Second Circuit Creates Split on Investment Company Act Private Right of Action

 

By: Gabriel K. Gillett and Howard S. Suskin

New-Development-IconIn a decision issued on August 5, 2019, the US Court of Appeals for the Second Circuit created a split with other courts, including the Third Circuit, on the issue of whether there is a private right of action for rescission under the Investment Company Act (ICA).  The Second Circuit held that, based on the text of the statute and its legislative history, “ICA § 47(b)(2) creates an implied private right of action for a party to a contract that violates the ICA to seek rescission of that violative contract.”  Oxford University Bank v. Lansuppe Feeder Inc., No. 16-4061 (2d Cir. Aug. 5, 2019), Slip op. 23.  In so holding, the court acknowledged that it was creating a circuit split:

We note that the Third Circuit and several lower courts have reached the opposite result.  In Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co., 677 F.3d 178 (3d Cir. 2012), the Third Circuit found plaintiffs lacked a private right of action to seek rescission under § 47(b).  Plaintiffs in Santomenno alleged violations of ICA § 26(f), which makes it unlawful to pay ‘fees and charges’ on certain insurance contracts that exceed what is ‘reasonable,’ id. at 187, and sought rescission (in addition to monetary damages).  The court in Santomenno found that plaintiffs did not have a cause of action.  We do not find the reasoning in Santomenno persuasive. 

Slip op. 21-22.

Litigators should watch to see how other courts weigh in, and whether the Supreme Court ultimately takes up the issue to resolve the split.

Gabriel Gillett is an Associate in Jenner & Block’s Appellate & Supreme Court Practice in Chicago.   Howard Suskin is a Partner and Co-Chair of the Securities Litigation Practice Group at the firm.


FinCen Issues Report on Business Email Scams

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By: David P. Saunders




Data securityAt the risk of stating the obvious, everyone uses email. It has become a central component of both our daily lives and, of course our businesses.  As we transform into a fully digital,
corporate world, there are those who have sought to exploit the growing reliance on email.  Spammers, hackers, and of course, phishers.  No, not the people who go to those really long concerts; we are talking about email scammers who purport to tell you that your UPS package has arrived, but all you need to do is click a link and enter some information.  These scams can cripple a business, and trying to prevent these scams is difficult because in many ways, the solution relies on removing human error.

Enter the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.  FinCEN recently held a forum aimed at discussing ways to identify and curtail business email scammers.  The forum, held in New York City, analyzed the trends in business email scams.  At the forum, FinCEN released a report indicating that reporting of business email scams had more than doubled between 2016 and 2018.  The report also detailed that fake invoice scams grew as a methodology, and that manufacturing and construction businesses were top targets.

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Crypto Corner – Updates on Cryptocurrency

By: Michael W. Ross

CryptoIn the first half of 2019, the “crypto-winter” that had set in during 2018 appeared to see signs of a thaw, albeit with new regulatory developments and controversy continuing to characterize the space.  On the regulatory front, the Securities and Exchange Commission (SEC) issued more detailed guidelines for companies seeking to sell digital tokens.  The 13-page “Framework for ‘Investment Contract’ Analysis of Digital Assets” provides a detailed analysis of the factors relevant to the Howey test that the SEC uses to determine the existence of a security (and all that designation entails).  At the same time, the SEC issued a no-action letter for a company that had represented it would not be using its tokens to fund the development of the token network, and that the tokens would be immediately usable—underscoring two key factors of the SEC’s assessment.  In another development, the Financial Action Task Force (FATF)—a global inter-governmental organization focused on fighting money-laundering—issued new guidelines on cryptocurrency companies operating in its 37 member countries, including requirements about collecting user information.  FINRA has also decided to continue a reporting initiative it announced last year.

On the news-making front, much industry attention was paid to the SEC’s suit against a Canadian messaging company called Kik Interactive, alleging that Kik propped up its failing business by pivoting to an unregistered token offering through which it raised $100 million.  Some have viewed the case as one to watch to see whether courts will view digital tokens the same way as the SEC has.  More recently, focus on developments at the SEC have been overtaken by news of Facebook’s anticipated Libra token.  Built on a permissioned blockchain network overseen by a litany of household names, and backed by a basket of traditional assets, the Libra token met early news of its potential to change the game for cryptocurrency.  More recent weeks have seen a flurry of commentary by regulators and legislators focused on the need to analyze the token under existing financial services laws, as well as concerns about money-laundering, consumer protection and privacy.  For those interested in the space, it will be worth monitoring further developments as they unfold.

