Category: finance

US Banking Agencies Issue Statement on Alternative Date in Credit Underwriting

On December 3, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB) and the National Credit Union Administration (the Banking Agencies) released interagency guidance related to the use of alternative data for purposes of underwriting credit (the Guidance).

The Guidance acknowledges that alternative data may “improve the speed and accuracy of credit decisions,” especially in cases where consumer credit applicants have “thin files” because they are generally outside the mainstream credit system. In order to comply with applicable federal laws and regulations when using such alterative data, including those related to unfair, deceptive, or abusive acts or practices, the Banking Agencies advise that lenders should responsibly use such information. Furthermore, the Guidance reminds lenders of the importance of an appropriate compliance management program that comports with the requirements of applicable consumer protection laws and regulations.

As a final recommendation, the Banking Agencies suggest that lenders consult with appropriate regulators when planning to use alternative data to underwrite credit.

The Guidance is available here.

©2019 Katten Muchin Rosenman LLP

Japan’s New Crypto Regulation – 2019 Amendments to Payment Services Act and Financial Instruments and Exchange Act of Japan

Japan will fundamentally change its crypto asset regulations effective in spring of 2020.

In May, 2019, the National Diet, the Japanese national legislature, passed an amendment bill to the Payment Services Act (the “PSA”) and the Financial Instruments and Exchange Act (the “FIEA”), which was promulgated on June 7, 2019 (the “2019 Amendment”).  The 2019 Amendment will become effective within one year from promulgation, following further rulemaking by the Japan Financial Services Agency (the “JFSA”) to implement the 2019 Amendment, which is anticipated sometime soon and includes public comment process.

Key Takeaways of the 2019 Amendment

The 2019 Amendment, coming into force within one year of the promulgation, will bring certain significant and fundamental changes to how crypto assets are regulated in Japan.  Key takeaways are:

  • Crypto asset margin trading and other crypto asset derivative transactions will become subject to Japanese regulations on derivative transactions generally.  Broker-dealers and exchanges will likely need to revisit and update their registration status and policies and procedures.  While it may be possible to rely on a limited grandfathering provision for 6 months after the effective date, a notification must be submitted to a relevant local Finance Bureau within two weeks after the effective date of the 2019 Amendment.
  • Certain crypto assets distributed through distributed ledger technologies (such as blockchain) will be expressly regulated as Type I securities.  Consequently, solicitation and offering of such crypto assets, including Initial Coin Offerings, to Japanese investors will require careful review and structuring to avoid any regulatory pitfalls.
  • Crypto asset-related custodial activities will be subject to licensing.
  • Crypto asset trading activities will be subject to various prohibitions on unfair trading and practices.
  • A detailed rulemaking process will follow and involve opportunities to submit comments during the public consultation process.

Copyright 2019 K & L Gates

ARTICLE BY Tsuguhito Omagari of K&L Gates.
More on cyprocurrency regulation on the National Law Review Financial Institutions & Banking law page.

The Future of the CFPB: the Executive Branch and Separation of Powers

On October 18, 2019 the Supreme Court granted certiorari in Seila Law v. Consumer Financial Protection Bureau (CFPB). SCOTUS  will answer the question of “whether the substantial executive authority yielded by the CFPB, an independent agency led by a single director, violates the separation of powers,” and the Justices requested that the parties brief and argue an additional issue: “If the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. § 5491(c)(3) [the for-cause removal provision] be severed from the Dodd-Frank Act?”

Origins of the Consumer Financial Bureau and Previous Constitutional Challenges

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) established the CFPB as an independent bureau within the Federal Reserve System designed to protect consumers from abusive financial services practices.  The structure and constitutionality of the CFPB has been addressed before. In 2018, the D.C. Circuit held in PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir. 2018) (PHH) that the current structure of the CFPB, which features a single director that cannot be removed by the president except for cause, “is consistent with Article II” of the Constitution.

The PHH opinion stated that Congress’ response to the consumer finance abuse that led up to the 2008 financial crisis purposely created the CFPB to be “a regulator attentive to individuals and families”  because the existing regulatory agencies were too concerned about the financial industry they were supposed to supervise. It was determined that the CFPB needed independence to do its job, and the CPFB structure was designed to confer that independence.   Neither PHH Corporation nor the CFPB filed a petition for certiorari to ask the Supreme Court to review the D.C. Circuit’s decision.

