Category Archives: Uncategorized

Title closing fee: How much do you tip a title closer?

Title Closer: To Tip or Not to Tip?

At a typical residential closing in New York, you can expect to see the seller, the seller’s attorney, the buyer, the buyer’s attorney and a representative from the title insurance company known as the title closer. Why do you need a title closer? This person plays an integral part in ensuring the success of the closing. The title closer ensures that the deed and any financing documents are in recordable form, confirms the pay-off of the seller’s existing loan, collects the amount needed to satisfy the seller’s existing loan and remits payment to the seller’s lender. Not very glamorous, but without these services, the title company would not be able to issue a policy of title insurance to the buyer or, perhaps even more importantly, to the buyer’s lender, as required by the lender to provide the loan to the buyer so they can purchase the home.

Given the importance of these services, it has been customary until very recently for buyers to provide title closers with a gratuity at the closing, anywhere between $100 to $200. Additionally, title closers would charge sellers a fee, called the “pick-up” fee, for taking on the responsibility of remitting the final payment to seller’s existing lender in satisfaction of seller’s existing mortgage. A typical pick-up fee would be $250 per mortgage being satisfied.

But on Dec. 18, 2017, new Part 228 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York went into effect. Among other things, this regulation imposes an obligation on title insurance companies to prohibit their title closers from accepting any payment from the buyer, including gratuity. And if a title closer is an employee of the title insurance company, they may not charge a pick-up fee. If the title closer is an independent contractor, a pick-up fee may be charged, provided the fee is reasonable and the amount of the fee is provided to the seller no later than three days prior to the closing. It is unclear whether or not a separate pick-up fee may be charged for each mortgage being satisfied, and this, along with other provisions of the new regulation, are still being interpreted by title companies and legal practitioners.

How will this affect residential closings moving forward? For now, it’s too soon to tell, and we’ll have to wait and see.

Cuddy & Feder’s Real Estate team represents buyers, sellers and lenders in a variety of real estate transactions, both commercial and residential. Founded on the strength of our real estate practice, the firm has played a key role in shaping the real estate landscape throughout Westchester, Fairfield, Long Island and the Hudson Valley.

Arbitrability - New York arbitration clause – forum selection clause

Business Lessons From Recent New York Arbitrability Cases

(Note: This post from November 3, 2017 has been updated to reflect the May 21, 2018 decision by the U.S. Supreme Court confirming that class action waivers are not precluded by the collective bargaining provision of the National Labor Relations Act)

Many businesses fail to give forum selection clauses much thought, focusing instead on negotiating the material business terms when drafting or negotiating their agreements. However, a carefully-crafted and thoughtful forum selection clause can save businesses significant time and capital. Hastily consenting to “submit disputes to arbitration” is not the answer, as hundreds of businesses end up in court litigating about whether they should be there at all.

Arbitrability “is a term of art covering ‘dispute[s] about whether the parties are bound by a given arbitration clause’ as well as ‘disagreement[s] about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy.’”1 Recent cases in New York highlight important takeaways that can improve companies’ bottom lines, whether by avoiding unnecessary litigation regarding where to litigate (due to conflicting forum selection clauses in multi-contractual disputes or ambiguous forum selection clauses), or by utilizing highly specific language in forum selection clauses and understanding the rules of the chosen forum.

Delegation Clauses and Their Implications

Generally, arbitrability (whether an agreement to arbitrate exists, and whether it covers the dispute) is an issue for the courts to decide.2 However, parties can specifically provide, in what is known as a “delegation clause,” that arbitrators not only have exclusive jurisdiction over a dispute, but also exclusive jurisdiction over “any question as to its arbitrability.”3 Further, even without an express “delegation clause,” if an arbitration agreement incorporates by reference a forum’s rules, the parties may have contracted away their right for the courts to determine the threshold issue of arbitrability.4

New York Courts have provided for a couple of small carveouts to this rule. Incorporation by reference of a forum’s rules reserving arbitrability to itself does not constitute “clear and unmistakable evidence” that the parties intended to delegate arbitrability to an arbitrator where the arbitration agreement is narrow.5 Moreover, where a party claims that they never assented to the agreement containing the arbitration clause, courts will determine whether the parties assented to the agreement notwithstanding the delegation clause.6

Takeaway: Know the applicable rules in the selected forum and the implications of those rules. Consider supplementing or changing those rules to address specific business concerns, such as the time within which arbitration must be commenced, the arbitrator selection process, and any discovery parameters.

Enforcement By Or Against Non-Signatories

There are only five recognized theories to bind a non-signatory to an arbitration agreement: 1) incorporation by reference;7 2) assumption;8 3) agency;9 4) veil-piercing/alter ego;10 and 5) estoppel.11 In Katsoris, the Southern District of New York held that a corporate parties’ successor-in-interest (non-signatory) was bound by an agreement to arbitrate, as was the plaintiff (non-signatory) who had negotiated the work-for-hire agreement for his yet-to-be formed foundation;12 however, a non-signatory entity which clearly benefitted from the work-for-hire agreement but did not receive a “direct benefit” therefrom could not be compelled to arbitrate.13

Third-party beneficiaries may enforce arbitration agreements, but whether a non-signatory is a third-party beneficiary entitled to enforce arbitration is a threshold issue of arbitrability for the courts to decide.14

Takeaway: Know the rules for binding non-signatories to arbitration agreements, and carefully consider the parents, subsidiaries, and third-party beneficiaries of the parties and agreement(s). Specifically name such parties and, if possible, require their signatures on the arbitration agreement(s), and incorporate the arbitration clause into related agreements.

Class Action Waivers

Class action waivers in arbitration agreements have long been upheld by the United States Supreme Court.15 In a May 21, 2018 5-4 decision, SCOTUS resolved a Circuit split to side with the Second, Fifth and Eighth Circuits by holding that class action waivers in arbitration agreements are not precluded by the rights to collective action granted by the National Labor Relations Act (NLRA).16  While there are a few legislative prohibitions of pre-dispute arbitration agreements and/or waivers of rights and remedies in the employment context,17 class action waivers are otherwise valid and might operate to preclude the assertion of smaller claims by foreclosing the economies of a class action.

Takeaway: Including class action waivers in arbitration agreements could prevent the assertion of smaller claims against your business.

18

Internet-Based Agreements and Consent

Internet contracts have been found valid where “the user takes some action demonstrating that [she has] at least constructive knowledge of the terms of the agreement, from which knowledge a court can infer acceptance.”19

“Clickwrap” or “click-through” agreements require users to click “I agree” after users are presented with terms and conditions of use, in contrast with “browse-wrap” agreements which post terms and conditions via “hyperlink” on a website.20  “Scroll-wraps” require users to scroll through terms before clicking “I agree,”21 and “sign-in wraps” advise users that they are agreeing to terms of service when registering or signing up for services. While Clickwrap agreements are routinely upheld because users must affirmatively assent to terms of an agreement, browse-wrap agreements receive closer scrutiny.22 Nevertheless, the Second Circuit has held that “a reasonably prudent user knows that the text that is highlighted in blue and underlined is a hyperlink to another webpage where additional information will be found.”23

Takeaway: Language and consent buttons in web-based agreements should be very clear, and best practices should include using clickwrap (rather than hyperlinks) to disclose the terms of consent to arbitration.

