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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