Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Whistleblower Augmented Reward and Nonretaliation Act of 2016, with the confusing alternative title of the WARN Act of 2016, has been introduced before the House of Representatives.

The proposed legislation would amend the Exchange Act to provide an employer may not take any action to impede an individual who is about to or has assisted or engaged in activity protected by the Act, including:

  • issuing, proposing, initiating, enforcing, or threatening to enforce, a confidentiality agreement with respect to such communications;
  • initiating, enforcing, or threatening to enforce, any agreement, policy, form, or condition of employment, including by any predispute arbitration agreement, that waives the rights and remedies provided for in certain provisions of the Act;
  • requiring an individual to waive, release, or assign any monetary award such individual may receive from the SEC, or conditioning an individual’s right to receive any contractual or employment-related benefit on such a waiver, release, or assignment;
  • requiring an individual to disclose to any private party whether such individual has, or in the future intends to, communicate with the Commission staff about a possible commodities law violation;
  • conditioning an individual’s right to receive any contractual or employment-related benefit on a representation that such individual has not communicated with, or provided documents or other information, to the Commission staff;
  • seeking civil or criminal liability for acquiring and communicating information to the Commission or other activity protected by certain provisions of the Act;
  • seeking professional discipline through loss of license, certification, or other disciplinary activities for engaging in activity protected by the Act;
  • seeking professional discipline of attorneys for representation of activities protected by the Act, or other action that obstructs the whistleblower’s right to counsel; or
  • engaging in any other discrimination that would chill the exercise of activity protected by certain provisions of the Act.

The Act also requires the Commission to issue regulations requiring each employer:

  • to have a procedure in place for an employee or former employee to report directly to the chief executive officer, a representative appointed by and reporting directly to the chief executive officer who is specifically designated to receive such a report, or through a hotline consistent with professional best practices to the audit committee of the board of directors, if such employee or former employee believes that violations of certain provisions of the Act have occurred or are occurring at the place of employment or place of former employment; and
  • to not discriminate against an employee or former employee for such reports.

The Act also provides for whistleblower awards under the Financial Institutions Anti-Fraud Enforcement Act and the Federal Deposit Insurance Act.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

The staff of the SEC’s Divisions of Trading and Markets, Investment Management, and Corporation Finance have updated guidance on the SEC’s final rule implementing section 13 of the Bank Holding Company Act of 1956 (“BHC Act”), commonly referred to as the Volcker Rule.

In the new FAQs the staff advises a banking entity is not required to deduct from its tier 1 capital an investment in a Qualifying TruPS CDO retained pursuant to § 255.16(a) of the interim final rule. In January 2014, regulators adopted an interim final rule to add § 255.16 to the final rules implementing section 13 of the BHC Act. Section 16(a) of the interim final rule permitted banking entities to retain an interest in, or act as sponsor (including as trustee), of an issuer of collateralized debt obligations backed by trust preferred securities (“TruPS CDOs”), so long as:

  • the issuer was established, and the interest was issued, before May 19, 2010;
  • the banking entity reasonably believes that the offering proceeds received by the issuer were invested primarily in Qualifying TruPS Collateral; and
  • the banking entity’s interest in the vehicle was acquired on or before December 10, 2013 (or acquired in connection with a merger or acquisition of a banking entity that acquired the interest on or before December 10, 2013).

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

On March 2, 2016, the Consumer Financial Protection Bureau (CFPB) announced its first data security related enforcement action against online payment systems company Dwolla, Inc.

Dwolla, Inc., operates an online payment system that involves the collection and storage of consumers’ sensitive personal information, including names, addresses, dates of birth, telephone numbers, social security numbers, bank account and routing numbers, passwords, and a unique 4-digit PIN.

Dwolla, Inc., represented directly to consumers and on its website that:

  • It protects consumers’ data from unauthorized access with “safe” and “secure” transactions;
  • Its data security practices exceeded industry standards and were Payment Card Industry Data Security Standard Compliant;
  • It encrypted all sensitive consumer personal information; and
  • Its mobile applications were safe and secure.

In its consent order, the CFPB alleges that Dwolla, Inc.’s claims about its data-security practices were false and deceptive and violated the Consumer Financial Protection Act and 12 U.S.C. §§ 5531(a), 5536(a)(1).  Specifically, the CFPB alleges that Dwolla, Inc., misrepresented its data-security practices by:

  • Falsely claiming its data security practices “exceeded” or “surpass” industry security standards when, in fact, Dwolla, Inc., allegedly failed to employ reasonable and appropriate measures to protect consumer data; and
  • Falsely claiming its “information is securely encrypted and stored” when, in fact Dwolla, Inc., did not encrypt all consumer data.