Background of the Seila Law Case

In Seila Law v. Consumer Financial Protection Bureau (CFPB) the Petitioner is a law firm that provides a variety of legal services to consumers, and as part of a CFPB investigation into whether Seila Law violated certain federal laws, the CFPB issued a civil investigative demand seeking information and documents. Seila Law objected to the demand on the ground that the CFPB was unconstitutionally structured and filed a petition to a federal district court for enforcement. The district court held that the structure of the CFPB did not violate the separation of powers and was constitutional, after which that district court decision was appealed. The Ninth Circuit affirmed, noting that the issues had been “thoroughly canvassed” in the DC Circuit it in PHH, and adopting the position of the PHH majority that the CFPB’s structure is constitutional. Seila Law filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling, and here we are.

An Experienced Federal Agency Litigator’s Perspective

Mr. Anthony E. DiResta, is co-chair of Holland & Knight’s Consumer Protection Defense and Compliance Team, and a former Director of the Federal Trade Commission’s (FTC) Southeast Regional office.  Mr. DiResta was kind enough to take some time with the National Law Review to discuss the upcoming Seila Law decision and its impact on the future of the CFPB.

_______________

NLR: Can you sum up the CFPB and separation of powers story to this point from your own viewpoint?

DiResta: The Supreme Court has decided to review this case because of the constitutionality of the CFPB’s structure, based on separation of powers. Any single leader in government who doesn’t serve at the pleasure of the President may simply have too much power, and people with certain jurisprudential philosophies about how government should be run find that an offensive situation. That’s the theory behind the certiorari decision and why SCOTUS is addressing the case – it’s really a question of constitutionality and the power of administrative agencies. Additionally, the Court will look at the severability of the CFPB in Dodd-Frank, whether it’s possible to just restructure the single leader structure, and then leave the Bureau intact to continue business as usual.

NLR: It seems many of these issues could’ve been avoided had the CFPB been structured more as a multi-member commission initially or if Congress had simply expanded FTC powers.  Why do you think it was structured differently?

DiResta: That’s a matter of speculation – but I think it might have gone something like this: After the Recession in the early 2000s, many people felt that government was asleep at the wheel, letting  devastating things in banking and finance and servicing to consumers run out of control, which led to serious blunders and mishaps. So it was decided that a new office was needed – and this was led by representatives in Congress like Elizabeth Warren.

Why they didn’t simply expand the power and resources of the FTC is also pure speculation – they could have merely expanded FTC’s jurisdiction and reach to achieve similar outcomes and intentions.

The Constitutionality of the CFPB

NLR: Do you think SCOTUS will rule in favor of the petitioner in Seila Law, and find the structure of the CFPB unconstitutional?

DiResta: I do. I suspect that SCOTUS will, in fact, find the structure unconstitutional on the basis of the separation of powers. But I also believe that an even more interesting part of that will be the discussion of the severability of the organization’s leadership, leaving the CFPB itself intact. If the structure is unconstitutional, how the Court recommends a remedy to correct that unconstitutionality could have far-reaching effects. This is so important – and we should all be excited that we get to watch this corrective process in action.

NLR: Is there a chance this would result in a complete restructure of CFPB, or even its possible dissolution?

DiResta: I really don’t think so – and the Court couldn’t do that anyway. The Court could recommend to Congress that a certain path for correction be followed, but it will be up to Congress to rearrange the CFPB (if that’s the result) in the best way. The legislative branch will just have to make sure it’s done, in a way that the Court recommends.

Some More Background on CFPB Constitutionality Litigation

Then-Judge, now Justice Kavanaugh was on the U.S Court of Appeals Court for the D.C. Circuit for the 2018 en banc ruling in the PHH Corp. v. CFPB case and on the 2016 three-judge decision. Judge Kavanaugh authored two opinions regarding PHH:  declaring a certain aspect of the CFPB to be unconstitutional and in 2018, the dissenting opinion from the en banc U.S. Court of Appeals for the D.C Circuit’s decision overruling the 2016 panel opinion.

The 2016 panel opinion determined that the structure of the CFPB is unconstitutional stating:  “The concentration of massive, unchecked power in a single Director marks a dramatic departure from settled historical practice and makes the CFPB unique among independent agencies.” And the 2016 panel also presented a view of the Constitution that vests with the president an extensive degree of unilateral authority over the executive branch’s enforcement of federal laws.

NLR:  Since Justice Kavanaugh was a judge involved in a similar case – PHH Corp. v. CFPB – why is he allowed to rule on this matter again?

DiResta: I’m not an expert on judicial ethics but there does not appear to be improper bias in Kavanaugh reviewing this decision. Rather, his views in PHH reflect a philosophical perspective on separation of powers and the role of administrative agencies.  In fact, I expect they’ll use his past ruling on PHH as part of their internal discussion.

