OCC Lays Groundwork for National Fintech Charters

Posted in FDIC, Fintech

Recently, the OCC has begun to lay the groundwork for future national fintech charters, relying on an existing federal law which grants the OCC receivership powers over non-depositary financial institutions, which would permit the OCC to grant charters to fintech companies without their having to obtain insurance from the FDIC. In a release issued on Sept. 13, 2016, the OCC indicated that it would have authority to grant new charters to those fintech companies whose business plans do not call for them to obtain deposit insurance, if the OCC determines that those companies have a reasonable chance of succeeding and can operate in a safe and sound matter, among other considerations. To some extent, the OCC approach to chartering fintech companies would help to resolve the question of which federal agency would have primary jurisdiction over fintech companies, as federal bank charters would fall  under the primary federal supervision of the OCC. The OCC requests that comments on this proposal be submitted by Nov. 14, 2016.


The DOL Fiduciary Duty Rule: Impact on Cash Solicitors for Advisory Firms

Posted in Investment Regulation, SEC, Securities

Under Rule 206(4)-3, adopted by the U.S. Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940 (and under a number of parallel state securities laws or regulations), an investment adviser may compensate a cash solicitor who is not otherwise connected to the advisory firm for soliciting and referring prospective clients to the adviser.  The Rule relies upon a number of procedural and disclosure provisions incorporated in the rule to protect investors.  However, for firms covered by the new Department of Labor Fiduciary Duty Rule that use such solicitors to locate and refer clients, there is a very significant impact that has to be considered.  Under appropriate circumstances, this could include anything from a huge company pension plan to a 401(k) roll-over account of an individual’s defined benefit or defined contribution plan, among others.

Under the new rule, people and entities providing investment advice will be deemed to be a “fiduciary” subject to very extensive provisions of the rule.  Under the rule, recommending an investment adviser or soliciting prospective clients for an adviser is deemed to be the giving of investment advice, and causes the party giving that advice to fall into the definition of a fiduciary.  That could result in a firm asking to be hired by a client to be deemed a fiduciary even before they enter into a relationship.  That clearly is unworkable.  To address this, the rule has an exception that allows an adviser to solicit prospective clients for itself without becoming a fiduciary during the solicitation process.  This reflects the view that a prospective client who is being solicited will recognize that someone saying “hire me” is acting in the firm’s interest.  The built-in bias is self-evident.

So what is the problem?  The key to the exemption is that the solicitation is being done by the person or firm for itself.  An independent cash solicitor under the rule is not soliciting for himself or herself.  The person is soliciting the prospective client for another entity – the advisory firm.  This solicitation would appear to fall outside the scope of the “hire me” exception.  When (or if) the DOL rule takes effect next year, an independent solicitor should consider establishing a more formal relationship with a firm for which he or she solicits.  And investment advisory firms would have to consider whether and how they may continue to use cash solicitors if the firm seeks prospective clients covered under the new DOL rule.

For more information regarding the DOL’s new fiduciary adviser rule, please see our GT Alert, “The DOL Issues Broader Fiduciary Adviser Definition: What Does it Mean for You?


New ADV Rule

Posted in Investment Regulation, Risk Management, SEC

Today, the SEC announced the adoption of amendments to several rules under the Investment Advisers Act of 1940 and to Form ADV, the investment adviser registration and reporting form. Although there is a long lead-in time to get in compliance with the new rules and Form ADV, advisers should consider beginning work now to ensure compliance by next year. The SEC proposed the Form ADV amendments in May 2015 and the final release addresses three areas:

(i) The adopted amendments will require advisers to aggregate information about the separately managed accounts they advise and, according to the adopting release, are designed to improve the depth and quality of the information collected by the SEC. The enhanced information also will be used to facilitate the SEC’s risk management initiatives and risk-based exam program.

(ii) The amendments incorporate a method for adviser entities operating a single advisory business to register with the SEC using a single Form ADV (i.e., umbrella registration). These changes relate to the 2012 No-Action Letter of the Office of Investment Adviser Regulation to the American Bar Association, Business Law Section, which provided a method for certain affiliates of a registered adviser to “rely” upon the registration of its affiliated adviser when conducting a single advisory business. These amendments formally incorporate this concept into Form ADV and are intended to make the availability of umbrella registration more well known to advisers and provide more data and a clearer picture of registrants utilizing umbrella registration to the SEC.

