Costco Claims Tiffany & Co. is Generic Re: Trademark Infringement and Genericide

Katten Muchin

One of the biggest threats to a brand owner is genericide, whereby widespread usage of a mark in the marketplace causes the term to be considered by the public to be a generic term for a particular product rather than a source identifier. Some well-known examples of marks which became generic over time in certain jurisdictions are “aspirin” and “escalator”. When genericide occurs, a mark can no longer function as a trade mark, as it ceases to identify a particular source or to distinguish the origin of the product from competing products. Once a mark has become generic, the law deems it available for all parties to use and the now-former brand owner no longer has exclusive rights to it.

The threat of genericide is something that brand owners work very hard to try and avoid, since the result would be that they no longer have a trade mark.  Similarly, if a mark has become generic, third parties have the right to use it.  Therefore, a claim that a particular mark has become generic is a defense to an allegation of trade mark infringement.

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The general test for whether a designation has become generic is whether the public believes that such designation connotes the generic name of a product or a brand indicating the source of the product. This issue will soon be considered by the courts in a lawsuit initiated by Tiffany & Co against Costco.

In the lawsuit, Tiffany accused Costco of trade mark infringement and false advertising, objecting to Costco’s offering of rings which were promoted as “Tiffany diamond engagement rings”. Rather than deny Tiffany’s accusations, Costco took an aggressive defensive position, claiming that a “Tiffany setting” is generic for an engagement ring setting comprised of multiple slender prongs extending upward from a base to hold a single gemstone. Costco further alleged that although a design called a “Tiffany setting” may have started out as a trademark, frequent third-party use had caused it to become genericide. As part of its counterclaims, Costco claimed that certain of Tiffany’s trade mark registrations are invalid. Not surprisingly, Tiffany has vehemently objected to Costco’s claims of genericide. The legal battle is just getting underway but this matter will be one that is highly publicized and closely monitored.

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Yahoo!/Tumblr Deal and the Tax Cost of Cash Acquisition Payments

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When Yahoo! recently acquired the blogging service Tumblr, the two companies structured the deal so that virtually all of the $1.1 billion price tag for Tumblr will be paid in cash. In the current economy, many companies, particularly tech companies, have a lot of cash available, making the more traditional payment in stock appear less desirable. However, tax planning during mergers or acquisitions can be invaluable because, with proper counsel, the organizations can anticipate and mitigate the tax ramifications for the companies, individuals and shareholders.

Specific information about any tax planning in the Yahoo!/Tumblr deal hasn’t been released, but let’s consider the potential tax consequences of an essentially all-cash deal.

Most of Tumblr’s existing shareholders likely purchased their stock for substantially less than it was valued at the time of Yahoo’s acquisition. Since capital gains taxes are levied on the difference between the purchase price and the sale price, those Tumblr shareholders may be facing a hefty capital gains tax bill that will come due as soon as the transaction is complete.

If the deal had been structured as a stock transaction, on the other hand, it might have been structured to defer the capital gains tax for those shareholders until they actually sell their stock to Yahoo! There are a number of methods, such as 1031 exchanges, Section 368 tax-free reorganizations, and or 338(h)(10) stock purchase elections, that might also be effective in mitigating the tax burden.

An all-cash deal also presents challenges for Yahoo! in that it could affect the incentives for Tumblr’s founder and senior management going forward. In a tax-free reorganization, for example, they would generally be compensated in Yahoo! stock, which automatically creates an incentive for Tumblr’s leadership to build value for Yahoo! Without stock, a different incentive plan is needed.

According to The New York Times’ DealBook blog, Yahoo! may not need to worry about incentivizing Tumblr’s leadership, however, as it plans to continue to run the blog service as a separate company with the same group of executives. That may leave the existing incentives for success in place.

In this particular case, we don’t have enough information to determine why Yahoo! and Tumblr structured the acquisition as an all-cash deal. Well-considered tax planning, however, is essential for any business considering a merger or acquisition, stock sale, or major asset sale. Anticipating and minimizing transactional taxes, including business transfer taxes and business succession taxes, can help ensure that companies garner all potential benefits of the deal.

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Are You Falling Down on Following Up?

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Of all the marketing initiatives that are critical for lawyers to commit to, the most basic and seemingly obvious is the “sin” of omission – – the failure to follow up.

We have worked with lawyers who have spent innumerable hours and thousands of dollars chasing after new clients and prospects but have largely been unsuccessful in retentions because of a gap in their business development process: following up.

Do any of these example ring familiar:

  • A very sociable corporate partner attended numerous networking events a month, engaged easily with others attending, handed out business cards, but rarely received calls or new clients as a result. Because of her frustration, she curtailed her networking activities and short-circuited this important business development action step.
  • A New York labor and employment boutique law firm hosted an annual educational program which featured leaders in the field and attracted high level CFOs and HR professionals to the event. They received high marks on all aspects of the events but few, if any, calls from prospects.  Members of the disappointed team deemed the effort a “failure” and asserted that seminars don’t “work” to get new clients.
  •  The managing partner of a Connecticut firm received a referral from a trusted client who was searching for new counsel in this attorney’s “sweet spot” of legal practice.  The partner attended a prospective client interview in which he thoroughly espoused all the ways his firm could save this prospect’s firm significant amounts of money, given the specific legal issues at stake.  Day after day, the managing partner didn’t receive a call or email to discuss retention and getting started.  Why did this prospect waste his time was the only thought the frustrated managing partner ruminated upon.

While each of these examples highlight effective marketing initiatives (targeted networking; educational seminars; in-person client interviews), they all share the same flawed result: lack of follow up and planning.

A Follow-Up Re-Do

As part of the business development process, lawyers must recognize and integrate into their “SOP” (standard operating procedures), action steps that extend beyond “showing up.”  By leaving out the planning and following up components, lawyers are short circuiting the process, leaving money on the table, and becoming more cynical that marketing actually “works”, however one defines that.

To examine the first example above, the more effective steps of action would have been:

  • Request an event registration list so that the lawyer could have identified several targeted folks “of interest” to seek out and engage.  It would be very effective to gather some background information (a quick Google search) about the target companies to make conversations more meaningful.
  • With a little research in hand, the lawyer arrives to the networking event with a plan of who she plans to engage, who she intends to connect, and how she will spend the next several hours.  This is work, not an opportunity to have a few free drinks and yuk it up with firm colleagues whom she sees every day.
  • Practicing effective networking techniques, this sociable lawyer knows that it is essential to be more “interested” than “interesting”, so she exercises active listening techniques by asking open-ended questions of her networking partners to learn more about their businesses and challenges.  From this, she receives a number of “high impact” business cards which she will use to follow up after the event.