Seila Law v CFPB and Election Politics

NLR: It’s difficult to ignore the political undertones of this case:  a watchdog organization created, in part, with input from some high-profile democrats (most notably Elizabeth Warren, who is currently running as a candidate for president) is being challenged and that challenge is being echoed in support by largely conservative elements.  In your view, is this case a litmus test for the Supreme Court delving into political issues, something it has largely tried not to do?

DiResta: No – I really don’t see this as political. Again, this is a purely constitutional question, a legal question, and it’s exactly the kind of case the SCOTUS should be deciding. If we’re honest, this is a perfect example of why we have SCOTUS in the first place: To examine how effective our public servants are behaving and performing their responsibilities under the constitutional structure revealed in the separation of powers doctrine.

Besides that, politically speaking, this could boomerang. Consider: if the Democrats win the White House in 2020, and the Court were to change the structure, that would offer any Democratic President the opportunity to appoint a new Director in 2021, and Kathleen Kraninger’s term isn’t up until 2023.

Informed Democracy at Work

While the situation with CFPB and its constitutionality is demonstrably important, DiResta touched on a few more salient – though no less important – points.

DiResta: Democracy isn’t supposed to be easy. Democracy is hard – it’s messy and complicated. It’s in its nature, and in the nature of different ideas.

In a free marketplace of ideas, people will clash when citizens are free to express themselves, and there will always be conflict – but it’s out of resolving those conflicts that democracy claims – and grows – its power and attraction. It’s so important that we – the people – see this and get to comment on it – to watch this happening.

NLR: Absolutely. In a world where the news cycle has compressed from days, to hours, to minutes – while attention spans have diminished in similar fashion – it’s increasingly important that these monumental workings in government are transparent, and that people see them.

DiResta: I couldn’t agree more. And – as a young lawyer, I  had the privilege to work with some very dedicated and highly professional journalists who understood journalism as a public service, not as entertainment.  These journalists saw themselves as educators, bringing light to the processes and prospects of government to citizens. And that’s how the media serves effectively as the Fourth Branch of government. A branch that presents a constant check to the power of government and its branches, and that gives the people the knowledge to make better decisions, and to vote for the best people and the best situations.

We sincerely appreciate Mr. DiResta for his thoughtful insights and for taking time out of his busy schedule to share them with the National Law Review.

Copyright ©2019 National Law Forum, LLC

Appellate Court Tells CitiMortgage It Can’t Force “Repurchase” Of What No Longer Exists

A recent decision by the United States Court of Appeals for the Eighth Circuit offers some vindication for mortgage companies still facing “repurchase” demands made by the banks to which they sold residential mortgages in the years leading up to the financial crisis that began in 2007 and accelerated in 2008.  In CitiMortgage, Inc. v. Equity Bank, N.A., No. 18-1312 (8th Cir. 2019), the Eighth Circuit (which has appellate jurisdiction over the federal district courts of Arkansas, Iowa, Minnesota, Missouri, Nebraska, and the Dakotas) reached the common-sense conclusion that a plaintiff cannot require a defendant loan originator/seller to “repurchase” a loan extinguished by foreclosure.  In such a circumstance, the court reasoned, there simply is nothing left to repurchase.  In so holding, the Eighth Circuit affirmed the judgment of the United States District Court for the Eastern District of Missouri  — a court that, despite being CitiMortgage’s consistently chosen forum for repurchase and contractual indemnification claims against loan sellers, had granted summary judgment to the defendant, Equity Bank, on this issue.

The relevant factual background is as follows. CitiMortgage filed suit against Equity, demanding that Equity repurchase 12 residential mortgage loans. CitiMortgage had notified Equity that it needed to take action under the cure-or-purchase provision in the parties’ Agreement.  The Eighth Circuit affirmed the district court’s holding that Equity’s duty to repurchase was limited to the six loans that had not gone through foreclosure. For the loans that had not gone through foreclosure, the court affirmed the district court’s holding that Equity breached the Agreement. The court rejected Equity’s claims that CitiMortgage’s letters lacked the necessary detail to trigger its duty to perform, and that CitiMortgage waited too long to exercise its rights. But, as to the six loans that had gone through foreclosure, the court affirmed the district court’s holding that Equity owed nothing to CitiMortgage.

As part of its analysis detailing the reasons that Equity could not be required to repurchase loans already foreclosed upon, the Eighth Circuit faulted CitiMortgage for never explaining what, exactly, Equity was supposed to repurchase. We have regularly made that argument when defending clients against repurchase claims and likewise, have never gotten a satisfactory response as to what our client could repurchase.   Typically, in tacit acknowledgment of the merit of that argument, plaintiffs make sure to do something that the appellate court intimated CitiMortgage should have done in this case.  That is to seek instead what is usually an alternative contractual remedy, indemnification.   Perhaps because it considered the repurchase provision in its contract with Equity more likely to generate a significant damages award (this contract’s repurchase provision established a “repurchase price formula” favorable to CitiMortgage), CitiMortgage opted in this case to seek only the remedy of “repurchase.”

