NY Governor’s Proposed Budget Forecasts Increased Regulation of Fintech

Posted in Fintech

In his proposed budget for fiscal year 2017-2018, New York Governor Andrew Cuomo advanced changes to the New York Banking Law that would give the Department of Financial Services (NY DFS) increased licensing authority over online and marketplace lenders.[1] The proposed budget would prohibit any entity from engaging in the business of making loans in New York of $25,000 or less to individuals for personal, family, household, or investment purposes except as authorized by regulations issued by the Superintendent of NY DFS and after first obtaining a license. Similar restrictions would be imposed on entities making business loans of less than $50,000. If enacted, this requirement would take effect Jan. 1, 2018.

According to the proposal, an entity would be considered to be engaging in the business of making loans in New York even if it is not the lender, but instead an entity that “purchases or otherwise acquires from others loans or other forms of financing, or arranges or facilitates the funding of loans” to individuals residing in the state of New York. Depending on the regulations eventually issued by the NY DFS, this change in the law could require companies currently engaging in small-balance lending to NY borrowers to cease their activities in New York until they obtain a license. Obtaining such a license could take a significant amount of time, and cause a significant interruption to the entity’s business, unless the NY DFS were to authorize entities to continue business while the license application is pending.

The New York Legislature is in the process of completing hearings on the Governor’s proposed budget. The Senate and Assembly is each expected to introduce and pass legislation that stakes out the House’s position on the Governor’s proposals on or before March 15. 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.

This development further highlights the significance of the plan by the Office of the Comptroller of the Currency (OCC) to charter financial technology companies under a special-purpose federal charter.[2] Any entity granted a federal banking charter would be largely exempted from such state licensing requirements, just as federally chartered banks are not typically subject to state licensing. The preemption of state licensing and regulatory authority was cited by the Conference of State Bank Supervisors as one of reasons that they were “firmly opposed” to any special-purpose federal charter for Fintech companies.[3] While the requirements of an OCC charter may prove to be unpalatable or difficult to satisfy for certain Fintech companies, if the licensing regulations promulgated by the NY DFS impose similar regulatory burdens, or if other states follow suit with similar or more stringent requirements, then the comparative appeal of an OCC charter is likely to improve.

[1] https://www.budget.ny.gov/pubs/executive/eBudget1718/fy18artVIIbills/TEDArticleVII.pdf at Part EE.

[2] See GT Alert, “OCC Consideration of Special Purpose Fintech Charters Draws Rapid Reaction from State Banking Regulators,” Dec. 15, 2016.

[3] See Letter to Comptroller Curry from the Conference of State Bank Supervisors dated Nov. 14, 2016, p. 2.


No Action Relief Regarding Variation Margin Rules

Posted in CFTC, Tax

Yesterday, the U.S. Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) announced the issuance of a time-limited no-action letter stating that, from March 1, 2017 to September 1, 2017, DSIO will not recommend an enforcement action against a swap dealer (SD) for failure to comply with the variation margin requirements for swaps that are subject to a March 1, 2017 compliance date. The DSIO no-action letter does not postpone the March 1, 2017 compliance date for variation margin, rather it allows market participants a grace period to come into compliance.  The alternative investment community should address this letter in conjunction with separately issued CFTC no action letters as well as EMIR’s variation margin requirements which target March 1st. Check with your counsel on “real time” developments that directly affect your portfolio.

The alternative investment community is thrilled given that these new rules require that initial margin be segregated from variation margin which produces opportunity costs to both sides.  Netting allows parties to benefit from heavily in-the-money positions in light of large initial margin amounts due at trading. Another major issue with the variation margin rules is the shorter delivery and resolution period. Are our back offices truly ready and is this rule actually benefiting our community or hurting our bottom line?! Irrespective of the opportunity costs or benefits to tax payers and investors alike, the alternative investment community undoubtedly welcomes the extra time to become compliant.

