Tag: Consumer Protection

Working with 3rd Party Providers to Make Dodd Frank Conflict Mineral Compliance Easy

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At your firm or within your company dealing with conflict minerals, you might have recently heard the buzz about the latest Dodd Frank Conflict Mineral Compliance requirements. If these requirements affect the way law firms or companies do business, then working towards compliance initiatives remains a priority.

Regulatory Assessment and Scope Analysis

This involves examining the law firm’s client or company seeking compliance product portfolio and doing an analysis of whether the product are affected by the law and therefore must be in compliance, or “in scope” Vs “out of scope.” It can also include:

  • Examining corporate obligations
  • Determination of key regulatory compliance decision points
  • Creation of a conflict minerals technical document

Creation of a Compliance Plan

This involves creating an end to end compliance plan and associated processes

  • All activities detailed in chronological order
  • Creation of application of due diligence standards
  • Responsibilities assigned to personnel
  • Determination of compliance communication pathways

Software Set Up

Industry standard to date for the majority of companies in scope of this regulation involve using a software platform to manage the large amount of data and suppliers that will be surveyed.Vendor Selection

  • Vendor Selection
  • Decisions to integrate with Enterprise Resource Planning system  (ERP), which is used to design and manage resources within a company, as well as Product Lifecyle Management (PLM), used to design, manufacture and plan the development of products
  • Methodology of supplier communication

Supplier Engagement

This portion of the process involves communication and data collection from the supply chain. Includes:

  • Data collection methodology
  • Reporting and analytics of the data collected
  • Corrective action and addressing problem suppliers

Reporting

Once data has been collected firms enter the reporting phase to complete the process for the first year. This process is then replicated year over year. With the infrastructure in place firms enter the “maintenance” phase of compliance.

Standard practise in the compliance industry has also seen that Law firms or the company seeking Dodd Frank compliance are engaging 3-4 outside service providers.

They are usually:

1.       Law firms: To determine exact requirements and legal requirements.

2.       Software: To provide the platform for data collection, management and analytics.

3.    Accounting: To audit the data collected and ensure strong data backing the program.

4.    Consulting: To develop the processes, work with /train suppliers and help with data collection.

Assisting your clients with Dodd Frank Conflict Mineral Compliance does not have to be complicated. Working through the 5 step process above and working with other 3rd party providers makes compliance at any level easy.

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What Does The Word “Natural” Mean, Anyway?

Mintz Logot’s 2 o’clock in the afternoon, you need a snack – maybe a granola bar, but which one? Does the package that boasts it is “100% Natural” win out over the one that is only “All Natural”?  Would you even consider one that is merely “Natural”? Well, don’t expect the U.S. Food and Drug Administration to help you decide anytime soon – they have left it up to the courts to grapple with.

Lawsuits against food companies alleging consumer fraud based on deceptive labeling have increased in the last few years.  Many of these lawsuits have been brought in the U.S. District Court in the Northern District of California, causing that court to be known as the “Food Court” (no, not the one at the mall).  One common bone of contention is the use of the word “natural” in food labeling.  “Natural” remains undefined by the U.S. Food and Drug Administration after a failed attempt to do so in 1991.  It reaffirmed its informal policy for use of the word “natural” on food labeling claims:

The agency will maintain its current policy . . . not to restrict the use of the term “natural” except for added color, synthetic substances, and flavors as provided in [21 CFR] §101.22.  Additionally, the agency will maintain its policy . . . regarding the use of “natural,” as meaning that nothing artificial or synthetic (including all color additives regardless of source) has been included in, or has been added to, a food that would not normally be expected to be in the food.  Further, at this time the agency will continue to distinguish between natural and artificial flavors as outlined in §101.22. See more here.

A typical claim in a lawsuit will contend that the use of the word “natural,” whether as “100% Natural,” “All Natural,” or something similar, is misleading if the product contains or was processed with a compound perceived by plaintiffs to be artificial or synthetic.  The problem in these lawsuits is that the term is undefined, and even FDA says that it is difficult to define a food product that is natural because it has likely been processed and is no longer a “product of the earth.”  This leaves fertile ground for plaintiff’s class action attorneys to bring claims against food companies for any use of the word.