The steps described above take very little investment of time, but will yield a very different experience which can lead directly to a new client retention or, at minimum, a new business connection for referrals.

Contrasting the legal profession with corporate America in developing new business, one only has to examine the models of each.  Corporate America devotes billions of dollars every year to “sales and marketing”, to the process of cultivating and nurturing new prospect relationships leading to a “sale”.  The typical sales process may involve innumerable “follow ups” before a sale is actually consummated.

The legal profession historically has played a reactive role wherein new clients (new sales) seek out the law firm to engage them.  It is unwise in these ultra competitive times and a poor business model to continue this practice.  If lawyers are the ones seeking new business or even additional work from existing clients, the obligation falls upon them to pursue it and continue to make contacts until they are  directed otherwise.  (Remember, studies show that it takes at least 7-10 “touches” to become top-of-mind with clients and prospects).

Difference Faces of Follow Up

Though follow up can take many different approaches, the overall non-negotiable component involves any action step which provokes the other party (existing client, prospect, etc.) to want to continue contact with you. You are focused on cultivating and nurturing a relationships which will ultimately be mutually beneficial and add value.

A few examples of effective follow up include:

  • Brief thank you emails following an event (networking, educational programs, or entertainment).
  • Handwritten notes of congratulations for personal or business accomplishments.
  • Links to a relevant news article in which your contact would benefit.
  • Personal visits to a client’s work site to deliver a work product.
  • Invitations to social events, professional organization programs, or business workshops.

The more lawyers engage in marketing initiatives, the most important task to remember is to plan appropriately before taking any action what the follow-up steps will be, who will take them, and in what time frame. Treat this component of the business development process as you would a client obligation and coordinate your calendar with all parties involved.  It is in this step that the revenue will be found, the meaningful business relationships will be established and robust practices will be built.

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Supreme Court Ruling on Defense of Marriage Act (DOMA) Could Lead to Refunds of Federal Taxes

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Employers providing benefits for employees’ same-sex spouses may want to consider the availability of federal payroll tax refunds if the Supreme Court of the United States finds Section 3 of the Defense of Marriage Act (DOMA) unconstitutional.  Employers currently must impute income to an employee for the fair market value of benefit coverage for a non-dependent same-sex spouse.  Such imputed income is subject to federal income and payroll taxes, as well as state income taxes in the majority of states.

The Supreme Court of the United States is expected to rule in late June on the constitutionality of Section 3 of the Defense of Marriage Act (DOMA).  A ruling that DOMA is unconstitutional will favorably reverse the federal tax treatment of employer-provided benefits for non-dependent same-sex spouses.  Such a reversal may lead to refunds of federal payroll taxes paid by employers and federal income taxes paid by employees on income imputed to employees for same-sex spouse benefit coverage.

Current Law

The Supreme Court is considering the constitutionality of Section 3 of DOMA in United States v. Windsor.  Windsor is a surviving spouse who was required to pay $350,000 in federal estate taxes after her same-sex spouse died—taxes she would not have had to pay if her same-sex marriage that was legally recognized in her home state of New York was also recognized under federal law.  Section 3 of DOMA provides that for all purposes of federal law, the word “marriage” means “only a legal union between one man and one woman as husband and wife,” and the word “spouse” refers “only to a person of the opposite-sex who is a husband or wife.”

Employees who enroll a non-dependent same-sex spouse or partner under an employer-sponsored benefit plan currently must pay federal income taxes on the fair market value of such coverage.  While federal law excludes amounts that an employer pays toward medical, dental or vision benefits for an employee and the employee’s opposite-sex spouse and dependents from the employee’s taxable income, employers that provide these same benefits to employees’ same-sex spouses or partners are required to impute the fair market value of the benefits as income to the employee that is subject to federal income tax, unless the same-sex spouse or partner otherwise qualifies as the employee’s “dependent” as defined for federal income tax purposes.  Employers are required to withhold federal payroll taxes from the imputed amount, including income, Social Security and Medicare taxes.  In addition, employers must pay their share of Social Security and Medicare taxes on the imputed amount, as well as Federal Unemployment Tax Act taxes.  The majority of states follow the federal income tax rules approach and also require employers to impute income on the value of such benefits for state income tax purposes.

Consider Filing a Protective Claim Now

Employers that have imputed income on the fair market value of benefits for employees’ same-sex spouses should consider filing protective FICA tax refund claims and should be poised to change their systems to allow for the future exclusion of benefits provided to same-sex spouses.  Although filing a complete refund claim can be burdensome from an administrative perspective, it is relatively easy for an employer to file a protective claim to preserve the statute of limitations on employment tax refund claims for open years and later file a supplementary claim with necessary employee consents and exact calculations. 

In general, the statute of limitations for tax refund claims is three years.  The due date for the protective claim is three years from April 15 of the calendar year following the year in which the income was imputed to the employee.  For example, for employment taxes paid on income imputed in 2010, a protective claim should be filed by April 15, 2014.  If not filed already, a refund claim cannot be filed with respect to employment taxes paid on income imputed before 2010 as the statute has run for that year.

If an employment tax refund had already been filed and the Internal Revenue Service (IRS) issued a notice of claim disallowance, the taxpayer must either bring suit to contest the disallowance within two years after the issuance of the notice or obtain an extension of the time to file such a suit with the IRS—this process can be initiated by filing IRS Form 907, Agreement to Extend the Time to Bring Suit.

Next Steps

Until the Supreme Court rules on Windsor, employers are advised to continue imputing income on the value of benefit coverage for employees’ non-dependent same-sex spouses and partners and to continue withholding and paying federal payroll taxes on the imputed amount.

View “Supreme Court Oral Arguments on DOMA, Proposition 8: Potential Employee Benefit Plan Implications” for more information on the employee benefit plan implications of the Supreme Court’s possible rulings on the constitutionality of DOMA in Windsor and California’s Proposition 8 in Hollingsworth v. Perry.

Health Care Obligations of Employers Under the Affordable Care Act

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For most employers, the most important part of the Patient Protection and Affordable Care Act (commonly referred to as the “ACA” or “Obamacare”) will be the section known as the employer shared responsibility provision.  Many media outlets continue to incorrectly suggest that this provision requires employers to provide health insurance to all of their employees.  This is not actually the case.  Instead, this provision subjects employers to taxes or penalties if they fail to offer “adequate” and “affordable” health insurance to their employees.   Another fact commonly misunderstood is that for now, the only employers who need to be concerned about this issue are those who employ 50 or more “full time” employees (the ACA uses a very specific formula to determine who is considered full time) or those who employ under 25 employees and are looking to take advantage of the small business tax credit.