Multi-Contractual Disputes

Arbitrability is frequently contested where a case involves multiple contracts, particularly when the contracts present conflicting forum selection clauses. Generally, “’a broad arbitration clause in an agreement survives and remains enforceable for the resolution of disputes arising out of that agreement subsequent to the termination thereof and the discharge of obligations thereunder’ unless a merger clause in a subsequent agreement serves to supersede the prior agreement to arbitrate.”24 “Where a later contract includes only…general language in its merger clause, the clause does not terminate a requirement to arbitrate issues that arose under a prior agreement.”25 However, where there is “a showing of specific intent for a subsequent contract to supersede a prior agreement to arbitrate, the later contract’s language controls.”26

In Mumin v. Uber Techs., Inc.,27 the Court compelled arbitration notwithstanding that two separate agreements provided that courts in San Francisco would have “exclusive jurisdiction” over disputes arising out of the parties’ agreement, citing the rationale that “it may be necessary to file an action in court to enforce an arbitration agreement, or to obtain a judgment enforcing an arbitration award, and the parties may need to invoke the jurisdiction of a court to obtain other remedies.”28

Mere choice of law provisions are not considered forum selection clauses, let alone “mandatory” or “all-inclusive” forum selection clauses, for the purposes of overriding arbitration clauses.29 Moreover, settlement agreements which settle arbitrable claims but contain merger clauses and conflicting forum selection clauses are not subject to arbitration in actions for breach of the settlement agreement.30

Takeaway: Ensure that forum selection clauses are consistent across contracts most likely to be implicated in a single dispute. For example, employment agreements, NDAs, Confidentiality Agreements, and Work-For-Hire Agreements all may be implicated if an employee steals trade secrets.

Conclusion and Takeaways

While this article does not address the pros and cons of arbitration versus litigation, businesses are well-advised to carefully consider those advantages and disadvantages when drafting and/or negotiating forum selection clauses. To the extent that businesses have decided to use arbitration clauses in their agreements, they should at a minimum:

  • Know the applicable rules in the selected forum and the implications of those rules;
  • Expressly provide whether court(s) or the arbitrator(s) should address threshold issues of arbitrability, rather than rely upon incorporation by reference of a forum’s rules as determinative of that issue;
  • Confirm that forum selection clauses are consistent across contracts likely to be implicated in a single dispute;
  • Ensure that the language and consent buttons in web-based agreements are very clear, and use clickwrap rather than hyperlinks to disclose terms;
  • Consider including class action waivers.

Forum selection clauses are powerful tools which, if carefully considered and crafted, can save businesses significant time and money. Because such provisions are usually noncontroversial when the parties are negotiating material business terms, that is the best time to consult with litigation counsel to ensure that the clause is properly drafted, consistent with related agreements, and makes good business sense.

SLAPPs: When to Turn the Other Cheek

Introduction

Strategic lawsuits against public participation, or SLAPPs, are a tool commonly used by developers and others to deter community opposition to projects. By threatening opponents with the burden of protracted and expensive litigation, SLAPPs work to intimidate critics into abandoning – and even foregoing initially – their opposition to projects under review. In response to the widespread use of SLAPPs, many states, including New York, have enacted so-called Anti-SLAPP statutes. These laws are designed to prevent what is perceived as abusive litigation aimed at silencing community expression while not eliminating judicial recourse for those with meritorious claims.

Anti-SLAPP laws provide developers and others seeking to improve real property with serious issues to consider before commencing a suit that could potentially run afoul of them. In New York, these considerations are both pecuniary and procedural in nature, and taken as a whole, often militate against commencing action against opponents of development. By refraining from engaging the legal system in these circumstances, developers and others can avoid potentially significant monetary penalties and, more importantly, deprive opposition groups of a significant platform from which to espouse their views. Nevertheless, some circumstances will involve opposition that warrants legal action, and in these cases it is important to ensure that the claims are hardy enough to withstand inevitable attack and worthwhile in light of the added voice given the opposition.

New York’s Anti-SLAPP Law

New York’s Anti-SLAPP provisions are set forth in sections 70-a and 76-a of New York’s Civil Rights Law. In adopting this legislation, it was declared to be the policy of the State

that the rights of citizens to participate freely in the public process
must be safeguarded with great diligence. The laws of the state
must provide the utmost protection for the free exercise of speech,
petition and association rights, particularly where such rights are
exercised in a public forum with respect to issues of public concern. 1

Sections 70-a and 76-a of the Civil Rights Law create a right of action for defendants – either individually or as organizations – in suits “involving public petition and participation,” whereby a “public applicant or permittee” commences suit that is “materially related to any efforts of the defendant to report on, comment on, rule on, challenge or oppose such application or permission.”2 Public applicants and permittees include “any person[s] who [have] applied for or obtained a permit…to act from any government body…” 3

In addition to these potential pecuniary pitfalls, a client’s decision to bring suit against an individual or group opposing its application can also have other, unintended consequences with far-reaching effect.

Turning the Other Cheek

Successfully invoking New York’s Anti-SLAPP laws can entitle a party to costs and attorney’s fees (“upon a demonstration that the action…was commenced or continued without a substantial basis in fact and law and could not be supported by a substantial argument for the extension, modification or reversal of existing law”), compensatory damages (“upon a demonstration that the action…was commenced or continued for the purpose of harassing, intimidating, punishing or otherwise maliciously inhibiting the free exercise of speech, petition or association rights”), and/or punitive damages (“upon an additional demonstration that the action…was commenced or continued for the sole purpose of harassing, intimidating, punishing or otherwise maliciously inhibiting the free exercise of speech, petition or association rights”). 4 However, even if a party successfully proves that a SLAPP has been filed against her, it is still within the sole discretion of the trial court to award damages. 5

In addition to these potential pecuniary pitfalls, a client’s decision to bring suit against an individual or group opposing its application can also have other, unintended consequences with far-reaching effect. Oftentimes, opposition groups or individuals opposed to a project have limited access to the formal decision-making process as it relates to an application and are relegated to a more tertiary role. Comments and complaints are made, public meetings are packed, and the press can even be rallied by such groups, but they are not entitled to much else beyond that. However, when suit is filed by a developer in response to such opposition activity, a new platform is presented to opposition groups that can provide them with a soapbox from which to have a much greater impact on the approval process.

