InfoBytes, February 26, 2010
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Securities
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Federal Reserve Board Proposes Clarifications to Rules on ATM Charges, Fees. On February 19, the Federal Reserve Board (Board) proposed clarifications to its rules on overdraft services under Regulations E (Electronic Fund Transfer Act) and DD (Truth in Savings Act) that were published in the Federal Register on November 17, 2009 (reported in InfoBytes, Nov. 13, 2009). The rules, among other things, (i) limit overdraft charges on transactions at automated teller machines (ATMs) and “one-time” debit card transactions without the consumer’s consent, and (ii) require financial institutions to provide disclosures that outline the fees and terms associated with the financial institution’s overdraft services for ATMs and cards before giving the consumer the option to opt-in to its overdraft program and assess such fees (for a copy of the Board’s highlights summary of the rules, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a2.pdf). The rules additionally require mandatory compliance by July 1, 2010. The Board’s proposed clarifications provide technical corrections and respond to questions raised by the financial services industry. Importantly, the Board proposal states that any institution that cannot come into compliance with the overdraft rule by July 1, 2010, may not assess any overdraft fees until full compliance with the opt-in requirements is implemented by the institution. In addition, the Board clarified that the limitation on assessing overdraft fees without affirmative consent from the consumer applies to all institutions, even if the institution has a policy and practice of declining ATM and debit card transactions upon reasonable belief that an account has insufficient funds. As a result, circumstances may arise where an institution must pay an ATM or one-time debit card transaction that overdraws a customer’s account, even if the customer has not opted-in. Comments on the proposal are due 30 days following publication in the Federal Register. For a copy of the proposal, please see http://www.federalreserve.gov/newsevents/press/bcreg/20100219a.htm.
FinCEN Issues Proposed Rule on Reporting Foreign Bank and Financial Accounts. On February 26, the Financial Crimes Enforcement Network (FinCEN) published a Notice of Proposed Rulemaking (NPRM) to amend the Bank Secrecy Act’s implementing regulations concerning the Report of Foreign Bank and Financial Accounts (FBAR). For accounts with aggregate values exceeding $10,000, FBAR forms facilitate reporting financial interests in, or signature or authority over, financial accounts in foreign countries. Among other things, the proposed rule:
• defines various terms and concepts, e.g., (i) the types of reportable accounts (exempting certain low-risk accounts, such as accounts of a government entity) from reporting requirements), (ii) when a "United States person" must file a FBAR, and (iii) when a person has a "financial interest" in a foreign account;
• exempts certain persons from filing FBARs, including (i) certain persons without financial interests in foreign financial accounts, (ii) certain retirement plan participants and beneficiaries, and (iii) certain trust beneficiaries;
• allows (i) persons with a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more accounts to make a summary filing, and (ii) an entity to file a consolidated FBAR on behalf of itself and any subsidiaries in which it holds 50 percent or greater interest; and
• adds provisions generally designed to ensure compliance with reporting requirements.
Comments on the NPRM are due by April 27, 2010. For a copy of the NPRM, please see http://www.fincen.gov/statutes_regs/frn/pdf/2010-4042.pdf.
Senator Dodd Issues Letter on Commercial Real Estate to Banking Regulatory Agencies. On February 22, Senate Banking Committee Chairman Christopher Dodd (D-CT) wrote to the federal banking regulatory agencies regarding his concerns about the state of the commercial real estate (CRE) market. In particular, Senator Dodd has requested information about (i) how the recently-issued CRE policy statement (reported in InfoBytes, Nov. 6, 2009) will help stabilize the CRE market, and (ii) additional steps taken by the regulators to address problems in the CRE market. Senator Dodd’s letter states that he hopes regulators will take “prompt and robust” action to mitigate the effects of problems in the CRE market. For a copy of the letter to the Federal Reserve Board, please see http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=f75993ed-9668-e587-638e-be2132a4b76a.
FTC Notifies Organizations Regarding Information Available on P2P Networks. On February 22, the Federal Trade Commission (FTC) announced that it has notified almost 100 organizations that personal information, including sensitive customer and employee data, stored on internal computer networks has been shared and made available to users on peer-to-peer file sharing networks (P2P networks) and that such information may be used to facilitate identity theft or fraud. According to the FTC, the failure to prevent the sharing of such information may violate, among other things, the Gramm-Leach-Bliley Act and the FTC Act. The FTC issued the letters both to companies within and outside its jurisdiction, including banks. The letters (i) urge the review of security practices – and, if appropriate, the practices of contractors and vendors – to ensure that the practices are “reasonable, appropriate, and in compliance with the law,” and (ii) recommend that the entities identify, and consider issuing written notification to, affected individuals. The FTC notes that it has also opened non-public investigations of other companies whose customer or employee information may have been shared on P2P networks. Finally, the FTC has made available a new business education brochure, Peer-to-Peer File Sharing: A Guide for Business. The brochure provides assistance regarding file-sharing technology and explains how to safeguard sensitive information. For a copy of the brochure, please see http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus46.shtm. For a copy of the press release, please see http://ftc.gov/opa/2010/02/p2palert.shtm.
FINRA Issues Guidance Regarding Firm, Broker Use of Social Networking Sites. On January 25, the Financial Industry Regulatory Authority (FINRA) issued guidance to securities firms and brokers regarding use of social media Web sites, including Facebook, Twitter, LinkedIn and blogs, to communicate advice to the public. Regulatory Notice 10-06 (the Notice) clarifies the obligations of a firm to supervise its use of social networking sites for business purposes to ensure that recommendations by the firm or its personnel are suitable and are not false or misleading to clients or investors. The Notice also establishes recordkeeping requirements to retain communications made to the public on social media Web sites, as required by the Securities Exchange Act of 1934 and National Association of Securities Dealers Rule 3110. FINRA does not endorse any particular monitoring or archiving technology to comply with such recordkeeping requirements, and noted that it is not “certain that adequate technology currently exists.” Firms are also required to develop policies and procedures to ensure compliance by its personnel with all applicable regulatory requirements. FINRA notes that firms may adopt supervisory procedures similar to those established in Regulatory Notice 07-59 for electronic correspondence. The Notice supplements past guidance regarding the application of the communication rules set forth in its Guide to the Internet for Registered Representatives and podcasts, For a copy of the press release, please see http://www.finra.org/Newsroom/NewsReleases/2010/P120780. For a copy of the Notice, please see http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120779.pdf.
New Credit Card Rules Take Effect. On February 22, the Federal Reserve Board’s (Board) final rule amending Regulation Z to implement certain provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 became effective (the final rule was reported in InfoBytes, Jan. 15, 2010). The rule imposes various new requirements on the issuance of open-end credit, including credit cards. Specifically, the rule (i) restricts a card issuer’s ability to increase interest rates on new and existing accounts, (ii) prohibits an issuer from opening a new account unless the issuer has considered the ability of the consumer to make the required payments, (iii) restricts the ability to issue cards to consumers under the age of 21 without an approved co-signature, or to market cards to students, (iv) prohibits the ability to charge overlimit fees without consumer consent, (v) restricts the manner in which an issuer may allocate payments to avoid practices that maximize interest charges, and (vi) bans the “two-cycle” billing method to impose interest charges. For a copy of the Board’s final rule and press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20100112a.htm.
