Funds Talk: August 2018
Legal commentary on the news and events that matter most to alternative asset managers and funds.
Topics covered in this issue include:
- Cryptocurrencies Face Rise in Investor Class Actions Regulators’ increased interest in digital currencies has been followed by a rise in class actions against cryptocurrency firms, alleging the new products haven’t delivered the advertised results.
- OCIE Warns Advisers Regarding Best Execution Obligations After observing several common issues in the course of its regular inspections, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert so that investment advisers can ensure their practices are compliant.
- Financial Industry Awaits OCC Fintech Charter Decision Approximately 18 months after announcing it may allow fintech firms to apply for approval to operate nationwide — a move that sparked several legal challenges — the Office of the Comptroller of the Currency may soon be ready to release a decision on a proposed fintech charter.
- Feds Announce Proposal to Simplify, Tailor Volcker Rule Federal regulators have published a proposed rule that would simplify and tailor the Volcker Rule, which prohibits large financial institutions from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds. The proposal is open for public comment until Sept. 17.
- The California Consumer Privacy Act of 2018: Summary and Comparison to GDPR On June 28, 2018, the California Consumer Privacy Act of 2018 (CCPA) was signed into law. The bill was drafted and passed quickly, just prior to a deadline for removing a similar initiative from the ballot that would have appeared before California voters in November. Many expect revisions to or guidance regarding the law to be promulgated prior to the CCPA’s entry into force on Jan. 1, 2020.
Cryptocurrencies Face Rise in Investor Class Actions
After a surge in popularity and an increased interest from regulators, virtual currencies — also known as cryptocurrencies — have entered into a new phase in their relatively short history, with an increase in class actions targeting the emerging assets.
The emergence of cryptocurrency class actions comes after the market witnessed a rapid rise in the number and value of initial coin offerings (ICOs) in 2017, which prompted financial regulatory agencies to ramp up their focus on virtual currencies correspondingly. Most notably, the Chairman of the Securities and Exchange Commission previously announced that cryptocurrencies may be subject to U.S. securities laws — an announcement that has done little to dampen the market’s enthusiasm for cryptocurrencies — and has also secured several emergency freezes against fraudulent ICOs in recent months.
Another emerging cryptocurrency narrative is the launch of several class actions focused on virtual currencies and their ICOs. Perhaps the most prominent of these is blockchain project Tezos, which faces a series of class actions in the wake of its $232 million ICO in 2017, while other cryptocurrencies such as Ripple are also facing litigation from investors. Investment advisers involved with cryptocurrency offerings and other transactions should be aware of these class actions and monitor their progress as the courts begin to determine how securities laws will be applied to virtual currencies.
The first class action against Tezos was filed in California in October 2017. It named multiple defendants, including founders Kathleen and Arthur Breitman and Johann Gevers, the head of the nonprofit Tezos Foundation, alleging they violated U.S. securities law through the sale of unregistered securities, and also alleged defendants committed securities fraud and engaged in false advertising and unfair competition in the form of material misrepresentations and omissions during the ICO. In April of 2018, another class action was filed in California. Significantly, both class actions allege violations of federal and state securities laws, and seek rescission and compensatory damages, demonstrating the complex nature of the risk facing cryptocurrencies that run afoul of investors.
Similarly, fintech startup Ripple Labs Inc. is also facing a slew of class action complaints after its XRP tokens became the world’s third-largest cryptocurrency. The first class action, filed in the Superior Court of California, alleged the company violated state and federal laws by offering unregistered securities to retail investors. It further alleged that Ripple attempted — but ultimately failed — to bribe digital currency exchanges Coinbase Inc. and Gemini Trust Co. LLC in order to get them to list XRP. Although the effort was unsuccessful, plaintiffs argue that Ripple profited from the price increases that resulted from the rumored potential listings. At least three class actions have been filed against Ripple, all arguing the same general allegation that the company violated securities laws and that XRP has the “hallmarks of a security.”
Tezos and Ripple represent only two of the cryptocurrency companies currently facing a class action complaint. Although cryptocurrencies and ICOs still enjoy a high level of popularity, the increased regulatory activity and class action litigation demonstrate they are not without risks. Advisers involved in such products and transactions will be paying close attention as these cases work their way through the courts.
