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CFTC Releases Artificial Intelligence Report

On 2 May 2024, the Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee (Committee) released a report entitled Responsible AI in Financial Markets: Opportunities, Risks & Recommendations. The report discusses the impact and future implications of artificial intelligence (AI) on financial markets and further illustrates the CFTC’s desire to oversee the AI space.

In the accompanying press release, Commissioner Goldsmith Romero highlighted the significance of the Committee’s recommendations, acknowledging decades of AI use in financial markets and proposing that new challenges will arise with the development of generative AI. Importantly, the report proposes that the CFTC develop a sector-specific AI Risk Management Framework addressing AI-associated risks.

The Committee opined that, without proper industry engagement and regulatory guardrails, the use of AI could “erode public trust in financial markets.” The report outlines potential risks associated with AI in financial markets such as the lack of transparency in AI decision processes, data handling errors, and the potential reinforcement of existing biases.

The report recommends that the CFTC host public roundtable discussions to foster a deeper understanding of AI’s role in financial markets and develop an AI Risk Management Framework for CTFC-registered entities aligned with the National Institute of Standards and Technology’s AI Risk Management Framework. This approach aims to enhance the transparency and reliability of AI systems in financial settings.

The report also calls for continued collaboration across federal agencies and stresses the importance of developing internal AI expertise within the CFTC. It advocates for responsible and transparent AI usage that adheres to ethical standards to ensure the stability and integrity of financial markets.

Eleventh Circuit Affirms Dismissal of FCRA Claims Since Alleged Inaccurate Information Was Not Objectively and Readily Verifiable

In Holden v. Holiday Inn Club Vacations Inc., No. 22-11014, No. 22-11734, 2024 WL 1759143 (11th Cir. 2024), which was a consolidated appeal, the United States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit” or “Court”) held that the purchasers of a timeshare did not have actionable FCRA claims since the alleged inaccurate information reported to one of the consumer reporting agencies (“CRAs”) was not objectively and readily verifiable. In doing so, the Eleventh Circuit affirmed two decisions issued by United States District Court for the Middle District of Florida (“District Court”) granting of summary judgment in favor of the timeshare company in the respective cases.

Summary of Facts and Background

Two consumers, Mark Mayer (“Mayer”) and Tanethia Holden (“Holden”), entered into two separate purchase agreements with Holiday Inn Club Vacations Incorporated (“Holiday”) to acquire timeshare interests in Cape Canaveral and Las Vegas, respectively. Holiday is a timeshare company that allows customers to purchase one or more of its vacation properties in weekly increments that can be used annually during the designated period. As part of the transaction, Holiday’s customers typically elect to finance their timeshare purchases through Holiday, which results in the execution of a promissory note and mortgage.

Mayer’s Purchase, Default, and Dispute

On September 15, 2014, Mayer entered into his purchase agreement with Holiday, which contained a title and closing provision stating the transaction would not close until Mayer made the first three monthly payments, and Holiday recorded a deed in Mayer’s name. The purchase agreement also included a purchaser’s default provision stating that upon Mayer’s default or breach of any of the terms or conditions of the agreement, all sums paid by Mayer would be retained by Holiday as liquidated damages and the parties to the purchase agreement would be relieved from all obligations thereunder. Further, the purchase agreement provided that any payments made under a related promissory note prior to the closing would be subject to the purchaser’s default provision. On the same day, Mayer executed a promissory note to finance his timeshare purchase, which was for a term of 120 months. On July 13, 2015, Holiday recorded a deed in Mayer’s name, and he proceeded to tender timely monthly payments until May 2017. As a result of Mayer’s failure to tender subsequent payments, Holiday reported Mayer’s delinquency to the CRA.

Approximately two years later, Mayer obtained a copy of his credit report and discovered Holiday had reported a past-due balance. Thereafter, Mayer sent multiple letters to the CRA disputing the debt, as he believed the purchase agreement was terminated under the purchaser’s default provision. Each dispute was communicated to Holiday, who in turn certified that the information was accurately reported. Mayer sued Holiday for an alleged violation of 15 U.S.C. § 1681s-2(b) of the FCRA based on the furnishing of inaccurate information and failure to “fully and properly re-investigate” the disputes. Holiday eventually moved for partial summary judgment, which the District Court granted. The District Court reasoned that the underlying issue of whether the default provision excused Mayer’s obligation to keep paying was a legal dispute rather than a factual inaccuracy and, in turn, made Mayer’s claim not actionable under the FCRA. Mayer timely appealed to the Eleventh Circuit.

Holden’s Purchase, Default, and Dispute

On June 25, 2016, Holden entered into her purchase agreement with Holiday, which contained a nearly identical title and closing provision to that of Mayer’s purchase agreement. Additionally, Holden’s purchase agreement incorporated a similar purchaser’s default provision. Similarly, Holden executed a promissory note to finance her timeshare purchase, which was for a term of 120 months, and entered into a mortgage to secure the payments under the note. After making her third payment, Holden defaulted and hired an attorney to cancel the purchase agreement pursuant to the closing and title provision and purchaser’s default provision. However, Holiday disputed the purchase agreement was canceled and, on June 19, 2017, recorded a timeshare deed in Holden’s name. More importantly, Holiday reported Holden’s delinquent debt to the CRA.