To be sure, a plaintiff’s decision to seek an “indemnification” remedy also creates obstacles to recovery in most cases of this type.  Among those obstacles are many of the same statute of limitations problems that parties asking for repurchase face, as well as substantial questions about the circumstances under which the party seeking indemnification incurred the liability for which it is seeking payment.  Relatedly, whether a particular alleged loan defect can fairly be said to have caused the plaintiff’s monetary loss is typically very much in question when a plaintiff aggregator seeks indemnification from a defendant loan seller. Many battles over such issues remain to be fought, but, in the meantime, the Eighth Circuit’s recognition that a party cannot repurchase what no longer exists is a welcome development for residential mortgage loan originators.

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP

London–IBOR’s Falling Down, Falling Down

The IRS has released proposed regulations that provide a fluid transition to the use of references rates other than the interbank offered rates, such as the London Interbank Offered Rate (LIBOR), in debt instruments and financial products. In July 2017, the UK Financial Conduct Authority announced that the LIBOR might be phased out after 2021. The announcement came amid concerns of manipulation, a decline in the volume of funding from which the LIBOR is calculated, and recommendations for the development of a reference rate based on transactions in a more robust market. The Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and the New York Fed, recommended the Secured Overnight Financing Rate (SOFR) as a replacement to the LIBOR, and petitioned the IRS for guidance on the tax consequences of the transition from the LIBOR to the SOFR.

In an effort to “minimize potential market disruption and . . . facilitate an orderly transition in connection with the phase-out” of the LIBOR and other similar reference rates, the IRS issued flexible proposed regulations based on the ARRC’s recommendations. The regulations address seven key areas of the Internal Revenue Code and Treasury Regulations impacted by the change in reference rates. These areas include: (1) the potential gain recognized on modification of debt instruments to change the reference rate; (2) the dissolution of integrated instruments as a result of termination or legging out of an integrated hedge; (3) the source and character of one-time payments used as an alternative to an adjustment to the spread between the LIBOR and SOFR; (4) the conversion of grandfathered debt instruments to registration-required obligations; (5) whether debt-instruments referencing the SOFR will qualify as variable rate debt instruments; (6) the preclusion of “regular interest” classification in a real estate mortgage investment conduit; and (7) foreign bank corporations’ use of the SOFR to calculate interest expense allocable to excess US-connected liabilities.

The regulations generally allow the SOFR to be a replacement for the LIBOR and provide guidance that ensures the tax impacts of the transition from LIBOR to SOFR will be minimal. For example, the parties may generally modify debt instruments to change the reference rate without triggering potential gain or loss that may normally result from material changes to the interest rate of a debt instrument under the significant modification rules.

Taxpayers may rely on these proposed regulations for changes made to debt instruments on or after October 9, 2019.

© 2019 Jones Walker LLP

FCA Publishes “Brexit Special” Market Watch

On October 7, the Financial Conduct Authority (FCA) published a “Brexit Special” of its monthly Market Watch newsletter, in which it summarized some recent developments and publications in connection with the regulated sector’s preparedness for the forthcoming departure of the UK from the EU on November 1.

In the newsletter, the FCA noted that Andrew Bailey, FCA CEO, gave a speech in September at Bloomberg London on the Brexit “state of play”. Mr. Bailey outlined recent developments and the outstanding issues, such as the desire for an equivalence agreement for the Share Trading Obligation (STO). (For more information, please see the June 14 edition of Corporate & Financial Weekly Digest).

The FCA explained that transaction reporting rules under the Markets in Financial Instruments Regulation (MiFIR) will not be subject to the temporary transitional power. (For more information, please see the September 27 edition of Corporate & Financial Weekly Digest). Therefore, firms, trading venues and approved reporting mechanisms will need to take “reasonable steps to comply with the changes to their regulatory obligations”. Firms who cannot comply on the day that the UK leaves the EU will need to back-report missing, incomplete or inaccurate transaction reports as soon as possible thereafter.

The FCA provided an updated statement on the operation of the Markets in Financial Instruments Directive (MiFID) transparency regime following Brexit. The FCA published a statement on this topic in March 2019 (please see the March 8 edition of Corporate & Financial Weekly Digest), and the main purpose of this update was to change dates to reflect the extension of the departure date from March to October 2019.

