As we’ve previously discussed, the FDIC has revised the brokered deposit/interest rate restrictions to create a presumption in favor of a “national deposit interest rate” starting January 1, 2009. Less than well-capitalized institutions will be then barred from paying in excess of 75 basis above the national rate, unless the institution is successful in convincing the FDIC that the institution’s local deposit rate market is above the national rate.
We have had several conversations with FDIC staff over the last few weeks regarding the FDIC’s intentions with respect to the new national deposit rate structure and how FDIC in Atlanta would approach it, given that the apparent average rate in Atlanta is already higher than 75 basis points more than the national rate. FDIC staff stated that this was a very difficult and very sensitive issue, and that the local office of FDIC anticipated that most banks would, and would be permitted to, use a local rate basis. That was the good news.
The bad news is that the burden of proof is going to become very high for any bank attempting to demonstrate the local rates. The FDIC has subscribed to a service called “RateWatch” that they were going to use, he believed, as a reference point. The FDIC will analyze carefully the definition of the local market and the computation of the average from that market. We understand that the analysis will have to be done on a branch by branch basis within the chosen market area (using newspaper quotes is apparently not enough).
Banks seeking to support a higher local rate would need to define its “local market” — i.e., counties in which the bank has branches, or perhaps another standard that the bank can support — and then calculate the local rate paid by each bank and branch in its local market. For this purpose, each branch is given the same weight as a single-office bank; for example, if Bank of America has 5 branches in your market, the rate paid by each of those branches is counted individually and weighted equally. This will likely cause the large national retail banks to have a significant and disproportionate influence on local rates, especially if they are not competing for the same local deposits sought by community banks.
Although some questioned if the day would arrive, the Red Flag Rules issued by the FTC, the federal bank regulatory agencies and the National Credit Union Administration go into effect August 1, 2009. The Rules are drafted broadly and will apply to many different companies, including “financial institutions and creditors with covered accounts.” Essentially, if you offer any form of loan or maintain any form of money account, you will have to comply the Red Flag Rules.
Preparing for August 1
The biggest step you should take is to prepare a Red Flag Plan. Although the Rules stress that each program should be tailored to the individual entity, some central elements should be present:
IDENTIFICATION – Make sure your plan identifies what constitutes a “red flag” (i.e. what could reasonably indicate identify theft).
DETECTION – Make sure you have a written procedure for how you will detect, understand and process any red flags.
RESPONSE – Make sure you adequately define how you will respond, making sure that you include enough flexibility to respond adequately to different levels of threat.
MAINTENANCE – Make sure you have a set process for reviewing, updating and revising your Red Flag Plan.
OVERSIGHT – Make sure the plan is properly approved by the Board of Directors, Managers or similar management positions, and include explicit designations of power as to who in management (either the Board or a senior officer) will oversee the Plan and its execution.
The Interim Final Rules regarding Executive Compensation for TARP recipients provide a number of corporate governance standards for Compensation Committees. While these standards currently only apply to financial institutions that have outstanding TARP investments, many of the standards are likely to be considered best practices for the compensation committees of all companies.
TARP recipients generally are required to have a compensation committee consisting solely of independent directors (with independence determined by reference to the federal securities laws). (Private TARP recipients who received a TARP investment of less than $25 million are not required to have a compensation committee, in which case the full Board of Directors is required to take the actions detailed below).
As noted by the Wall Street Journal (subscription required), a steady stream of small banks are still lining up for government money.
Since May 31, 20 small banks have received a total of $164.1 million in taxpayer-funded capital, according to the Treasury’s latest available figures. Half of those banks got the money in the same week that 10 big financial institutions gave theirs back.
Analysts see no end in sight to the trend. The recession and borrowers are squeezing most of the 8,200 federally insured commercial banks and savings institutions in the U.S., so even a dollop of TARP funds could make a difference. Some banks are turning to the government to fill a void left by investors who are leery about pouring money into the sector, despite the rebound by bank stocks since early March.
Meanwhile, the rules and stigma of TARP that turned some executives such as J.P. Morgan Chairman and CEO James Dimon against the program are irrelevant to small institutions.
Their employees usually don’t fly on corporate jets or collect hefty bonuses that trigger outrage from taxpayers, customers and Congress. And curbs on dividend payments are a modest price to pay for greater assurance that the banks can plow ahead with their core mission to gather local deposits, lend them nearby and support local charities, some recent TARP recipients said.
It’s certainly a stretch to say the executive compensation restrictions are “irrelevant” to small institutions, but community banks generally don’t have the excesses that have drawn public and congressional scorn. With the deadline for smaller community banks to apply to participate under the TARP Capital Purchase Program extended until November 9, 2009, many institutions are taking a fresh look as to whether to apply, even as larger institutions are making a decision as to whether to seek to redeem the TARP investment they’ve already received.
Even as five of the eight initial Capital Purchase Program recipients have redeemed their TARP investments with the Treasury, hundreds of applications are still being processed, as reported by the American Banker on June 26, 2009 (subscription required).
The Government Accountability Office said in a June 17 report that the Treasury had received more than 1,300 applications from federal regulators as of June 12, and that fewer than 100 were still awaiting a decision. The GAO also said bank regulators are reviewing another 220 applications that have not yet been forwarded to the Treasury.
Of the banking agencies, only the Office of Thrift Supervision details the Tarp application process. Of the roughly 800 companies it oversees, the OTS said 302 have applied for capital injections. Forty-nine have gotten the money and 140 have withdrawn their applications. Another 71 are in some state of review while 42 have yet to be considered.
The Treasury may emphasize that “fewer than 100 are still awaiting a decision,” but that excludes over 200 applications that are haven’t even made it to the Treasury yet. All told, there are probably 300 applicants that haven’t been told whether they are eligible to receive a TARP investment.