The employer shared responsibility provision goes into effect on Jan 1, 2014.   In most cases, in order to determine who is a full time employee, the employer reviews each employee’s full time status by “looking back” at a past employment period of between three (3) and twelve (12) months.   As a result, it is critically important that employers start thinking about their obligations under the ACA right now so they can be prepared for January 1, 2014.

Determining who is considered a full time employee under the ACA can be complex.  Under the ACA, a full time employee is someone who works 30 or more hours per week, on average.  Also taken into consideration are full time equivalent employees (“FTE”).  The number FTE employees are determined by adding up the total number of hours worked in a given month by part time employees and dividing than number by 120.  So for example, 10 part time employees working 60 hours per month would be counted as 5 FTE employees (10×60 = 600; 600/120=5).  Special rules also apply for seasonal employees, temporary employees, etc.

For those employers who have 50 or more full time employees under the ACA, the employer shared responsibility provision leaves the employer with several options:

Option 1– Provide health care coverage that is both “adequate” and “affordable” under the ACA.  Determining if coverage meets these requirements requires analysis of the costs of the plan to full time employees and the number of full time employees eligible under the plan.  The employer must also determine if providing coverage is more costly than the fines it would be subject to if it chose not to provide coverage.

Option 2 – Do nothing and provide no coverage to the employees, potentially subjecting the employer to a $2000 fine per employee.  Rather than simply rejecting this option of out of hand, the employer needs to determine the potential fine it faces and whether or not certain exemptions are applicable that could greatly reduce, if not eliminate the fine entirely.

Option 3 – Provide coverage that is not considered “affordable” under the ACA, subjecting the employer to a $3000 fine for each employee who chooses not to partake in the employer offered health plan and who instead purchases coverage through an insurance exchange and receives a tax credit or subsidy.  Before taking this route, an employer must carefully consider whether it believes its employees will seek coverage through an exchange and whether the savings it will gain from not paying its portion of the employee’s health care coverage will offset any potential penalty.

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Consumer Financial Services Basics 2013 – September 30 – October 01, 2013

The National Law Review is pleased to bring you information about the upcoming  Consumer Financial Services Basics 2013.

CFSB Sept 30 2013

When

September 30 – October 01, 2013

Where

  • University of Maryland
  • Francis King Carey School of Law
  • 500 W Baltimore St
  • Baltimore, MD 21201-1701
  • United States of America

Facing the most comprehensive revision of federal consumer financial services (CFS) law in 75 years, even experienced consumer finance lawyers might feel it is time to get back in the classroom. This live meeting is designed to expose practitioners to key areas of consumer financial services law, whether you need a primer or a refresher.

It is time to take a step back and think through some of these complex issues with a faculty that combines decades of practical experience with law school analysis. The classroom approach is used to review the background, assess the current policy factors, step into the shoes of regulators, and develop an approach that can be used to interpret and evaluate the scores of laws and regulations that affect your clients.

Big Box Retailers and Major Fast Food Chains Targeted by Unions and National Labor Relations Board (NLRB)

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The NLRB Rules Against Target

There are more than 1,750 Target stores nationwide, and none have been organized by a union. This fact was not lost on the National Labor Relations Board (the Board) when, on April 26, 2013, it affirmed the decision of an Administrative Law Judge that Target Corporation (Target)’s no-solicitation/no-distribution policy violated the National Labor Relations Act (the Act) and ordered Target to amend its policies nationwide. The consolidated cases, known as Target Corporation and United Food & Commercial Workers (UFCW) Local 1500, 359 NLRB No. 103 (2013), originated when the UFCW filed charges with the Board following an unsuccessful organizing campaign at a Target store in Valley Stream, New York.

The key issue addressed by the Board was whether Target maintained a no-solicitation/no-distribution policy that violated employees’ Section 7 rights under the Act. Target’s policy prohibited solicitation on the store’s premises at all times if it was for “personal profit,” “commercial purposes,” or “a charitable organization that isn’t part of the Target Community Relations program and isn’t designed to enhance the company’s goodwill and business.” The Board focused on the ban on solicitation “for commercial purposes,” finding that Target failed to define the phrase or provide illustrative examples to clarify what it meant. Because the phrase was undefined, the Board found that Target employees could have interpreted the phrase to ban solicitation and distribution on behalf of unions, which would violate the Act.[1]  

Ultimately, the Board ordered Target to rescind nationwide its no-solicitation/no-distribution rule and to:

[f]urnish all current employees nationwide with inserts for their current employee handbooks that (1) advise that the unlawful rules listed above have been rescinded, or (2) provide lawfully-worded rules on adhesive backing that will cover the unlawful rules; or publish and distribute to all current employees nationwide revised employee handbooks that (1) do not contain the unlawful rules, or (2) provide lawfully-worded rules.

The Board also set aside the union’s unsuccessful election attempt and ordered a new election to take place under the direction and supervision of the Regional Director.

Is Walmart The Next Target?

Walmart has more than 4,500 retail locations in the United States, and like Target, none are unionized. In recent months, the UFCW-backed group OUR Walmart has been advocating for strikes in several locations. On May 28, 2013, several media outlets reported a new round of strikes coordinated by OUR Walmart in advance of Walmart’s June 7, 2013 annual shareholder meeting.

In addition to the strike efforts, the UFCW, OUR Walmart, and Walmart have filed dozens of NLRB charges against each other in 2013. In May, the labor-backed group filed a new round of charges with the NLRB. Meanwhile, Walmart has filed lawsuits against the UFCW and OUR Walmart in Florida and California state courts in recent months alleging trespass and unlawful organizing activity on Walmart property.

Though the Board is currently under scrutiny based on recent court decisions invalidating the President’s recess appointments, the charges against Walmart provide it with another opportunity to make a nationwide statement against a non-union employer. Given the Board’s recent penchant for union activism, do not be surprised if it takes a close look at Walmart’s policies and practices in the coming months.

The Fast Food Industry

On May 15, 2013 hundreds of Milwaukee fast food workers walked off their jobs and launched a one-day strike demanding a raise to $15 per hour and the right to unionize without intimidation or retaliation. This was the fifth such strike in six weeks, following strikes in St. Louis and Detroit the week before, and in New York and Chicago in April. In each of those strikes, local groups organized fast food workers with support from the Service Employees International Union (SEIU), one of the nation’s largest unions. All of these strikes were preceded or followed by the filing of a slew of NLRB charges against the employers, alleging myriad unfair labor practices.