(iii) The amendments make other clarifying, technical, and other amendments to current items and instructions, which are based upon the staff’s experience with the current Form ADV and responses to inquiries from advisers and their service providers.

Additionally, the SEC has adopted various rule amendments, including amendments to the “books & records” rule, Rule 204-2, related to making and keeping records related to performance calculations and rates of return communicated in writing by an adviser to any person, as well as certain other technical amendments.

The amendments become effective 60 days after publication of the adopting release in the Federal Register. Compliance with the revised books & records rule will be required with respect to any communication circulated after Oct. 1, 2017. Any initial Form ADV filing or amendment to an existing Form ADV that is filed on or after Oct. 1, 2017, will be required to comply with the amended Form ADV. The SEC does not expect the electronic filing system (the IARD) to be able to accept the amended Form ADV until around the time of the 2017 compliance date, so it does not appear that early adoption will be an option.

If you have questions, they can be directed to Greenberg Traurig’s Investment Regulation Group or your Greenberg Traurig attorney.

SEC Scrutinizes Severance Agreements for Compliance With Dodd-Frank

Posted in Dodd-Frank, SEC

Recent SEC Fines

On Aug. 16, 2016, the U.S. Securities and Exchange Commission (SEC) announced that it had issued its second fine in as many weeks concerning a company’s use of severance agreements that contain confidentiality and/or covenant-not-to-sue or release provisions that allegedly violate SEC whistleblower Rules.

These recent SEC charges arise from SEC Rules, passed in August 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which enable whistleblowers to collect 10 percent to 30 percent of the total award when giving information that leads to an action recovering at least $1 million. Rule 21F-17 provides that “[n]o person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

According to the most recent SEC order, Health Net Inc. agreed to a monetary penalty without admitting or denying the SEC’s allegations that it illegally used severance agreements requiring outgoing employees to waive their ability to obtain monetary awards from the SEC’s whistleblower program. According to the cease-and-desist order from the SEC, from August 2011 to October 2015, Health Net had language in its severance agreements that stopped employees from “filing an application for, or accepting, a whistle-blower award” from the SEC.  In addition to the fine, the settlement agreement also required Health Net to notify former employees who signed the severance agreements to let them know they are not prohibited from accepting SEC whistle-blower rewards.

To learn more, please see GT Alert “SEC Scrutinizes Severance Agreements for Compliance with Dodd-Frank” authored by Greenberg Traurig attorneys Todd D. Wozniak and Jack S. Gearan.

The Ninth Circuit Issued a Ruling in Bourne Valley Court Trust v. Wells Fargo Bank, NA

Posted in foreclosure, Lending, Litigation, Mortgage

Last week, the Ninth Circuit held, in Bourne Valley Court Trust v. Wells Fargo Bank, NA that Nevada’s super-lien priority statute, NRS § 116.310, prior to certain amendments enacted in 2015, was facially unconstitutional.

Nev. Rev. Stat. 116.3116 establishes that liens resulting from non-payment of homeowners’ association (HOA) have priority over other secured liens for up to nine (9) months of unpaid HOA dues.  In September 2014, the Nevada Supreme Court held, in SFR Invest. Pool I, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. Sept. 18, 2014), that NRS 116.3116 does not establish merely payment priority, but provides a homeowners’ association with a true super-priority lien, which upon proper foreclosure may extinguish an otherwise valid first deed of trust.  The impact of this ruling on secured lenders was compounded by the fact that the statute did not require HOAs to provide notice of their lien to other security holders unless the lien-holder had expressly “opted-in” to receiving HOA notices when it recorded its lien.  See N.R.S. section 116.31163(2) (requiring notice of default and election to sell be mailed to “any holder of a security interest encumbering the unit’s owner’s interest who has notified the association, 30 days before the recordation of the notice of default, of the security interest”).  In the wake of the SFR Investments ruling, HOAs foreclosed their interests, often without notice to other lien holders, and in some cases accepting bids equal to a fraction of the amount owed to the secured lender.  The purchasers at the foreclosure sales were often professional investors.  To ensure that they took title to a property free and clear of any liens, investors frequently filed quiet title actions against all of the junior lien holders.  Lenders raised a variety of legal defenses in these suits, including that NRS 116.3116 was unconstitutional.  These cases have been making their way through state and federal courts since then with widely diverging results.  