 


Facebook’s Libra Prompts Federal Draft Legislation

 

By: Jeffrey A. Atteberry

CryptocurrencyIn June, Facebook publicly launched an initiative to develop a cryptocurrency called Libra in partnership with 27 other technology and finance companies including Visa, PayPal and Uber.  According to Facebook, consumers will be able to buy Libra anonymously and then use the currency to buy things online, send money to people, or cash out at physical exchange points such as grocery stores.  The blockchain technology behind Libra is meant to be open-source and not controlled exclusively by Facebook, but by an association of its founding companies, each of which has already invested at least $10 million into the venture. 

Facebook’s announcement triggered a rapid response from federal legislators, and on July 15 the House Financial Services Committee introduced draft legislation aimed at preventing large tech companies from creating digital currencies such as Libra.  Entitled “Keep Big Tech Out of Finance Act,” the draft legislation would apply only to tech companies with over $25 billion in annual global revenue that primarily operate online marketplaces or social platforms.  Such companies would be prohibited from using blockchain or distributed ledger technology to create or operate “a digital asset that is intended to be widely used as a medium of exchange, unit of account, store of value, or any other similar function.”  The draft legislation would further prohibit such tech companies from being or affiliating with “a financial institution.” 

The draft legislation is just the latest indication that federal legislators and regulators are increasingly focused on the growing linkages between technology, particularly in the form of social media and online marketplaces, and more traditional consumer finance industries.


The Consumer Finance Observer

CFOJenner & Block has recently launched The Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch.  In this issue, consumer finance lawyers David BitkowerKali BraceyJeremy M. CreelanJoseph L. NogaMichael W. Ross and Damon Y. Smith and Associate William S.C. Goldstein discuss how enforcement authorities are zeroing in on alternative data; the NY District Court’s block of a fintech charter; the CFPB’s proposed debt collection rules; the Saga of Madden v. Midland Funding; news from the CFPB’s UDAAP Symposium; updates on cryptocurrency; the FDIC’s consumer compliance supervisory highlights; and Texas’s enactment of new consumer finance laws. 

To read the full newsletter, click here.


Eighth Circuit Reminds: The First Principle of Arbitration Is Get Consent

 

By: Gabriel K. Gillett

6a01310fa9d1ee970c0240a482f2c4200dIn recent years, the Supreme Court has issued many decisions about arbitration, including the enforceability of arbitration agreements and employment agreements that bar classwide arbitration.  Last week, the Eighth Circuit issued a decision in a case involving those issues, holding that an employment agreement’s arbitration clause mandating individual arbitration was unenforceable.  Shockley v. PrimeLending, -- F.3d. --, 2019 WL 3070502 (8th Cir. 2019).  The arbitration clause provided that the employee and the company agree to “resolve the covered dispute exclusively through final and binding arbitration,” that both parties waive “the right to initiate a class, collective, representative or private attorney general action,” and that “[a]ll Covered Disputes will be settled by binding arbitration, on an individual basis.”  The court did not find that belt-and-suspenders language defective in any way.  Rather, the court reasoned that a valid agreement to arbitrate had not been formed because the employer had provided the employee with a link to the agreement, but there was no evidence the employee had clicked the link or otherwise assented to the agreement. 

The Eighth Circuit’s decision does not provide gloss on the Supreme Court’s arbitration jurisprudence—it does not even cite many of the Court’s recent cases.  The Eighth Circuit’s decision also does not discuss a novel legal theory or break new ground in the arbitration space.  Nor does it address one of the many open and often litigated issues related to arbitration.  Still, the holding is notable because it serves as an important reminder: even the best, clearest language in an arbitration clause (or any contract for that matter) is enforceable only if the parties actually agreed to it.  See, e.g., Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415 (2019) (“‘[T]he first principle that underscores all of our arbitration decisions’ is that ‘[a]rbitration is strictly a matter of consent.’” (citations omitted)).


British Airways: To Fly. To [be] Serve[d with a huge fine]

 

By: Kelly Hagedorn and Oliver J. Thomson

AirplaneThe UK Information Commissioner’s Office (ICO) on 8 July 2019 issued a notice of its intention to fine British Airways £183.39 million for infringements of the General Data Protection Regulation (GDPR).  Such a fine, if levied, would represent around 1.5% of British Airways’ worldwide turnover for 2017, and would be approximately 367 times larger than the next largest fine that the ICO has imposed.