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Consumer Financial Protection Bureau (CFPB) Releases Exam Procedure Updates For Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA)

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On August 15 the Consumer Financial Protection Bureau released updates to its examination procedures in connection with the new mortgage regulations that were issued in January. These updates offer valuable guidance on how the CFPB will conduct examinations for compliance with the Truth in Lending Act and the Real Estate Settlement Procedures Act.

The updates incorporate the first set of interim TILA exam procedures from June. The CFPB Examination manual now contains updated interim exam procedures for RESPA, covering final rules issued by the CFPB through July 10, procedures for TILA, covering final rules issued by the CFPB through May 29, and the previously released interim exam procedures for the Equal Credit Opportunity Act, covering final rules issued by the CFPB through January 18.

A copy of the RESPA exam procedures released on August 15 can be found at:http://files.consumerfinance.gov/f/201308_cfpb_respa_narrative-exam-procedures.pdf

A copy of the TILA exam procedures released on August 15 can be found at: http://files.consumerfinance.gov/f/201308_cfpb_tila-narrative-exam-procedures.pdf

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ALERT: Fraud Scheme Targets Foreign Nationals

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Foreign nationals are advised to be aware of a reported fraud scheme that is currently being perpetrated in the United States.

Individuals purporting to be officers of U.S. Citizenship and Immigration Services (USCIS) are reportedly telephoning foreign nationals to falsely claim a discrepancy or problem in such individuals’ immigration records and pressure victims to pay a “penalty” to rectify the issue. Victims are told to wire funds to an address the caller provides.

The perpetrators may possess personal information about the victim and may ask victims to provide or confirm immigration information, including an I-94 number, an alien registration number or a visa control number.

Foreign nationals who receive such calls should not forward any funds as instructed by the caller or disclose any personal information. Those targeted by the scheme should contact law enforcement, the Federal Trade Commission Bureau of Consumer Protection, and an attorney.

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Recent Data Breach Reports: And the Hits Keep on Coming….

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The ”hits” to data bases, in any event.   Here is a rundown of some of the most recent data breach reports –

Oregon Health & Science University Data Breach Compromises 3,000 Patients’ Records in the Cloud.

Modern Healthcare (subscription may be required) reports that the Oregon Health & Science University announced it is “notifying more than 3,000 of its patients of a breach of their personally identifiable information after their data were placed by OHSU resident physicians on a pair of Google’s cloud-based information-sharing services.” The data breach, which involves “patients’ names, medical record numbers, dates of service, ages, diagnoses and prognoses and their providers’ names” posted to Gmail or Google Drive, was discovered in May by an OHSU faculty member.  According to  Healthcare IT News, this is OHSU’s “fourth big HIPAA breach since 2009 and third big breach just in the past two years, according to data from the Department of Health and Human Services.”

Citigroup Reports Breach of Personal Data in Unredacted Court Filings; Settles with Justice Department

American Banker reports that Citigroup recently admitted having failed to safeguard the personal data (including birthdates and Social Security numbers) of approximately 146,000 customers who filed for bankruptcy between 2007 and 2011. Citi apparently failed to fully redact court records placed on the Public Access to Court Electronic Records (PACER) system. “The redaction issues primarily resluted from a limitation in the technology Citi had used to redact personally identifiable information in the filings,” Citi said in a statement. “As a result of this limitation in technology, personally identifiable information could be exposed and read if electronic versions of the court records were accessed and downloaded from the courts’ online docket system and if the person downloading the information had the technical knowledge and software to restore the redacted information.”

In a settlement with the Justice Department’s U.S. Trustee Program, Citi has agreed to redact the customer information, notify all affected debtors and third parties, and offer all those affected a year of free credit monitoring.

