on Enforcement

Posted in CFPB

In its third Request for Information to “ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers,” the Consumer Financial Protection Bureau seeks comments “to help assess the overall efficiency and effectiveness” of its enforcement process. We issued client alerts previously on the CFPB’s outreach and RFI process, the first RFI relating to Civil Investigative Demands, and the second RFI on administrative adjudications. All three of the RFIs seek to address primary criticisms that the Bureau’s enforcement process has been overzealous and an inappropriate burden on the financial industry. Respondents may well address the issues in all three related RFIs together. The comment period on this RFI will run for 60 days after the RFI is published in the Federal Register, which is anticipated to happen by February 12.

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