In response, Holden’s attorney sent three dispute letters to Holiday, which resulted in Holiday investigating the dispute and determining the reporting was accurate since Holden was still obligated under the note. Eventually, Holden sued Holiday for various violations of Florida State law and the FCRA. Holden claimed Holiday reported inaccurate information to the CRA, failed to conduct an appropriate investigation, and failed to correct the inaccuracies. The parties filed competing motions for partial summary judgment, which ended with the District Court granting Holiday’s motion and denying Holden’s motion. Specifically, the District Court held that Holden’s FCRA claim failed because contract disputes regarding whether Holden still owed the underlying debt are legal disputes and not factual inaccuracies. Holden timely appealed to the Eleventh Circuit.

The Fair Credit Reporting Act

As the Eleventh Circuit reiterated in Holden, when a furnisher is notified of a consumer’s dispute, the furnisher must undertake the following three actions: (1) conduct an investigation surrounding the disputed information; (2) review all relevant information provided by the CRA; and (3) report the results of the investigation to the CRA. When a furnisher determines an item of information disputed by a consumer is incomplete, inaccurate, or cannot be verified, the furnisher is required to modify, delete, or permanently block reporting of the disputed information. See 15 U.S.C. § 1681s-2(b)(1)(E). Additionally, any disputed information that a furnisher determines is inaccurate or incomplete must be reported to all other CRAs. See 15 U.S.C. § 1681s-2(b)(1)(D). Despite the foregoing, consumers have no private right of action against furnishers merely for reporting inaccurate information to the CRAs. The only private right of action a consumer may assert against a furnisher is for a violation of 15 U.S.C. § 1681s-2(b) for failure to conduct a reasonable investigation upon receiving notice of a dispute from a CRA. See 15 U.S.C. § 1681s-2(c)(1)).

To successfully prove an FCRA claim, the consumer must demonstrate the following: (1) the consumer identified inaccurate or incomplete information that the furnisher provided to the CRA; and (2) the ensuing investigation was unreasonable based on some facts the furnisher could have uncovered that establish the reported information was inaccurate or incomplete.

The Eleventh Circuit’s Decision

In affirming the District Court’s decisions granting summary judgment and dismissing the FCRA claims, the Eleventh Circuit clarified that whether the alleged inaccuracy was factual or legal was “beside the point. Instead, what matters is whether the alleged inaccuracy was objectively and readily verifiable.” Specifically, the Eleventh Circuit cited to Erickson v. First Advantage Background Servs. Corp., 981 F. 3d 1246, 1251-52 (11th Cir. 2020), which defined “accuracy” as “freedom from mistake or error.” The Eleventh Circuit continued by reiterating that “when evaluating whether a report is accurate under the [FCRA], we look to the objectively reasonable interpretations of the report.” As such, “a report must be factually incorrect, objectively likely to mislead its intended user, or both to violate the maximal accuracy standards of the [FCRA].”

Based on this standard, the Eleventh Circuit held that the alleged inaccurate information on which Mayer and Holden based their FCRA claims was not objectively and readily verifiable since the information stemmed from contractual disputes without simple answers. As such, the Eleventh Circuit found that Holiday took appropriate action upon receiving Mayer and Holden’s disputes by assessing the issues and determining whether the respective debts were due and/or collectible, which thereby satisfied its obligation under the FCRA. While Mayer and Holden argued to the contrary, the Eleventh Circuit held that the resolutions of these contract disputes were not straightforward applications of the law to facts. In support of its decision, the Eleventh Circuit cited to the fact that Florida State courts have reviewed similar timeshare purchase agreements and reached conflicting conclusions about whether the default provisions excused a consumer’s obligation to pay the underlying debt.

Conclusion

Holden is a limited victory for furnishers, as the Eleventh Circuit declined to impose a bright-line rule that only purely factual or transcription errors are actionable under the FCRA and held a court must determine whether the alleged inaccurate information is “objectively and readily verifiable.” Accordingly, there are situations when furnishers are required by the FCRA to accurately report information derived from the readily verifiable and straightforward application of the law to facts. One example of such a situation is misreporting the clear effect of a bankruptcy discharge order on certain types of debt. Thus, furnishers should revisit their investigation and verification procedures so they do not run afoul of the FCRA. Furnishers should also continue to monitor for developing case law as other circuit courts confront these issues.

Business Taxation of Hedging Transactions Part IV: Tax Timing

What are the tax accounting rules for hedges?

Whether or not a qualified tax hedge is properly identified, it must be tax accounted for under a method that clearly reflects income.[1] The timing of gains and losses on hedges must match the timing of income and loss reporting on the hedged items. Aggregate tax hedgers must provide in their Aggregate Programs robust descriptions of the tax accounting methods used for each type of hedge that is part of its Aggregate Program. In addition, the Aggregate Program’s documentation must contain enough detail to sufficiently demonstrate how the clear reflection of income requirement is met.

Which transactions must be tax accounted in a way that clearly reflects income?

As a general matter, a taxpayer must compute all of its taxable income in a way that clearly reflects income. This requirement also applies to qualified tax hedges. Under Treas. Reg. § 1.446-4, a taxpayer must clearly reflect income, regardless of whether the taxpayer properly identified the hedging transaction.[2] A taxpayer cannot avoid the requirement to clearly reflect income by simply failing to identify as a hedge.

Can more than one method of tax accounting clearly reflect income?

Yes. As long as a taxpayer’s hedge accounting method meets the matching requirement to clearly reflect income, the taxpayer has flexibility to adopt an appropriate tax accounting method[3] provided it meets Treas. Reg. § 1.446-4(c).

Do generally accepted accounting principles (GAAP) clearly reflect income for purposes of tax hedge accounting?

No. Although GAAP might clearly reflect taxable income, it might not reasonably match taxable gain and loss on the hedge with that of the hedged item. Regardless of GAAP, a taxpayer must follow the clear reflection of income requirements set out in Treas. Reg. § 1.446-4.

