Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

Congress’ recent passage and President Obama’s signing of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” provides significant incentives for financial industry whistleblowers to assist the government root out fraudulent practices and other unlawful conduct in the industry. Supporters of the Dodd-Frank Act are praising its expansive whistleblower protections as a necessary good corporate-citizen tool to help the government ensure a financial crisis like 2008 never happens again.

Under the Dodd-Frank Act, whistleblowers in publicly traded companies are provided significant personal financial incentives to disclose to the SEC “original” information concerning securities laws violations occurring within their companies. “Original” information means the information must be derived from the whistleblower’s independent knowledge or analysis and cannot be known to the SEC from any other source. The available financial reward — or “bounty” — available to a qualifying whistleblower will range from 10% to 30% of any financial recovery in excess of $1,000,000 that the SEC obtains from the targeted corporation, including the amount of any penalties, disgorgement and interest.

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On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Although the Act focuses primarily on the financial industry, the Act contains a section that requires the Securities and Exchange Commission (“SEC”) to publish rules that direct the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement an appropriate clawback policy.

Specifically, a clawback policy must provide that an issuer that is required to restate its financial statements because of a material financial reporting violation must recover from certain executive officers the amount in excess of what would have been paid to them under the issuer’s restated financial statements. No showing of misconduct or negligence on the part of the affected executives is required. In other words, public companies must recover the excess, if any, between the actual pay-out under the original financial statements and the amount payable under the restated financial statements. This policy must apply to any current or former executive officer who received incentive-based compensation (including stock options) during the three-year period preceding the date on which the restatement is required. The Act also requires that companies disclose this clawback policy to shareholders. Any former employee who was an executive officer at any time apparently will be subject to the clawback policy without regard to whether he or she was an executive officer at the time of the restatement or whether the compensation that was received had been earned prior to the three-year period.

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Trying to understand the whole of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, is tough. The Act is long, complex and if you are focusing directly on the credit crisis, the Act is not particularly intuitive. Much of the Act has only a tangential relationship to the core purpose of the bill, preventing a reoccurrence of the credit crisis. Here is a brief, title by title summary to help, and along the way, I will point out the more important sections for community bankers.

I. Financial Stability – addresses the core purpose of the bill by creating a new oversight regulator, the Financial Stability Oversight Council. This council of regulators will monitor the financial system for "systemic risk" and will determine which entities pose significant systemic risk. Generally speaking, it will make recommendations to regulators for the implementation of the increased risk standards, also known as prudential regulation, to be applied to bank-holding companies with total consolidated assets of $50 billion or more and to designated nonbanks.

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Is your phone ringing off the hook? Then you’d better check your bank account. According to the Federal Bureau of Investigation, a new “telephone denial-of-service” attack is combining high-tech and low-tech fraud techniques to steal money from the bank accounts of unsuspecting victims.

As reported in the alert issued by the FBI, the scam begins with the suspect obtaining a victim’s personal and banking information, perhaps including bank account numbers, PINs, and passwords. Scammer can obtain a victim’s personal and banking information in a variety of ways, such as through phishing emails, social engineering tactics, or malware surreptitiously installed on a person’s computer.

Once the scammers have the victim’s personal information, they begin tying up the victim’s telephone line by using automated resources to place hundreds or thousands of calls to the victim’s telephone, not unlike a Distributed Denial of Service attack aimed at a computer network that overwhelms a computer with requests for information resulting in a slowing or failure of the network. 

While the victim is busy dealing with the onslaught of telephone calls, the scammers quickly drain the victim’s bank account using the previously obtained personal and banking information to gain access to the account. If the banking institution calls its customer to verify the transactions they find the victim’s telephone line to be busy. In some cases, scammers are brazen enough to change a victim’s contact information listed with the bank. As a result, calls from a bank to verify fraudulent transactions are redirected to the scammers. According to the FBI, “[b]y the time the victim or the financial institution realize what happens, it’s too late.”

Although the FBI did not disclose how much money it believes to have been stolen in this matter, it highlighted the case of a Florida dentist who lost $400,000 from his retirement account through such a scam. Based on the Bureau’s alert, it appears that such crimes will continue to increase in frequency.

Ultimately, the telephone calls serve as a diversion to occupy the victim and a barrier to prevent a bank from verifying the authenticity of fraudulent transactions. If you believe you have been targeted in such a scam, or if you believe you have been the victim of any other online fraud, visit the Internet Crime Complaint Center for resources and guidance.

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We are pleased to share with our Banking & Finance Law Report friends that Chambers USA has ranked Porter Wright’s Banking & Finance practice among the leading practices in Ohio in their most recent report.

To read about our review, please click here:

Banking & Finance - Ohio

Chambers USA also ranked Tim Grady individually for his experience and reputation in Banking & Finance Law.

Timothy Grady - Banking & Finance - Ohio

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Many community banks under pressure to raise capital are considering selling new shares of stock to investors; however, doing so may cause some banks to be required to register under Section 12(g) of the Securities Exchange Act of 1934. The Act provides that even if a company has never made a public offering of stock, it must register its stock with the SEC if has more than $10 million in assets and 500 shareholders of record. Once registered, the company must comply with the SEC’s costly periodic reporting requirements.

Even the smallest of banking organizations typically have more than $10 million in assets so the important requirement to avoid registration is to remain below 500 shareholders of record. As banks seek new investors, remaining below the threshold becomes difficult.