OCIE Warns Advisers Regarding Best Execution Obligations
On July 11, 2018, the Securities and Exchange Commission (SEC) issued a risk alert outlining certain compliance issues identified by its Office of Compliance Inspections and Examinations (OCIE) related to the obligation to seek best execution under the Investment Advisers Act of 1940 (the Act).
Registered advisers should review their policies and practices in light of OCIE’s alert in order to ensure their compliance programs meet their obligations in this regard — and make any necessary improvements.
Under the Act, advisers’ fiduciary obligations require that when they select broker-dealers and execute client trades, they seek the “best execution” of client transactions, including by ensuring that the client’s total costs or proceeds are the most favorable under the circumstances in each transaction. Specifically, the SEC reiterated that “the determinative factor [in an adviser’s best execution analysis] is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account.” To that end, the SEC recommended that advisers “periodically and systematically evaluate the execution quality of broker-dealers executing their clients’ transactions.”
In this regard, OCIE indicated that an adviser’s receipt of soft dollars such as brokerage and research services as part of so-called soft dollar arrangements may affect an adviser's best execution assessment. While advisers’ fiduciary duty does not require them to pay the lowest-available rate for such services, OCIE stated that “an adviser should make a reasonable allocation of the costs of the product or service according to its use and keep adequate books and records concerning such allocation. Advisers must disclose soft dollar arrangements and must provide more detailed disclosure when the products or services they receive do not qualify for Section 28(e)’s safe harbor.”
The risk alert further elaborated on several of the most common deficiencies OCIE staff discovered during examinations of advisers’ best execution obligations. These included:
- Not performing best execution reviews — Certain advisers could not demonstrate they conducted periodic and systematic evaluations of the execution performance of the broker-dealers they used in connection with the execution of client transactions. In fact, OCIE staff noted that some advisers did not conduct a best execution evaluation when selecting a broker-dealer, while others were unable to demonstrate, through documentation or otherwise, that they performed such an evaluation.
- Not considering material factors during reviews — Staff observed that some advisers did not consider the full range and quality of a broker-dealer’s services. In this regard, the OCIE staff indicated that some advisers failed to evaluate any qualitative factors associated with the broker-dealer (including, but not limited to, the broker-dealer’s execution capability, financial responsibility and responsiveness to the adviser), and did not solicit or review input from the adviser’s traders and portfolio managers during a review of a broker-dealer’s services.
- Not seeking comparisons from other broker-dealers — Some advisers did not seek out or consider the quality and costs of services available from other competing broker-dealers, either initially or on an ongoing basis. Other advisers utilized a single broker-dealer “based solely on cursory reviews of the broker-dealer’s policies and prices” or relied solely on the broker-dealer’s “brief summary of its services without seeking comparisons from other broker-dealers,” making it impossible to determine whether they were meeting their best execution obligations.
- Not fully disclosing best execution practices — OCIE staff observed that some advisers did not provide full disclosure of best execution practices, including failing to disclose information that certain types of client accounts may trade the same securities after other client accounts and the potential impact of this practice on execution prices. Other advisers did not fulfill representations made in their brochures that they would review trades to ensure that prices fell within an acceptable range.
- Not disclosing soft dollar arrangements — Certain advisers did not provide full and fair disclosure in Form ADV of their soft dollar arrangements, including their use of such arrangements or the potential cost for investors.
- Not properly administering mixed use allocations — Staff observed deficiencies related to mixed use allocations, such as advisers that did not appear to make a reasonable allocation of the cost of a mixed use product or service according to its use, or did not produce supporting reasons for such mixed use allocations.
- Inadequate best execution policies and procedures — Staff observed advisers that had inadequate compliance policies and procedures or internal controls regarding best execution. This included advisers that lacked any policy relating to best execution, and others that had insufficient internal controls due to their failure to monitor broker-dealer execution performance or had policies that did not consider the current business of the adviser, such as the type of securities traded.
- Not following best execution policies and procedures — The OCIE staff also noted that some advisers were not following their own policies and procedures regarding best execution, including some that did not follow policies regarding best execution review, seeking comparisons from competing broker-dealers or allocating soft dollar expenses.