Must all hedges be tax accounted for on the same method?

No. A taxpayer can adopt different methods of tax accounting for different types of hedges if they clearly reflect income and meet two additional conditions.[4] First, once an accounting method is adopted, it must be consistently applied; and second, an accounting method can only be changed with IRS consent.[5]

When is a tax accounting method assumed to have been adopted for hedges?

A taxpayer has adopted a tax accounting method when it has accounted for a “material item” in the same way on two or more consecutively filed tax returns. In this situation, the item “represents consistent treatment of that item” for purposes of satisfying Treas. Reg. § 1.446-1(e)(2)(ii)(a).[6] If a hedge is correctly accounted for in the first year, however, a taxpayer is treated as having adopted an accounting method after the first year.[7] Once a method is adopted, it must be consistently applied and can only be changed with IRS consent.[8]

What happens if the IRS determines that a taxpayer’s method of tax accounting does not clearly reflect income?

If a taxpayer’s accounting method does not clearly reflect income, the IRS can recompute taxable income in a manner that clearly reflects income. Unless the taxpayer can successfully contest this treatment at audit, on appeal, or in subsequent litigation, it must use the IRS’s method to tax account for its hedging gain or loss. To change the method of tax accounting the taxpayer uses for its hedges, it must first obtain IRS consent.[9]

Can a taxpayer change from an impermissible method of tax accounting to a permissible method without first obtaining IRS consent?

No. The taxpayer must obtain consent from the IRS consent in advance of making any tax accounting changes.[10]

What tax timing rules apply to hedges of aggregate risks?

A taxpayer that hedges its risks on an aggregate basis must adopt a tax accounting method that clearly reflects income.[11] As a result, the timing of income, deduction, gain, or loss with respect to hedges must reasonably match that of the items being hedged.[12]

What are the tax timing requirements for hedges of debt instruments?

Hedges of debt instruments, whether held or to be held by the taxpayer, are tax accounted by reference to the period or periods to which the hedge relates.[13] For a debt instrument that provides interest at a fixed or qualified floating rate, constant yield principles generally clearly reflect income.[14] This means that hedging gain or loss is taken into account as if the gain or loss “adjusted the yield of the instrument over the term to which it relates.”[15] For a hedge of an anticipated fixed rate borrowing, gain (loss) is taken into account as if it increased (reduced) the issue price for the debt instrument.[16] It is treated as an adjustment to the debt instrument’s issue price, and it is taken into account over the term of the hedge. If the hedge is entered into but the anticipated debt issuance or obligation is not consummated, the taxpayer will take into account gain or loss from the hedge on a “when realized” basis.[17]

What tax accounting methods are provided in the Treasury Regulations for hedges of inventory?

Four accounting methods are provided in the Treasury Regulations for inventory hedges—the general method, mark-and-spread, and two simplified methods:

(1) General method Gain or loss on hedges of inventory purchases can be taken into account in the same time period as income or loss on the hedged item as if the gain or loss were an element of the cost of the inventory.[18] Gain or loss on hedges of inventory sales can be taken into account as if the gain or loss were an element of the sales proceeds.[19] For specifically identified hedges, this method is easy to comply with because it allows for hedging gain or loss to be taken into account as if it were an element of the cost incurred in (or sales proceeds from) that particular transaction. An aggregate hedger, on the other hand, might not be able to take hedging gains or losses into account directly as part of the cost incurred in (or sales proceeds with respect to) an inventory transaction (an aggregate hedger might not be able to match the hedge with a particular inventory purchase or sale).[20]

(2) Mark-and-spread method To match an inventory hedge to the timing of aggregate hedged items, a taxpayer may account for the hedge under the mark-and-spread method. Mark-and-spread is permissible for an aggregate inventory hedger. With mark-and-spread, a taxpayer periodically marks the hedge to market no less frequently than quarterly, taking the resulting gain or loss into account over the period in which the hedge is intended to reduce the taxpayer’s risk exposure to the hedged item.[21] Gain or loss from marking the hedge to market is then spread over the period that such gain or loss would have been taken into account as if it had been an increase or decrease to inventory cost or gross sales proceeds in that period.

(3) Simplified inventory method Inventory hedgers that do not use the last-in-first-out (LIFO) method of accounting for inventory take into account realized gains or losses on hedges of inventory purchases and sales when they would be taken into account as if the gains or losses were elements of inventory cost during the period realized.[22]

(4) Simplified mark-to-market method Marking hedges to market to take gain or loss into account immediately might clearly reflect income even if the hedged inventory is not on mark-to-market. Mark-to-market hedge accounting might only be appropriate if inventory is not accounted for under the LIFO method or the lower-of-cost-or-market method, and only if the inventory items are held for a short period of time.[23]

[1] Treas. Reg. § 1.446-4.

[2] Rev. Rul. 2003-127.

[3] Treas. Reg. § 1.446-4(c).

[4] Rev. Rul. 2003-127.

[5] Rev. Rul. 2003-127.

[6] Rev. Rul. 2003-127 citing Rev. Rul. 90-38, 1990-1 C.B. 5-7.

[7] Rev. Rul. 2003-127.

[8] Rev. Rul. 2003-127.

[9] Treas. Reg. § 1.446-1(b)(1).

[10] See Rev. Proc. 97-27, 1997-1 C.B. 680 for the procedure to obtain consent.

[11] Treas. Reg. § 1.446-4(b).

[12] Treas. Reg. § 1.446-4(e)(1).

