According to a press release issued by the U.S. Department of the Treasury earlier today, Kenneth A. Blanco has been named Director of the Financial Crimes Enforcement Network (FinCEN). Mr. Blanco will join FinCEN after serving as the Acting Assistant Attorney General of the DOJ Criminal Division. He has significant expertise in money laundering and terrorist financing enforcement given his prior experience at the DOJ, U.S. Attorney’s Office for the Southern District of Florida, and Miami-Dade State Attorney’s Office.
The Consumer Financial Protection Bureau announced today that Kristen Donoghue would be appointed as its new Assistant Director of Enforcement, effective next Friday, November 17.
As we explained in an earlier post, Anthony Alexis, the former head of enforcement, announced his intention to step down from his position upon appointment of his successor. Donoghue is the fourth head of the enforcement office since the Bureau’s inception in 2011.
This appointment is unlikely to signify any significant changes in the CFPB’s enforcement direction. First, Donoghue has contributed significantly to the Bureau’s current enforcement policies and priorities. She has served as a CFPB enforcement attorney since the establishment of the Bureau in 2011, and most recently served as the Bureau’s Principal Deputy Enforcement Director. Second, the Assistant Director of Enforcement does not have the last word on enforcement policy at the CFPB; the Assistant Director reports up to the Associate Director for Supervision, Enforcement & Lending, a role that will continue to be held by long-time staffer (and former Chief of Staff to Director Cordray) Christopher D’Angelo.
Prior to joining the CFPB in 2011, Donoghue spent more than ten years as an insurance, securities and contract litigator at a law firm in Washington D.C.
Donoghue’s appointment is not subject to confirmation or other external approval, and so should take effect as announced.
On November 2, 2017, Consumer Financial Protection Bureau (“CFPB” or “Bureau”) Director Richard Cordray delivered remarks at a meeting of the Consumer Advisory Board in Tampa, Florida. Director Cordray’s remarks touched on the following issues:
- Reverse Mortgages: Noting that Florida is home to millions of senior Americans, Director Cordray discussed reverse mortgages, a financial product specifically for seniors. Citing a report issued by the Bureau in August on reverse mortgages, Director Cordray argued that the costs of using a reverse mortgage to delay Social Security retirement benefits from age 62 until full retirement age “usually exceed the extra benefits.” Director Cordray indicated the CFPB would be further addressing the issue.
- Financial Well-Being: Director Cordray discussed the Bureau’s efforts in studying consumer financial well-being. Specifically, he discussed a recent CFPB report on financial well-being. Among other things, that report found that more than 40% of U.S. adults reported struggling to make ends meet in a typical month.
- Americans with Limited English Proficiency: Director Cordray discussed the potential financial difficulties faced by those Americans with limited English proficiency, specifically Spanish-speaking Americans, who he noted often have “thinner credit files and less use of banks and credit unions.” Director Cordray further lauded the Bureau’s efforts to reach out to those Americans.
- Payday Loans: Director Cordray offered a defense of the CFPB’s recently released Payday Lending Rule. Director Cordray argued that the rule was necessary to address “a market where far too often lenders have succeeded by setting up borrowers to fail.”
Such remarks are notable, as they indicate potential Bureau priorities. In this case, Director Cordray made clear that seniors, non-English speakers, and economically vulnerable consumers will continue to be focal points of Bureau activities.
On October 26, 2017, the Commodity Futures Trading Commission (“CFTC”) issued an order postponing the automatic lowering of the swap dealer de minimis threshold. Instead of dropping from $8 billion in notional value (measured over the prior 12-month period) to $3 billion on December 31, 2018, which would have required firms to begin tracking swap activity on January 1, 2018, the threshold will drop on December 31, 2019, unless the CFTC determines to change the threshold prior to this date. Thus, firms will not have to start tracking swap activity for the $3 billion threshold until January 1, 2019; firms will, of course, need to track for the $8 billion threshold. Chairman Giancarlo forecast this delay in his appearance before the House Committee on Agriculture on October 11, 2017, testifying that he would seek the delay because he wanted “to get the right result, not a rushed result,” and noting that recent turnover in the Commission made it difficult to implement “such an important decision in a rush.” However, Chairman Giancarlo indicated that no further delays were expected, and that the CFTC would establish a de minimis threshold in the first half of 2018.
On October 18, 2017, the Consumer Financial Protection Bureau issued “Consumer Protection Principles” for protecting consumers’ interests in the context of consumer-authorized data sharing and aggregation. The principles are related to the Request for Information that the Bureau issued in connection with section 1033 of the Dodd-Frank Act late last year.
The Consumer Protection Principles emphasize the growing role of fintech companies that access consumers’ financial data – with their permission – in order to provide services such as data aggregation or financial advice. Acknowledging that industry participants are already working on developing agreed-upon practices and norms for such services, the Bureau insists that “consumer interests must be the priority of all stakeholders,” and presents these Principles as the agency’s “vision for realizing a robust, safe, and workable data aggregation market that gives consumers protection, usefulness, and value.” The Bureau also released an outline describing the stakeholder insights that it took into account in developing the principles.
