Entitled to Stay Relief? Prove it.
Bankruptcy is a headache for lenders.
For example, you make a commercial real estate loan and record your deed of trust. The borrower pays you for a time but then defaults. You tried loan forbearance and modification, but it was unsuccessful. The borrower falls further and further behind on the loan. You are left with no choice but to foreclose on your collateral.
You start a foreclosure special proceeding in state court. You pay your attorney and a foreclosure trustee. After what seems like forever — months of continuances, no payments, and possible depreciation of your collateral — the clerk of court authorizes the sale of the property. Another month goes by, and a sale is conducted. Your credit bid is the only bid for the property. Nine days of the upset bid period pass, and you are one day away from owning the property. Then, an unwelcomed companion arrives with your morning coffee: A NOTICE OF BANKRUPTCY CASE stamped with the official seal of the United States Bankruptcy Court.
Your borrower has filed for bankruptcy, and the automatic stay is in effect. You cannot complete the foreclosure. You do not own the property. Your loan is not off the books.
Now, you pay your attorney to represent you in the bankruptcy. The borrower has filed Chapter 11, says he intends to reorganize and needs the property to succeed. The bankruptcy case languishes for six months. Finally, the debtor concedes that reorganization is unlikely, and the bankruptcy court dismisses the case. You can now resume the foreclosure, but by law, you must conduct a new sale. You can’t just let the original upset bid run for the full 10 days. You conduct another foreclosure sale, you credit bid again, and nine days of the upset bid period pass. Then, in the words of Yogi Berra, it’s déjà vu all over again. Your borrower filed a second bankruptcy, and the automatic stay has blocked the completion of your foreclosure.
Now what? A creditor can move for relief from the automatic stay. This article focuses on real property collateral and when a debtor has schemed to delay, hinder, or defraud its creditors by transferring an interest in the property without permission or by filing multiple bankruptcy cases affecting the property.
A recent decision by the Honorable Ashley A. Edwards, the newly-appointed bankruptcy judge for the Western District of North Carolina, stresses the importance of proving the material facts necessary to pierce a debtor’s automatic stay shield.
Stay relief is an exception to the broad protections of bankruptcy afforded a debtor. The creditor must prove that the specific facts warrant it. Our illustration, with the back-to-back bankruptcy filings, looks like an easy win for the lender. However, the bankruptcy court denied the lender’s motion for stay relief. Why? Because it appears the lender filed a motion and did little else to establish the key facts to support stay relief.
The bankruptcy court pointed out that the lender offered no evidence at the hearing – no documents, exhibits, or witness testimony. The bankruptcy court also held that establishing a “scheme” is a heightened burden. Courts define “scheme” narrowly. The facts must establish a debtor’s “intentional artful plot or plan,” not just “misadventure or negligence.” Stay relief is appropriate where facts establish multiple property transfers without consideration to circumvent a creditor’s rights and remedies. Reliance on public records alone is insufficient. The court will want testimony from key participants in the scheme.
Despite the two bankruptcy filings during the upset bid period, sufficient facts remained unclear to the bankruptcy court to permit stay relief. Even with judicial notice of the multiple bankruptcies, the court required additional facts showing a scheme and relating to the use, tenancy, and status of the property.
This case underscores an important lesson: if you’re going to seek stay relief, follow the Powell Doctrine and deploy every relevant fact in your arsenal to support all the elements of your motion. Don’t simply file a motion, show up at the hearing, and expect the court to “get it.” Descend on the courthouse with your witnesses and exhibits and be ready to conduct a mini-trial. This is time-consuming and expensive, but it will put you in the best position to win.
Why Financial Institutions Should Stay the Course
Introduction
Many regulated businesses believe that the only thing worse than strict regulations is a wholly uncertain regulatory environment. With many rule changes on hold and enforcement actions and investigations being terminated or limited, how do banks, payments program managers, processors, and fintechs move forward? Do they “take their gloves off” and take advantage of a possible enforcement void to maximize profits, or do they stay the course given that there are 50-year-old laws on the books that still apply and probably are not going anywhere?
We say, continue to innovate with the expectation that certain fundamental laws and rules are unlikely to change and that consumers still want and need financial services and products.
The Resilience of Statutes and Regulations
Most financial institutions, payments companies, and fintechs have always designed their products and services for compliance. When new rules and orders come out, they often do not have to make changes because they had a robust compliance program in place and had already been using best practices. Similarly, they are not quick to take advantage of a “bad” ruling, knowing instinctively that a new statute, order, or ruling will soon restore the status quo.
Even in a time of regulatory uncertainty, the primary federal consumer protection rules that have existed since the late 1960s and 1970s are likely to stay in place. These include the following:
The Truth in Lending Act (TILA) and its Regulation Z, which, among other things, require loan disclosures, periodic statements for open-end credit, and prepaid account disclosures, and provide consumers with protections from unauthorized credit card transactions.
The Electronic Fund Transfers Act (EFTA) and its Regulation E, requiring initial disclosures, regulating electronic fund transfer (EFT) arrangements, and providing significant consumer protections from unauthorized EFTs.
