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  • NIST Publishes Cloud Computing Guidance

    Fintech

    On September 21, 2016, the SEC reached a $766,000 settlement with Nu Skin Enterprises, Inc. over charges that it violated the internal controls and books and records provisions of the FCPA. The SEC alleged that Nu Skin’s China subsidiary made a $150,000 payment to a charity chosen by a Chinese Communist party official in order to obtain that official’s assistance in terminating an on-going provisional agency investigation into Nu Skin’s compliance with local rules for direct selling.

    The settlement reveals important lessons for U.S. companies regarding oversight of charitable contributions made by their foreign-based subsidiaries.  According to the Order, Nu Skin’s China subsidiary had informed its U.S. counterpart of the donation but omitted the relationship between the donation, foreign official, and provisional agency investigation. While the U.S. company flagged the FCPA risks a large donation in China may raise, and advised its China subsidiary to consult with outside U.S. legal counsel to assure compliance, the counsel’s advice was ultimately ignored by the subsidiary.  The SEC concluded that Nu Skin failed to maintain necessary internal controls, specifically with respect to due diligence conducted by its China subsidiary regarding charitable contributions and accounting for such donations.

    Notably, this is the second time that the government has charged a company with violating the FCPA based only on a charitable donation to purportedly buy the influence of a foreign official.  The settlement illustrates the SEC’s increasing focus on charitable donations in high risk markets.

    NIST Privacy/Cyber Risk & Data Security

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  • Federal District Court Allows Interlocutory Appeal of Challenge to FHFA MBS Suit

    Securities

    On September 30, 2016, the SEC reached a $20 million settlement with GlaxoSmithKline arising from the company’s business in China.  The SEC alleged that between 2010 and 2013, sales and marketing managers of GlaxoSmithKline’s China subsidiary made corrupt payments to medical professionals to encourage more prescriptions for the company’s products.  The purported corrupt payments included gifts, travel, entertainment, shopping, and cash but were recorded in GlaxoSmithKline’s books and records as legitimate marketing expenses, speaker fees, medical association payments, and travel and entertainment expenses.  Because the medical professionals worked in government-owned hospitals, the SEC considered them to be foreign government officials under the FCPA, and charged the company with violations of the internal controls and recordkeeping provisions of the FCPA.

    The $20 million dollar settlement with the SEC follows an almost $490 million sanction ordered in 2014 by a Chinese Court against GlaxoSmithKline’s Chinese subsidiary based on the same alleged bribery scheme.  Five of GlaxoSmithKline’s managers were also convicted in that action in China and its former country manager was deported.  FCPA Scorecard coverage of the Chinese Court order can be found here.

    Freddie Mac Fannie Mae RMBS FHFA

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  • CFPB Seeks Additional Private Student Loan Complaints

    Consumer Finance

    On June 13, the CFPB issued a Notice of Request for Information seeking information on existing private student loan complaints collected by state agencies, institutions of higher education, consumer and legal advocates, and lenders. In addition to its general solicitation, the CFPB specifically invited the participation of state attorneys general, schools, and advocacy groups. The responses received by the CFPB will be incorporated into the student loan ombudsman’s report it provides to Congress pursuant to the Dodd-Frank Act. In conjunction with its general solicitation, the CFPB also published the nearly 2,000 comments it received in response to a Notice and Request for Information on private student loans that it issued on November 17, 2011. The CFPB identified the following common themes from the data collected to date in connection with its earlier solicitation: (i) many borrowers report relying on school financial aid offices for information and guidance on which loan products to use, (ii) many borrowers struggling in today’s economy are finding their private student loan debt to be unmanageable, and (iii) many borrowers report finding it difficult to navigate the repayment process.