In response to SFR Investments, the Nevada Legislature amended the statute to provide certain protections to lenders.  Among them was the elimination of the “opt-in” notice feature. The amended statute requires that the HOA mail to the first deed of trust holder the default and sale notices within 10 days of recording, and that the HOA record an affidavit indicating those notices were sent to the first lien holder.  The amendments applied only to HOA foreclosures that occur on or after Oct. 1, 2015.  Completed and pending foreclosures were not benefitted by the amendments and litigation involving those properties continued to comprise a substantial portion of court dockets.

In Bourne Valley Court Trust v. Wells Fargo Bank, NA, the Ninth Circuit addressed one of the defenses lenders asserted in post-foreclosure quiet title actions – that the super-lien statute was unconstitutional on its face because it results in the taking of bank property without due process.  The plaintiff, Bourne Valley Court Trust, had purchased the subject property at an HOA foreclosure sale and then commenced a quiet title action.  The district court granted the HOA’s motion for judgment, agreeing that NRS § 116.3116(2) had extinguished all junior interests.  The Ninth Circuit reversed, concluding that the foreclosure violated the due process rights of the senior lien holder because it impermissibly shifted the burden to mortgage lenders to request notice of an HOA’s foreclosure proceedings, without any regard for: (1) whether the mortgage lender was aware that the homeowner had defaulted on her dues to the homeowners’ association, (2) whether the mortgage lender’s interest had been recorded such that it would have been easily discoverable through a title search, or (3) whether the homeowners’ association had made any effort whatsoever to contact the mortgage lender.  

The Court found the requisite “state action” in the enactment of the statute itself.   Although the HOA’s foreclosure sale was a private transaction, the statute itself “unconstitutionally degraded [Wells Fargo’s] interest in the Property.  Absent operation of the statute, Wells Fargo would have had a fully secured interest in the Property.”  Accordingly, the Court concluded, NRS § 116.3116’s “opt-in” notice scheme facially violated mortgage lenders’ constitutional due process rights.  The Court vacated the district court’s judgment and remanded the case for further proceedings.  Although the decision is silent regarding any retroactive application, arguably all foreclosures conducted under NRS § 116 prior to the 2015 amendments are unconstitutional. 

To view a copy of Bourne Valley Court Trust v. Wells Fargo Bank, please click here.


Davos Report Envisions Blockchain Technology as Central to Global Banking

Posted in Banks, Consumer Financial Services, Fintech

On Aug. 12, 2016, the World Economic Forum in Davos issued a report that predicts that distributive ledger systems, or blockchains, could enable banks to offer cheaper, faster and more secure services, without using bitcoin or other virtual currencies for transactions, according to the New York Times.  Distributed ledger technology, or blockchain, is a system of maintaining records that is operated by a network of users, rather than, in the case of traditional banking, a single financial institution.  The New York Times has drawn comparisons to the network of users who maintain Wikipedia.  The use of digital ledger technology in the financial services industry could permit multiple banks to move money and track transactions in new ways across borders and other networks in a more secure, transparent, and effective manner by allowing multiple points of access to the distributed ledger system. Because blockchains displace the need for third parties intermediaries, blockchains have the potential to reduce transaction costs. This might be especially attractive to businesses which lack a central database they can trust to keep their records.

The report is the result of one year of research and five meetings of senior executives from major financial institutions.  The World Economic Forum identified six value-drivers of distributed ledger technology as it could be applied to the financial services industry:

(1)    Operational simplification– reduction or elimination of manual energy needed to resolve disputes;

(2)    Regulatory efficiency improvement – regulators will be able to monitor activity in real-time;

(3)    Counterparty risk reduction – agreements are codified, executed and shared in an immutable environment, limiting the need to rely on trust of counterparties;

(4)    Clearing and settlement time reduction – Third parties support transaction verification and accelerates settlement;

(5)    Liquidity and capital improvement – reduction of locked in capital would provide transparency in sourcing liquidity for assets; and

(6)    Fraud minimization – Asset provenance and transaction history can be established within a single source.