The Consumer Protection Principles highlight the following themes for account providers and for third parties authorized by consumers to access financial data:
- Consumer Access. Account providers should make consumer data available timely and securely to consumers and to consumer-authorized third parties without requiring that consumers share their account credentials with the third parties.
- Data Scope and Usability. Account providers should make consumer data available in a manner that is “readily usable” by consumers and authorized third parties. Third parties should access only the data necessary for the requested products or services and should erase such data as soon as it is no longer necessary for those purposes.
- Control and Informed Consent. Terms of access, storage, use, and disposal should be effectively disclosed and neither “overly broad” nor inconsistent with a consumer’s “reasonable expectations.” The Principles indicate that consumers should have the benefit of terms that allow them to easily revoke their authorizations and to order third parties to delete any personally identifiable information. Accessing information and making payments should require “separate and distinct” consumer authorizations.
- Data Security. There should be secure methods of accessing, storing, using, and distributing consumer data, including consumers’ access credentials.
- Transparency. For every third party with access to consumer data, consumers should be able to readily ascertain the “identity and security” of the party, the data it accesses, and how frequently and how it uses such data.
- Dispute Resolution. Companies should provide consumers with “reasonable means” to dispute and resolve alleged inaccuracies in their data, even if an inaccuracy is attributable to another party. Companies should also provide means to dispute and resolve alleged unauthorized access, data sharing, payments, or failures to comply with other obligations.
- Accountability. Account providers and authorized third parties should set “goals and incentives” that ensure that consumers are protected and that companies are accountable for any harms they incur on consumers.
The Bureau provides an important caveat for the Principles by stating that they “are not intended to alter, interpret, or otherwise provide guidance on—although they may accord with—existing statutes and regulations that apply in this market” and “are not intended as a statement of the Bureau’s future enforcement or supervisory priorities.”
On October 18, 2017, the Consumer Financial Protection Bureau published a draft Strategic Plan for FY 2018–2022 and invited comment by November 18, 2017. The draft is organized around four overarching goals:
- Prevent financial harm to consumers while promoting good practices that work for consumers, responsible providers, and the economy as a whole.
- Empower consumers to make informed financial choices to reach their own life goals and enhance their own financial well-being.
- Inform the public, policy makers, and the CFPB’s own policy-making with market intelligence and data-driven analysis of consumer financial markets and consumer behavior.
- Advance the CFPB’s performance by maximizing resource productivity.
While these goals, and the draft plan as a whole, do not represent any major departures from the Bureau’s existing operations, a close read of the plan reveals some noteworthy details.
- The draft repeatedly indicates that the Bureau will consider “alternative” strategies and approaches to address market issues, which presumably contemplates actions other than notice-and-comment rulemakings.
- The draft plan also states that the Bureau’s Division of Supervision, Enforcement, and Fair Lending will launch a pilot project to “expand Supervision’s capacity and flexibility to address consumer harm by conducting supervisory activities to supplement the traditional examination process.” The initiative is described in high-level terms, but it signals a willingness to go beyond the roles and processes of the traditional prudential regulators.
- The Bureau intends to provide market participants with “tools and resources” to assist with implementing and complying with consumer financial rules. The draft does not offer specifics on this point, but regulated entities would certainly welcome more assistance and certainty in complying with Bureau rules. One specific welcome possibility would be for the CFPB to develop a more robust guidance process as part of this initiative.
- The draft strategic plan states that the CFPB’s Division of Research, Markets, and Regulations will launch a program to review existing regulations to “assess opportunities for clarification, updating, and streamlining.” The CFPB already reviews regulations pursuant to a Dodd-Frank Act requirement to conduct an assessment of each significant rule five years after its adoption. The draft strategic plan may indicate further efforts to develop a more formal and regular program that would supplement these one-time assessments.
- The draft indicates that the Bureau will continue sharing information and coordinating activities with other supervisory and law enforcement agencies. It also recommits the Bureau to sharing consumer complaint data within the CFPB, presumably enabling those complaints to inform supervisory and enforcement decisions. Responsiveness to those complaints should clearly continue to be a priority for regulated entities.
- Finally, the draft strategic plan makes apparent that the Bureau intends to continue collecting substantial amounts of consumer data. This has long been a controversial aspect of the Bureau’s operations, but the Bureau does not seem deterred by such concerns.
Given that these and other issues may have significant impacts on regulated entities, it would be advisable for regulated entities to consider ways to take advantage of the comment period.