The consent order requires Dwolla, Inc., to:

  • Stop misrepresenting its data security practices;
  • Enact comprehensive data security measures and policies, including a program of risk assessments and audits;
  • Train employees on the company’s data security policies and procedures;
  • Fix all security weaknesses found in its web and mobile applications; and
  • Pay a $100,000 civil money penalty.

This enforcement action is significant, because it marks the CFPB’s first data-security related enforcement action.  Given the increase in the number of recent data breaches, many regulators are beginning to emphasize the importance of data-security.  The Dwolla, Inc., enforcement action should serve as a reminder to companies to ensure that they have developed and implemented thorough data security policies and procedures and that they are accurately advertising their data security practices to avoid or minimize future CFPB or other regulatory action.  It is also important to remember that effective data security programs require policies and procedures that not only effectively protect consumers’ data, but also include a thorough response plan in the event a data breach occurs.  For more information on what your company should consider in evaluating its cybersecurity preparedness, review Key Considerations for Financial Institutions’ Cybersecurity Preparedness (article begins on page 3).

You can view the CFPB’s Dwolla, Inc., consent order here: http://files.consumerfinance.gov/f/201603_cfpb_consent-order-dwolla-inc.pdf.

You can view the Key Considerations for Financial Institutions’ Cybersecurity Preparedness article here (article begins on page 3):  file:///C:/Users/Zane/Downloads/Zane%20Gilmer%20January%202016%20Article.pdf.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

 

 

 

On March 2, 2016, a number of U.S. Senate and House members sent a letter to SEC Chair Mary Jo White urging the Commission to speed-up its review of a rulemaking petition that would require increased disclosures regarding corporate board diversity.

The letter, spearheaded by Senator Sherrod Brown and Representative Maxine Waters, each ranking members of the Senate Committee on Banking, Housing, and Urban Affairs, and the House Financial Services Committee, respectively, contends that the SEC’s rule changes in 2009 requiring board diversity disclosures are ineffective. Rather, the requirements regarding minimum director qualifications, specific qualities or skills that at least one director must possesses, and whether the board considers diversity in identifying board nominees, fall “short of providing stakeholders with the information they need on board diversity.”  Especially problematic, the letter notes, is the lack of a diversity definition in the regulations. These requirements–if the reader is interested–may be found in Item 407(c)(2)(v)-(vi) of Regulation S-K.

The rulemaking petition to which the letter refers was submitted by nine public pension fund administrators on March 31, 2015. Collectively representing around $1.12 trillion in assets, the petition drafters desire a requirement that public companies include in their proxy statements and reports a chart or matrix that visually depicts the company’s approach to director qualifications and skills.  The petition specifically proposes adding the following sentence to the end of Item 407(c)(2)(v):

When the disclosure [regarding director qualifications] is presented in a proxy or information statement relating to the election of directors, these qualities, along with the nominee’s gender, race, and ethnicity should be presented in a chart or matrix form.

Perhaps the lawmakers’ letter will spur the SEC into action regarding this rulemaking petition. Stay tuned for more dodd-frank.com coverage on this topic.

You can read the full text of the Letter here and the Rulemaking Petition here.

As Broc Romanek of TheCorporateCounsel.net recently noted, the SEC issued 18 no-action letters regarding the exclusion of shareholder proposals for proxy access under Rule 14a-8(i)(10) – the “substantially implemented” basis. Each of the issuers had already adopted a proxy access mechanic and sought to exclude the shareholder proposal as substantially implemented. The SEC provided relief to 15 issuers agreeing the proposals could be excluded and denied relief in three.  Where relief was denied it appeared to center on a 5% versus a 3% ownership threshold.

While good policy reasons exist for granting the no-action relief, it has the collateral effect of suppressing a shareholder vote on the issue and leaving the wishes of shareholders unknown.

However, based on the recent vote at Apple Inc., it appears many shareholders are happy with board designed proxy access. At Apple, 2,083,600,907 voted against a more stringent shareholder proxy access proposal, and 1,011,922,207 voted for.  This result occurred even though ISS recommended a vote for the shareholder proposal.  Of note is 18,560,227 shareholders abstained, with 1,559,945,580 broker non-votes.  The large number of abstentions makes it difficult to predict the outcome of future votes.

