Regulatory Developments

OFAC Updates Frequently Asked Questions Regarding Lifting Sanctions on Iran

On June 8, the Office of Foreign Assets Control of the U.S. Department of the Treasury (OFAC) updated its Frequently Asked Questions (FAQs) relating to the lifting of certain U.S. sanctions under the joint comprehensive plan of action, commonly known as the Iran nuclear deal, on Implementation Day, or January 16, 2016. The FAQs are related to financial and banking measures and foreign entities owned or controlled by U.S. persons and were updated in an effort to clarify the scope of sanctions lifting that occurred on Implementation Day. 

Enforcement Litigation

State Challenge to Preemption in Regulation A+ Offerings Dismissed by Federal Court

On June 14, the U.S. Court of Appeals for the D.C. Circuit denied the consolidated petitions for review of a final SEC rule in Lindeen v. SEC. The petitions were brought by the Montana Commissioner of Securities and Insurance and the Massachusetts Attorney General challenging the SEC’s amendments to Regulation A, popularly called Regulation A+, to the extent that they provide preemption of state registration, merit review and disclosure requirements for Tier 2 offerings under Regulation A+. Section 18(b)(3) of the Securities Act of 1933, added by the National Securities Markets Improvement Act of 1996 (NSMIA), provides for a class of “covered securities,” having the benefit of preemption, that are sold to “qualified purchasers” as defined by the SEC. In Regulation A+, the SEC defined “qualified purchaser” in a Tier 2 offering as any person to whom securities in the offering are offered and sold. In denying the petitions, the Court rejected the claim by the petitioners that the use of such a broad definition of qualified purchaser was contrary to the intent of Congress, as well as a claim that the rule providing preemption was arbitrary and capricious, in violation of the Administrative Procedures Act.

CFPB Files Lawsuit Against Payment Processor Over Alleged Unauthorized Withdrawals from Consumer Accounts

On June 6, the Consumer Financial Protection Bureau (CFPB) announced it filed a lawsuit against a third-party payment processor and two of the company’s executives over allegations the company permitted unauthorized withdrawals from consumer accounts, in violation of Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Consumer Financial Protection Act. The company facilitated ACH payment transactions between clients and consumers’ bank accounts. The company’s clients include payday and auto title lenders, some of whom allegedly could not establish relationships with traditional banks. According to the CFPB, the company willfully ignored numerous signs that some of their clients were requesting illegal or fraudulent transactions, including unauthorized ACH transaction requests. The company allegedly ignored complaints from consumers, high return rates and law enforcement actions against clients alleging financial fraud. The CFPB alleged the company processed millions of dollars in unlawful and unauthorized transactions. The CFPB seeks to permanently enjoin the company from future violations of the Consumer Financial Protection Act, restitution to affected consumers, and civil monetary penalties. The company has not had an opportunity to respond to the allegations.

SEC: Financial Services Firm Failed to Safeguard Customer Data

The Securities and Exchange Commission (SEC) fined financial services firm Morgan Stanley $1 million to settle charges related to inadequate safeguards of customer data. The SEC order found that Morgan Stanley failed to adopt written policies and procedures designed to protect customer data, resulting in a then-employee storing data on a personal server. Some of this customer data was subsequently hacked and offered for sale online.

Obama Vetoes Attempt to Block DOL Fiduciary Rule; Lawsuits Move Forward

On June 8, President Obama vetoed a resolution passed by Congress that would have prevented the enforcement of new rules by the Department of Labor (DOL) that aim to significantly expand the types of retirement investment advice covered by fiduciary protections (the Fiduciary Rule). Notwithstanding the president’s veto, a number of leading industry trade groups, including the American Council of Life Insurers (ACLI) and National Association of Insurance and Financial Advisors (NAIFA), have filed a lawsuit in federal court to block the implementation of the Fiduciary Rule on the basis that the DOL acted without authority in developing the Fiduciary Rule and failed to follow the proper protocol in giving notice and providing reasonable comment periods. A federal court in Washington, D.C. has set August 25 as the date for a motion hearing in a similar lawsuit filed by the National Association for Fixed Annuities (NAFA).