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Category Archives: Regulation and Compliance

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UPDATE: FDIC joins in on IOLTAs for CRA consideration

Posted in Bank Regulation, Regulation and Compliance

Editor’s Note: This post was prepared by Susan A. Choe, Deputy Director & General Counsel, The Ohio Legal Assistance Foundation.

As an update to our guest blog post of April 10, 2014, the Ohio Legal Assistance Foundation is pleased to report that the Federal Deposit Insurance Corporation (FDIC) will join the Ohio Office of the Comptroller of the Currency and the Federal Reserve Board of Cleveland, in reviewing on a case-by-case basis interest paid above market rates on Ohio IOLTAs (interest on lawyer trust accounts) for potential positive CRA consideration.…

“The Bandits’ Club” gets its due

Posted in Bank Litigation, Regulation and Compliance

Our colleagues at Antitrust Law Source posted an interesting update about probable charges alleging that traders at approximately a dozen global banks – including Deutsche Bank, JPMorgan Chase, Barclays, and USB – fixed the foreign exchange market, or “forex,” market. The U.S. Department of Justice may bring charges by the end of the year. Read the complete article on Antitrust Law Source.…

CIP To Cover Small Business Ownership And Control

Posted in Bank Regulation, BSA/AML, Regulation and Compliance

It has been an active couple of weeks for FinCEN from a regulatory pronouncement perspective. For example, FinCEN has proposed a regulation to amend existing “know your customer” rules for certain financial institutions to require the verification of beneficial owners of legal entities. Legal entities in this context would mean corporations, partnerships or similar business entities. Public companies, regulated entities and trusts other than business and statutory trusts, would not be covered.

In addition, FinCEN issued an advisory for financial institutions on the importance of a “culture of compliance” with respect to BSA/AML. The guidance had these suggestions based on recent enforcement actions: ensure leadership that supports compliance; don’t mitigate BSA/AML efforts in light of revenue considerations; operating departments must share with compliance staff BSA/AML information; the organization must devote adequate resources to BSA/AML compliance; BSA/AML compliance should be tested by an independent party and the organization’s leadership and staff should understand the purpose and use of BSA/AML reporting. FIN-2014-A007 is available here.

FinCEN’s proposal to amend existing “know your customer” rules requires a financial institution would have to identify each individual who directly or indirectly own 25% or more of the equity and one individual who has responsibility to control, manage or direct the legal entity. This information is to be recorded on the standard certification form.

The proposal is available here. Comments are due on October 3rd, 2014. The original release contemplates that the rule would be effective one year after adoption, so it would appear …

Covered affirmative action employers — more scary news from the OFCCP

Posted in Bank Regulation, Labor Law, Regulation and Compliance

On August 6, 2014, the Office of Federal Contract Compliance Programs (OFCCP) announced a proposed rule that should be of real concern to covered affirmative action federal contractors. The OFCCP is the agency that enforces federal affirmative action laws. If the proposed rule is adopted, it will add compensation data to the information that covered employers must submit with their annual EEO-1 reports. Keep in mind the “web” of coverage under affirmative action laws reaches far. Coverage is triggered not just by direct federal contracts but also by contracts to provide goods or services to any private sector entity, as long as those goods or services are used in connection with fulfilling some federal contract that your customer or their customers may have. Coverage of financial institutions is triggered by being a depository for federal funds or by being an issuing or paying agent for U.S. Savings Bonds or Notes. Coverage issues and obligations can vary with the dollar volume of the covered work.

The Specifics:


Currently, the annual EEO-1 report contains race, ethnicity, and gender information about your workplace, sorted by nine EEO job-type categories. The proposed rule would expand the report to include the following information for each of the EEO categories by race, ethnicity, and gender: total number of employees; total W-2 income; total hours worked.


The obligation to provide compensation information on EEO-1 reports would apply to covered affirmative action employers with more than 100 employees and a covered federal contract or subcontract for …

FDIC Guidance on Agricultural Credits

Posted in Agricultural Lending, Bank Lending, Bank Regulation, Commercial Lending, Community Banking, Regulation and Compliance

At a time of relative affluence in the farming industry, the FDIC has issued a warning on a need for monitoring agricultural credits. FIL-39-2014 (July 16, 2014) suggests that banking institutions of all sizes should carefully consider a recent, negative projection by the U.S. Department of Agriculture.

While current market conditions are good, the projection suggests there will be a slowdown in the growth of the farming and livestock sectors and that agriculture may be affected by adverse weather and declining land values, among other factors.

The guidance suggests that financial institutions should work carefully with agricultural borrowers when they experience financial difficulties. The guidance states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue (although the letter is rescinded in light of the current letter).

Cash flow analysis, secondary repayment sources and collateral support levels must be considered in order to properly analyze agricultural credits, according to the guidance.

The guidance notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required.

