This morning we attended the first public hearing held by the NJBOS concerning its pre-proposal to adopt a rule implementing a uniform fiduciary standard for investment professionals, including broker-dealers and investment advisers. The hearing was administered by New Jersey officials, including Christopher Gerold, Chief of the NJBOS. There were approximately 40 attendees from diverse backgrounds – investment firms, industry groups, in-house and outside counsel, and consultants. Here are three takeaways from the hearing:
Today the New Jersey Bureau of Securities began rulemaking on a proposed uniform fiduciary standard for investment professionals. Attached below is the Bureau’s Notice of Pre-Proposal. Comments on the Pre-Proposal are due to the Bureau by December 14, 2018, and the Bureau will hold two (2) informal conferences (on November 2 and November 19, 2018) in order to take testimony, gather facts, and provide for the opportunity of public comment. Reed Smith will continue to monitor this process and intends on attending the public conferences. We are available to assist clients through this process.
Read our blog post on the initial announcement here.
Earlier this week, New Jersey Governor Phil Murphy announced that the New Jersey Bureau of Securities would start rulemaking to “impose a fiduciary duty on all New Jersey investment professionals, requiring them to place their clients’ interests above their own when recommending investments.” The rule is aimed at reconciling the different standards of care that apply to investment professionals, such as broker-dealers and investment advisers. Addressing the need for this rule, Bureau Chief Christopher Gerold added, “The roles, duties and obligations of investment advisers and broker-dealers are confusing to investors under current federal regulations.” New Jersey Attorney General Gurbir S. Grewel also confirmed his office’s support for the action stating “With the Trump Administration gutting those [investor and consumer] protections left and right, it falls to states like New Jersey to fill the void”.
A formal Notice of Pre-Proposal to solicit public comment will be issued by the Bureau.
Reed Smith will monitor this rulemaking, which addresses an important issue for our broker-dealer and investment adviser clients, especially given judicial action striking down the Department of Labor’s Fiduciary Rule in March 2018, as well as the proposal in April 2018 of Regulation Best Interest by the Securities and Exchange Commission. We are available to assist our clients in addressing the New Jersey rulemaking process including submission of responses to the proposed rule.
A link to the State’s Press Release from earlier this week is below.
On Friday, March 16, 2018, the United States Court of Appeals for the District of Columbia issued its long-awaited ruling in ACA International et al. v. FCC (see attached). The petition before the court challenged aspects of the Telephone Consumer Protection Act (TCPA) Omnibus Declaratory Ruling and Order issued by the Federal Communications Commission (FCC) in July of 2015.
Please read the full client alert at reedsmith.com.
In an important decision for the collection industry, the court in Michel v. Credit Protection Ass’n L.P., No. 14-cv-8452, 2017 WL 3620809 (N.D. Ill. Aug. 23, 2017), refused to find a debt collection company liable under the TCPA for cell phone calls made on behalf of one creditor (ComEd) when the plaintiff’s oral revocation of consent related to a different creditor (Comcast). The Michel court reasoned that obtaining consent under the TCPA is creditor-specific and so revocation should be creditor-specific as well.
The Consumer Financial Protection Bureau (CFPB) finally moved forward today to ban class action waivers in mandatory arbitration clauses found in certain consumer financial services contracts.
In October 2015, the CFPB published its multiyear study on arbitration provisions in consumer financial contracts and an outline of the proposal under consideration. It then convened a Small Business Review Panel to gather feedback. The Bureau also sought comments from stakeholders — the public, consumer groups, and industry —before moving forward with rulemaking. In May 2016, the Bureau issued its proposed rule. The public responded with more than 110,000 comments during the comment period that followed.
The CFPB’s new rule ensures consumers’ right to participate in class action lawsuits. It applies to consumer financial products and services, including those entities that lend money, store money, and move or exchange money. Specifically, it covers extensions of consumer credit; automobile leases; debt management and settlement services; providing credit information directly to consumers; providing accounts under the Truth in Savings Act and Electronic Fund Transfer Act; transmitting and exchanging funds; certain payment processing services; check cashing services; and related debt collection activities. Congress already prohibits arbitration agreements in residential mortgages.
Individual arbitration clauses are still permitted. But if a company includes an arbitration clause in a new contract, specific contractual language must be used.
The CFPB also attempts to make the individual arbitration process “more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.” It will collect information regarding a company’s non-payment of arbitration fees and failure to follow arbitration fairness standards. As explained in the Bureau’s press release, “[g]athering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair. The materials must be submitted with appropriate redactions of personal information. The Bureau intends to publish these redacted materials on its website beginning in July 2019.”