[13] Treas. Reg. § 1.446-4(e)(4).

[14] Id.

[15] Id.

[16] Id.

[17] Treas. Reg. § 1.446-4(e)(8)(i).

[18] Treas. Reg. § 1.446-4(e)(3)(i).

[19] Id.

[20] Treas. Reg. § 1.446-4(e)(1)(i).

[21] Treas. Reg. § 1.446-4(e)(1)(ii).

[22] Treas. Reg. § 1.446-4(e)(3)(ii)(A).

[23] Treas. Reg. § 1.446-4(e)(3)(ii)(B).

Read Part 1

Read Part 2

Read Part 3

States Sue the Biden Administration to Stop Loan Relief Plan

On April 9, 2024, seven states filed suit against the Biden administration in an attempt to block its new “SAVE” plan, an income-driven repayment plan that leads to eventual loan forgiveness. The case is pending in the U.S. District Court for the Eastern District of Missouri.

Plaintiff states claim that the plan is unlawful because it evades limits Congress imposed for income-based repayment plans and sets arbitrarily high thresholds that would effectively create a grant program for student borrowers. Plaintiffs allege that the US Supreme Court struck down a similar plan last year proposed by the Biden administration which would have cost taxpayers $430 billion. See Biden v. Nebraska, 143 S. Ct. 2355, 2362 (2023). The states allege that the plan violates the Higher Education Act of 1965 and subsequent amendments, which allows student-loan cancelation to occur only after a borrower pays 15% of their disposable income (which is defined as 150% above the poverty line) after 25 years.

The states further allege that the disposable income threshold would increase from 150% to 225% above the poverty line and that the plan would only require borrowers to pay 5% of their income for 10 years before loans are cancelled, “gut[ting] the statutory purpose of providing loans.”

Plaintiffs seek a declaratory judgment that the relief plan is unlawful and injunctive relief.

Putting It Into Practice: State attorneys general continue to challenge Biden regulatory actions through litigation (previously discussed here and here). Given the success they have achieved thus far, it will be interesting to see how this litigation develops. We will continue to monitor the case for developments.

Regulation Round Up March 2024

Welcome to the UK Regulation Round Up, a regular bulletin highlighting the latest developments in UK and EU financial services regulation.

Key developments in March 2024:

28 March

FCA Regulation Round-up: The FCA published its regulation round-up for March 2024.

26 March

AIFMD II: Directive (EU) 2024/927 amending the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”) and the UCITS Directive (2009/65/EC) (“UCITS Directive”) relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by alternative investment funds has been published in the Official Journal of the European Union (“EU”). Please refer to our dedicated article on this topic here.

ELTIFs: The European Commission published a Communication to the Commission explaining that it intends to adopt, with amendments, ESMA’s proposed regulatory technical standards (“RTS”) under Regulations 9(3), 18(6), 19(5), 21(3) and 25(3) of the Regulation on European Long-Term Investment Funds ((EU) 2015/760) as amended by Regulation (EU) 2023/606.

Financial Promotions: The FCA published finalised guidance (FG24/1) on financial promotions on social media.

Cryptoassets: The Investment Association (“IA”) published its second report on UK fund tokenisation written by the technology working group to HM Treasury’s asset management taskforce.

25 March

Cryptoassets: ESMA published a final report (ESMA75-453128700-949) on draft technical standards specifying requirements for co-operation, exchange of information and notification between competent authorities, European Supervisory Authorities and third countries under the Regulation on markets in cryptoassets ((EU) 2023/1114) (“MiCA”).PRIIPS Regulation: the European Parliament’s Economic and Monetary Affairs Committee (“ECON”) published the report (PE753.665v02-00) it has adopted on the European Commission’s legislative proposal for a Regulation making amendments to the Regulation on key information documents (“KIDs”) for packaged retail and insurance-based investment products (1286/2014) (“PRIIPs Regulation”) (2023/0166(COD)).

Alternative Investment Funds: The FCA published the findings from a review it carried out in 2023 of alternative investment fund managers that use the host model to manage alternative investment funds.

AIFMD: Four Delegated and Implementing Regulations concerning cross-border marketing and management notifications relating to the UCITS Directive and the AIFMD have been published in the Official Journal of the European Union (here, here, here, and here).

22 March

Smarter Regulatory Framework: HM Treasury published a document on the next phase of the Smarter Regulatory Framework, its project to replace assimilated law relating to financial services.

21 March

Market Transparency: ESMA published a communication on the transition to the new rules under the Markets in Financial Instruments Regulation (600/2014) (“MiFIR”) to improve market access and transparency.

Retail Investment Package: ECON published a press release announcing it had adopted its draft report on the proposed Directive on retail investment protection (2023/0167(COD)). The proposed Directive will amend the MiFID II Directive (2014/65/EU) (“MiFID II”), the Insurance Distribution Directive ((EU) 2016/97), the Solvency II Directive (2009/138/EC), the UCITS Directive and the AIFMD.

19 March

ESG: The Council of the EU proposed a new compromise text for the Corporate Sustainability Due Diligence Directive, on which political agreement had previously been reached in December 2023.

FCA Business Plan: The FCA published its 2024/25 Business Plan, which sets out its business priorities for the year ahead.

15 March

Customer Duty: The FCA announced that it is to conduct a review into firms’ treatment of customers in vulnerable circumstances.

PRIIPS Regulation: The Joint Committee of the European Supervisory Authorities published an updated version of its Q&As (JC 2023 22) on the key information document requirements for packaged retail and insurance-based investment products (“PRIIPs”), as laid down in Commission Delegated Regulation (EU) 2017/653.

