SEC Priorities for 2025: What Investment Advisers Should Know
The US Securities and Exchange Commission (SEC) recently released its priorities for 2025. As in recent years, the SEC is focusing on fiduciary duties and the development of compliance programs as well as emerging risk areas such as cybersecurity and artificial intelligence (AI). This alert details the key areas of focus for investment advisers.
1. Fiduciary Duties Standards of Conduct
The Investment Advisers Act of 1940 (Advisers Act) established that all investment advisers owe their clients the duties of care and loyalty. In 2025, the SEC will focus on whether investment advice to clients satisfies an investment adviser’s fiduciary obligations, particularly in relation to (1) high-cost products, (2) unconventional investments, (3) illiquid assets, (4) assets that are difficult to value, (5) assets that are sensitive to heightened interest rates and market conditions, and (6) conflicts of interests.
For investment advisers who are dual registrants or affiliated with broker-dealers, the SEC will focus on reviewing (1) whether investment advice is suitable for a client’s advisory accounts, (2) disclosures regarding recommendations, (3) account selection practices, and (4) disclosures regarding conflicts of interests.
2. Effectiveness of Advisers Compliance Programs
The Compliance Rule, Rule 206(4)-7, under the Advisers Act requires investment advisers to (1) implement written policies reasonably designed to prevent violations of the Advisers Act, (2) designate a Chief Compliance Officer, and (3) annually review such policies for adequacy and effectiveness.
In 2025, the SEC will focus on a variety of topics related to the Compliance Rule, including marketing, valuation, trading, investment management, disclosure, filings, and custody, as well as the effectiveness of annual reviews.
Among its top priorities is evaluating whether compliance policies and procedures are reasonably designed to prevent conflicts of interest. Such examination may include a focus on (1) fiduciary obligations related to outsourcing investment selection and management, (2) alternative sources of revenue or benefits received by advisers, and (3) fee calculations and disclosure.
Review under the Compliance Rule is fact-specific, meaning it will vary depending on each adviser’s practices and products. For example, advisers who utilize AI for management, trading, marketing, and compliance will be evaluated to determine the effectiveness of compliance programs related to the use of AI. The SEC may also focus more on advisers with clients that invest in difficult-to-value assets.
3. Examinations of Private Fund Advisers
The SEC will continue to focus on advisers to private funds, which constitute a significant portion of SEC-registered advisers. Specifically, the SEC will prioritize reviewing:
Disclosures to determine whether they are consistent with actual practices.
Fiduciary duties during volatile markets.
Exposure to interest rate fluctuations.
Calculations and allocations of fees and expenses.
Disclosures related to conflicts of interests and investment risks.
Compliance with recently adopted or amended SEC rules, such as Form PF (previously discussed here).
4. Never Examined Advisers, Recently Registered Advisers, and Advisers Not Recently Examined
Finally, the SEC will continue to prioritize recently registered advisers, advisers not examined recently, and advisers who have never been examined.
Key Takeaways
Investment advisers can expect SEC examinations in 2025 to focus heavily on fiduciary duties, compliance programs, and conflicts of interest. As such, advisers should review their policies and procedures related to fiduciary duties and conflicts of interest as well as evaluating the effectiveness of their compliance programs.
Game On: How the CFPB’s EFTA and Regulation E Changes Could Shape Video Game and Online Marketplace Transactions
The Electronic Fund Transfer Act (EFTA) and Regulation E apply to an electronic fund transfer (EFT) that authorizes a “financial institution” to debit or credit a consumer’s account. While a “financial institution” traditionally refers to a bank, credit union, or savings association, it is well established that “financial institutions” can also include non-bank entities that directly or indirectly hold an account belonging to a consumer, or that issue an access device and agree with a consumer to provide EFT services. Prepaid accounts and “other consumer asset accounts” into which funds can be deposited by or on behalf of the consumer and which have features of deposit or savings accounts, also meet Regulation E’s definition of “account.” Some video game accounts used to purchase virtual items from multiple game developers or players may fall under the definition of “other consumer asset accounts.”
In April 2024, the Consumer Financial Protection Bureau (CFPB) issued a report on the banking and payment services becoming more prevalent in gaming and virtual worlds where consumers spend billions of dollars annually to purchase gaming assets—often by converting U.S. dollars to virtual currencies. The report raised concerns about consumer protections and the uncertain allocation of responsibility for errors or fraud when a customer’s digital currency or assets are lost through hacking, account theft, scams, or unauthorized transactions.
Recent Developments
Following that report, on January 10, 2025, the CFPB issued a proposed interpretive rule that aims to expand the scope of Regulation E’s coverage to video game platforms that hold consumers’ money for personal, family, or household use and treat those game platforms as if they are account holders just like a bank or credit union for Regulation E purposes.
