As Fintech Platforms Grow Up, Investment Management Firms Face the ‘Problems of Tomorrow’

Fund groups face disruptive developments, as advances in financial technology, often called fintech, continue at an ever more rapid pace. Even as new efficiencies and opportunities blossom, regulators have pushed financial firms to recognize the dangers of technological failures. To help prepare investment management firms for changes ushered in by fintech, we offer our primer on the latest key developments and potential risks.  Read our new article in The Investment Lawyer to learn more about the legal and regulatory implications of emerging technologies, including blockchain and digital ledger technology, investing in fintech companies, robo-advisers and algorithms, and cybersecurity.

U.S. Government Accountability Office Report: Financial Technology – Information on Subsectors and Regulatory Oversight

The U.S. Government Accountability Office (“GAO” or the “Office”) recently published its study related to the financial technology (“fintech”) industry. Members of Congress (Hon. Sherrod Brown, Hon. Jeanne Shaheen, and Hon. Jeffrey A. Merkley) asked the GAO to review a number of issues related to the fintech industry including how fintech products and services are regulated. The GAO does not make any recommendations in this initial report, but the Office plans to issue a series of reports on fintech addressing four common subsectors of fintech (marketplace lenders, mobile payments, digital wealth management platforms, and distributed ledger technology) and each subsector’s regulatory oversight. This initial report attempts to define each subsector, explain how it works, who uses it, benefits and risks, industry trends, and regulation and oversight. The GAO provided a draft of the report for review and comment to the CFPB, CFTC, CSBS, FDIC, the Federal Reserve, FINRA, FTC, NCUA, OCC, SBA, SEC, and Treasury. The Office incorporated technical comments from these agencies as appropriate. The GAO conducted this study from July 2016 to April 2017 in accordance with generally accepted government auditing standards. The GAO reported, as an example, that depending on services provided a marketplace lender may be subject to:  federal regulation (e.g., Federal Reserve, FDIC, OCC), state licensing and regulation, securities offering registration (e.g., SEC), and/or enforcement actions (e.g., CFPB, FTC). The GAO noted that each subsector’s regulation depends on (1) the extent to which the firms provide a regulated service and (2) the format in which the services are provided.

GAO Report to Congress on Financial Technology

GAO Report Highlights

Fintech Week in Review – April 17, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Announcements

The OCC’s Office of Innovation To Hold Upcoming Office Hours
As part of the OCC’s new Office of Innovation, the OCC has announced that it will hold office hours where it will conduct one-on-one meetings for fintech industry members for companies wishing to discuss the OCC’s perspective on responsible innovation. The OCC will provide feedback to companies and answer questions. Meetings will be held at the OCC’s San Francisco Office on May 16 and 17, 2017. Space for these meetings is limited. The OCC plans to meet with only about 15 companies over the two-day period. OCC 4/13/2017 Press Release

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Fintech Week in Review – March 10, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Class Action to Proceed in Fair Debt Collection Practices Suit Against Midland
The U.S. District Court for the Southern District of New York is permitting a class action lawsuit to proceed involving allegations that Midland Funding, LLC (Midland) violated state usury laws in its debt collection practices. Midland had claimed that, since the original debt agreement contained Delaware choice-of-law provisions, and since the debtor had defaulted on the obligations, New York’s criminal usury interest rate cap of 25% should not apply to Midland’s collection of the debt – notwithstanding that the debtor lived in New York. In certifying two classes of plaintiffs which could cover as many as 50,000 residents of New York, the U.S. District Court disagreed with Midland and concluded that the court should apply New York law pursuant to New York’s common law choice of law rule and that the New York criminal usury cap of 25% applies to defaulted obligations. A scheduling conference regarding further proceedings took place on March 8, and the Opinion and Order can be found here. Continue Reading

Fintech Week in Review – March 3, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

FinCEN Announces Measure to Track Cash Buyers of High-End Real Estate in Six Metropolitan Areas
The Financial Crimes Enforcement Network (“FinCEN”) recently announced its plan to renew its existing “Geographic Targeting Orders” or “GTOs,” which require U.S. title insurance companies to identify the natural persons behind shell companies used to purchase residential high-end real estate with all cash. FinCEN Press Release, Feb. 23, 2017

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SEC Staff Compliance Guidance For Robo Advisors

On February 23, 2017 the Staff of the SEC’s Division of Investment Management released “suggestions” on how robo-advisers meet their obligations under the Investment Advisers Act of 1940 (“Advisers Act”).   The Staff noted that their guidance was intended for robo-advisers that “provide services directly to clients over the internet” but noted that the guidance could be useful to other types of robo-advisers.

The Staff categorized its guidance into the following three areas:

  • Disclosures to clients;
  • Information required to provide suitable advice;
  • Effective compliance program designed to address automated advice.