Background

The proposed fine relates to a data breach notified to the ICO by British Airways in September 2018.  In late August and early September 2018, British Airways customers attempting to use the British Airways website or app were redirected to a fraudulent website, which then gathered the customers’ personal data.  This personal data gathered included payment card information, booking details, and name and address information.  The breach affected around 500,000 British Airways customers.

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What Securities Pros Need to Know About SEC Data Analytics

CodeIn an article published by Law360, Partner Charles D. Riely and Associate Danielle Muniz explore the publicly available information about the US Securities and Exchange Commission’s use of data analytics to detect and pursue violators.  The authors discuss why understanding the SEC’s data analytics concepts is important for lawyers and other professionals responsible for supervision and compliance at investment advisers and broker-dealers. 

To read the full article, please click here


SDNY Decision Blocks National Bank Charters for FinTech

By William S. C. Goldstein

FintechEarlier this month, a federal district court in New York handed a win to the New York State Department of Financial Services (DFS) in its long-running, closely watched suit seeking to block the Office of the Comptroller of the Currency (OCC) from issuing national bank charters to non-bank financial technology (FinTech) companies that don’t receive deposits.  Judge Victor Marrero denied most of OCC’s motion to dismiss and found the agency’s interpretation of the National Bank Act, 12 U.S.C. § 21 et seq., to be unpersuasive.  Vullo v. Office of the Comptroller of the Currency, No. 18-cv-8377, 2019 WL 2057691, at *18 & n.13 (S.D.N.Y. May 2, 2019).  DFS’s suit has significant stakes for the FinTech industry: under the United States’ dual banking system, nationally chartered banks are regulated primarily by OCC and avoid the application of most state laws and regulations through federal preemption, while financial institutions without national bank charters are generally subject to state oversight—and non-bank institutions are often regulated by multiple states. Id. at *8.  Judge Marrero’s decision casts doubt on whether comprehensive, uniform regulation of FinTech companies can be achieved without congressional action.

The OCC allegedly first began considering whether to accept applications from FinTech companies for special purpose national bank (SPNB) charters in early 2016, pursuant to a 2003 regulation authorizing such charters for entities engaged in “at least one” core banking function: receiving deposits, paying checks, or lending money. Id. at *2 (quoting 12 C.F.R. § 5.20(e)(1)(i)).  DFS first sued OCC in 2017, arguing that the National Bank Act (NBA) prohibits charters from issuing to entities that don’t receive deposits and that to issue them would violate the Tenth Amendment of the Constitution.  That suit was dismissed without prejudice in December of 2017 on justiciability grounds after Judge Naomi Reice Buchwald found that DFS had not suffered an injury in fact and that its claims were not ripe. Id. at *3.  After OCC announced in July of 2018 that it would begin accepting applications from non-depository FinTech companies for SPNB charters, DFS sued again, under the Administrative Procedure Act (APA) and the Tenth Amendment, to prevent OCC from issuing any charters and to invalidate the underlying regulation.  OCC moved to dismiss this past February, arguing that DFS lacked standing, its claims weren’t ripe or timely, and that on the merits it failed to state a claim. Id. at *4.  Judge Marrero issued a decision on OCC’s motion on Thursday, May 2.

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The CFPB Rolls Out New Regulations for Debt Collection

By Amy Egerton-Wiley

CallDebt collectors have for years sought guidance on how and when digital messages could be sent to contact consumers.  On Tuesday, the Consumer Financial Protection Bureau (CFPB) announced a notice of proposed debt collection regulations that would provide that guidance.  The new regulations would expand the potential avenues by which debt collectors could contact consumers and would establish a host of other regulations that would alter debt collection practices.  The proposed rulemaking announced by the CFPB is more than 500-pages long and would be the first substantive rules to interpret the Fair Debt Collection Practices Act, which regulates the debt collection industry. 

The CFPB identified several main highlights that the proposed rulemaking would achieve, including establishing a bright-line rule limiting call attempts and telephone conversations, clarifying consumer protection requirements for certain consumer-facing debt collection disclosures, clarifying how debt collectors can communicate with consumers, prohibiting suits on time barred debts, and requiring communication before credit reporting. 

The new regulations would allow debt collectors to expand methods of communicating with consumers, such as exploring WhatsApp or other online models.  They also, however, restrict the abilities of debt collectors to contact consumers.  For example, the proposed rules would cap the number of times a debt collector could call a consumer to seven times in one week, and once the debt collector reached the consumer, it would not be able to contact the individual again for another week.  The bureau cited increased clarity and modernizing the legal regime as its goal for the new regulations. 

The CFPB’s statement and proposed rules can be found here.