    CFPB Dodd-Frank Student Lending

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  • Federal Bank Regulators Seek Comment on Three Proposed Regulatory Capital Rules, Finalize Market Risk Rule

    Consumer Finance

    On June 12, the Federal Reserve Board, the OCC, and the FDIC jointly issued three proposed rules, which would implement the risk-based and leverage capital requirements in the Basel III framework and relevant provisions mandated by the Dodd-Frank Act. The first proposed rule would, among other things, (i) raise the minimum regulatory capital levels; (ii) introduce an additional common equity capital buffer; and (iii) adopt a stricter definition of capital. Taken together, these requirements would require banking organizations to increase the quality and quantity of their regulatory capital. The second proposed rule incorporates aspects of Basel II’s Standardized Approach to enhance the risk-sensitivity of a banking organization’s risk-weighted assets calculations. In addition, the second proposed rule sets forth alternatives that would replace the use of external credit ratings, a change required by Section 939A of the Dodd-Frank Act. The third proposed rule would apply to banking organizations that are currently subject to the advanced approaches rule or to the market risk rule, and for the first time, to savings and loan holding companies that meet the relevant size, foreign exposure, and trading activity thresholds. This rule seeks to enhance the risk-based capital rules’ sensitivity to trading risks and also would eliminate the use of external ratings as required by Section 939A of the Dodd-Frank Act. Comments on each of the proposed rules can be submitted through September 7, 2012.

    Concurrent with the proposed rules, the federal regulators released a final rule regarding market risk. By amending the calculation of market risk, the final rule seeks to better characterize the risks facing a particular institution and to help ensure the adequacy of capital related to the institution’s market risk-related positions. The final rule incorporates comments received in response to a January 2011 proposed rule, as well as a December 2011 amended proposed rule, and applies to a banking organization with aggregate trading assets and liabilities equal to 10 percent of total assets, or $1 billion or more. According to the regulators, the most significant change from the proposals relates to the methods for determining the capital requirements for securitization positions. The final rule will impose greater capital requirements on the more subordinate tranches in a securitization because the final rule mechanism to calculate the capital charges on securitization exposures when the underlying pool of assets demonstrates credit weakness was altered to focus on delinquent exposures rather than on cumulative losses. This rule takes effect January 1, 2013.

    FDIC Dodd-Frank Federal Reserve OCC

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  • Tenth Circuit Holds Notice Does Not Extend Three-Year TILA Rescission Right

    Lending

    On June 11, the U.S. Court of Appeals for the Tenth Circuit held that mere notice from a borrower does not extend the three-year period for filing an action for rescission under TILA. Rosenfield v. HSBC Bank, USA, No. 10-1442, 2012 WL 2087193 (10th Cir. Jun 11, 2012). In so holding, the unanimous three-judge panel rejected the position of the amicus brief filed by the CFPB and sided with the defendant-lender and three financial industry trade groups. Relying on Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), the Tenth Circuit emphasized that TILA’s three-year statute of repose was a strict limit on the time for filing suits for rescission. According to the court, an attempt to extend the period by filing a notice within the three-year period would be inconsistent with that strict limit. Furthermore, the court reasoned that adopting the borrower’s position would make TILA enforcement difficult and expensive, all while clouding title on foreclosed homes. This decision deepens an already-existent circuit split between the Ninth Circuit (which took the same approach as the Tenth Circuit) and the Fourth Circuit (which concluded that notice within the three-year period was sufficient). The Eighth and Third Circuits currently are considering the same issue in pending cases.

    TILA

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  • OCC Finalizes Rule to Replace Certain Credit Rating References with Alternative Creditworthiness Standards.

    Consumer Finance

    On June 13, pursuant to Section 939A of the Dodd-Frank Act, the OCC published a final rule with regard to regulations applicable to investment securities, securities offerings, and foreign bank capital equivalency deposits. The final rule is identical to the rule proposed by the OCC in November 2011 and will require national banks to assess whether a security issuer has an "adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure," a standard which may be met if the risk of default by the issuer is low and timely repayment of principal and interest is expected. For federal savings associations, the definition of "investment grade" would cross-reference the requirement established by the FDIC. Simultaneously, the OCC finalized guidance to outline measures (i) banks should put in place to demonstrate they have properly verified their investments, and (ii) institutions should put in place to demonstrate their compliance with due diligence requirements when making investments and reviewing investment portfolios. Specific due diligence factors will depend on the type of security, and firms will need to adjust the depth of due diligence to match the credit quality of the security, its complexity, and the size of the investment.