HUD Announces Website to Allow Online Reporting of Fraud Complaints Against Loan Modification Service Providers. On February 26, the U.S. Department of Housing and Urban Development (HUD), in partnership with the Loan Modification Scam Prevention Network, announced the launch of a new website, http://www.PreventLoanScams.org, to allow homeowners to electronically file complaints against loan modification service providers. HUD has also directed its local fair housing and housing counseling grantees to report alleged loan modification scams via the website. Complaints filed via the website are added to a national complaint database and forwarded to law enforcement agencies for review; further, the website facilitates the sharing of information by federal, state, and local government agencies with non-profit organizations. According to the statement, the website “will likely lead to an increase in private enforcement action filings.” For a copy of the press release, please see
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-039.
Government Announces $1.5. Billion Fund to Help Homeowners. On February 19, President Obama and Senate Majority Leader Reid announced the creation of a $1.5. billion fund to help homeowners in states that have suffered an average home price drop of 20% from peak prices. The fund is comprised of money set aside for housing under the Emergency Economic Stabilization Act of 2008 (EESA) and will provide resources to Housing Finance Agencies (HFAs). The fund may be used by HFAs to develop programs in recipient states, such as programs that (i) assist borrowers to negotiate with lenders to write down mortgages when the borrower is “underwater” and owes more than what the house is worth on the current market, and (ii) pay incentives to second mortgage holders in certain circumstances. To determine the allotment of funds to eligible states, the U.S. Department of the Treasury (Treasury) will implement a formula that takes into account the level of each state’s home price declines and its unemployment rate. Once allocations are determined, HFAs may seek funding by submitting program designs to Treasury. HFAs must comply with EESA’s funding requirements to receive money from the fund. For a copy of the White House’s press release, please see http://www.whitehouse.gov/the-press-office/president-obama-announces-help-hardest-hit-housing-markets.
Federal Banking Regulatory Agencies Clarify Risk Weight Assignments. On February 26, the federal banking regulatory agencies – the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision – clarified risk weights for claims on or guaranteed by the FDIC for calculating risk-based capital requirements. According to the statement, direct claims on and claims unconditionally guaranteed by the FDIC (e.g., FDIC-insured deposits, prepaid assessments of deposit insurance premiums, and debt guaranteed under the Temporary Liquidity Guarantee Program) may be assigned a zero percent risk weight. However, loss-sharing agreements entered into by the FDIC with acquirers of assets from failed institutions are considered “conditional guarantees” that may be assigned a 20 percent risk weight for the guaranteed portion of assets subject to the agreement. Institutions are urged to consult the institution’s primary federal regulator to determine the appropriate risk-based capital treatment for specific loss-sharing agreements. For a copy of the press release, please see http://www.fdic.gov/news/news/financial/2010/fil10007a.html.
Comptroller Dugan Cautions Against Excessive Loss Forbearance. On February 26, Comptroller John Dugan testified before the House Financial Services Committee and the House Small Business Committee (the Committees). Comptroller Dugan informed the Committees that the Office of the Comptroller of the Currency is working to ensure safe lending without stifling loan growth. Comptroller Dugan further noted that banks must continue to make prudent loans to creditworthy borrowers and cautioned banks to avoid too much forbearance on existing losses, calling on banks to “realistically recognize losses and deal with them.” For a copy of the testimony, please see http://www.occ.gov/ftp/release/2010-24a.pdf.
FTC Settles Online Privacy, Security Certification Charges Against Company. On February 25, the Federal Trade Commission (FTC) announced that ControlScan, a company that certifies the privacy and security of online retailers and other websites, has agreed to settle FTC charges that it misled consumers regarding the frequency of its monitoring, as well as the steps taken to verify its privacy and security practices. ControlScan’s founder and former CEO entered into a separate agreement with the FTC. Privacy and security certification services like ControlScan provide website clients with privacy and security “seals,” which convey to consumers that an independent third party is regularly assessing the practices of the site to ensure the protection of consumer data. The FTC alleges that ControlScan provided “seals” to various websites with “little or no verification” of its security or privacy protections. In addition, the FTC alleges that while the seals displayed a current date stamp, ControlScan did not review seal sites on a daily or weekly basis, or in some instances, at all. Taken together, the FTC charged that these “deceptive acts” violated federal law. The consent agreements bar ControlScan and the former CEO from misrepresenting (i) the steps taken to verify a site’s privacy and security protection, and (ii) the frequency of verification. In addition, ControlScan must notify the websites displaying seals of the FTC action and require the sites to remove the seals. Finally, the former CEO must pay $102,000 to the FTC and ControlScan agreed to the entry of a $750,000 judgment (less any amounts paid by the former CEO), which was suspended based on its inability to pay. The agreement is subject to public comment through March 29, after which time the FTC can finalize the settlement. For a copy of the press release, please see http://www.ftc.gov/opa/2010/02/controlscan.shtm.
FTC Issues Free Credit Reporting Final Rule. On February 23, the Federal Trade Commission (FTC) issued a final rule that requires certain advertisements for “free credit reports” to include prominent disclosures to prevent confusion with federally-mandated free annual credit reports (the proposed rule was reported in InfoBytes, Oct. 9, 2009). Generally, the rule regulates such disclosures in television, radio, print, Internet, and other media. Additionally, the rule prohibits credit reporting agencies from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibits other practices that may interfere with the free credit report process. The rule becomes effective April 1, 2010, except for certain disclosure requirements, which take effect September 1, 2010. The FTC notes that it will consider “additional changes as necessary” to the final rule. For a copy of the press release, please see http://ftc.gov/opa/2010/02/facta.shtm.
FFIEC Issues Updated Retail Payment Systems Booklet. On February 25, the Federal Financial Institutions Examination Council (FFIEC) issued an updated Retail Payment Systems booklet. The booklet is part of the Information Technology Examination Handbook series, which provides guidance on identifying and controlling risks in connection with retail payment systems and related banking activities, including checks, electronic payments related to credit and debit cards, and the automated clearing house. In particular, the revised booklet provides guidance on The Check Clearing for the 21st Century Act of 2004, including examination procedures related to remote deposit capture. As well, the booklet addresses emerging payment technologies such as (i) decoupled debit cards, (ii) stored value cards, (iii) account-to-account services, (iv) contactless payment devices, and (v) remotely created checks. For a copy of the booklet, as well as the entire FFIEC Information Technology Examination Handbook, please see http://www.ffiec.gov/ffiecinfobase/html_pages/it_01.html.
State Issues
Manhattan DA Announces New Major Economic Crimes Bureau. On February 18, Manhattan District Attorney Cyrus R. Vance, Jr. announced the formation of the Major Economic Crimes Bureau (Bureau), which is intended to combat complex economic crime. The Bureau will combine the previously-existing Frauds Bureau, which has dealt with white-collar crime enforcement such as securities and bank fraud prosecutions, and the Investigation Division Central. The Bureau will be responsible for various complex financial investigations including, among other things, (i) mortgage fraud and financial institution fraud, (ii) securities, commodities, and investment fraud, and (iii) international money laundering. District Attorney Vance appointed Richard Weber, currently the Chief of the Asset Forfeiture and Money Laundering Section (AFMLS) of the U.S. Department of Justice, as Bureau Chief. For a copy of the press release, please see http://www.manhattanda.org/whatsnew/press/2010-02-18.shtml.