President Trump Signs Executive Order Establishing “Core Principles” of Financial Regulation and Addressing the DOL Fiduciary Rule

Posted in Financial Regulation

On Friday, Feb. 3, 2017, President Trump signed an executive order entitled, “Core Principles for Regulating the United States Financial System.” While the Order was widely characterized as commencing a roll-back of financial regulations, including the Dodd-Frank Act and the Fiduciary Rule,[1] the text of the actual order is more modest.  It instead sets forth a set of “Core Principles” which it directs the Secretary of the Treasury and the Financial Stability Oversight Council to consider in reviewing existing laws and regulations and to report back to the President within 120 days on steps which may be needed to support those Core Principles.  The Core Principles set forth are:

  1. empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
  2. prevent taxpayer-funded bailouts;
  3. foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
  4. enable American companies to be competitive with foreign firms in domestic and foreign markets;
  5. advance American interest in international regulatory negotiations and meetings;
  6. make regulation efficient, effective, and appropriately tailored; and
  7. restore public accountability within Federal regulatory agencies and rationalize the Federal regulatory framework.[2]

The Order has no immediate impact on existing regulations, other than to direct regulatory agencies to enforce a set of priorities. While certain aspects of Dodd-Frank can be addressed by executive agencies, significant changes would likely require congressional action, such as the “Financial CHOICE Act” being advocated for by House Financial Services Committee Chairman Jeb Hensarling. Regardless, the order provides insight into which aspects of the existing regulatory framework are likely to survive or be jettisoned if the White House is successful in implementing its objectives.

On Feb. 3 President Trump also signed an Executive Order addressing the Department of Labor (DOL) Fiduciary Rule. The final memo (attached) is addressed to the Secretary of Labor and states that the President has made it a priority to empower Americans to make their own financial decisions and save for their own well-being. The memorandum states that the Rule “may significantly alter the manner in which Americans can receive financial advice, and may not be consistent with the policies of my Administration.” The President directs the Secretary of Labor to conduct a new economic and legal analysis to determine whether the rule: (i) has or is likely to harm investors by reducing access to savings offerings; (ii) has resulted in dislocations and disruptions in the retirement services industry that may adversely affect investors or retirees; and (iii) is likely to cause an increase in litigation and increase in the prices that investors must pay to gain access to retirement services. This echoes many of the concerns voiced by opponents of the Rule. The memo further states that if the Secretary of Labor concludes that the rule is likely to result in any of the consequences described above or if the DOL concludes for any other reason that the rule is inconsistent with the administration’s priority to empower Americans to make their own financial decisions, then the DOL shall publish a proposed rule for notice and comment “rescinding or revising” the Rule. Contrary to earlier reports, the final memo does not contain any language directing the DOL to delay Rule implementation 180 days. It appears that the administration may have removed originally reported explicit implementation delay language before releasing the memorandum late Friday afternoon, possibly relying on the Jan. 23, 2016 memorandum by Chief of Staff Reince Priebus ordering all executive department and agency heads to institute a moratorium on new rules and delaying finalized rule effective dates 60 days. This would potentially push the Rule implementation date to June, although there is some uncertainty as to the application of this memorandum to the Rule.

The Order does not send a clear message as to the fate of the Rule and it does not put a deadline on when the Secretary of Labor must make the determinations described in the memo. That being said, the Order reflects many opponents’ criticisms of the Rule and provides the Secretary of Labor with broad discretion to propose a rule that rescinds or revises the Rule if he concludes “for any other reason” that the Rule is inconsistent with the President’s priority with respect to American investors. For now there is an acting Secretary of Labor, but the confirmation hearings for the President’s appointee as Secretary of Labor, Andrew Puzder, CEO of CKE Restaurants that owns Hardees and Carl’s Jr. restaurants, were delayed again last week to an undetermined date.