The FCA’s MiFID transparency regime update also reflects a statement made on October 7 from the European Securities and Markets Authority (ESMA). In addition to other updates, ESMA described how reference data submitted by UK trading venues and systematic internalisers will be phased out of EU calculations. ESMA will “freeze” the quarterly calculations until Q1 2020, during which time the EU will re-determine the relevant competent authority (RCA) for all financial instruments that remain available for trading in the EU, for which the FCA is currently the RCA.

Finally, the FCA announced that industry testing for the FCA Financial Instruments Transparency Systems (FITRS) would start on October 10 and noted that it continues to update the Brexit material available on its website.

The Market Watch newsletter is available here.

Andrew Bailey’s speech is available here.

The FCA’s updated statement is available here.

ESMA’s statement is available here.

©2019 Katten Muchin Rosenman LLP

Five Tips to Mitigate Risk in Cryptocurrency Mergers and Acquisitions

Congratulations!

Your client just closed on the purchase of a cutting-edge, blockchainbased payment processing startup. Before this deal, you had heard of bitcoin and blockchain. But, you had never seen a company that actually accepted payment in bitcoin and other cryptocurrencies. You were a little confused by the whole idea. However, your client liked the prospect of purchasing a company that had dealt in digital assets, so you didn’t think much about it.

Arriving to the office the day after the closing, you open up your computer to learn news of a hack at one of the big bitcoin exchanges. The article explains that hackers had accessed the hot wallets on the exchange and made off with over $150 million in digital assets. News of the hack sent the price of bitcoin tumbling 15% in the four hours following the incident. Other digital assets had plunged even further. The headline jumped out at you because the company that your client just purchased used custodial wallets on the exchange to store a lot of its digital assets.

Five minutes after you finish reading the article, you get a call from your client. Sure enough, a good chunk of the digital assets that your client had just purchased were lost in the hack. To make matters worse, the new company had just lost 5 percent of its book value because of the crashing cryptocurrency market.

Volatility of Digital Assets Means Risk

The world of cryptocurrencies has matured somewhat. But, scenarios like the previous hypothetical above remain a real possibility. Indeed, 15 percent price swings in a matter of hours are still common for cryptocurrencies, also known as digital assets, especially for less established currencies. In addition to big price swings, the digital asset industry continues to face regulatory uncertainty, especially in the United States with the SEC, CFTC, FINRA and other regulators undecided about how exactly to regulate digital assets. Despite the volatility and regulatory ambiguity, for risk hungry participants, the potential for large gains has helped drive an increase in merger activity in the digital asset world during the past two years.

Acquiring or selling a company that deals heavily in digital assets presents a litigation risk. Many of the factors that increase the risk of litigation in mergers or acquisitions in the digital asset industry are outside the control of the parties to a transaction. Deal lawyers try to control for these externalities but, in the new and vibrant realm of companies who deal in cryptocurrencies, those controls can be elusive, which in turn enhances the risk of litigation.

There are, however, ways to minimize the chance of a dispute. The following are a few practical tips for transactional lawyers and litigators to help contain the risks inherent in digital asset M&As.