Courts
Oregon Federal Court Holds Refinance Transactions Rescindable. On February 22, the U.S. District Court for the District of Oregon entered a preliminary injunction (PI) preventing the execution of a foreclosure sale based on the likelihood that a borrower would succeed in his allegations that his three refinance transactions with a lender were rescindable under the Truth in Lending Act (TILA) and the Home Owners Equity Protection Act (HOEPA). McGee v. Gregory Funding, LLC, No. 09-1258 (D. Or. Feb. 22, 2010). Following the foreclosure sale of his property, the plaintiff borrower in McGee initially sought a temporary restraining order (TRO) against his lender, alleging that, among other things, the lender failed to provide disclosures and notices of the right to cancel required by HOEPA and TILA in connection with three mortgage refinance loan transactions over the course of more than three years. The court granted the TRO and then considered the borrower’s motion for injunctive relief to prevent defendant from executing the foreclosure sale. The lender opposed the motion, arguing, among other things, that the borrower was unlikely to succeed on the merits because the rescission claim under TILA was time barred. The court disagreed, however, and granted the PI. Recognizing that more than three years had passed from the date of the first loan to the date the borrower filed his complaint, the court acknowledged that the borrower’s attempted rescission of the first loan fell outside of TILA’s three year rescission period; however, citing the refinancing exemption under Regulation Z, the court found that the second two refinance transactions were rescindable under TILA to the extent that those loans included “new amounts financed that exceed the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of refinancing or consolidation ….” Moreover, relying on King v. State of California, 784 F.2d 910 (9th Cir. 1986), the court applied the doctrine of equitable tolling to allow the plaintiff to also rescind the first loan transaction, based in large part on the alleged failure of the lender to provide various required disclosures. The court further held that HOEPA provided additional authority for rescission of the three loan transactions. For a copy of the opinion, please see http://www.buckleysandler.com/McGee_v_Gregory.pdf.
New York District Court Denies Summary Judgment in Challenge to Electronically-Signed Application. In a recent case, a New York federal district court denied summary judgment on claims that the online submission of a life insurance policy violated the New York Electronic Signatures and Records Act (ESRA). The Prudential Ins. Co. of America v. Dukoff, No. 07-1080, 2009 WL 4884008 (E.D.N.Y. Dec. 18, 2009). In this case, The Prudential Insurance Company of America (Prudential) challenged the validity of a life insurance policy and alleged, among other things, that the applicant had made materially false statements on the application. The defendants (the spouse and estate of the deceased policy holder) counterclaimed for full payment under the insurance policy and argued that, among other things, the statements made in the application could not be used to rescind the contract because the application failed to comply with the requirements of ESRA. Both parties moved for summary judgment on various claims. In particular, the defendants argued that the purported material misstatements were barred because the application was not a “written instrument” signed by the policy holder, and pointed specifically to an interpretive opinion issued by the Office of General Counsel for the New York Insurance Department (Department), which stated that a checked box on an internet application is a valid electronic signature only if the insurer using the technology “is capable of verifying that the person providing the signature is actually the party to be charged.” The defendants argued that Prudential had no such verification ability. The court considered whether Prudential’s “click-through” electronic submission process satisfied the requirements for an electronic signature. The court first noted that the New York legislature had amended ESRA to remove a requirement that an electronic signature be accompanied by an “identifier,” that is capable verification that is unique to the person signing the electronic record; yet, nevertheless, the court afforded deference to the Department’s opinion. Thus, the court held that Prudential could use statements made in the application only if it could “reasonably identify” the person who made the statements. The court stated that while the final page of the insurance application does not require identifying information, “the applicant nonetheless transmits important identifying information to Prudential—including his or her address, social security number, and physical description—when he or she submits the application.” Consequently, the court denied the motion for summary judgment, finding that there was a triable issue of fact as to whether the application process satisfied the requirements of the Department’s opinion. The court further denied all other motions for summary judgment made by both parties. For a copy of the opinion, please see http://www.buckleysandler.com/Prudential_v_Dukoff.pdf.
Second Circuit Affirms Dismissal of Sherman Act Claims Against Title Insurers Based on Filed Rate Doctrine. On February 11, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a case alleging a price-fixing conspiracy in violation of the Sherman Act and deceptive practices in violation of New York state law in connection with title insurance. Dolan v. Fidelity National Title Ins. Co., No. 09-2697, 2010 WL 457318 (2nd Cir. Feb. 11, 2010). In Dolan, the plaintiffs alleged that several title insurance companies conspired (i) to fix title insurance rates, (ii) to include agency commission costs in the rates, (iii) to embed kickbacks in the rates, and (iv) to obscure these supposed costs from regulatory scrutiny by funneling the costs to and through title agents. The district court dismissed the claims based on the “filed rate doctrine,” which holds that any filed rate – i.e., a rate approved by the governing regulatory agency – is “per se reasonable and unassailable in judicial proceedings brought by ratepayers.” In this case, the title insurance rates at issue had been filed with and approved by the New York Insurance Department. The court of appeals, in affirming the dismissal, rejected the plaintiffs’ arguments that the filed rate doctrine did not apply, reasoning that (i) the rates were properly filed, (ii) the doctrine applies “to all filed rates, not merely those rates investigated before their approval,” (iii) New York insurance law did not provide a private right of action for the plaintiffs, (iv) the filed rate doctrine applied to New York’s title insurance system, and (v) the plaintiffs were merely seeking lower title insurance rates, and antitrust law cannot enjoin operation under established rates. The court further noted that decisions invoking the Real Estate Settlement Procedures Act (RESPA) and declining to apply the filed rate doctrine were inapplicable because RESPA provides for rights of action and remedies not invoked by the plaintiffs. For a copy of the opinion, please see http://www.buckleysandler.com/Dolan_v_FNTI.pdf.
Firm News
David Baris was extensively quoted in a recent article for SNL Financial. In the article, David discussed the financial difficulties facing community banks, as well as his future predictions on the role that private equity firms and other nontraditional bank investors may play in the financial services industry. For a copy of the article, please see http://www.snl.com/InteractiveX/article.aspx?CDID=A-10783252-12084.
David Baris will speak regarding bank director liability at the NACD/AABD Bank Director Workshop on April 14.
Clint Rockwell was recently appointed to a three-year term of membership to the Business Law Section of the State Bar of California’s Consumer Financial Services Committee.
Margo Tank presented a CLE telephone seminar entitled “Electronic Signatures and Records—What’s the Current Law?” on January 26.
Andrew Sandler spoke at the American Conference Institute’s 9th Annual Conference on Consumer Finance Class Actions & Litigation in New York City on January 27-8.
Jennifer Slagle Peck spoke at an event at American University Washington College of Law on Thursday, February 4 regarding legal careers.
John Kromer was a participant in a panel entitled "Federal Registration of Mortgage Loan Originators and NMLS" on February 10 at the 2010 NMLS User Conference in San Diego, CA.
Andrew Sandler recently spoke at ZC Sterling’s President’s Advisory Board in Palm Springs, CA, delivering a presentation regarding Industry Updates.
Chris Witeck was a participant on a panel regarding “What’s up with Ginnie Mae?” at the NRMLA Roadshow in Atlanta, GA on February 25.
Sara Emley spoke at the Investment Adviser Association/ACA Insight 2010 Adviser Compliance Forum on February 25 in Arlington, VA. Her topic was “Current Hot Topics for Managers with Individual Clients.”