Jim McRitchie expresses his views in this blog.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

On March 1, 2016, the Consumer Financial Protection Bureau (CFPB) released its latest Monthly Complaint Report for February 2016, which provides an overview of three-month trends in consumer complaints.  This Monthly Report also highlights consumer complaints related to prepaid products and complaints from the Houston, Texas metro area.

Prepaid Product Complaint Spotlight

Prepaid products are one of the fastest growing financial products, which permit consumers or third-parties to load funds, allow people to make payments, store funds, withdraw cash, receive direct deposits, and send funds to other consumers.  As of February 1, 2016, the CFPB has handled approximately 4,300 prepaid product complaints.  The prepaid product complaints show the following:

  • a large number of complaints related to Empowerment Ventures, LLC, the parent company of RushCard;
  • consumers could not access funds on cards;
  • companies refused to reissue expired cards with the remaining balance from the expired card; and
  • consumers incurred charges including, monthly, inactivity, transaction, balance inquiry, PIN change, and overdraft fees.

National Complaint Overview

As of February 1, 2016, the CFPB handled 811,700 complaints across all consumer financial products and services regulated by the CFPB.  The Monthly Complaint Report includes the following statistics about those complaints through February 1, 2016:

  • debt collection, mortgages, and credit reporting were the most complained about products, representing two-thirds of all complaints;
  • there was an 8 percent increase in complaint submissions between December 2015 and January 2016;
  • in a comparison of November 2015 through January 2016 versus the same time period 12 months before, complaints about debt settlement, check cashing, and money orders rose 77 percent;
  • complaints related to payday lending showed the greatest decrease;
  • complaints coming from Arizona showed the greatest increase in volume; and
  • the most complained about companies between September 2015 and November 2015 were Equifax, TransUnion, and Experian.

Houston Area Complaints

In addition to providing national consumer financial complaint trends, the Monthly Complaint Report also highlights complaints originating from the Houston, Texas metro area.  Of the 8111,700 complaints that have been submitted to the CFPB, 63,200 have originated from Texas and 15,700 from the Houston metro area.  Consumer complaints submitted by Texas consumers revealed the following:

  • Texas consumers complained the most about debt collection services;
  • Texas mortgage-related complaints are lower than the national average; and
  • Texas consumers complained the most about Equifax, Experian, and TransUnion.

CFPB’s Consumer Complaint Database

In June 2012, the CFPB launched its Consumer Complaint Database, which permits consumers to submit complaints about consumer financial products and services.  Once the CFPB receives a complaint it forwards the complaint to the relevant company for a response.  Companies generally have 15 days to respond to the complaint, unless an extension is secured in the meantime.  The consumer complaint and company’s response, if one is provided, is published on the public facing Consumer Complaint Database, which can be accessed and viewed by the public.  The information provided on the database can be valuable to not only consumers, but also to companies.  For example, it provides a valuable tool for companies to understand how consumers view the quality of the company’s products and services.  It also provides companies with an opportunity to evaluate whether complaint trends suggest that problems exist with certain products and services that need to be addressed to avoid or minimize regulatory action.  As such, although the Consumer Complaint Database is not generally viewed favorably by financial industry companies, it can provide valuable information.

For more information on the CFPB’s consumer complaint process go here: https://www.stinson.com/Resources/PDF_Files/Navigating_CFPBs_Consumer_Complaint_Process.aspx.

You can view the CFPB’s Monthly Complaint Report here: http://www.consumerfinance.gov/newsroom/cfpb-monthly-complaint-snapshot-examines-prepaid-complaints/.

You can view the CFPB’s Consumer Complaint Database here: http://www.consumerfinance.gov/complaintdatabase/.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

 

 

On February 23, 2015, the Consumer Financial Protection Bureau (CFPB) announced two separate enforcement actions against Citibank, N.A., its affiliates, and two debt collection law firms, for alleged illegal debt sales and debt collection practices.

Debt Sales Enforcement Action

In the first enforcement action, the CFPB alleges that Citibank, N.A., violated the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act in connection with its sale of debt to third parties.  Specifically, the CFPB alleges Citibank, N.A.:

  • Overstated the annual percentage rate (APR) for 128,809 accounts sold to sixteen debt buyers, resulting in consumers paying approximately $4.89 million to debt buyers who used an inflated APR of more than 1 percent; and
  • Delayed sending debt buyers nearly 14,000 payments made by consumers, totaling nearly $1 million, resulting in consumers enduring debt collection efforts after debts were paid.

