US – Page 12 – FinTech and Blockchain Law Watch

Marketplace lending technology patents held invalid

Aug 09 2016

By Joseph Valenti, Samuel Reger and Chris Bell

On July 25, 2016, three appellate judges in the United States held that a popular online marketplace lender’s patents were invalid because they merely reflected an “abstract idea” that is not entitled to be patented or otherwise eligible for exclusive protection under American intellectual-property laws. The practical effect of this decision is that the lender could not sue its competitors for patent infringement where those competitors allegedly used the same techniques to match borrowers with lenders on their own marketplace lending platforms.

The judges from the Federal Circuit Court of Appeals likened the claimed inventions to a “fundamental economic concept” (i.e., an abstract idea) that served as the basis for the consumer-loan industry. They ruled that simply implementing this concept with “generic technology” to automate the process does not then make it patentable.

K&L Gates Adds Leading FinTech Partners

Jul 28 2016

Global law firm K&L Gates welcomes Judith Rinearson and Linda C. Odom as partners in the firm’s FinTech and Consumer Financial Services practices. Rinearson joins K&L Gates’ New York and London offices, and Odom, joins the Washington, D.C. office. “Judie Rinearson and Linda Odom are highly respected authorities in numerous key regulatory and commercial areas within the FinTech ecosystem,” stated Robert Zinn, co-leader of K&L Gates’ global corporate and transactional practice area as well as of the firm’s market-leading global FinTech practice.

To read our full press release please click here.

Massachusetts issues guidelines for using third-party robo-advisers

Jul 21 2016

By Susan P. Altman and C. Todd Gibson

In April 2016, the Massachusetts Securities Division issued a policy statement with respect to the fiduciary obligations of state-registered advisers providing robo-advice. The MSD has now issued further regulatory guidance in a new Policy Statement with respect to the use of third-party robo-advisers by state-registered investment advisers. The MSD noted the significant growth in popularity of third-party robo-advisers and the increasing number of state-registered investment advisers working with third-party robo-advisers.

The new guidance describes minimum disclosure that state-registered investment advisers using third-party robo-advisers must provide to investors in order to meet Massachusetts regulatory requirements, including:

Clearly identifying the robo-advisers and explaining their services;
Notifying investors that, when applicable, they could get the services directly from the robo-adviser without paying additional fees to the state-registered investment adviser;
Describing the value provided to the investor by the state-registered investment adviser;
Specifically identifying the services the state-registered adviser cannot perform, such as having no ability to access, select, change or customize the portfolio structure or investment products at the robo-adviser;
Identifying limitations of available investment products offered to the client through the robo-adviser; and
Using customized, easy-to-understand disclosure language.

Most importantly perhaps, the investment advisers must charge an advisory fee that is reasonable in light of fees charged by others providing essentially the same services. An investor is usually charged a fee by both the investment adviser and the robo-adviser based on a percentage of the investor’s assets under management. Massachusetts state-regulated advisers will have to demonstrate the value behind the fees they charge on top of the robo-adviser’s fees, such as specialized knowledge of the products or the investor’s personal circumstances.

The Policy Statement can be found here.

Global equity crowdfunding developments

Jul 19 2016

By Jim Bulling and Michelle Chasser

Australia’s equity crowdfunding reforms have been delayed due to the Australian federal election. After passing the House of Representatives back in February the Corporations Amendment (Crowd-sourced Funding) Bill 2015 lapsed in May when Parliament was dissolved. As the Turnbull Government was returned to power at the election it is likely the Bill will be reintroduced shortly. While crowdfunding changes have stalled in Australia developments have been continuing in the rest of the world .

Easier crowdfunding for FinTech start-ups in the USA has moved a step closer. The Fix Crowdfunding Act and the Supporting America’s Investors Act easily passed through the US House of Representatives on 6 July 2016 with bipartisan support and will now be introduced in the Senate. The Fix Crowdfunding Act will increase the maximum amount of money that a start-up can raise through crowdfunding from US$1 million to US$5 million. The Supporting America’s Investors Act increases the number of people allowed to invest in a qualifying venture capital fund from 100 up to 500. Read More

Regulators notice small business loans are big business

Jul 07 2016

By Jim Bulling and Michelle Chasser

The focus in marketplace lending appears to be shifting to small business loans recently and it is clear that small business loans are big business. The European Investment Bank has agreed to make a £100 million investment in small business loans originated through Funding Circle in the UK as part of its priority to improve access to finance for small and medium businesses. In the US marketplace lenders originated around US$1.9B in 2015 up nearly 60% from 2014.

The increased volume of small business loans has not escaped the notice of US federal regulators. There are concerns that sometimes small businesses are essentially individual entrepreneurs and may not have any more tools than consumers to assess the terms of loans offered to them. The US Treasury’s recent white paper, Opportunities and Challenges in Online Marketplace Lending, made a number of recommendations including that more robust small business borrower protections and effective oversight be introduced for online marketplace lenders. A number of regulators including the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York and the Securities and Exchange Commission were contributors to that paper.