In this regard, opposition groups and individuals who are made part of a judicial proceeding due to their opposition become entitled to notice of every step of the process going forward and can participate in myriad ways. For instance, once made part of an action, they then have the opportunity to engage in full scale discovery with respect to all of the issues relevant to the litigation, including by seeking responsive documents and taking depositions of key party and nonparty witnesses. This could place developers and other clients in a worse position than before commencing suit without providing much in the way of strategic benefit.

Defending Against SLAPP Allegations

That being said, if a client insists upon filing suit against an individual or such a group, because individuals have standing to invoke the protections of New York’s Anti-SLAPP laws, 6 the best recommendation to protect a client’s interests is to ensure that any cause of action they decide to maintain is substantially based in fact and law or supported by a substantial argument for the extension, modification, or reversal of some existing law. Crucially, the burden will be on the claimant to prove by clear and convincing evidence – a more stringent standard than would otherwise apply – that their claims have such a basis. 7

A property owner did just that and defended himself against an anti-SLAPP claim in Giorgio v. Pilla, supra. There, the Appellate Division, Second Department upheld the Supreme Court’s denial of Defendants Steven and Deborah Pilla’s motion for summary judgment on their counterclaims alleging that Plaintiff Dominick Giorgio’s suit against them was a SLAPP. Prior to the dispute, Giorgio had obtained a permit from the Westchester County Department of Health to construct a well and sewage system, along with a home, on his unimproved property. After construction began, the Pillas – who owned property immediately adjacent to Giorgio’s lot – successfully lobbied the Department to revoke the permit it had granted Giorgio. As a result, Giorgio sued the Pillas for nuisance and negligence, claiming that when they had updated and relocated their own septic system several years earlier, they had done so in a careless manner. The Pillas counterclaimed against Giorgio pursuant to Civil Rights Law § 70-a, claiming the suit Giorgio filed against them constituted a SLAPP and should therefore be dismissed with damages being awarded to the Pillas. In affirming the Supreme Court’s denial of the Pillas’ motion, the Second Department concluded that Giorgio “tendered proof sufficiently demonstrating that [his] action has a substantial basis in fact and law.” 8

While the Appellate Division did not provide further guidance as to what constitutes a substantial basis in fact and law, CPLR 3211 and 3212, which, respectively, set forth the standards for dismissal and summary judgment in New York, also make use of the phrase. Subsection (g) of CPLR 3211 and subsection (h) of CPLR 3212 shift the burden on motions for dismissal and summary judgment to the nonmoving party – who, in these cases, is the party alleged to have commenced a SLAPP – to demonstrate that the action has a substantial basis in fact and law. Therefore, it is reasonable to conclude that being able to plead a prima facie claim and show that the other party is not entitled to judgment as a matter of law – such as would successfully defend against both a motion to dismiss and a motion for summary judgment – will suffice. In other words, if a claim can withstand either type of motion, it is likely to be deemed substantially based in fact and law for purposes of defending against allegations of a SLAPP.

Conclusion

Ultimately, there will be many instances when it is strategic to counsel a developer-client to refrain from engaging members of the opposition in a formal legal proceeding. In avoiding the potential monetary penalties associated with being deemed a SLAPP and withholding a vital platform from opposition groups and individuals, more benefit may ultimately inure to the client. Nevertheless, in those circumstances where the manner of opposition to a project warrants legal action, it is crucial that any claim have such a basis in fact and law that it would ultimately withstand an attempt at summary disposition.

 

Early Lessons from the Equifax Hack

Early Lessons from the Equifax Hack

The Equifax data breach, also known as the Equifax hack, in which highly sensitive personal information of approximately 50% of all Americans was compromised, is fascinating from a legal standpoint for a variety of reasons.

It will likely take years to fully understand what happened, what measures Equifax did or did not have in place to prevent the breach, exactly what Equifax did in the immediate aftermath of learning of the hack, and the extent of damages and harm to the 143 million or so individuals whose data was stolen.

We know that multiple states’ attorneys generals are conducting investigations, including the New York State Attorney General’s office, the FTC has instituted an investigation, quite a bit of noise is being made about the fact that three company insiders sold $1.5 million of company shares shortly after the breach but prior to Equifax publicly disclosing it (which will likely lead to at least some additional regulatory or perhaps congressional inquiries), thousands of individuals have filed small claims law suits against Equifax thanks to a chatbot, which streamlines the process for individuals to file such actions, and more than twenty class action law suits have been filed, with plaintiffs’ attorneys in the first filed case stating that they will seek an eye popping $70 billion in damages.

So, Equifax’s legal team will have its hands full for a while.

Lessons Learned from the Equifax Hack

What interests me about this case so much is that it touches upon and provides lessons, or at least will provide lessons as we learn more, about both preventative cybersecurity measures and reactive measures in the case of an actual breach and the developing web of regulations dealing with both of those items.

While keeping data safe is of course paramount, the inherent fallibility of current cyber security measures means that what companies do after a breach is at least as important as what they do to prevent one.

Earlier this year, I wrote a blog post that discussed the increasing focus of FINRA and the SEC on cybersecurity enforcement actions against covered entities. This trend is certainly continuing and recent statements and publications by the SEC have made clear that cybersecurity will continue to be a, if not the, major focus of the Commission moving forward. Specifically, earlier this Summer, Steven Peiken, the co-director of the Division of Enforcement, gave an interview in which he stated that “The greatest threat to our markets right now is the cyber threat.” And in August, the Office of Compliance Inspections and Examinations (OICE) of the SEC, as part of its Cybersecurity 2 Initiative, released the findings of its examination of the cybersecurity practices of 75 broker dealers, investment advisors, and investment firms. Among other things, the OICE’s findings included a list of suggested best practices and identified certain common deficiencies in cybersecurity plans/implementation at the examined firms. 1

What Companies Do After a Breach

Another aspect of cybersecurity regulations, which has been brought sharply into focus in the Equifax case, is aimed at what a company does after it learns of a breach. While the SEC and FINRA regulations are focused on preventing data breaches, much of the work currently being done at the state level addresses the steps that companies must take following a breach (the New York State Department of Financial Services Cyber Security Regulations 2, enacted March of this year and which many think will become a model for other states to follow, address both preventative and remedial issues).

While keeping data safe is of course paramount, the inherent fallibility of current cyber security measures means that what companies do after a breach is at least as important as what they do to prevent one. In short, it is impossible to secure data with certainty and all companies, and particularly those holding sensitive personal information (like Equifax), should assume that they will be hacked and have a plan in place for how they will respond when that happens.

Various state and federal regulators will continue to adopt rules and regulations addressing what a company needs to do following a breach, but this will likely be a moving target for some time, if not indefinitely. In the meantime companies big and small that hold customers’ personal data need to have plans in place for what they will do in the aftermath of a breach, which conform to the specific regulatory requirements that those companies are governed by and which make business and customer relations sense.