University of Delaware Reports Cyberattack – 72,000 Records Affected

The University of Delaware is notifying the campus community that it has experienced a cyberattack in which files were taken that included confidential personal information of more than 72,000 current and past employees, including student employees. The confidential personal information includes names, addresses, UD IDs (employee identification numbers) and Social Security numbers.

Stanford University Reports Hack – Investigating Scope

Stanford University has announced that its information technology infrastructure has been breached, “similar to incidents reported in recent months by a range of companies and large organizations in the United States,” according to a Stanford press release. Though the school does not yet “know the scope of the intrusion,” an investigation is underway. “We are not aware of any protected health information, personal financial information or Social Security numbers being compromised, and Stanford does not conduct classified research.”

Japan’s Railway Company Apologizes for Unauthorized “Sharing”

The Wall Street Journal reported yesterday (registration may be required) that Japan’s national railway system has apologized for sharing its passengers’ travel habits and other personal information with a pre-paid fare card system without user consent, The Wall Street Journal reports. East Japan Railway admitted to selling the data to Suica—one of the pre-paid card businesses. The data included card holders’ ID numbers, ages, genders and where and when passengers got on and off the train. A transportation ministry official, however, said they will not investigate the issue for privacy violations because the railway company “told us that it wasn’t personal information, as it didn’t include names and addresses of users.” The Ministry of Internal Affairs and Communications is looking into the issue and has set up a team to research the matter, the report states.

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In Largest Known Data Breach Conspiracy, Five Suspects Indicted in New Jersey

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On July 25, 2013, the United States Attorney for the District of New Jersey announced indictments against five men alleging their participation in a global hacking and data breach scheme in which more than 160 million American and foreign credit card numbers were stolen from corporate victims, including retailers, financial institutions, payment processing firms, an airline, and NASDAQ.  The scheme is the largest of its kind ever prosecuted in the United States.

The Second Superseding Indictment alleges the defendants (four Russian nationals and one Ukrainian national) and other uncharged co-conspirators targeted corporate victims’ networks using “SQL [Structured Query Language] Injection Attacks,” meaning the hackers identified vulnerabilities in their victims’ databases and exploited those weaknesses to penetrate the networks.  Once the defendants had access to the networks, they used malware to create “back doors” to allow them continued access, and used their access to install “sniffers,” programs designed to identify, gather and steal data.

Once the defendants obtained the credit card information, they allegedly sold it to resellers all over the world, who in turn sold the information through online forums or directly to individuals and organizations.  The ultimate purchasers encoded the stolen information on blank cards and used those cards to make purchases or withdraw cash from ATMs.

The defendants allegedly used a number of methods to evade detection.  They used web-hosting services provided by one of the defendants, who unlike traditional internet service providers, did not keep records of users’ activities or share information with law enforcement.  The defendants also communicated through private and encrypted communication channels and tried to meet in person.  They also changed the settings on the victims’ networks in order to disable security mechanisms and used malware to circumvent security software.

Four of the defendants are charged with unauthorized access to computers (18 U.S.C. §§ 1030(a)(2)(C) and (c)(2)(B)(i)) and wire fraud (18 U.S.C. § 1343).  All of the defendants are charged with conspiracy to commit these crimes.

Two of the defendants have been arrested, with one in federal custody and the other awaiting an extradition hearing.  The other three defendants, two of whom have been charged in connection with hacking schemes, remain at large.

This conspiracy is noteworthy for its massive scale, and for the patience the hackers demonstrated in siphoning data from the networks.  The U.S. Attorney “conservatively” estimates more than 160 million credit card numbers were compromised in the attacks, and alleges that the hackers had access to many victims’ computer networks for more than a year.  Many prominent retailers were targets, including convenience store giant 7-Eleven, Inc.; multi-national French retailer Carrefour, S.A.; American department store chain JCPenney, Inc.; New England supermarket chain Hannaford Brothers Co.; and apparel retailer Wet Seal, Inc.  Payment processors were also heavily targeted, including one of the world’s largest credit card processing companies, Heartland Payment Systems, Inc., as well as European payment processor Commidea Ltd.; Euronet, Global Payment Systems and Ingenicard US, Inc. The hackers also targeted financial institutions such as Dexia Bank of Belgium, “Bank A” of the United Arab Emirates; the NASDAQ electronic securities exchange; and JetBlue Airways.  Damages are difficult to estimate with precision, but they total several hundred million dollars at least.  Just three of the corporate victims suffered losses totaling more than $300 million.

