The first deadline – June 30, 2013 – under Delaware’s new unclaimed property Voluntary Disclosure Agreement (VDA) program is fast approaching! This initial deadline offers the maximum program benefits to VDA participants: Prior to the new VDA program, holders were required to report and remit any past due unclaimed property starting in 1981. However, holders who enter into the new VDA program by June 30, 2013 qualify for a limited look-back period through 1996. Holders who sign up by June 30, 2014 qualify for a look-back period through 1993.
For those who may not be aware, Delaware’s new VDA program is an amnesty program primarily aimed at helping non-compliant companies become compliant under the law. The business-friendly program is run by the Department of State, and is designed so companies can “catch up” on their past due unclaimed property obligations, avoid interest and penalties, and significantly reduce their unclaimed property liability. Completion of the program also offers companies a full release of all past due unclaimed property liability in a reasonably short and efficient process.
Notwithstanding the headlines in the press, more community banks thrived during the Great Recession than failed. A new study from the Federal Reserve Bank of St. Louis looks at The Future of Community Banks: Lessons from Banks That Thrived During the Recent Financial Crisis. While 417 banks and thrifts failed from the beginning of 2006 through the end of 2011 (and another 51 banks failed during 2012), the Federal Reserve Bank of St. Louis found that 702 community banks (total assets of less than $10 billion) retained a composite CAMELS 1 rating throughout the financial downturn.
The report confirms that community banks can continue to play a vital role in the U.S. economy by allocating credit and providing financial services in their communities – particularly to the small businesses in those communities. In general, the thriving banks were found to have strong commitments to maintaining standards for risk control in all economic environments and business plans that work for their individual markets. At a macro level, the thriving banks had lower total loans-to-total asset ratios (54% vs. 65%), lower concentrations in commercial real estate and construction and development lending, higher concentrations in consumer and agricultural loans, and were slightly more reliant on core deposits.
Bryan Cave attorneys discuss guidance from the Federal Trade Commission and its impact on banks.
Banks have an important role to play in development of mobile banking and mobile payment technologies. Although nearly 45 percent of all mobile phone users have a smartphone, only 12 percent are using mobile devices to make payments, according to a new report from the Federal Trade Commission (FTC). The primary reason for not using mobile payments is security concerns (42 percent).
Currently, the Federal Trade Commission is leading the charge to explore the need for mobile payments regulation. For banks interested in mobile banking, its actions and publications are very instructive.
Over the last two years, the FTC’s actions include: bringing law enforcement actions, obtaining high-profile settlements with Google and Facebook and issuing policy reports for mobile businesses and policymakers. Although financial institutions are not directly regulated by the FTC in this area, the FTC does regulate all other mobile providers including merchants, payment card networks, and payment processors. Further, the FTC will likely influence and coordinate with other regulators, particularly with respect to data security and privacy.
During a teleconference on February 1, 2013, discussing the FTC report, “Mobile Privacy Disclosures Building Trust through Transparency,” the outgoing FTC Chairman, Jon Leibowitz, called on the industry to adopt strong privacy and data security measures for mobile technologies or face increased regulation. Most recently, the FTC issued a Staff Report on March 8, 2013, entitled “Payments,” which outlines a number of key concerns and recommendations for businesses implementing mobile payments:
(1) develop clear policies for disputes for fraudulent or unauthorized mobile payments that address:
- the confusing landscape for consumers when selecting a payment method since each product has a different means, as well as different levels of protection, for disputing payments;
- the potential need to incorporate FTC Act and potential Consumer Financial Protection Bureau protections. At this time, unless Regulation E applies to a payment method, Reg E type protections for fraudulent or unauthorized payments are offered on a contractual or voluntary basis only; and
- mobile “cramming,” where companies place unauthorized charges on mobile phone bills.
(2) adopt strong security measures throughout the mobile payment process to:
- receive, transmit and store financial data using “end-to-end” encryption;
- incorporate security measures such as dynamic data authentication and separate secure element storage of data to prevent hackers from accessing financial information on mobile devices;
- comply with federal and state data security laws such as the FTC Safeguards Rule 16 C.F.R. § 314.1 et seq. and the FTC Act prohibition against unfair, deceptive and abusive practices;
- require strong data security measures by all companies in the mobile payments chain; and
- implement additional consumer security protections such as second level passwords and a means to immediately disable apps if a phone is lost or stolen.