Commentary regarding the Order indicates that “insiders” think this Order will result in the implementation of the Rule being delayed and that the Rule ultimately will be rescinded by a subsequent rule. Others believe complete rescission is unlikely for a rule that is advertised as protecting the American investing public. In any case the process will take time.


[1] See, e.g., “Trump Signs Actions to Begin Scaling Back Dodd-Frank,” Wall Street Journal, February 3, 2017, https://www.wsj.com/articles/trump-signs-executive-actions-toward-scaling-back-dodd-frank-financial-regulation-1486148274

[2] Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs, https://www.whitehouse.gov/the-press-office/2017/01/30/presidential-executive-order-reducing-regulation-and-controlling

Mortgage Servicers Subject to New California Law Protecting Surviving Spouses and Heirs; Violations Carry Steep Penalties

Posted in CFPB, Mortgage

A new California law protects widowed spouses and other survivors, including domestic partners, heirs, siblings, joint tenants, and other people who own their homes but are not listed on the mortgage, from foreclosure following the death of a mortgagor. The Homeowner Survivor Bill of Rights (SBOR), California Civil Code § 2920.7, went into effect on Jan. 1, 2017, and requires mortgage lenders and servicers to provide surviving spouses or heirs with information about the loan and grants these surviving persons the right to seek a loan assumption and modification, if needed. The law provides a private right of action against lenders and servicers that violate the law, including post-foreclosure remedies of $50,000 or treble actual damages.

To learn more, please view GT AlertMortgage Servicers Subject to New California Law Protecting Surviving Spouses and Heirs; Violations Carry Steep Penalties.”


The Supreme Court Agrees to Determine Whether SEC Actions Seeking Disgorgement are Subject to the Five-Year Limitations Period Set Forth in 28 U.S.C. § 2462

Posted in SEC, U.S. Supreme Court

At the urging of both an individual petitioner and the SEC, the Supreme Court has agreed to resolve a recent circuit split as to whether the five-year limitations period applicable to SEC enforcement actions applies to the remedy of disgorgement. Kokesh v. SEC, __ S. Ct. __, No. 16-529, 2017 WL 125673 (U.S. Jan. 13, 2017). The issue is whether disgorgement is a “penalty” or “forfeiture” for purposes of the five-year limitations period in 28 U.S.C. § 2462, which applies to government actions seeking a “civil fine, penalty, or forfeiture.” If, on the other hand, disgorgement is an equitable remedy akin to injunctive relief, a long line of cases holds that the statute would not apply. Last year two U.S. Courts of Appeal reach diametrically opposed conclusions on this question. In May, the Eleventh Circuit held that disgorgement is a “forfeiture” subject to the five-year limitations period. See SEC v. Graham, 823 F.3d 1357, 1363-64 (11th Cir. 2016). Three months later, the Tenth Circuit held that disgorgement is neither a “penalty” nor a “forfeiture” and therefore is not subject to the five-year limitations period. See SEC v. Kokesh, 834 F.3d 1158, 1166-67 (10th Cir. 2016).

To learn more, please see GT AlertThe Supreme Court Agrees to Determine Whether SEC Actions Seeking Disgorgement are Subject to the Five-Year Limitations Period Set Forth in 28 U.S.C. § 2462.”

Ninth Circuit Holds that Foreclosure Trustee is Not Subject to FDCPA

Posted in FDCPA, Mortgage

In Ho v. ReconTrust Co., No. 10-56884, 9th Cir.; 2016 U.S. App. LEXIS 18836 (October 19, 2016), a borrower sued a foreclosure trustee, ReconTrust, and others, asserting that recording a notice of default and other statutorily mandated notices violated the FDCPA because they misrepresented the amount owed on the mortgage loan. The district court granted the trustee’s motion to dismiss, and the plaintiff appealed. In a two-to-one decision, the Ninth Circuit affirmed the district court.