The interpretive rule expands on what constitutes an EFT, particularly for new payment methods such as peer-to-peer payment platforms and digital wallets. This expansion includes transfers initiated through apps and payment systems tied to consumer accounts. The key is whether the funds act like or are used like money, such that they are accepted as a medium of exchange, a measure of value, or a means of payment.
The interpretive rule would also clarify that video game companies operating online marketplaces or otherwise facilitating EFTs would be subject to the consumer protection provisions under Regulation E, namely investigation and error resolution obligations. Additionally, the interpretive rule would require a video game company to disclose the terms and conditions of EFT services.
Next Steps
The CFPB is soliciting comments from the gaming community for this proposed interpretive rule, which must be sent via email to [email protected] on or before March 31, 2025.
How Will the Cannabis World Look When Marijuana Is Rescheduled?
A few weeks ago, someone at a holiday party asked “Whitt, why doesn’t Budding Trends take on the weighty legal issues of the day and instead resort to cheap pop culture references and puns?” I thought about responding with a quote from “Run Like an Antelope” but then it hit me: Maybe we should give some thought to a more high-minded discussion about the practical implications of marijuana rescheduling. (Editor’s note: This exchange did not actually happen.) So, I guess set the gear shift for the high gear of your soul, and let’s dive in.
It has been said that our greatest hopes and our worst fears are seldom realized. I think the recent efforts by DEA to reschedule marijuana from Schedule I to Schedule III is a good example of both. Those looking for news that marijuana is soon to be freely available nationwide will be disappointed, as, we suspect, will those who fear that rescheduling will immediately destroy the existing marijuana industry. It’s like Tom Petty reminded us, “most things I worry about, never happen anyway.”
None of This Matters if Marijuana Is Not Rescheduled, and That’s Far from a Settled Question
All of this is, of course, moot if marijuana is not rescheduled. While rescheduling is considered by many to be a fait accompli (oh yeah, Budding Trends dropping French on you) – and I agree it is more likely than not that marijuana will be rescheduled, although not in 2025 – there are a number of potential roadblocks standing in the way. We previously wrote about the process here.
But even if marijuana is not rescheduled in the near future, hopefully the discussion below will be helpful in thinking through the practical implications if marijuana is rescheduled in the future.
280E in the Rearview
It is widely assumed by many that one of the certain impacts of rescheduling is that marijuana operators would no longer be subject to the draconian tax consequences of 280E.
We previously wrote on the subject:
One of the most significant impediments to the growth of marijuana operators, and dispensaries in particular, is 26 U.S.C 280E. That one-sentence provision may be the biggest hurdle to the development of the marijuana industry in the United States. It dictates that:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
280E has crippled the marijuana industry, often exacting an effective tax rate north of 60% for operators. “Within the meaning of schedule I and II of the Controlled Substances Act” is the ballgame. If marijuana is rescheduled to Schedule III, 280E would no longer apply and marijuana operations would be taxed as normal businesses – provided that Congress did not specially enact a marijuana tax.
Obviously, state tax laws may still penalize marijuana businesses akin to 280E, but some states proactively exempted licensed cannabis businesses from those impacts.
One question that has stuck in my mind is whether rescheduling marijuana to Schedule III would remove state-legal operators from the ambit of 280E, or would that benefit only be afforded to businesses who manufactured, distributed, and sold FDA-approved Schedule III products (i.e., not most state-licensed operators at present)?
This is a question of statutory interpretation, and I think it comes down to how the government characterizes marijuana that is not compliant with Schedule III requirements. Is non-compliant marijuana still a Schedule III substance? If so, does it somehow become Schedule I or II? If not, then it would appear that that 280E does not capture non-compliant marijuana because that provision appears to be limited on its face to Schedule I and II substances. I think the better reading is that, while non-compliant marijuana operators may face consequences as discussed immediately below, 280E will no longer include marijuana.
Another related question of great interest to marijuana operators currently sitting on huge overdue tax bills is whether rescheduling marijuana would have a retroactive effect eliminating the existing tax liabilities for marijuana operators. Generally speaking, changes to tax laws are not retroactive unless Congress expressly says so. It strikes me as very unlikely that lawmakers will be interested in allowing marijuana operators who have not paid their full tax bills for years (and in some instances publicly admitted as much) to simply walk away from those obligations.
State Medical Programs
So, if marijuana is rescheduled, what happens to existing marijuana businesses operating under the auspices of state laws? This, as well as the fate of adult-use operators discussed immediately below, may be the most consequential yet unclear aspects of rescheduling.
State-licensed marijuana operators have existed in a sort of legal limbo since their inception. How, if at all, will the rules change for state-licensed operators if marijuana is rescheduled?