These strikes share several common characteristics. Each was a one-day strike by fast food workers, backed by ad hoc coalitions of unions and community groups. In the case of the Milwaukee strike, the organizing group was called “Wisconsin Citizen Action,” and the campaign was called “Raise Up, MKE.” The St. Louis campaign was called “STL Can’t Survive on $7.35,” and Detroit’s was called “D15.” These strikes have all been part of “minority unionism” campaigns, where the focus is on staging actions by a minority of the workforce designed to inspire their co-workers, rather than waiting until they have gained support from a majority of the workers. The short duration of the strike is calculated to minimize the risk that striking workers will be replaced by their employers after walking off.

The spread of these fast food strikes, as well as strikes by non-union workers in retailers like Walmart, comes amid a long-term decline in strikes in the U.S. Both the fast food and retail industries are overwhelmingly not unionized. The strategy pursued by the groups organizing these strikes is thus one of spectacle or demonstration, calling attention to the wages and working conditions of the employees in these industries.

[1] Oddly, the Board overruled a second finding by the Administrative Law Judge that a policy instructing employees to report unknown persons seen loitering the parking lot also violated Section 7 of the Act. The Board noted it would not conclude that a reasonable employee would read a rule to violate Section 7 simply because the rule could be interpreted that way.

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New Cybersecurity Guidance Released by the National Institute of Standards and Technology: What You Need to Know for Your Business

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The National Institute of Standards and Technology (“NIST”)1 has released the fourth revision of its standard-setting computer security guide, Special Publication 800-53 titled Security and Privacy Controls for Federal Information Systems and Organizations2 (“SP 800-53 Revision 4”), and this marks a very important release in the world of data privacy controls and standards. First published in 2005, SP 800-53 is the catalog of security controls used by federal agencies and federal contractors in their cybersecurity and information risk management programs. Developed by NIST, the Department of Defense, the Intelligence Community, the Committee on National Security Systems as part of the Joint Task Force Transformation Initiative Interagency Working Group3over a period of several years with input collected from industry, Revision 4 “is the most comprehensive update to the security controls catalog since the document’s inception in 2005.”4

Taking “a more holistic approach to information security and risk management,5” the new revision of SP 800-53 also includes, for the first time, a catalog of privacy controls (the “Privacy Controls”) and offers guidance in the selection, implementation, assessment, and ongoing monitoring of the privacy controls for federal information systems, programs, and organizations (the “Privacy Appendix”).6 The Privacy Controls are a structured set of standardized administrative, technical, and physical safeguards, based on best practices, for the protection of the privacy of personally identifiable information (“PII”)7 in both paper and electronic form during the entire life cycle8of the PII, in accordance with federal privacy legislation, policies, directives, regulations, guidelines, and best practices.9 The Privacy Controls can also be used by organizations that do not collect and use PII, but otherwise engage in activities that raise privacy risk, to analyze and, if necessary, mitigate such risk.

Description of the Eight Families of Privacy Controls

The Privacy Appendix catalogs eight privacy control families, based on the widely accepted Fair Information Practice Principles (FIPPs)10 embodied in the Privacy Act of 1974, Section 208 of the E-Government Act of 2002, and policies of the Office of Management and Budget (OMB). Each of the following eight privacy control families aligns with one of the eight FIPPs:

  1. Authority and Purpose. This family of controls ensures that an organization (i) identifies the legal authority for its collection of PII or for engaging in other activities that impact privacy, and (ii) describes the purpose of PII collection in its privacy notice(s).
  2. Accountability, Audit, and Risk Management. This family of controls ensures that an organization (i) develops and implements a comprehensive governance and privacy program; (ii) documents and implements a privacy risk management process that assesses privacy risk to individuals resulting from collection of PII and/or other activities that involve such PII; (iii) conducts Privacy Impact Assessments (“PIAs”) for information systems, programs, or other activities that pose a privacy risk; (iv) establishes privacy requirements for contractors and service providers and includes such requirements in the agreements with such third parties; (v) monitors and audits privacy controls and internal privacy policy to ensure effective implementation; (vi) develops, implements, and updates a comprehensive awareness and training program for personnel; (vii) engages in internal and external privacy reporting; (viii) designs information systems to support privacy by automating privacy controls, and (ix) maintains an accurate accounting of disclosures of records in accordance with the applicable requirements and, upon request, provides such accounting of disclosures to the persons named in the record.
  3. Data Quality and Integrity. This family of controls ensures that an organization takes reasonable steps to validate that the PII collected and maintained by the organization is accurate, relevant, timely, and complete.
  4. Data Minimization and Retention. This family of controls addresses (i) the implementation of data minimization requirements to collect, use, and retain only PII that is relevant and necessary for the original, legally authorized purpose of collection, and (ii) the implementation of data retention and disposal requirements.
  5. Individual Participation and Redress. This family of controls addresses implementation of processes (i) to obtain consent from individuals for the collection of their PII, (ii) to provide such individuals with access to the PII, (iii) to correct or amend collected PII, as appropriate, and (iv) to manage complaints from individuals.
  6. Security. This family of controls supplements the security controls in Appendix F and are implemented in coordinating with information security personnel to ensure that the appropriate administrative, technical, and physical safeguards are in place to (i) protect the confidentiality, integrity, and availability of PII, and (ii) to ensure compliance with applicable federal policies and guidance.
  7. Transparency. This family of controls ensures that organizations (i) provide clear and comprehensive notices to the public and to individuals regarding their information practices and activities that impact privacy, and (ii) generally keep the public informed of their privacy practices.
  8. Use Limitation. This family of controls addresses the implementation of mechanisms that ensure that an organization’s scope of use of PII is limited to the scope specified in their privacy notice or as otherwise permitted by law.

Some of the Privacy Controls, such as Data Quality and Integrity, Data Minimization and Retention, Individual Participation and Redress, and Transparency also contain control enhancements, and while these enhancements reflect best practices which organizations should strive to achieve, they are not mandatory.11 The Office of Management and Budget (“OMB”), tasked with enforcement of the Privacy Controls, expects all federal agencies and third-party contractors to implement the mandatory Privacy Controls by April 30, 2014.

The privacy families must be analyzed and selected based on the specific operational needs and privacy requirements of each organization and can be implemented at various operational levels (e.g., organization level, mission/business process level, and/or information system level12). The Privacy Controls and the roadmap provided in the Privacy Appendix will be primarily used by Chief Privacy Officers (“CPO”) or Senior Agency Officials for Privacy (“SAOP”) to develop enterprise-wide privacy programs or to improve an existing privacy programs in order to meet an organization’s privacy requirements and demonstrate compliance with such requirements. The Privacy Controls supplement and complement the security control families set forth in Appendix F (Security Control Catalog) and Appendix G (Information Security Programs) and together these controls can be used by an organization’s privacy, information security, and other risk management offices to develop and maintain a robust and effective enterprise-wide program for management of information security and privacy risk.