We do not yet know what Equifax could have done to prevent the hack or at least mitigate the risk of a hack. But, it is already clear that the company’s response to the hack was lacking, to put it mildly. Equifax did not notify customers until well after learning about the hack. It then communicated poorly regarding what it was offering to customers to help protect them and the terms of that offer. And it has been largely unable or unavailable to answer questions from individual customers and media outlets about what happened and what it was doing about it. This response has had the impact of making a very bad situation worse and bringing more regulatory and legal scrutiny on a company that was already going to face a lot of it.

As I noted above, we will continue to learn lessons from this case as more and more information is uncovered, but in the immediate aftermath, we have a clear reminder that a big part of compliance planning and execution is to do no harm. Sometimes plans do not work – they may not be executed properly, or were insufficient in the first place, or maybe a company did everything right but something still went wrong – and bad things happen. Companies, particularly in the area of cybersecurity, need to have a plan for that eventuality so that they can prevent a bad business and legal situation from becoming worse.

Land use trends and developments

2017 TRENDS + DEVELOPMENTS. LAND USE.

The most significant developments, issues and opportunities, as we see it, facing us on the road ahead.

Retail

A key trend in the ever-changing retail market is the need for companies to provide a unique experience, not just a product, in order to compete with e-commerce retailers. At the same time, e-commerce retailers known exclusively as online companies are seeking to expand their brick and mortar presence, becoming an important entrant into the market. In addition, as brick-and-mortar companies and e-commerce retailers continue to trade strategies, the food and beverage industry will continue to be the bridge between them and consumers.
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Retail
Solar Energy

Solar Energy

Our Energy & Environmental Law Practice Group anticipates providing assistance in the coming months with the development of Community Choice Aggregation (CCA) energy purchasing groups not only in the Hudson Valley but throughout New York State in view of its orts in the development of the CCA known as Westchester Power by Sustainable Westchester.
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Meeting the needs of an aging population

An active topic of discussion amongst planners has been the impending effects on communities as the United States’ aging population sharply increases. Studies have shown that older citizens stay healthy longer in walkable urban settings. Some may benefit from adult day care programs that provide assistance during certain hours of the day, when adult children or other caretakers are working.
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Meeting the needs of an aging population
Educational & Medical - EDS & meds

Educational & Medical – EDS & meds

Health and educational innovation and development increasingly rely on high speed and high capacity data infrastructure including wired broadband, wireless networks and data storage.
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Brownfields

It’s Time to Repave and Redevelop a (Brownfield) Parking Lot to Reuse and Rebuild a New Paradise

For Developers, Participants and Volunteers alike in the Brownfields Cleanup Program, new deadlines incentivize timely redevelopment for sites to finish cleanup to ensure that a development comes in at the right price including all available incentives and tax credits.
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Brownfields
Transit oriented development

Tod: Transit oriented development

Location, Location, Location – Transit Oriented Development Takes Off In Westchester

Many Westchester communities are reexamining their local codes to focus specifically on transit-oriented development in an attempt to attract young professionals. The key is proximity (and planning!). Communities in Westchester are using local land use planning tools including rezoning, incentive zoning and smart growth techniques to foster transit oriented development zones in an attempt to attract and maintain millennial populations.
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Landlocked property rights New York State – Easement by necessity New York

When is Necessity Actually Necessary? The Changing Landscape of Easements by Necessity in New York

A situation commonly arising in the course of a land use and real estate practitioner’s work sounds much like the following: Smith owns Greenacre, a large parcel of land that she subdivides and then sells piecemeal. Jones, looking for somewhere nice to build his home, purchases one of the lots, which just happens to be landlocked and inaccessible from the local roads. Not being of substantial means, and his helicopter badly needing repairs, Jones must obtain an easement, or right to use others’ land for some purpose (in this circumstance, as a right of way). If, for some reason, our unlucky protagonist is unable to negotiate an easement with one of his neighbors so that his lot has overland access to a public right of way, his primary recourse would be to commence an action seeking a declaration from a court that an easement for such use is necessary and that he be permitted access.

To prevail on this claim, the law in New York has traditionally required that Jones establish, by clear and convincing evidence, that his lot was part of a greater unified parcel that became landlocked upon severance, or division, such that an easement was absolutely necessary at the time of severance. In other words, under the traditional framework, the claimed necessity must have always existed – and not because of some action taken by the party seeking the easement – or an easement by necessity was not the appropriate remedy.

Interestingly, the defendant’s lot had already been accessible for years pursuant to an express easement that had been deeded to him by the owner of a separate adjacent parcel.

This high standard is understandably difficult to meet and has resulted in application of the doctrine in limited circumstances.  As a result, some courts have begun to weaken the originally stringent requirement that the necessity for the easement exist at the time of severance, and have replaced it with a more attainable standard that, unfortunately, has all but eliminated the certainty associated with the traditional rule.

Over the years, a line of cases has developed whereby claimants have prevailed in seeking an easement by necessity despite there being no strict necessity for it at the time of severance. Illustrative of this is Mobile Motivations, Inc. v. Lenches, 809 N.Y.S.2d 253 (3d Dept. 2006), where the Appellate Division for the Third Department cited the significantly broadened version of the rule in a decision affirming the lower court’s finding that an easement by necessity had been established. The plaintiff in Lenches sought to enjoin the use of its driveway by the defendant, who was a neighbor with a landlocked parcel.

Interestingly, the defendant’s lot had already been accessible for years pursuant to an express easement that had been deeded to him by the owner of a separate adjacent parcel. The necessity for the new easement – which was absolute and not occasioned by any conduct of the defendant – only arose when a septic system was constructed in the vicinity of the former easement, thereby rendering it unusable. The Appellate Division held that, regardless of the fact that there had been a deeded right-of-way since the time of severance, and hence no necessity at that time, the subsequent alterations that destroyed its utility resulted in necessity sufficient to warrant invocation of the doctrine.

As this decision highlights, there are plenty of sound reasons for New York courts to expand the scope and application of the doctrine of easements by necessity, for without such an expansion of the rule the Lenches defendant would have been left without any means by which to access his property, a result not favored by the law. However, this apparent circumvention of the traditional rule’s requirement of strict necessity at the time of severance was accomplished without comment or further explanation by the court, and practitioners are left with no clear indication that the doctrine would be similarly applied in future cases.

Given the current state of legal limbo on this issue, it would be highly beneficial to practitioners for the courts to finally retire the requirement of strict necessity at the time of severance in favor of the broader, more inclusive rule that strict necessity arising at any time – so long as not self-created – is sufficient to justify application of the doctrine. In doing so, the interests of justice would be better served, predictability for practitioners and their clients would be dramatically enhanced, and the law of easements would be updated to address the fast-paced changes widespread development is bringing to the system.

The Land Use, Zoning & Development attorneys at Cuddy & Feder are available to address any questions you may have regarding easement by necessity or landlocked property rights in New York State.

document with gavel

DEC’s Proposed 2017 Amendments to SEQRA: Do They Help or Hurt Project Applicants?

