BILL NUMBER: S3789

SPONSOR: MYRIE
 
TITLE OF BILL:

An act to amend the financial services law, in relation to civil penal-
ties for certain fraud or misrepresentation of a material fact with
respect to a financial product or service

 
PURPOSE:

This legislation intends to close a loophole in the financial services
law requiring intentionality for fraud or misrepresentation that is
generally not required in the enforcement of civil law.

 
SUMMARY OF PROVISIONS:

Section 1 amends subparagraph (A) of paragraph 1 of subsection (a) of 2
section 408 of the financial services law which removes the word,
"intentional".

Section 2 provides the effective date.
              

 
JUSTIFICATION:

In 2011, the Department of Financial Services ("DFS"), New York's prima-
ry regulator of licensed or chartered financial service entities, was
granted enforcement powers over non-licensed entities under the new
Financial Services Law (adapted from the Insurance and Banking laws).
The agency has since used this authority to investigate unregulated
entities that have engaged in unfair, deceptive, or abusive acts or
practices resulting in harm to New York consumers.

Currently, however, the Financial Services Law requires fraudulent
behavior to be intentional, an abnormally high standard of proof within
a civil penalties provision. In the context of other financial fraud,
the New York Court of Appeals has held that where the purpose of the law
is to "prevent all kinds of fraud" and "defeat all related schemes
whereby the public is exploited," the term "fraud" should be given a
"wide meaning so as to embrace all deceitful practices contrary to the
plain rules of common honesty, including all acts, even though not orig-
inating in any actual evil design to perpetrate fraud or injury upon
others, which do tend to deceive or mislead the purchasing public."
(People v. Lexington Sixty-First Assocs., 38 N.Y.2d 588, 595; discussing
the Martin Act).

DFS's statutory stated purpose comports with the Court's construction.
In Section 102 of the Financial Services Law, DFS's stated goals
include, among other things, to:

"ensure the continued safety and soundness of New York's banking, insur-
ance and financial services industries, as well as the prudent conduct
of the providers of financial products and services, through responsible
regulation and supervision (subsection i);

"protect the public interest and the interests of depositors, creditors,
policyholders, underwriters, shareholders and stockholders" (subsection
j); and

"promote the reduction and elimination of fraud..."(subsection k) A
significant part of DFS's mission is to reduce and eliminate fraud,
protect the public interest, and ensure the safety and soundness of
entities serving the purchasing public, which are the same factors the
Court of Appeals used to eliminate intentionality standards for other
civil penalty regimes. By removing Intentional" from Section 408 of the
Financial Services Law, consumers will be further protected from bad
actors not regulated under the Martin Act but who remain free to perpe-
trate fraud and misrepresentations on the public as long as their behav-
ior is not "intentional."

Furthermore, intentionality is an element more often found in criminal,
not civil law. Its placement in a civil penalty provision for white-col-
lar crime is unusual and requires correction.

 
LEGISLATIVE HISTORY:

S6639 of 2023-24: Referred to Banks.

 
FISCAL IMPLICATIONS:

None.

 
EFFECTIVE DATE:
This act shall take effect immediately.