What You Need to Know

The Privacy Appendix is based upon best practices developed under current law, regulations, policies, and guidance applicable to federal information systems, programs, and organizations, and by implication, to their third-party contractors. If you provide services to the federal government, work on government contracts, or are the recipient of certain grants that may require compliance with federal information system security practices, you should already be sitting up and paying attention. This revision puts privacy up front with security.

Like other NIST publications, this revision will be looked at as an industry standard for best practices, even for commercial entities that are not doing business with the federal government. In fact, over the last few years, we have seen increasing references to compliance with NIST 800-53 as setting a contractual baseline for security. We expect that this will continue, and now will include both the Security Controls and the Privacy Controls. As such, general counsel, business executives and IT professionals should become familiar with and conversant in the Privacy Controls set forth in the new revision to SP 800-53. At a minimum, businesses should undertake a gap analysis of the privacy controls at their organization against these Privacy Controls to determine if they are up to par or if they have to enhance their current privacy programs. And, if NIST 800-53 appears in contract language as the “minimum standard” to which your company’s policies and procedures must comply, the gap analysis will at least inform you of what needs to be done to bring both your privacy and security programs up to speed.

1 The National Institute of Standards and Technology is a non-regulatory agency within the U.S. Department of Commerce, which, among other things, develops information security standards and guidelines, including minimum requirements for federal information systems to assist federal agencies in implementing the Federal Information Security Management Act of 2002.

2 See Security and Privacy Controls for Federal Information Systems and Organizations, NIST Special Publ. (SP) 800-53,
Rev. 4 (April 30, 2013), http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf.

3 The Joint Task Force Transformation Initiative Interagency Working Group is an interagency partnership formed in 2009 to produce a unified security framework for the federal government. It includes representatives from the Civil, Defense, and Intelligence Communities of the federal government.

4 See NIST Press Release for SP 800-53 Revision 4 at http://www.nist.gov/itl/csd/201304_sp80053.cfm. Revision 4 of
SP 800-53 adds a substantial number of security controls to the catalog, including controls that address new technology such as digital and mobile technologies and cloud computing. With the exception of the controls that address evolving technologies, the majority of the cataloged security controls are policy and technology neutral, focusing on the fundamental safeguards and countermeasures required to protect information during processing, while in storage, and during transmission.

5 See NIST Press Release for SP 800-53 Revision 4 at http://www.nist.gov/itl/csd/201304_sp80053.cfm.

6 See Appendix J, Privacy Control Catalog to Security and Privacy Controls for Federal Information Systems and Organizations, NIST Special Publ. (SP) 800-53, Rev. 4 (April 30, 2013),http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf. Appendix J was developed by NIST and the Privacy Committee of the Federal Chief Information Officer (CIO) Council.

7 Personally Identifiable Information is defined broadly in the Glossary to SP 800-53 Revision 4 as “Information which can be used to distinguish or trace the identity of an individual (e.g., name, social security number, biometric records, etc.) alone, or when combined with other personal or identifying information which is linked or likable to a specific individual (e.g., date and place of birth, mother’s maiden name, etc.). See page B-16 of Appendix B, Privacy Control Catalog to Security and Privacy Controls for Federal Information Systems and Organizations, NIST Special Publ. (SP) 800-53, Rev. 4 (April 30, 2013),http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf. However, as stated in footnote 119 in Appendix J, “the privacy controls in this appendix apply regardless of the definition of PII by organizations.”

8 Collection, use, retention, disclosure, and disposal of PII.

9 See page J-4 of Appendix J, Privacy Control Catalog to Security and Privacy Controls for Federal Information Systems and Organizations, NIST Special Publ. (SP) 800-53, Rev. 4 (April 30, 2013),http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf.

10 See NIST description and overview of Fair Information Practice Principles at http://www.nist.gov/nstic/NSTIC-FIPPs.pdf.

11 See pages J-4 of Appendix J, Privacy Control Catalog to Security and Privacy Controls for Federal Information Systems and Organizations, NIST Special Publ. (SP) 800-53, Rev. 4 (April 30, 2013),http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf.

12 See page J-2 of Appendix J, Privacy Control Catalog to Security and Privacy Controls for Federal Information Systems and Organizations, NIST Special Publ. (SP) 800-53, Rev. 4 (April 30, 2013),http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r4.pdf.

Securities and Exchange Commission (SEC) Issues Guidance on Resource Extraction Issuer Rules

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FAQs clarify which entities and payments are subject to the final rules.

On May 30, the Securities and Exchange Commission (SEC) released frequently asked questions (FAQs) providing guidance on certain aspects of its final rules for resource extraction issuers (the Resource Extraction Rules).[1] The Resource Extraction Rules, which were adopted on August 22, 2012 pursuant to section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), require companies that are engaged in the commercial development of oil, natural gas, or minerals and required to file annual reports with the SEC to disclose certain payments made to the U.S. federal government or foreign governments (and related entities) for the purpose of commercial development of oil, natural gas, or minerals.[2] The FAQs provide guidance, among other things, as to which issuers are subject to the reporting requirements, what the meaning of “minerals” is, which payments must be reported and how they should be reported, and the consequences of a failure to timely file a Form SD.

Questions Answered by the FAQs

Which entities are resource extraction issuers?

  • Holding companies may be resource extraction issuers. Question 1 clarifies that a holding company is a resource extraction issuer if a subsidiary or other controlled entity is engaged in the commercial development of oil, natural gas, or minerals.
  • Entities engaged in associated services only are not resource extraction issuers. Questions 2 and 4 clarify that an issuer providing services associated with the exploration, extraction, processing, and export of a resource is not a resource extraction issuer. Only issuers directly engaged in the commercial development of oil, natural gas, or minerals must disclose payments to governments. Issuers providing associated services not covered by the Resource Extraction Rules include the following:
    • Issuers providing hardware and logistics for exploration or extraction
    • Issuers providing hydraulic fracturing or drilling services for an operator
    • Issuers providing transport services, including between countries, so long as the issuer does not have an ownership interest in the transported resources

Question 4 further clarifies that transportation activities are generally not included within the definition of “commercial development” unless they are directly related to the export of a resource. Generally, however, the SEC staff would view the movement of a resource across an international border from one host country to another country by a company with an ownership interest in the resource as export.

  • The term “minerals” has been defined. Question 3 provides clarity as to the definition of “minerals” under the Resource Extraction Rules by stating that “minerals” are any materials commonly understood to be minerals. Materials extracted and gathered by means of mining activity—including any materials for which disclosure would be required under Industry Guide 7, “Description of Property by Issuers Engaged or to Be Engaged in Significant Mining Operations”[3]—are encompassed in the definition and include materials such as metalliferous minerals, coal, oil shale, tar, sands, and limestone.