Click here to read the full post on our sister blog, Derivatives and Repo Report.

Fintech Week in Review – February 10, 2017

Below is a list of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

  • Arizona Bill Seeks to Recognize Validity of Smart Contracts and Blockchain Records
  • Virtual Currency Provisions Proposed under Vermont’s Money Transmitter Laws
  • SEC Seeking Comments to Proposed Listing of Bitcoin Investment Trust on NYSE Arca

International Developments

  • Philippines Adopt Virtual Currency Regulations
  • People’s Bank of China Issues Warning to Digital Currency Exchanges
  • Reserve Bank of India Warns Consumers Against Digital Currencies
  • New Questions Emerge on the Legality of Virtual Currency in the United Arab Emirates

For more information on the listed actions, visit our Virtual Currency Report blog. For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.

Fintech Week in Review – February 17, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

California and New York Take Divergent Approaches to Regulating Fintech

After the OCC began developing bank charters for fintech firms, California’s financial regulator sent a letter to 13 fintech companies seeking a “frank, constructive dialogue” on ways to improve on “the lack of consistency and certainty in the current state regulatory regime.” Jan Owen, commissioner of California’s Department of Business oversight, further stated she is “interested in finding ways to improve the interstate regulatory structure so fintech companies can operate across jurisdictional lines with less cost, regulatory burden, and compliance risk.”

In contrast, by virtue of a proposed FY 2018 budget from Governor Andrew Cuomo, the New York State Department of Financial Services (“NYDFS”) may see significantly expanded oversight and authority over certain fintech companies offering services to residents of New York. If passed, certain measures would increase NYDFS’ authority over and/or impose new licensing requirements on businesses engaged in various insurance, mortgage, or lending activities. At least one measure specifically targets online lending businesses.

These actions illustrate the concerns financial regulators face as they attempt to balance an interest in seeing web-based financial services offered seamlessly throughout the U.S. with an interest in imposing consumer protection measures on financial services companies.

CFPB Lives to Fight Another Day

By order dated February 16, the D.C. Court of Appeals granted the Consumer Financial Protection Bureau’s (“CFPB”) petition for a rehearing on the Court’s October 2016 decision in PHH Corp. v. CFPB. CFPB had ordered PHH to pay an unprecedented $109 million penalty for captive mortgage re-insurance arrangements that CFPB’s director held were impermissible under the Real Estate Settlement Procedures Act (“RESPA”). Following PHH’s appeal to the D.C. Court of Appeals, the October 2016 decision held in PHH’s favor, finding, among other things, that:

  1. Since CFPB has a single director, removable only for cause, CFPB lacks adequate “checks” on its power in violation of Article II of the U.S. Constitution; and
  2. CFPB erroneously interpreted the relevant RESPA provisions at issue, or alternatively, CFPB retroactively applied a new interpretation of RESPA, in violation of PHH’s due process rights.

The Court will hear oral argument on these issues on May 24, 2017.

All this comes on the heels of a February 3 Executive Order in which President Trump directed his Treasury Secretary to prepare a report within 120 days identifying laws and regulations that conflict with his financial policy principles. The President made it clear that this Executive Order is aimed at scaling back the Dodd-Frank Act, which created the CFPB.

A New AML Paradigm is Proposed

In a Clearing House Report published February 16, a consortium of stakeholders from both the financial service and law enforcement sectors propose an overhaul in the way financial firms are expected to assist in preventing and reporting criminal activity, including terrorist financing. The Report proposes shifting to a system where law enforcement and investigators relay their priorities, and financial firms report on those priorities rather than reporting every potentially suspicious transaction, as is the current practice. The recommendations are designed to both cut down on the extensive use of resources and reports which yield very limited benefit to law enforcement, and to simultaneously shift those resources to where they can most effectively prevent criminal activity.

Hawaii Legislature May Establish a Blockchain Working Group… In 21 Years.

On January 25, 2017, Representatives Mark Nakashima and Chris Lee introduced HB1481 in the House of Hawaii’s State Legislature. For more information, please visit our sister blog Virtual Currency Report

North Dakota Legislature Hits Roadblock in Attempt to Study Virtual Currency

After unanimously passing in the Senate, North Dakota’s Senate Bill No. 2100 received a unanimous “do not pass” recommendation from the House committee for Industry, Business and Labor on February 14. For more information, please visit our sister blog Virtual Currency Report.

International Developments

BTCChina Halts Bitcoin and Litecoin Withdrawals

Citing the need to upgrade inspection and verification systems to “aggressively guard against money laundering, illegal money exchange, pyramid schemes, and other illegal activity,” BTCChina announced suspension of bitcoin and litecoin withdrawals until March 15. For more information, please visit our sister blog Virtual Currency Report

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