In response to OCIE’s examinations, some advisers have modified their disclosures regarding best execution and/or soft dollar arrangements, revised their compliance policies and procedures, or otherwise updated their practices in these areas. OCIE encouraged advisers to review their own practices, policies and procedures in the outlined areas and make any required improvements in order to ensure their compliance programs meet their obligations.
Financial Industry Awaits OCC Fintech Charter Decision
The regulatory landscape of the U.S. fintech industry could soon see a milestone development, as the Office of the Comptroller of the Currency (OCC) is expected to release its long-awaited position on a proposed charter for online lenders. If the OCC proceeds with the charter, it would allow fintech firms, such as marketplace lenders, to apply for approval to operate nationwide rather than having to seek approval from individual state regulators or enter into program arrangements with banks. If granted, the charter could potentially open a new segment of the market to fintech firms, which offer lending and other financial services to consumers and small businesses that are traditionally underserved by banks and finance companies.
Successful charter applicants would also face the added regulatory requirements that come with operating as a special-purpose bank, however, such as maintaining specific levels of capital and liquidity. As a result, the number of fintech firms interested in filing applications may be relatively limited, although the alternatives of navigating a state-by-state approval process or entering into bank partnerships that try to satisfy evolving and nonuniform “true lender” criteria may make an OCC application more attractive to some firms.
The OCC first announced that it would consider fintech charter applications in December 2016, when former Comptroller of the Currency Thomas J. Curry opened the door to the idea of fintech firms operating as special-purpose national banks. In so doing, Curry remarked that such a move was in the public interest because “fintech companies hold great potential to expand financial inclusion,” and added that making such applications optional would allow fintech companies to choose whether to seek a federal or state charter (similar to the choice banks have) or to operate outside of the banking system.
The possibility has met with resistance from some quarters, however. Several state regulators challenged the OCC’s ability to consider such a change, arguing it exceeded the agency’s mandate under the National Banking Act. For example, a court in Manhattan rejected a legal challenge from the New York Department of Financial Services (NYDFS), determining any purported harm was merely “speculative” at that early stage. However, the NYDFS has made it clear that it would seek to revive its challenge if the OCC proceeded to issue fintech charters.
A precise date for an announcement from the OCC is unknown as of this writing. Speaking at a conference in April, Comptroller of the Currency Joseph Otting indicated that the regulator was hoping to release its position in 60 to 90 days — a timeline it has now exceeded, meaning the release could either be imminent or be facing further delays. At the same event, Otting stated the OCC had yet to finalize its position and still welcomed feedback, adding that “if we did allow fintech to be regulated, they would be subject to the same rules and regulations as other banks.”
Meanwhile, the OCC charter decision is just one looming change that could affect the environment in which fintechs will operate going forward. The U.S. Department of the Treasury released a report on July 31 “identifying improvements to the regulatory landscape that will better support nonbank financial institutions,” among other goals. Treasury specifically recommended legislative solutions for the challenges posed by the Madden decision and recent “true lender” decisions (such solutions as including codifying the “valid when made” doctrine and the validity of properly constructed bank partnership programs) and recommended that the OCC move forward with considering special-purpose national bank charters for fintech companies. In addition, several fintech firms are navigating the Federal Deposit Insurance Corp. (FDIC) approval process for forming industrial loan companies, with the FDIC pledging to provide clarity regarding its position on allowing fintech firms to move into traditional banking activities. The result of all of these processes will give fintech firms a better idea of what their options are for navigating the different federal and state regulatory regimes for financial products.
Feds Announce Proposal to Simplify, Tailor Volcker Rule
On July 17, the five main federal financial regulatory bodies — the Board of Governors of the Federal Reserve System (the Fed), the Securities and Exchange Commission, the Federal Deposit Insurance Corp., the Commodities Futures Trading Commission and the Office of the Comptroller of the Currency — published a proposed rule to simplify and tailor the so-called Volcker Rule, a provision under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that generally prohibits banking entities (including so-called nonbank systemically important financial institutions, or SIFIs) from engaging in proprietary trading and from owning or controlling “covered funds.” (Covered funds are entities, such as hedge funds or private equity funds, relying on certain specified exemptions from the Investment Company Act of 1940.)
