Category — Reregulation of Banking and Financial Services

In 2009, SEC enforcement actions reached an all-time high, doubling the number of formal investigations that took place in 2008.  This rising tide of enforcement will undoubtedly grow larger given the newly-enacted Dodd-Frank Act’s whistleblower provisions, which provide significant monetary incentives to individuals willing to reveal certain types of financial misconduct.  With this onslaught in mind, companies and individuals working in SEC regulated industries must clearly understand what behavior can place them in the government’s crosshairs. [Read more →]

Corporate governance experts and other U.S. business interests are expressing deep concerns about the possible impact of the new bounty program authorized by Congress this year under which the Securities and Exchange Commission will pay awards to whistleblowers who provide the agency with information about securities law violations. The negative implications for the internal employee concerns programs that companies have put in place over the past two decades are potentially enormous. [Read more →]

The Dodd-Frank Act Orderly Liquidation Authority (“OLA”) provides an alternate insolvency regime for systemically important non-bank financial companies determined to pose a significant risk to the nation’s financial stability. OLA provides that the Federal Deposit Insurance Corporation (the “FDIC”) may be appointed as receiver of a “financial company” as defined in the Act if the Secretary of the Treasury, in consultation with the President, makes certain determinations following the recommendation of the Board of Governors of the Federal Reserve System and the FDIC (in the case of a “financial company”), the Securities and Exchange Commission (in the case of a broker or dealer) or the Director of the Federal Insurance Office (in the case of an insurance company). The Act also authorizes the FDIC to draft implementing regulations in consultation with the Financial Stability Oversight Council. [Read more →]

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) includes significant new whistleblower provisions that encourage and further protect employees that report violations of securities and consumer finance law.

Section 922 of the Dodd-Frank Act establishes a new whistleblower program (the Program) for individuals that provide information to the Securities and Exchange Commission (the SEC) about securities law violations.  If a whistleblower provides original information(1) to the SEC and this information leads to a successful SEC enforcement proceeding, the Program may award to the individual providing the information between 10 percent and 30 percent of any sanction imposed over $1 million.  The Program also protects whistleblowers against retaliation by an employer because of providing information to the SEC under the Program, participating in any investigation or enforcement activity initiated by the SEC based upon the information provided, or making public disclosures that are otherwise provided by federal securities laws. 

Although the SEC must issue final regulations by April 17, 2011 to fully implement certain aspects of the Program, the whistleblower protections against retaliation, the accompanying private right of action and eligibility for whistleblower awards began immediately upon enactment of the Dodd-Frank Act.  As compared to the whistleblower provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the Program provides greater remedies and longer filing periods than Sarbanes-Oxley, without requiring (as Sarbanes-Oxley does) that the whistleblower exhaust available administrative remedies with the Department of Labor before filing an action in federal district court to enforce the Program’s anti-retaliation protections.

Section 922 of the Dodd-Frank Act also amends the whistleblower provisions of Sarbanes-Oxley to extend the time in which whistleblowers must file claims with the Department of Labor to 180 days, and to begin this time at the later of the date on which the violation occurs or the date on which the whistleblower became aware of the securities law violation.  Also as a result of the Dodd-Frank Act, whistleblowers claiming protection under Sarbanes-Oxley are now entitled to a jury trial and companies cannot avoid litigation of Sarbanes-Oxley retaliation claims through arbitration agreements or settlement and release agreements to be signed by the whistleblower that waive anti-retaliation rights provided by Sarbanes-Oxley.

Employees of companies that provide consumer financial products or services will receive additional whistleblower protections, commencing when the Consumer Financial Protection Bureau (CFPB) receives its authority over federal consumer financial laws on July 21, 2011.  Section 1057 of the Dodd-Frank Act protects these employees from retaliation because of providing information to the CFPB or other government agency about violations of the Dodd-Frank Act’s consumer protection provisions or other law or regulation enforced by the CFPB, testifying in a proceeding or filing an action under any federal consumer financial law, or refusing to participate in an activity the employee reasonably believes violates any law subject to the CFPB’s jurisdiction.  Similar to the revised Sarbanes-Oxley provisions, companies generally cannot avoid litigation of Section 1057 retaliation claims by using pre-dispute arbitration agreements or settlement and release agreements signed by the whistleblower that waive anti-retaliation rights provided by Section 1057.

In light of these significant increases in whistleblower protections and reporting incentives, publicly-traded companies and companies that provide consumer financial products and services should: (1) ensure that proper reporting mechanisms and anti-retaliation policies are implemented, (2) consider strategies to encourage internal reporting of concerns regarding compliance with securities and consumer financial protection laws, (3) review and revise management and board of directors training programs to include information on recognizing corporate whistleblower complaints, and (4) implement policies for processing and responding to any such complaints received by company management or the board.

The foregoing is only a summary of certain of the many significant issues affecting financial institutions.  If you have any questions about the foregoing or about other financial institution issues, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.