The way I see it, there are three paths forward for state-licensed marijuana operators if marijuana is rescheduled:
The federal government, in a break from more than a decade of quasi-official federal policy, could actually follow the Controlled Substances Act and require marijuana operators to meet the requirements for Schedule III substances.
There is no practical change and the federal policy of non-enforcement of most marijuana operations remains in place, along with a similar posture from the states with marijuana regimes.
There is no immediate change in federal enforcement policy, but states tighten marijuana rules over time to allow for a gradual change such that access to marijuana is not immediately shut off as the federal government and marijuana operators take the steps necessary to treat marijuana like other Schedule III substances.
In a nutshell, the path chosen will answer what I believe is the most interesting and critical question in this whole discussion: Does the government intend for marijuana scheduling to be a dead letter or does the government intend to regulate marijuana as a controlled substance?
That answer will govern whether and, if so, how the federal government will regulate state-licensed cannabis operators – including potential enforcement actions.
Of the three paths above, the first strikes me as the least likely and the last strikes me as the most likely. Why? I am skeptical that the federal government would shut down existing access to marijuana (i.e., state-licensed operators) under the guise of making marijuana more available. That certainly does not comport with the statements of the political supporters of rescheduling or the spirit of rescheduling. And make no mistake, it will take years of clinical trials and FDA approval for the first marijuana medication (in a specific formulation with a specific indication) to be approved for use by patients.
I do think, however, that there will be political pressure from certain companies that do develop FDA-approved marijuana medications to curtail the state markets. Why would a company spend the substantial time and money to develop a Schedule III medication for FDA approval for a specific indication when someone can just buy marijuana to be used for any purpose from a dispensary down the street?
State Adult-Use Programs
Like state-licensed medical marijuana operators, state-licensed adult use operators have also been operating in legal purgatory, albeit with probably less legal certainty than medical operators.
To be very clear: Rescheduling marijuana under the Controlled Substances Act will do absolutely nothing to the legality of adult-use marijuana. Schedule III regulates medications prescribed by physicians and does not contemplate the recreational use of any Schedule III product.
But what does this actually mean for adult-use programs and individual operators as a practical matter? Well, as with several of the points above, we’ll see.
It is certainly possible that the federal government will continue its hands-off approach to adult-use marijuana programs. It is also possible that the federal government – and potentially some state governments – will use the ability to access federally legal marijuana by prescription to scrap existing adult-use programs. But if I was a betting man (and I am), I would bet that at least in the short term there would not be much impact, if any, to adult-use regimes.
Interstate Commerce
When it comes to transporting marijuana across state lines with Schedule III approval and appropriate federal and state licenses, interstate commerce should not be a problem.
When it comes to transporting unlicensed marijuana, theoretically it would remain illegal, and it will come down to the federal government’s appetite to enforce interstate transportation of marijuana.
Banking
Here is another instance where it depends on whether the federal government insists that marijuana products comply with the rules of Schedule III.
If the federal government insists on strict compliance with Schedule III, then any non-conforming products would likely fall within the ambit of anti-money laundering statutes. If, on the other hand, the government treats all marijuana as Schedule III, then banks may be able (albeit perhaps uninterested initially) to bank all marijuana businesses.
Private Investment
I expect there will be an immediate influx of private capital to marijuana businesses if marijuana is rescheduled. Momentum will (at least appear to) be on the side of marijuana businesses. A number of funds that have formal or informal policies governing investment in marijuana businesses will immediately investigate the opportunities. And investors will be even more motivated because it appears that 280E would no longer provide a substantial tax headwind for growth of those businesses.
This could all be thwarted if the federal government immediately makes clear that it will vigorously enforce the requirements of Schedule III, meaning that it will be extremely cash-intensive to develop profit-generating products. As noted above, I think that is unlikely, but it would certainly be an impediment to obtaining private capital.
Big Pharma/Pharmacies
The multibillion-dollar question: What role, if any, will big pharmaceutical companies and pharmacies play in the event marijuana is rescheduled?
I suspect big pharma won’t rush into the marijuana space, in part because of all the uncertainties discussed above and in part for reputational reasons. But I will be on the lookout for quiet investments by Big Pharma in companies researching and developing marijuana formulations that meet the requirements of Schedule III.
If things break a certain way, you may be able to get the best weed ever made courtesy of a brand-name pharmaceutical company. But I do believe we are years away from that happening.
Intellectual Property
This area of the law could be particularly interesting because the USPTO will have a layer of input on top of the Department of Justice and state regulators. If a product complies with Schedule III, it will have the ability to be protected by United States intellectual property laws, including trademarks and patents. If it does not comply with Schedule III, the USPTO could independently conclude that such products may not avail themselves of those protections.