Miscellany
EU Issues Model Contract Language for Personal Data Transfers. On February 18, the European Commission adopted a Directive to increase standards for transfers of personal data with non-European Union (EU) countries that do not offer adequate levels of data protection. To assist transferors in complying with the Directive, the EU earlier this month released a Decision offering standard contractual clauses that companies may use to ensure better protection in “controller to processor” contracts. That Decision was accompanied by two others that offer standard contractual clauses for “controller to controller” contracts. For a copy of the Directive, please see http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=EN&numdoc=31995L0046.
Mortgages
HUD Announces Website to Allow Online Reporting of Fraud Complaints Against Loan Modification Service Providers. On February 26, the U.S. Department of Housing and Urban Development (HUD), in partnership with the Loan Modification Scam Prevention Network, announced the launch of a new website, http://www.PreventLoanScams.org, to allow homeowners to electronically file complaints against loan modification service providers. HUD has also directed its local fair housing and housing counseling grantees to report alleged loan modification scams via the website. Complaints filed via the website are added to a national complaint database and forwarded to law enforcement agencies for review; further, the website facilitates the sharing of information by federal, state, and local government agencies with non-profit organizations. According to the statement, the website “will likely lead to an increase in private enforcement action filings.” For a copy of the press release, please see
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-039.
Government Announces $1.5. Billion Fund to Help Homeowners. On February 19, President Obama and Senate Majority Leader Reid announced the creation of a $1.5. billion fund to help homeowners in states that have suffered an average home price drop of 20% from peak prices. The fund is comprised of money set aside for housing under the Emergency Economic Stabilization Act of 2008 (EESA) and will provide resources to Housing Finance Agencies (HFAs). The fund may be used by HFAs to develop programs in recipient states, such as programs that (i) assist borrowers to negotiate with lenders to write down mortgages when the borrower is “underwater” and owes more than what the house is worth on the current market, and (ii) pay incentives to second mortgage holders in certain circumstances. To determine the allotment of funds to eligible states, the U.S. Department of the Treasury (Treasury) will implement a formula that takes into account the level of each state’s home price declines and its unemployment rate. Once allocations are determined, HFAs may seek funding by submitting program designs to Treasury. HFAs must comply with EESA’s funding requirements to receive money from the fund. For a copy of the White House’s press release, please see http://www.whitehouse.gov/the-press-office/president-obama-announces-help-hardest-hit-housing-markets.
Manhattan DA Announces New Major Economic Crimes Bureau. On February 18, Manhattan District Attorney Cyrus R. Vance, Jr. announced the formation of the Major Economic Crimes Bureau (Bureau), which is intended to combat complex economic crime. The Bureau will combine the previously-existing Frauds Bureau, which has dealt with white-collar crime enforcement such as securities and bank fraud prosecutions, and the Investigation Division Central. The Bureau will be responsible for various complex financial investigations including, among other things, (i) mortgage fraud and financial institution fraud, (ii) securities, commodities, and investment fraud, and (iii) international money laundering. District Attorney Vance appointed Richard Weber, currently the Chief of the Asset Forfeiture and Money Laundering Section (AFMLS) of the U.S. Department of Justice, as Bureau Chief. For a copy of the press release, please see http://www.manhattanda.org/whatsnew/press/2010-02-18.shtml.
Banking
Federal Reserve Board Proposes Clarifications to Rules on ATM Charges, Fees. On February 19, the Federal Reserve Board (Board) proposed clarifications to its rules on overdraft services under Regulations E (Electronic Fund Transfer Act) and DD (Truth in Savings Act) that were published in the Federal Register on November 17, 2009 (reported in InfoBytes, Nov. 13, 2009). The rules, among other things, (i) limit overdraft charges on transactions at automated teller machines (ATMs) and “one-time” debit card transactions without the consumer’s consent, and (ii) require financial institutions to provide disclosures that outline the fees and terms associated with the financial institution’s overdraft services for ATMs and cards before giving the consumer the option to opt-in to its overdraft program and assess such fees (for a copy of the Board’s highlights summary of the rules, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a2.pdf). The rules additionally require mandatory compliance by July 1, 2010. The Board’s proposed clarifications provide technical corrections and respond to questions raised by the financial services industry. Importantly, the Board proposal states that any institution that cannot come into compliance with the overdraft rule by July 1, 2010, may not assess any overdraft fees until full compliance with the opt-in requirements is implemented by the institution. In addition, the Board clarified that the limitation on assessing overdraft fees without affirmative consent from the consumer applies to all institutions, even if the institution has a policy and practice of declining ATM and debit card transactions upon reasonable belief that an account has insufficient funds. As a result, circumstances may arise where an institution must pay an ATM or one-time debit card transaction that overdraws a customer’s account, even if the customer has not opted-in. Comments on the proposal are due 30 days following publication in the Federal Register. For a copy of the proposal, please see http://www.federalreserve.gov/newsevents/press/bcreg/20100219a.htm.
FinCEN Issues Proposed Rule on Reporting Foreign Bank and Financial Accounts. On February 26, the Financial Crimes Enforcement Network (FinCEN) published a Notice of Proposed Rulemaking (NPRM) to amend the Bank Secrecy Act’s implementing regulations concerning the Report of Foreign Bank and Financial Accounts (FBAR). For accounts with aggregate values exceeding $10,000, FBAR forms facilitate reporting financial interests in, or signature or authority over, financial accounts in foreign countries. Among other things, the proposed rule:
• defines various terms and concepts, e.g., (i) the types of reportable accounts (exempting certain low-risk accounts, such as accounts of a government entity) from reporting requirements), (ii) when a "United States person" must file a FBAR, and (iii) when a person has a "financial interest" in a foreign account;
• exempts certain persons from filing FBARs, including (i) certain persons without financial interests in foreign financial accounts, (ii) certain retirement plan participants and beneficiaries, and (iii) certain trust beneficiaries;
• allows (i) persons with a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more accounts to make a summary filing, and (ii) an entity to file a consolidated FBAR on behalf of itself and any subsidiaries in which it holds 50 percent or greater interest; and
• adds provisions generally designed to ensure compliance with reporting requirements.
Comments on the NPRM are due by April 27, 2010. For a copy of the NPRM, please see http://www.fincen.gov/statutes_regs/frn/pdf/2010-4042.pdf.
Senator Dodd Issues Letter on Commercial Real Estate to Banking Regulatory Agencies. On February 22, Senate Banking Committee Chairman Christopher Dodd (D-CT) wrote to the federal banking regulatory agencies regarding his concerns about the state of the commercial real estate (CRE) market. In particular, Senator Dodd has requested information about (i) how the recently-issued CRE policy statement (reported in InfoBytes, Nov. 6, 2009) will help stabilize the CRE market, and (ii) additional steps taken by the regulators to address problems in the CRE market. Senator Dodd’s letter states that he hopes regulators will take “prompt and robust” action to mitigate the effects of problems in the CRE market. For a copy of the letter to the Federal Reserve Board, please see http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=f75993ed-9668-e587-638e-be2132a4b76a.