14 March

FCA Regulatory Approach: The FCA published a speech given by Nikhil Rathi, FCA Chief Executive, on its regulatory approach to deliver for consumers, markets and competitiveness and its shift to outcomes-focused regulation.

11 March

AML: HM Treasury launched a consultation on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692). The consultation runs until 9 June 2024 and covers four distinct areas.

08 March

ESG: The IA published a report on insights and suggested actions for asset managers following the commencement of reporting obligations of climate-related disclosures under the ESG sourcebook.

ESG: The House of Commons Treasury Committee published a report on the findings from its “Sexism in the City” inquiry.

Cryptoassets: The EBA published a consultation paper (EBA/CP/2024/09) on draft guidelines on redemption plans under Articles 47 and 55 of the MiCA.

05 March

Financial Sanctions: The Foreign, Commonwealth and Development Office published Post-Legislative Scrutiny Memorandum: Sanctions and Anti-Money Laundering Act 2018.

AML: The FCA published a Dear CEO letter sent to Annex I financial institutions concerning common control failings identified in anti-money laundering (AML) frameworks.

ESG: The European Commission adopted a delegated regulation supplementing the Securitisation Regulation ((EU) 2017/2402) with regard to regulatory technical standards specifying, for simple, transparent and standardised non-ABCP traditional securitisation, and for simple, transparent and standardised on-balance-sheet securitisation, the content, methodologies and presentation of information related to the principal adverse impacts of the assets financed by the underlying exposures on sustainability factors.

CRD IV: The European Commission adopted a Commission Implementing Regulation that amends Commission Implementing Regulation (EU) 650/2014 containing ITS on supervisory disclosure under the CRD IV Directive (2013/36/EU) (“CRD IV”).

01 March

Alternative Investment Funds: The FCA published a portfolio letter providing an interim update on its supervisory strategy for the asset management and alternatives portfolios.

Corporate Transparency: The Economic Crime and Corporate Transparency Act 2023 (Commencement No. 2 and Transitional Provision) Regulations 2024 (SI 2024/269) have been made and published.

Financial Sanctions: The Treasury Committee launched an inquiry into the effectiveness of financial sanctions on Russia.

EMIR: The FCA published a consultation paperin which it, together with the Bank of England, seeks feedback on draft guidance in the form of Q&As on the revised reporting requirements under Article 9 of UK EMIR (648/2012).

FCA Handbook: The FCA published Handbook Notice 116 (dated February 2024), which sets out changes to the FCA Handbook made by the FCA board on 29 February 2024.

FCA Handbook: the FCA published its 43rd quarterly consultation paper (CP24/3), inviting comments on proposed changes to a number of FCA Handbook provisions.

Amar Unadkat, Sulaiman Malik & Michael Singh also contributed to this article.

Federal Court Confirms Case Challenging Bank of America’s Fraudulent COVID Relief Program Can Proceed

In a significant step forward for consumer protection, the Northern District of California confirmed that claims that Bank of America’s (“BofA”) misled its customers with false promises to provide overdraft fee relief during the COVID-19 pandemic could proceed.

The litigation centers on allegations that BofA widely advertised a COVID-19 bank fee relief program to garner publicity and goodwill but, instead of honoring its promises, the Bank abruptly and quietly ended any relief just a few months into the raging pandemic. Instead of announcing the shutdown, BofA kept promoting the program when none existed. Plaintiffs and other Americans across the country, who were suffering significant financial hardship as a result of the pandemic, trusted the bank’s marketing, and incurred significant fees that the bank refused to waive.

Plaintiffs Anthony Ramirez, Mynor Villatoro Aldana, and Janet Hobson have lodged claims on behalf of a putative nationwide class and state subclasses. The Court’s denial of BofA’s motion to dismiss supports plaintiffs’ allegations that the bank’s continued advertisement of the defunct relief program was deceptive and unlawful, depriving consumers across the country of millions of dollars in promised fee refunds.

This decision bolsters consumer protection rights and reinforces the judiciary’s role in ensuring that big banks like BofA make good on their promises to financially struggling customers.

The case is Ramirez, et al. v. Bank of America, N.A., Case No.: 4:22-cv-00859-YGR in the United States District Court for the Northern District of California.

A copy of the order is available here.

Unlocking India’s Space Potential: India Liberalizes Foreign Direct Investment Regime

The foreign investment policy was ambiguous about space activities beyond satellites, leading to different interpretations.
Some companies made investments basis the view that investments in the activities not listed under the FDI policy in this sector could be made up to 100% without prior government approval.
The proposed FDI Space Policy addresses these concerns and allows 100% foreign investments under the automatic and governmental approval route.
Formal notification is awaited which will make this policy effective as law.

Background

India currently is home to more than 200 space start-ups, and the space sector in India has attracted USD 124.7 million investment in the year 2023. The existing foreign investment policy of India (“FDI Policy”) requires foreign investors to obtain prior government approvals for investing in the space sector, particularly for the establishment of satellites.

Considering the growth of this sector, the Indian government has been periodically releasing policies / notifications, establishing organizations, etc. with the intent to allow more private participation in this sector. This has led to the establishment of an organization to promote the sector called the Indian National Space Promotion and Authorization Centre in 2020, as well as the introduction of the National Geospatial Policy, 2022 followed by the Indian Space Policy, 2023.

On February 21, 2024, the Union Cabinet approved amendments to the Foreign Direct Investment (“FDI”) policy and communicated it in a press release (“FDI Space Policy”) which proposes to liberalize investments in the space sector. However, a formal notification from the relevant authorities is still awaited for the amendments to become enforceable as law.