Conclusions
[Deep exhale] For years, cannabis activists and legal scholars have debated the possibility and the wisdom of rescheduling marijuana. Now that we may – and I stress may – be on the horizon, it seems there are just as many questions as answers about what the implications of that change would be. So much of those implications depend on things that we do not yet know. For example, will a Trump HHS/DOJ/DEA take a different position than the Biden HHS/DOJ/DEA? Will states change their rules in response to rescheduling? And how will financial institutions and private investors react to those developments.
Third-Party Litigation Funding in England and Wales Post-PACCAR: Where are We Now?
In our earlier alert on third-party funding (TPF) and the UK Supreme Court’s decision in PACCAR, we discussed the initial industry reaction, subsequent litigation, and legislative reform proposals (at the time, through the remit of the Digital Markets, Competition and Consumers Bill (DMCC Bill) – introduced by the former, Conservative UK government under then Prime Minister, Rishi Sunak).
This alert provides an update on where we are now, following the publication of the Civil Justice Council (CJC) interim report and consultation on litigation funding, which confirmed that the current UK government will not be re-introducing the Litigation Funding Agreements (Enforceability) Bill (LFA Bill) any time soon—instead, looking at legislative reform in the round after the CJC’s final report is published in summer.
We therefore discuss the early indications around the CJC’s direction of travel and recent industry reaction as we await these all-important clarifications.
Recap
In July 2023 in PACCAR, the UK Supreme Court held that litigation funding agreements (LFAs) that entitle funders to payments based on the amount of damages recovered would be classified as damages-based agreements (DBAs). In turn, they would have to comply with the Damages-Based Agreements Regulations 2013 (DBA regime) or risk being deemed unenforceable. The decision brought the enforceability of many pre-existing LFAs into question and created large scale uncertainty within the TPF market. This was a particular problem for opt-out collective proceedings in the Competition and Appeals Tribunal (CAT), where DBAs are strictly prohibited (s.47C(8), Competition Act 1998).
Originally, there were proposals to restore the pre-PACCAR position through a last minute amendment to the DMCC Bill. By March 2024, this was a bill of its own—the LFA Bill. The LFA Bill was to be an integral part of the last government’s commitment to restoring the pre-PACCAR status quo, passing second reading in the House of Lords on 15 April 2024. However, it did not survive the pre-election wash up ahead of the dissolution of parliament on 30 May 2024, remaining indefinitely postponed under the new administration.
CJC Review of the TPF Market in England and Wales
In spring 2024, prompted by the PACCAR decision, the then Lord Chancellor called upon the CJC to conduct a wider review of the TPF market. At this time, the PACCAR decision was to be reversed via the LFA Bill, which, as above, later fell through on change of governments.
On 31 October 2024, the CJC published its much-anticipated interim report and consultation on litigation funding, as the first phase of the CJC review process. Being interim in nature, it seeks to identify the concerns within the current system of TPF in England and Wales and set up the key issues that the CJC is consulting on. Whilst only interim in nature, it does give an indication of the CJC’s (and, subsequently, the government’s) direction of travel.
Broadly, the interim report covers the development of TPF in England and Wales and the current self-regulatory model, approaches to the regulation of TPF across different jurisdictions, the relationship between costs and funding, and existing funding options.
There are 39 consultation questions that the CJC seeks input on, located at Appendix A.
In sum, these questions cover:
The benefits of TPF (namely, access to justice and equality of arms between parties to litigation).
The extent to which the current model of self-regulation works and whether there should be one homogenous regulatory framework applied to (i) all types of litigation and (ii) English-seated arbitration.
Whether and, if so, to what extent, a funder’s return on any third-party funding agreement should be subject to a cap.
How TPF should best be deployed relative to other sources of funding (including legal expenses insurance and crowd funding).
The role of the court in controlling the conduct of litigation support by TPF or similar funding arrangements.
What provision (including provision for professional legal services regulation), if any, needs to be made for the protection of claimants whose litigation is funded by TPF.
The extent to which the availability of TPF encourages specific forms of litigation.
Responses to the consultation are sought by 11:59 pm on Friday 31 January. The CJC will then issue a final report in summer with outcomes and recommendations.
Direction of Travel
Whilst the CJC report is only interim in nature, it does give us an indication of the CJC’s early thinking and the potential direction of travel. Some of these key themes are discussed below.
Self-Regulation
A large section of the CJC interim report focuses on the self-regulation of TPF in England and Wales through voluntary subscription to the ‘Code of Conduct for Litigation Funders’ published by the Association of Litigation Funders (ALF Code) and how this compares with other jurisdictions. The report notes that the current model of self-regulation was introduced in 2011, at a time when the TPF market was still beginning to develop, and notes that the TPF market has since expanded very significantly, especially in respect of funding collective proceedings and group litigation. On take up of the ALF Code, the report suggests that whilst an estimated 44 funders operate in England and Wales, only 16 are members of the ALF and thereby party to the ALF Code. Of these 16 members, eight are also members of the International Litigation Funders Association. Many commentators suggest that the interim report’s discussion of the current model of self-regulation may be indicative of the introduction of new legislation to regulate the TPF industry in the future.