    • Valuation Methodology: Transaction and litigation counsel should pay close attention to valuation methods used in a digital asset transaction. Cryptocurrencies and digital tokens are new and the methods used to value them may be untested. Different digital assets have different applications, e.g., utility tokens versus value storage tokens, and valuation theories should be tailored to the transaction and assets involved. In light of these unique issues and the attendant risks, transactional lawyers should give particular scrutiny to the valuation formulas to avoid a dispute. Litigators, too, should take note of the valuation methods used since they may be fodder for a dispute. And, of course, litigators should also be aware of the possibility for a Daubert-type challenge of any expert valuation witness that may arise in a subsequent dispute.
    • Earn-Outs/Purchase Price Adjustments: Transactional lawyers should pay special attention to earn-out or purchase price adjustment provisions in a digital asset M&A deal. Valuating digital assets is difficult; thus, inclusion of an earn-out or purchase price adjustment clause might help the parties reach a deal more easily. Given the volatility of digital assets, there is a higher than typical likelihood that the value of the earn-out or purchase price adjustment will also fluctuate substantially. Litigators, in turn, should also be especially cognizant of earn-out and purchase price adjustment provisions. Earn-out provisions can be especially ripe for dispute since the earn-out periods often extend for years after closing. While long earn-out periods might not present problems in more traditional fields, the fast pace of change and high levels of volatility in the digital asset industry mean that long earn-out periods are particularly susceptible to disagreement.
    • Reverse Break Up Fees: Transactional lawyers should consider including a reverse breakup fee or a reverse termination fee. These are fees paid by the buyer if the buyer breaches the governing agreements or is unable to close the transaction. For example, imagine you represent the seller in a deal set to close in three days when news breaks about a lawsuit filed by a state attorney general against a new cryptocurrency company. The enforcement action sends the price of all digital assets plummeting by 20 percent in a matter of hours. Your client still meets all of the closing conditions, but the client’s value, which consists largely of digital assets, has just taken a huge hit and the buyer’s counsel is telling you that her client is going to walk away from the deal unless your client drops the price. A reverse breakup fee will help to lessen the buyer’s willingness to run from the transaction and may also help your client recoup costs incurred in the event the buyer does walk away. Litigators representing a buyer or seller should also pay particular attention to whether the conditions in a breakup fee or reverse breakup fee clause have been satisfied.
  • Heightened Importance of Stock Terms: Transactional lawyers should give extra consideration to the applicable law and venue selection provisions in the deal documents. Some states, e.g., Wyoming, among others, have adopted more crypto-friendly regulatory regimes than other states. Consequently, transaction lawyers should consider the pros and cons of each viable state law. And, corporate attorneys should consider obtaining review of deal documents by experienced cryptocurrency litigators who can help position the transaction as best as possible in case of future litigation.
  • Last, transaction lawyers should consider the appropriateness of a mandatory arbitration provision. Arbitration has its drawbacks, e.g., the cost of the arbitrator, absence of clear rules for discovery, restricted appeal rights, etc., but the benefits of arbitration may be particularly helpful when dealing with a digital asset M&A dispute. For example, the parties can make their proceedings confidential, which can avoid the disclosure of trade secrets or other proprietary information in public court proceedings. Further, in the highly technical field of cryptocurrencies, the parties have greater latitude to ensure that the proceeding is adjudicated by an arbitrator with pertinent knowledge of and/or experience in digital assets or blockchain technology.

Of course, the foregoing is not an exhaustive list of the ways to reduce risk in digital asset M&A deals. Other terms and conditions in the transaction contracts for a digital asset M&A deal should not escape scrutiny. Representations and warranties, contract exhibits and schedules should be tailored to the deal and the nature of digital assets in play. Due diligence is also an especially important component of risk mitigation since the nature of digital assets makes for a more difficult diligence process than a traditional transaction. Regardless of which contractual provisions are used, litigators and transactional lawyers should both be aware of and understand the heightened risk of a dispute in the volatile world of cryptocurrencies and digital assets.

© Polsinelli PC, Polsinelli LLP in California

ARTICLE BY Thomas H. Wagner of Polsinelli PC.
For more on cryptocurrency, see the Financial Institutions & Banking law page on the National Law Review.

House Vote on Cannabis Industry-Related SAFE Banking Act Scheduled for September 2019

As early as September 23, 2019, the United States House of Representatives is expected to vote on the widely anticipated Secure and Fair Enforcement (SAFE) Banking Act. First introduced in both chambers of Congress in 2017, re-introduced in the House in March of 2019, and amended this past June, the SAFE Banking Act has garnered bipartisan support as a necessary solution to the dilemma created by conflicting federal and state cannabis law regimes, particularly as it relates to financial service providers.

According to a press release issued by the House Committee on Financial Services on March 26, 2019, committee chairwoman, Representative Maxine Waters (D-CA), remarked, the SAFE Banking Act “addresses an urgent public safety concern for legitimate businesses that currently have no recourse but to operate with just cash.” The Act joins the ranks of congressional efforts such as the Rohrabacher-Farr amendment to omnibus spending bills, Section 728 of the Consolidated Appropriations Act of 2019, the pending Blumenauer amendment, and proposed Strengthening the Tenth Amendment Through Entrusting States (STATES) Act—all of which seek to reconcile the federal government’s failure to enact comprehensive marijuana and, until recently, hemp policy despite widespread support on the state and local level. Status in the Senate is uncertain, as the chair of the Banking Committee has indicated an intent to poll those in Idaho, a state that has failed to legalize any form of cannabis, regarding the issue.

Today’s cannabis industry encompasses the growth, processing, distribution, and other ancillary services related to both hemp and marijuana. While hemp and marijuana are both derived from the plant Cannabis sativa L, they are legally distinguished on both a federal and state level by their THC content. As a result, marijuana remains a controlled substance under federal law, while hemp, boasting lower THC levels, is classified as an agricultural product within the purview of the United States Department of Agriculture (USDA). This federal distinction, however, has not prevented more than 40 states from legalizing marijuana for medical and/or recreational adult use. Unfortunately, the businesses that choose to take advantage of such progressive state marijuana laws must do so without the support of traditional financial institutions that businesses, particularly minority and women-owned, rely on to fund and protect their financial growth.