FTC Notifies Organizations Regarding Information Available on P2P Networks. On February 22, the Federal Trade Commission (FTC) announced that it has notified almost 100 organizations that personal information, including sensitive customer and employee data, stored on internal computer networks has been shared and made available to users on peer-to-peer file sharing networks (P2P networks) and that such information may be used to facilitate identity theft or fraud. According to the FTC, the failure to prevent the sharing of such information may violate, among other things, the Gramm-Leach-Bliley Act and the FTC Act. The FTC issued the letters both to companies within and outside its jurisdiction, including banks. The letters (i) urge the review of security practices – and, if appropriate, the practices of contractors and vendors – to ensure that the practices are “reasonable, appropriate, and in compliance with the law,” and (ii) recommend that the entities identify, and consider issuing written notification to, affected individuals. The FTC notes that it has also opened non-public investigations of other companies whose customer or employee information may have been shared on P2P networks. Finally, the FTC has made available a new business education brochure, Peer-to-Peer File Sharing: A Guide for Business. The brochure provides assistance regarding file-sharing technology and explains how to safeguard sensitive information. For a copy of the brochure, please see http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus46.shtm. For a copy of the press release, please see http://ftc.gov/opa/2010/02/p2palert.shtm.
Federal Banking Regulatory Agencies Clarify Risk Weight Assignments. On February 26, the federal banking regulatory agencies – the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision – clarified risk weights for claims on or guaranteed by the FDIC for calculating risk-based capital requirements. According to the statement, direct claims on and claims unconditionally guaranteed by the FDIC (e.g., FDIC-insured deposits, prepaid assessments of deposit insurance premiums, and debt guaranteed under the Temporary Liquidity Guarantee Program) may be assigned a zero percent risk weight. However, loss-sharing agreements entered into by the FDIC with acquirers of assets from failed institutions are considered “conditional guarantees” that may be assigned a 20 percent risk weight for the guaranteed portion of assets subject to the agreement. Institutions are urged to consult the institution’s primary federal regulator to determine the appropriate risk-based capital treatment for specific loss-sharing agreements. For a copy of the press release, please see http://www.fdic.gov/news/news/financial/2010/fil10007a.html.
Comptroller Dugan Cautions Against Excessive Loss Forbearance. On February 26, Comptroller John Dugan testified before the House Financial Services Committee and the House Small Business Committee (the Committees). Comptroller Dugan informed the Committees that the Office of the Comptroller of the Currency is working to ensure safe lending without stifling loan growth. Comptroller Dugan further noted that banks must continue to make prudent loans to creditworthy borrowers and cautioned banks to avoid too much forbearance on existing losses, calling on banks to “realistically recognize losses and deal with them.” For a copy of the testimony, please see http://www.occ.gov/ftp/release/2010-24a.pdf.
FFIEC Issues Updated Retail Payment Systems Booklet. On February 25, the Federal Financial Institutions Examination Council (FFIEC) issued an updated Retail Payment Systems booklet. The booklet is part of the Information Technology Examination Handbook series, which provides guidance on identifying and controlling risks in connection with retail payment systems and related banking activities, including checks, electronic payments related to credit and debit cards, and the automated clearing house. In particular, the revised booklet provides guidance on The Check Clearing for the 21st Century Act of 2004, including examination procedures related to remote deposit capture. As well, the booklet addresses emerging payment technologies such as (i) decoupled debit cards, (ii) stored value cards, (iii) account-to-account services, (iv) contactless payment devices, and (v) remotely created checks. For a copy of the booklet, as well as the entire FFIEC Information Technology Examination Handbook, please see http://www.ffiec.gov/ffiecinfobase/html_pages/it_01.html.
Manhattan DA Announces New Major Economic Crimes Bureau. On February 18, Manhattan District Attorney Cyrus R. Vance, Jr. announced the formation of the Major Economic Crimes Bureau (Bureau), which is intended to combat complex economic crime. The Bureau will combine the previously-existing Frauds Bureau, which has dealt with white-collar crime enforcement such as securities and bank fraud prosecutions, and the Investigation Division Central. The Bureau will be responsible for various complex financial investigations including, among other things, (i) mortgage fraud and financial institution fraud, (ii) securities, commodities, and investment fraud, and (iii) international money laundering. District Attorney Vance appointed Richard Weber, currently the Chief of the Asset Forfeiture and Money Laundering Section (AFMLS) of the U.S. Department of Justice, as Bureau Chief. For a copy of the press release, please see http://www.manhattanda.org/whatsnew/press/2010-02-18.shtml.
Consumer Finance
FTC Issues Free Credit Reporting Final Rule. On February 23, the Federal Trade Commission (FTC) issued a final rule that requires certain advertisements for “free credit reports” to include prominent disclosures to prevent confusion with federally-mandated free annual credit reports (the proposed rule was reported in InfoBytes, Oct. 9, 2009). Generally, the rule regulates such disclosures in television, radio, print, Internet, and other media. Additionally, the rule prohibits credit reporting agencies from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibits other practices that may interfere with the free credit report process. The rule becomes effective April 1, 2010, except for certain disclosure requirements, which take effect September 1, 2010. The FTC notes that it will consider “additional changes as necessary” to the final rule. For a copy of the press release, please see http://ftc.gov/opa/2010/02/facta.shtm.
Oregon Federal Court Holds Refinance Transactions Rescindable. On February 22, the U.S. District Court for the District of Oregon entered a preliminary injunction (PI) preventing the execution of a foreclosure sale based on the likelihood that a borrower would succeed in his allegations that his three refinance transactions with a lender were rescindable under the Truth in Lending Act (TILA) and the Home Owners Equity Protection Act (HOEPA). McGee v. Gregory Funding, LLC, No. 09-1258 (D. Or. Feb. 22, 2010). Following the foreclosure sale of his property, the plaintiff borrower in McGee initially sought a temporary restraining order (TRO) against his lender, alleging that, among other things, the lender failed to provide disclosures and notices of the right to cancel required by HOEPA and TILA in connection with three mortgage refinance loan transactions over the course of more than three years. The court granted the TRO and then considered the borrower’s motion for injunctive relief to prevent defendant from executing the foreclosure sale. The lender opposed the motion, arguing, among other things, that the borrower was unlikely to succeed on the merits because the rescission claim under TILA was time barred. The court disagreed, however, and granted the PI. Recognizing that more than three years had passed from the date of the first loan to the date the borrower filed his complaint, the court acknowledged that the borrower’s attempted rescission of the first loan fell outside of TILA’s three year rescission period; however, citing the refinancing exemption under Regulation Z, the court found that the second two refinance transactions were rescindable under TILA to the extent that those loans included “new amounts financed that exceed the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of refinancing or consolidation ….” Moreover, relying on King v. State of California, 784 F.2d 910 (9th Cir. 1986), the court applied the doctrine of equitable tolling to allow the plaintiff to also rescind the first loan transaction, based in large part on the alleged failure of the lender to provide various required disclosures. The court further held that HOEPA provided additional authority for rescission of the three loan transactions. For a copy of the opinion, please see http://www.buckleysandler.com/McGee_v_Gregory.pdf.