PACCAR
The interim report doesn’t address the resolution of PACCAR specifically, which has sparked some criticism. Some commentators have referred to the fact that when the CJC’s original Terms of Reference were set in spring 2024, PACCAR was to be resolved via legislation which has since fallen away. The interim report offers no indication of whether PACCAR would be addressed in light of this.
The co-chair of the CJC review, Dr John Sorabji, has since suggested that whilst consideration of a litigation funding bill falls outside of the Terms of Reference, the CJC’s wider review of TPF industry includes consideration of the DBA regime, for which PACCAR will inevitably be considered.
Several challenges to LFAs are currently stayed in the Court of Appeal as the TPF market awaits a legislative solution to PACCAR. Many funders have since adopted some combination of the ‘multiples’ approach linked to sums invested, internal rates of return and compound interest rates, and creatively drafted clauses that seek to pre-empt a legislative resolution to PACCAR. For now, the TPF market will have to eagerly await the final report and any legislative solution that follows.
Funder Involvement in the Settlement of Disputes
The interim report notes that the nature of TPF means, on the one hand, that the ‘risk exists that funders will control the litigation’ and that ‘TPF discourages and undermines just settlement’. On the other hand, the report explains how the ALF Code makes provision for a dispute resolution procedure in these instances. Here, under the ALF Code the funder and funded are required to instruct a Kings Counsel (either jointly instructed, or as nominated by the Chairman of the Bar Council) to provide a binding opinion on the settlement proposal.
The debate around funder involvement in settlement has also been accelerated by recent headlines around the long running collective action in Merricks v Mastercard, in which the class representative, Walter Merricks, is said to have accepted a £200m settlement offer, much below the original claim value. The funder, Innsworth, has since publicly criticised the decision and written to the CAT ahead of the tribunal reviewing the terms of the settlement early this year.
There is currently no clarity as to whether—and if so to what extent—a funder’s interests will be considered a relevant factor in deciding whether a settlement is just and reasonable. Indeed, this may be the first case to decide the point.
Conclusion
The interim report has therefore provided much food for thought around the future direction of travel. Whilst only indicative at this stage, it looks as though we may be moving away from the model of self-regulation that has existed since 2011, that PACCAR is likely to be addressed in the context of a wider discussion of the existing DBA regime, and that Courts will soon be tasked with considering funder submissions around settlement terms.
Responses to the CJC consultation are open until 31 January. Consultees do not need to answer all questions if only some are of interest or relevance. The full list of consultation questions is available here.
Federal Court Rules ESG-Guided Investing of 401(k) Plan Is a Breach of Fiduciary Duty
Following a bench trial, Judge O’Connor (N.D. Tex.) held that “that Defendants breached their fiduciary duty by failing to loyally act solely in the retirement plan’s best financial interests by allowing their corporate interests, as well as BlackRock’s ESG interests, to influence management of the plan.” In other words, investing a 401(k) retirement plan to reflect ESG interests–rather than strictly financial ones–constitutes a breach of the fiduciary duty of loyalty. (Notably, despite this holding, the court nonetheless ruled that the fiduciary duty of prudence had not been violated, because ESG-influenced investing was “act[ing] according to prevailing industry practices.”) In so holding, the Court emphasized that “[w]hile it is permissible to consider ESG risks when done through a strictly financial lens . . . ESG cannot stand on its own. . . . [as] ERISA does not permit a fiduciary to pursue a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim.”
This decision–the first to consider ESG-focused investing of a 401(k) plan following a trial on the merits–will undoubtedly be influential, as it supports the position advocated by a number of critics of ESG that such ESG-influenced investment activity is per se a breach of fiduciary duty. Additionally, as this decision was issued by a federal district court in Texas, it is likely that it will be upheld on appeal, as the Fifth Circuit Court of Appeals–which oversees this particular district court–is the most conservative in the United States.
Still, this ruling does also offer a partial roadmap for ESG-focused investing to survive such challenges–as if ESG-focused investing can be justified based upon financial metrics, than it will pass legal muster.
Based upon the results in this case–although damages are yet to be determined–it is likely that additional lawsuits will be filed on behalf of 401(k) participants against investment managers who made use of ESG factors when determining investments.
