Litigation

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Yesterday, the Texas Bankers Association, the Amarillo Chamber of Commerce, the American Bankers Association, the Chamber of Commerce of the United States of America, the Longview Chamber of Commerce, the Independent Community Bankers of America, and the Independent Bankers Association of Texas Revenue Based Finance Coalition (collectively, the plaintiffs) filed a complaint in the U.S. District Court for the Northern District of Texas challenging the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency’s (collectively, the agencies) Final Rule modernizing how they assess lenders’ compliance under the Community Reinvestment Act (CRA). In their complaint, the plaintiffs asked the court to vacate the Final Rule and provide a preliminary injunction that would pause implementation of the Final Rule while the court decides the case.

We are pleased to share our annual review of regulatory and legal developments in the consumer financial services industry. With active federal and state legislatures, consumer financial services providers faced a challenging 2023. Courts across the country issued rulings that will have immediate and lasting impacts on the industry. Our team of more than 140 professionals has prepared this concise, yet thorough analysis of the most important issues and trends throughout our industry. We not only examined what happened in 2023, but also what to expect — and how to prepare — for the months ahead.

Troutman Pepper has been recognized for its exceptional work in the field of Banking & Finance and Financial Services Law in the 14th edition of Best Law Firms®. Our firm’s National Tier 1 rankings include Banking and Finance Law, Financial Services Regulation Law and Banking & Finance Litigation.

On October 19, the Securities and Exchange Commission (SEC) dismissed its claims against Ripple Labs, Inc. (Ripple) executives Bradley Garlinghouse and Christian Larsen for allegedly aiding and abetting Ripple’s violations of the Securities Act with respect to its “institutional sales” of XRP. The Southern District of New York had deemed “institutional sales” to be unregistered securities in its July summary judgment decision, however, at that time the court reserved judgment as to the aiding and abetting claims against the executives. The matter was set for trial in 2024.

In its highly anticipated decision, the Second Circuit has answered the question of whether a syndicated term loan qualifies as a “security” with a definitive “no”. On August 24, the Court of Appeals for the Second Circuit issued its ruling, affirming the lower court’s holding in Kirschner[1] that leveraged loans are not securities. After the Securities and Exchange Commission (SEC) declined to submit a brief, the court determined, in its application of the Reves test, that three of the four Reves factors weighed against concluding that the complaint plausibly alleged that the loans in question are securities.

On August 9, the Securities and Exchange Commission (SEC) sent a letter to U.S. District Judge Analisa Torres requesting leave to file an interlocutory appeal in SEC v. Ripple Labs, Inc. as to the two adverse liability determinations in her July 13, 2023 order. That order granted partial summary judgment in Ripple Labs’ favor regarding the sale of its XRP token. As we previously discussed here, the court held in deciding cross motions for summary judgment that defendants’ “programmatic” offers and sales to XRP buyers over crypto asset trading platforms and Ripple’s “other distributions” in exchange for labor and services did not involve the offer or sale of securities under the U.S. Supreme Court’s decision in SEC v. W.J. Howey Co.

In a long-awaited decision in SEC v. Ripple Labs, Inc., U.S. District Judge Analisa Torres of the Southern District of New York held that Ripple Labs, Inc.’s (Ripple) XRP token is not, in and of itself, a security requiring registration. Although the decision is being regarded by many as a victory for both Ripple and the crypto industry, the nuances in the decision may result in an appeal from both sides.

Mindful of the impending retirement of many millions of investors in the “baby boomer” generation, which hold a substantial amount of the world’s wealth, the Financial Industry Regulatory Authority (FINRA) continues to heavily monitor its member firms supervision of their registered financial advisors who service vulnerable and elderly investor customers. For example, last month FINRA suspended a former David Lerner Associates (DLA) branch manager for failing to properly supervise sales of interests in two illiquid oil and gas limited partnerships. The suspended manager at issue approved these transactions, which carried a high degree of risk, to some senior investors with insufficient tolerance for risk. Ultimately, FINRA concluded that the supervising branch manager failed to “conduct a reasonable analysis” of the suitability of those investments for the elderly customers or within 30 days of their risk tolerance increasing.

A contentious divide in the leadership of Republic First Bancorp, Inc. (Republic First) has now resulted in a third lawsuit against the company, this one filed by shareholders. Early last year, Republic First’s eight-person board of directors was evenly split into two camps: one led by former Republic First CEO, Vernon Hill, II, and another led by Harry Madonna, who had been CEO of Republic First prior to Hill. The two groups held conflicting views on the future of Republic First, with Hill’s faction seeking an expansion of retail banking operations and Madonna’s in favor of selling the company. The dispute between the two groups quickly became a public issue as Madonna’s group of directors issued a press release in March of 2022 accusing Hill and his associates of self-dealing and mismanagement. As a result of the letter, Republic First’s independent auditor expressed concerns about its forthcoming work with the company, and Republic First was unable to file its Form 10-K for the 2021 fiscal year until those concerns were addressed and the audit completed.