The FDCPA defines “debt” as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” “Debt is synonymous with money.” 15 U.S.C. § 1692a(5). A trustee’s notice of default and a notice of sale do not demand payment of money. Rather, they are statutorily-required notices that must be recorded before a trustee may exercise the power of sale. The majority explained that while default notices may “induce” a borrower to repay all or part of the mortgage arrearage, these inducements arise from the underlying lien and risk of foreclosure, not the debt. Chief Judge Kozinski analogized the situation to parking tickets: “[t]he fear of having your car impounded may induce you to pay off a stack of accumulated parking tickets, but that does not make the guy with the tow truck a debt collector.”

The FDCPA specifically discusses “security interests” and contains provisions governing when those who seek to enforce them come within the statutory definition of “debt collector.” Enforcement of a security interest falls within the narrow purview of 15 U.S.C. § 1692f (6), which only prohibits the taking, or threatening to take, non-judicial action to dispossess a consumer of his or her property when there is no right or intent to do so. The court held that Congress intended a narrower definition to apply to those seeking to enforce a security interest rather than the general definition of “debt collector.” Otherwise, the provision containing the narrower definition would be rendered superfluous. However, the court limited its holding, noting that “[I]f entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors.”

Finally, the court expressed concern that subjecting trustees to FDCPA duties would frustrate their ability to comply with California law. California’s non-judicial foreclosure law required the trustee to send the notices in question and required that notices be published in ways that might be deemed illegal communications with third parties under the FDCPA. The FDCPA’s debt verification requirements also could conflict with state law notice deadlines, the majority warned. Given a choice between two reasonable interpretations of federal law–one that might conflict with state law and one that would not–principles of federalism dictate that the court select the latter, the majority explained.

One judge dissented, arguing that “the only reasonable reading” of the FDCPA required the court to find that ReconTrust was a “debt collector.” A foreclosure causes the sale of a property and uses the sale proceeds to pay off some or all the mortgagor’s debt. Thus, the dissent explained, the purpose of a foreclosure is the payment of money. Because the FDCPA applies to entities who collect debts on behalf of others, the act applies to trustees who carry out foreclosure sales. This view is shared by the Fourth and Sixth Circuits, which hold that foreclosure-related-activity is subject to the FDCPA.

Federal Reserve Board’s Divisions of Research & Statistics and Monetary Affairs Issued Their First Research Paper on Blockchain Technology

Posted in Cybersecurity, Financial Regulation, Fintech, Government, Risk Management, Securities, Virtual Currency

Last month, the Federal Reserve Board’s Divisions of Research & Statistics and Monetary Affairs issued their first research paper on blockchain technology, entitled “Distributed Ledger Technology in Payments, Clearing, and Settlement.” The Report identifies both the opportunities and challenges entailed in widespread adoption of distributed ledger technology. The Report suggests that blockchain technology has the potential to provide new ways to transfer and record the ownership of digital assets; securely store information; provide for identity management; and other evolving operations through peer-to-peer networking, access to a distributed but common ledger among participants and cryptography. Potential use cases in payments, clearing and settlement include cross-border payments and the post-trade clearing and settlement of securities transactions. Blockchain technology could reduce or eliminate operational and financial frictions around existing services. Nonetheless, the paper notes that the application of this technology is still in its infancy, and widespread adoption is unlikely before technological hurdles, legal considerations and risk management considerations are addressed.


SEC’s Office of Compliance Inspections and Examinations Releases Annual Examination Priorities

Posted in Financial Regulation, Investment Regulation, OCIE, SEC

On Jan. 12, 2017, the Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) issued its annual Examinations Priorities for 2017 (Exam Priorities), which is available for download here.  As in past years, the Exam Priorities focus around three thematic areas, the first and the last of which are similar to the thematic areas highlighted in 2016 (which we summarized in the GT Alert titled “2016 SEC Exam Priorities”) while the second is an expansion of a past focus of OCIE – (1) matters of importance to retail investors, (2) risks specific to elderly and retiring investors and (3) market-wide risks. OCIE also highlights its objective of conducting data-driven and risk-based exam initiatives and the use of data analytics in “the vast majority” of exam initiatives.