According to §4(a) of the bill’s text, the SAFE Banking Act will shield depository institutions that serve cannabis-related businesses from federal penalties in states and Indian country where “cultivation, production, manufacture, sale, transportation, display, dispensing, distribution, or purchase” of cannabis is legal. In particular, the Act will prohibit regulators from terminating or limiting deposit or share insurance of financial instruments because an institution’s client participates directly or indirectly in the cannabis industry. Regulators will also be prohibited from penalizing institutions for authorizing, processing, clearing, settling, billing, transferring, reconciling, or collecting payments for a legitimate cannabis-related business for payments made by any means, including a credit, debit, or other payment card, an account, check, or electronic funds transfer. Perhaps, most importantly, the Act will also require the Federal Financial Institutions Examination Council (FFIEC) to develop uniform guidance and examination procedures for depository institutions serving cannabis-related businesses.

For financial institutions and insurance providers operating in states where cannabis is legal, this creates an immense opportunity and incentive to assist industry participants as they strive to protect and invest their monetary assets without putting the institutions they rely on at risk of federal prosecution. However, because protections under the SAFE Banking Act only apply when legitimate cannabis-related businesses are involved, monitoring clients’ compliance with relevant state laws will be particularly important. In the absence of clear federal marijuana policy and official hemp regulations under the 2018 Farm Bill, in addition to constantly evolving state laws and regulations, this may prove especially challenging. As such, in anticipation of the Act’s passage, financial institutions should enlist the support of experienced legal counsel to ensure the necessary processes for monitoring clients’ compliance are in place. In addition, those seeking to benefit under the Act should still pay close attention to due diligence requirements promulgated by the Financial Crimes Enforcement Network (FinCEN), although many concerns should be alleviated by the Act’s prohibition on civil or criminal prosecution solely based on the provision of financial services or investing income derived from such services.

NOTE: Cannabis as defined under the Act only references marijuana. However, in practice, the bill’s passage should alleviate apprehension surrounding hemp, as many financial institutions and their affiliates have refrained from offering services to hemp businesses under the current financial legal framework, even in the wake of the 2018 Farm Bill and pending USDA regulations.

Read the bill’s text here.

© 2019 Dinsmore & Shohl LLP. All rights reserved.

This article was written by Jennifer K. Mason, Michael G. Dailey and Ambur C. Smith of Dinsmore & Shohl LLP.
For more marijuana & cannabis legislation, see the National Law Review Biotech, Food & Drug law page.

Important Differences Between Federal and Private Student Loans

Student loan borrowers commonly wonder whether they should refinance federal loans into private loans. There are many factors to consider in the case of federal loans, such as interest subsidies and possible forgiveness (but often with income tax consequences) paired with interest rates that are often lower in the case of private loans. Knowing the differences between federal and private student loans is imperative when making this decision.

Most notably, federal student loans are generally forgiven upon death whereas private lenders will pursue an estate for amounts owed by deceased borrowers.

Before refinancing your federal student loans into private ones, consider the cost of the extra life insurance you will need to purchase to cover the debt and, if you have already refinanced, be sure that your insurance coverage is adequate so that amounts intended for your family do not instead pay back creditors. When planning for federal student loan forgiveness, do not forget to account for any associated cancellation of debt income and purchase adequate insurance to cover the anticipated tax burden. The income tax on cancellation of debt income regarding federal student loans forgiven due to death was eliminated by the 2017 Tax Cuts and Jobs Act but this change is set to expire at the end of 2025 unless extended by Congress.

Similarly, consider any federal interest subsidies that may be available before refinancing. In some cases, the offset of the federal interest subsidy combined with the cost of the additional life insurance needed to cover the private loan debt makes refinancing a disadvantageous move.

In all cases, be sure to discuss the extent and type of your student loan debt and your repayment plan with your estate planning attorney. Planning for federal student loans is notoriously difficult because they are a moving target. The rules surrounding forgiveness, associated income tax consequences, repayment plans and interest subsidies can be changed at any time by any administration. Until a borrower’s loans are actually forgiven or paid off, the rules may be changed in the middle of the game which can make planning very dynamic. It is imperative to monitor the laws surrounding student loans and how they may affect repayment options, forgiveness options and associated income tax consequences.

© 2019 Varnum LLP

ARTICLE BY Rebecca K. Wrock of Varnum LLP.

