Court Rules That Consumer Financial Protection Bureau Is Unconstitutional

Summary of SDNY order holding that CFPB is unconstitutional

CFPB v. RD Legal Funding, LLC, 17-cv-890 (June 21, 2018, S.D.N.Y.)

Last week, a federal court in New York ruled that the entire Consumer Financial Protection Bureau (“CFPB”) is unconstitutional. The CFPB was established by Congress in response to the 2007-2008 financial crisis to regulate financial institutions and protect consumers, especially with respect to mortgages, credit cards, and student loans. Although the CFPB has refrained from regulating virtual currencies and other distributed ledger technologies, that could change as these technologies are applied to mortgages, loans, and other areas of consumer finance.

The court’s ruling is notable for its lack of analysis. Although it exceeds 100 pages, the court devotes fewer than 2 pages to the constitutionality of the CFPB. The analysis begins by rejecting, without explanation, a recent federal court of appeals decision in PHH Corp. v. CFPB, which held that the CFPB is, in fact, constitutional.

Instead, the ruling combines different parts of two dissenting opinions in PHH Corp. It adopts the legal reasoning of the first dissent but rejects its remedy. Its preferred remedy—striking down the entire CFPB—comes from the second dissent, which was supported by only 1 of 10 judges who decided PHH Corp. In other words, the analysis consists of opinions already rejected by the court of appeals.

Typically, this ruling would have few practical consequences. It is not precedent for other courts and, given its contradiction of the court of appeals, will likely be overturned. The Trump administration, however, is critical of the CFPB and may choose to accept the ruling. Doing so might encourage more lawsuits against the CFPB, embolden the agency’s critics, and make it easier for other courts to find the CFPB unconstitutional.

These outcomes, if they occur, could affect how companies offer consumer financial services in the future, including those based on distributed ledger technology. We will report on these developments as they occur. For now, though, the CFPB will continue to operate as it has.

Continue to check our blog for updates on this issue.

Fintech in Review – Weeks of April 21st through May 4th, 2018

Below is a summary of some of the significant legal and regulatory actions that occurred over the past weeks. 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.  These are the Fintech updates that ties to the post Blockchain in Review – Weeks of April 21st through May 4th, 2018 from our sister blog, VirtualCurrencyReport.

CFTC Issues Request for Input on LabCFTC Prize Competitions

LabCFTC of the Commodity Futures Trading Commission (CFTC), tasked with leading the Commission’s FinTech initiative, issued a Request for Input in which it solicited the general public for ideas and topics for innovation competitions Under the Science Prize Competition Act, which became law in 2017, government agencies may hold competitions and award prizes, which the CFTC seeks to do in the areas of FinTech and RegTech, to promoting market-enhancing development.  LabCFTC is seeking input specifically on (i) areas/topics of focus for potential innovation competitions; and (ii) how best to structure competitions to maximize their impact in financial markets.  The Request for Information mentions possible competition topics including automated trading, “big data” analysis and interpretation (developing data visualization tools), the use of AI in trade execution, smart contracts that calculate payments in real-time, behavioral biometrics to detect and combat online fraud, and blockchain/DLTs.  All comments must be received by July 24, 2018 in the Federal Register on the CFTC’s website.

CFTC Press Release 4.24.18; CFTC Request 2018-08673

SEC Requests Comment on Bitcoin Futures ETFs

On March 23, 2018, the U.S. Securities and Exchange Commission (“SEC”) issued an order instituting proceedings to determine whether it will approve or disapprove a proposal for Bitcoin futures exchange-traded funds (“ETFs”) (the “Order”).Commenters will have until April 19, 2018 to submit comments.  Those with rebuttals to the comments will have until May 3, 2018 to submit rebuttals.