Which payments are subject to the Resource Extraction Rules?

For payments to be subject to the Resource Extraction Rules, they must be made to further the commercial development of oil, natural gas, or minerals and take the forms of taxes, royalties, fees, production entitlements, bonuses, dividends, or payments for infrastructure improvements.

  • Certain payments are excluded. Questions 5, 6, and 8 clarify that certain payments are not subject to disclosure pursuant to the Resource Extraction Rules. These include the following:
    • Payments made to majority-owned government entities for services or activities that are ancillary or preparatory to the commercial development of oil, natural gas, or minerals, such as payments for providing transportation services to supply people or materials to a job site.
    • Penalties or fines related to resource extraction.
    • Corporate-level income tax payments to governments on income not generated by the commercial development of oil, natural gas, or minerals. (However, a resource extraction issuer is not required to segregate this income and may disclose that the information includes payments made for purposes other than the commercial development of oil, natural gas, or minerals.)
  • The format for payment disclosure has been clarified. Question 7 provides that a resource extraction issuer is to present payment information on an unaudited, cash basis for the year in which the payments are made.

What are the consequences of failing to timely file a Form SD?

Question 9 provides that, if a resource extraction issuer fails to timely file a Form SD, the issuer does not lose eligibility to use Form S-3.

[1]. View the FAQs here.

[2]. For more information on the Resource Extraction Rules and the implications for affected companies, see our September 19, 2012 LawFlash, “SEC Adopts Payment Disclosure Rules for Resource Extraction Issuers,” available here.

[3]. View SEC Industry Guide 7 here.

Financial Services Legislative and Regulatory Update – Week of June 10, 2013

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Leading the Past Week

And the beat goes on… Another week with the White House dealing with another issue, this time news that the national security apparatus is collecting and combing through telephone record metadata.  The widespread revelation about a data mining program that would make any hedge fund quant jealous drowned out more positive news of the week, including that the U.S. recovery continues its sluggish, yet positive pace with 175,000 jobs added in May.

And in an interesting comparison, as noted by the extraordinary team at Davis Polk, while the agencies were silent during the Month of May, and did not announce any new implementations of the Dodd-Frank Act, last week, three major implications of the implementation were announced.  First, the SEC publicly released its much anticipated and long awaited money market mutual fund rules.  Second, the Fed announced an almost equally anticipate interim final “push out” rule that provided significant relief to foreign-based banks with operations in the United States.  Finally, the FSOC made its first round of non-bank systemically important financial institutions (“SIFIs”) designations.

Legislative Branch

Senate

As Administration Announces New Iran Sanctions, Senate Banking Members Skeptical of their Effectiveness

On June 4th, the Senate Banking Committee held a hearing to review sanctions against Iran. Witnesses and lawmakers were split regarding the efficacy of the sanctions, some arguing that their effectiveness has been proved by Iran’s continued inability to fund nuclear enrichment and other arguing that the sanctions have not had the desired result of fundamentally changing the governance of the country. Specifically, Ranking Member Mike Crapo (R-ID) and Senators Bob Corker (R-TN), Bob Menendez (D-NJ), and Chuck Schumer (D-NY) all expressed concerns that the sanctions have not measurably changed Iran’s behavior. Witnesses included: David Cohen, Under Secretary for Terrorism and Financial Intelligence for the Treasury; Wendy Sherman, Under Secretary for Political Affairs with the Department of State; and Eric Hirschhorn, Under Secretary for Industry and Security with the Department of Commerce. The hearing comes as the Administration announced a new set of sanctions against the country. An Executive Order released June 3rd takes aim at Iran’s currency and auto sector in addition to expanding sanctions against private business supporting the government of Iran.

Senate Finance Committee Releases Income and Business Entities Tax Reform Working Paper

On June 6th, the Senate Finance Committee released the latest in a series of options papers outlining tax reform options for individual and business income taxes and payroll taxes. The proposal outlines three options for tackling the integration of individual and corporate taxes, such as making the corporate tax a withholding tax on dividends and adjusting capital gains taxes for businesses to match the individual Code. In addition, the paper discusses ways in which to reach a long-term solution for taxing derivatives.

Senate Banking Approves Nomination to Ex-Im Bank

On June 6th, the Senate Banking Committee voted 20 to 2 in favor of Fred Hochberg to continue to head the Export-Import Bank. Senator Tom Coburn (R-OK) and Senator Patrick Toomey (R-PA) both voted against the nomination. Hochberg’s nomination now moves to the full Senate where, though he is expected to be confirmed, he must be approved before July 20th or else the bank would lose its quorum for voting on items.  During the same executive session, the Committee approved by voice vote the National Association of Registered Agents and Brokers Reform Act of 2013 (S. 534) which would make it easier for insurance agents to sell state-regulated insurance in multiple states.

Senator Brown Calls on CFPB to Target Debt Collectors

On June 4th, Senator Sherrod Brown (D-OH) wrote to the CFPB, urging the Bureau to enact rules to curb customer abuses by debt collectors. In a statement accompanying the letter, Brown, Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, said he intends to hold a hearing in the next month which will shine a light on bad practices and consumer abuses in the industry. The Dodd-Frank Act gives the CFPB authority to enforce and enact rules under the Fair Debt Collection Practices Act (FDCPA). Brown’s letter urged Director Cordray to pursue debt collectors as soon as possible, as the Bureau would lose its oversight authority in this space should Cordray’s nomination expire and a director not be in place.

Senate Banking Committee To Consider Flood Insurance As Soon As July

In remarks made on June 6th, Chairman of the Banking Committee Tim Johnson (D-SD) said the panel will hold hearings as soon as July to consider national flood insurance affordability. The announcement comes as a number of lawmakers express concerns that rate increases in the 2012 reauthorization are not affordable.

Senate Banking Subcommittee Looks into the State of the Middle Class

On June 6th, the Senate Banking Subcommittee on Economic Policy held a hearing titled “The State of the American Dream: Economic Policy and the Future of the Middle Class.” It was Senator Jeff Merkley’s first hearing as Chair of the Subcommittee, he said he wanted to feature witnesses whose voices were not normally heard in committee hearings and public policy debates. The witnesses included: Ms. Diedre Melson; Mr. John Cox; and Ms. Pamela Thatcher, who were subjects of the documentary movie American Winter; Dr. Atif Mian, Professor of Economics and Public Policy at Princeton University; Ms. Amy Traub, Senior Policy Analyst for Demos; Mr. Nick Hanauer with Second Avenue Partners; and Mr. Steve Hill, Executive Director of Nevada Governor’s Office of Economic Development.

