Feature: CFPB’s Proposed Arbitration Rule

Pursuant to the Dodd-Frank Act, the Consumer Financial Protection Bureau (“CFPB”) is required to study companies’ use of arbitration agreements, release its findings to Congress, and take action if those arbitration agreements are found to be contrary to the public interest. In March 2015, the CFPB released its report on arbitration agreements. It determined that banks which currently include a “mandatory arbitration clause” in their credit card and loan agreements, are routinely using arbitration agreements to bar their customers from bringing class action suits against them. CFPB director Richard Cordray remarked that, by using these arbitration agreements, banks are able to “...sidestep the legal system, avoid accountability, and continue to pursue profitable practices even if they may violate the law and harm thousands or even millions of consumers.”  

In the wake of its report and in an effort to restrict what the agency found to be abusive practices, the CFPB on May 5th proposed a rule that would require banks to do away with such arbitration agreements and give customers the right to file class action lawsuits, which the CFPB argues are a “more effective means [than arbitration] for consumers to challenge problematic practices by…companies.”  

If the proposed rule is passed, banks would still be able to include arbitration clauses in their contracts that are subject to the proposal. However, those arbitration clauses would have to clearly state that they cannot be used to stop consumers from bringing a class action lawsuit. In addition, the rule would provide the specific language that companies would be required to include in their contracts. Furthermore, companies that include such arbitration clauses in their contracts would be required to submit to the CFPB any claims, awards, and related items that are filed with arbitration cases – this way, the CFPB will be able to monitor consumer finance arbitrations to guarantee that the arbitration process is fair for consumers.  

Many in the financial industry are saying that giving customers the right to file class action lawsuits in lieu of arbitration simply serves as a boon for plaintiffs’ attorneys. The U.S. Chamber of Commerce’s Travis Norton, who referred to the CFPB as “the plaintiff’s lawyer protection bureau,” took the position that the proposed rule could result in an abundance of frivolous class action lawsuits. Norton added that the proposed rule would raise legal costs for companies, which would lead to increased prices for consumers. Other opponents of the rule, which include the American Bankers Association, caution that allowing its proposal to take effect would release a “flood of attorney-driven class action suits.” Jeb Hensarling, R-Texas and Chairman of the U.S. House Financial Services Committee, which is said to be holding a hearing on the proposed rule “soon,” referred to it as a “big, wet kiss” to trial attorneys.  

Comments on the proposed rule must be received on or before 90 days after publication in the Federal Register.One probable controversy between consumers’ rights groups and industry groups will be whether the rule would grandfather in existing arbitration clauses. If a final rule is issued, it is likely to go into effect in 2017.

Banking Agency Developments


OCC Releases Mid-Cycle Status Report on its Fiscal Year 2016 Committee on Bank Supervision Operating Plan

On May 11th, the Office of the Comptroller of the Currency (“OCC”) released its mid-cycle report on significant actions completed to date to execute its annual Committee on Bank Supervision’s operating plan and on priority objectives for the remainder of the year. OCC Press Release.

OCC Issues ‘Student Lending’ Booklet

On May 9th, the OCC issued the “Student Lending” booklet, a new booklet of the Comptroller’s Handbook. This booklet, which is prepared for use by OCC examiners in connection with their examination and supervision of national banks and federal savings associations that are engaged in private student lending, addresses the risks in private student lending by banks and in regulatory expectations for safe and sound operations. OCC Press Release.

Federal Reserve

Federal Reserve Offering Seven-Day Term Deposits Through its TDF

On May 12th, the Federal Reserve announced that it plans to continue its previously announced periodic testing of the Term Deposit Facility (“TDF”) with one operation in May. These operations are aimed at ensuring the operational readiness of the TDF and providing eligible institutions with an opportunity to maintain familiarity with term deposit procedures. The Federal Reserve plans to conduct a similar routine TDF test operation each quarter in 2016. The schedule and terms for future test operations will be announced at later dates.

Office of Financial Policy and Research Is Renamed Division of Financial Stability

On May 11th, the Federal Reserve announced that the Office of Financial Policy and Research has been designated a division of the Federal Reserve and renamed as the Division of Financial Stability. The Federal Reserve is part of the Financial Stability Oversight Council (FSOC), a group of U.S. regulatory agencies created by the 2010 Dodd-Frank Wall Street reform law that is tasked with identifying threats that could lead to another financial crisis. Reuters.