(3) Implement “privacy by design” as set forth in the FTC’s report “Protecting Consumer Privacy in an Era of Rapid Change,” including at a minimum:
- strong privacy practices at every stage of product development covering:
—data collection limited to the context of consumer interaction with your business (e.g., no geolocation data unless needed)
- simplified consumer choice:
—allowing consumers to restrict unnecessary information disclosure
—discouraging “pre-checked” boxes to obtain consumer consent for the use of data for non-processing purposes
- transparency regarding data collection, storage and use to strengthen consumer trust.
To enable mobile to reach its full potential, financial institutions can play a lead role, including by responding to the FTC chairman’s call for industry self-regulation and the recommendations noted in the Staff Report. Taking the security and privacy obligations that already exist under the Gramm-Leach-Bliley Act, with further guidance from sources like the FTC, financial institutions can move the industry forward by developing meaningful mobile disclosures and transparent privacy policies and practices and by requiring similar compliance of their mobile payment service providers.
Banks should implement, and require their service providers to implement, data security safeguards for sensitive financial information at all segments of the payment chain and allocate responsibilities and liability among them. Banks should develop data breach response plans including notifications and consider purchasing cyber-security insurance.
This article was originally published on BankDirector.com.
Tom Richey’s annual survey of decisions handed down during 2012 by the state and federal courts on Georgia corporate and business organization issues is available. This survey covers the legal principles governing Georgia businesses, their management and ownership. It catalogs decisions ruling on issues of corporate, partnership and limited liability company law, as well as transactions and litigation issues involving those entities, their governance and investments in them. In 2012, the courts decided cases involving the effect of a reliance clause on claims for oral misrepresentations in a private placement and whether communications to all shareholders can support a holding claim. Federal courts handed down multiple rulings in suits brought by the FDIC regarding the business judgment rule and standard of care for bank directors and officers. Several decisions addressed unusual claims of alter ego liability between legal entities. Other cases involved shareholder buy-sell agreements; the effect of a trust indenture’s no-action clause on bondholder claims; agreements with investment bankers; partnership dissolution issues; LLC derivative action procedure; a question regarding when a lawyer representing a corporation enters into an attorney-client relationship with the corporation’s principal officer/shareholder; the admissibility of expert witness testimony on matters of corporate governance, and much more. The Survey also covers selected 2012 decisions from the Fulton Superior Court Business Court, including cases involving a challenge to a public company merger, the independence of a special litigation committee and adequacy of its investigation, and the imputation of officer and director knowledge and conduct to the corporation for purposes of an in pari delicto defense to a bankruptcy trustee’s malpractice claims against the corporation’s auditor.
Some of the same law firms that filed numerous class action lawsuits against banks for owning or operating ATMs in alleged violation of the Electronic Fund Transfer Act (EFTA) are now turning their attention to similar lawsuits against banks who own or operate ATMs in alleged violation of the Americans with Disabilities Act (ADA).
A new class action complaint was filed against BB&T last week in federal court in Atlanta alleging that two of BB&T’s ATMs did not meet the accessibility features that are mandated by the ADA. Thomas v. Branch Banking and Trust Company, U.S. District Court, Northern District of Georgia, Civil Action No. 1:13-cv-00656. The lawsuit was filed by a plaintiff who states that she is a blind individual that was denied access to two ATMs because the ATMs had no voice-guidance feature, no Braille instructions for initiating speech mode, and the function keys did not have the required tactile symbols. The lawsuit seeks an injunction and payment of costs and attorneys’ fees.
If this new litigation follows the same trajectory as the EFTA class actions filed in the past year, we can expect similar lawsuits to continue to be filed against other banks over the next few weeks or months as the plaintiff and her attorney seek out other ADA violators. If you have not checked your ATM for ADA compliance recently, now is the time to do so.
Bryan Cave has defended numerous class actions involving ATMs in Georgia and across the country and is fully prepared to assist its banking clients in the defense of any new actions or in implementing a monitoring program. If you have questions about this litigation, compliance with the statute, or the defense of these cases, please do not hesitate to call Bill Custer (404.572.6828), Jen Dempsey (404.572.6985), or Kalee Vargo (404.572.6639).
For the first time since the advent of the Great Recession, the FDIC has filed an action against former bank directors based only on theories of gross negligence. The lawsuit was filed against the former directors of Orion Bank (“Orion” or the “Bank”) of Naples, FL, which failed and went into receivership in November 2009. A copy of the FDIC’s complaint is available here.
The FDIC’s central case theory focuses on the defendant directors’ completely lack of oversight over Orion’s President and CEO, Jerry Williams. According to the complaint, Mr. Williams became such a dominant decision-maker that the defendant directors generally approved any and all of his proposals with little, if any, scrutiny. Their alleged abdication of responsibility bled over into role as members of the Board Loan Committee, and they “blithely rubberstamped” any loan that Mr. Williams proposed without any meaningful review or deliberation. The FDIC contends that the director defendants continued to “rubberstamp” Mr. Williams’ proposed loans even after banking regulators had specifically criticized their lack of oversight and had warned them to be personally and directly involved in reviewing, analyzing and independently evaluating loans presented for approval.