House of Representatives

House to Consider Multiple Financial Services Bills Next Week

Next week the House is set to consider and vote on four separate bills dealing with the Financial Industry.  Three of the these bills, The Business Risk Mitigation and Price Stabilization Act (H.R. 634), The Reverse Mortgage Stabilization Act (H.R. 2167), the Swap Data Repository and Clearing House Indemnification Correction Act (H.R. 742) will be brought up on the suspension calendar, which is generally used for non-controversial measures.  The other bill, the Swap Jurisdiction Certainty Act (H.R. 1256) will be brought forward under a rule, which may allow for amendments to the bill that directs the SEC and CFTC to issue joint rules on swaps and security-based international swaps.  All are expected to pass the House.

Financial Services Subcommittee Examines Role of Proxy Advisory Firms

On June 5th, the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises met to examine the growing reliance on proxy advisory firms in proxy solicitations and corporate governance. Specifically, the Subcommittee sought to investigate the effect proxy advisory firms have on corporate governance standards, the market power of these firms, potential conflicts of interest, and SEC proposals seeking to modernize corporate governance standards. During the hearing Subcommittee Chairman Scott Garrett (R-NJ) voiced concern that institutions are overly reliant on proxy advisory firms in determining how to cast shareholder votes and questioned whether conflicts of interest and voting recommendations based on one-size-fits all policies affect shareholder value.

Witnesses at the hearing included: former SEC Chairman Harvey Pitt,  Timothy Bartl, President of the Center on Executive Compensation, Niels Holch, Executive Director of Shareholder Communications Coalition, Michael McCauley, Senior Offices for Investment Programs and Governance of the Florida State Board of Administration, Jeffrey Morgan, President and CEO of the National Investor Relations Institute, Darla Stuckey, Senior Vice President of the Society of Corporate Secretaries & Governance Professionals, and Lynn Turner, Managing Director of LitiNomics. The hearing comes as SEC Commission Daniel Gallagher recognized that lawmakers and regulators need to re-examine the role of advisory firms in the corporate governance matters as “no one should be able to outsource their fiduciary duties.”

Lawmakers Introduce Legislation Targeting Foreign Cyber Criminals

On June 6th, House Intelligence Committee Chairman Mike Rogers (R-MI) along with Representative Tim Ryan (D-OH) and Senator Ron Johnson (D-WI) introduced legislation that would impose visa and financial penalties on foreign cyber criminals who target American businesses. Specifically, the measure would deny foreign agents engaged in cybercrime from apply for visas or, if they reside in the U.S., would revoke visas and freeze financial assets. The bill also calls for the Department of Justice to bring more economic espionage criminal cases against offending foreign actors.

Online Gambling Legislation Introduced

On June 6th, Representative Peter King (R-NY) introduced legislation to create broad federal Internet gambling regulations and allow all online gambling with the exception of betting on sports and where Indian tribes opt not to participate. The legislation would also establish an office of Internet gaming housed within the Treasury. Following a 2011 ruling by the Justice Department that the 1961 Wire Act does not ban online gambling, several states, including Delaware, New Jersey, and Nevada, have moved forward with creating intra-state online gaming operations.  The movement at the state level has taken some of the momentum out of federal legalization efforts.

Executive Branch

Treasury

FSOC Selects First Group of Non-Banks to be SIFIs

On June 3rd, the Financial Stability Oversight Council (FSOC) voted on the preliminary list of systemically important financial institutions (SIFIs) which will be subject to additional regulation by the Fed. This additional regulation will include new stress tests to monitor stability, additional capital requirements, and the need to create living wills in the event of resolution. While the Council did not release the names or the number of non-banks that have been selected, several firms have announced that they have received notice from the FSOC regarding their designation, including GE Capital, Prudential Financial, and AIG. Now that designations have been made, companies selected will have 30 days to request a hearing to contest the designation. While Secretary Jack Lew called the designations an “important step forward,” Chairman of the House Financial Services Committee Jeb Hensarling criticized the move, saying perpetuating non-banks as “too big to fail” will only put taxpayers on the hook for another bailout.

Federal Reserve

Fed Approves Final Rule Clarifying Treatment of Foreign Banks Under Push-Out Rule

On June 5th, the Fed approved an interim final rule clarifying the treatment of uninsured U.S. branches of foreign banks under the Dodd-Frank Act swaps push-out measure. Dodd-Frank calls for banks to separate certain swap trading activities from divisions that are backed by federal deposit insurance or which have access to the Fed discount window. Under the clarification, the Fed states uninsured U.S. branches of foreign banks will be treated as insured depository institutions and that entities covered by the rule, including U.S. branches of foreign banks, can apply for a transition period of up to 24 months to comply with the push out provisions. The interim final rule also states that state member banks and uninsured state branches of foreign banks may apply for the transition period. The Institute of International Bankers, which represents international banks operating in the U.S., praised the Fed for offering clarity on a “widely acknowledged drafting error in the original legislation.”

Fed Vice Chairman Appears to Support Stronger Capital Rules for Large Banks

Speaking in Shanghai last week, Fed Vice Chairman Janet Yellen said that it may be necessary for regulators to impose capital requirements even higher than those set forth in the Basel III agreement. Agreeing with Fed Governors Daniel Tarullo and Jeremy Stein, Yellen said “fully offsetting any remaining “too big to fail” subsidies and forcing full internalization of the social costs of a SIFI failure may require either a steeper capital surcharge curve or some other mechanism for requiring that additional capital be held by firms that potentially pose the greatest risks to financial stability.” To that end, Yellen noted that the Fed and FDIC are “considering the merits” of requiring systemically significant firms to hold minimum levels of long-term unsecured debt to absorb losses and support orderly liquidation. Yellen who, is seen by many as the frontrunner for Fed Chairman following Bernanke’s term, is starting to generate a lot more attention as we come closer to the end of Bernanke’s reign.  However, she is not the only member of the Fed espousing this policy.  In a speech later in the week, Philadelphia Fed President Charles Plosser echoed Yellen’s sentiments, saying Dodd-Frank and other efforts to end “too big to fail” may not be “sufficient.” Plosser argued that current capital requirements should be made more stringent but also simpler by relying on a leverage ratio rather than the current practice of risk weighting.