American Airlines Inc. violated federal law by filling its 401(k) plan with funds from investment companies that pursue environmental, social, and corporate governance goals, a Texas federal judge ruled Friday in the biggest victory yet for opponents of the strategy. The airline breached its fiduciary duty of loyalty—but not its fiduciary duty of prudence—in allowing its $26 billion retirement plan to be influenced by corporate goals unrelated to workers’ best financial interests, Judge Reed O’Connor of the US District Court for the Northern District of Texas said after a four-day, non-jury trial. The 2023 lawsuit, which says the airline wrongly offered 401(k) funds managed by companies that pursue ESG policy goals through proxy voting and shareholder activism, is the latest battle in the broader debate over socially conscious investing.
www.bloomberglaw.com/…
CFPB Announces Plans to Regulate Nonbank Personal Loan Providers
On January 8, the CFPB announced its intent to pursue rulemaking that would allow the agency to oversee nonbank personal loan lender. The announcement came in response to a petition filed in September 2022 by the Consumer Bankers Association and the Center for Responsible Lending, which called on the CFPB to engage in rulemaking under section 1024(a)(2) of the Consumer Financial Protection Act to subject certain “larger participants” in the nonbank personal loan market to the CFPB’s supervisory authority.
The petitioners argued that, although the CFPB’s supervisory authority already extends to large banks and nonbanks in most segments of consumer lending, the CFPB’s authority over the personal loan market currently does not extend beyond short-term payday lenders. The petitioners further argued that this gap in the CFPB’s supervisory authority creates both an unlevel playing filed and a significant risk that consumer protections issues affecting vulnerable consumers will go undetected.
In a response letter to the petitioners, the CFPB’s general counsel acknowledged the gap in the agency’s authority over the nonbank segment of the personal loan market, which consists of 85 million accounts and over $125 billion in outstanding balances. In addition, the letter expresses agreement with the petitioners’ concerns with respect to the unlevel playing filed that this gap creates. Finally, the letter states that, while the CFPB is already supervising certain nonbank personal loan providers pursuant to other authorities, the Bureau further intends to develop a proposed rule in line with the petitioners’ suggestion.
Putting it into Practice: Although the CFPB has expressed its intent to pursue so-called “large participant” rulemaking, it is unclear whether there will be any follow through. Anticipated shifts in policy priorities under the incoming administration may mean that the Bureau will not ultimately pursue the rulemaking. Despite this uncertainty, the petitioners have expressed that they are eager to continue working with the Bureau to level the playing field in the nonbank personal loan market.
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CFPB Updates No-Action Letter and Compliance Assistance Sandbox Policies to Spur Innovation
On January 3, 2025, the CFPB announced a reboot of its no-action letter and compliance assistance sandbox policy, aimed at promoting consumer-beneficial innovation in financial services. The new policies are designed to foster competition and transparency while addressing unmet consumer needs.
The CFPB originally rescinded the policies in 2022, citing a failure to meet transparency standards and promote consumer-beneficial innovation. The updated framework aims to address these shortcomings with several key changes, including:
Unmet Consumer Needs. Applicants must clearly identify a specific consumer problem their product or service addresses, providing data and detailed explanations to justify the innovation’s necessity and benefits.
Market Competition. To avoid granting regulatory advantages to an individual company, the CFPB will solicit applications from competitors offering similar products or services, ensuring a level playing field within the market. The Bureau does not want any company to have a first-mover advantage; but with its policy, the CFPB is essentially signaling to your competitors what you intend to do.
Eligibility Criteria. The CFPB will not consider applications that have been the subject of an enforcement action involving violations of federal consumer financial law in the past five years, or who are the subject of a pending state or federal enforcement action. This restriction applies even if the enforcement action was in a product vertical wholly unrelated to the one being considered for the no-action letter.
Former CFPB Employees Face Bureau “Non-Compete.” The Bureau has stated it will not consider applications from companies that are represented by former CFPB attorneys as outside counsel, even if those lawyers worked at the Bureau more than ten years ago, to avoid any perceived “ethical conflict.”
Finally, recipients of sandbox approvals or no-action letters are prohibited from using these designations in promotional materials to avoid misleading consumers into believing the CFPB endorses their offerings.
Putting It Into Practice: With less than a week to go before a change in administration, the Bureau has decided to reboot its regulatory sandbox policy. However, given the overbearing requirements and restrictions on applying for a no-action letter under the Bureau’s new innovation policies, it will be interesting to see how many companies decide to apply, or if the policies will soon be rescinded.
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FDIC Enforcement Spotlights Deficiencies in Kansas Bank’s Anti-Money Laundering Program
On December 27, 2024, the Federal Deposit Insurance Corporation (FDIC) announced a notice of assessment of a civil money penalty against a Kansas-based bank. The action, originally brought in November, imposed a $20.4 million civil money penalty against the bank and alleged violations of the Bank Secrecy Act (BSA), 31 U.S.C. § 5311 et seq., for its failure to implement an adequate anti-money laundering and counter-terrorism program.