The guidance also notes workout strategies must be specifically tailored for agricultural credits in light of experience in the 1980’s with depreciating farm land values, among other factors. The guidance suggests that properly restructured loans to farming operations with a documented ability to repay under the modified terms will not be subject to adverse classification because the value of the underlying collateral …

Personal Liability, Bank Directors and the Business Judgment Rule

Posted in Bank Regulation, Community Banking, Corporate Governance, Corporate Law, Regulation and Compliance

Last April, a trade association for bank directors, the American Association of Bank Directors reported the results of a survey designed to measure the impact of concerns about personal liability on the decision of bank board members to resign and by individuals to turn down board seats on banking organizations.

One of the key concerns, the survey highlighted, is the possibility of an FDIC lawsuit against the directors if a bank failure occurs. The fear was bank directors would be liable for decisions made as directors notwithstanding what is commonly referred to as the business judgment rule. Generally, the business judgment rule shields corporate directors, including bank directors, from liability when board decisions result in losses to the corporation or to shareholders.

The AABD mentioned in particular a then pending lawsuit in Georgia arising out of FDIC claims related to the failure of Buckhead Bank. These claims against the directors sounded in simple negligence regarding the making of loans. And the directors had asserted the business judgment as a defense.

A few days ago the Georgia Supreme Court ruled on the matter and the decision is worth a review by bank directors and managers even though they don’t do business in Georgia. The Georgia Supreme Court decision elegantly summarizes the business judgment rule including its history and common law origins. So the opinion is a useful “read” for bankers everywhere because the development of local jurisprudence in most states is likely similar to the process described in the opinion.

The …

Ohio IOLTA and IOTA Provide CRA Consideration

Posted in CRA, Regulation and Compliance

Editor’s Note:

This post was prepared by Susan A. Choe, Deputy Director & General Counsel, The Ohio Legal Assistance Foundation.

Federal bank examiners will now provide positive CRA consideration under the investment test for interest paid above the market rate on Ohio IOLTAs (“interest on lawyer trust accounts”) and IOTAs (“interest on title agent trust accounts”). This development was confirmed by the Cleveland office of the Office of the Comptroller of the Currency and representatives of the Federal Reserve Bank of Cleveland.  Confirmation was sought by the Ohio Legal Assistance Foundation to reinforce support for Ohio’s legal aids during a time of declining revenues and increased demand for legal aid.

Since the mid-1980’s, IOLTAs and IOTAs have been used to fund civil legal aid for Ohioans who cannot afford an attorney. In this way, civil legal aid ensures fairness in the justice system regardless of how much money a person has.

For more information on CRA investment credits related to IOLTA or IOTA accounts, please contact Susan Choe, Esq., Deputy Director and General Counsel for the Ohio Legal Assistance Foundation, by email to schoe@olaf.org.


Regulatory Guidance on the Classification of Investment Securities Without Reliance on Credit Ratings

Posted in Bank Regulation, Regulation and Compliance

Recently, the primary federal bank regulators took the latest step in the long and winding road toward the replacement of credit ratings in the analysis of investment securities by insured financial institutions. You will recall this process began with the passage of the Dodd-Frank Act in July 2010 that, in the wake of the financial crisis in 2008, required government regulators of all types to deemphasize the role of credit ratings from the traditional credit rating firms.

The three primary federal bank regulators — the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation — in November issued regulatory guidance in the form of an agreement among themselves regarding the appropriate approach to the asset classification of investment securities for regulatory purposes. The guidance applies to national banks, state-chartered banks, and state- and federally-chartered savings associations, and supersedes previous guidance from 2004.…

Lending License Required for Real Estate Commission Financing

Posted in Ohio Law, Regulation and Compliance

In a triumph of substance over form, on August 22, 2013, the Tenth Appellate District Court of Appeals disregarding self-serving labels and further clarified the distinction between a loan and a sale of accounts receivable in Fenway Financial, LLC dba Commission Express v. Greater Columbus Realty, LLC dba Keller Williams Greater Columbus Realty, LLC, No. 12AP-291. To cut to the chase, the Court found that regardless of the buzz words used, leaving the seller of an account receivable with the risk of collectability is a key factor in characterizing a transaction as a loan, not as a sale, and may implicate state loan licensing requirements and other statutes, including provisions dealing with the scope of UCC Article 9.…

SEC Updates: Staying Ahead of the Regulatory Curve

Posted in Regulation and Compliance

Our colleagues on the Federal Securities Law Blog have been tracking new and updated SEC regulations that are likely to have an impact on your business now and in the near future. The compilation of articles in their most recent eBook — SEC Updates: Staying Ahead of the Regulatory Curve — discuss three important SEC regulatory changes: compensation committee rules, conflict minerals reporting and whether companies that use social media to communicate with investors are complying with Regulation Fair Disclosure. Download the SEC Updates: Staying Ahead of the Regulatory Curve eBook.…

SEC and CFTC Red Flag Rules Become Effective May 20, 2013

Posted in Regulation and Compliance

The Securities and Exchange Commission and the Commodity Futures Trading Commission have adopted rules that require most broker-dealers, mutual funds, investment advisers, and certain other regulated entities to create programs to prevent identity theft. The new rules become effective May 20, 2013, and entities regulated by the new rules must comply by November 20, 2013.

