Insights from Winston & Strawn 

Recent CFPB Win in CashCall Lawsuit Underscores Potential “Federalization” of State Law Violations

A federal court recently granted the Consumer Financial Protection Bureau (CFPB) summary judgment regarding liability against CashCall, Inc., its affiliated entities, and its owner. In a 16-page opinion issued August 31, 2016, the court ruled that CashCall engaged in deceptive practices by servicing and collecting on loans where the interest rate charged on the loans exceeded state law interest caps and where the lenders did not comply with state licensing requirements.

The case concerned a partner lending arrangement between CashCall and a separate entity, Western Sky Financial, to offer short-term, high interest rate loans to consumers in 16 states. Western Sky, which had connections to the Cheyenne River Sioux Tribe, served as the primary customer-facing entity and was identified as the lender in the loan documents. Because the loan documents specified tribal law as the source of governing law, on their face state restrictions regarding interest rates and lender licensing did not appear applicable. However, the court determined that CashCall was, in fact, the “true lender” given its role with respect to underwriting the loans and bearing the actual economic risk of borrower default. On that basis, the court invalidated the provisions that made the loan agreements subject to tribal law, and ruled instead that state laws where the borrowers lived governed the agreements.

CashCall also serviced and collected on the loans. Because the loans were unenforceable under state law, the court found that CashCall’s servicing and collection activities were deceptive and therefore violated the prohibitions against unfair, deceptive, and abusive acts and practices (“UDAAPs”) in the Consumer Finance Protection Act of 2010. The court determined that by “servicing and collecting on Western Sky loans, CashCall [and its affiliate] created the ‘net impression’ that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements.”

The CashCall decision is noteworthy for several reasons, including the “true lender” standard adopted by the court and the individual liability assessed against CashCall’s owner. Particularly important, however, is the determination that servicing and collecting on loans void under state law gives rise to UDAAP liability. The court (and the CFPB) seemed to reason that UDAAP liability hinged not on the violation of state law itself, but instead on the fact that servicing and collecting activities misinformed consumers, to their detriment, that the loans were enforceable and had to be repaid. In practical terms, the outcome is the same, namely, to “federalize” conduct already addressed by state law.

This ruling may encourage the CFPB to “federalize” its enforcement priorities in other areas where consumer financial firms are found to have acted in violation of state law.

Feature: SEC Will Examine Investment Advisers’ Supervision of Employees with Disciplinary Histories

The Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) is increasing scrutiny of investment advisers who supervise employees that have a history of disciplinary actions. OCIE announced in a Risk Alert published on September 12th that it will conduct an examination sweep of supervision practices at registered investment advisers, with a specific emphasis on firms’ business and compliance practices related to the supervision of their higher-risk employees.

OCIE indicated at the beginning of the year that its examination priorities for 2016 would include the compliance oversight and controls of investment advisers who employ representatives with a history of misconduct. The focus on firms that hire representatives with disciplinary histories is also shared by the Financial Industry Regulatory Authority (“FINRA”) in its review of firm culture. In remarks to FINRA’s Annual Conference last spring, former FINRA Chair and CEO Richard Ketchum said that firms with a large concentration of representatives with problematic disciplinary histories should be “expecting searching questions from FINRA as to the special supervisory steps they have taken to ensure no further bad actions.” Earlier this year, Senator Elizabeth Warrenasked Ketchum thorough questions about FINRA’s ability to protect investors, following publication of a study that showed that 44% of representatives fired for misconduct were rehired by other firms within one year. OCIE cited the study when it announced its examination sweep, noting the study raised concerns that, by hiring these individuals, firms may put their clients at increased risk.

OCIE said that it will identify which investment advisers need to be examined by using its analytical capabilities to review the disciplinary information reported on an adviser’s Form ADV; information from unreported, relevant legal actions; and information from SEC enforcement actions in which the SEC barred individuals from certain financial industries. OCIE will look at whether the firms selected for examination have implemented policies and procedures specific to the risks presented by employees with disciplinary histories. OCIE indicated that it would focus on the compliance cultures and the “tone at the top” of these firms, noting that the tone is “critical to setting the ethical environment of the organization.”

The examinations will focus on several key risk areas, including:

  • Compliance Program: OCIE examiners will evaluate the firms’ practices related to their hiring processes, ongoing reporting obligations, employee oversight practices, and complaint handling processes.
  • Disclosures: OCIE examiners will review advisers’ practices for disclosing regulatory and disciplinary actions for accuracy, adequacy, and effectiveness.
  • Conflicts of Interest: The examinations will assess the advisers’ conflicts of interest, especially with respect to financial arrangements initiated by representatives with disciplinary histories.
  • Marketing: Examiners will review firms’ advertisements and marketing materials to identify conflicts of interest associated with higher-risk representatives.

