SEC Continues Enforcement Push as Outlined in its Announcement of FY 2016 Statistics

Posted in SEC

In an announcement this week related to FY 2016 enforcement statistics, the SEC reported another increase and outlined its continued robust efforts.  In 2016, the SEC filed 868 enforcement actions besting its 2015 total by 61 actions and 2014 by 113 actions.  Although enforcement actions were up, the SEC announced that it had obtained judgments and orders totaling more than $4 billion, a sum consistent with amounts obtained in 2014 and 2015 ($4.16 billion and $4.19 billion respectively).  Enforcement actions for FY 2016 included the most cases ever initiated against or involving investment advisors or investment companies totaling 258, approximately 30% of the total enforcement actions filed.  FCPA related enforcement actions also rose to an all-time high of 21 and whistleblowers were paid distributions of $57 million in 2016.   Based on the last three years, it seems safe to say that SEC enforcement is continuing to ramp up with no signs of slowing down.


U.S. Court of Appeals for the District of Columbia Circuit Declared CFPB’s Single-director Structure Unconstitutional

Posted in CFPB, Dodd-Frank, U.S. Supreme Court

In a 110-page decision issued on Oct. 11, 2016, the United States Court of Appeals for the District of Columbia Circuit declared the Consumer Financial Protection Bureau’s (CFPB) single-director structure unconstitutional and vacated a $103 million fine against PHH.  The Court found that the current structure allows the Commissioner to wield too much power that is unchecked by any other part of government.  To remedy this concern, the Court severed the “for cause” provision from the statute, placing the agency under the direct supervision of the president.  The Court also vacated the Order against PHH, finding that the CFPB’s interpretation of RESPA violated PHH’s due process rights in several respects. First, the Commissioner erred in disregarding long-standing guidance from the Department of Housing and Urban Development (HUD) recognizing that Section 8 of RESPA allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.  The Court declared that Section 8 shall continue to have the meaning ascribed to it by HUD.  Secondly, in calculating the penalty against PHH, the Commissioner had improperly included loans that had closed more than three years prior to the action.  The Court rejected the CFPB argument that it was not subject to any statute of limitations, and ruled that the agency was subject to the three-year limitations period that has traditionally applied to agency actions to enforce RESPA.

As we wrote about previously, this case stems back to a June 2015 CFPB order in which CFPB Director Richard Cordray singlehandedly increased a $6 million fine levied by an administrative law judge against PHH for allegedly referring consumers to mortgage insurers in exchange for kickbacks in violation of the Real Estate Procedures Act (RESPA).  The ALJ’s fine was based upon loans closed on or after July 21, 2008..  PHH appealed that ruling to the Director.  Cordray issued a final order that required PHH to disgorge $109 million – all the reinsurance premiums it received on or after July 21, 2008.On appeal, PHH challenged Cordray’s authority to levy the additional fine and challenged the constitutionality of the CFPB itself.

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Greenberg Traurig Hosts the Program ‘Emerging Issues in Banking, Consumer Finance, and FinTech Litigation’

Posted in Events, Financial Regulation, Financial Services Litigation, Fintech

On Oct. 25, please join Greenberg Traurig’s Class Action Litigation and Consumer Financial Services Litigation Practice Groups in the presentation titled “Emerging Issues in Banking, Consumer Finance, and FinTech Litigation” in our Silicon Valley Office or via Webinar.

While the finance capitals of the world have traditionally been in places like New York, London, and Hong Kong, Silicon Valley has become the epicenter for innovation in financial services markets. Last year alone, more than $19 billion was invested in FinTech, spurring remarkable innovation and setting the stage for large-scale disruption of the industry. At the same time, the financial services industry has never faced greater regulatory scrutiny or uncertainty. These dynamics also make FinTech companies a prime target of litigation. This program will explore the litigation risks facing FinTech companies and traditional financial institutions entering into these emerging markets. Greenberg Traurig Shareholders, Jennifer Gray, Co-Chair Consumer Financial Services Class Action Litigation, Cindy Hamilton and Paul Ferak will address the following topic areas.

  • Class action risk areas and trend
  • Mobile Payments litigation and emerging payment technologies
  • Virtual currency litigation
  • Litigation strategies
  • Litigation and regulatory outlook for 2017
  • Marketplace lending

Tuesday, October 25, 2016
Lunch served: 11:30 a.m.
Program begins: 12:00 p.m.

Greenberg Traurig, LLP
1900 University Avenue
5th Floor
East Palo Alto, CA 94303

Please RSVP for the live seminar by Thursday, October, 20. To register for the live seminar, please click here. To register for the webinar, please click here.

CLE Credits: 1.0 General/Professional Practice credit pending approval.

New Proposed RIC Regulations

Posted in Client Alert, Financial Regulation, Securities, Tax

The Internal Revenue Service (the Service) issued guidance last month that will, practically speaking, make it slightly more difficult for entities to qualify as regulated investment companies (RICs) for federal income tax purposes.

Under current law, an SEC registered investment company may qualify as a RIC only if, inter alia, (i) 90 percent of its gross income is derived from the business of investing in stock, securities or currencies, and (ii) at least 50 percent of its total assets are represented by cash, cash equivalents, and certain securities.  For these purposes a “security” is an instrument that is treated as a security under applicable sections of the Investment Company Act of 1940.  This has the anomalous effect of making a tax-law classification dependent on a regulatory law definition.

Prior to 2011, the Service issued both public and private guidance regarding the classification of instruments as securities for these purposes.  Derivatives that referenced an index of commodities were held not to be securities; however, shares in an entity whose assets consisted solely of commodity positions were held to constitute securities, even though they offered exposure similar to that of a cash or derivative commodity position.

In the recently-issued guidance, the Service stated that, as of Sept. 27, 2016, it will no longer rule on whether an instrument constitutes a security for these purposes, and ceded exclusive jurisdiction in this area to the SEC, which has historically interpreted the term “securities” more narrowly.

The Service issued proposed regulations simultaneously with the guidance described above.  These regulations hold that taxable “phantom” distributions under Sections 951(a) or 1293(a) of the Internal Revenue Code (relating to investments in certain types of foreign corporations) are not treated as dividends or other qualifying income for purposes of the RIC qualification tests unless they are accompanied by actual cash distributions.  These proposed regulations will be effective in tax years beginning on or after the date that is 90 days after the regulations are published in the Federal Register in final form.

To learn more, please view the GT Alert, “New Proposed RIC Regulations.”

Greenberg Traurig’s Koichiro Ohashi, Lori Nugent, and Jonathan Beckham to Participate in the ACCA and FIAJ Seminar on Cloud Computing Services Usage by the Financial Services Industry

Posted in Cybersecurity, Events, Fintech

Greenberg Traurig is proud to host and participate in the Asia Cloud Computing Association (ACCA) and the Futures Industry Association of Japan (FIAJ) program “Cloud Computing Services Usage by the Financial Services Industry – Business Models and Regulatory Approach” in the GT Tokyo office on Nov. 1, 2016. GT Shareholders Koichiro Ohashi and Lori Nugent and Of Counsel Jonathan Beckham, will participate as speakers in the program. Ohashi will provide information regarding the Japan data privacy law that is scheduled to change. Beckham and Nugent will address U.S. regulator concerns regarding cyber risks.


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.