Securities
FINRA Issues Guidance Regarding Firm, Broker Use of Social Networking Sites. On January 25, the Financial Industry Regulatory Authority (FINRA) issued guidance to securities firms and brokers regarding use of social media Web sites, including Facebook, Twitter, LinkedIn and blogs, to communicate advice to the public. Regulatory Notice 10-06 (the Notice) clarifies the obligations of a firm to supervise its use of social networking sites for business purposes to ensure that recommendations by the firm or its personnel are suitable and are not false or misleading to clients or investors. The Notice also establishes recordkeeping requirements to retain communications made to the public on social media Web sites, as required by the Securities Exchange Act of 1934 and National Association of Securities Dealers Rule 3110. FINRA does not endorse any particular monitoring or archiving technology to comply with such recordkeeping requirements, and noted that it is not “certain that adequate technology currently exists.” Firms are also required to develop policies and procedures to ensure compliance by its personnel with all applicable regulatory requirements. FINRA notes that firms may adopt supervisory procedures similar to those established in Regulatory Notice 07-59 for electronic correspondence. The Notice supplements past guidance regarding the application of the communication rules set forth in its Guide to the Internet for Registered Representatives and podcasts, For a copy of the press release, please see http://www.finra.org/Newsroom/NewsReleases/2010/P120780.
Manhattan DA Announces New Major Economic Crimes Bureau. On February 18, Manhattan District Attorney Cyrus R. Vance, Jr. announced the formation of the Major Economic Crimes Bureau (Bureau), which is intended to combat complex economic crime. The Bureau will combine the previously-existing Frauds Bureau, which has dealt with white-collar crime enforcement such as securities and bank fraud prosecutions, and the Investigation Division Central. The Bureau will be responsible for various complex financial investigations including, among other things, (i) mortgage fraud and financial institution fraud, (ii) securities, commodities, and investment fraud, and (iii) international money laundering. District Attorney Vance appointed Richard Weber, currently the Chief of the Asset Forfeiture and Money Laundering Section (AFMLS) of the U.S. Department of Justice, as Bureau Chief. For a copy of the press release, please see http://www.manhattanda.org/whatsnew/press/2010-02-18.shtml.
Insurance
New York District Court Denies Summary Judgment in Challenge to Electronically-Signed Application. In a recent case, a New York federal district court denied summary judgment on claims that the online submission of a life insurance policy violated the New York Electronic Signatures and Records Act (ESRA). The Prudential Ins. Co. of America v. Dukoff, No. 07-1080, 2009 WL 4884008 (E.D.N.Y. Dec. 18, 2009). In this case, The Prudential Insurance Company of America (Prudential) challenged the validity of a life insurance policy and alleged, among other things, that the applicant had made materially false statements on the application. The defendants (the spouse and estate of the deceased policy holder) counterclaimed for full payment under the insurance policy and argued that, among other things, the statements made in the application could not be used to rescind the contract because the application failed to comply with the requirements of ESRA. Both parties moved for summary judgment on various claims. In particular, the defendants argued that the purported material misstatements were barred because the application was not a “written instrument” signed by the policy holder, and pointed specifically to an interpretive opinion issued by the Office of General Counsel for the New York Insurance Department (Department), which stated that a checked box on an internet application is a valid electronic signature only if the insurer using the technology “is capable of verifying that the person providing the signature is actually the party to be charged.” The defendants argued that Prudential had no such verification ability. The court considered whether Prudential’s “click-through” electronic submission process satisfied the requirements for an electronic signature. The court first noted that the New York legislature had amended ESRA to remove a requirement that an electronic signature be accompanied by an “identifier,” that is capable verification that is unique to the person signing the electronic record; yet, nevertheless, the court afforded deference to the Department’s opinion. Thus, the court held that Prudential could use statements made in the application only if it could “reasonably identify” the person who made the statements. The court stated that while the final page of the insurance application does not require identifying information, “the applicant nonetheless transmits important identifying information to Prudential—including his or her address, social security number, and physical description—when he or she submits the application.” Consequently, the court denied the motion for summary judgment, finding that there was a triable issue of fact as to whether the application process satisfied the requirements of the Department’s opinion. The court further denied all other motions for summary judgment made by both parties. For a copy of the opinion, please see http://www.buckleysandler.com/Prudential_v_Dukoff.pdf.
Second Circuit Affirms Dismissal of Sherman Act Claims Against Title Insurers Based on Filed Rate Doctrine. On February 11, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a case alleging a price-fixing conspiracy in violation of the Sherman Act and deceptive practices in violation of New York state law in connection with title insurance. Dolan v. Fidelity National Title Ins. Co., No. 09-2697, 2010 WL 457318 (2nd Cir. Feb. 11, 2010). In Dolan, the plaintiffs alleged that several title insurance companies conspired (i) to fix title insurance rates, (ii) to include agency commission costs in the rates, (iii) to embed kickbacks in the rates, and (iv) to obscure these supposed costs from regulatory scrutiny by funneling the costs to and through title agents. The district court dismissed the claims based on the “filed rate doctrine,” which holds that any filed rate – i.e., a rate approved by the governing regulatory agency – is “per se reasonable and unassailable in judicial proceedings brought by ratepayers.” In this case, the title insurance rates at issue had been filed with and approved by the New York Insurance Department. The court of appeals, in affirming the dismissal, rejected the plaintiffs’ arguments that the filed rate doctrine did not apply, reasoning that (i) the rates were properly filed, (ii) the doctrine applies “to all filed rates, not merely those rates investigated before their approval,” (iii) New York insurance law did not provide a private right of action for the plaintiffs, (iv) the filed rate doctrine applied to New York’s title insurance system, and (v) the plaintiffs were merely seeking lower title insurance rates, and antitrust law cannot enjoin operation under established rates. The court further noted that decisions invoking the Real Estate Settlement Procedures Act (RESPA) and declining to apply the filed rate doctrine were inapplicable because RESPA provides for rights of action and remedies not invoked by the plaintiffs. For a copy of the opinion, please see http://www.buckleysandler.com/Dolan_v_FNTI.pdf.
Litigation
Oregon Federal Court Holds Refinance Transactions Rescindable. On February 22, the U.S. District Court for the District of Oregon entered a preliminary injunction (PI) preventing the execution of a foreclosure sale based on the likelihood that a borrower would succeed in his allegations that his three refinance transactions with a lender were rescindable under the Truth in Lending Act (TILA) and the Home Owners Equity Protection Act (HOEPA). McGee v. Gregory Funding, LLC, No. 09-1258 (D. Or. Feb. 22, 2010). Following the foreclosure sale of his property, the plaintiff borrower in McGee initially sought a temporary restraining order (TRO) against his lender, alleging that, among other things, the lender failed to provide disclosures and notices of the right to cancel required by HOEPA and TILA in connection with three mortgage refinance loan transactions over the course of more than three years. The court granted the TRO and then considered the borrower’s motion for injunctive relief to prevent defendant from executing the foreclosure sale. The lender opposed the motion, arguing, among other things, that the borrower was unlikely to succeed on the merits because the rescission claim under TILA was time barred. The court disagreed, however, and granted the PI. Recognizing that more than three years had passed from the date of the first loan to the date the borrower filed his complaint, the court acknowledged that the borrower’s attempted rescission of the first loan fell outside of TILA’s three year rescission period; however, citing the refinancing exemption under Regulation Z, the court found that the second two refinance transactions were rescindable under TILA to the extent that those loans included “new amounts financed that exceed the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of refinancing or consolidation ….” Moreover, relying on King v. State of California, 784 F.2d 910 (9th Cir. 1986), the court applied the doctrine of equitable tolling to allow the plaintiff to also rescind the first loan transaction, based in large part on the alleged failure of the lender to provide various required disclosures. The court further held that HOEPA provided additional authority for rescission of the three loan transactions. For a copy of the opinion, please see http://www.buckleysandler.com/McGee_v_Gregory.pdf.