The Equal Credit Opportunity Act (ECOA) and its Regulation B, prohibiting impermissible forms of credit discrimination and requiring “adverse action” notices or other notifications regarding credit applications and existing extensions of credit. While the scope of the impermissible discrimination rules may change from time to time, including as a result of court decisions, the basic credit notification requirements are unlikely to change.
The Truth in Savings Act and its Regulation DD, which requires initial disclosures for consumer deposit accounts and, if statements are provided, requires specific information to be included in such statements.
The Real Estate Settlement Procedures Act (RESPA) and its Regulation X. In addition to requiring certain mortgage loan disclosures, Section 8 of RESPA prohibits referral fee and kickback arrangements involving “settlement services.” Here is one area for which the rules might be relaxed. For many years, the ability to enter into marketing services agreements and similar arrangements has been severely limited due to the Section 8 interpretations and enforcement actions of the Consumer Financial Protection Bureau (CFPB). With the CFPB being under new leadership and its future uncertain, marketing arrangements that survived Section 8 scrutiny prior to the CFPB might again be viable.
For all of the above, while enforcement by federal regulators might be reduced, enforcement by plaintiffs’ lawyers likely will not. This seems particularly likely for those laws such as TILA, the EFTA, and ECOA that provide for class-action liability.
State laws governing credit interest rates, loan and other product and service fees, and consumer disclosures also are likely to stay in place. Those laws might shift in some states, particularly those laws that were made more burdensome in recent years, but they are unlikely to go away entirely.
States May Fill the Void
All of the federal laws listed above are “federal consumer financial laws” under the Dodd-Frank Act, and state attorneys general and state regulators are empowered by that act to bring a civil action to enforce any of these laws. The main exception is that a state attorney general or regulator generally may not bring such civil actions against a national bank or federal savings association.
Conclusion
Although there may be some regulatory uncertainty, some things remain constant. Lawyers will be lawyers and lawsuits will be brought, and state attorneys general and regulators can enforce the federal consumer financial laws against most banks and nonbank businesses.
It is just a question of complying with the existing laws, applying common sense rules, and developing attractive consumer options. We are not without regulatory guardrails, but old-fashioned banking with modern innovations still provides routes to develop and market consumer products and services and build customer relationships. Those businesses that continue to innovate can take the lead.
Splitting the Pie Fairly: Using Creativity to Achieve a Successful Business Divorce
Throwing the baby out with the bath water is a pithy expression that suggests exercising caution when business partners in private companies are seeking to achieve a business divorce. The majority owner and the departing minority partner in the business may both see this process as a “take no prisoners” type of battle. But adopting the view that a zero-sum outcome is the only possible result when a business divorce takes place — with just one clear winner and loser — is not just unnecessary, it can be destructive to the parties’ relationship and to the business. When parties instead consider creative strategies that are designed to optimize the result for both sides, they will ratchet down the emotional tensions involved, preserve their long-term relationship, and avoid doing serious damage to the company’s reputation and performance.
In this post, we consider a variety of approaches to business divorce that provide for a partner exit based on objectively reasonable terms, which will help preserve the company’s value and provide a structure that enhances the company’s longevity.
A Phased Buyout with Security Protections
A business divorce involving a full cash payment up front is rarely optimal for either the majority owner or the minority investor. The company will be reluctant to fund an immediate cash buyout from the business, because this sudden removal of the cash on hand will negatively impact the company’s ongoing operations. The departing minority partner will also likely be concerned that insisting on an all-cash buyout will result in an effort to apply deep discounts to the purchase price, i.e.,force a buyout of the minority interest “on the cheap.”
The reluctance of both parties to push for an immediate payment is why it is customary for business divorce buyouts to take place over an extended period. The parties will implement a valuation process using an objective third-party valuation firm to determine the enterprise value of the company; in some cases, both the company and the minority investor will retain business valuation experts to compare reports to achieve an objective resolution of the company value. Once the value has been agreed on, the parties will put in place a multi-year payment plan for the purchase of the investor’s interest. The investor will also want some form of security in the event of a default in payment, and this can be provided in a number of ways. Some examples include providing a pledged interest in some of the company’s assets or receivables, the majority owner providing a personal guaranty, or the unpaid purchase amount due could be subject to a security interest in a portion of the company’s stock.
Performance Based Buyouts
When business divorces do become contentious, the business partners are usually in conflict over the company’s value — typically when the majority owner has presented a buyout figure that the minority investor considers much too low. When this valuation dispute results in an impasse between the parties, the filing of a lawsuit may seem like the inevitable next step. But moving to the courthouse is not the only way to resolve this valuation conflict. .
One way to head off litigation over valuation is to provide for the minority investor to receive additional payments that increase the total purchase price paid for the investor’s interest based on the company’s future performance. The majority owner (or company) still acquires the full ownership interest of the minority investor at a closing, but the investor will also receive a (negotiated) percentage of the company’s future revenue for some period of time.
