D.C. Circuit Court Strikes Opt-Out Notice Requirement For Certain Faxes

On Friday, in a decision certain to please the business community as well as the Chair and new majority of the Federal Communications Committee, the D.C. Circuit struck down parts of the FCC’s October 30, 2014 Order, 29 F.C.C. Rcd. 13998 (FCC 14-164), requiring that solicited faxes (those sent with consent of the recipient) must contain opt-out notices in order to avoid violating the TCPA. See Bais Yaakov of Spring Valley, et al v. FCC (No. 14-1234). In a 2-1 decision, the majority held that the FCC lacked authority under the statute to regulate solicited faxes. The D.C. Circuit thus limits liability under the TCPA to just unsolicited fax advertisements, as its plain language states.

This ruling vindicates the two Republican FCC Commissioners, now Agency Chair Ajit Pai and Commissioner Michael O’Reilly, both of whom dissented in 2014 when the Commission’s fax Order was adopted. The ruling should also moot pending lawsuits based solely on the absence of an opt-out notice in faxes sent with the recipient’s express permission or invitation.

One caution is worth noting though. The decision does not eliminate the need to honor opt-out requests, thus creating a potential issue of fact for litigants.  On the one hand, this should make it much harder for plaintiffs’ attorneys to succeed at class certification because whether any particular person opted out of receiving faxes is an individualized factual issue.  On the other hand, however, it becomes harder for a defendant to refute a claim that a particular plaintiff revoked his or her consent before receiving an allegedly offending fax.

Under the FCC’s 2014 Order, onerous as the requirement to include an opt-out notice in every fax was, the business community had certainty as to what was required in communicating with customers or potential customers by fax. Now, it is incumbent on businesses to review their existing procedures or implement new procedures to defend against allegations that they have ignored or mishandled attempts by consumers to withdraw consent.

It is also worth pointing out that Bais Yaakov was argued before a three judge panel consisting of D.C. Circuit Judges Brett Kavanaugh and Nina Pillard, and Senior Circuit Judge Raymond Randolph on November 8, 2016.  Oral argument in the all-important TCPA case ACA International, et al. v. FCC, also before the D.C. Circuit, was argued a few weeks earlier, on October 19, 2016, before Judges Pillard, Sri Srinivasan, and Harry Edwards.  Now that Bais Yaakov has been decided, one can assume that decision in ACA cannot be far behind, and with it more certainty with respect to the definition of an “automatic telephone dialing system” and — hopefully — some much needed, practical relief, such as in the case of reassigned telephone numbers.

Before one starts uncorking the champagne, however, it is worth noting that Judge Pillard, the only judge on both the panel that heard Bais Yaakov and the panel that heard ACA, was the lone dissenter in the just decided fax case.  In her dissent, Judge Pillard focused on consumer harm and the need to address what she referred to as “a fusillade of annoying and unstoppable advertisements.” In her view, Congress expressly delegated authority to the FCC to implement a prohibition on unsolicited fax advertisements, and the opt-out notice requirement gave practical effect to that ban.

In any event, it shouldn’t be long now until we see how Judge Pillard and the rest of the D.C. Circuit’s ACA panel weighs in on this ever-evolving area of the law.

Second Bitcoin ETF Rejected by SEC

On March 28, 2017, the U.S. Securities Exchange Commission (“SEC”) issued a second denial of a bitcoin exchange-traded fund (“ETF”), following its rejection of the Winklevoss Bitcoin Trust earlier this month (Reed Smith commentary is available here). SolidX Bitcoin Trust would hold bitcoin as its primary asset, together with smaller amounts of cash.  Theft of bitcoins would be protected against through insurance coverage. Read our full report on our sister site, FinTech Update.

SEC Rejects Bitcoin ETF Proposal Citing Lack of Regulation

On March 10, 2017, the U.S. Securities Exchange Commission (“SEC“) issued an order disapproving BATS BZX Exchange’s proposal to list and trade shares of the Winklevoss Bitcoin Trust. The proposal, if granted, would have established a bitcoin exchange-traded fund (“ETF“) that market participants could invest in through the BATS BZX Exchange platform.

The SEC rejected the Winklevoss Bitcoin Trust due to the lack of regulation in the bitcoin market. It explained that “the significant markets for bitcoin are unregulated and that, therefore, the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares.” The SEC concluded that the bitcoin market is largely unregulated, unlike the markets for other commodities such as gold and silver, and therefore the Winklevoss Bitcoin Trust is susceptible to manipulation. “Absent the ability to detect and deter manipulation of the Shares—through surveillance sharing with significant, regulated markets related to the underlying asset—the [SEC] does not believe that a national securities exchange can meet its” regulatory obligations.