OCIE encouraged all registered investment advisers to review their risks, practices, policies, and procedures in these areas and consider making improvements. Think Advisor reported that the examinations are expected to begin sometime during fiscal year 2017.

Banking Agency Developments


Comptroller Discusses the Condition of the Federal Banking System

On September 15th, Comptroller of the Currency Thomas J. Curry delivered the 2016 Robert Glauber Lecture at the Harvard Kennedy School, where he discussed how the financial system has progressed since the Great Recession, its present strengths, and the need to remain vigilant against risks.

OCC Releases Bank Supervision Operating Plan for Fiscal Year 2017

On September 14th, the Office of the Comptroller of the Currency (“OCC”) announced the release of its bank supervision operating plan for fiscal year 2017.

OCC Requesting Comment on Proposed Rule Regarding Receiverships for Uninsured National Banks

On September 13th, the OCC announced that it is requesting comment on a proposed rule to implement the basic legal framework for receiverships set forth in the National Bank Act. The proposed rule would apply to receiverships for any national bank that is not insured by the Federal Deposit Insurance Corporation (“FDIC”) and for which the FDIC is not required to be appointed as receiver, such as an uninsured trust bank. This proposed rule would not apply to federal savings associations, all of which are insured. The comment period for the proposed rule ends on November 14, 2016.

OCC Newsletter Focuses on Housing Financing in Indian Country

On September 9th, the OCC announced its publication of the latest edition of its Community Development Investments newsletter entitled “Housing Financing in Indian Country: Spotlight on HUD’s Title VI Program.” This issue describes the Department of Housing and Urban Development’s Title VI loan guarantee program, and presents examples of how banks have used the program to extend financing for housing in Indian Country. This edition also reviews how these activities may be eligible for Community Reinvestment Act consideration.


FDIC Unveils Resources to Help Community Bankers Learn More about Affordable Mortgage Programs

On September 15th, the FDIC announced that it has published The Affordable Mortgage Lending Guide, Part I: Federal Agencies and Government Sponsored Enterprises and launched the Affordable Mortgage Lending Center, an online resource center to help community bankers learn more about single-family housing products offered by federal agencies and government-sponsored enterprises. 

Federal Reserve

Federal Reserve Board Proposed Rulemaking Regarding Capital Requirements and Insurance Activities

Winston & Strawn recently submitted a comment letter on the Federal Reserve Board’s Advance Notice of Proposed Rulemaking (“ANPR”) on Capital Requirements for Supervised Institutions Significantly Engaged in Insurance Activities.  In response to the ANPR, Winston formed a discussion group composed of representatives of almost all 12 of the potentially impacted insurance depository institution holding companies.  The comment letter represented some of the collective thoughts and concerns of that discussion group.  While the comment letter was generally positive regarding the proposed Building Blocks Approach (“BBA”), Winston and Group members requested clarification on a number of issues, in particular that the FRB would, in calculating a company’s current and required capital levels in a variety of situations, defer to the capital standards that had been established by the state insurance regulators.  For a copy of the comment letter, please see here

Securities and Exchange Commission

Speeches and Statements

White Says SEC Will Move Forward with Transparency Rules for ATSs, Wait On Proposal on Disruptive Trading Practices

In a keynote address delivered to the Security Traders Association’s Annual Market Structure Conference on September 14th, SEC Chair Mary Jo White reviewed the SEC’s progress in making improvements to equity market structure and its consideration of fundamental market structure questions related to operational integrity, market transparency, and algorithmic trading. White indicated that the SEC will consider a final proposal for rules requiring disclosures by alternative trading systems (“ATSs”) about their operations in the next few months. White also said that the SEC will seek comments on its staff’s work on disruptive trading practices before it proposes an anti-disruptive trading rule, describing the task of “developing the right regulatory response” to such practices as “difficult.”

Ceresney Highlights Success of SEC’s Whistleblower Program

In remarks to the Sixteenth Annual Taxpayers against Fraud Conference on September 14th, SEC Division of Enforcement Director Andrew Ceresney discussed the impact of the SEC’s whistleblower program and provided an overview of the different types of whistleblowers that have participated in the program. Ceresney noted that whistleblower assistance has been particularly invaluable in cases involving issuer reporting and disclosure violations; offering frauds and Ponzi schemes; and Foreign Corrupt Practices Act (“FCPA”) violations.

White Updates NASAA on Fiduciary Rule and Accredited Investor Definition Progress

During a question-and-answer session at the North American Securities Administrators Association (“NASAA”) conference on September 12th, SEC Chair Mary Jo White indicated that SEC commissioners are reviewing staff recommendations on a potential rule to raise standards for retail investment advice, but will not issue a proposed rule in the near future. White also said that the SEC staff is drafting a recommendation for a revised accredited investor definition. 