This is known as a revenue-sharing agreement – the purchase price involves payment to the investor of a fixed amount with additional payments that are based on the company’s future performance. The percentage of the revenue share does not have to be flat, i.e., it could be 15% of the revenues the first year, 10% in year two, and 5% in year three — all of these amounts are subject to negotiation. Further, the parties can also include a high-low arrangement that adds both a floor and a ceiling for the future payments. In this scenario, the investor is guaranteed to receive a total minimum amount based on future payments that are made regardless of the company’s actual revenue, which sets the floor for the total purchase price to be paid. If the investor negotiates to include a floor as a guaranteed minimum payment, however, the majority owner will then include a cap that will establish the maximum amount that the investor has the potential to receive based on the revenue share.
Dividing Assets, Markets or Clients Than Cash
One of the most creative approaches to achieving a business divorce is to structure the buyout based on the assets of the business rather than using cash alone to fund the purchase of the departing partner’s interest. This is an unusual option that will not work in many companies or where partners do not wish to continue operating any part of the business, but when the facts make it possible, this path may help to avoid conflicts and/or a legal battle between the partners.
In this type of business divorce, the parties will evaluate all the parts of the business and then divide certain company assets between them. There are no limits to the creativity involved in this process, and the partners can decide how to divide assets, including, but not limited to, the geographic regions or territories in which the company operates, the company’s different product lines, different groups of employees working at the company, or different customers the partners are working with in the business.
When the partners divide assets, they will both usually continue to work in the industry, and they will divvy up the company’s territories, product lines, customers and/or its employees in a manner that they determine is appropriate. This is obviously a more complicated scenario than a simple monetary buyout, but if the partners remain on good terms when they are conducting their business divorce, this type of asset division may be less contentious because each partner will receive the assets they need from the company to be successful as they move forward in the same or similar industry.
Conclusion
Business divorces often present emotional challenges for the partners, particularly when they have been in business together for years. But if the partners approach their separation in an effort to secure a win-win outcome, they can achieve a productive transition and avoid personal animosity that could negatively impact the business. These creative exits include a variety of potential structures such as phased buyouts based on future performance, asset-based divisions, and longer-term buyouts. These approaches share the common goals of preserving the value of the company and achieving a reasonable exit price that is acceptable to both partners.
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SEC Extends Compliance Period for the Amended Names Rule
On 14 March 2025, the Securities Exchange Commission (SEC) extended the compliance dates for the amendments to Rule 35d-1 (Amended Names Rule) under the Investment Company Act of 1940, as amended (1940 Act), by six months. However, as discussed below, some funds may have much longer to comply.
In response to requests submitted by the Investment Company Institute and Investment Adviser Association, highlighting challenges that funds and their service providers are experiencing associated with the timing of the initial compliance dates, the SEC extended the compliance dates as follows:
From 11 December 2025 to 11 June 2026 for fund groups with net assets of US$1 billion or more and
From 11 June 2026 to 11 December 2026 for fund groups with less than US$1 billion net assets (New Compliance Dates).
The SEC also aligned the compliance dates with the timing of certain annual disclosure and reporting obligations that are tied to the end of a fund’s fiscal year, for example the on-cycle annual update for an existing open-end fund (or other continuously offered fund) or annual report for a closed end fund or non continuously offered business development company (BDC). Compliance for these funds will be their first relevant filing following the New Compliance Dates.
As a result, depending on the type of fund, size of its fund group, its fiscal year end, and the date of its next on-cycle annual update or annual report (in the case of closed end funds or non continuously offered BDCs) following the New Compliance Dates, some funds may have significantly more than an additional six months to comply.
For example, an existing open-end fund or other continuously offered fund in a larger fund group with a fiscal year end of 31 January would be required to comply with the Amended Names Rule in May of 2027 (120 days following its fiscal year end) or such earlier date that it files its first annual update on or following 11 June 2026. An existing open-end fund or other continuously offered fund in a smaller fund group with a fiscal year end of 31 July would be required to comply with the Amended Names Rule in November of 2027 (120 days following its fiscal year end) or such earlier date that it files its first annual update on or following 11 December 2026. The table below illustrates the applicability of this extension based on the type of fund being considered.
Type of Fund
Compliance Date
New fund
Effective date of initial registration statement on or following the New Compliance Dates.
Existing open-end fund or other continuously offered fund (larger fund groups)
At the time of the effective date of its first “on-cycle” annual prospectus update filed on or following 11 June 2026.
Existing open-end fund or other continuously offered fund (smaller fund groups)
At the time of the effective date of its first “on-cycle” annual prospectus update filed on or following 11 December 2026.
A fund solely registered under the 1940 Act that does not rely on Rule 8b-16(b)
As of the date the fund files its annual update required by Rule 8b-16(a) on or following the New Compliance Dates.
Existing closed end fund that relies on Rule 8b-16(b)
As of the time of the transmittal of its first annual report to shareholders on or following the New Compliance Dates.
Existing BDC (not continuously offered)
As of the time of the filing of its first annual report on Form 10-K on or following the New Compliance Dates.
Privately offered BDC
As of the effective date of the BDC’s filing on Form 10, or the filing of its election to be regulated as a BDC on Form N-54A, on or following the New Compliance Dates.
The SEC reports their belief that the extension and ability to make disclosure changes “on-cycle” will balance the benefits to investors of the amended names rule framework with the timing needs of a fund to implement the Amended Names Rules properly.