Pursuant to the administrative consent order entered by the CFPB to resolve the alleged illegal debt sales practices, Citibank, N.A., must:

  • Refund the approximate $4.89 million to nearly 2,100 consumers that was collected as a result of inflated APRs in excess of 1 percent;
  • Accurately document debt sells;
  • Stop selling debt it is unable to verify;
  • Include language in debt sales contracts that prohibits debt purchasers from reselling the debt;
  • Provide consumers with information about the debts when it sells a debt, such as the name of the original creditor, the credit agreement, and recent account statements; and
  • Pay a $3 million civil penalty.

Debt Collection/Affidavits Enforcement Action

In addition to the alleged illegal debt sales enforcement action, the CFPB also announced a second enforcement action against Citibank, N.A., two of its affiliates—Department Stores National Bank and CitiFinancial Servicing, LLC—and two debt collection law firms—Faloni & Associates, LLC and Solomon & Solomon, P.C.—for altering affidavits filed in debt collection lawsuits.

The CFPB alleges that Citibank, N.A., and its affiliates provided to the law firms sworn affidavits attesting to the accuracy of the debt allegedly owed.  According to the CFPB, in violation of the Fair Debt Collection Practices Act (FDCPA), the law firms then altered the dates of the affidavits and/or the amount of the debt allegedly owed and filed the affidavits in court actions initiated against the consumers to collect the debts.

The CFPB entered into separate consent orders with Citibank, N.A., its affiliates, and the law firms to resolve the alleged violations of the FDCPA.  As part of those consent orders, Citibank, N.A., is required to comply with a separate New Jersey state court order (resulting from the filing of an altered affidavit), that required Citibank, N.A., to refund $11 million to consumers and stop collecting on an additional $34 million in in debts.  In addition, Solomon & Solomon, P.C., must pay a $65,000 civil penalty and Faloni & Associates, LLC, must pay a $15,000 civil penalty.

These enforcement actions are the latest in a series of CFPB enforcement actions related to debt collection practices.  The CFPB has made clear that one of its top enforcement priorities relates to consumer debt collection.  Given the number of CFPB enforcement actions related to debt collection, and the likelihood that this area will continue to be a CFPB enforcement priority, financial services companies, debt purchasers, and collectors must ensure that their practices are in compliance with the FDCPA and other applicable laws.

You can view debt sales consent order here:  http://files.consumerfinance.gov/f/201602_cfpb_consent-order-citibank-na.pdf.

You can view the Citibank, N.A., debt collection/affidavit consent order here:  http://files.consumerfinance.gov/f/201602_cfpb_consent-order-citibank-na-department-stores-national-bank-and-citifinancial-servicing-llc.pdf.

You can view the Solomon & Solomon, P.C., consent order here:  http://files.consumerfinance.gov/f/201602_cfpb_consent-order-solomon-and-solomon-pc.pdf.

You can view the Faloni & Associates, LLC, consent order here:  http://files.consumerfinance.gov/f/201602_cfpb_consent-order-faloni-and-associates-llc.pdf.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

 

In FdG Logistics LLC v. A&R Logistics Holdings, Inc. Chancellor Bouchard of the Delaware Court of Chancery found that a seller’s disclaimer of extracontractual representations is not enough to preclude a fraud claim.  A fraud claim can only be precluded if the buyer affirmatively states what it is relying on and that it is not relying on extracontractual representations.

The Court noted “we will not insulate a party from liability for its counterparty’s reliance on fraudulent statements made outside of an agreement absent a clear statement by that counterparty—that is, the one who is seeking to rely on extra-contractual statements—disclaiming such reliance”

The Court examined similar past decisions in Anvil Holding Corp., and Prairie Capital III, L.P. v. Double E Holdings Corp. The Court noted:

Here, similar to Anvil but unlike Prairie Capital, the critical language missing from Sections 5.27 and 10.7 of the Merger Agreement is any affirmative expression by Buyer of (1) specifically what it was relying on when it decided to enter the Merger Agreement or (2) that it is was not relying on any representations made outside of the Merger Agreement. Instead, Section 5.27 amounts to a disclaimer by the selling company (Old A&R) of what it was and was not representing and warranting. Moreover, the integration clause contained in Section 10.7 merely states in general terms that the Merger Agreement constitutes the entire agreement between the parties, and does not contain an unambiguous statement by Buyer disclaiming reliance on extra-contractual statements.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC has approved an NYSE rule change which will require foreign private issuers to file semiannual financial statements on Form 6-K. Foreign private issuers are not currently subject to any SEC rule that specifically requires the filing of interim financial information.