Read more on our sister blog Derivatives & Repo Report

Fintech in Review – Weeks of March 19th through March 30th, 2018

Below is a summary of some of the significant legal and regulatory actions that occurred over the past weeks. 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.  These are the Fintech updates that ties to the post Blockchain in Review – Weeks of March 19th through March 30th, 2018 

Arizona Becomes First State to Create Legislative “Sandbox” for FinTech Innovations

On March 22, Arizona Governor Doug Ducey signed into law H.B. 2434, a measure that will provide a regulatory “sandbox” for FinTech innovators to bring new products to customers within the state without requiring formal licensure, via a pilot program. Traditionally, businesses seeking to bring a new product to market in the state would need a license issued by the Arizona Department of Financial Institutions.  Under the sandbox program, which is scheduled to begin in late 2018, a company would have to submit a less onerous application for the pilot program.  After approval, the company would be able to test a new product with 10,000 customers for up to two years before needing to apply for licensure.  The company could test the product on an additional 7,500 customers upon demonstration of adequate capitalization and risk management procedures.  The measure additionally provides companies an opportunity to apply for a one-year extension.  The office of the Arizona Attorney General will administer and monitor the sandbox program, an initiative it has supported through the legislative process.  Attorney General Mark Brnovich opined in a statement that federal regulators have not provided adequate guidance to innovators in the FinTech space and hopes that Arizona’s initiative will attract more capital investment to the state.

Litigation and Court Decisions

DOJ and SEC Push Back Against Claims that Securities Laws Regarding ICOs are Too Vague

On March 19, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) filed Oppositions in New York federal court to dismiss dual indictments against Maksim Zaslavskiy, who was charged with fraud related to two initial coin offerings (ICOs). The SEC charged Zaslavskiy with securities fraud in September 2017; the DOJ filed additional charges in November 2017.  The SEC’s case is on hold, pending the DOJ’s criminal case.  Zaslavskiy allegedly made false statements regarding “investment opportunities” related to the issuance of two commodities-backed coins, REcoin (purportedly backed by real estate holdings) and Diamond (backed by diamonds).  Zaslavskiy has pled not guilty to securities fraud, claiming U.S. securities laws do not apply to his coin offerings, arguing that they are merely currencies.  He has argued further that U.S. securities laws are unconstitutionally vague and do not provide issuers like himself with fair notice that their conduct is unlawful.  The DOJ and SEC have maintained that Zaslavskiy’s claims are without merit in their respective Oppositions.

Open Session of the U.S. Senate’s Committee on Banking, Housing and Urban Affairs Hears Joint Testimony from Heads of the SEC & CFTC

On February 6, 2018, the United States Senate Committee on Banking, Housing and Urban Affairs conducted a hearing entitled “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” Hearing. The Chairman of the U.S. Securities and Exchange Commission (SEC), Jay Clayton, and the Chairman of the U.S. Commodity Futures Trading Commission (CFTC), J. Christopher Giancarlo, provided testimony.

The hearing comes at a time when both agencies are increasingly active in the virtual currency space. Most notably, the SEC has provided extensive guidance and taken enforcement action against certain “initial coin offerings” for violations of the U.S. securities laws. Similarly, the CFTC has taken enforcement actions against fraudulent schemes, as well as overseeing the launch of Bitcoin futures contracts. For further information on these actions, please consult The testimony from both agencies follows on public statements by both Chairmen, including most recently a joint op-ed published in the Wall Street Journal. Continue Reading

Understanding Cryptocurrencies in Asset Management Forum held in New York, materials now available

On January 18th, Perkins Coie LLP held a forum entitled Understanding Cryptocurrencies in Asset Management in its New York office.  This forum covered how cryptocurrencies and blockchain technology are affecting the asset management industry with specifics on:

  • Investing in Bitcoin futures and other crypto-derivatives
  • Emerging crypto indices
  • Overview of product development including Bitcoin ETFs and cryptocurrencies as an asset class
  • The use of Distributed Ledger Technology (DLT) in processing and trading of securities and derivatives

Speakers included Andrew Cross, Partner, Perkins Coie, Todd Zerega, Partner, Perkins Coie and Dana Syracuse, Counsel, Perkins Coie.

The presentation is now available here. For further information, please contact one of the speakers.