Trusts as Qualified Purchasers: Navigating the Qualified Purchaser Threshold for Trusts Investing in Private Securities
This article is the third and final part in a series discussing trusts in the context of certain common investor thresholds for investment in private securities. This article will examine trusts as “qualified purchases” under the Investment Company Act.
What is the Investment Company Act and Why Does It Matter?
The Investment Company Act of 1940 regulates “investment companies,” which are entities that primarily engage in buying, selling, and holding securities. Typically, the Company Act requires entities that fall under the definition of an investment company to register with the SEC. However, many private offerings rely on exclusions from the definition of investment company under Section 3(c)(1) and Section 3(c)(7).
Section 3(c)(1) excludes from the definition of investment company entities with fewer than 100 investors.
Section 3(c)(7) excludes from the definition of investment company entities whose securities are owned solely by “qualified purchasers” and which are not making or intend to make a public offering of their securities. This section is crucial for funds targeting institutional investors and ultra-high-net-worth individuals.
For trusts, investing in private securities through a Section 3(c)(7) fund requires meeting the qualified purchaser criteria, which are more stringent than those for accredited investors or qualified clients.
How Trusts Can Qualify as Qualified Purchasers
A trust may qualify as a qualified purchaser in three ways:
Large Investment Trusts:A trust qualifies if it owns or invests at least $25 million in investments on a discretionary basis. It must meet this threshold independently, even if the trustee is a qualified purchaser.
Family Companies:If a trust is a family company (established for the benefit of two or more related individuals such as siblings, spouses, direct lineal descendants by birth or adoption, or their spouses (including former spouses)) and holds at least $5 million in “investments,” it qualifies as a qualified purchaser.
Non-Family Companies:A trust that is not a family company qualifies only if each trustee (or decision-maker) and each settlor (or contributor of assets) is a qualified purchaser.
Why This is Important for Trusts Investing in Private Securities
The qualified purchaser threshold is critical for trusts seeking to invest in private securities under Section 3(c)(7) of the Investment Company Act. As private markets expand and wealth transfers increase, understanding these requirements will become even more essential. Trusts that meet the qualified purchaser criteria can access a wider range of private investment opportunities, including private equity and hedge funds, which often require this designation.
When advising clients, it is vital to ensure that trusts are structured correctly to meet the qualified purchaser threshold. Thereby allowing access to invest in certain private offerings.
The surge in wealth transfers and the growth of private securities will likely lead to more trusts investing in these asset classes.
Advisors to trusts seeking to participate in institutional-grade private funds that rely on Section 3(c)(7) must structure such trusts to meet the qualified purchaser threshold. By doing so, they can help trusts capitalize on the expanding opportunities in private securities, benefiting from both wealth transfer strategies and access to high-growth investments.
For more information, please see the article prepared by Andrew Rosell, Nick Curley, and Sarah Ghaffari, SEC Considerations – Investments in Private Securities.
The Latest Attack on Consumer Arbitration Agreements
The war against arbitration agreements continues apace. The latest volley comes from the U.S. Court of Appeals for the Fourth Circuit, Johnson v. Continental Finance Company, LLC, No. 23-2047 (4th Cir. Mar. 11, 2025). In Johnson, the court considered whether a change-in-terms provision in a cardholder agreement rendered arbitration and delegation clauses illusory under Maryland law. In a 2-1 decision featuring opinions by all three panel members, the court said “yes,” and found the arbitration and delegation clauses unenforceable.
Plaintiffs filed putative class-action complaints against Continental Finance Company, LLC and Continental Purchasing, LLC. Continental moved to compel arbitration pursuant to the arbitration provision contained in the cardholder agreement Plaintiffs received upon account opening. Plaintiffs opposed, arguing the cardholder agreement lacked consideration because the agreement’s change in terms provision permitted Continental to unilaterally amend the agreement at its “sole discretion”:
We can change any term of this Agreement, including the rate at which or manner in which INTEREST CHARGES, Fees, and Other Charges are calculated, in our sole discretion, upon such notice to you as is required by law. At our option, any change will apply both to your new activity and to your outstanding balance when the change is effective as permitted by law.
Affirming the district court, a majority of the panel agreed that the arbitration clause was illusory because the change-in-terms provision allowed Continental to “change any term of [the] Agreement in [its] sole discretion, upon such notice to [Plaintiffs] as is required by law.” Citing a decision by the Supreme Court of Maryland (Cheek v. United Healthcare), the majority said such provisions “are so one-sided and vague” under Maryland law that they “allow[] a party to escape all of its contractual obligations at will,” including the obligation to arbitrate. Based on this, the majority held that the arbitration and delegation clauses were unenforceable.
Judge Wilkinson’s lead opinion raises a difficult question: If the change-in-terms provision renders the arbitration clause illusory, then why doesn’t it render the entire cardholder agreement illusory? To be sure, the plaintiffs limited their argument to the arbitration and delegation clauses, and the majority affirmed that these were the only provisions that its judgment disturbed. The lead opinion doesn’t answer this question. To our eyes, we see no limiting principle that would prevent the same argument from taking down the entire cardholder agreement. What’s good for the goose is good for the gander: Arbitration agreements are to be treated just like every other contract under state law. If the change-in-terms provision nullifies the formation of the arbitration agreement, the same should be true for every other term in the contract. Such a drastic outcome would jeopardize the formation of countless consumer contracts. As the dissent (authored by Judge Niemeyer) points out, the change-in-terms language here is “legal and widespread.” All that is required is sufficient notice of the change. If consumers don’t like the change, they negotiate with their wallets and take their business elsewhere.