New York District Court Denies Summary Judgment in Challenge to Electronically-Signed Application. In a recent case, a New York federal district court denied summary judgment on claims that the online submission of a life insurance policy violated the New York Electronic Signatures and Records Act (ESRA). The Prudential Ins. Co. of America v. Dukoff, No. 07-1080, 2009 WL 4884008 (E.D.N.Y. Dec. 18, 2009). In this case, The Prudential Insurance Company of America (Prudential) challenged the validity of a life insurance policy and alleged, among other things, that the applicant had made materially false statements on the application. The defendants (the spouse and estate of the deceased policy holder) counterclaimed for full payment under the insurance policy and argued that, among other things, the statements made in the application could not be used to rescind the contract because the application failed to comply with the requirements of ESRA. Both parties moved for summary judgment on various claims. In particular, the defendants argued that the purported material misstatements were barred because the application was not a “written instrument” signed by the policy holder, and pointed specifically to an interpretive opinion issued by the Office of General Counsel for the New York Insurance Department (Department), which stated that a checked box on an internet application is a valid electronic signature only if the insurer using the technology “is capable of verifying that the person providing the signature is actually the party to be charged.” The defendants argued that Prudential had no such verification ability. The court considered whether Prudential’s “click-through” electronic submission process satisfied the requirements for an electronic signature. The court first noted that the New York legislature had amended ESRA to remove a requirement that an electronic signature be accompanied by an “identifier,” that is capable verification that is unique to the person signing the electronic record; yet, nevertheless, the court afforded deference to the Department’s opinion. Thus, the court held that Prudential could use statements made in the application only if it could “reasonably identify” the person who made the statements. The court stated that while the final page of the insurance application does not require identifying information, “the applicant nonetheless transmits important identifying information to Prudential—including his or her address, social security number, and physical description—when he or she submits the application.” Consequently, the court denied the motion for summary judgment, finding that there was a triable issue of fact as to whether the application process satisfied the requirements of the Department’s opinion. The court further denied all other motions for summary judgment made by both parties. For a copy of the opinion, please see http://www.buckleysandler.com/Prudential_v_Dukoff.pdf.
Second Circuit Affirms Dismissal of Sherman Act Claims Against Title Insurers Based on Filed Rate Doctrine. On February 11, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a case alleging a price-fixing conspiracy in violation of the Sherman Act and deceptive practices in violation of New York state law in connection with title insurance. Dolan v. Fidelity National Title Ins. Co., No. 09-2697, 2010 WL 457318 (2nd Cir. Feb. 11, 2010). In Dolan, the plaintiffs alleged that several title insurance companies conspired (i) to fix title insurance rates, (ii) to include agency commission costs in the rates, (iii) to embed kickbacks in the rates, and (iv) to obscure these supposed costs from regulatory scrutiny by funneling the costs to and through title agents. The district court dismissed the claims based on the “filed rate doctrine,” which holds that any filed rate – i.e., a rate approved by the governing regulatory agency – is “per se reasonable and unassailable in judicial proceedings brought by ratepayers.” In this case, the title insurance rates at issue had been filed with and approved by the New York Insurance Department. The court of appeals, in affirming the dismissal, rejected the plaintiffs’ arguments that the filed rate doctrine did not apply, reasoning that (i) the rates were properly filed, (ii) the doctrine applies “to all filed rates, not merely those rates investigated before their approval,” (iii) New York insurance law did not provide a private right of action for the plaintiffs, (iv) the filed rate doctrine applied to New York’s title insurance system, and (v) the plaintiffs were merely seeking lower title insurance rates, and antitrust law cannot enjoin operation under established rates. The court further noted that decisions invoking the Real Estate Settlement Procedures Act (RESPA) and declining to apply the filed rate doctrine were inapplicable because RESPA provides for rights of action and remedies not invoked by the plaintiffs. For a copy of the opinion, please see http://www.buckleysandler.com/Dolan_v_FNTI.pdf.
E-Financial Services
FINRA Issues Guidance Regarding Firm, Broker Use of Social Networking Sites. On January 25, the Financial Industry Regulatory Authority (FINRA) issued guidance to securities firms and brokers regarding use of social media Web sites, including Facebook, Twitter, LinkedIn and blogs, to communicate advice to the public. Regulatory Notice 10-06 (the Notice) clarifies the obligations of a firm to supervise its use of social networking sites for business purposes to ensure that recommendations by the firm or its personnel are suitable and are not false or misleading to clients or investors. The Notice also establishes recordkeeping requirements to retain communications made to the public on social media Web sites, as required by the Securities Exchange Act of 1934 and National Association of Securities Dealers Rule 3110. FINRA does not endorse any particular monitoring or archiving technology to comply with such recordkeeping requirements, and noted that it is not “certain that adequate technology currently exists.” Firms are also required to develop policies and procedures to ensure compliance by its personnel with all applicable regulatory requirements. FINRA notes that firms may adopt supervisory procedures similar to those established in Regulatory Notice 07-59 for electronic correspondence. The Notice supplements past guidance regarding the application of the communication rules set forth in its Guide to the Internet for Registered Representatives and podcasts, For a copy of the press release, please see http://www.finra.org/Newsroom/NewsReleases/2010/P120780.
FTC Settles Online Privacy, Security Certification Charges Against Company. On February 25, the Federal Trade Commission (FTC) announced that ControlScan, a company that certifies the privacy and security of online retailers and other websites, has agreed to settle FTC charges that it misled consumers regarding the frequency of its monitoring, as well as the steps taken to verify its privacy and security practices. ControlScan’s founder and former CEO entered into a separate agreement with the FTC. Privacy and security certification services like ControlScan provide website clients with privacy and security “seals,” which convey to consumers that an independent third party is regularly assessing the practices of the site to ensure the protection of consumer data. The FTC alleges that ControlScan provided “seals” to various websites with “little or no verification” of its security or privacy protections. In addition, the FTC alleges that while the seals displayed a current date stamp, ControlScan did not review seal sites on a daily or weekly basis, or in some instances, at all. Taken together, the FTC charged that these “deceptive acts” violated federal law. The consent agreements bar ControlScan and the former CEO from misrepresenting (i) the steps taken to verify a site’s privacy and security protection, and (ii) the frequency of verification. In addition, ControlScan must notify the websites displaying seals of the FTC action and require the sites to remove the seals. Finally, the former CEO must pay $102,000 to the FTC and ControlScan agreed to the entry of a $750,000 judgment (less any amounts paid by the former CEO), which was suspended based on its inability to pay. The agreement is subject to public comment through March 29, after which time the FTC can finalize the settlement. For a copy of the press release, please see http://www.ftc.gov/opa/2010/02/controlscan.shtm.
FFIEC Issues Updated Retail Payment Systems Booklet. On February 25, the Federal Financial Institutions Examination Council (FFIEC) issued an updated Retail Payment Systems booklet. The booklet is part of the Information Technology Examination Handbook series, which provides guidance on identifying and controlling risks in connection with retail payment systems and related banking activities, including checks, electronic payments related to credit and debit cards, and the automated clearing house. In particular, the revised booklet provides guidance on The Check Clearing for the 21st Century Act of 2004, including examination procedures related to remote deposit capture. As well, the booklet addresses emerging payment technologies such as (i) decoupled debit cards, (ii) stored value cards, (iii) account-to-account services, (iv) contactless payment devices, and (v) remotely created checks. For a copy of the booklet, as well as the entire FFIEC Information Technology Examination Handbook, please see http://www.ffiec.gov/ffiecinfobase/html_pages/it_01.html.