SEC

SEC Proposes Long-Anticipated Money Market Mutual Fund Overhaul

On June 5th, the SEC released a proposal which would change the way the $2.6 trillion money market mutual fund industry is regulated. After months of internal disagreement within the SEC, the Commission voted unanimously to propose the plan. The goal of the proposal is to avoid future runs on the market, like that which occurred during the financial crisis, in tandem with ensuring that the industry still function as a viable investment vehicle. The Commission’s proposal sets out two alternative options for reform which could be enacted alone or in combination. The first would require institutional prime money market funds to operate with a floating net asset value (NAV). Notably, retail and government funds would still be allowed to operate with a fixed-NAV. The second alternative would require nongovernment funds whose liquid assets fell below 15 percent of total assets to impose a 2 percent liquidity fee on all redemptions. If this were to occur, a money market fund’s board would be permitted to suspend redemptions for up to 30 days. The proposal also calls for prompt public disclosure if a fund dips below the 15 percent weekly liquid asset threshold.

Coalition of Investment and Consumer Interests Call for Strong Uniform Fiduciary Standard

In a letter sent to the SEC on June 4th, a coalition of investment and consumer groups called on the Commission to enact a uniform fiduciary standard that would require broker-dealers and investment advisers to act in consumers’ best interest. The letter, signed by organizations such as AARP, the Consumer Federation of America, and the Investment Adviser Association, is in response to an SEC request for information (RFI) requesting input on regarding the possible extension of a fiduciary duty to broker-dealers. The groups assert that, the fiduciary standard set forth in the RFI is weak compared to current law and “seems to contemplate little more than the existing suitability standard supplemented by some conflict of interest disclosures.”

District Court Hears Challenge to SEC Critical Minerals Rule

On June 7th, the Court of Appeals for the D.C. Circuit heard a challenge brought on behalf of the American Petroleum Institute, the Chamber of Commerce, and others to the SEC’s critical minerals rule which requires companies to disclose payments made to foreign governments. Industry argues that the rule is overly burdensome and could result in proprietary information being shared with competitors. However, supporters of the rule, including Oxfam America, assert that the measure will increase transparency and help combat human rights abuses.

FDIC

FDIC Approves Non-Bank Resolution Final Rule

On June 4th, the FDIC approved a final rule establishing the criteria which will be used to determine which non-bank financial firms will be required to comply with the FDIC’s authority to liquidate large failing companies. The rule, which lays out factors used to determine if a company is “predominately engaged in financial activity,” requires companies where at least 85 percent of revenues are classified as financial in nature by the Bank Holding Company Act to comply. The FDIC’s rule closely resembles a final proposal by the Fed which established criteria for non-banks to be flagged for additional supervision under Dodd-Frank.

CFPB

CFPB Finalizes Ability-to-Repay Rule Amendments

On May 29th, the CFPB finalized rules designed to increase access to credit through exemptions and modifications to the Bureau’s ability-to-repay rule. The ability-to-repay rule, which was finalized in January 2013, requires that new mortgages comply with basic consumer protection requirements that are meant to ensure consumers do not take out loans they cannot pay back through Qualified Mortgages (QMs). In response to public and Congressional concerns about the scope of the rule, the Bureau’s finalized rules exempt certain nonprofit creditors and community-based lenders who service low- and moderate-income borrowers, facilitate lending by small creditors, banks and credit unions with less than $2 billion in assets and which make 500 or fewer mortgages loans per year, and establish how to calculate loan origination compensation. In announcing the amendments, the CFPB also delayed the effective date of provisions prohibiting creditors from financing certain credit insurance premiums in connection with certain mortgage loans. Currently, the effective date is January 10, 2014; however, the Bureau plans to solicit comment on an appropriate effective date for proposed credit insurance clarifications.

Bureau Issues Mortgage Rule Exam Guidelines

On June 4th, the CFPB issued an update to its exam procedures based on the new Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA) mortgage regulations finalized in January. The guidance addresses questions about how mortgage companies will be examined such as for: setting qualification and screening standards for loan originators; prohibiting steering incentives; prohibiting “dual compensation,” protecting borrowers of higher-priced loans; prohibiting the waiver of consumer rights; prohibiting mandatory arbitration; requiring lenders to provide appraisal reports and valuations; and prohibiting single premium credit insurance.

CFPB Announced Further Study on Pre-Dispute Arbitration in Financial Products

In a notice and request for comment published on June 7th, the CFPB announced it will conduct phone surveys of credit card holders as part of its study of mandatory pre-dispute arbitration agreements. While Dodd-Frank gave the CFPB authority to ban the use of arbitration in mortgages, Section 1028(a) of the Dodd-Frank Act requires the Bureau to conduct a study before taking additional action to limit arbitration in other financial products. According to the notice, the survey will investigate “the extent of consumer awareness of dispute resolution provisions in their agreements with credit card providers” and consumers’ assessments of these tools.

International

IMF Working Paper Calls for Taxes on Large Banks to Level Playing Field, End “Too Big to Fail”

In a working paper published at the end of May, the International Monetary Fund (IMF), suggesting that large banks in advanced economies have more incentive to take risks due to cheaper funding sources, proposed taxing large banks to “extract their unfair competitive advantage.” The authors of the paper argue that such as tax would level the playing field from the perspective of competitive policy and reduce excess incentives of banks to grow, reducing the problem of “too big to fail” and increasing financial stability. Specifically, the paper found that the implicit guarantee that “too big to fail” banks will be bailed out in the event of failure or crisis can lead to a funding advantage of up to 0.8 percent a year. In related news, On June 5th, Representative Michael Capuano (D-MA) introduced legislation (H.R. 2266) which would require certain systemically important institutions to account for the financial benefit they receive as a result of the expectations on the part of shareholders, creditors, and counterparties that the government will bail them out in the event of failure.

Upcoming Hearings

On Wednesday, June 12th at 10am, in 1100 Longworth, the Trade Subcommittee of House Ways and Means Committee will hold a hearing titled “U.S.-Brazil Trade and Investment Relationship: Opportunities and Challenges.”

On Wednesday, June 12th at 10am, in 2128 Rayburn, the House Financial Services Committee will hold a hearing titled “Beyond GSEs: Examples of Successful Housing Finance Models without Explicit Government Guarantees.”

On Wednesday, June 12th at 2pm, in 2128 Rayburn, the Capital Markets and Government Sponsored Enterprises Subcommittee of House Financial Services Committee will hold a hearing on proposals intended to support capital formation.

On Thursday, June 13th at 10am, in 538 Dirksen, the Senate Banking, Housing, and Urban Affairs Committee will hold a hearing titled “Lessons Learned From the Financial Crisis Regarding Community Banks.”

On Thursday, June 13th at 10am, in 2128 Rayburn, the Monetary Policy and Trade Subcommittee of House Financial Services Committee will hold a hearing on changes to the Export-Import Bank.

On Thursday, June 13th at 1pm, in 2128 Rayburn, the Housing and Insurance Subcommittee of House Financial Services Committee will hold a hearing on international insurance issues.

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