Perhaps sensing this gap in the lead opinion, Judge Wynn addresses it in his decisive concurrence. But in doing so, he frankly raises more troubling questions. He points to another Maryland Supreme Court case (Holmes v. Coverall N.A., Inc.) stating that “an arbitration provision contained within a broader contract is a separate agreement that requires separated consideration in order to be legally formed.” This strand of Maryland law strikes us as potentially unlawful as preempted under the Federal Arbitration Act. Again, arbitration agreements must be treated on the same footing as every other contract under state law. No one disagrees that every other provision in Continental’s contract can be negotiated collectively and supported by the same pot of consideration. So why do arbitration agreements require something different and more rigorous under Maryland law? Though we’re obviously Monday morning quarterbacking this case, our answer is: They shouldn’t.
As noted at the top, Johnson is part of a larger judicial war by plaintiffs’ lawyers and consumer advocacy groups against consumer arbitration—one that we expect to grow in ferocity given the Trump administration’s recent defanging (and defunding) of the CFPB. Several courts have limited the enforcement of arbitration provisions in consumer contracts where plaintiffs have argued that the unilateral modification of such contracts to include arbitration provisions was illusory or did not comply with the implied covenant of good faith and fair dealing. See Canteen v. Charlotte Metro Credit Union, 900 S.E.2d 890 (N.C. 2024); Decker v. Star Fin. Grp., Inc., 204 N.E.3d 918 (Ind. 2023); Badie v. Bank of Am., 67 Cal. App. 4th 779 (1998). And prior to the recent changes in Washington, the CFPB had proposed a rule making one-sided “change-in-terms” provisions illegal and unenforceable.
We note however that several courts have gone the other way, see, e.g., SouthTrust Bank v. Williams, 775 So. 2d 184 (Ala. 2000), and the cases that have refused to enforce arbitration provisions have indicated that such provisions may be enforceable where the change in terms clause expressly requires a detailed description of changes before they become effective (Johnson) or the contract previously had a governing law provision that specified the forum for the resolution of disputes (Canteen).
Companies that have arbitration provisions or are considering adding them to their consumer contracts should stay apprised of the developing law in this area, particularly in the states in which they are located. Please talk to a lawyer before you draft or promulgate an arbitration clause—an ounce of prevention is worth a pound of cure.
FINRA Proposes and Seeks Comment on Simplified Rules for Outside Business Activities and Private Securities Transactions
On Friday, March 14, in Regulatory Notice 25-05, the Financial Industry Regulatory Authority (FINRA) proposed a new rule to address when registered individuals engage in activities away from their member firms and when associated persons (which can be registered or unregistered individuals) engage in securities transactions away from their member firms. If adopted, new FINRA Rule 3290 would replace existing FINRA Rule 3270 (covering what was known as “Outside Business Activities” or “OBAs” and under the proposed rule will be known as “outside activities”) and FINRA Rule 3280 (covering what was known as “Private Securities Transactions” or “PSTs” and under the proposed rule will be known as “outside securities transactions”). FINRA previously proposed similar changes in 2018, but that proposal did not move forward, given concerns over the prior proposal’s treatment of investment advisor activities conducted away from the employing member firm. The current proposal, therefore, provides little change from the current rules on outside activities and transactions at unaffiliated investment advisers. It does, however, simplify and streamline the OBA and PST compliance process by:
Expressly excluding Outside Business Activities that are not “investment related.” Member firms and their registered persons need not focus on, for example, “side hustle” jobs, such as driving for a rideshare service, bartending on weekends, or being employed as a referee.
Making clear those requirements applicable only to registered persons (that is, non-investment related Outside Business Activities, which are now called “outside activities”) and those obligations applicable to associated persons (whether registered or non-registered; that is, Personal Securities Transactions, now called “outside securities transactions.”)
Making clear when a member firm must acknowledge or approve an outside activity or outside securities transaction (whether or not for compensation). In short, member firms need not acknowledge or approve a registered person’s notice of an outside activity. If an outside securities transaction is not for compensation, the member firm needs only acknowledge the associated persons’ written notice of the transaction, but it can require compliance with specific conditions or restrictions. If an outside securities transaction is for compensation, the member must approve or disapprove the transaction (or approve subject to limitations or conditions) and provide such decision in writing.
Expressly excluding rentals, leases, purchases, and sales of main homes and rental properties. FINRA recognizes that these events are more common, pose lower risks, and require effort to review without commensurate benefits.
Excluding activity conducted at non-broker-dealer affiliates of the member firm and clarifies that activities performed at dually registered firms are not performed “away” from the member firm (and therefore not “outside” or subject to the rule). An associated person’s activities conducted at an unaffiliated investment adviser would be covered by the proposed new rule.