The report further states that distributed ledgers could enable banks to improve mainstream transaction record-keeping like global payments and stock trading and less well-known sectors like trade finance and contingent convertible bonds.  The report estimates that 80% of banks globally could start distributed ledger projects by next year.  Please click here to view a copy of the report.

Also in August 2016, fifteen global banks, including UBS and Wells Fargo, indicated that they had completed a prototype of a distributed ledger system that could track trade financing around the globe and provide a single database for scattered and hard-to-track transactions, as reported by the New York Times.

CFPB Finalizes Notable Revisions to Regulations X and Z

Posted in Bankruptcy, CFPB, Compliance, Financial Regulation, foreclosure

On August 4, 2016, the Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) announced that it had finalized revisions to its regulations concerning the servicing of residential mortgage loans. The goal of the changes is to provide greater protections to mortgage borrowers, particularly their successors in interest, and to prevent borrowers from being wrongly Foreclosed upon, according to CFPB Director Richard Cordray. The CFPB initially proposed revisions to the regulations in November 2014. It ultimately modified its proposal to address concerns from the public, the industry, and other commenters.

To learn more, please see GT Alert “CFPB Finalizes Notable Revisions to Regulations X and Z.”


Massachusetts Offers Policy Guidance on Investment Advisers’ Use of Robo-Advisers

Posted in Financial Regulation, Investment Regulation, Risk Management, U.S. Financial Market

As robo-advisers continue to grow in popularity with investors, especially millennial investors, at least one regulator is taking a closer look.  On July 14, 2016, Massachusetts Secretary of the Commonwealth William Galvin issued a policy statement addressing the use by investment advisers under his jurisdiction of third-party robo-advisers.  This follows a similar policy statement by Secretary Galvin in April 2016 addressing fully-automated robo-advisers.  The more recent guidance urges IAs to provide highly-specific disclosures to clients about a firm’s relationships with robo-advisers, the purported benefits and limitations of using a robo-adviser, and, perhaps most importantly, the multiple layers of fee structures.

A robo-adviser provides an automated service, without the need for traditional advisor relationships, by employing asset-allocation models and algorithms to invest client portfolios.  According to the Massachusetts policy statement, robo-advisers have experienced significant growth “based in large part on their perceived simplicity, their ease of accessibility, and their ability to service investment advisory clients who may not have sufficient assets to establish a relationship with a traditional investment adviser.”  Massachusetts has stressed that robo-advisers are investment advisers, and that they owe the fiduciary duties of loyalty and care to their current and prospective investment advisory clients.

The state’s guidance makes clear that, to satisfy their fiduciary obligations, investment advisers registered in Massachusetts have a high disclosure burden any time they enter into a sub-advisory relationship with a robo-adviser.  This includes the following:

  • The IA should identify the proposed robo-adviser to its clients and provide a detailed explanation of its services.  Specifically, the IA should explain: (i) why it chose the proposed robo-adviser as opposed to others; (ii) any conflicts of interest that may arise; (iii) any additional fees that may be incurred; and (iv) the perceived advantages and disadvantages of the robo-adviser relationship.  These disclosures should be made to the client before the robo-adviser relationship has been established.
  • The IA should inform those clients, such as retail investors, who can receive robo-adviser services directly that such services can be obtained without an intermediary, and without paying an additional layer of advisory fees.
  • The IA should explain the ways in which it provides value to its client over and above the value provided by the robo-adviser.  This might include, for example, assisting the client in establishing financial and investment goals, providing financial planning services, or evaluating the client’s overall investment portfolio.  These investment adviser services should be distinguished from those services that will be provided by the robo-adviser.
  • The IA should explain the services that it does not provide when it uses a robo-adviser.  Most robo-advisers use proprietary algorithms to make asset allocation determinations in the client’s account, and most of them—or their broker-dealer affiliates—effect trades in the client’s robo-adviser account.  These services typically would not be provided by the IA.
  • The IA should explain the type of investment products used by the robo-adviser in its portfolio structure.  It is common for robo-advisers to use a pool of ETF securities for client portfolios, the weightings of which are adjusted and rebalanced algorithmically over time.  The IA should consider, consistent with its fiduciary obligations, whether such investment products are appropriate for its individual clients.
  • The IA should avoid boilerplate disclosures that are not tailored specifically to its robo-adviser relationships.  Many IAs use the services of compliance consultants to assist in preparing regulatory disclosures—but they cannot delegate those regulatory responsibilities, and bear the full responsibility of satisfying their disclosure obligations, when they engage robo-advisers.