The New York State Department of Environmental Conservation (“DEC”) has proposed a series of amendments to the State Environmental Quality Review Act (“SEQRA”), which the agency maintains are intended to streamline the review process, especially for projects that the agency considers to be in line with state public policy. Comments on the proposed changes will be accepted until close of business on May 19, 2017.  The DEC has established a regional public hearing schedule for March 31, 2017 in Albany, April 6th in New Paltz, April 13th in Hauppauge, and April 18th in Rochester.

Cuddy & Feder is a mid-size firm operating in the Hudson Valley, Long Island, and New York City’s outer boroughs. The firm exclusively and passionately represents project applicants. Our clients include both for-profit and not-for-profit property owners, and those whose underlying business is real estate, as well as those whose business operates from real estate. Thus, the firm’s perspective stems from extensive experience in representing our clients throughout the SEQRA process.

The following analysis shows that the proposed SEQRA amendments slightly improve the existing regulations for certain types of projects, but will in most instances lengthen the review process due to proposed mandatory scoping. The elephant in the room is what these regulations don’t do for applicants – provide any assurances as to SEQRA processes or timelines.

The number of caveats and restrictions based on local population, location/prior use of the parcel, and square footage limitations altogether provide that only a narrow range of projects will qualify as a Type II action under this provision.

We encourage our clients to contact the DEC about the lack of certainty in the review process as well as the timeliness of review, and how this impedes them from taking risks in growing their businesses and/or siting facilities in New York.  Further, we think it is time for DEC to provide dispute resolution provisions for applicants who find their projects at an impasse with the Lead Agency at key junctures, such as the determination of significance, and the completeness of either a DEIS or FEIS.

1.    Proposed Changes to the Type II List

The changes to the Type II list are a slight improvement over the existing exemptions of 4,000 SF for non-residential uses and 10,000 SF for educational uses (§ 617.5(c)(7),(8)), but either benefit only municipalities or specific and limited applicant projects.

A.    Solely Municipal Benefits

Many of the proposed Type II additions only provide a benefit to municipal processes and projects, and do not ease the burden on applicants. These include transfers and dedication of parkland and acquisition of less than 100 acres of dedicated parkland (§ 617.5(c)(44), § 617.5(c)(45)); land transfers of five acres or less to a public or nonprofit corporation from a municipality to construct 1- to 3-family homes § 617.5(c)(46)); selling/conveying property by public auction (pursuant to RPTL Art. II (§ 617.5(c)(47)); siting anaerobic digesters at publically-owned wastewater treatment facilities and municipal landfills (§ 617.5(c)(49)); and siting solar arrays of less than 5MW on mostly publically-owned sites such as landfills, brownfield sites, wastewater treatment facilities, industrial sites, canopies above residential/commercial parking facilities, and on existing non-historic structures (§§ 617.5(c)(15), (16)).

B.    Narrow Application and Limited Benefits for Applicants

There may be some very limited benefits from a few of the proposed amendments for certain types of applicants; e.g., nonprofit organizations such as Habitat for Humanity may benefit from the new land transfer addition. However, even the benefits aimed at applicants have limited application, or have almost uniformly long been treated as not having environmental significance despite technically being considered Unlisted. For example, applicants may benefit from the solar array Type II addition, but only for very specific types of solar; arrays must be less than 5MW, and the classification only applies to arrays sited on brownfield and industrial sites, parking facilities, or existing non-historic structures (§§ 617.5(c)(15), (16)).

The other proposed additions are likewise quite constricted in their application to development projects. Minor subdivisions (§ 617.5(c)(18)) are proposed to receive a boost to the Type II list. However, which subdivisions qualify is another very narrowly targeted provision: the subdivision must be either defined as “minor” in the local code or consist of 4 or fewer lots (whichever is less); involve 10 acres or less; may not have been part of a larger tract subdivided within the previous 5 years; and may not be within/substantially contiguous to a designated critical environmental area.

Reuse of a “commercial or residential structure” (§ 617.5(c)(23)), where the activity is consistent with the current zoning law – a measure aimed at adaptive reuse of the state’s many existing vacant and abandoned buildings – is another proposed Type II list addition. However, the proposed amendments do not define what constitutes a vacant “commercial or residential structure,” or provide any guidance beyond requiring consistency with the locality’s zoning. This addition could therefore do as much or more harm than good, as applicants will likely have to expend resources to achieve a determination that their adaptive reuse project can be classified under this provision.

DEC considers that their proposed Type II actions to promote “sustainable development” on “previously disturbed urban sites” (617.5(c)(19), (20), (21), (22)), will provide a “sliding scale of development”; yet, these sustainable development exemptions still have a narrow scope. Only applicable to previously disturbed urban sites within municipal centers that have adopted zoning laws, the projects may not involve a change in zoning, a use variance, or the construction of new roads. The amendments add definitions for “municipal center” and “previously disturbed” which make it clear that the projects are limited to “central business districts, main streets, and downtown areas” and parcels within those areas that were “occupied by a principal building” once “used for residential or commercial purposes” where the building “has been abandoned or demolished.” These projects must also be subject to site plan review, and ultimately be connected to existing community-owned or public water/sewer systems that have capacity to provide service. The maximum square footage for projects meeting the above requirements is further broken down by the population size of the community in which it is to be sited, as follows:

  • a local population of 20,000 persons or less permits construction of a residential or commercial structure or facility involving less than 8,000 SF of gross floor area;
  • a local population of more than 20,000 persons but less than 50,000 persons permits construction of a residential or commercial structure or facility involving less than 10,000 SF of gross floor area;
  • a local population of than 50,000 persons but less than 250,000 persons permits construction of a residential or commercial structure or facility involving less than 20,000 SF of gross floor area; and
  • a local population of 250,000 persons or more permits construction of a residential or commercial structure or facility involving less than 40,000 SF of gross floor area. However, this project must additionally be located within a quarter mile of a commuter railroad station, be classified under a transit-oriented zoning district or overlay district.

The number of caveats and restrictions based on local population, location/prior use of the parcel, and square footage limitations altogether provide that only a narrow range of projects will qualify as a Type II action under this provision.

In sum, although the above proposed amendments present slight improvements and expansions beyond the existing Type II exemptions for non-residential and educational uses, it is not clear that any of these proposed additions will provide material additional benefits to the majority of project applicants.

C.    Provisions Merely Clarifying That Unlisted Actions Almost Always Treated to Have No Environmental Significance are Type II

Finally, several provisions merely clarify that some actions have clearly either never been subject to SEQRA (such as County planning board referrals pursuant to GML §§ 239-m, 239-n, which are advisory opinions), or that are Unlisted but when considered alone, are almost always determined to never have a significant impact on the environment. These include expansion of broadband services (§ 617.5(c)(7)) in existing highway or utility rights of way; co-location of cellular antennas and repeaters (§ 617.5(c)(14)) on any non-historic structures (clarifying that the current Type II item 617.5(c)(7) precluding the installation of radio communication and microwave transmission facilities as a Type II action should not likewise preclude co-location); brownfield site clean-up agreements pursuant to ECL (§ 617.5(c)(48); provided that design and implementation of the remedy do not commit DEC or any other agency to specific further uses or actions or prevent an evaluation of a reasonable range of alternative future uses of or actions on the remedial site); and any lot line adjustments/area variances not involving a change in allowable density (replacing existing items 12 and 13 in § 617.5(c); as these often have no significance alone and are just one step in the context of a larger project subject to SEQRA review).

