On July 19, 2017, the Consumer Financial Protection Bureau (“CFPB”) published a new rule that has the potential to significantly increase the number of class action lawsuits brought by consumers against their financial services providers. Although consumer advocates applaud the rule, critics argue that the rule will lead to an explosion of frivolous lawsuits. Congress, for its part, is currently taking steps to stop the rule from ever taking effect.
The rule would no longer allow a financial services provider to use mandatory arbitration clauses to stop its consumers from bringing class action lawsuits against that provider. Mandatory arbitration clauses require that disputes between parties to a contract must be resolved by privately appointed arbitrators rather than the courts, with few exceptions. According to the CFPB, financial services providers have used arbitration clauses in consumer contracts to block class action lawsuits, forcing each consumer to pursue individual claims. A CFPB study from March 2015 further claims that mandatory arbitration clauses are harmful to consumers because companies avoid paying full relief to all those harmed and are therefore not sufficiently deterred from engaging in the misconduct moving forward. READ MORE
The Financial CHOICE Act (or “CHOICE Act 2.0”), which would significantly narrow the SEC’s ability to bring enforcement actions and make it more challenging for it to prevail in such actions, is inching its way towards becoming law. On May 4, 2017, the Financial Services Committee passed the Act and it is now slated to be introduced to the House in the coming weeks. As part of the push by the current administration to deregulate, this bill aims to repeal key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including those directed towards the SEC. Although the Act has a long way to go before it is enacted, many of its provisions would have far-reaching consequences and would change the way the SEC operates as we know it.
Should the CHOICE Act 2.0 become law, the following are some of the more important effects it would have on the SEC’s enforcement abilities:
Judge Jed S. Rakoff (S.D.N.Y.) recently made headlines after urging lawyers to draft and advocate for a more straightforward insider trading statute to replace judicially-created insider trading law. During his keynote speech at the New York City Bar’s annual Securities Litigation & Enforcement Institute, Judge Rakoff explained that the law has become overly-complicated since courts were forced to define insider trading by shoehorning the concept into the fraud provisions of the Securities Exchange Act of 1934. As a result, increasingly suspect theories have been developed to address potential insider trading in an expanding variety of scenarios.
In promoting a statutory solution for insider trading law, Judge Rakoff pointed to the Europe Union (“EU”) as an example. He explained that the EU defined insider trading by statute in simple and broad terms, and avoided relying on the framework of fraud. Considering Judge Rakoff’s influence and expertise in securities law, inquiry into the EU’s approach to insider trading is warranted.