Consumer Financial Protection Bureau Prohibits Certain Arbitration Clauses

The Consumer Financial Protection Bureau (“CFPB”) released a final rule that prohibits certain financial service companies from blocking class action lawsuits with pre-dispute arbitration clauses and class action waiver clauses in consumer financial services contracts. The final rule requires arbitration clauses to contain a provision that explains that the arbitration clause cannot be invoked in a class action proceeding and requires parties to submit certain arbitration records to the CFPB whenever an arbitration claim is filed in relation to a consumer that entered a pre-dispute arbitration agreement after the rule’s compliance date.

 

The rule is a consequence of the Dodd-Frank Act of 2010, in which Congress authorized the CFPB to issues regulations that limit or prohibit the use of arbitration agreements in the financial industry.  However, it is unclear whether the broad scope may adversely impact smaller entities that cannot afford to defend themselves against a class action lawsuit.

 

The rule is set to become effective on September 17, 2017 and applies to consumer financial services contracts that are entered into 180 days after September 17, 2017.  Thus, the rule does not affect existing contracts, except when a new financial services entity becomes a party to an older contract. Institutions should prepare to review and update their contract provisions to comply with the final rule.

 

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Department of Labor Clarifies Stance on Still-Pending Overtime Rule

By James Pieper

In 2016, a dramatic overhaul of the rules for eligibility and payment of overtime under the Fair Labor Standards Act (FLSA) was on the verge of taking effect before being halted by an injunction issued by a federal judge.

With a new administration taking over the Department of Labor, the status of the overtime revisions has been uncertain.  Nor was it known whether the Department would defend its authority to revise the rules in the subject litigation.

In a brief filed on June 30, the Department’s new leadership finally provided some clarity.  The Department defended its legal authority to adopt a new rule (as had been challenged by the plaintiffs), but did not defend the actual changes proposed by the prior administration.

Accordingly, although the rule remains in legal and administrative limbo, it is clear that it will not take effect in the form proposed in 2016.  Should the courts conclude that the Department does have authority to set the earning threshold (under which overtime must be paid to non-exempt employees) by administrative rule, then the new Department leadership will adopt a threshold lower than the amount of $47,476 that was set prior to the injunction.

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IRS Adopts Simplified Form for Small Nonprofits

By James Pieper

The Internal Revenue Service (IRS) has adopted a new, shorter online form for small charitable organizations seeking nonprofit status.

The Form 1023-EZ reduces the existing 26-page form to three pages for qualifying groups.  Organizations with gross receipts of $50,000 or less and assets of $250,000 or less will be able to use the streamlined process.

In a media release, IRS Commissioner John Koskinen stated: “This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well. The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new form can only be completed online and will help the IRS clear its backlog of more than 60,000 pending nonprofit applications.

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FINRA Clarifies Rules Concerning Social Media and Digital Communications

The Financial Industry Regulatory Authority (“FINRA”) issued a regulatory notice that addresses the use of digital communications and social media by FINRA member firms. FINRA recognized the expansion of social media and digital communication by broker-dealers, which prompted this guidance, updating the 2011 guidance. The new regulatory notice focuses on text messaging, personal versus business communications, third-party content, hyperlinks, native advertising, testimonials, endorsements, and links to BrokerCheck.

The updated guidance addresses the recordkeeping requirements in Rule 17a-4, which ensures certain communications are preserved. FINRA reminds firms that sharing or linking to specific content, such as a video or article, is a communication by the firm subject to Rule 2210 filing and content requirements. FINRA also clarifies that linking to or sharing an independent third-party website may be subject to Rule 2210 requirements, depending on whether the hyperlink is “ongoing” and whether the firm has influence over the content.

FINRA member broker-dealers may use native advertising, but it must comply with Rule 2210. This means that the advertising must be balanced, fair, and not misleading. Additionally, if a firm arranges for an individual to make a comment or post that promotes the firm, its products, or its services, the communication must comply with Rule 2210 and the firm must identify the communication as an advertisement. Similarly, FINRA reiterated that posts by customers or other third parties on the firm’s website or social media sites are not communications with the public and are not subject to the Rule 2210 requirements. However, if the firm or one of its registered representatives “likes” or shares any of the comments the customers or third parties post, the content becomes subject to the communication requirements of Rule 2210.

In light of these guidelines, FINRA members are advised to review their digital communication policy to ensure compliance with the recently issued regulatory notices.