The original Volcker Rule was codified in Section 619 of Dodd-Frank and formally implemented by federal regulation in December 2013 by the five bodies. In announcing the proposed rulemaking this past spring, the Fed indicated that the “proposed changes are intended to streamline the rule by eliminating or modifying requirements that are not necessary to effectively implement the statute, without diminishing the safety and soundness of banking entities.” The proposal is open for public comment until Sept. 17.
Key changes contemplated by the proposal include those summarized below.
- With respect to the prohibition on “proprietary trading” by banking entities:
- The definition of “trading account” — the entity on which the prohibition is actually imposed — is narrowed. Currently, a trading account is any account used for purchasing financial instruments primarily for the purpose of short-term resale or trading. Under the proposal, only financial instruments subject to capital requirements or certain accounting requirements would result in the account’s being deemed a trading account.
- Similarly, a presumption in the current rule that certain types of short-term trades make an account a trading account would be removed. In its place, a presumptive safe harbor would be granted for a trading desk that does not purchase or sell financial instruments for a trading account. Such a desk may calculate the net gain or net loss on its portfolio of financial instruments each business day, and if the sum of the absolute values of the daily net gain and loss figures for a rolling 90-calendar-day period does not exceed $25 million, the trading desk is presumed to be in compliance with the proprietary trading prohibition. If it exceeds such amounts, it must report such fact to the relevant federal regulatory body.
- An exemption from the definition of trading account, for certain accounts using liquidity management techniques, has been widened to permit the purchase of not only securities but also foreign exchange derivatives (e.g., currency swaps).
- An exemption to the proprietary trading prohibition has been added for trades made in error or trades needed to correct an error.
- In the rule’s existing exemptions for underwriting and market-making activities, a requirement that the bank enforce certain internal limits in order to qualify for the exemption has been narrowed to apply only to banking entities having “significant trading assets and liabilities” (generally, trading assets and liabilities, other than U.S. government-backed instruments in the case of a U.S. entity, the average gross sum of which over the previous consecutive four quarter-ends equals or exceeds $10 billion), and a presumptive safe harbor is granted to other types of banking entities that do maintain and enforce the specified internal limits.
- The conditions necessary to qualify for the safe harbor for “risk-mitigating hedging activities” have been relaxed, with some conditions being applied only to banking entities having “significant trading assets and liabilities.”
- The conditions necessary to qualify for the safe harbor for trading activities of foreign banking entities have been relaxed, with certain prongs of the existing rule eliminated under the proposal.
- With respect to covered funds:
- In order to qualify for the exemption for underwriting or market-making activities, under the proposal it would no longer be necessary that the banking entity not guaranty or assume the covered fund’s obligation.
- The ability to engage in “risk-mitigating hedging activities” without violating the covered fund prohibitions has been broadened to:
- No longer require a “demonstrable” showing of risk mitigation
- Include transactions that accommodate a customer’s specific request with respect to the fund
- Permit transactions in which the bank is acting as an intermediary on behalf of a customer
- With respect to permitted activities outside the United States:
- One of the conditions in the current rule to qualify for this exemption is that no ownership interest in the covered fund is offered to a resident of the U.S. The proposal would specify that an ownership interest in a covered fund is deemed “not offered for sale or sold to a resident of the U.S.” only if it is not sold “pursuant to an offering that targets residents” of the U.S. “in which the banking entity or any affiliate of the banking entity participates.”
- Another existing condition is that “no financing for the banking entity’s purchase or sale is provided, directly or indirectly, by any branch or affiliate that is located in the U.S. or organized under the laws of the U.S. or any state.” The proposal would delete this condition.
- With respect to reporting requirements:
- Banking entities with “limited trading assets and liabilities” (generally, trading assets and liabilities, other than U.S. government-backed instruments, the average gross sum of which over the previous consecutive four quarter-ends is less than $1 billion) are exempted from having a program to demonstrate compliance with the Volcker Rule.
Other specific prongs of a required compliance program would be applicable only to banking entities having “significant trading assets and liabilities.”