    FDIC Dodd-Frank OCC

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  • Ninth Circuit Holds Debt Validation Notice That Implicitly Requires Debtor to Dispute Debt in Writing Does Not Violate FDCPA

    Consumer Finance

    On August 30, the SEC announced a $5.5 million settlement with AstraZeneca, the U.K.-based pharmaceutical company, to settle charges under the FCPA’s books and records and internal control provisions due to allegedly improper payments made by the company’s wholly-owned subsidiaries in China and Russia.  In its administrative order, the SEC alleged that the Chinese subsidiaries made improper payments to doctors at state-owned healthcare providers to incentivize purchasing and prescribing AstraZeneca pharmaceuticals. The improper payments were funded by fraudulent tax receipts, inflated travel invoices, and fabricated speaker fees.  The Chinese subsidiary also allegedly made improper payments to government officials in exchange for reductions or dismissals of proposed financial sanctions against the subsidiary.  Similarly, the SEC alleged that AstraZeneca’s Russian subsidiary made improper payments in connection with pharmaceutical sales. Without admitting or denying the SEC’s findings, AstraZeneca agreed to disgorge $4.325 million and pay a $375,000 civil penalty with $822,000 in prejudgment interest.

    The SEC’s administrative order indicates that AstraZeneca waived its statute of limitations defenses. This is notable because AstraZeneca’s misconduct allegedly ended in 2010, and the statute of limitations for FCPA offenses is five years.

    This settlement represents another in a series of SEC investigations of the pharmaceutical industry. Examples include the March 2016 Novartis settlement and payment of $25 million, and SciClone Pharmaceuticals’ settlement earlier this year for $12.8 million. Other notable pharmaceutical companies with recent FCPA settlements include Bristol-Myers Squibb in 2015 settling for $14 million; Eli Lily in 2012 settling for $29 million; and Johnson & Johnson settling with the SEC and DOJ in 2011 for $70 million.

    FDCPA Debt Collection

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  • FHFA Submits Annual Report to Congress

    Lending

    On June 13, the FHFA submitted to Congress its annual report on its 2011 examinations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The report rates Fannie Mae and Freddie Mac as “critical supervisory concerns” and states that their continuing credit losses stem primarily from loans originated during 2005-2007. The report cites certain key challenges of Fannie Mae and Freddie Mac, which include (i) the ongoing stress in the national housing market, (ii) the broader economic environment, and (iii) the lack of certainty about the future of Fannie Mae and Freddie Mac. Among other things, the report provides updated information about the Fannie Mae and Freddie Mac portfolios and foreclosure prevention efforts. The report also notes that the financial condition of the Federal Home Loan Banks remained stable, though exposure to private-label mortgage-backed securities continues to impact certain of the Banks.

    Freddie Mac Fannie Mae FHFA

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  • Fannie Mae and Freddie Mac Update Servicing Requirements

    Lending

    On June 13, Freddie Mac published Bulletin 2012-13, which updates multiple servicing requirements in the Single-Family Seller/Servicer Guide. With regard to the state foreclosure timeline, the Bulletin (i) adds several circumstances in which the timeline will be extended for all foreclosure sales completed on or after January 1, 2012, (ii) revises the calculation for compensatory fees associated with exceeding a state foreclosure timeline, and (iii) alters the compensatory fee appeal process. With regard to certain operational procedures, the Bulletin (i) adds a time frame for reimbursement of taxes that were incurred and paid to a taxing authority for non-real estate owned expenses, (ii) allows wire transfers for REO-related remittances, and (iii) clarifies the time frame for submitting modification agreements to document custodians. The Bulletin also makes changes to the Guide related to unemployment forbearance, the quality right party contract performance standard, fraud prevention and reporting, and MERS Rule 14.