Apart from its allegations that the defendant directors failed to properly oversee management, the FDIC also alleges that the defendants routinely disregarded proper loan underwriting standards, the Bank’s own loan policy, repeated warnings from regulators, and the rapidly declining real estate market. Worse yet, the defendant directors continued to approve ADC lending at an accelerated rate between 2005 and 2007 despite obvious signs that the real estate market was in steep decline. In total, the FDIC seeks to recover more than $53 million in connection with several bad loans approved by the defendants.
A collection of new banking resources from around the internet:
- Comptroller of the Currency Speaks at Acquire or Be Acquired – The Comptroller spoke of the OCC’s need to balance holding directors responsible while also being supportive of directors that are doing the best they can.
- Fed Governor Duke Speaks on the Future of Community Banks – Speaking at the Terry College of Business’ Southeastern Bank Management and Directors Conference, which was sponsored by Bryan Cave, Betsy Duke emphasized the need for community banks to continue to speak up on the unique impact of banking regulations on community banks.
- FDIC Board Meeting Scheduled for Tuesday, February 12th – The FDIC Board is considering providing notice of proposed rule making regarding the definition of insured deposits.
- FRED Excel Add-in – The Federal Reserve Bank of St. Louis makes available an Excel add-in to allow easy importing from the Federal Reserve Economic Data (i.e., FRED).
- Bryan Cave and New York City both lost a friend in the passing of Bryan Cave Partner Ed Koch. Both the New York Times and BuzzFeed offered beautiful obituaries.
- Fed Cartoon Explaining the Central Bank System – The Atlanta Federal Reserve Bank provides this animated video to explain the history of the Federal Reserve System and how its three main functions help foster a stable financial system and a growing economy.
- Atlanta Fed Survey of Regional Employment Trends – “We can conclude that hiring activity in our region appears to be improving slowly.” I can only think of snarky comments, so I’m going to let this speak for itself.
- What if you went swimming in a nuclear spent fuel pool? -Turns out it appears to be safer than the banking business generally.
For banking-related content from around the web on a real-time basis, follow @RobertKlingler on Twitter.
Many community banks are reluctant to consider interest rate swaps due to perceived complexity as well as accounting and regulatory burdens. But, in a record low interest rate environment, the most desirable customers almost universally demand something that is hard for community banks to deliver: a long-term, fixed interest rate. Large banks are eager to accommodate this demand and usually do so by offering such a borrower an interest rate swap that, together with the loan facility, delivers the borrower a net long-term, fixed rate obligation and the lending bank a loan with an effective variable rate.
The alternatives to using swaps are not appealing. A community bank can limit its product offerings to only variable rate loans or short-term, fixed rate loans and thereby lose many good customers to larger competitors. The bank can offer a long-term fixed rate on the loan and then (a) sell the loan and lose ongoing earnings and the customer relationship, or (b) borrow long-term funds from the Federal Home Loan Bank to match that asset with appropriate liabilities, a choice that significantly erodes profit on the loan and uses up precious wholesale liquidity.
If a community bank wants to compete using interest rate swaps, then there are three general methods for packaging an interest rate swap with a typical loan offered by a community bank. There are several regulations that apply to swaps, including changes to the Commodities Exchange Act enacted by the Dodd-Frank Act and the numerous related rules and regulations promulgated by the U.S. Commodity Futures Trading Commission (the “CFTC”). If the community bank is under $10 billion in assets, then all three swap methods described below should qualify for an exemption from regulatory requirements that interest rate swaps be cleared through a derivatives exchange. Avoiding clearing requirements saves considerable costs and operational effort.
The first is a one-way swap in which a community bank simply makes a long term, fixed-rate loan to its borrower and then executes an interest rate swap with a swap dealer (such as a broker-dealer affiliate of a larger commercial bank) to hedge against rising interest rates. In a one-way swap, the community bank is subject to fair value hedge accounting, which requires the bank to mark the swap to market on its balance sheet and run changes in fair value through its income statement.
On February 5, 2013, Bryan Cave LLP Partners, Walt Moeling and Jim McAlpin, presented at the 2013 UGA Southeastern Bank Management and Directors Conference on “Board of Director Issues in the Community Bank of 2016.”
The presentation includes the results of the 2013 Bryan Cave Survey of banking industry observers and is available here.