The California Consumer Privacy Act of 2018: Summary and Comparison to GDPR
On June 28, 2018, the California Consumer Privacy Act of 2018 (CCPA) was signed into law. The bill was drafted and passed quickly, just prior to a deadline for removing a similar initiative from the ballot that would have appeared before California voters in November. Many expect revisions to or guidance regarding the law to be promulgated prior to the CCPA’s entry into force on Jan.1, 2020. Nonetheless, businesses that will be subject to the law would be well advised to consider the process of bringing themselves into compliance sooner rather than later. Some businesses that will be regulated under the CCPA may also fall within the ambit of the European Union’s General Data Protection Regulation (GDPR), which became effective on May 25, 2018 (see our previous publication). This alert will examine the provisions of the CCPA, drawing comparisons with the GDPR where appropriate, in an effort to identify the steps covered entities may need to take as the implementation date for this important new law approaches.
Who Is Protected by the CCPA?
The CCPA will protect “consumers,” a term defined to include natural persons who are California residents. 1798.140(g). Like the GDPR, the rights granted under the law do not extend to legal persons like corporations. Art. 4(1).
Who or What Is Regulated by the CCPA?
To come within the regulatory reach of the CCPA, a business must collect “personal information” from consumers, it must “do[ ] business” in California for profit or for the financial benefit of shareholders, and must meet or surpass one of the following three minimum thresholds:
- $25 million in annual gross revenue
- Buy, receive for commercial purposes, sell, or share for commercial purposes, the personal information of 50,000 or more consumers
- Derive 50 percent or more of annual revenue from selling consumers’ personal information
“Personal information” is defined as “information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” 1798.140(o). The CCPA goes on to offer a nonexhaustive but extensive list of examples of data that qualify as personal information. The list includes:
- Standard personal information, such as name, address, or government ID numbers
- Commercial information including goods or services purchased by the consumer
- Web-based information including browsing and search history
- Geolocation data
- Information related to a consumer’s employment or education
- Inferences drawn from the above types of information to create consumer profiles
As in the CCPA, the definition of “personal data” in the GDPR is quite broad, encompassing most pieces of information that relate to an identifiable natural person. Art. 4(1). But in a notable difference from the GDPR, the definition of “personal information” in the CCPA excludes “publicly available information,” meaning information that is lawfully available through government records. In another difference, the GDPR identifies “special categories of personal data” that are entitled to extra protections, whereas the CCPA recognizes personal information as a single category that may be composed of different kinds of data. Art. 9. Note that the CCPA uses the statutorily defined term “business” to refer to the entities that will be regulated under the law, while the GDPR regulates the “controllers” who determine what personal data is collected and the “processors” who process personal data on behalf of controllers. Art. 4(7)-(8).
What it means to “do[ ] business” in California is not defined in the CCPA, though the term is generally understood broadly under other California statutes. For example, the California Revenue and Taxation Code, Section 23101, provides that a company is doing business in California if it is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” in California.
It may also be worthwhile to observe that the scope of the CCPA is tethered to the locus of the consumer—that is, it is focused on protecting the rights of people resident in California. The CCPA is not concerned with the manner in which California-based businesses handle the personal data of non-Californian consumers. By contrast, the GDPR regulates businesses established in the EU, regardless of whether the personal data collected concerns EU citizens or not, as well as businesses located outside the EU that offer goods or services in the EU and process the data of EU citizens.
What Rights Does the CCPA Establish for Consumers?
Making reference to past breaches of consumer privacy and observing that “[p]eople desire privacy and more control over their information,” the CCPA grants California consumers new rights over the personal information collected about them by covered businesses. These rights in turn create responsibilities for those businesses that will be regulated under the law. The section below summarizes the rights granted to consumers under the CCPA and the steps businesses must take to ensure that these rights are protected.
Right to Know What Information Is Collected About You
The CCPA grants consumers the right to request that businesses disclose the “categories and specific pieces of personal information the business has collected” about them. 1798.100(a).
Upon request, a business must disclose to a consumer:
- The categories of personal information it has collected about the consumer
- The categories of sources from which the personal information was collected
- The business purpose behind collecting the personal information
- The categories of third parties with whom the business has shared the information
- The specific pieces of personal information it has collected about the consumer
This information may be provided to the consumer electronically or by mail. If transmitted electronically, the data “shall be portable” and, to the extent possible, provided “in a readily useable format that allows the consumer to transmit this information to another entity without hindrance.” 1798.100(d). Businesses are not, however, obliged to retain personal information for one-time transactions, so long as that information is not retained by the business or sold to a third party. The CCPA calls on the attorney general to adopt regulations concerning how businesses should verify consumer requests to ensure that businesses only share personal information with the consumer to whom the personal information relates. 1798.185(a)(7).