New York District Court Denies Summary Judgment in Challenge to Electronically-Signed Application. In a recent case, a New York federal district court denied summary judgment on claims that the online submission of a life insurance policy violated the New York Electronic Signatures and Records Act (ESRA). The Prudential Ins. Co. of America v. Dukoff, No. 07-1080, 2009 WL 4884008 (E.D.N.Y. Dec. 18, 2009). In this case, The Prudential Insurance Company of America (Prudential) challenged the validity of a life insurance policy and alleged, among other things, that the applicant had made materially false statements on the application. The defendants (the spouse and estate of the deceased policy holder) counterclaimed for full payment under the insurance policy and argued that, among other things, the statements made in the application could not be used to rescind the contract because the application failed to comply with the requirements of ESRA. Both parties moved for summary judgment on various claims. In particular, the defendants argued that the purported material misstatements were barred because the application was not a “written instrument” signed by the policy holder, and pointed specifically to an interpretive opinion issued by the Office of General Counsel for the New York Insurance Department (Department), which stated that a checked box on an internet application is a valid electronic signature only if the insurer using the technology “is capable of verifying that the person providing the signature is actually the party to be charged.” The defendants argued that Prudential had no such verification ability. The court considered whether Prudential’s “click-through” electronic submission process satisfied the requirements for an electronic signature. The court first noted that the New York legislature had amended ESRA to remove a requirement that an electronic signature be accompanied by an “identifier,” that is capable verification that is unique to the person signing the electronic record; yet, nevertheless, the court afforded deference to the Department’s opinion. Thus, the court held that Prudential could use statements made in the application only if it could “reasonably identify” the person who made the statements. The court stated that while the final page of the insurance application does not require identifying information, “the applicant nonetheless transmits important identifying information to Prudential—including his or her address, social security number, and physical description—when he or she submits the application.” Consequently, the court denied the motion for summary judgment, finding that there was a triable issue of fact as to whether the application process satisfied the requirements of the Department’s opinion. The court further denied all other motions for summary judgment made by both parties. For a copy of the opinion, please see http://www.buckleysandler.com/Prudential_v_Dukoff.pdf.
Privacy/Data Security
FINRA Issues Guidance Regarding Firm, Broker Use of Social Networking Sites. On January 25, the Financial Industry Regulatory Authority (FINRA) issued guidance to securities firms and brokers regarding use of social media Web sites, including Facebook, Twitter, LinkedIn and blogs, to communicate advice to the public. Regulatory Notice 10-06 (the Notice) clarifies the obligations of a firm to supervise its use of social networking sites for business purposes to ensure that recommendations by the firm or its personnel are suitable and are not false or misleading to clients or investors. The Notice also establishes recordkeeping requirements to retain communications made to the public on social media Web sites, as required by the Securities Exchange Act of 1934 and National Association of Securities Dealers Rule 3110. FINRA does not endorse any particular monitoring or archiving technology to comply with such recordkeeping requirements, and noted that it is not “certain that adequate technology currently exists.” Firms are also required to develop policies and procedures to ensure compliance by its personnel with all applicable regulatory requirements. FINRA notes that firms may adopt supervisory procedures similar to those established in Regulatory Notice 07-59 for electronic correspondence. The Notice supplements past guidance regarding the application of the communication rules set forth in its Guide to the Internet for Registered Representatives and podcasts, For a copy of the press release, please see http://www.finra.org/Newsroom/NewsReleases/2010/P120780.
FTC Settles Online Privacy, Security Certification Charges Against Company. On February 25, the Federal Trade Commission (FTC) announced that ControlScan, a company that certifies the privacy and security of online retailers and other websites, has agreed to settle FTC charges that it misled consumers regarding the frequency of its monitoring, as well as the steps taken to verify its privacy and security practices. ControlScan’s founder and former CEO entered into a separate agreement with the FTC. Privacy and security certification services like ControlScan provide website clients with privacy and security “seals,” which convey to consumers that an independent third party is regularly assessing the practices of the site to ensure the protection of consumer data. The FTC alleges that ControlScan provided “seals” to various websites with “little or no verification” of its security or privacy protections. In addition, the FTC alleges that while the seals displayed a current date stamp, ControlScan did not review seal sites on a daily or weekly basis, or in some instances, at all. Taken together, the FTC charged that these “deceptive acts” violated federal law. The consent agreements bar ControlScan and the former CEO from misrepresenting (i) the steps taken to verify a site’s privacy and security protection, and (ii) the frequency of verification. In addition, ControlScan must notify the websites displaying seals of the FTC action and require the sites to remove the seals. Finally, the former CEO must pay $102,000 to the FTC and ControlScan agreed to the entry of a $750,000 judgment (less any amounts paid by the former CEO), which was suspended based on its inability to pay. The agreement is subject to public comment through March 29, after which time the FTC can finalize the settlement. For a copy of the press release, please see http://www.ftc.gov/opa/2010/02/controlscan.shtm.
EU Issues Model Contract Language for Personal Data Transfers. On February 18, the European Commission adopted a Directive to increase standards for transfers of personal data with non-European Union (EU) countries that do not offer adequate levels of data protection. To assist transferors in complying with the Directive, the EU earlier this month released a Decision offering standard contractual clauses that companies may use to ensure better protection in “controller to processor” contracts. That Decision was accompanied by two others that offer standard contractual clauses for “controller to controller” contracts. For a copy of the Directive, please see http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=EN&numdoc=31995L0046.
Credit Cards
New Credit Card Rules Take Effect. On February 22, the Federal Reserve Board’s (Board) final rule amending Regulation Z to implement certain provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 became effective (the final rule was reported in InfoBytes, Jan. 15, 2010). The rule imposes various new requirements on the issuance of open-end credit, including credit cards. Specifically, the rule (i) restricts a card issuer’s ability to increase interest rates on new and existing accounts, (ii) prohibits an issuer from opening a new account unless the issuer has considered the ability of the consumer to make the required payments, (iii) restricts the ability to issue cards to consumers under the age of 21 without an approved co-signature, or to market cards to students, (iv) prohibits the ability to charge overlimit fees without consumer consent, (v) restricts the manner in which an issuer may allocate payments to avoid practices that maximize interest charges, and (vi) bans the “two-cycle” billing method to impose interest charges. For a copy of the Board’s final rule and press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20100112a.htm.
FFIEC Issues Updated Retail Payment Systems Booklet. On February 25, the Federal Financial Institutions Examination Council (FFIEC) issued an updated Retail Payment Systems booklet. The booklet is part of the Information Technology Examination Handbook series, which provides guidance on identifying and controlling risks in connection with retail payment systems and related banking activities, including checks, electronic payments related to credit and debit cards, and the automated clearing house. In particular, the revised booklet provides guidance on The Check Clearing for the 21st Century Act of 2004, including examination procedures related to remote deposit capture. As well, the booklet addresses emerging payment technologies such as (i) decoupled debit cards, (ii) stored value cards, (iii) account-to-account services, (iv) contactless payment devices, and (v) remotely created checks. For a copy of the booklet, as well as the entire FFIEC Information Technology Examination Handbook, please see http://www.ffiec.gov/ffiecinfobase/html_pages/it_01.html.