    Also on June 13, Fannie Mae published Announcement SVC-2012-10, which updates its notice of data breach and incident response policy to require servicers to provide written notice to Fannie Mae of a data breach in addition to any reporting to consumers or state authorities required under applicable state law. A servicer also must request permission to use Fannie Mae’s name if it intends to refer to Fannie Mae in any notices sent to affected borrowers or regulatory agencies. On the same day, Fannie Mae also published Announcement SVC-2012-11, which updates and clarifies for all mortgages with a foreclosure sale date on or after January 1, 2012, (i) the maximum allowable foreclosure time frames for twelve jurisdictions, (ii) compensatory fee assessments and appeals, and (iii) the preferred method of foreclosure in Montana and Nebraska.

    Foreclosure Freddie Mac Fannie Mae Mortgage Servicing Privacy/Cyber Risk & Data Security

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  • FTC Settles FCRA Charges Against Data Broker

    Fintech

    In a SEC cease and desist order filed on August 11, Key Energy Services, Inc., a Houston-based provider of rig-based oil well services, agreed to disgorge $5 million to settle charges that the company violated the books and records and internal control provisions of the FCPA.  According to the order, from August 2010 through at least April 2013, Key Energy’s Mexican subsidiary paid bribes of at least $229,000 to a contract employee at Petroleos Mexicanos (Pemex), the Mexican state-owned oil and gas company.  In exchange, the subsidiary received Pemex non-public information, advice and assistance on contracts with Pemex, and lucrative amplifications or amendments to those contracts.  The funds were allegedly funneled through an entity purporting to provide consulting services, but for which there was no evidence of appropriate authorization of the relationship, and no supporting documentation regarding the purported consulting work performed.  According to the SEC, the subsidiary improperly recorded the transfers to the consulting firm as legitimate business expenses, which were consolidated into Key Energy’s books and records.  Key Energy allegedly failed to implement and maintain sufficient internal controls, including within the subsidiary relating to interactions with Pemex officials, and failed to respond to indications that the subsidiary was improperly using consultants.

    It is notable that Key Energy was not required to pay a civil fine in addition to disgorgement.  The SEC identified three reasons for accepting Key Energy’s offer of settlement and not imposing a separate civil penalty.  First, the SEC praised Key Energy for cooperating with and assisting in its investigation.  Key Energy was first contacted by the SEC in January 2014 concerning possible FCPA violations.  In April 2014, Key Energy was informed by employees of its subsidiary of possible bribes, at which time the company reported the allegations to the SEC and “undertook a broad internal investigation and risk assessment of [its] international operations.”  The SEC specifically noted that, “to the extent the internal investigation identified additional issues of concern, Key Energy provided updates to the Commission staff.”

    Second, the SEC considered not only the “cooperation Key Energy afforded to the Commission staff,” but also the “remedial acts undertaken by [the company].”  The SEC noted that Key Energy, during its internal review, “promptly and simultaneously undertook significant remedial measures including … a renovation and enhancement of [its] compliance program.”  Specific remedial measures included (1) stronger vendor oversight, (2) enhanced financial controls, (3) increased training of all international employees, (4) developing and/or reviewing policies and procedures pertaining to the FCPA, codes of business conduct, and more, and (5) a coordinated wind-down and exit from all markets outside of North America, including a commitment to exit Mexico by the end of 2016.

    Finally, “in determining the disgorgement amount and not to impose a penalty,” the SEC “considered Key Energy’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.”  This third justification indicates the SEC is not only aware of the current financial strains within the oil and gas services sector, but is uninterested in unnecessarily putting companies out of business.  It is also possible that Key Energy’s cooperation and remediation, coupled with its tenuous financial condition, factored into the DOJ’s decision in April to close its investigation of the same conduct without bringing charges.

    FTC FCRA Consumer Reporting Privacy/Cyber Risk & Data Security

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