Like the CCPA, the GDPR allows data subjects to request information about the personal data that the controller has collected about them, though it distinguishes personal data obtained from the data subject and personal data obtained from outside parties. When personal data is collected from someone other than the data subjects, the GDPR grants data subjects the additional right to know from what sources the personal data originated. Art. 14. But the GDPR also identifies a number of situations in which controllers and processors need not share information with the data subject when the information was collected from an outside party, including if the data subject already has the information, where provision of the requested information would be “impossible or would involve a disproportionate effort,” where an EU member state provides for different rules that protect the data subject's legitimate interests, or where the personal data must remain confidential subject to “an obligation of professional secrecy” or a statutory obligation of secrecy. When it comes to requesting a copy of the personal information a controller or processor has obtained about a data subject, the GDPR makes no distinction—data subjects have the right to a copy of the personal data that was collected about them regardless of the source, with the caveat that this right “shall not adversely affect the rights and freedoms of others.” Art. 15.
Right to Request Deletion
The CCPA grants consumers the right to request that businesses delete any personal information about the consumer that the business has collected from the consumer. 1798.105. Note that the CCPA does not grant consumers the right to request that a business delete personal information obtained from someone other than the consumer.
To effectuate this right, the CCPA provides that regulated businesses must:
- Delete consumers’ personal information upon request and “direct any service providers to delete the consumer’s personal information from their records.” 105(c).
The CCPA does, however, indicate a number of circumstances in which a business need not comply with a consumer request to delete personal information. These include situations where the personal information is necessary to complete a transaction, to detect or prevent fraudulent activity, to comply with a legal obligation, or “[t]o enable solely internal uses that are reasonably aligned with the expectations of the consumer based on the consumer’s relationship with the business.” 1798.105(d).
The GDPR contains a similar provision, referred to as the “right to be forgotten,” allowing data subjects the right to have personal data concerning them deleted by the data controller under certain circumstances. Data subjects enjoy this right regardless of the source from which the data was obtained. Art. 17. As with the CCPA’s right to deletion, the GDPR’s right to be forgotten is cabined by several exceptions, allowing controllers to deny erasure requests when doing so is part of an exercise of free expression; is necessary for compliance with a legal obligation or the establishment, exercise or defense of legal claims; or when retaining the data is in the public interest. The GDPR also allows data subjects to request that controllers implement restrictions on the use of their personal data in certain circumstances, and requires businesses to notify any recipient to whom they have disclosed the subject’s personal data of any limitations or erasures requested by the subject that they have implemented. Art. 18-19.
Right to Request Disclosures About Personal Information That Is Sold
Californians have the right to request that businesses that sell consumer personal information, or that disclose personal information for a business purpose, provide information regarding these practices to the consumer upon request. 1798.115. The consumer may seek the following information from a business engaged in selling personal information:
- The categories of personal information collected about the consumer
- The categories of personal information that were sold, and the category or categories of third parties to whom the personal information was sold
- The categories of personal information that the business disclosed about the consumer for a “business purpose”
Right to Opt Out of the Sale of Personal Information
The CCPA also allows consumers to demand that businesses cease and desist from selling their personal information, referring to this ability as “the right to opt out.” 1798.120. The CCPA adopts an “opt in” framework where selling a child’s personal information is concerned: affirmative parental consent is required before the sale of personal information regarding a child under 13 years of age, while affirmative “opt in” consent is required by the consumer for consumers between 13 and 16 years of age. 1798.120(d). The GDPR generally requires parental consent for any processing of a subject’s data where the data subject is under 16 years of age. Art. 8. These provisions may be of special relevance for businesses operating in the social media space.
