NJ Governor-Elect Murphy Has Businesses Prepared for Change

Democrat Phil Murphy has been elected as the next Governor of the State of New Jersey. Murphy comes into the office with a double-digit victory over departing lieutenant governor Kim Guadagno (R), and the backing of a state legislature controlled by Democrats.  Governor-Elect Murphy, who has never served in elected office, promises to take the Garden State in a new direction. Read our full report on our sister site, the Technology Law Dispatch.

Digital Currency Company Receives SEC Complaint After Bitcoin Conversion Scheme

On October 30, 2017, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint in federal court against a day trader for allegedly committing fraud and market manipulation during which the trader utilized a digital currency exchange in a supposed attempt to cover his tracks. The SEC claims that defendant’s associate obtained unauthorized access to other people’s brokerage accounts and caused them to enter unauthorized trade orders at artificial prices.  Many of these orders then executed, directly or indirectly, against the defendant’s orders.  The defendant then allegedly transferred a share of the profits to his associate.  Notably, the defendant transferred the proceeds, which were denominated in U.S. dollars, to a digital currency company that converted the dollars to bitcoin and transmitted them to the defendant’s associate.

Read the full report on our sister site, the FinTech Update.

Prize-Linked Savings Laws Spread Across States

With Americans’ saving habits in the news as the federal government considers caps on retirement contributions, financial institutions should be aware that many states are passing laws making it easier to incentivize saving.

To date, 26 states have enacted legislation that liberalizes their approaches to games of chance in support of good consumer saving practices. Prize-linked savings (PLS) accounts allow consumers that invest in savings accounts or certificates of deposit to be entered into drawings that can augment their original deposits, with the prizes funded by the interest generated. By passing laws that permit PLS accounts, states are allowing financial institutions to run lotteries in ways not traditionally permitted in order to persuade more Americans to save for a rainy day.

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Banks, Fintechs and Consumer Data: The CFPB Weighs In

On October 18, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) entered  into the long simmering debate over consumer-authorized data sharing.  This debate pits mainstream financial institutions, which are typically reticent to share customer data with third parties, against data aggregators and other fintechs.  Those newer companies provide services directly to consumers—or to enhance the consumer experience—and rely on data from mainstream institutions in order to do so.  Both sides are grappling with complex issues surrounding consumer information, including who owns consumers’ financial data as well as how it can be used, shared, and kept secure.  The CFPB released a set of nine consumer protection principles  to address those and other issues and “help safeguard consumer interests as the consumer-authorized aggregation services market develops.”  Read the full report on our sister site, the Technology Law Dispatch.

Senate Nullifies Arbitration Rule in Huge Setback to CFPB

Late Tuesday evening the Senate voted to nullify the Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) controversial Arbitration Agreements Rule (“Rule”).  All but two Senate Republicans supported a resolution to repeal the Rule pursuant to the Congressional Review Act.  While there were rumors that one or two Democrats might also lend their support, none ultimately did so.  The Vice President cast the tie breaking vote.

The House of Representatives voted to nullify the Rule in July days after the CFPB released the final Rule. The late night vote in the Senate garnered just enough support—a simple majority—to send the resolution to President Trump’s desk.  The President already indicated his support of the resolution.  Following a string of defeats on healthcare, and lukewarm support on tax policy, this action in Congress marks the first significant legislative win for the Trump administration.

As we noted recently, opposition to the Rule has been strong and several industry groups recently filed a federal lawsuit.  The Rule became effective September 18, 2017 and would have impacted agreements entered into after March 19, 2018.  In light of the fast-approaching deadline, many companies have struggled to determine how much effort to invest in preparing to come into compliance.  The nullification of this Rule will be a welcome relief.

The vote represents a full rebuke of the CFPB’s efforts concerning arbitration. The Rule followed years of information-gathering and analysis by the Bureau.  CFPB staff at all levels, including Director Cordray, staunchly defended the Rule, its legal and factual underpinnings, and its potential to protect consumers. Nullification of this Rule is a massive blow to an agency that has suffered a number of recent losses in federal court.  The CFPB will now be barred from promulgating another Rule concerning class action waivers in arbitration clauses.

Industry will likely be buoyed by this vote. As the CFPB increasingly comes under fire from the Trump administration, Congress, and through litigation defeats, more companies may be willing to openly challenge the Bureau—something that was virtually unheard of just a year ago.  With the head of Enforcement recently announcing his departure and rumors of Director Cordray leaving to run for governor in Ohio, the future of the CFPB seems much more tenuous following this vote.

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Maria Earley is a partner in Reed Smith’s Financial Industry Group in Washington, D.C. and a former enforcement attorney with the CFPB. Ashley Shively is counsel in the Financial Industry Group in San Francisco. Maria, Ashley, and several other Reed Smith attorneys have significant experience handling supervisory, enforcement, and litigation matters involving the CFPB.  If you have questions about this Rule, the CFPB, or consumer litigation, please do not hesitate to contact a member of the Reed Smith team.

