A fact of business today is that customers – both consumers and other businesses – and employees expect to transact digitally. To remain competitive, companies find themselves increasing their efforts to digitally transform their businesses.
Successfully implementing this transformation requires careful planning to ensure regulatory compliance, a smooth integration with existing business technology and a positive customer experience.
Each issue will feature in-depth insight on a timely and important current topic.
In this issue, our Insights piece highlights environmental, social, and governance standards and how going digital can assist in this process. We also report on other recently enacted federal and state laws, federal and state regulatory activities, fresh judicial precedent and other important news.
For related information regarding blockchain and digital assets, please see our monthly bulletin Blockchain and Digital Assets News and Trends.
Embracing the movement towards digital and ESG
By Margo H.K. Tank, R. David Whitaker, Andrew W. Grant and Liz Caires
Environmental, social, and governance (ESG) initiatives have come sharply into focus among many sectors, including financial institutions and regulatory bodies; insurance; the sale of consumer goods; the technology sector; and media, sports and entertainment. As governments seek to shape the country’s long-term response to COVID-19, greater focus and concern over ESG initiatives is emerging, placing the green economy at the heart of the post-pandemic recovery.
For example, a dramatic shift is occurring in regulation and standards-setting concerning ESG, especially for financial institutions. Prudent financial institutions recognize that climate change needs to be factored into their risk management and stress-testing frameworks. Additionally, with more people working remotely, the demand for digital financial services has increased, and financial institutions will likely need to significantly enhance their technology capabilities. This greater reliance on the internet results in institutional exposure to other vulnerabilities, such as those related to cyber attacks and data breaches.
One way for entities to implement ESG into their processes is to digitize more of their operations. For more information about how to do so, please see our Insight titled, “So you want to go digital.”
Congressional Research Service releases report on digital wallets: On April 18, 2022, the Congressional Research Service (CRS) released a report titled, “Digital Wallets and Selected Policy Issues.” The report divided digital wallets into two primary categories – mobile wallets, which may be general or tied to a specific merchant, and cryptocurrency wallets, which may be hosted or unhosted wallets. The report addressed certain policy considerations for mobile wallets and crypto wallets, including (i) consumer protection and investor protection and (ii) systemic risk and market power. For consumer and investor protection, CRS noted that consumers using debit, credit or prepaid cards stored on the mobile wallet are protected by the Electronic Fund Transfer Act and the Truth in Lending Act, and their implementing regulations. That said, CRS stated that funds stored on a mobile wallet are not deposits and are generally not eligible for deposit insurance except if the wallet provider provides “pass-through insurance.” CRS therefore noted that, where insurance is not offered, policymakers may wish to consider whether wallet users are under a misimpression that their funds are insured and whether insured balances pose a systemic risk. For crypto wallets, CRS took the position that cryptocurrency transactions are not subject to Regulation E mainly because they are not bank products and are not typically used for consumer payments. Based on its assertion that cryptocurrency transactions are not currently covered by Regulation E, CRS suggested that, as the discussion around whether and to what extent banks may participate in cryptocurrency activities, it is possible that certain Regulation E protections could be extended to bank-based cryptocurrency products.
CFPB and FDIC issue Supervisory Highlights that address compliance issues for the Electronic Fund Transfer Act and Regulation E:
- In May 2022, the CFPB issued its Spring 2022 Supervisory Highlights, in which it, in part, highlights violations related to prepaid accounts and remittance transfers.
For prepaid accounts, the CPFB stated that examiners found violations of the Electronic Fund Transfer Act (EFTA) and Regulation E related to receipt of valid stop payment requests from prepaid account users and violations related to the notice provided to consumers after an institution determined that no error or a different error than that which the consumer alleged occurred.
Regarding remittances, the CFPB stated that examiners found violations of the EFTA and Regulation E as well as a deceptive act or practice regarding the following:
- Deceptive claims on transfer speeds for remittance transfers
Remittance transfer service agreements containing provisions that violate the EFTAs prohibition on waivers of rights conferred or causes of action created by the EFTA
Disclosure and timing requirements on receipts for remittance transfers
Disclosure, timing and refund issues relating to error investigations
In March 2022, the Federal Deposit Insurance Corporation (FDIC) issued its Consumer Compliance Supervisory Highlights, in which it highlighted violations of Regulation E related to liability protections for a consumer deceived into giving authorization credentials. The FDIC noted that the financial institution disclosed in its agreements that neither it nor its service provider would ever ask for a two-factor authentication code. At the same time, Regulation E’s liability protections for unauthorized transfers apply even when a consumer is deceived into giving another person their authorization credentials. The FDIC stated that account disclosures cannot limit protections provided in the regulation.
The FDIC also noted that there were instances where a consumer provided his or her account credentials for fraudulent electronic fund transfers through a money payment platform (MPP). The FDIC noted that, when an MPP entered into an agreement with a consumer, that agreement extended to the financial institution holding the consumer’s account. Under Regulation E, both the account-holding institution and the MPP would be “financial institutions,” and both have investigative and error-resolution obligations.