Jurisdictional Lessons from Mt. Gox Cryptocurrency Litigation

Last week, on the heels of a significant decline in Bitcoin prices, Forbes reported that China’s Central Bank is set to launch the world’s first state-backed cryptocurrency. The cryptocurrency will be made available initially to seven of China’s largest financial institutions, including three banks and two financial technology companies (including Alibaba).  It is planned to eventually reach the virtual wallets of U.S. consumers, through relationships with Western correspondent banks.

Meanwhile, in the United States, litigation rages on against Mark Karpeles, the President and CEO of Mt. Gox. Formerly the world’s leading bitcoin exchange platform, Mt. Gox filed for bankruptcy protection in Japan in 2014 amidst reports of rampant security breaches and refusal by its Japanese banking partner, Mizuho Bank, to process withdrawals for Mt. Gox users. Before its bankruptcy, Mt. Gox announced that 850,000 bitcoins valued at more than $450 million had gone “missing,” likely due to cyber theft.

In the aftermath, Mt. Gox account holders filed putative class actions against Karpeles and Mizuho in the Central District of California, the Northern District of Illinois, and the Eastern District of Pennsylvania, asserting causes of action for negligence, fraud, and tortious interference. In each action, both defendants filed motions to dismiss, claiming lack of personal jurisdiction due to their residences in France and Japan, respectively.

Earlier this year, all three courts dismissed Mizuho from the litigation, agreeing that the bank did not purposefully direct any activity at the forum states. Mt. Gox’s bank accounts with Mizuho were located in Japan, the decisions not to process withdrawals from those accounts were made by Mizuho employees located in Japan, and all wire transfers were initiated or received in Japan.

However, all three courts denied Mr. Karpeles’ motions to dismiss for lack of personal jurisdiction.  Mr. Karpeles,  a French citizen, argued that his contacts with the forum states were merely the incidental result of where some Mt. Gox users lived. The courts unanimously disagreed.

In the most recent of these three decisions, the Eastern District of Pennsylvania, relying on the previous decisions by the courts in California and Illinois, held that it has specific jurisdiction over Karpeles “because he availed himself of the privilege of conducting business in Pennsylvania through soliciting business from [a named plaintiff] and thousands of other Pennsylvania residents through the Mt. Gox website.” Pearce v. Karpeles, No. CV 18-306, 2019 WL 3409495, at *4 (E.D. Pa. July 26, 2019).

The Court applied the “sliding scale” test established by Zippo Manufacturing v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1123-24 (W.D. Pa. 1997), which has been characterized as “a seminal authority regarding personal jurisdiction based upon the operation of an internet website,” to determine that Karpeles’ internet presence sufficiently gave rise to personal jurisdiction over him. Karpeles, 2019 WL 3409495, at *4-5. The Zippo scale “ranges from situations where a defendant uses an interactive commercial website to actively transact business with residents of a forum state (personal jurisdiction exists) to situations where a passive website merely provides information that is accessible to users in the forum state (personal jurisdiction does not exist).” Id. at *4. Under that Pennsylvania precedent, a defendant has purposefully availed itself of the privilege of doing business in the state if its website “repeatedly attracts business from a forum or knowingly conducts business with forum state residents via the site.” Id. at *5.

The Court held that Mt. Gox’s internet activity fell at the “interactive end of the Zippo spectrum.” Id. Mt. Gox’s website was interactive, allowing users to open and manage accounts, make purchases and trades, and transfer and deposit cash. Id. Further, Mt. Gox had knowledge of the residences of its users because at the time they opened accounts, they had to provide Mt. Gox with their addresses and other personal information. Id. Users could also purchase “Yubikeys” (a hardware authentication device that allows users to securely log into their accounts) to be sent to their physical addresses. Id. Approximately 4% of all Mt. Gox users (over 19,000 individuals) who registered with addresses were Pennsylvania citizens, making Karpeles’ interactions with the forum state neither random, isolated, nor fortuitous. Id. at *6.

The Court also rejected Karpeles’ assertion that it would be unfair to force him to defend in the United States since he is on probation in Japan and prohibited from leaving the country, holding that the interests of the plaintiffs and the forum state justified any burden of defending in Pennsylvania. Karpeles, 2019 WL 3409495, at *8-9.

The increased use of cryptocurrency looks inevitable, with Facebook’s cryptocurrency, Libra, poised to launch in 2020, and some economists proposing that a cryptocurrency backed by central banks throughout the world will email one day replace the U.S. dollar as the world’s global reserve currency. As cryptocurrency proliferates, it is likely that so too will cryptocurrency litigation, bringing with it a host of jurisdictional challenges for litigants. The Mt. Gox-related orders provide valuable insight into how some such challenges may be resolved in the future.

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP

ARTICLE BY Shalia Sakona and Philip R. Stein of Bilzin Sumberg.