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Recent Consumer Financial Protection Bureau (CFPB) Developments

Rules Creating Exemptions to the ATR Rule Finalized

The Consumer Financial Protection Bureau (CFPB) recently finalized rules that modified and created specific exemptions to the CFPB’s Ability-to-Repay Rule. The rules have three main effects.

  1. They exempt certain community development lenders and nonprofits—specifically those that lend only to low- and moderate-income consumers, and make 200 or fewer such loans per year—from the ATR Rule.
  2. They facilitate lending by community banks and credit unions that have less than $2 billion in assets, and make 500 or fewer first lien mortgages per year.
  3. They no longer require that compensation paid by a broker or lender to a loan originator counts towards the Dodd-Frank points and fees limits.

These changes to the ATR Rule will take effect on January 10, 2014.

Effective Date of Prohibitions on Financing Credit Insurance Premiums Delayed

The CFPB has delayed the effective date of a regulation prohibiting creditors from financing credit insurance premiums secured by a dwelling. The regulation, previously effective June 1, 2013, has been delayed until January 10, 2014. The CFPB wanted to clarify how the rule applied to transactions other than those where a lump-sum premium was added to the loan amount at closing.

CFBP Seeking Comments on Possible Revisions to the Civil Penalty Rule

The CFPB is seeking comments on possible revisions to the Consumer Financial Civil Penalty Fund Rule. The CFBP uses this fund, established by the Dodd-Frank Act, to deposit civil penalties obtained in judicial or administrative actions under federal consumer financial laws. The fund can be used to pay victims of violations of federal consumer financial laws, or, if victims cannot be found, to educate consumers and provide financial literacy programs. The rule articulates the CFPB’s interpretations of what kind of victim payments are appropriate and how to otherwise allocate the funds. Comments are due on July 8, 2013.

White Paper Concerning Overdraft Practice Concerns Published

The CFPB published a white paper concerning overdraft practice concerns and institutional practices. The paper finds that a large portion of consumer checking account revenue continues to come from overdraft fees. Furthermore, those consumers who choose, let alone use, overdraft coverage have higher costs and a higher chance of having their checking accounts involuntary closed. No action, other than further research, is currently planned.

CFPB Launches New Mortgage Rule Implementation Page

The new mortgage rule implementation page is part of an effort to help lenders comply with the Dodd-Frank Act reforms and CFPB rules. Debtors and potential debtors can find potentially useful information, including quick reference charts, video guides, manuals, etc.—related to the new 2013 mortgage rules. While the CFPB’s intention for the site is to help understand the rules, the materials are not a substitute for the rules themselves.

Ryan C. Fairchild, summer law clerk at Poyner Spruill, co-authored this article.

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The Consumer Financial Protection Bureau, Week in Review: June 10 – June 14, 2013

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CFPB Launches Regulatory Implementation Page

In an effort to streamline resources and better assist financial institutions implementing the many new rules and policies promulgated by the CFPB, the CFPB announced the launch of its “Regulatory Implementation” webpage, available here. The page is a one-stop shop for financial institutions looking for assistance in understanding some of the more salient differences and requirements of the rules. In addition to a number of quick-reference guides, the page also contains compliance guides for the following rules: (i) Ability to Repay/Qualified Mortgage; (ii) 2013 HOEPA Rule; (iii) Loan Originator Compensation; (iv) ECOA Valuations; (v) TILA HPML Appraisals; (vi) Escrows; and (vii) TILA and RESPA Servicing.