Treasury Report Takes Aim at CFPB Arbitration Rule

The CFPB’s Arbitration Agreements Rule (“Rule”), which was finalized on July 18, 2017, came under fire today in a report released by the U.S. Department of Treasury (“Treasury”).  The 18-page report details the “extraordinary costs” the Rule will impose if implemented—more than $500 million in additional legal defense fees, $330 million in payments to plaintiffs’ lawyers, and $1.7 billion in additional settlements.  The report is a complete takedown of the CFPB’s years-long efforts concerning arbitration, questioning the CFPB’s 2015 Congressionally-mandated arbitration study, the data relied on by the Bureau, and the CFPB’s overall analysis of arbitration-related information.

In addition to a detailed criticism of the costs imposed by the Rule, Treasury’s study highlighted other defects:

    • According to the Bureau’s own data, class members obtain no relief in the vast majority of consumer class actions.
    • When class relief is ordered, only a few affected consumers actually pursue settlement funds.
    • Plaintiffs’ attorneys will be the biggest beneficiaries of the Rule, which Treasury characterized as a “large wealth transfer” to those lawyers.
    • More prominent disclosures concerning arbitration would benefit consumers more than a ban—an avenue the Bureau failed to seriously consider.
    • The Bureau also overlooked the costs of meritless litigation that the Rule will generate.
    • The Bureau asserted that the Rule will improve compliance with federal consumer financial laws but offered nothing to credibly support this claim.

The Rule continues to be controversial and its future remains uncertain. The Senate could nullify the Rule by a simple majority vote pursuant to the Congressional Review Act, a move that is fully supported by the Trump administration.  In addition, on September 29, 2017, several industry associations and chambers of commerce filed a lawsuit in federal court challenging the Rule.  Finally, on September 20, 2017, the Office of the Comptroller of the Currency released its own report critiquing the Rule, and the acting comptroller has engaged in an ongoing, public dispute with the CFPB director over the potential impacts of the Rule and the research on which it was based.

Reed Smith will be watching these efforts closely and will provide relevant updates as they arise.

Educational Tool on Virtual Currencies released by CFTC

On October 17, 2017, the U.S. Commodity Futures Trading Commission’s (“CFTC”) LabCFTC released a primer on virtual currencies, available here.  The primer is an “education tool” that provides an overview of the virtual currency landscape and is “not intended to describe the official policy or position of the CFTC, or to limit the CFTC’s current or future positions or actions.”  While the document is largely unrevealing, everyone in the initial coin offering (“ICO”) market should carefully review the risk factors outlined in the document to ensure that they are incorporated into their whitepapers and offering materials. Read the full report on our sister site, the FinTech Update.


Travis Nelson Organizes Annual OCC Alumni Association Event in Washington, DC

On October 12, 2017, Travis Nelson of the Reed Smith’s Financial Services Regulatory Group, organized the annual Office of the Comptroller of the Currency (OCC) Alumni Association reception and dinner in Washington, DC. Travis is the current Secretary-Treasurer and former board President of the Association.  Attended by nearly 100 current and former OCC employees, it was a great opportunity to reconnect with former friends and colleagues and establish new relationships.  The event featured great speeches by Comptroller Keith Noreika, Chief Counsel Amy Friend, and former Comptroller Tom Curry.  Also in attendance were former Comptrollers John Hawke and Robert Clarke, and former Acting Comptrollers John Walsh and Julie Williams.  It was a great way to celebrate the special bond among the dedicated professionals serving in the banking industry – both within and outside of the OCC.

Travis is formerly with the Enforcement Division at the OCC in Washington, DC. Travis is also Chair of the Banking Law Section of the New Jersey State Bar, and adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation.

Blunt Talk on Marijuana Banking in New Jersey

On Wednesday, October 11, 2017, Reed Smith Princeton attorneys Travis Nelson and Kristy Keiser will lead a discussion at the quarterly meeting of the Banking Law Section of the New Jersey State Bar Association. In addition to the meeting’s regularly scheduled agenda items, including planning for future CLE programs, and discussion of recent and pending legislation in the Garden State, the Banking Law Section meetings feature a Hot Topics discussion.  This month’s Hot Topics discussion will focus on how federally-insured banks are to deal with marijuana related businesses, from front-line growers and sellers in states where marijuana is legal under state law, to companies that may provide services to marijuana businesses, to other types of businesses.  The Banking Law Section meeting is from 6:30pm-8:00pm at the New Jersey State Bar Association’s conference center in New Brunswick, NJ.  Advance registration through the New Jersey State Bar Association is required.  For information on registration, contact the NJ State Bar at (732) 249-5000, or contact Travis Nelson at tnelson@reedsmith.com.


Travis Nelson, the Chair of the Banking Law Section, is a member of Reed Smith’s Financial Services Regulatory Group, formerly with the Enforcement Division of the Office of the Comptroller of the Currency, and Co-Chair of the Firm’s Anti-Money Laundering and Trade Sanctions Group. Kristy Keiser is a member of Reed Smith’s Financial Services Litigation Group.

Final Payday Lending Rule Released by the CFPB

On Thursday October 5, the Consumer Financial Protection Bureau (CFPB) issued a long-awaited final rule governing certain short-term loans and longer term loans involving balloon payments, better known as the payday lending rule. The rule is expected to dramatically impact the short-term loan industry, imposing numerous new restrictions on both short-term lenders (including “payday” lenders and auto title lenders), and lenders offering longer-term loans with large, final balloon payments.

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