The FDIC asserts that between December 2018 and August 2020, the Bank’s AML/CFT compliance program failed to address risks associated with its high-volume international banking operations. These operations included processing $27 billion in wire transfers for foreign banks in 2018 alone and facilitating bulk cash shipments from Mexico. Specific deficiencies cited by the FDIC include:
Inadequate Internal Controls. The bank’s reliance on flawed AML monitoring software and manual reviews failed to detect red flags, such as large, suspicious transactions and activity linked to high-risk jurisdictions. Although the banks employed external auditors to analyze its BSA compliance, the complaint claims the testing was too limited and lacked sufficient data.
Customer Due Diligence Failures. The bank failed to establish and maintain an effective customer due diligence program, as the BSA Officer’s ongoing due diligence for the bulk cash business was limited to comparing actual to expected cash deposits without conducting denomination analysis or monitoring outgoing wire activity, resulting in missed data indicative of money laundering and terrorist financing risk.
Deficient Reporting. The bank failed to file hundreds of suspicious activity reports (SARs) required by federal law, and did not implement sufficient customer due diligence or foreign correspondent account monitoring. The FDIC also found that the bank’s BSA Officer was not properly empowered to make SAR filings, SAR filing decisions were instead made collectively by a committee consisting of various C-suite executives of the bank.
Unqualified Oversight. The appointed BSA officer during the relevant period lacked necessary experience and authority to manage the bank’s AML compliance program effectively, pointing to deficiencies in the bank’s BSA/AML training program.
The FDIC described the alleged violations as part of a “pattern of misconduct” and noted that the bank benefited financially from these failures, generating significant fee income.
Putting It Into Practice: The FDIC’s action was swiftly challenged by the bank. On November 19, it filed a complaint in the U.S. District Court for the District of Kansas challenging the FDIC’s findings, emphasizing that the bank ceased the operations in question in 2020 and took swift corrective actions. In its complaint, the bank also argues that the fine penalizes “years-old conduct” and disregards the bank’s current compliance improvements.
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CFPB Alleges Credit Reporting Agency Conducted Sham Investigations of Errors
On January 7, 2025, the CFPB filed a lawsuit against a nationwide consumer reporting agency for violations of the Fair Credit Reporting Act. The lawsuit claims the company’s investigation of consumer disputes was inadequate, specifically criticizing their intake, processing, investigation, and customer notification processes. The lawsuit also alleges the company reinserted inaccurate information on credit reports, which the agency alleges harmed consumers’ access to credit, employment, and housing. In addition to FCRA, the Bureau alleges that the company’s faulty intake procedures and unlawful processes regarding consumer reports violated the Consumer Financial Protection Act’s (CFPA) prohibition on unfair acts or practices.
Specifically, the Bureau alleges the company:
Conducted sham investigations. The CFPB claims the company uses faulty intake procedures when handling consumer disputes, including not accurately conveying all relevant information about the disputes to the original furnisher. The company also allegedly routinely accepted furnisher responses to the disputes without an appropriate review such as when furnisher responses seemed improbable, illogical, or when the company has information that the furnisher was unreliable. The Bureau also alleged the company failed to provide consumers with investigation results and provided them ambiguous, incorrect, or internally inconsistent information.
Improperly reinserted inaccurate information on consumer reports. The CFPB alleged the company failed to use adequate matching tools, leading to reinsertion of previously deleted inaccurate information on consumer reports. Consumers who disputed the accuracy of an account and thought their consumer report had been corrected instead saw the same inaccurate information reappear on their consumer report without explanation under the name of a new furnisher.
Putting It Into Practice: This lawsuit reflects a broader trend of the CFPB’s increased regulatory scrutiny of FCRA compliance. (previously discussed here, here, and here). The CFPB has demonstrated a focus on ensuring the accuracy and integrity of consumer credit information. Consumer reporting agencies should proactively review their policies and procedures related to dispute investigation, data handling, and furnisher interaction to ensure they are in compliance with all aspects of the FCRA.
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CFPB Sues Mortgage Lender for Predatory Lending Practices in Manufacture Homes Loans
On January 6, 2025, the CFPB filed a lawsuit against a non-bank manufactured home financing company for violations of the Truth in Lending Act and Regulation Z. The lawsuit alleges that the mortgage lender engaged in predatory lending practices by providing manufactured home loans to borrowers it knew could not afford them.
According to the CFPB, the mortgage lender allegedly ignored “clear and obvious red flags” indicating the borrowers’ inability to afford the loans. This resulted in many families struggling to make payments, afford basic necessities, and facing fees, penalties, and even foreclosure. The Bureau alleges the lender failed to make reasonable, good-faith determinations of borrower’s ability to repay, as required by the Truth in Lending Act (TILA) and Regulation Z.