Existing FDI Policy

Existing foreign investment limits in the space sector are provided under the Schedule I of Foreign Exchange Management Act (Non-Debt Instrument) Rules, 2019 (“NDI Rules”). The current norms do not recognize “space” as a sector in itself. Instead, the space related activities are primarily captured under the head – “satellites – establishment and operation”. 100% foreign investment is allowed in this sector but the same is subject to approval from the government along with compliance of sectoral guidelines from Department of Space / Indian Space Research Organisation. In essence, all foreign investments in companies undertaking the activities of satellites-establishment and operations require government approval.

Reforms – New FDI Space Policy

The proposed FDI Space Policy allows 100% foreign investment in the space sector and has also created sub-categories, entry route and investment thresholds for various space related activities, which are as follows:

S.no.	Activity	FDI Thresholds
1.	Satellites-manufacturing & operation, satellite data products and ground segment & user segment	Up to 74% under automatic route and beyond 74% (up to 100%) under government route
2.	Launch vehicles and associated systems or subsystems, creation of spaceports for launching and receiving spacecraft	Up to 49% under automatic route and beyond 49% (up to 100%) under government route
3.	Manufacturing of components and systems/ sub-systems for satellites, ground segment and user segment	Up to 100% under automatic route

Analysis

(i) Status of existing investments

The existing FDI policy did not include space sector related activities (other than satellites-establishment and operation) such as launch vehicle business, ground segment, user segment, sub-component / sub-systems manufacturing, data products etc.

Various stakeholders argued that since the existing FDI policy did not specify certain activities such as launch vehicles, data sets, manufacturing of space systems / components etc. under the head of “satellites-establishment and operation”, foreign investments in such cases should be permitted up to 100% under the automatic route. This was based on the interpretation under the FDI policy that sectors / activities not specifically listed or prohibited, are permissible for foreign investment up to 100% under the automatic route, subject to sectoral conditionalities. Relying on the same, foreign investors made investments in space start-ups whose activities were not explicitly listed or regulated under the current FDI regime without obtaining government approval.

Some stakeholders interpreted “satellites” very broadly and took a more conservative view that all space related activities required government approval. Similarly, there were overlaps in activities / interpretation of the FDI policy under the sectors of defence, telecom and manufacturing.

The space liberalization norms under the proposed FDI Space Policy may have actually de-liberalized this sector for certain companies who received investments in allied space activities based on the understanding that sectors / activities not specifically listed or prohibited, should be eligible for foreign investments up to 100% under the automatic route. In such cases where the investment thresholds under the proposed FDI Space Policy may be breached, it would be interesting to see the government’s approach including granting approvals on a post-facto basis.

(ii) Sub- categorizations of activities within the Space Sector

While the government has acknowledged the sub-categories of activities within the space sector, it hasn’t clarified its rationale for providing different foreign investment thresholds for such activities. Relaxed thresholds for satellites (i.e., 74% under the automatic route (up to 100% under government route)) and its sub-components (i.e., 100% under the automatic route) encourage foreign participation in commercial aspects of space activities. In contrast, the 49% cap on foreign investments under the automatic route (up to 100% under government route) on launch vehicles acknowledge their dual-use potential for both civilian and defence purposes. This sensitivity, combined with the launching state’s heightened liability under Article II of the Convention on International Liability for Damage Caused by Space Objects (“Liability Convention”), may be viewed as necessitating greater government oversight.

However, industry players have also criticized the differential treatment provided to launch vehicles vis-a-vis satellites. They believe, in essence, both industries have similar sensitivity issues and hence should be treated at par from a foreign investment perspective. Hence, the difference in foreign investment thresholds require more explanation from the government.

(iii) Satellite Data Products

The term ‘satellite data products’ has not been defined under the proposed FDI Space Policy but investments in such activities would be permitted up to 74% under the automatic route (up to 100% under government route). This may lead to some conflict from a satellite imagery / data perspective read along with the liberalized Geospatial Guidelines, 2021. (“Geospatial Guidelines”).

The Geospatial Guidelines largely permit foreign investments up to 100% under the automatic route with limited foreign investment restrictions especially if the activity is for (i) creation / ownership / storage of geospatial data of a certain accuracy (as defined under the Geospatial Guidelines); (ii) terrestrial mobile survey, street view survey and surveying activities in Indian territorial waters. There seems to be no specific restriction on satellite generated data (other than the above) under the Geospatial Guidelines. Thus, the proposed FDI Space Policy may end up limiting foreign investments for activities relating to Satellite Data Products (which would include geo-spatial data) in which otherwise is viewed to be permissible up to 100% under the automatic route.

The government should also define what constitutes satellite data products and to the extent possible it would be recommended that foreign investment up to 100% should be permitted under the automatic route.

Additionally, the rationale for capping investments for satellite data products under the proposed FDI Space Policy seems unclear as these are data sets which could be regulated under the Geospatial Guidelines and the new Indian privacy law.

(iv) Where are sub-components for launch vehicles covered?

The proposed FDI Space Policy explicitly covers the manufacturing of components and systems / sub-systems for the satellite sector, ground & user segment, and permits 100% FDI under automatic route for the same. With the absence of similar language for components in launch vehicles, it could imply its inclusion under the broader launch vehicle category, hence falling under the 49% automatic route (up to 100% under government route). Alternatively, it could also be argued since it is not expressly specified, the same could be covered under the 100% automatic route category. However, considering the critical role of such components in the sector’s development, clarification from the government would provide much-needed comfort especially if the components are dual use (satellite and launch vehicle usage).