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The Importance of Personal Cybersecurity

Malware attacks occur regularly in the United States, costing an estimated $15 million annually. The attacks on large corporations tend to make the news, but anyone connected to the internet is at risk of becoming a victim of a cyberattack. Personal internet connections are, generally, open, and personal computers are easy to locate with scanners, making an easy target for the cybercriminal.

Roughly 64% of Americans experience a data breach and nearly 20 million people become victims of identity theft each year. Many consumers fall prey to hackers through use of social media, where Cybercriminals gain access to personal data by creating fake links that download malware to user devices when users click the link. Consumers may also suffer data loss when cyber thieves victimize companies. The companies are desirable targets for cybertheft as they often collect their customers’ addresses, names, social security numbers, and other personal information.

In response to the data breaches, security-related legislation has been enacted at both the state and federal level. This legislation requires companies to take certain measures to protect sensitive information and establishes standards for notifying consumers when a breach occurs. Depending upon the industry, such as the healthcare industry, additional rules and penalties apply. Overall, with the proliferation and advanced tactics of cyber criminals, careful planning is required, both by a business and those with devices connected to the internet.

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The Defend Trade Secrets Act

Last summer, Congress enacted the Defend Trade Secrets Act (“DTSA”), which created a federal civil cause of action for misappropriation of trade secrets. Recently, various courts have started to interpret the DTSA, and determined that it does not preempt existing state law, but gives trade secret owners the option to enforce their claims and receive more consistent outcomes than they would in state court. Prior to the DTSA’s enactment, manufacturers and sellers had to bring trade secret misappropriation claims in state court, unless the parties could establish diversity jurisdiction or an independent federal cause of action.  Because state interpretations of the Uniform Trade Secrets Act vary in every state, consistent relief was not always possible.  For example, the definition of “trade secret” and the types of remedies differ across states. However, the DTSA applies nationwide and provides a uniform statute for trade secret owners to rely on in federal court.

The DTSA has important features that will impact trade secret owners.  Notably, it defines “misappropriation” and “trade secret”, which aids in consistent enforcement across state lines.  Additionally, it creates a civil seizure mechanism, which allows courts to order the seizure of property to prevent the propagation or dissemination of the trade secret, even before a formal finding of misappropriation is established and without notice to the alleged wrongdoer.  Last, a whistleblower provision provides immunity to employees from criminal or civil liability under federal or state laws for disclosing a trade secret to an attorney or government official for purposes of reporting or investigating a suspected violation of the law or filing a lawsuit made under seal.

Most controversial is the civil seizure provision, and courts are reluctant to permit seizures unless the plaintiff establishes necessity. Also controversial, federal courts are turning to state courts for guidance in interpreting the DTSA, thus, defeating its underlying purpose of providing uniformity. However, these issues are likely to be resolved over time. Since its enactment, it is estimated that less than seventy cases have been brought under the DTSA, but the law provides an important option for those pursuing trade secret claims.

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A Business Entity on the Rise: The Public Benefit Corporation

Until recently, many entrepreneurs were struggling to use their businesses to create a positive social change, mainly because traditional corporate laws require a corporation’s purpose to focus on maximizing shareholder value. However, the public benefit corporation is a newer business structure that is legally required to consider how its decisions will affect the general public, in addition to how its decisions will maximize shareholder profits. Thus, public benefit corporations can serve the best interests of society while creating value for stockholders.

Approximately thirty-two states recognize benefit corporations. In 2013, Delaware adopted legislation that recognizes the public benefit corporation as an entity and it is currently one of the most popular states for incorporation. Delaware corporation laws require a public benefit corporation to have the corporate purpose of operating in a responsible and sustainable manner. Further, the benefit corporation must identify one or more public benefit purposes. Last, Delaware benefit corporations must report biennially to shareholders about the corporation’s overall impact on the shareholders’ financial interests and on the interest of those identified in the public benefit corporate purpose.

In 2014, Nebraska joined the ranks of the other states that recognize benefit corporations as a legal entity. Nebraska benefit corporations have the purpose of creating general public benefits and may also have specific public benefit purposes, such as the purpose of promoting the arts and sciences. Additionally, the benefit corporation must prepare an annual report for the corporation’s shareholders that identifies the ways in which the benefit corporation pursued a general public benefit during the year and any circumstances that hindered the creation of a general or specific public benefit.

Ultimately, lawmakers hope public benefit corporations will create jobs, improve communities, and use innovative approaches to solve society’s most challenging problems.

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