Benjamin M. Lawsky, who heads the New York State Department of Financial Services (DFS), indicated that his agency is seriously considering more aggressive investigation and pursuit of individuals whose malfeasance has led (or may lead) to significant losses on Wall Street. Citing public discontent that not a single senior executive has been prosecuted or subjected to severe civil sanctions for wrongdoing that led to the financial crisis or occurred in its wake, Mr. Lawsky decried the “accountability gap” on Wall Street. That gap fuels public outrage, he said, even as a proliferation of post-crisis scandals—money laundering, LIBOR, tax evasion, and currency manipulation—suggest that lessons from the crisis have not adequately been learned.

Speaking at the Exchequer Club in Washington, D.C., on March 19, 2014, Mr. Lawsky said that citing a “culture on Wall Street” and only penalizing the institutions themselves plays into an “everyone was doing it” defense for individuals who engage in misconduct. He blames “lax enforcement” by regulators as contributing to a vicious cycle of scandal after scandal and a mindset that wrongdoing for profit is worth the risk because many people don’t get caught and, even if caught, are not held personally responsible.

Mr. Lawsky’s opinion is that real deterrence cannot be accomplished solely by corporate accountability, regardless of the size of the fines and penalties, and can only succeed if regulators and prosecutors change that focus to individual accountability. That entails two steps: first, public disclosure, in great detail, of actual, specific misconduct engaged in by individuals; and second, severe sanctions for those individuals. Such sanctions could include fines and imprisonment on the criminal side but also suspensions, terminations, bonus clawbacks, and other civil remedies.

Touching on other topics in his address, Mr. Lawsky characterized banks’ exit from the mortgage servicing business as an unintended consequence of Basel III and expressed concern that nonbank servicers have become so large so fast that he apprehends harm to consumers, particularly in the foreclosure context. He indicated that DFS is cooperating closely with the Consumer Financial Protection Bureau on this and other matters.

We can also expect DFS to focus with greater intensity on unregulated “niche players” (among whom Mr. Lawsky mentioned only payday lenders explicitly, but clearly he has other nonbank lenders in mind as well). The agency will also focus on areas that are either ignored or under-enforced by federal regulators.

In recent months, DFS has paid considerable attention to virtual currencies and held a major hearing on the subject last summer. Topics of concern include:

  • Investor activity in the virtual currency space
  • Consumer protection issues
  • Law enforcement concerns linked to the pseudo-anonymity of virtual currency users
  • The potential and limitations of the related technology
  • Fundamental safety and soundness considerations

DFS has determined that virtual currencies are not going to disappear anytime soon, so they might as well be regulated. On March 11, Mr. Lawsky issued an order to the effect that DFS will consider formal proposals and applications by firms wishing to operate virtual currency exchanges in New York. Regulatory priorities in this space will include robust standards for consumer protection, cybersecurity, and anti-money laundering compliance.

During a Q&A session following his address, Mr. Lawsky expressed surprise that people are not paying adequate attention to insurance regulatory issues. Citing significant activity on the international insurance regulatory front, Mr. Lawsky criticized a proposed global capital standard as relying too heavily on Basel models without recognizing the significant differences between bank capital and insurance company capital structures.

On Tuesday, April 15, 2014, Ballard Spahr will host a webinar, “The Consumer Financial Services Industry in the Crosshairs of NY Regulators,” that will focus on increased activity by DFS under Mr. Lawsky and the Office of the New York Attorney General under Eric Schneiderman.

Ballard Spahr’s Bank Regulation and Supervision Group provides informed, insightful advice on regulatory, transactional, legislative, and strategic planning matters and assists clients with examinations, supervision, and enforcement issues and related litigation. Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in handling litigation with DFS and the New York Attorney General.

Our Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Keith R. Fisher in the Bank Regulation and Supervision Group at 202.661.2284 or fisherk@ballardspahr.com. Please also feel free to contact the participants in our webinar, Marjorie J. Peerce at 212.223.0200 x8039 or peercem@bssfny.com, or Denise L. Plunkett at 646.346.8036 or plunkettd@ballardspahr.com.


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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