The SEC considered the U.S. Commodity Futures Trading Commission’s (“CFTC“) jurisdiction over virtual currencies as “commodities,” but found it insufficient to prevent manipulation in bitcoin spot markets. It explained that “[a]lthough the CFTC can bring enforcement actions against manipulative conduct in spot markets for a commodity, spot markets are not required to register with the CFTC, unless they offer leveraged, margined, or financed trading to retail customers.”

This creates a bit of a chicken and egg situation, with regulated products not being approved because there are insufficient regulated markets with which to have surveillance-sharing agreements. The SEC order offers some hope for bitcoin ETFs that remain on the docket for approval, noting that bitcoin is “still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop.” As the spot bitcoin market likely will remain largely unregulated, it is most likely that the SEC will require bitcoin-based derivatives products, such as futures or options, to be traded on regulated exchanges before approving a bitcoin ETF. However, if bitcoin prices remain high, but still volatile, it may not be very long before we see a bitcoin derivatives product traded on an exchange registered with the CFTC as more traders seek to speculate or hedge bitcoin risk.

The SEC order is available here.

Alternative Data and Credit Scores: Will it Trigger CFPB Enforcement?

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) recently announced an effort to better understand how “alternative data” could be used to expand access to credit. Through a formal notice and request for information just published, the CFPB is trying to learn more about the potential to use of what it calls “non-traditional” or “alternative” data points to develop credit scores.  These data items include occupation, length of time in a particular job or residence, behavioral data, such as shopping habits, and information about consumers’ friends and associates gleaned from social media networks (among other things).  The CFPB believes that use of this data could help provide credit scores to the “credit invisibles” – the roughly 45 million Americans who have limited, stale, or no credit history – and potentially move those consumers into mainstream credit products with more affordable terms. While not the CFPB’s current area of focus, they also welcome information about alternative data and modeling techniques in business lending markets.

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NY Proposed Budget Would Expand NYDFS Authority over FinTech Lending Companies

Lender license requirements recently included in the New York governor’s proposed 2017-2018 budget would expand the jurisdiction of the New York State Department of Financial Services (NYDFS) to cover many financial technology (FinTech) credit-lending companies that are currently exempt from license requirements.  The proposed budget would prohibit businesses that are not registered as licensed lenders from making personal loans with a principal of $25,000 or less, and commercial loans of $50,000 or less, regardless of interest rate.  Current New York state banking law only requires a license if the charged interest rate is above 16 percent.  The budget would additionally apply the licensing requirement not only to any company that solicits and “makes, purchases or acquires” loans for New York residents, but also to any that “arranges or facilitates” the origination of such loans.

NYDFS’ expanded lender licensing authority would apply to marketplace lenders—online platforms that facilitate small-scale loans by matching credit lenders with consumers—as well as to merchant cash advance companies, big data credit startups, and any other companies that provide or facilitate smaller-scale loans online or offline. The proposed budget provides that the NYDFS superintendent may allow an exemption from the licensing requirement “when necessary to facilitate low cost lending in any community.”  However, neither the proposed budget nor NYDFS has offered further guidance as to how the exemption would be applied.

NYDFS currently imposes significant registration requirements on licensed lenders.  Among other hurdles, businesses must file and maintain compliance documentation, implement internal controls, and undergo background checks, examinations, and annual assessments.  Businesses seeking licensed lender status are not permitted to make loans while registration is pending.

New York’s proposed expansion of the lender license requirement continues an ongoing dispute between federal and state authorities over the regulation of FinTech companies. In December, the Office of the Comptroller of the Currency (OCC) announced it would consider granting FinTech companies special-purpose national bank charters that would treat them similarly to national banks from a regulatory perspective, and generally preempt state laws.  The OCC’s proposal would enable non-bank FinTech companies to seek a single banking license from a single national regulator, as opposed to numerous licenses across multiple states.  In response, NYDFS Superintendent Maria Vullo submitted a letter opposing the OCC’s proposal, and claiming FinTech activities would be better regulated by the states.  The proposed expansion of NYDFS’ lender license requirements appears to follow Superintendent Vullo’s views.

FinTech companies and marketplace lenders in particular should be cognizant of these and other continuing efforts to regulate FinTech, and should prepare accordingly. Steps that FinTech companies can take now to prepare for future regulation include engaging directly with potential regulators; conducting self-assessments of compliance with existing lending and finance laws, such as the Gramm-Leach-Bliley Act; assessing the retention of company data and records; and crafting and implementing internal compliance policies and controls.