In addition, FDIC stated that Regulation E applies to peer-to-peer payments made through MPPs, even where the MPP does not have a specific agreement with the other MPP regarding the financial institution holding the consumer’s account, if the transmitter issues an access device and agrees to provide electronic fund transfer services that enable the consumer to access the account. A mobile phone and an MPP Electronic Fund Transfers Act (EFT) application constitute an “access device.” Therefore, an MPP must comply with Regulation E for transactions connected to a consumer’s debit card or account.
NYDFS advises on use of blockchain analytics: On April 28, 2022, the New York Department of Financial Services (NYDFS) issued guidance to all entities licensed under New York’s Bitlicense law or chartered as limited-purpose trust companies under New York’s Banking Law regarding the use of blockchain analytics. The NYDFS emphasized that the characteristics of virtual currencies – with immutable, on-chain information – make the use of blockchain analytics important in addressing anti-money laundering requirements under New York law, and a range of Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC)-related compliance controls.
Utah expands one regulatory sandbox program and repeals two others: On March 24, 2022, the governor of Utah signed into law HB 243, which expands the regulatory sandbox program administered by the Governor’s Office of Economic Opportunity by allowing a person who offers a financial or insurance product or service to participate in the program. The law repeals the regulatory sandbox programs administered by the Utah Department of Commerce and the Department of Insurance.
Utah enacts law creating Blockchain Taskforce: On March 24, 2022, the governor of Utah signed HB 335, which creates the Blockchain and Digital Innovation Task Force (Task Force). The Task Force is directed to develop knowledge and expertise about blockchain and related technologies as well as make policy recommendations related to blockchain and related technologies. The Task Force must make an annual report.
Washington enacts law creating Blockchain Working Group: On March 30, 2022, the governor signed SB 5544 into law, which creates the Washington Blockchain Work Group. The group was established to examine potential applications for blockchain technology, such as computing, banking and other financial services; the real estate transaction process; healthcare; supply chain management; higher education; and public recordkeeping.
States enact laws governing digital assets:
- Idaho enacts law defining legal status of digital assets: On March 28, 2022, the governor of Idaho signed into law HB 583, which adds a new chapter to Idaho’s Commercial Transactions Title to address the legal status of digital assets. The law classifies digital assets as personal property and specifies the rights of purchase, possession and control.
- Utah enacts law governing ownership of digital assets: On March 24, 2022, the governor of Utah signed into law SB 182, which defines and describes ownership of digital securities and digital assets, including that the owner of a digital user asset may demonstrate ownership through control.
- Note that neither Idaho nor Utah adopted the Uniform Law Commission’s draft model UCC Article 12. Please see our most recent coverage of the development of Article 12.
Electronic signature and contract formation
Court finds that there was no mutual asset to arbitration agreement presented through hyperlink: In Berman v. Freedom Financial Network, No. 20-16900 (9th Cir. Apr. 5, 2022), the court analyzed whether there was mutual assent when the plaintiffs were presented with a disclosure that stated, “I understand and agree to the Terms & Conditions which includes mandatory arbitration.” While the plaintiffs visited separate webpages, for both, the above language was in gray font and, while the hyperlinks were underlined, they were in the same gray font and not in blue, as is typically found with hyperlinks. For both plaintiffs, the above language was placed above a green button titled, “Continue,” which the plaintiffs needed to press to proceed. The defendant did not contend that the plaintiffs had actual knowledge of the agreement; therefore, an enforceable contract will be found on inquiry notice only if (i) the website provides reasonably conspicuous notice of the terms and (ii) the consumer takes some action that unambiguously manifests his or her assent.
The court found that the webpages did not provide reasonably conspicuous notice for two reasons. First, the notice must be in a font size and format that the court can assume a reasonably prudent internet user would see. Here, the text was printed in grey font that was considerably smaller than the surrounding website elements. The text was also de-emphasized by the webpage’s overall design, which drew a user’s attention away from the terms and conditions language. Second, while disclosing terms via hyperlink is permitted, the hyperlinked text must be sufficiently “set apart” from the surrounding text. The text in question failed to clearly denote the hyperlinks.
The court concluded that the plaintiffs did not take any actions that unambiguously manifested their assent to be bound by the terms. While the plaintiffs clicked on the green “Continue” button, that action in the abstract did not signify that the plaintiffs agreed to anything. Clicking a button can be construed only as an unambiguous manifestation of assent if the user is explicitly advised that clicking will constitute assent. Therefore, the court affirmed the lower court’s denial of the defendant’s motion to compel arbitration.