Other Developments 

Small and Emerging Companies Advisory Committee to Meet

The SEC announced that its Advisory Committee on Small and Emerging Companies will meet on October 5th.  Written statements to the Committee should be submitted on or before October 3rd.

SEC Seeks Comment on Rules Under Review Pursuant to Regulatory Flexibility Act

On September 15th, the SEC published for comment the list of rules scheduled for review, pursuant to the Regulatory Flexibility Act, that have a significant economic impact upon a substantial number of small entities. The list included, among other things, revisions to the accelerated filer definition and accelerated deadlines; Regulation NMS; and the XBRL voluntary financial reporting program on the EDGAR system. Comments should be submitted within 30 days of publication in the Federal Register. In a statement, SEC Commissioner Michael S. Piwowar urged the public to comment on the rules under review and noted that a review of Regulation NMS would encourage the SEC to consider changes to the rules as a part of “a comprehensive equity market structure review program.”

Staff Announcements

On September 15th, the SEC announced that Jennifer Marietta-Westberg, Deputy Chief Economist and Deputy Director of the SEC’s Division of Economic and Risk Analysis (“DERA”), will leave the agency to join the private sector. Marietta-Westberg first joined the SEC ten years ago.

Investor Advocate Urges SEC to Adopt Regulation ATS Proposal and Include Disclosure Requirements for Fixed Income ATSs

On September 9th, SEC Investor Advocate Rick A. Fleming submitted a comment letter addressing the SEC’s proposed amendments to Regulation ATS, which would require ATSs to disclose additional information about their operations and activities. Fleming expressed support for the proposal and urged the Commission to refrain from making revisions that would reduce the level of detailed information requested in proposed Form ATS-N or prevent the public disclosure of certain information. Fleming encouraged the SEC to modify the proposal to require ATSs that transact solely in government securities to file the current version of Form ATS and to make filings on current Form ATS public for all fixed income ATSs. 

Commodity Futures Trading Commission

Yieldbroker Qualifies for First-of-its-Kind No-Action Relief

On September 14th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced that its Divisions of Market Oversight and Swap and Intermediary Oversight have stated that Yieldbroker, a multilateral swaps trading facility that is licensed and regulated in Australia, has qualified for no-action relief in connection with CFTC No-Action Letter No. 15-29. This makes Yieldbroker the first foreign-regulated, multilateral swap trading facility that permits direct access to U.S. persons to qualify for long-term no-action relief from the requirement to register as a swap execution facility with the CFTC. No-Action Letter No. 16-72

Federal Rules Effective Dates

September 2016 – November 2016

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Exchanges and Self-Regulatory Organizations


SEC Institutes Disapproval Proceedings Regarding BZX’s Proposed Modifications to the Options Regulatory Fee

On September 15th, the SEC suspended Bats BZX Exchange, Inc.’s (“BZX”) proposed rule change to lower the amount of the Options Regulatory Fee (“ORF”) from $0.0010 to $.0008 per contract side and expand its application to non-Members, and instituted proceedings to determine whether to approve or disapprove the proposal. The SEC cited questions about whether a sufficient regulatory nexus exists between BZX and a non-Member to justify imposition of the ORF on a non-Member. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of September 19, 2016. SEC Release No. 34-78849

Chicago Board Options Exchange

CBOE Proposes New and Enhanced Price Protection Mechanisms and Risk Controls

On September 14th, the SEC provided notice of a proposed rule change filed by the Chicago Board Options Exchange, Incorporated (“CBOE”) that would add new and enhance current price protection mechanisms and risk controls to provide additional protections against potentially harmful and disruptive trading. Among other things, the proposal would amend the limit order price parameter for simple orders, the drill through price check parameter, and the put strike price and call underlying value checks. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of September 19, 2016. SEC Release No. 34-78839

Financial Industry Regulatory Authority

SEC Approves FINRA’s Arbitration Rule Amendments Relating to the Panel Selection Process

On September 14th, the SEC issued an order approving FINRA’s proposal to amend its arbitration rules to increase the number of arbitrators on the public list FINRA sends to parties to 15 and to increase the number of strikes to the public arbitrator list to six. SEC Release No. 34-78836

FINRA Conducts Exam Sweep of Early Rollovers in Unit Investment Trusts

In a targeted exam letter published on September 13th, FINRA requested that firms provide information regarding Unit Investment Trust (“UIT”) rollovers, including relevant written supervisory procedures; a list and description of exception reports used to monitor UIT activity; and a list of the top 25 registered representatives who generated the highest Early Rollover revenue and the highest number of Early Rollovers.