2.    Proposed Changes to the Type I List

The proposed changes to the Type I list lower the thresholds so that more projects fall within the ambit of the Type I category. A brief summary of the proposed Type I actions are as follows:

A.    Reducing Threshold for Residential Units

DEC first proposes to reduce the §§ 617.4(b)(5)(iii),(iv),(v) threshold for residential units, maintaining that the threshold level was set too high in 1978 and that the threshold is therefore rarely triggered. The threshold reductions are broken down by local population/ triggering number of units as follows:

  • local population of 150,000 or fewer, 200 units (decreased from 250 units);
  • local population of more than 150,000 but less than 1,000,000, 500 units (decreased from 1,000 units);
  • local population of greater than 1,000,000, 1,000 units (decreased from 2,500 units).

Applicants will therefore be subject to Type I review at lower thresholds, whereas the project would previously have been considered an Unlisted action.

B.    Addition of Parking Space Threshold

Currently, the SEQRA regulations classify as a Type I action in § 617.4(b)(6)(iii),(iv) all activities that result in the parking for 1,000 or more vehicles. The proposed amendment would lower the parking thresholds based on local population as follows:

  • a locality having a population of 150,000 or less, parking for 500 vehicles;
  • a locality having a population of 150,000 or more, parking for 1,000 vehicles.

This amendment will result in many more commercial and industrial activities being classified as Type I actions, despite DEC’s assertion that many of these projects would have triggered the existing Type I threshold of 100,000 SF of gross floor area anyway.

C.    Addition of 25% Historic Threshold and Expansion to Include OPRHP “Eligible” List

Currently, any Unlisted action occurring partly/wholly within or substantially contiguous to a historic resource is elevated to a Type I action, no matter the size of the action. This proposed amendment classifies as a Type I action any Unlisted action that exceeds 25% of any threshold in this section occurring wholly/partly within or substantially contiguous to a historic building, structure, facility, site, district, or prehistoric site that is listed on the National or State Register of Historic Places. It also expands this provision to include any historic property determined by the Commissioner of the Office of Parks, Recreation and Historic Preservation to be eligible for listing on the State Register of Historic Places. DEC has acknowledged here that it has been “unduly onerous for a project sponsor to have to complete a Full EAF for a relatively minor activity.” However, it is unclear given the other changes proposed whether adding a 25% threshold will lessen the burden on an applicant.

D.    Mandatory Scoping

The importance of DEC’s proposed amendment to § 617.8 that all Type I actions that receive a positive declaration now undergo mandatory scoping cannot be understated. Despite DEC’s assertion that this will be a benefit for project sponsors because EISs can become too “defensive” and result in “cooking the ocean” (in other words, unnecessarily including a discussion of impacts that are trivial or non-significant), making this additional step mandatory can greatly lengthen the EIS process and adds to applicant uncertainty as to the SEQRA timeline for a project.

All projects that will now fall under these proposed reduced thresholds will be subject to Type I review, which means that the project will then require a full environmental assessment form, need to undergo coordinated review, and be subject to the Type I presumption of significance. Ultimately, these reductions are greatly concerning for applicants as the proposed amendments may significantly lengthen the timeline for any project determined to be Type I.

3.    Takeaway: What is Missing is More Significant than What is Proposed

The ultimate takeaways from a review of the proposed amendments are that: (1) no procedural changes are proposed and (2) no new timelines have been provided. Meanwhile, the proposed amendments leave applicants in no better position than before, as the addition of a few narrowly targeted actions to the Type II list are negligible compared to the increased burdens that will be placed on project applicants by the reduction of several Type I thresholds and the imposition of mandatory scoping. The daily, practical difficulties of integrating SEQRA into a wide variety of different development activities, having varying timelines and myriad procedural steps, remain unaddressed.

Further, no dispute resolution processes are proposed, such as permitting the Commissioner of DEC to hear and resolve disputes over stages in the SEQRA process, particularly those that have gone outside the few existing timelines, or that have not necessarily yet resulted in an agency’s “final determination.” Litigation remains an applicant’s sole remedy. We see the need for dispute resolution occurring through the DEC Commissioner when: (i) a positive declaration is made that appears inconsistent with prior Lead Agency determinations or is intended as a means to delay or stop a project, or (ii) the review process exceeds any of the handful of mandatory timeliness in SEQRA such as the scoping process, or (iii) the SEQRA review process has exceeded 2 years since the establishment of a Lead Agency.

Alternatively, DEC should consider amendments to SEQRA to explicitly require the strict adherence to enumerated deadlines, or in other words, project benchmarks, including but not limited to existing SEQRA time frames such as the thirty (30) day period to establish lead agency, the sixty (60) day (optional) scoping period, and the forty-five (45) day period to accept the Draft Environmental Impact Statement (“EIS”).  Such benchmark violations would not result in default entitlement to receive the subject approvals. Instead, if the lead agency failed to comply with each deadline, the application would automatically move to the next stage in the process.

Additionally, it is worth noting an amendment to § 617.13 proposes to give applicants a clearer right to information about how their escrow funds are being used; but what is the remedy for applicants for excessive fees? Litigation is still the only way for an applicant to achieve a just determination and recoup costs after an abuse of the SEQRA process. SEQRA will continue to have few teeth.

The above conclusions are troubling, as SEQRA already adds a substantial layer of regulation for businesses interested in either putting down roots or remaining located in New York. With today’s technological advances such as telecommuting and the ongoing retail revolution of “clicks vs. bricks”, the state should be cognizant of staying competitive in attracting people, jobs, and commercial investment. It was “not the intention of SEQRA that environmental factors be the sole consideration in decision-making”; rather, it was the intention of the Legislature that the “protection and enhancement of the environment, human and community resources should be given appropriate weight with social and economic considerations in determining public policy, and that those factors be considered together in reaching decisions on proposed activities” (See SEQRA § 617.1(d)). What was sought was that a “suitable balance of social, economic and environmental factors be incorporated into the planning and decision-making processes of state, regional and local agencies” (See SEQRA § 617.1(d)). Therefore, for the benefit of businesses in New York as a whole, these proposed amendments fall far short of providing the clearer guidance needed to provide more certainty as to SEQRA’s process and timelines.

Retailers are Re-Tooling – Is Your Community Ready?

Retailers are Re-Tooling – Is Your Community Ready?