The American Bankers Association has long argued that the 500 shareholders threshold should be raised to somewhere between 1,500 and 3,000.  The ABA argues that when the 500 shareholders threshold was set in 1964, the number of investors in the marketplace and the market presence of 500 shareholders were 3-6 times smaller than they are now. Thus, the 500 shareholders threshold should be increased 3-6 times. The ABA laments that many community banks have had to redeem stock at the expense of capital to reduce the number of their shareholders of record to below 300, the requirement to deregister under the Exchange Act.

The SEC has considered updating the 500 shareholders threshold at various times since 1996 but has not yet done so. Community banks eager to raise capital without burdensome SEC reporting costs continue to push for change.
 

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Due to recent guidance from the U.S. Department of Labor, financial institutions should examine their classification of mortgage loan officers and similar employees. Last month, the DOL’s Wage and Hour Division released its first Administrator Interpretation (Interpretation No. 2010-1). In the Interpretation, the Division concluded that mortgage loan officers – and employees performing the typical duties of a mortgage loan officer – do not qualify as administrative employees exempt from the provisions of the Fair Labor Standards Act.

The Interpretation states that the typical job titles given to such employees include "mortgage loan representative," "mortgage loan consultant," and "mortgage loan originator."  It also lists the job duties of such individuals as:  receiving internal leads, contacting potential customers, collecting required financial information from loan applicants, entering collected financial information into a computer program that identifies which loan products may be offered to customers, assessing the loan products identified, discussing with the customers the terms and conditions of particular loans, compiling customer documents for forwarding to an underwriter or loan processor, and/or finalizing loan documents for closings.

Administrative employees are exempt from the minimum wage and overtime requirements of the FLSA. In a 2006 opinion letter, the DOL had previously opined that mortgage loan officers were administrative employees, and therefore exempt under the FLSA. See FLSA2006-31. However, the agency specifically withdrew that opinion letter in its recent Interpretation, finding that such employees are “production, rather than administrative employees” because they have a primary duty of sales, rather than of performing administrative functions for the financial institution.

While its recent Interpretation represents a shift in the DOL’s opinion on the issue, there have been many court opinions, including Chao v. First National Lending Corp., 516 F.Supp.2d 895 (N.D. 2006), holding that mortgage loan officers are non-exempt. Nevertheless, due to DOL’s recent Interpretation, it is now more clear than ever that mortgage officers – and any other employees performing the job duties listed above – must be paid overtime for any hours worked over 40 in a week. Of course, the job title given to an employee will not control whether they are exempt or not. If the employee’s primary duty is the performance of one or more of the tasks listed above, they are likely covered by this Interpretation. Therefore, all financial institutions employing such employees should examine their current classification and determine whether changes need to be made as a result of this guidance.

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That is the question addressed in Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, 894 N.Y.S.2d 47 (N.Y. App. Div. 1^st Dep’t Feb. 4, 2010).

Amcan Holdings, Inc. (“Amcan”), certain of Amcan’s affiliates (together with Amcan, collectively, “Borrower”), and Canadian Imperial Bank of Commerce (“Lender”) negotiated, executed and delivered a certain “Summary of Terms and Conditions” (the “Term Sheet”). The Term Sheet contained a variety of agreed upon terms and conditions, including the principal amounts of the revolving and term facilities, interest and amortization schedules, maturity dates, fees, the collateral to secure the debt, and a proposed closing date. 

After discovering that Borrower was subject to a preliminary injunction that prohibited Borrower from pledging to Lender certain equity interests, Lender lost interest in the proposed financing arrangement. Six years later, Borrower initiated a breach of contract action against Lender. Borrower’s position was that the Term Sheet was a binding commitment to lend.

The New York appellate court disagreed. The court stated that the fundamental issue to be determined in these cases is whether the parties intended to be bound by the agreed upon terms and conditions set forth in the preliminary agreement (i.e., the Term Sheet). To support its conclusion that the Term Sheet was not binding, the court noted that the Term Sheet clearly states “the credit facilities will only be established upon completion of definitive loan documentation, which would contain not only the terms and conditions in those documents but also such other terms and conditions as [Lender] may reasonably require. Although the [Term Sheet] was detailed in its terms, it was clearly dependent on a future definitive agreement, including a credit agreement. At no point did the parties explicitly state that they intended to be bound by the [Term Sheet] pending the final Credit Agreement, nor did they waive the finalization of such agreement.”    

Based upon this case, a prudent lender should make it clear within the term sheet which provisions, if any, are binding upon the parties. Additionally, the term sheet should indicate that the proposed credit facilities shall not be established, and lender shall not be committed to lend, unless and until the parties execute and deliver definitive loan documentation.

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            As you read this, annual meeting season is in full swing. One of the traditional hallmarks of the season is the annual proxy report which firms distribute in advance of the annual meeting. The ostensible purpose of the report is to solicit votes for the slate of directors, usually incumbents, to be elected at such annual meeting. But the broader purpose of the proxy of course is to describe the leadership of the firm, including such things as corporate governance practices, the overall structure of the board of directors, and the background of both management and the board of directors, including their compensation and real and potential conflicts of interest.

            The dramatic business environment over the last few years has led to numerous changes in both the form and the style of proxy disclosures. There is more emphasis now, for example, on what is called “transparency” for shareholders. In practice, this means more disclosures related to compensation and conflicts.

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