The CFPB’s lawsuit specifically claims that the lender:
Manipulated lending standards. The mortgage lender disregarded clear and obvious evidence that borrowers lacked sufficient income or assets to meet their mortgage obligations and basic living expenses. On some occasions, borrowers who were already struggling financially were approved for loans, worsening their financial situation.
Fabricated unrealistic estimates of living expenses. The company justified its determination that borrowers could afford loans by using artificially low estimates of living expenses. The estimated living expenses were about half of the average of self-reported living expenses for other, similar loan applicants.
Made loans to borrowers projected to be unable to pay. The lender approved loans despite the company’s own internal estimates indicating the borrower’s inability to pay.
Putting It Into Practice: As Chopra’s term wraps out, the Bureau is on a frantic mission to file as many lawsuits as it can for its ongoing enforcement matters. How that will impact the incoming administration remains to be seen. But it seems likely that a new CFPB Director will take a hard look at much of the active litigation and re-evaluate the Bureau’s position.
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CFPB Finalizes Rule Removing Medical Bills from Credit Reports
On January 7, 2025, the CFPB announced the finalization of a rule amending Regulation V, which implements the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., to prohibit the inclusion of medical bills on credit reports used by lenders and prevent lenders from using medical information in lending decisions. According to the Bureau, the final rule (previously discussed here) will remove an estimated $49 billion in medical bills from the credit reports of about 15 million Americans.
The Bureau noted that medical debts are not effective predictors of whether a borrower will repay a debt. Consumers frequently report that they receive inaccurate bills or are asked to pay bills that should have been covered by insurance. The CFPB estimates that this rule will result in the approval of approximately 22,000 additional mortgages each year and increase credit scores for those with medical debt by an average of 20 points.
This rule follows changes by three nationwide credit reporting companies and two major credit scoring companies to reduce the impact of medical debt on credit reports and scores. Specifically, the final rule will:
Prohibit lenders from considering medical information. The rule will amend Regulation V and prohibit creditors from using certain medical information and data when making lending decisions, including information about medical devices that could be used as collateral for a loan.
Ban medical bills on credit reports. The rule prohibits consumer reporting agencies from including medical debt information on credit reports and credit scores sent to lenders. The Bureau seeks to prevent debt collectors from using the credit reporting system to pressure consumers to pay medical bills, regardless of their accuracy.
The rule is effective 60 days after publication in the Federal Register.
Putting It Into Practice: The final rule is another example of the CFPB’s increased focus on regulating the credit reporting industry. (previously discussed here). However, immediately after the Bureau finalized the rule, it was hit with two separate lawsuits by trade associations challenging the rule.
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The Outlook for US Private Equity in 2025
As we launch into the next quarter century, there is much speculation about what the future holds for private equity (PE) as an asset class and driver in dealmaking. Momentum started to pick up in 2024 with the Fed announcing a series of interest rate cuts, and there was a sense of increasing certainty with the Presidential election now behind us. Now, everyone is eager to see what the new year will hold.
PitchBook analysts have released their 2025 US Private Equity Outlook, examining the trends that could redefine the market. One of the most interesting is the significant shift they are expecting in the IPO landscape this year. Their analysts are looking at the potential for PE-backed companies to capture 40% of all the IPO capital raised on major US exchanges this year. That would be a nearly 10% jump from the decade average, as well as a change in investor preferences.
Their data shows that since 2000, PE-backed companies averaged about 30.6% of IPO capital raised on major exchanges within the past decade, with a high of 54.2% in 2016 and a low of 3% in 2022. PE-backed companies reached approximately a one-third share of all IPOs in 2024, and Pitchbook is expecting that to be even greater in 2025.
In looking at the gains, they point to the focus on growth and profitability for PE-backed companies, as well as stable cash flows and successful capital allocation. They also tend to operate within sectors that have rational pricing and competition, providing predictable returns that make them appealing candidates for IPO investors. Coupled with the impressive stock performance of PE-backed companies recently, this puts them in a prime position for success this year.
There has also been recent coverage indicating that Wall Street banks are preparing for a rebound as bankers and analysts are anticipating a great deal of IPO announcements in the first half of 2025. With several PE-backed firms already filing IPO paperwork, all the speculation might actually come to fruition as PE firms are more eager to begin offloading some of their assets.
We see some risk if major US public market indexes encounter some kind of significant correction, leading to a more negative market sentiment. If this were to occur, the IPO window could close for a period of time until investor confidence returned, meaning PE-backed companies would again have to alter their IPO plans.
There are many factors at play here and a lot of moving parts. Everyone is closely watching to see if the new Presidential administration will loosen regulations, whether punitive tariffs will be imposed, the impact on inflation and interest rates, and what will happen with taxes. But cautious optimism definitely exists, and there does seem to be an opportunity to build on momentum here. We have all been waiting for a real return to IPOs, and 2025 could be the year that finally happens.