The rule becomes effective 60-days after publication in the Federal Register and applies to contracts entered into more than 180-days thereafter. Several obstacles could delay, or even prevent, it from going into effect, however. The rule could be repealed under the Congressional Review Act. Affected parties could sue to overturn the rule on grounds that it is an abuse of discretion or beyond the authority given to the CFPB by the Dodd-Frank Act. Or, it could be delayed by a new Director of the Bureau (Director Cordray’s term ends in July 2018).
Reed Smith’s financial services attorneys have for many years helped to draft arbitration clauses for consumer contracts, and enforced such provisions through motions to compel arbitration. We have closely followed the Dodd-Frank rules, including this final rule. Should the final rule remain in place, we can advise you on how current arbitration clause language will need to change, how to preserve rights under present contracts, and, as always, how to protect your rights in court.
Stay tuned for updates as we continue to unpack the 775-page rule.
In a watershed ruling for businesses facing the recent onslaught of Telephone Consumer Protection Act (TCPA) claims, the Second Circuit Court of Appeals held that consumers cannot revoke their consent to receive automated or prerecorded cell phone calls if they previously consented to receive those calls as part of a binding contract. See Reyes v. Lincoln Automotive Fin. Servs., No. 16-2104-cv, slip op. (2d Cir. June 22, 2017).
In Reyes, the plaintiff entered into a binding auto lease agreement, which contained a provision stating that he expressly consented to be contacted using “prerecorded or artificial voice messages, text messages, emails and/or automatic telephone dialing systems” at the cell phone number he had provided on his application. When the plaintiff defaulted on his car lease and he started receiving collection calls on his cell phone, he allegedly mailed a letter revoking his consent to receive further calls, but they continued.
The New York federal district court granted summary judgment to the defendant in part on the basis that “the TCPA does not permit a party to a legally binding contract to unilaterally revoke bargained-for consent to be contacted by telephone.” On appeal, the Second Circuit affirmed the district court’s decision, holding that “the TCPA does not permit a party who agrees to be contacted as part of a bargained-for exchange to unilaterally revoke that consent, and we decline to read such a provision into the act.”
In reaching this ruling, the Second Circuit reasoned that the “text of the TCPA evidences no intent to deviate from common law rules in defining ‘consent.’” The court distinguished between (i) “gratuitous actions” under the tort law, such as voluntarily providing one’s cell phone number on a loan application without exchanging any consideration, versus (ii) providing consent “as an express provision of a contract to lease an automobile.” In the former case, where the consent was purely voluntary, revocation is allowed at any time. But in the latter case, where consent is provided as a term of a binding agreement, that consent “become[s] irrevocable” because “one party may not alter a bilateral contract by revoking a term without the consent of the counterparty.” Given Congress’ silence about revocation in the TCPA, the Second Circuit was not willing to conclude that “Congress intended to alter the common law of contracts.” The Second Circuit further rejected the plaintiff’s argument that any ambiguities should be construed in the consumers’ favor because the statute contained no ambiguity on the revocation point.
Take-away: Businesses face thousands of TCPA lawsuits each year based on alleged revocations of prior express consent. This Second Circuit decision creates a powerful defense to these claims as long as the defendant can show that the plaintiff’s prior express consent to receive automated or prerecorded calls was given as part of a binding contractual agreement. If so, the plaintiff cannot unilaterally revoke that consent as a matter of law. While this decision only is binding in the Second Circuit, it can and should be used by defendants as persuasive precedent across the entire country.
On Friday, in a decision certain to please the business community as well as the Chair and new majority of the Federal Communications Committee, the D.C. Circuit struck down parts of the FCC’s October 30, 2014 Order, 29 F.C.C. Rcd. 13998 (FCC 14-164), requiring that solicited faxes (those sent with consent of the recipient) must contain opt-out notices in order to avoid violating the TCPA. See Bais Yaakov of Spring Valley, et al v. FCC (No. 14-1234). In a 2-1 decision, the majority held that the FCC lacked authority under the statute to regulate solicited faxes. The D.C. Circuit thus limits liability under the TCPA to just unsolicited fax advertisements, as its plain language states.
This ruling vindicates the two Republican FCC Commissioners, now Agency Chair Ajit Pai and Commissioner Michael O’Reilly, both of whom dissented in 2014 when the Commission’s fax Order was adopted. The ruling should also moot pending lawsuits based solely on the absence of an opt-out notice in faxes sent with the recipient’s express permission or invitation.
One caution is worth noting though. The decision does not eliminate the need to honor opt-out requests, thus creating a potential issue of fact for litigants. On the one hand, this should make it much harder for plaintiffs’ attorneys to succeed at class certification because whether any particular person opted out of receiving faxes is an individualized factual issue. On the other hand, however, it becomes harder for a defendant to refute a claim that a particular plaintiff revoked his or her consent before receiving an allegedly offending fax.