The guidance provided by Secretary Galvin applies to investment advisers under his jurisdiction in Massachusetts, but IAs not registered in Massachusetts should also be aware of these issues and prepare for the inevitability of similar guidance from other state and federal regulators.  Massachusetts is ahead of the pack on this issue, but will not be alone for long.  We expect this to be a harbinger of things to come.

The Massachusetts Policy Statement can be found here: https://www.sec.state.ma.us/sct/sctpdf/Policy-Statement-State-Registered-Investment-Advisers-Use-of-Third-Party-Robo-Advisers.pdf

A version of this blog post appeared in Compliance Reporter on Aug. 8, 2016.  It can be accessed here.

FINRA Sends Targeted Exam Letter Concerning the Sale of Non-Traded Business Development Companies

Posted in Brokers, Compliance, FINRA, Investment Regulation, SEC

FINRA recently sent a sweep letter (or targeted exam letter) to select broker dealers, inquiring about those firms’ sale of non-traded Business Development Companies (BDCs).  BDCs are SEC-registered investment companies (usually closed-end funds) that pool investor funds in a debt or equity portfolio (typically of small- or medium-sized companies), with the objective of generating income or capital growth (or both).  Non-traded BDCs are illiquid and have no secondary market.  The product has come under recent scrutiny for allegedly high upfront fees.

FINRA is asking firms for information related to non-traded BDCs for the period from Jan. 1, 2015, through June 30, 2016, including:

  1. A list of each BDC offered by the firm that includes the name of the BDC, the dates of each offering, and the firm’s role in each offering (e.g., sole dealer-manager, lead dealer-manager, distributor, etc.);
  2. For each BDC offered: (a) a list of all participating broker-dealers that have a selling agreement with the firm per each registration statement; and, (b) sample copies representative of each type of selling agreement utilized;
  3. A spreadsheet which lists, by date, all broker-dealers that sold the identified BDCs to its customers in initial or follow-on offerings that includes for each BDC: (a) the name of the participating broker-dealer; (b) the total number of shares bought and sold; (c) the total dollar value of proceeds; and, (d) the number of customers purchasing the BDC; and
  4. A copy of the firm’s due diligence procedures and a written description of the due diligence that the firm conducts of the BDC initially and on an ongoing basis (as well as a written description of the due diligence that the firm conducts of participating broker-dealers with which the firm has a selling agreement.)

The sweep letter follows recent enforcement actions by FINRA concerning the sale of non-traded BDCs (most specifically with regard to the alleged failure by firms to pass on volume discounts or other savings to customers).  Firms receiving the sweep letter have until Sept. 9, 2016, to respond.

FINRA’s press release announcing the sweep letter may be viewed here.

U.S. Treasury Department Expands its ‘Real Estate GTOs’ to Require Title Insurance Companies and Their Agents To Report the Ultimate Beneficial Owners of Entities Used To Buy Residential Real Estate in All-Cash Purchases in Six Metropolitan Areas, Including all of New York City, South Florida and Portions of California and Texas

Posted in Financial Crimes Enforcement Network, Insurance, Real Estate, Regulatory Compliance

On July 27, 2016, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN) issued a press release announcing new Geographic Targeting Orders (GTOs) applicable to certain U.S. title insurance companies and their subsidiaries and “agents” (collectively, the Targeted Title Insurance Companies). The new GTOs go well beyond those that were initially issued in January 2016 that were geographically limited to certain residential real estate transactions in Manhattan and Miami-Dade County.  The new GTOs require Targeted Title Insurance Companies to obtain information on the ultimate beneficial owners of certain entities buying residential real estate in six U.S. metropolitan markets.

To learn more about this topic, please see GT AlertInsurance Companies and Their Agents To Report the Ultimate Beneficial Owners of Entities Used To Buy Residential Real Estate in All-Cash Purchases in Six Metropolitan Areas, Including all of New York City, South Florida and Portions of California and Texas.”