Making clear the assessments and evaluations a member firm must perform after receiving notice of a registered employee’s written notice of an outside activity or an associated person’s notice receipt of an outside securities transaction.
Making clear that purchasing a security from an issuer or unaffiliated broker-dealer (known as “buying away”) continues to be covered by the proposed rule as an “outside securities transaction.”
FINRA has created a helpful flowchart of the proposed rule’s application, as well as a comparison of how 10 scenarios would be treated under both the existing rules and the new proposed rule.
FINRA is seeking comments on the proposed rule, due May 13, 2025.
FinCEN Issues Geographic Targeting Order to Require Certain Money Services Businesses to File CTRs for Smaller Transactions
On 11 March 2025, the Financial Crimes Enforcement Network (FinCEN) issued a Geographic Targeting Order (GTO) to require money services businesses (MSBs) located in specified counties of California and Texas to file currency transaction reports (CTRs) for currency transactions of more than US$200 but not more than US$10,000. The regular CTR filing requirement for transactions of more than US$10,000 remains in place, but the GTO effectively reduces the threshold for such filings.
FinCEN’s authority to issue GTOs is provided by the Bank Secrecy Act (BSA), which authorizes FinCEN to order additional recordkeeping and reporting requirements upon finding reasonable grounds to conclude that such requirements are necessary to carry out the purposes of the BSA or to prevent evasions thereof. This GTO becomes effective 14 April 2025 and will expire 180 days thereafter unless it is renewed.
This 180-day effective period is consistent with the BSA, but, as a practical matter, FinCEN tends to renew its GTOs and often expands them to cover other geographies. According to FinCEN, the new GTO is in furtherance of Treasury’s efforts to combat illicit finance by drug cartels and other illicit actors along the southwest border of the US. FinCEN can renew this GTO if it determines that to be appropriate, and/or could amend it to cover additional states, such as Arizona or New Mexico that also share a border with Mexico.
Except for the reduced dollar threshold, the “Covered Transactions” for this GTO are the same as for regular CTRs: “each deposit, withdrawal, exchange of currency or other payment or transfer, by, through or to” the covered financial institution, in this case MSBs located in the Covered Geographic Area. For all CTR purposes, “currency” means cash: the coin and paper money of the US or of any other country that is designated as legal tender.
The “Covered Geographic Area” for this GTO include 30 enumerated zip codes, including at least parts of Imperial and San Diego County of California, and Cameron, El Paso, Hidalgo, Maverick and Webb Counties of Texas. If an MSB is located in any of these zip codes and engages in Covered Transactions in any of those places, it is subject to this GTO.
Before concluding a Covered Transaction, the MSB must perform the identification requirements regarding the individual presenting the transaction and, if applicable, any individual or entity on behalf of which the transaction is to be effected, following the rules for regular CTR filings.
The GTO does not alter the US$2,000 threshold for suspicious activity report (SAR) filings, but the GTO encourages MSBs to make voluntary SAR filings to report transactions conducted to evade the US$200 reporting threshold.
Each MSB that is subject to this GTO is responsible for compliance by each of its officers, directors, employees, and agents. The GTO also directs each covered MSB to transmit the GTO to its agents that are located in the Covered Geographic Area.
UK Sanctions Update: OFSI Releases Financial Services Threat Assessment – Part 2
Last month, the UK’s Office of Financial Sanctions Implementation’s (“OFSI”) published a Threat Assessment analyzing sanctions compliance involving UK financial services firms since February 2022, when Russia invaded Ukraine.
In the first of our two-part article (available here), we summarized the six key areas of risk that OFSI identified in its Threat Assessment.
In this concluding part, we consider next steps for UK financial services firms, including performing targeted lookbacks and assessing whether existing sanctions compliance programs and controls are properly attuned to the threats and vulnerabilities that OFSI identified, or whether urgent remediation is necessary.
Recapping the Key Threats
Briefly, according to OFSI’s “Threat Assessment” report[1], the six key sanctions-related threats posed to the UK by firms operating in the UK’s financial services sector are the following:
Failures to report suspected breaches to OFSI.
Frozen funds being improperly maintained, and license conditions being breached.
Usage of new professional and non-professional enablers to evade sanctions.
Usage of enablers to make the payments necessary to maintain the lifestyles or assets of Russian Designated Persons (“DPs”).
Enablers “fronting” for Russian DPs and claiming ownership of frozen assets.
Usage of alternative payment methods and intermediary countries.
Overall, OFSI’s report very clearly signals the growing sophistication of the sanctions evasive tactics being deployed by Russian DPs.
Next Steps for UK Financial Services Firms
Given the potential for serious civil penalties, including fines of up to GBP 1 million or 50% of the total value of each violation, whichever is higher, on a strict liability basis, criminal prosecutions and jail terms of up to seven years, and the indeterminate reputational damage that can follow from sanctions violations, all financial services firms subject to UK sanctions must carefully review their sanctions compliance frameworks in light of OFSI’s findings and recommendations to ensure that they are not falling short in any of the areas identified.
In particular, UK financial services firms would be well-advised to respond to the Threat Assessment by:
Self-reporting any suspected breaches of UK financial sanctions in a timely manner. This necessitates two action items and possibly the support of specialist counsel:
A lookback exercise to identify any past suspected breaches that might not have been reported but ought to have been.