Blockchain… A Threat to Safety, Soundness & Resiliency?

Jul 04 2016

By Tyler Kirk

On June 21, 2016, the U.S. Financial Stability Oversight counsel (“FSOC”) released its 2016 annual report. The purpose of the annual report is to summarize the FSOC’s current views on the U.S. financial system according to its mission to: (1) identify risks; (2) promote market discipline; and (3) respond to emerging threats. Notably, the 2016 report identified the use of blockchain as an emerging business practice requiring vigilant monitoring by financial regulators.

Since its establishment in 2010, the FSOC has issued six annual reports. This is the first time FinTech issues such as the blockchain have been identified as a potential risk to U.S. financial market stability. The FSOC noted that the use of blockchain protocols by financial institutions could positively impact the U.S. financial system by introducing efficiencies and reducing costs. However, according to the FSOC, “Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale.”

Further, the FSOC cautioned that a “considerable degree of coordination among regulators” may be required given the distributed nature of blockchain networks. Noting that the U.S. financial system is constantly evolving, Treasury Secretary Jacob Lew advocated for regulators to remain vigilant in order to maintain the safety, soundness and resiliency of the U.S. financial system. Yet, beyond vigilance, the FSOC did not recommend any specific action on blockchain by regulators, preserving the current hands-off approach.

The FSOC 2016 report can be found here.

Project Bletchley

Jul 04 2016

By Tyler Kirk

On June 15, 2016, Microsoft released a white paper introducing Project Bletchley, Microsoft’s next iteration on its blockchain as a service (“BaaS”) product. In late 2015, Microsoft announced that it would be leveraging its cloud platform, Azure, to provide a low-risk sandbox for customers to gain experience with how blockchain may be applied in various business scenarios, such as supply chain management. Bletchley is positioned as incorporating the latest innovations on the blockchain protocol in the Azure cloud service.

Generally, blockchain is a decentralized digital ledger. Blockchain differs from traditional centralized ledgers because the blockchain protocol uses encryption combined with distributed copies of the ledger to replace the need for a third-party to serve as the ledger’s trusted guardian. Further, blockchain is more efficient because all transactions are mathematically provable and do not require a multi-day verification process. The protocol is append only, and distributed, thus every participant receives an update to their copy of the ledger with the latest transactions. Yet, this revolutionary framework, blockchain 1.0, was just the beginning.

CFPB Takes Aim at Marketplace Lenders

May 16 2016

By David Christensen

Last Fall, in its 2015 Rulemaking Agenda, the Consumer Financial Protection Bureau (“CFPB”) signaled its intent to “to develop rules to define larger participants in markets for consumer installment loans.”[1] Under the Dodd-Frank Act, the CFPB is authorized to issue “larger participant” rules to define entities in a particular market for consumer financial products or services. The issuance of such rules opens the door for supervisory and examination authority over such entities. Fast forward to Spring 2016, when the CFPB announced that it is accepting complaints from consumers regarding alleged problems with online marketplace loans, and it appears that the CFPB has marketplace lenders squarely in its sights.[2]

Treasury releases white paper on marketplace lending

May 12 2016

By Sean P. Mahoney

On May 10, 2016, the US Treasury issued its much anticipated white paper on marketplace lending. The whitepaper follows Treasury’s July 2015 request for information. The white paper highlighted some keys risks and made six concrete recommendations for future action.

More specifically, the white paper noted that the use of sophisticated data-driven algorithms may result in unexpected correlations that could result in disparate impacts and give rise to fair lending violations. The use of data outside of regulated credit reports also creates the risk that borrowers may have no redress if information used as a basis for an underwriting decision proves inaccurate. Treasury made it a point to note, however, that marketplace lenders that partner with banks may be subject to regulation and examination by prudential bank regulators under the US Bank Service Company Act.

FinCEN proposal to impose AML obligations on U.S. Funding Portals

May 09 2016

By C. Todd Gibson, Michael McGrath and Ken Juster

On April 4, 2016, the U.S. Financial Crimes Enforcement Network (a bureau of the U.S. Treasury Department) (“FinCEN”) proposed rules that would require “funding portals” established under new Regulation Crowdfunding to implement policies and procedures designed to prevent money laundering, terrorist financing, and other financial crimes.

Current regulations under the Bank Secrecy Act (“BSA”) define a “Broker or Dealer in Securities” as an entity registered, or required to be registered as a broker or dealer under the Securities Exchange Act of 1934. Certain funding portals that operate in compliance with Regulation Crowdfunding are exempt from such registration, and therefore fall outside of the BSA definition. FinCEN is proposing to amend the defintion of a “Broker or Dealer in Securities” to specifically include funding portals, which will have the effect of imposing the same BSA obligations on funding portals as are currently imposed on fully-registered broker-dealers, such as filing suspicious activity reports.

A copy of the proposed amendment can be found here.

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