In order to survive, retailers must adapt to the major shift in buying habits from brick and mortar to e-commerce. How big a shift is it? Think about it for a minute – how much on-line shopping do you do today? Now compare that frequency to the amount of on-line shopping you did five years ago. In fact, for Black Friday 2016, the National Retail Federation’s consumer survey showed that 108.5 million people shopped Black Friday deals online while 99 million shopped in stores. 1 This trend will only continue as mobile bandwidth and speed become more available.

This trend to offer more than just your typical retail experience is also being embraced by the e-commerce retailers known exclusively as on-line retailers.

To compete with this rapidly increasing trend, many retailers boosted their on-line presence. However, more is needed to remain competitive as evidenced by the bankruptcies of Borders, Circuit City, Office Depot, to name a few. The brick and mortar retailer needs to find ways to attract customers and create a unique experience so that customers stay in the physical store and shop. To accomplish this, retailers are adding and combining multiple services, such as dining and entertainment, to their traditional retail spaces.

The new Barnes & Noble model is one such example. 2 They rolled out 4 new concept stores that feature wine and beer and an expanded café to draw in shoppers and keep them in the store. Another example is Starbucks’ Roastery locations, where customers are encouraged to interact with roasters and baristas and learn about sourcing, roasting and brewing rare coffees. 3

This trend to offer more than just your typical retail experience is also being embraced by the e-commerce retailers known exclusively as on-line retailers. Amazon plans to open a brick and mortar store in New York City and planning “pop up” stores in malls and existing shopping centers. 4 They are also introducing curb-side pickup locations to support its grocery business.

This retail re-tooling is good news for communities as it presents an opportunity to re-adapt existing buildings. The large retailers that could not adapt left big empty buildings in the wake of their demise. These existing empty spaces can be readapted to host these new multiple-service retailers. Using existing space is attractive for retailers as it is typically less expensive than building out raw space and eliminates the need to find available land. For communities, readapting existing space revitalizes neighborhoods, boosts the local economy and results in less impacts than new construction.

So, is your community ready to embrace the benefits of this new trend in the retail market?  Since many local zoning codes were adopted long before the impacts of e-commerce forced retailers to rethink their business models, many codes may hinder creative adaptive reuse, or stifle projects that seek to create a new shopping experience for consumers. For example, for a project involving more than one use, like a retailer with a restaurant component, some codes require the provision of the minimum off-street parking requirement for each use. This requirement leads to over-parking as it fails to account for shared parking. And, in many cases, this requirement will result in the need for a parking variance as existing parking areas were not designed for this new trend in multiple complementary uses, or, in some cases, there is just not enough land to build the required parking.

Local municipalities, like the retailers, need to adapt to market changes and examine their codes to encourage adaptive reuse and promote the new retail business model, both of which result in many benefits to their communities. However, updating a zoning code is rarely a timely process. So, in the meantime, what can retail developers do to get their new business model implemented?  They can work with experienced land use counsel, like Cuddy & Feder, to discover creative ways to interpret existing zoning requirements to streamline the process and avoid variances and to engage the community to demonstrate the benefits of their project.

The re-tooling of the retail market is an opportunity for growth and innovation and communities that embrace this change will reap the benefits.

Wind and Solar energy development

New York State’s Energy Marketplace Heading Into 2016 Q4

Reforming the Energy Vision New York State has positioned itself as a significant disruptor in the energy markets through its Reforming the Energy Vision (REV) initiative. As part of REV, on August 1, 2016, Governor Andrew M. Cuomo announced the New York State Public Service Commission’s approval of his directive to establish New York’s Clean Energy Standard, calling it “the most comprehensive and ambitious clean energy mandate in the state’s history, to fight climate change, reduce harmful air pollution, and ensure a diverse and reliable energy supply.”

The Clean Energy Standard will require that 50 percent of New York’s electricity comes from renewable energy sources (such as wind and solar) by 2030. In its initial phase, utilities and other energy suppliers are required to procure and phase in new renewable power resources starting with 26.31 percent of the state’s total electricity load in 2017 and growing to 30.54 percent of the statewide total in 2021.

It is anticipated that this “50 by 30” goal will foster a large push to further deregulate the energy marketplace, and to decouple the elements of the energy industry, namely, the generation (the process of generating electric power at a power plant), the transmission (moving the generated electricity from a power plant to a substation) and the supply (moving the electricity from the substation to customers).

Property Assessed Clean Energy (PACE) financing for renewable and energy efficiency, administered through the Energy Improvement Corporation of NY, based in northern Westchester County, continues to gain traction and grow.

The approval of the Clean Energy Standard comes on the heels of another aspect of REV: the NYS PSC’s efforts to foster Community Choice Aggregation, or CCA, which is a program that allows municipalities to pool together to replace the utility as the default supplier of electricity and gas. CCAs are created through the municipalities’ home rule power to enact local laws. Sustainable Westchester was the first CCA, and is the model for other statewide CCAs.

It is anticipated that municipalities will band together through inter-municipal agreements to retain Community Choice Aggregation Administrators, who will guide the municipalities through the process of moving most energy users to receiving supply from energy supply companies (ESCOs) after a competitive bid process. The goal is for the ESCO competition to drive down NY’s electricity rates.

Currently, certain customers pay in excess of 20 cents/kW hour, and supply generally represents at least half of that kW hour cost.

The Public Service Commission also has open dockets seeking to encourage and facilitate community solar, demand response, distributed energy resources, microgrids, and energy efficiency in localities.

Property Assessed Clean Energy Financing

Meanwhile, Property Assessed Clean Energy (PACE) financing for renewable and energy efficiency, administered through the Energy Improvement Corporation of NY, based in northern Westchester County, continues to gain traction and grow.

EIC’s Energize NY program has approved millions of dollars in clean energy projects in its member municipalities since launching in 2015, including a 120 kW roof-mounted solar electric system at Terra Tile & Marble in the Town of Ossining, and energy efficiency upgrades at the Robson House, a multifamily affordable housing facility in North Salem, which is owned by A-HOME, a not-for-profit based in Pleasantville, NY. More recently, Energize NY approved a 20-year $150,800 PACE loan that covered 100% of the costs of both roof repair and solar installation, at a very affordable 3.83% interest rate, for St. Christopher’s Roman Catholic Church in Cortlandt, NY.

In July 2016, the Federal Housing Authority (FHA) and the U.S. Department of Veterans Affairs (VA) issued guidelines to the housing lending market indicating that both agencies will continue to insure mortgage loans associated with individually owned residential properties that have taken out a PACE loan to finance energy improvements.

The NY Green Bank also has committed to deals resulting in $686 million of private and public investments to date, including its announced closing on August 5, 2016, of a $37.5 million loan to Vivint Solar, which will result in approximately $167 million in new investment in New York’s clean energy economy, and will provide financing for thousands of new solar projects at homes across the state.