The GDPR does not focus directly on the potential sale of personal data to the same degree as the CCPA, whose drafters pointed specifically to Cambridge Analytica’s improper use of Facebook user data as a motivation for passage of the law. But the absence of specific language addressing the sale of personal information does not mean the GDPR has nothing to say on the subject. On the contrary, the GDPR requires controllers to inform data subjects of the recipients or categories of recipients that have received their personal data (Art. 13-15) and to inform recipients of personal data of any restrictions or erasures undertaken at the request of the data subjects (Art. 19). It also grants data subjects the right to object to the use of their personal data for direct marketing purposes. Art. 21. Most importantly, under the GDPR, any “processing” of personal data, which would include “disclosure by transmission” or “otherwise making available” personal data to a recipient, must be based on one of the six lawful grounds for personal data processing articulated in Article 6. To the extent that any sale of personal data was based on the consent of the data subject (consent being one of the lawful bases for processing included in Article 6), withdrawal of the data subject’s consent would render any subsequent sale unlawful under the GDPR.
Right to Be Free From Discrimination
Businesses are barred from discriminating against consumers that exercise their rights under the CCPA. 1798.125. Specifically, following a demand from the consumer to stop selling their personal information, a business may not:
- Deny goods or services to the consumer
- Charge different prices for goods or services
- Provide a different quality of goods or services
- “Suggest” that the consumer will receive a different price or quality of goods or services
The drafters of the CCPA, however, included a qualification to the non-discrimination provision. The CCPA provides that businesses may still charge “a consumer a different price or rate, or [provide] a different level or quality of goods or services to the consumer, if that difference is reasonably related to the value provided to the consumer by the consumer’s data.” 1798.125(a)(2). In other words, a business may provide a different level of service or charge a different price if a limitation imposed by the consumer on the use of his or her personal information affects the business’s ability to provide a good or service to the consumer. The CCPA also provides that businesses may offer incentives to consumers for the collection or sale of personal information, though these financial incentives may not be “unreasonable” and are subject to an “opt in” from consumers that they may revoke at their will. 1798.125(b).
- A description of consumers’ right to request disclosures regarding the personal information that has been collected about them, including the specific pieces of personal information the business has collected
- A description of consumers’ right to request information about any sale or disclosure of their personal information
- A statement of consumers’ protection against discrimination in the event that a consumer exercises any of their rights under the CCPA
- A list of the categories of personal information collected about consumers in the past 12 months. The CCPA directs that the categories of information track the types of “personal information” listed in the statutory definition of that term (name, address, browsing or search history, etc.). 1798.140(o).
- A list of the categories of personal information it has sold in the preceding 12 months or an affirmation that the business has sold no personal information
- A list of categories of personal information it has disclosed about consumers for a business purpose in the preceding 12 months or an affirmation that the business has made no such disclosures
How Should a Business Field Requests From Consumers?
How Is the CCPA Enforced?
The CCPA permits private individuals to sue in the event of any unauthorized “exfiltration, theft, or disclosure” that results from the regulated business’s failure to “implement and maintain reasonable security procedures and practices appropriate to the nature” of the personal information they hold. 1798.150. Should such a situation arise, private plaintiffs may recover:
- The greater of $750 per consumer per incident, or actual damages
- Injunctive or declaratory relief
- Any other relief the court deems proper
The CCPA does, however, place limits on private plaintiffs’ ability to bring claims. Any individual pursuing this course must notify the business of the specific provisions of the CCPA the consumer believes were violated and give the business 30 days to “cure” the violations. In the event the business succeeds in curing the violations, notifies the consumer, and assures him or her no further violations will occur, no individual or class-wide damages may be pursued. Consumers seeking only “actual pecuniary damages” as a result of a breach are not required to provide this notice. 1798.150(b)(1).
Once a private action has been initiated, plaintiffs must notify the attorney general within 30 days of filing a claim. Upon receipt of this notice, the attorney general may allow the private plaintiff to proceed, pursue his or her own enforcement action, or decide that the private plaintiff may not proceed with the action. 1798.150(b)(3). The CCPA also empowers the attorney general to pursue civil penalties against businesses that intentionally violate the law. Penalties for intentional violations may be assessed at up to $7,500 per violation. 1798.155(b).
Importantly, the CCPA insulates a business from liability when it shares personal information with a service provider and the service provider uses the personal information in violation of the CCPA, so long as the business had no reason to believe that the service provider intended to commit a violation. Reciprocally, the CCPA relieves service providers of liability for any violations committed by the business that collected the personal information. 1798.145(h).