As set out in our advisory of July 1, 2009, the vital decision of the United States Supreme Court in Cuomo v. Clearing House Association, LLC, et al. produced an avenue for states to enforce national bank compliance with certain state civil and criminal laws, including fair lending practices and state consumer protection laws.  The Supreme Court’s decision allowed Attorneys General to proceed with enforcement actions through court proceedings, but remained vague as to the permissibility of actions through investigations or administrative proceedings.  Regardless, the ramifications of Cuomo are unraveling as all eyes turn to analyze the actions of mortgage loan servicers.  [Read more →]

Federal banking regulators have increased their focus on executive and incentive compensation in regulatory examinations, making this area one of the highest priorities in the examination process. [Read more →]

Attorney General Tom Miller is to appear today on CNBC’s “Closing Bell,” 4:30 p.m. EDT/ 3:30 p.m. CDT to discuss what he is referring to as the “Robo-Signing” issue.   Miller, with the exception of one four year term, has been Attorney General of Iowa since 1979 and has chaired a number of the NAAG standing committees, including the Consumer Protection Committee. 

He has announced that he is now putting together a broad multistate bipartisan coalition of Attorneys General, working together with federal banking regulators under the new powers and authority of the Dodd/Frank Act regulating financial practices.  

CONTACT

Jake Lutz
Practice Group Leader
804.697.1490

John C. Lynch
757.687.7765

Ashley L. Taylor, Jr
804.697.1286

Anthony F. Troy
804.697.1318

On September 27, 2010 President Obama signed into law the Small Business Jobs and Credit Act of 2010, which includes the Small Business Lending Fund (SBLF).

Under the SBLF the United States Treasury (the Treasury) will make capital investments by purchasing securities in participating community banks, most likely in the form of senior preferred stock.  The SBLF limits investment by the Treasury to 5 percent of risk-weighted assets for participating banks with total assets of $1 billion or less, and to 3 percent of risk-weighted assets for participating banks with more than $1 billion but less than $10 billion of total assets.  Community banks with a 4 or 5 CAMELS rating (or have had such a rating in the past 90 days) may not participate in the SBLF.  Although the dividend rate of SBLF securities would initially be set at 5 percent, the participating community bank could decrease the dividend rate by increasing its small business lending; as a general example, to decrease the dividend rate to 1%, small business lending must increase by 10% or more.  However, four and a half years after issuance, the dividend rate on SBLF securities will increase to 7 percent regardless of the level of small business lending. [Read more →]

The United States Senate, upon returning from its August recess, will resume consideration of the Small Business Jobs and Credit Act of 2010 (H.R. 5297), which would create the Small Business Lending Fund (the SBLF).  The SBLF would provide $30 billion in capital investment for banks and other depository institutions with less than $10 billion in assets and provide certain incentives for participants to increase small business lending.

Under the SBLF, the United States Treasury (the Treasury) would make capital investments by purchasing securities in participating community banks, most likely in the form of senior preferred stock.  As proposed, the SBLF limits investment by the Treasury to 5 percent of risk-weighted assets for participating banks with total assets of $1 billion or less, and to 3 percent of risk-weighted assets for participating banks with more than $1 billion and less than $10 billion of total assets.  The SBLF aims to stimulate small business lending by reducing the dividend rate on SBLF capital investments as a participating community bank increases lending to small businesses.  Although the dividend rate would initially be set at 5 percent, the participating community bank could decrease the dividend rate to 1 percent by increasing its small business lending, thus providing the bank with an attractive and relatively inexpensive source of capital.

As proposed, the SBLF also provides an attractive option for many community banks to refinance preferred stock issued to the Treasury pursuant to the TARP program.  The primary advantages of such a refinancing would be: (1) by increasing small business lending, the participating community bank could decrease the dividend rate on SBLF securities well below the 5 percent (and 9 percent after five years) TARP dividend rates; and (2) participation in the SBLF is likely to impose fewer restrictions on the participating community bank than TARP participation, including fewer restrictions on executive compensation.  However, community banks participating in the SBLF to refinance TARP securities would be required to be current on their dividend payments to the Treasury.

Senate approval appears to be the only remaining obstacle to the SBLF, as the House has already approved H.R. 5297 and the President is a strong advocate who intends to sign the bill into law as a jobs creation initiative.  Thereafter, the Treasury would be required to announce eligibility requirements and application processes for community banks to participate in the SBLF.  The Financial Institutions Practice Group at Troutman Sanders will continue to monitor all developments regarding the SBLF and will notify its clients and friends of any opportunity to participate in this capital investment program.

The foregoing is only a summary of one of the many significant issues affecting financial institutions.  If you have any questions about the foregoing or about other financial institution issues, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.

CONTACT

Jake Lutz
Practice Group Leader
804.697.1490

Tom Powell
404.885.3294

Jerome Walker
212.704.6286

CONTRIBUTOR

Seth Winter
804.697.2329

On August 11, 2010, the ABA Banking Law and Business Bankruptcy Committees are presenting the first in a two-part webinar series on the Dodd-Frank Wall Street Reform and Consumer Protection Act which was recently passed by Congress.  The Dodd-Frank Act is the most sweeping piece of financial regulatory reform since the Great Depression. Read more here…