Clear and reasoned internal policies and procedures to ensure efficient alert management and dispositioning, the timely escalation and investigation of suspicious activities or transactions, and the prompt regulatory reporting of suspected breaches on an ongoing basis.
Updating existing sanctions compliance training plans and materials to ensure they pay careful attention to OFSI’s insights and recommendations. Where necessary, firms should consider arranging external training by specialist counsel.
Closely monitoring transactions for indicators of violative conduct, and particularly the many red flags that OFSI identifies in its report, including:
New individuals or entities making payments to satisfy an obligation that previously was satisfied by a Russian DP.
Individuals associated with Russian DPs, including possible professional or non-professional enablers, receiving significant amounts without adequate explanation.
Frequent payments between companies owned or controlled by a DP.
Attempts to deposit large sums of cash without adequate explanation.
Crypto-to-fiat transactions (or vice versa) involving a Russian DP’s family members or associates.
4. Conducting appropriate due diligence on customers, scrutinizing arrangements for signs of “fronting”, and considering the following OFSI observations as triggers for enhanced due diligence:
Individuals with limited profiles in the public domain, including those with little relevant professional experience.
Inconsistencies in name spellings or transliterations, particularly those stemming from Cyrillic spellings.
Recently acquired non-Russian citizenships, including from countries which offer “golden visa” schemes.
Frequent or unexplained changes of name or locations of operation.
5. Determining which correspondent banks are part of the System for Transfer of Financial Messages (“SPFS”), which is Russia’s alternative to SWIFT and which has kept Russia connected to the international financial system and neutralized to some degree the intended effect of related restrictive measures. Since the European Counsel has banned EU banks operating outside of Russia from joining SPFS and since OFAC has warned in recent alerts that it will aggressively target foreign financial institutions who do so, it is important for financial services firms to factor into their sanctions risk assessments any ongoing transactional relationships with institutions using SPFS.
6. Understanding the requirements of all applicable sanctions regimes and remaining cognizant of the fact that there are many sanctions targets under the UK, EU, and US regimes that do not relate to Russia. For example, in its report, OFSI reminds UK financial services firms of the need to comply with sanctions relating to Iran, Libya, and North Korea.
7. Updating sanctions risk assessments to properly account for geographic exposure. For example, in its report, OFSI posits that, in the first quarter of 2024, of all the jurisdictions involved in breaches of UK financial sanctions, the UAE featured the most, followed by Luxembourg. This is valuable information and should be leveraged during any tailored and well-conducted risk assessment.
Additional Considerations
We understand that this is the first in a series of sector-specific assessments that OFSI plans to undertake, with the intention of assisting stakeholders in key UK sectors to understand and comply with UK sanctions. We will monitor for others and keep our readership updated.
[1] UK Government, Financial Services Threat Assessment, (February 2025).
Court: Investment Adviser Has No Duty To Warn Non-Clients
According to the Court of Appeal:
An imposter posing as investment advisor Daniel Corey Payne of Lifetime Financial, Inc. (Lifetime) stole more than $300,000 from Mark Frank Harding. Before this occurred, Lifetime had received several inquiries from other individuals about a potential imposter who was posing as Payne and asking for funds; Lifetime did not post a warning about the imposter on its website or take any other significant action.
Harding v. Lifetime Financial Inc., 2025 WL 815697 (Cal. Ct. App. Mar. 14, 2025). In an effort to recover his life savings, Harding sued Lifetime alleging “if Lifetime and LPI [a related advisory firm] had posted a warning on their website about the imposter, or if they had reported the matter to FINRA, Harding would have realized the person he was communicating with was an imposter, and he would not have lost his life savings”.
Harding’s efforts failed to meet with success in the trial court which granted summary judgment for the defendants. In affirming the trial court, the Court of Appeal noted that as a general matter there is no duty to protect others from the conduct of others. More specifically, it could find “no statutory or case authority holding that an investment advisor owes a duty to nonclients to post a notice on its website or notify law enforcement that someone has been impersonating the investment advisor.”
Harding argued that FINRA Rule 4530 created a duty to warn. That rule requires FINRA members to “promptly report to FINRA . . . after the member knows or should have known . . . [that] [¶] (1) the member or an associated person of the member: [¶] . . . [¶] (B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery.” The Court of Appeal disagreed, finding:
in order for Defendants to have had a reporting duty under this rule, they would have had to receive a written complaint which alleged Defendants engaged in theft, misappropriation of funds or securities, or forgery, and that written complaint would have had to come from a person whom Defendants engaged or sought to engage in security activities. That is not what happened here.
Harding illustrates how difficult it can be to detect an impersonation. The imposter initially contacted the plaintiff by phone and the plaintiff spoke with the imposter several times thereafter. The imposter used the name of a representative at Lifetime and had an email address that included “lifetime” as part of the address. The plaintiff researched Lifetime online and verified Lifetime’s CRD number and Lifetime’s registration.
European Commission Publishes Draft Clean Industrial Deal State Aid Framework and Calls for Feedback
The European Commission (the Commission) is proposing to adapt the rules governing Member State economic support to industry, changing the focus of the permitted subsidies that guide the EU economy to a great degree. The proposal forms part of a wave of initiatives aimed at improving the competitiveness of the EU.