Under the FCC’s 2014 Order, onerous as the requirement to include an opt-out notice in every fax was, the business community had certainty as to what was required in communicating with customers or potential customers by fax. Now, it is incumbent on businesses to review their existing procedures or implement new procedures to defend against allegations that they have ignored or mishandled attempts by consumers to withdraw consent.
It is also worth pointing out that Bais Yaakov was argued before a three judge panel consisting of D.C. Circuit Judges Brett Kavanaugh and Nina Pillard, and Senior Circuit Judge Raymond Randolph on November 8, 2016. Oral argument in the all-important TCPA case ACA International, et al. v. FCC, also before the D.C. Circuit, was argued a few weeks earlier, on October 19, 2016, before Judges Pillard, Sri Srinivasan, and Harry Edwards. Now that Bais Yaakov has been decided, one can assume that decision in ACA cannot be far behind, and with it more certainty with respect to the definition of an “automatic telephone dialing system” and — hopefully — some much needed, practical relief, such as in the case of reassigned telephone numbers.
Before one starts uncorking the champagne, however, it is worth noting that Judge Pillard, the only judge on both the panel that heard Bais Yaakov and the panel that heard ACA, was the lone dissenter in the just decided fax case. In her dissent, Judge Pillard focused on consumer harm and the need to address what she referred to as “a fusillade of annoying and unstoppable advertisements.” In her view, Congress expressly delegated authority to the FCC to implement a prohibition on unsolicited fax advertisements, and the opt-out notice requirement gave practical effect to that ban.
In any event, it shouldn’t be long now until we see how Judge Pillard and the rest of the D.C. Circuit’s ACA panel weighs in on this ever-evolving area of the law.
In a January 10, 2017 decision, United States District Judge Thomas M. Rose in the Southern District of Ohio ruled that plaintiffs, who claimed to be investors in a Ponzi scheme operated by customers of PNC Bank, failed to state a claim against PNC Bank, National Association and The PNC Financial Services Group, Inc. (collectively, “PNC”) for allegedly violating the Ohio Securities Act, Ohio Rev. Code § 1707.01, et seq. Cruz v. PNC Bank, N.A., No. 3:16-cv-292, slip op. (S.D. Ohio Jan. 10, 2017). Plaintiffs alleged that PNC was liable for their losses because the alleged ringleaders of the fraud, William and Connie Apostelos (who are currently awaiting trial on various federal criminal charges), deposited virtually all of the funds they raised from investors into a PNC business account and made interest payments to investors from the account. Plaintiffs claimed that by providing the Aposteloses with account services and allegedly allowing them to use PNC facilities, PNC participated in the sale of unregistered securities by the Aposteloses.
In Rasheed Al Rushaid v. Pictet & Cie, the New York Court of Appeals ruled in a November 22, 2016 decision that a foreign bank’s allegedly intentional and repeated use of correspondent bank accounts in New York was sufficient to subject the bank to personal jurisdiction. The Court concluded in a 4-3 decision that the bank’s use of correspondent accounts as part of an alleged conspiracy to launder looted funds was “purposeful” under the transacting business prong of New York’s long-arm statute. In reaching this conclusion, the Court rejected the Appellate Division’s finding that the bank and its client manager were not subject to jurisdiction because they “merely carried out their clients’ instructions.”
Plaintiff Rasheed Al Rushaid (“Rushaid” or “Plaintiff”) filed suit against Swiss bank Pictet & Cie (“Pictet”), its general partners, and one of its client relationship managers, Pierre-Alain Chambaz (“Chambaz”) in New York state court, alleging that they assisted three employees in concealing money in connection with a kickback scheme relating to an oil rig project operated by Al Rushaid Petroleum Investment Corporation (“ARPD”), a Saudi company owned by Plaintiff. The three ARPD employees allegedly received kickbacks and bribes from vendors located around the world in exchange for purchasing products at inflated prices and ignoring deficiencies in the vendors’ services.
Plaintiff alleged that Defendants aided the scheme by laundering and concealing the funds. Specifically, Plaintiff alleged that Chambaz, a Pictet client relationship manager, created a sham company in the British Virgin Islands – TSJ Engineering Consulting Co., Ltd. (“TSJ”) – and then opened and managed accounts for TSJ, as well as individual accounts for the ARPD employees. According to the amended complaint, the vendors wired bribes in favor of “Pictet and Co. Bankers Geneva” to Pictet’s New York correspondent bank accounts and then Pictet credited the funds to TSJ’s Geneva-based account. The money was later divided up and transferred in Geneva to the ARPD employees’ individual accounts at Pictet.
The Supreme Court granted Defendants’ motion to dismiss for lack of personal jurisdiction under CPLR 3211(a), concluding that Defendants’ alleged use of the correspondent accounts was passive not purposeful. The Appellate Division affirmed.