The Exam Priorities note the evolving choices faced by retail investors, as well as the “ever widening array of information, advice, products and services” available to retail investors. Many of the Exam Priorities cited with respect to this theme – e.g., focusing on share class selection, multi-branch advisers, ETFs and wrap fee programs – represent a continuation or expansion of previously identified priorities and initiatives and past focus areas. OCIE also intends to expand its never-before-examined investment adviser initiative to cover not only select advisers that have been registered for a longer period but have not been examined but also focused, risk-based exams of newly-registered advisers, and for the first time highlights a focus on providers of electronic investment advice, including ‘robo-advisers.’

In focusing on elderly and retiring investors, in 2017 OCIE intends to continue its multi-year “ReTIRE” initiative (focused on retirement accounts serviced by SEC-registered advisers and broker-dealers) as well as its focus on the practices of public pension advisers (including pay-to-play compliance). In addition, OCIE intends to have a new focus on how asset management firms interact with senior investors and identify financial exploitation of seniors.

Related to market-wide risks, while cybersecurity and Regulation SCI will remain focus areas, the Exam Priorities highlight a number of newer initiatives. These initiatives include assessing the implementation and oversight of the newly-effective money market fund rules adopted in 2014, examining broker-dealers to assess compliance with their best execution duties and enhancing OCIE’s oversight of FINRA – focusing resources not just FINRA’s operations and regulatory programs, but also on assessing FINRA’s examination of individual broker-dealers.

In addition to these focus areas, the Exam Priorities identify municipal advisors, private fund advisers, and transfer agents as other types of capital markets participants to which OCIE’s examination resources are expected to be deployed.

The Financial Regulatory and Compliance and Investment Regulation Groups of Greenberg Traurig anticipate publishing a GT Alert providing additional detail on the Exam Priorities release in the near future.

NYS Department of Financial Services Releases Revised Proposal Addressing Cybersecurity Requirements for Financial Institutions

Posted in Cybersecurity, Financial Regulation

On December 28th, 2016, the New York State Department of Financial Services (DFS or the Department) published a revised version of its proposed regulation governing cybersecurity requirements for all entities required to operate in New York under a license, registration, or similar authorization issued by the Department (the Revised Proposal). Its provisions are scheduled to take effect on March 1, 2017, with phased-in implementation dates. DFS received over 150 comments in response to its originally proposed cybersecurity regulation (the Original Proposal), which led to the issuance of the Revised Proposal. Many of the comments addressed the perceived rigidity and excessively prescriptive requirements of the Proposal’s core provisions. Although the Revised Proposal included some significant revisions addressing those comments, a number of open questions remain. The publication of the Revised Proposal triggers a new opportunity for public comment, which continues until January 27th, 2017. The final version of the regulation could have a significant impact on entities nationwide, as the DFS language has the potential to become a template used throughout the country.

To learn more about this, please see the GT Alert “NYS Department of Financial Services Releases Revised Proposed Addressing Cybersecurity Requirements for Financial Institutions.”

FINRA’s 2017 Annual Regulatory and Examination Priorities

Posted in FINRA

On Jan. 4, 2017, FINRA released its 12th annual Regulatory and Examination Priorities Letter in which it identifies its areas of examination focus for 2017, recurring challenges faced by firms, and possible risks impacting the financial sector. FINRA’s 2017 exam priorities do not appear to be revolutionary or new relative to its pronouncements during the past several years. For example, FINRA will continue its focus on interest sensitive securities, “high risk” brokers, senior investors, and management of cyber-security risks.  Other areas of examination focus, such as sales practices surrounding complex investment products, financial controls, and order routing practices, appear to be new for 2017.

To learn more, please see GT Alert “FINRA’s 2017 Annual Regulatory and Examination Priorities .”