Federal Reserve Is Accepting Applications for its Community Advisory Council

On May 9th, the Federal Reserve announced that it is accepting applications from those who would like to be considered for membership on the Community Advisory Council (“CAC”), which advises the Federal Reserve on issues affecting consumers and communities and complements two of the Federal Reserve’s other advisory councils (the Federal Advisory Council and the Community Depository Institutions Advisory Council, whose members represent depository institutions). Additional information about the selection process, including instructions for submitting an application, can be found in the Federal Register Notice.

Treasury Department Developments

Treasury Department

U.S. Treasury Issues White Paper on Online Marketplace Lending Industry

On May 10th, the U.S. Treasury Department issued a white paper regarding its review of the online marketplace lending industry. The white paper, “Opportunities and Challenges in Online Marketplace Lending,” provides an overview of what the Treasury Department heard in response to its Request for Information, and contains research on and recommendations for the industry. U.S. Treasury Press Release.


FinCEN Issues Customer Due Diligence Requirements for Financial Institutions

On May 12th, the Financial Crimes Enforcement Network (“FinCEN”) issued final rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities. The rules contain explicit customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions. The final rules are effective July 11, 2016.

Securities and Exchange Commission

White Claims New Privacy Laws Would Hamper SEC’s Enforcement Efforts

In an op-ed published by the New York Timeson May 12th, Securities and Exchange Commission
(“SEC”) Chair Mary Jo White registered her concerns regarding proposed legislation to update the Electronic Communications Privacy Act of 1986 that would require law enforcement agencies to obtain a criminal warrant to access electronic records from internet service providers.  As White notes, civil law enforcement agencies like the SEC are not able to obtain criminal warrants. White proposed a solution that would allow civil agencies to seek a court order similar to a warrant after first requesting records directly from the individual under investigation and providing notice to the individual, who would be permitted to challenge the request in court.

Ceresney Highlights Increased Transparency as Benefit of Private Equity Enforcement Actions

In a keynote address to the Securities Enforcement Forum West 2016 on May 12th, SEC Division of Enforcement Director Andrew Ceresney discussed the conduct and practices that have resulted in private equity enforcement actions, including undisclosed fees, the misallocation of expenses, and the inadequate disclosure of conflicts of interest. Ceresney maintained that the Enforcement Division’s efforts in the private equity space have increased the level of transparency regarding fees, expenses, and conflicts of interest, which has benefitted investors.Ceresney Remarks.

White Highlights Recent SEC Initiatives Aimed at Boosting Capital Formation for Small Companies

In her opening remarks at a panel at the International Organization of Securities Commissions (“IOSCO”) Annual Conference on May 11th, SEC Chair Mary Jo White reviewed recent SEC initiatives designed to facilitate capital formation for small and emerging companies, including new rules for securities-based crowdfunding; the exemption to the general solicitation prohibition for smaller companies offering unregistered securities; Regulation A+; the “IPO on-ramp” for emerging growth companies; the proposed modernization and enhancement of rules governing local and regional offerings; and proposed revisions to the SEC’s disclosure regime. White Remarks.

SEC Releases Agenda for Advisory Committee on Small and Emerging Companies Meeting

On May 11th, the SEC published the agenda for the upcoming meeting of its Advisory Committee on Small and Emerging Companies, which will take place on May 18, 2016. The meeting will focus on the definition of “accredited investor” and on unregistered securities offerings under Regulation D. SEC Press Release.

SEC Approves PCAOB’s Proposal to Disclose Names of Audit Engagement Partner and Other Audit Firms

The SEC issued an order on May 9th that approves the Public Company Accounting Oversight Board’s (“PCAOB”) proposal to adopt new rules that will require registered public accounting firms to disclose information about the engagement partners and accounting firms that participate in an audit. The SEC also approved the adoption of new Form AP that firms will use to disclose the name and relevant ID of the engagement partner and accounting firms participating in an audit, as well as amendments to related accounting standards. The rules require firms to disclose information about engagement partners for audit reports issued on or after January 31, 2017, and to disclose information about the accounting firms for audit reports issued on or after June 30, 2017.SEC Release No. 34-77787.

Stein Urges SEC to Re-Envision Disclosure for the Digital Age

In a speech to the 48th Annual Rocky Mountain Securities Conference on May 6th, SEC Commissioner Kara M. Stein encouraged the SEC to revolutionize its disclosure paradigm by leveraging technology to deliver better information to investors and reduce burdens on companies.  Stein called on the SEC to form a Digital Disclosure Task Force, which would include investors, analysts, academics, companies, and technology experts, to explore “what disclosure should look like in the Digital Age.” Stein Remarks.

