Regulatory Developments
CFPB Announces Supervision of Nonbanks and Seeks Comment on Risk-Determination Procedures
On April 25, the CFPB announced its intention to supervise nonbanks, including fintechs, whose activities the CFPB has reasonable cause to determine pose risk to consumers. The CFPB will determine risk based on complaints collected by the CFPB, whistleblower complaints, judicial opinions, administrative decisions, news reports, information from state or federal partners, or other sources of information. To supervise a nonbank based on consumer risk, the CFPB must provide notice to the nonbank and a reasonable opportunity for the nonbank to respond. Accordingly, the CFPB issued and is seeking comment on a procedural rule allowing the Director to determine whether all or part of a decision or order on risk determination should be released publicly for purposes of transparency, marketplace guidance and use in future precedent.
“Given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to.”
- CFPB Director Rohit Chopra
SEC Issues Risk Alert Related to MNPI and Code of Ethics
On April 26, the SEC’s Division of Examinations (Exams) issued a risk alert concerning deficiencies regarding 1) the use of alternative data and interaction with value-add investors/expert networks with respect to MNPI, and 2) codes of ethics:
- Exams noted that investment advisers used alternative data in connection with their investment activities without adopting or implementing sufficient policies and procedures to address the potential risk of receipt or use of MNPI through alternative data sources, including adequate testing and documenting such testing to detect and mitigate such risk. Similarly, Exams noted inadequate policies and procedures with respect to identifying and controlling the risks posed by value-added investors (e.g., clients or fund investors that are corporate executives or financial professional investors who may have MNPI). In addition, Exams observed that investment advisers did not have sufficient policies and procedures, or did not sufficiently implement such policies and procedures, with respect to expert networks, (e.g., a group of professionals who are paid for their specialized information and research services), including keeping records of correspondences between the investment adviser and such persons, or reviewing the trading activities of such persons.
- Exams also identified common deficiencies by investment advisers in connection with code of ethics. Such deficiencies relate to adequately identifying access persons, requiring pre-approval for certain investments, such as IPOs or limited offerings, retaining evidence of review of holdings and transactions reports (including the CCO reviewing his/her own reports), retaining required content with respect to holdings and transaction reports, such as investments in private placements, and retaining evidence of written acknowledgements by the investment adviser’s supervised persons attesting to receipt of the code of ethics.
Texas Securities Sheriff Wrangles Metaverse Gamblers
Securities law enforcement entered the metaverse recently in the form of an emergency cease and desist order issued by the Texas State Securities Board against individuals and a company using NFTs to finance multiple metaverse casinos. Much like Wyatt Earp busting into the O.K. Corral, this one gets interesting.
The order alleges a high-tech fraudulent securities offering in which the respondents sought to raise capital via the offer of more than 12,000 non-fungible tokens or “NFTs” to fund development of multiple virtual casinos across metaverse platforms. These casinos would be spaces a person could enter virtually (in avatar form) to play the types of games often found in brick-and-mortar casinos. In many cases, the virtual land to build the casinos had already been purchased. Respondents were allegedly also developing a web 2.0 casino available online via the plain old internet.
Read the client alert to learn more about the order and how the intersection of law, policy, and the metaverse is rapidly developing and will continue to evolve over time, as we previously covered.
New York Insurance Regulator Sets Sights on Private Equity Investments
The Goodwin Insurtech team recently published an article highlighting the trend of insurance regulators focusing on private equity-owned insurers and the key regulatory considerations applicable to such investments. As noted, given the stringent disclosure requirements for controlling investors in the insurance space, any potential expansion of these requirements could cause some investors to back away from investment opportunities. Nonetheless, the New York State Department of Financial Services has now issued guidance which brings renewed pressure to the industry and may significantly alter the future of insurance transactions in New York.
Read the client alert to learn more.