(v) What about ground segment and user segment for launch vehicles?

Following the pattern observed with the satellite and ground segment categories, the absence of specific mention for the “ground segment & user segment” in the launch vehicle section raises further questions. This omission could be an oversight or intentional, but the lack of clarity hinders transparency and predictability for potential investors. Further clarity on the inclusion from an industry perspective in the official amendment notification would ensure a comprehensive and consistent policy framework for the entire launch vehicle sector.

(vi) Were any sub-categories / activities missed?

As space activities may expand to include space mining, exploration, international space station construction, space tourism etc., India needs to proactively address these areas. Especially, if these should be interpreted for foreign investments up to 100% under the automatic route, as this would have a bearing on India’s ability to attract foreign investment while safeguarding national interests, technological competitiveness, and responsible stewardship of India in space.

Conclusion

While the proposed FDI Space Policy provides substantial liberalization, further clarity is awaited based on the formal notification which will make this effective as law. Ideally, the Government should provide definitions / explanations for the proposed categorization and sub-categorizations, and further clarity on the inclusions and omissions of activities which may be related to most space sector functions such as user and ground segments.

While the move towards liberalization significantly reduces government control over the space sector, its inherent interconnectedness with other regulated domains like telecommunications / geospatial cannot be ignored. Despite these challenges, the government’s willingness to open the space sector to foreign investments is a positive step offering greater confidence to foreign investors. Relaxation in the existing norms also signifies a supportive stance towards the industry, encouraging both domestic and international participation. Notably, India successfully attracted substantial foreign investment even during the era of full government control. Therefore, with the current reforms, a significant increase in foreign investments is expected.

Footnotes
[1] Rajya Sabha Questions, Department of Space, available at
https://sansad.in/getFile/annex/262/AU621.pdf?source=pqars
[2] Notification, Department of Space, available at https://pib.gov.in/PressReleasePage.aspx?PRID=1988864
[3] Notification, Ministry of Commerce & Industry, available at
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2007876
[4] Article II of the Liability Convention provides that a launching State shall be absolutely liable to pay compensation for damage caused by its space object on the surface of the earth or to aircraft flight.

Compliance Update — Insights and Highlights January 2024

On December 7, 2023, the Consumer Financial Protection Bureau (CFPB) ordered Atlantic Union Bank, an approximately $20 billion bank headquartered in Richmond, Virginia, to pay $6.2 million for “illegal overdraft fee harvesting” and “illegally enrolling thousands of customers in checking account overdraft programs.” The bank was ordered to pay $5 million in refunds and $1.2 million to a victims’ relief fund.

Regulation E provides that a bank may not charge a fee for an ATM or one-time debit card transaction unless it completes four steps. First, the bank must provide the customer with a notice describing the bank’s overdraft services in writing. Then, the bank must provide the customer with a “reasonable opportunity” for that customer to “affirmatively consent” to the payment of the ATM or one-time debit card transaction fee. Third, the customer must provide that “affirmative consent” or opt-in to the bank. And finally, the bank must provide the customer with written confirmation of their consent, including a statement of the right to revoke the consent at any time.

The CFPB alleged that Atlantic Union Bank failed to obtain proper consent when an account was opened in person at a branch. Bank employees orally provided customers with options for opting in to the payment of one-time debit card and ATM transaction fees pursuant to Regulation E. Bank employees asked customers to opt in orallyand then input the option into the bank’s account-opening computer system before printing the written consent form. The consent form was printed at the end of the account-opening process and was pre-populated with the customer’s oral opt-in choice.

In instances in which a customer was given options for opting in to the payment of one-time debit card and ATM transaction fees over the phone, bank employees did not have a script and allegedly provided misinformation and misleading statements about the benefits, costs, and other aspects of opting in to the payment of one-time debit card and ATM transaction fees pursuant to Regulation E.

The CFPB has taken the logical approach that a bank must provide the customer with a written disclosure of its overdraft practices prior to having them opt in. Additionally, without providing the customer with a prior written disclosure, a bank should not pre-populate its Regulation E opt-in form. Now is the time to review the consent order and your bank’s Regulation E opt-in processes and procedures.

Third Time’s a Charm? SEC & CFTC Finalize Amendments to Form PF

On February 8, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) jointly adopted amendments to Form PF, the confidential reporting form for certain registered investment advisers to private funds. Form PF’s dual purpose is to assist the SEC’s and CFTC’s regulatory oversight of private fund advisers (who may be both SEC-registered investment advisers and also registered with the CFTC as commodity pool operators or commodity trading advisers) and investor protection efforts, as well as help the Financial Stability Oversight Council monitor systemic risk. In addition, the SEC entered into a memorandum of understanding with the CFTC to facilitate data sharing between the two agencies regarding information submitted on Form PF.

Continued Spotlight on Private Funds

The continued focus on private funds and private fund advisers is a recurring theme. The SEC recently adopted controversial and sweeping new rules governing many activities of private funds and private fund advisers. The SEC’s Division of Examinations also continues to highlight private funds in its annual examination priorities. Form PF is similarly no stranger to recent revisions and expansions in its scope. First, in May 2023, the SEC adopted requirements for certain advisers to hedge funds and private equity funds to provide current reporting of key events (within 72 hours). Second, in July 2023, the SEC finalized amendments to Form PF for large liquidity fund advisers to align their reporting requirements with those of money market funds. And last week, this third set of amendments to Form PF, briefly discussed below.