After months of speculation, the Senate voted tonight to strike down the CFPB’s controversial Arbitration Rule pursuant to the Congressional Review Act (CRA). Since the House voted to repeal the Rule back in July, the repeal now heads to the President, who is expected to sign it promptly. Once signed into law, the CRA repeal strikes down the rule and prevents the Bureau from issuing a substantially similar rule. This should remove any threat to the validity of arbitration agreements in financial services contracts for the foreseeable future.
While under the CRA only a bare majority of the Senate had to vote against the Rule for the repeal to pass, there had been widespread debate as to whether the Republicans had sufficient votes. In the end, the Senate deadlocked 50-50, with Vice President Pence breaking the tie in favor of disapproving of the rule. Notably, this vote comes just a day after the Treasury Department issued a scathing critique of the Rule, which itself followed widespread criticism of the Bureau’s process and conclusions, including by the OCC.
On October 13, 2017, the Consumer Financial Protection Bureau announced the upcoming departure of its enforcement chief, Assistant Director of Enforcement Anthony “Tony” Alexis.
Assistant Director Alexis has been with the CFPB since 2012, and in a statement (paywall) to The Wall Street Journal, CFPB Director Richard Cordray described him as “my strong right arm.” Before assuming his current role in 2015, Mr. Alexis served the Bureau as Acting Assistant Director and as Deputy Assistant Director for Field Litigation.
This is the highest-level departure from the Bureau since the election, and comes at a time when many are watching to see whether Director Cordray will serve out his term (ending in July 2018) or resign early to run to become the governor of Ohio.
Mr. Alexis will serve until his successor has been chosen, and the Bureau has already posted a job listing for the position. The post provides a window into the Bureau’s conception of the role by describing its responsibilities as requiring the Assistant Director to:
- Work with the senior management to plan, establish, direct, coordinate, and evaluate [the] CFPB’s enforcement programs.
- Formulate and develop needed policies, procedures, and guidelines for conducting enforcement functions effectively and efficiently, and ensure that legal advice is in accordance with applicable laws and regulations.
- Formulate, develop, and establish innovative methods, techniques and procedures to assure that the intent of the inaugural legislation is fully met.
- Develop enforcement objectives and provide executive direction over relevant enforcement activities.
- Develop and communicate overall implementation team vision, goals and objectives. Set organizational tone and direction and [create] and [model] an environment that fosters and sustains diversity, knowledge sharing, and consensus building.
On October 12, 2017, the Office of the Comptroller of the Currency (“OCC”) issued a Policies and Procedures Manual (“PPM”) outlining the framework to be used by examiners to determine whether an OCC-regulated bank should receive a downgrade of its Community Reinvestment Act (“CRA”) performance rating based on evidence of discriminatory or other illegal credit practices. The PPM signals that the OCC intends to depart from the federal banking agencies’ recent practice of downgrading a bank’s CRA composite rating by one or two levels in virtually any circumstance in which the bank has entered into a consent order related to a consumer compliance violation.
On September 29, 2017, the U.S. Securities and Exchange Commission filed a complaint in federal court against REcoin Group Foundation, LLC (“REcoin”); DRC World, Inc., also known as Diamond Reserve Club (“DRC”); and their principal, Maksim Zaslavskiy. The complaint alleges false and misleading statements and violations of securities laws in connection with initial coin offerings (“ICOs”) by the two companies.
According to the SEC, the defendants raised funds from hundreds of investors by offering nonexistent digital “tokens” or “coins” supposedly backed by investments in real estate (in REcoin’s case) and diamonds (in DRC’s case). The SEC further alleges that in order to evade securities laws, including registration requirements, the defendants styled the ICOs as sales in club memberships. The SEC’s complaint also alleges that the defendants made false and misleading statements including that: defendants had raised as much as $4 million (instead of the $300,000 they actually raised); the underlying assets would be selected by the companies’ “experts” and “team of lawyers, professionals, brokers, and accountants” (when none had been hired or consulted); and DRC investors could expect 10% to 15% returns (when the investments were nonexistent). According to the SEC, the defendants eventually terminated the REcoin ICO by falsely claiming that the U.S. government required them to do so, when the SEC alleges that Mr. Zaslavskiy himself characterized offering the advertised tokens as “impossible.”
We believe this action is the result of a lack of legal clarity as to when an ICO or a digital asset is a security. This lack of regulatory clarity was implicitly recognized by the SEC in its recent Report of Investigation of the Distributed Organization (“DAO”). While we disagree with the SEC’s claims that the tokens we sold are securities, and will vigorously defend ourselves, we are cooperating with the SEC in the hope of resolving this issue.
In the mentioned investigative report, the SEC concluded that whether an offer and sale of an interest in a virtual organization constitutes the offer and sale of a security depends on “the facts and circumstances” of the transaction, “regardless of the terminology used.” In July, the SEC Office of Investor Education and Advocacy also published an investor bulletin on the fraud risks posed by ICOs.
The SEC has announced that the U.S. District Court for the Eastern District of New York has granted an emergency order freezing the defendants’ assets.