Court finds valid agreement to arbitrate exists:
- In Hayes v. Conduent Commercial Solutions, LLC, 2022 WL 11104622, the court held that (i) the plaintiff had reasonable notice of the arbitration agreement and (ii) the plaintiff manifested his assent to the arbitration agreement. First, the plaintiff argued that the defendant failed to show that the arbitration agreement was reasonably communicated to him. The court reviewed the facts and the plaintiff’s arguments and stated that, even if the plaintiff’s arguments did not provide sufficient notice of the arbitration agreement’s terms, the arbitration agreement itself, which included all-capitalized and boldfaced terms, was the only document among the plaintiff’s offer acceptance paperwork to do so. The plaintiff was required to acknowledge that he had received and read or had the opportunity to read the agreement. Taken together, the court held that the plaintiff had reasonable notice of the arbitration agreement. As to a reasonable manifestation of assent, the plaintiff electronically signed the agreement when he executed the acknowledgment.
- In Daniel v. ABM Industries Incorporated, 2022 WL 993801 (E.D. Ark. March 31, 2022), the court held that the plaintiff executed the arbitration agreement despite the plaintiff’s arguments that (i) she did not sign the arbitration agreement itself, (ii) someone signed the acknowledgment on her behalf and (iii) there was no mutual assent. For the first argument, even though the plaintiff only signed an acknowledgment that contained the final paragraphs from the arbitration agreement and not the arbitration agreement itself, the court held that two documents taken together form an enforceable contract. For the second argument, the court found that, even with all reasonable inferences construed in the plaintiff’s favor, her forgery argument cannot survive summary judgment. The plaintiff had to access the relevant portal using a username and password; consent to the use of electronic signatures – which the plaintiff did; receive another email to begin the background check process; and sign a series of onboarding documents. The record evidence shows that the plaintiff signed those documents, including documents that required personal information that only she could provide. As for plaintiff’s third argument of mutual assent, the court found her arguments unpersuasive for the reasons stated above.
Read this next
Embracing digital evolution: Our new business report
Interview with Margo H.K. Tank by Börsen-Zeitung on cryptocurrency regulation.
DLA Piper lawyers ranked in Chambers FinTech 2022. DLA Piper is pleased to announce that the editors of this newsletter, Margo Tank and David Whitaker, have been ranked by Chamber & Partners in the area of USA FinTech Legal: Data Protection and Cyber Security. Margo Tank was also ranked in the area of FinTech Legal: Blockchain & Cryptocurrencies. In total, the firm received 19 firm rankings and 14 individual lawyer rankings in the Chambers FinTech 2022 guide.
Cryptocurrency and Digital Asset Regulation, published by the American Bar Association and co-edited by Deborah Meshulam and Michael Fluhr, including chapters by Meshulam and Fluhr and by Margo H.K. Tank and Andrew Grant.
The Law of Electronic Signatures, 2020 - 2021 Edition (Thomson Reuters) is an essential guide to electronic signatures and records laws, including the context in which the laws were adopted and the ways in which the authors believe the drafters intended them to be interpreted. The publication is prepared by authors, including Margo Tank and David Whitaker, with more than 30 years combined experience that includes involvement with the drafting and passage of Electronic Signatures in Global and National Commerce Act (ESIGN), the preparation of the Uniform Electronic Transactions Act (UETA), the creation of the Standards and Procedures for electronic Records and Signatures (SPeRS™) and serving as counsel to the Electronic Signatures and Records Association. The insights they provide will be relevant to anyone seeking to understand the impact of, and the liability associated with, using electronic signatures and electronic records.
These insights include:
- Details on the legal requirements for using electronic signatures and records, including delivery, presentation, signing and record retention
- Comprehensive tables itemizing the state variations to the uniform UETA language
- Special considerations for using electronic signatures and records in connection with emerging and evolving technology
- Using electronic records and signatures in specialized transactions and documents, such as securities, chattel paper and mortgages
- Analysis of the interplay between ESIGN, UETA and many other key laws and regulations
- Identification and summaries of recent legal developments and court cases impacting electronic signatures and records
The MBA Compliance Essentials Remote Online Notarization State Surveys, developed by DLA Piper, provides a comprehensive look at RON requirements in each state that has enacted RON legislation. These fully editable surveys are organized by category of requirements, including registration, technology, seal and signature, certificates of RON acts, journal, authentication, session, recording and additional requirements. Companies can purchase the full package which includes surveys for all states that have enacted RON legislation along with a matrix summarizing state requirements, or companies can purchase information about individual states as needed. Read more.
For more information
Our Global Tax Reform hub https://www.dlapiper.com/en/us/insights/topics/global-tax-reform/ looks at the latest developments regarding US tax legislation.
In case you missed it
The materials from our CLE Privacy Symposium held in partnership with the Electronic Signature & Records Association are available online. Access them here.
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Read the latest issue of our bulletin Consumer Finance Regulatory News and Trends
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Exchange - International: Financial Services Regulation Newsletter | Insights | DLA Piper Global Law Firm
Learn more about our eSignatures and ePayments practice by contacting:
Margo H.K. Tank