CFPB Examines Impact of Overdraft Practices on Consumers

On June 11, 2013, the CFPB released its “CFPB Study of Overdraft Programs” (the Report), which is available here. The Report was based upon (i) responses the CFPB received to a request for information published in the Federal Register in February 2012, and (ii) aggregate, institution-level information data and random samples of consumer checking accounts. Through the inquiry, the CFPB determined that overdraft programs are costly to consumers, provide substantial sources of checking account revenue for financial institutions, and vary widely across financial institutions.

The Report noted that overdraft practices employed by financial institutions are frequently very complex. Not only do the fees charged for overdraft protection vary, but many other differences exist throughout the industry, including: the number of times a consumer can be charged; whether there are caps on such charges; the amount of such caps; the scope of overdraft protection; and even the order in which transactions are posted. Each of these factors can play a significant role in determining the fees consumers will face. Accordingly, the CFPB’s report raises concerns about consumers’ ability to understand, navigate and anticipate fees.

In light of the Report’s findings, the CFPB has announced its intention to engage in further review of account-level data to better understand how differences in practices affect consumers.

CFPB Proposes New Redress System for Victims of Unlawful Activities

Under Section 1055(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB may obtain various types of monetary relief, such as restitution, refunds and damages, in both judicial and administrative proceedings. The CFPB collectively refers to such relief as “redress”, and can be required to receive such redress from a defendant and then distribute it to victims of unlawful activities. In order to better assist this process, which is known as “Bureau-Administered Redress,” the CFPB is proposing a new system of records that will enable the CFPB to manage distributions to consumers.

Specifically, the new system will enable the CFPB to: (i) track the collection, allocation and distribution of funds in the Civil Penalty Fund and redress monies; (ii) identify and locate victims who may receive such payments; (iii) determine the amounts that the CFPB will distribute to such victims; (iv) maintain associated account and financial information; and (v) develop reports to applicable tax officials regarding such payments.

The proposal, which is available here, states that any comments on the proposed system must be received no later than July 11, 2013. The new system will become effective on July 22, 2013, unless comments are received that result in a contrary determination.

CFPB Releases New Training Module to Combat Financial Exploitation of Older Americans

On June 12, 2013, the CFPB along with the Federal Deposit Insurance Corporation (FDIC), released a tool called “Money Smart for Older Adults.” The purpose of the module is to assist older adults (age 62 and older), as well as their caregivers, in avoiding and preventing financial exploitation. In addition, it provides information to educate consumers about planning for a secure financial future and making informed financial decisions.

The module, which consists of a scripted instructor guide, a participant/resource guide and Power Point slides, has been designed to be presented and administered by financial institution representatives, adult protective services agencies, senior advocacy organizations, law enforcement, and similar organizations and agencies.  The module is available, free of charge, on the FDIC website. Click here to view.

CFPB Assistant Director Tells Nonbanks to Quickly Implement Compliance Management Systems

During the American Bankers Association’s Regulatory Compliance Conference on June 12, 2013, Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, urged nonbank entities to implement compliance management systems without delay. She specifically pointed to many payday lenders, consumer reporting agencies, mortgage lenders and servicers, student lenders and debt collectors that have yet to implement these compliance management systems.

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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.

New Safeguards to Protect Consumers from Foodborne Illness

The National Law Review recently published an article regarding Foodborne Illness by Aaron M. Phelps of Varnum LLP:

Varnum LLP

 

 

The U.S. Department of Agriculture has set new safeguards that will better protect consumers from foodborne illness in meat and poultry products. It will now be easier to trace contaminated food materials in the supply chain, to act against contaminated products sooner, and to establish the effectiveness of food safety systems.

Policy measures include the following:

  • New traceback measures to control pathogens earlier and prevent them from triggering foodborne illnesses and outbreaks.
  • Requiring establishments to prepare and maintain recall procedures, to notify the Food and Safety Inspection Service (FSIS) within 24 hours that a meat or poultry product that could harm consumers has been shipped into commerce, and to document each reassessment of their hazard control and critical control point (HACCP) system food safety plans.

© 2012 Varnum LLP