On 11 March 2025, the Commission published a draft Commission Communication on a Framework for State Aid measures to support the Clean Industrial Deal (the draft State Aid Framework), setting out the latest evolution in the EU’s State aid policy. The draft State Aid Framework complements the existing EU State Aid guidelines, including the guidelines on State aid for climate, environmental protection and energy (CEEAG) by enabling and accelerating specific investments and activities. Competitiveness and sustainability constitute two pillars of the Commission’s overarching political objectives for the 2024-2029 legislature.
Until 25 April 2025, a window is open for stakeholders to share their views on the draft State Aid Framework as part of the public consultation being run by the Commission. Businesses that could benefit from aid measures, and businesses that compete with subsidized rivals, may have in an interest in submitting comments on the aspects that are most likely to affect them.
The Clean Industrial Deal and the State Aid Framework
The EC published on 26 February 2025 a Communication on a Clean Industrial Deal (the Clean Industrial Deal), which introduced a suite of sustainability and competitiveness measures to address challenges such as slow economic growth in the EU and technological competition, covered in our client alert.
The adoption of a modified State Aid Framework by Q2 2025 is one of the flagship actions laid out in the Clean Industrial Deal to improve EU investment levels and make energy more affordable in the EU. The new State Aid Framework is intended to replace the Temporary Crisis and Transition Framework, as amended, which has been in place in different forms since November 2022.
Under the Treaty on the Functioning of the EU (TFEU), State aid by EU Member States is generally prohibited, unless it is justified in order to support objectives such as economic development. EU State aid policy, which is managed by the Commission, aims to determine where the limits of the economic development justification lie. This is a key EU economic policy question, with serious consequences for the structure of the EU economy and the ability of non-EU companies to compete fairly on the EU market, for example.
The draft State Aid Framework proposes the following changes to EU State aid policy:
Compatibility Assessment under Article 107(3)(c) TFEU:
Subject to conditions, measures that are in line with the Clean Industrial Deal would tend to be more easily found to satisfy the positive and negative conditions of Article 107(3)(c) TFEU.
Aid under the draft State Aid Framework would generally be cumulable with other State aid, de minimis aid or centrally managed EU funds, subject to conditions.
Subject to detailed and extensive conditions, the Commission would generally deem compatible with the EU internal market (and thus greenlight) State aid to support the following activities:
Investments for the production of energy from renewable sources, including the production of renewable fuels of non-biological origin (RFNBOs), as well as investment in storage for RFNBOs, biofuels, bioliquids, biogas and biomass fuels obtaining at least 75% of its content from a directly connected production facility.
Electricity and thermal storage.
The promotion of non-fossil electricity flexibility.
Capacity mechanisms following a target model.
Investments contributing significantly to reductions of greenhouse gas emissions from industrial activities or leading to a substantial reduction in the energy consumption of industrial activities through the improvement of energy efficiency.
Investment projects creating additional manufacturing capacity to produce equipment relevant for the transition to a net-zero economy, its key components, and new or recovered related critical raw materials necessary for its production.
The acquisition of clean technology equipment through accelerated depreciation schemes.
The reduction of risks of private investments into portfolios of eligible projects in the renewable energy, industrial decarbonization and clean tech manufacturing areas.
The Public Consultation
The draft State Aid Framework has not been adopted yet. Rather, the Commission intends to adopt its definitive version by June 2025. As such, the content of the draft State Aid Framework is still subject to change.
From 11 March 2025 until 25 April 2025, the Commission’s Directorate-General for Competition, which is responsible for State aid enforcement and policy, is seeking feedback from citizens, organizations and public authorities concerning the draft State Aid Framework. To that effect, it is running a public consultation, to which contributions may be submitted here.
To the extent that the Commission seeks to simplify State aid rules, accelerate the rollout of renewable energy, deploy industrial decarbonization and ensure clean tech manufacturing capacity, the public consultation constitutes a good opportunity to share any views and suggestions in relation to those goals.
FTC Granted Injunction in Small Business Lending Case
On February 20, a judge for the U.S. District Court for the Central District of California granted the FTC a preliminary injunction against a small business financing company.
The FTC alleges that the company violated Section 5 of the FTC Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, and the Consumer Review Fairness Act of 2016 for misleading small business owners about the nature of its financial products, resulting in unexpected fees and damage to their credit.
According to the FTC’s complaint, the company marketed itself as a provider of business loans and lines of credit but instead applied for multiple personal credit cards in consumers’ names. Many small business owners only discovered the scheme after receiving an invoice demanding payment of high fees tied to their newly approved credit limits. The FTC further alleged the company engaged in deceptive advertising and unfair contract terms designed to prevent negative consumer reviews.
The court’s injunction freezes the company’s assets and restricts its business activities while the litigation proceeds.
Putting It Into Practice: While the CFPB faces uncertainty over its future (previously discussed here), the FTC has continued to be active in the financial services sector. This case reflects the agency’s continued focus on small business lending practices, particularly those practices related to deceptive marketing and undisclosed fees.
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