Commodity Futures Trading Commission

CFTC’s Division of Swap Dealer and Intermediary Oversight Issues ‘Residual Interest Deadline’ Report

On May 13th, the U.S. Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight issued a report on the “Residual Interest Deadline,” (“Deadline”) as required under CFTC regulations. In March 2015, the CFTC eliminated the automatic termination of the phase-in compliance period for the Deadline, which was scheduled to take place in December 2018. The Deadline remains at 6:00 p.m. ET on the date of settlement. The report determined that CFTC staff has no basis to believe that changing the Deadline to the time of settlement, or to another time of day, would be practicable for futures commission merchants or their customers. Members of the public wishing to comment on the report may do so by June 13, 2016. CFTC Press Release.

CFTC Issues Proposed Amendment to the 2013 Final Order Regarding RTOs and ISOs

On May 10th, the CFTC issued a proposed amendment to a final order that it issued on March 28, 2013 exempting certain specified transactions of six Regional Transmission Organizations and Independent System Operators (“RTO-ISO Order”) from certain provisions of the Commodity Exchange Act (“CEA”) and CFTC regulations, with the exception of the CFTC’s general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, under specified provisions of the CEA and implementing regulations. The comment period on the proposed amendment will be open for 30 days after publication in the Federal Register. CFTC Press ReleaseChairman Massad Statement in Support of Proposed AmendmentCommissioner Giancarlo Statement of Dissent.

Federal Rules Effective Dates

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Exchanges and Self-Regulatory Organizations

Financial Industry Regulatory Authority

FINRA Prepares Investors for Start of Securities-Based Crowdfunding

The Financial Industry Regulatory Authority (“FINRA”) published an Investor Alert on May 13th that offers information to investors who are considering investing in securities-based crowdfunding under new rules effective May 16, 2016. The alert provides investors with an overview of the new rules and tips that they can use to determine if crowdfunding investing is a good choice for them. FINRA Press Release.

SEC Approves FINRA’s Proposal to Expand Reporting Requirements for ATSs

On May 10th, the SEC approved FINRA’s proposed rule change that will impose additional reporting requirements on alternative trading systems (“ATSs”). Under the rule, ATSs will be required to report additional information under the following categories: data to be reported at the time of order receipt; data to be reported at the time of order execution; data to be reported by ATSs that display subscriber orders; and data to be reported by ATSs that are registered as ADF Trading Centers. SEC Release No. 34-77798.

International Swaps and Derivatives Association

ISDA: Cross-Border Fragmentation of Interest Rate Swaps Shows No Signs of Reversing

On May 10th, the International Swaps and Derivatives Association (“ISDA”) published its report Cross-Border Fragmentation of Global Interest Rate Derivatives: Second Half 2015 Update, which examines the impact of regulatory changes, particularly the 2013 U.S. swap execution facility rules, on liquidity in euro- and U.S. dollar-denominated interest rate swaps. The report found that fragmentation in the market for global interest rate swaps continues, especially in euro-denominated interest rate swaps. ISDA Report.

ISDA Offers Principles for Effective Global Policy on Cybersecurity, Data and Technology

The ISDA, along with the European Banking Federation (“EBF”) and the Global Financial Markets Association (“GFMA”), published a set of principles that seeks to encourage effective global policy measures on cybersecurity, data and technology. The principles encourage policymakers and regulators to consider the international component and shifting nature of cybersecurity threats, data protection and technological advancement when designing regulations. ISDA Press Release.


SEC Takes More Time to Consider NYSE Arca’s Proposed Discretionary Pegged Order

On May 12th, the SEC designated June 28, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE Arca Inc.’s (“NYSE Arca”) proposal to amend its rules to add a new Discretionary Pegged Order.  SEC Release No. 34-77820.

Industry News

Former Investment Banker Is Sentenced in Britain Insider Trading Case

On May 12th, DealBook reported that Martyn Dodgson, a former investment banker who had worked at large investment banks, was sentenced to four-and-a-half years in prison after being convicted on an insider trading charge in what the British authorities have termed the largest crackdown on improper trading in Britain. The Financial Conduct Authority of Britain accused Mr. Dodgson of improperly sharing information from the investment banks in which he worked with a friend as part of a conspiracy that started in 2006 and ended in 2010. The Financial Conduct Authority added that the members of the conspiracy used unregistered mobile phones, encrypted records, and safe deposit boxes to hide their improper trading from authorities. DealBook.