SEC Commissioner Peirce, in dissent:

“Boundless curiosity is wonderful in a small child; it is a less attractive trait in regulatory agencies…. Systemic risk involves the forest — trying to monitor the state of every individual tree at every given moment in time is a distraction and trades off the mistaken belief that we have the capacity to draw meaning from limitless amounts of discrete and often disparate information. Unbridled curiosity seems to be driving this decision rather than demonstrated need.”

Additional Reporting by Large Hedge Fund Advisers on Qualifying Hedge Funds

These amendments will, among other things, expand the reporting requirements for large hedge fund advisers with regard to “qualifying hedge funds” (i.e., hedge funds with a net asset value of at least $500 million). The amendments will require additional disclosures in the following categories:

Investment exposures, borrowing and counterparty exposures, currency exposures, country and industry exposures;
Market factor effects;
Central clearing counterparty reporting;
Risk metrics;
Investment performance by strategy;
Portfolio, financing, and investor liquidity; and
Turnover.

While the final amendments increase the amount of fund-level information the Commission will receive with regard to individual qualifying hedge funds, at the same time, the Commission has eliminated the aggregate reporting requirements in Section 2a of Form PF (noting, in its view, that such aggregate information can be misleading).

Enhanced Reporting by All Hedge Funds

The amendments will require more detailed reporting on Form PF regarding:

Hedge fund investment strategies (while digital assets are now an available strategy to select from, the SEC opted not to adopt its proposed definition of digital assets, instead noting that if a strategy can be classified as both a digital asset strategy and another strategy, the adviser should report the strategy as the non-digital asset strategy);
Counterparty exposures (including borrowing and financing arrangements); and
Trading and clearing mechanisms.

Other Amendments That Apply to All Form PF Filers

General Instructions. Form PF filers will be required to report separately each component fund of a master-feeder arrangement and parallel fund structure (rather than in the aggregate as permitted under the existing Form PF), other than a disregarded feeder fund (e.g., where a feeder fund invests all its assets in a single master fund, US treasury bills, and/or “cash and cash equivalents”). In addition, the amendments revise how filers will report private fund investments in other private funds, “trading vehicles” (a newly defined term), and other funds that are not private funds. For example, Form PF will now require an adviser to include the value of a reporting fund’s investments in other private funds when responding to questions on Form PF, including determining filing obligations and reporting thresholds (unless otherwise directed by the Form).
All Private Funds. Form PF filers reporting information about their private funds will report additional and/or new information regarding, for example: type of private fund; identifying information about master-feeder arrangements, internal and external private funds, and parallel fund structures; withdrawal/redemption rights; reporting of gross and net asset values; inflows/outflows; base currency; borrowings and types of creditors; fair value hierarchy; beneficial ownership; and fund performance.

Final Thoughts

With the recent and significant regulatory spotlight on investment advisers to private funds and private funds themselves, we encourage advisers to consider the interrelationships between new data reporting requirements on Form PF and the myriad of new regulations and disclosure obligations being imposed on investment advisers more generally (including private fund advisers).

The effective date and compliance date for new final amendments to Form PF is 12 months following the date of publication in the Federal Register.

Robert Bourret also contributed to this article.

New Diligence Opportunity for Financial Institutions

On Jan. 1, 2024, the Corporate Transparency Act (“CTA”) took effect. As a result, all business entities, unless expressly exempt by the CTA, must file Reports of Beneficial Ownership Information (“BOI”) with the Financial Crimes Enforcement Network (“FinCEN”), a unit of the U.S. Treasury. Under the CTA, “financial institutions,” i.e., banks and other entities that provide financings and are subject to the “Know Your Customer” and “Customer Due Diligence” regulations of FinCEN pursuant to the Bank Secrecy Act, the USA Patriot Act, and the Anti-Money Laundering Act of 2020, may access the BOI on reports filed with FinCEN.

To gain access to the BOI, the financial institution MUST:

Obtain the written consent of the customer, i.e., the borrower, guarantor, or other loan party, in connection with the diligence process required before entering a business relationship with the customer, or as part of the continuing diligence required in an existing relationship. Accordingly, forms used by the financial institution to open or to continue an existing business relationship must include a clear and conspicuous provision in which the customer gives consent. This will probably require a complete review and revision of those forms;
Determine that obtaining access to the BOI is reasonably necessary for the financial institution to meet its diligence obligations. That determination should be spelled out in the written request to FinCEN for access; and
Acknowledge the scope of confidentiality obligations with respect to the BOI obtained, including the limited use permitted of the information, as well as safeguarding that accessed BOI from misuse.

Financial institutions should be prepared to request access to BOI as a matter of course. In any case where a customer engages in violative activity, and the BOI would have alerted the financial institution to possible risks, that institution could be exposed to sanctions by its principal prudential regulator and/or by other law enforcement agencies.

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What are the tax accounting rules for hedges?

Which transactions must be tax accounted in a way that clearly reflects income?

Can more than one method of tax accounting clearly reflect income?

Do generally accepted accounting principles (GAAP) clearly reflect income for purposes of tax hedge accounting?

Must all hedges be tax accounted for on the same method?

When is a tax accounting method assumed to have been adopted for hedges?

What happens if the IRS determines that a taxpayer’s method of tax accounting does not clearly reflect income?

Can a taxpayer change from an impermissible method of tax accounting to a permissible method without first obtaining IRS consent?

What tax timing rules apply to hedges of aggregate risks?

What are the tax timing requirements for hedges of debt instruments?

What tax accounting methods are provided in the Treasury Regulations for hedges of inventory?

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