New Section 203.03 of the Listed Company Manual provides that each listed foreign private issuer must, at a minimum, submit to the SEC a Form 6-K that includes:

  • an interim balance sheet as of the end of its second fiscal quarter; and
  • a semi-annual income statement that covers its first two fiscal quarters.

The Form 6-K is required to be submitted no later than six months following the end of the company’s second fiscal quarter. The financial information included in the Form 6-K would be required to be presented in English, but would not be required to be reconciled to U.S. GAAP.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

On February 18, 2016, Director Richard Cordray of the Consumer Financial Protection Bureau (CFPB) gave a speech at the American Constitution Society, in which he repeatedly attacked arbitration provisions found in consumer agreements and set the stage for CFPB rulemaking that will likely greatly restrict the use of arbitration provisions going forward.

The CFPB’s Arbitration Study

Director Cordray’s remarks largely summarized the CFPB’s earlier statements and consideration of proposed rules related to the restriction of arbitration provisions in consumer agreements related to financial products and services.  For instance, in March 2015, pursuant to a mandate under The Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB released its Arbitration Study: Report to Congress 2015, which is a report on a study conducted by the CFPB to evaluate the impact of arbitration provisions on consumers.

Among other things, the study concluded that

  • arbitration clauses “restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits;”
  • most arbitration provisions include a prohibition against consumers bringing class actions;
  • very few consumers individually pursue relief against businesses through arbitration or federal courts; and
  • more than 75 percent of consumers in the credit card market did not know if they had agreed to arbitration in their credit card contract.

As a result of the study, the CFPB began considering rule proposals that would

  • ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts, unless and until the class certification is denied by the court or class claims are dismissed by the court;
  • require companies to that use arbitration clauses for individual disputes to submit to the CFPB all arbitration claims and awards (which the CFPB may publish on its website for the public to view) so that the CFPB can ensure that the process is fair to consumers and determine whether further restrictions on arbitrations should be undertaken; and
  • apply to nearly all consumer financial products and services that the CFPB regulates, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.

Arbitration Rulemaking is Imminent

Director Cordray’s latest comments make clear that restricting arbitration provisions, including banning class action waivers in arbitration provisions, is a key priority for the CFPB.  In fact, Director Cordray stated that “after carefully reflecting on the findings of our study, the Bureau has decided to launch a rulemaking process to protect consumers.”  The CFPB’s next step in that process is to “publish a Notice of Proposed Rulemaking and seek public comment from all stakeholders prior to finalizing a rule.”

Companies should pay close attention to the rulemaking process as it could have significant legal implications.  For example, if the CFPB passes arbitration restrictions that include class action waivers, companies that currently have such provisions in their consumer contracts will need to reevaluate those provisions.  One of the major considerations companies will face is whether to eliminate arbitration provisions completely from their contracts in order to preserve the right to maintain class action waivers.

The CFPB’s Arbitration Study is Marred with Controversy

Despite the CFPB’s reliance on its arbitration study to justify its current rulemaking efforts to restrict arbitration clauses, the study has been widely criticized as having relied on insufficient data and ignoring other information that would lead to conclusions not favorable to the CFPB’s initiative to eliminate class action waivers.  In other words, the CFPB is accused of using flawed and insufficient data to reach its desired outcome of restricting arbitration clauses and class action waivers.  One such critique, titled The Consumer Financial Protection Bureau’s Arbitration Study: A Summary and Critique, was issued by law professors from the University of Virginia School of Law and George Mason University School of Law.

 

You can view a transcript of Director Cordray’s remarks here: http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-american-constitution-society/.

You can view an outline of the proposals the CFPB is currently considering here: http://files.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf.

You can view the CFPB’s March 2015 report on arbitration provisions here: http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/.

You can view a critique of the CFPB’s March 2015 report here: http://mercatus.org/sites/default/files/Johnston-CFPB-Arbitration.pdf.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.