SEC Approves FINRA’s Proposed Changes to Rules on Public Communications, Investment Analysis Tools, and Bond Mutual Fund Volatility Ratings

On September 13th, the SEC issued an order granting accelerated approval to FINRA’s proposed amendments to the filing requirements in its rules governing communications with the public and requirements for the use of investment analysis tools, as well as the content and disclosure requirements in its rules governing the requirements for the use of bond mutual fund volatility ratings. The SEC also requested comments on a partial amendment to the proposal, which restores the requirement that new members file retail communications used in electronic or public media at least 10 days prior to use. Comments should be submitted within 21 days of publication, which is expected the week of September 19, 2016. SEC Release No. 34-78823

ICE Clear Credit

SEC Takes More Time to Consider ICC’s Proposed Changes to Its Risk Management Framework

On September 15th, the SEC designated November 2, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding ICE Clear Credit LLC’s (“ICC”) proposal to revise the ICC Risk Management Framework to incorporate certain risk model enhancements and make minor clarifications to the ICC Risk Management Model Description document and the ICC Risk Management Framework. SEC Release No. 34-78846

ICC Proposes to Clear Additional Credit Default Swap Contracts

On September 12th, the SEC requested comments on a proposal filed by ICC that would revise its rules to provide for the clearance of additional credit default swap contracts, including Standard Emerging Market Sovereign CDS contracts, 2003 ISDA Definitions of Standard Western European Sovereign CDS contracts, and an additional Asia/Pacific Sovereign CDS contract. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of September 19, 2016. SEC Release No. 34-78818

International Swaps and Derivatives Association

ISDA White Paper Recommends Ways to Increase Efficiency in Derivatives Market Infrastructures

 On September 15th, the International Swaps and Derivatives Association (“ISDA”) published The Future of Derivatives Processing and Market Infrastructure, a white paper that highlights several opportunities for improved efficiency in the derivatives trade processes through greater standardization and automation. Among other things, the white paper recommends implementing additional standardization in documentation, data, and processes; developing smart contracts to automatically execute intended lifecycle events; and adopting a standard, multi-use derivatives product identifier. ISDA Press Release

ISDA Publishes Academic Review of Single-Name CDS Market

On September 12th, ISDA announced the publication of an academic paper on single-name credit default swaps (“CDS”). The paper reviews and summarizes the analyses from academic literature examining the benefits and costs of single-name CDS, concluding that single-name CDS remain an efficient tool for hedging credit risk and can have a positive impact on the economy. ISDA Press Release

Municipal Securities Rulemaking Board

SEC Approves MSRB’s Proposed Academic Data Product for Municipal Market Research

On September 13th, the SEC granted accelerated approval to the Municipal Securities Rulemaking Board’s (“MSRB”) proposal to establish an academic historical transaction data product to provide institutions of higher education with post-trade municipal securities transaction data collected through the Real-Time Transaction Reporting System (“RTRS”) and would include anonymous dealer identifiers. The SEC also requested comments on an amendment to the proposed rule change, which amended the text of the proposal to conform the description of the proposed academic data product in the RTRS facility to the description intended by the MSRB. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of September 19, 2016. SEC Release No. 34-78826

National Futures Association

NFA Advises Members to Review AML Programs for Compliance with New FATF-Identified Jurisdictions

On September 14th, the National Futures Association (“NFA”) issued a Notice that reminds members to review and revise their anti-money laundering (“AML”) programs to ensure they have the most current information on jurisdictions identified by the Financial Action Task Force (“FATF”) with AML/CFT deficiencies. The Notice follows the publication of an advisory by the Financial Crimes Enforcement Network (“FinCEN”) announcing an update to FATF’s list of jurisdictions with AML/CFT deficiencies. NFA Notice I-16-19

Options Clearing Corporation

OCC Files Advance Notice Regarding Proposed Changes to Escrow Deposit Program

On September 14th, the SEC requested comments on The Options Clearing Corporation’s (“OCC”) advance notice related to proposed changes to improve the resiliency of its escrow deposit program.  Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of September 19, 2016. SEC Release No. 34-78834

Industry News

Class Action Brought by Former Madoff Customers Against HSBC Is Dismissed

A U.S. district court has dismissed a lawsuit brought in 2014 by former Bernard Madoff customers who accused HSBC Holdings Plc of driving Madoff’s colossal Ponzi scheme by ignoring red flags and encouraging “feeder funds” to invest with him. The court stated that a federal law governing securities fraud cases prevented plaintiffs from bringing their class action suit against the British bank’s U.S. unit. The court further noted that it lacked jurisdiction over claims against the HSBC parent company and non-U.S. affiliates. Reuters

Winston & Strawn Publications

Antitrust and Competition – The EU Weekly Briefing, Vol 4, Issue 35

The EU Weekly Briefing is designed to provide timely updates on recent European Union competition law by including a short description of, and links to, recent developments. Newsletter