The GDPR takes a different approach to enforcement, calling on each EU member state to establish its own Data Protection Authority (DPA) endowed with the power to issue fines for violations of the GDPR. The GDPR itself guarantees data subjects the right to an “effective judicial remedy” when their rights have been violated, regardless of the particular enforcement powers or actions of an individual DPA. Art. 78-79. Both the GDPR and CCPA grant individuals whose data privacy rights have been violated the right to seek compensation, though recovery can be obtained under the CCPA only in the event of a breach. Neither law appears to require proof of actual damage—the GDPR allows individuals to receive compensation for both “material and non-material damage,” while the CCPA leaves room for private suits regardless of actual damage in providing for damages of up to $750 per consumer per data breach “or actual damages, whichever is greater.” Art. 82; 1798.150.
General Exceptions to the CCPA
The CCPA carves out a variety of special contexts in which its provisions will not apply. Several exceptions relate to legal obligations, providing that the requirements of the CCPA will not restrict a business’s ability to comply with federal or state laws or with civil or criminal process, exercise or defend legal claims, or maintain privileged communications. Nor does the CCPA apply to health information collected by entities covered under laws and regulations concerning medical and health insurance information, personal information sold to or by a consumer reporting agency if the information will be used in a consumer report, or personal information collected pursuant to the Gramm-Leach-Bliley Act or the Driver’s Privacy Protection Act. 1798.145.
Overall Comparison to GDPR
While the GDPR and CCPA both seek to protect personal privacy, they differ from one another in important respects. At a fundamental level, the CCPA is a statute about disclosure and transparency. It requires businesses to proactively disclose to consumers the kinds of personal information that they collect and to tell consumers if they plan to sell consumers’ personal data. It gives consumers the right to request the specific personal data that businesses have collected about them, to request that the information be deleted, and to opt out of the sale of their personal information to third parties. Though the liability portion of the statute subjects covered businesses to lawsuits when their failure to “implement and maintain reasonable security procedures and practices” results in the unauthorized disclosure of personal information, the CCPA has relatively little to say about what security procedures and practices are “reasonable.”
As a more comprehensive, “General” regulation, the GDPR goes into greater detail as to how personal data should be protected, containing an entire chapter addressing the measures that data controllers and processors may need to adopt to maintain the security of personal data. The GDPR provides that data controllers and processors of significant size generally must maintain specific records regarding their processing of personal data (Art. 30), use encryption where appropriate (Art. 32), undertake data protection impact assessments prior to using personal data in new ways that may pose a risk to the privacy of data subjects (Art. 35), and must designate a data protection officer where the controller or processor processes personal data on a large scale (Art. 37). The GDPR also grants rights to consumers that the CCPA does not. The GDPR gives data subjects the right to request that those who control their personal information rectify any mistakes contained therein (Art. 16), the right to request that restrictions be placed on the use of their data instead of outright deletion (Art. 18), and requires businesses to report data breaches to the relevant DPA and to affected data subjects (Art. 33-34).
Thus, in most respects, the CCPA is relatively more modest than the GDPR. It focuses on disclosure, whereas the more ambitious GDPR provides data subjects more rights and imposes more obligations on data controllers and processors.
The CCPA will not enter into force for well over a year, but given the technological and compliance-related measures covered businesses may be obliged to undertake, it’s not too soon to consider preparations. Businesses that are subject to the GDPR and have sought to comply with its provisions may already have satisfied the CCPA’s requirement that businesses implement and maintain reasonable security procedures and practices designed to secure personal information. They are also likely to have already disclosed much of the information that is required under the CCPA. However, given the particularities of the CCPA, even those businesses that are fully in compliance with the GDPR will likely need to take additional measures to satisfy the provisions of the CCPA when it becomes operative in 2020. Businesses should begin to evaluate whether they are subject to the CCPA, identify steps that will be required to comply with its provisions, and stay tuned for guidance or regulations concerning the CCPA from the California attorney general.
 References to the GDPR appear as citations to articles (Art.). References to the CCPA appear as citations to the provisions added to California Civil Code at section 1798 by the CCPA.