For more information about efforts to regulate FinTech and maintaining compliance as a FinTech company, please contact Kari Larsen.

ESMA Publishes Report on Distributed Ledger Technology

On February 7, 2017, the European Securities and Markets Authority (“ESMA”) released a Report on Distributed Ledger Technology (“DLT”) (also known as “blockchain” technology) Applied to Securities Markets (the “Report”) that considers DLT’s effect on securities markets and fit to existing regulatory infrastructure.  The Report ultimately concludes that while many of the laws and regulations currently in place can be applied to DLT, “international regulatory engagement and cooperation are paramount . . . to ensure both that the DLT does not create unintended risks and that its benefits are not hindered by undue obstacles.”  Additionally, in an appendix to the Report, ESMA summarizes the comments of market participants to its June 2016 Discussion Paper.  Last month, the U.S. Financial Industry Regulatory Authority (“FINRA”) similarly acknowledged the need for international coordination in its own Report on DLT (see Reed Smith’s summary here).

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FINRA Issues Report on Distributed Ledger Technology

The Financial Industry Regulatory Authority (“FINRA”) published a report on January 18, 2017, regarding Distributed Ledger Technology (“DLT”) (also known as blockchain technology) that provides an overview of different DLT use cases and related regulatory considerations for market participants (the “Report”).  The Report provides valuable guidance to both the financial services industry and the broader technology sector as U.S. lawmakers and regulators begin to focus their attention on the development of these swiftly evolving technologies.   FINRA requests public comment on its conclusions, highlighted in this article, by March 31, 2017.

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Illinois Releases Proposed Guidance on Application of State Money Transmission Law to Digital Currency Activities

On November 30, 2016, the Illinois Department of Financial and Professional Regulation (IDFPR) issued a proposed “Digital Currency Regulatory Guidance” (the Guidance) regarding the application of the Illinois Transmitters of Money Act (TOMA) to various digital currency activities. The Guidance applies only to “decentralized digital currencies,” which are not issued by a particular person or entity, do not have a central administrator, and do not have a central repository.  Therefore, the Guidance would apply to activities involving Bitcoin and most other cryptocurrencies.  The IDFPR is accepting comments on the Guidance until January 18, 2017.

In the Guidance, the IDFPR concludes that the transmission of digital currency by itself does not require a money transmission license under TOMA.  TOMA requires a money transmission license for those who engage “in the business of receiving money for transmission or transmitting money,” and defines “money” as a “medium of exchange that is authorized by a domestic or foreign government as part of its currency….”  Because the decentralized digital currencies to which this Guidance applies have not been authorized or accepted by any governments, it is not considered “money” for purposes of TOMA.  Therefore, those who transmit digital currency by itself (without also transmitting traditional currency) are not in the business of “receiving money for transmission or transmitting money.”  Under the Guidance, therefore, intermediaries who receive digital currency for transfer to a third party, and virtual currency wallets that hold digital currency on behalf of customers, would generally not be required to obtain a money transmission license.

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Bob Jaworski to Speak at BankHorizons Conference

On December 2nd, please join Robert Jaworski, a partner in Reed Smith’s Financial Services Regulatory Group who will be speaking at the BankHorizons 2016 conference. Bob’s presentation will discuss:

For banks that rely heavily on consumer business, compliance with the ever-increasing volume of regulations coming out of Washington over the last several years has imposed a major burden. That burden has yet to show signs of diminishing, particularly with multiple regulatory initiatives being unveiled by the Consumer Financial Protection Bureau during the past year. This session will provide attendees with highlights of some of the most significant of these CFPB initiatives, including the CFPB’s new mortgage servicing rules, the recently proposed changes to the CFPB’s KBYO/TRID rule, the new HMDA rule, and more. In addition, we will also address the PHH v. CFPB decision recently issued by the D.C. Circuit Court of Appeals – what the court decided, what will happen next, and the implications of this decision for the future.

For more information on the conference, please click here.

Mortgage Lenders Receive Wake Up Call from CFPB

Last week, the CFPB issued a warning letter to 44 mortgage lenders and brokers concerning possible violations related to their collection and reporting of mortgage data under the Home Mortgage Disclosure Act (HMDA) and Regulation C. HMDA requires mortgage lenders to collect and report data related to certain housing-related loans, in part to ensure those lenders do not engage in discriminatory practices.  While the letter states that the CFPB has not made any finding of specific HMDA violations, it encourages institutions to undertake a review to ensure compliance with HMDA requirements and report any such efforts to the CFPB.

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