Other Projects

The incumbent utility companies are also seeking to actively participate in this dialogue and the oncoming transition to renewable energy. By example, Con Edison, through its “Connected Homes” REV demonstration project, seeks to increase the use of distributed energy resources and energy savings products, by using advanced customer segmentation and targeting analytics to allow users to determine the costs and benefits of these products, while receiving fees from companies such as Nest for introductions to potential customers — a new revenue stream for providing more than electricity and engaging customers.

Similarly, the New York ISO (Independent System Operator) continues to evaluate how, notwithstanding REV, it will maintain reliability and the overall cost of electricity. On June 30, 2016, the NY ISO issued a report entitled “Solar Impact on Grid Operations — An Initial Assessment,” examining the potential for growth in solar power, the impact of increasing intermittent resources on grid operations, and forecasting issues that must be addressed to make effective use of solar resources in the future.

Following its pioneering work in the area of wind forecasting, the NY ISO is evaluating potential solar forecasting systems, and is on track to have a system in place by the summer of 2017. The NY ISO’s forecasting tools are intended to help successfully integrate solar resources and explore the potential of storage resources with an energy storage market integration and optimization initiative. Further, the NY ISO is developing a Distributed Energy Resource Roadmap, to help guide changes in wholesale electricity market design that will enhance integration of distributed energy resources.

Conclusions

Ultimately, it seems that the trend for the future is more local and distributed energy. In many cases, it is expected that municipalities, through CCAs, will be the empowered parties, using municipal home rule legislation and project administrators paid for with energy savings. Indeed, REV seeks to create a disaggregated energy future, where each of the utilities will be pushed to have 50 percent of its generation provided by renewable sources, ESCOs will fight competitively for the supply business, and the transmission infrastructure will require numerous upgrades.

As such, we foresee REV continuing to push forward, with the New York State PSC (and possibly the legislature) as well as NYSERDA interpreting and providing for numerous changes to the rules and regulations, in order to facilitate the goals of increasing adoption of distributed energy resources, improving energy efficiency, and increasing customer engagement.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

The Year of Cybersecurity

The Year of Cybersecurity

Perhaps 2016 could be considered the year of cyber threats. This is not to say that this was a new issue in 2016, but rarely this year did more than a few news cycles pass without there being talk of a significant cybersecurity attack – be it hackers accessing customer data from a multinational corporation, state-sponsored attacks against foreign corporations, or good old fashion (adjusted to the modern age) State vs State espionage. Of course, the recent revelations regarding Russian hacking of both the Republican and Democratic National Committees in order to influence the U.S. Presidential election, and reports of similar efforts by Russia to impact upcoming European elections, is a stark reminder of just how serious cybercrime and cybersecurity is. But, in addition to being a national security issue and a business risk for large, multinational companies which hold large quantities of data, it is an everyday business risk that must be addressed and dealt with by companies of all sizes. This is not only because of the business and reputational risk that companies face should they fall victim to an attack, but because those companies’ regulators are now increasingly focusing on the internal controls that entities holding client information are putting in place.

There are multiple SEC and FINRA regulations and rules aimed at protecting confidential client information – the main one used in the context of cybersecurity protections is SEC Regulation S-P, which requires registered entities to “adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information.” Prior to 2016, FINRA more often than the SEC had brought enforcement actions for violations of Regulation S-P and similar FINRA regs. In all instances the firms entered into consent orders, in which they did not admit or deny any allegations but consented to the findings of fact contained in the order and the monetary penalty, which ranged from approximately $210,000 in customer reimbursements and fines for failure to formalize certain cybersecurity training leading to wires to an unauthorized bank account after a customer’s email account was hacked in In re VCA Securities, to a $375,000 fine for not having adequate safeguards to protect a database server that contained confidential customer information in In re D.A. Davidson & Co.

If FINRA decides to move further in the direction of penalizing firms for insufficient cybersecurity policies and procedures even where there has been no breach, that could drastically impact firms of all sizes.

At the beginning of 2016, both the SEC and FINRA stated that one of their regulatory/enforcement priorities would be on firms’ policies, procedures and implementation of same to protect customer and firm data. And in line with its stated focus, at the very end of its 2015 year (the SEC’s fiscal year begins in the 4th quarter), the SEC brought its first disciplinary action based solely on a violation of Regulation S-P against R. T. Jones. The SEC censured and fined R. T. Jones $75,000 for the firm’s failure to adopt written policies and procedures reasonably designed to protect customer information prior to a breach that compromised personal information of thousands of firm clients. Then in June of 2016, the SEC handed out a much meatier penalty to Morgan Stanley Smith Barney after customer information which it held was hacked and sold to third parties. In the Morgan Stanley matter, the SEC did not find a wholesale failure of Morgan Stanley’s policies and procedures, rather the Commission’s Consent Order stated that that the firm’s policies and procedures with respect to two portals that allowed employees to access confidential account info were not reasonable. As a result an employee impermissibly accessed and transferred data regarding over 700,000 accounts to his personal server, which was later hacked. Morgan Stanley paid a $1 million fine (the employee involved was criminally convicted and paid a $600,000 fine in a separate matter).

FINRA’s 2016, on the other hand, was notable with regards to cybersecurity for two reasons. First, FINRA made inquiries about cybersecurity a focus in its routine member institution examinations in continuation of a program it started in 2014 with the stated goals of (1) better understanding the threats that firms face, (2) increasing understanding of firms’ risk appetite, exposure and major areas of vulnerabilities, (3) better understand firms’ approaches to managing these threats, and (4) to share observations with firms (FINRA released a report based on its findings and observations in February 2015 [http://www.finra.org/sites/default/files/p602363%20Report%20on%20Cybersecurity%20Practices_0.pdf]). Second, in late December, FINRA announced a series of substantial enforcement actions in which it fined 12 separate firms a total of $14.4 million for failing to protect records from alteration. While not a violation of Regulation S-P, FINRA noted that these enforcement actions were directly related to FINRA’s focus on cybersecurity.

While the number of firms fined by FINRA sticks out, what is most significant about these enforcement actions is that they were for essentially victimless crimes. There were no allegations that any records had been breached or re-written, rather, the firms were penalized for failing to have proper procedures in place to prevent that possibility. In the past all SEC and FINRA actions based on cybersecurity deficiencies followed an actual breach of customer data. If FINRA decides to move further in the direction of penalizing firms for insufficient cybersecurity policies and procedures even where there has been no breach, that could drastically impact firms of all sizes.

Cybersecurity is sure to be a major issue in 2017 from both a business and reputational risk, as well as a regulatory risk. And firms of all sizes will need to look at their own policies and procedures. Indeed in FINRA’s 2015 Report on Cybersecurity Practices it specified that no firm was off the hook – stating that “no matter the firm’s size or business model” cybersecurity risk assessments served as “foundational tools” for firms. And along these lines, FINRA has published a cybersecurity checklist for small firms’ cybersecurity programs at http://www.finra.org/industry/cybersecurity#checklist, which smaller institutions would be well heeded to review both to protect customer data and to provide the firm protection from regulatory censure.