On June 26, 2009, the Treasury announced its policy with regard to the repurchase or other disposition of the warrants it received from exchange-traded companies under the TARP Capital Purchase Program.
Under the terms of the Capital Purchase Program contract, publicly-traded institutions that have repaid the Treasury’s TARP investment have 15 days following repayment to make a determination of the “fair market value” to repurchase the warrants as well. This determination is made by the institution’s Board of Directors, acting in good faith on the opinion of an independent banking firm. The Treasury then has 10 days to either accept the “fair market value” offered by the company, or will initate the three appraiser process established in the original contract to determine a final “fair market value.”
If a company decides not to repurchase the warrants, the Treasury intends to sell the warrants through an auction process over the next few months. The Treasury is in the process of establishing guidelines for these auctions. Treasury also has the authority to dispose of warrants held by companies that have not redeemed their TARP investment generally (subject to a requirement to retain half the warrants through December 31, 2009). Although the Treasury’s announcement of an upcoming auction does not specifically differentiate between companies that have and have not redeemed the TARP investment, presumably the upcoming auction is intended only for institutions that have elected not repurchase the warrants after redeeming the TARP investment.
On June 10, 2009, the Securities and Exchange Commission (the “SEC”) published the proposed new rules that would, under certain circumstances, require companies to include in their proxy materials nominations for election as directors submitted by eligible shareholders. As reported in our May 21 Client Bulletin, the proposal was adopted by a divided 3-2 vote at an SEC open meeting.
For more information, read the client alert published by Bryan Cave LLP’s Corporate Finance and Securities Client Service Group on June 22, 2009.
On July 15, 2009, Taiwan will become the 41st member of the Government Procurement Agreement (GPA) of the World Trade Organization (WTO). Taiwan’s President Ma Ying-Jeou signed the instrument of accession to the GPA on June 8, 2009, thus clearing the final hurdle for Taiwan to become a member of this plurilateral accord. On June 15, 2009, Taiwan’s delegation to the WTO deposited the accession instrument with the WTO Secretariat.
For more information, read the client alert published by Bryan Cave LLP’s International Trade Client Service Group on June 23, 2009.
If unsuccessful (despite the testimonials), we expect the Treasury’s next move may be to “Get Cash Now” through conversion of the TARP preferred structured settlements using JG Wentworth.
As part of the American Recovery and Relief Act of 2009 (a.k.a. the stimulus bill), Congress also adopted the Employ American Workers Act. Under the Employ American Workers Act, TARP recipients are subject to additional requirements if they seek to make a new hire of a foreign national to work under an H-1B petition. While this requirement is unlikely to affect most community bank recipients, it is an important restriction to keep in mind, especially for institutions with an international or ethnic-group focus.
The requirements of the Employ American Workers Act took effect on February 17, 2009, and remain effective until the earlier of: (a) redemption of any TARP investment (exclusive of any outstanding warrants); and (b) February 17, 2011.
Any TARP recipient seeking to hire an H-1B worker is required to make the following attestations to the U.S. Department of Labor:
it has taken good faith steps to recruit U.S. workers using industry-wide standards and offering compensation that is at least as great as those offered to the H-1B nonimmigrant;
it has offered the job to any U.S. worker who applies and is equally or better qualified for the job that is intended for the H-1B nonimmigrant;
it has not “displaced” any U.S. worker employed within the period beginning 90 days prior to the filing of the H-1B petition and ending 90 days after its filing. A U.S. worker is displaced if the worker is laid off from a job that is essentially the equivalent of the job for which an H-1B nonimmigrant is sought; and
it will not place an H-1B worker to work for another employer unless it has inquired whether the other employer has displaced or will displace a U.S. worker within 90 days before or after the placement of the H-1B worker.
We have recently had the opportunity to ask officials with the Treasury Department several questions regarding the new interim final executive compensation rules for TARP recipients. While answers weren’t available for every questions, the Treasury is aware of some of the open issues associated with the regulations and appears to be diligently at work to address those questions.
The Treasury was quick to admit a technical glitch with regard to the definition of “most highly compensated employees.” The definitions currently exclude senior executive officers from a determination of the most highly compensated employees. Accordingly, a technical reading of the regulations would, for example, apply the bonus restrictions for TARP recipients of less than $25 million to the most highly compensated employee who is not an executive officer, creating the absurd result that the CEO could receive a bonus, while the sixth highest paid employee could not. The Treasury has confirmed that this reading of the regulation, while technically correct, was not intended. A technical correction is forthcoming, but the Treasury would expect TARP recipients not to pay any bonus to the most highly paid employee (whether or not they are also a senior executive officer) and will not object to bonus payments to the sixth most highly paid employee.
The Treasury has also confirmed that it does not intend for private companies (those without securities registered with the SEC) to be required to comply with the say-on-pay provisions. The framework for the Treasury’s thoughts appear to be general deferral to the SEC, but with the understanding that the SEC generally does not have regulatory oversight of the proxies of private institutions. Given the uncertainty in the regulations, further clarification or guidance may be forthcoming.
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To TARP or Not to TARP
As noted by the Wall Street Journal (subscription required), a steady stream of small banks are still lining up for government money.
It’s certainly a stretch to say the executive compensation restrictions are “irrelevant” to small institutions, but community banks generally don’t have the excesses that have drawn public and congressional scorn. With the deadline for smaller community banks to apply to participate under the TARP Capital Purchase Program extended until November 9, 2009, many institutions are taking a fresh look as to whether to apply, even as larger institutions are making a decision as to whether to seek to redeem the TARP investment they’ve already received.
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