Regulated entities subject to the rules must develop identity theft prevention programs to detect “red flags” signaling potential identity theft, to respond appropriately to such red flags, and to periodically update detection programs as identity theft risks change.

Among other requirements, the Red Flag Rules apply to “financial institutions” that offer or maintain “covered accounts.” “Covered accounts” are defined broadly to include personal accounts designed to permit multiple transactions and any account with a reasonably foreseeable risk of identity theft to customers. “Financial institutions” include any entity that holds a transaction account belonging to a consumer on which the account holder can make withdrawals to pay third parties. Examples cited by the SEC include:

  1. a broker-dealer that offers custodial accounts;
  2. a registered investment company that enables investors to make wire transfers to other parties or that offers check-writing privileges; and
  3. an investment adviser that directly or indirectly holds transaction accounts and that is permitted to direct payments or transfers out of those accounts to third parties.

Many of these entities likely have identity theft prevention programs because they were previously required by Federal Trade Commission rules; however some entities, such as investment advisers, may have avoided scrutiny of their …

Financial Regulators Release Guidance Regarding Technology Service Providers

Posted in Regulation and Compliance

Financial institution executives with responsibility for the management of the technology of their financial institutions or their institution’s relationship with technology service providers (TSPs) should become familiar with the updated guidance regarding supervision of TSPs by financial institutions that was issued on October 31, 2012 by various federal banking regulatory agencies.  The issuance updates material that is nearly ten years old.

The Federal Financial Institutions Examination Council (FFIEC) released a revised Supervision of Technology Service Providers booklet (TSP Booklet), part of the FFIEC Information Technology Examination Handboot (IT Handbook).  The FFIEC exists to prescribe uniform principles, standards, and report forms and to promote uniformity in the supervision of financial institutions.  The TSP Booklet describes federal financial institution regulatory agencies’ statutory authority to supervise TSPs that contract with federally regulated financial institutions and provides guidance for these institutions and their examiners.  The TSP Booklet, which replaces and rescinds a March 2003 booklet, emphasizes that the ultimate responsibility for the conduct of third-party service providers and their compliance with applicable law and regulation lies with a financial institution’s management and board of directors.

The TSP Booklet describes the federal Risk Based-Examination Priority Ranking Program (RB-EPRP) and the Uniform Rating System for Information Technology (URSIT) used in evaluating TSPs of financial institutions. The RB-EPRP utilizes a risk-based approach to determine the examination priority of TSPs, while the URSIT is used to consistently assess and rate IT-related risks of financial institutions and their TSPs.

Concurrently with the TSP Booklet, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance …

CFPB Releases Examination Manual

Posted in Bank Regulation, Consumer Law, Consumer Law and Litigation, Regulation and Compliance

In October, the Consumer Financial Protection Bureau published its first supervision examination manual which will be of interest to bankers and other financial service executives.

On one level, the manual is fairly pedestrian and may contain little surprising in that most bankers have a fairly extensive appreciation of (and experience with) an examination process. And, of course, the Bureau has direct supervisory authority only over the roughly 100 large banks, thrifts, and credit unions that have assets more than $10 billion.

What should be interesting to many bankers, however, is the insight the Manual provides into the examination approach of the Bureau, an approach that will doubtlessly influence and inform the practices and procedures of all other financial institution regulators, large and small. Essentially, the Manual describes the Bureau’s process for risk assessment: first there will be the establishment of the inherent risk of a particular "product" line for consumers and then there will be an assessment of an entity’s set of quality controls to manage and mitigate the risks.…

Revised Discovery Guide and Document Production Lists for FINRA Customer Arbitration Proceedings Take Effect on May 16, 2011

Posted in Regulation and Compliance

On Monday, May 16, 2011, the revisions to FINRA’s Discovery Guide (“Guide”) and Document Production Lists (“Production Lists”) for customer arbitration proceedings take effect. These revisions will apply to all customer cases filed on or after May 16. FINRA first adopted the Guide in 1999 for use in customer arbitration proceedings and last revised the Guide in 2007. The Guide supplements the discovery rules contained in the FINRA Code of Arbitration Procedure for Customer Disputes. (See Rules 12505-12511.)

FINRA’s revisions to the Guide expand the guidance FINRA gives to parties and arbitrators on the discovery process. This expanded guidance is particularly important because of the growing prevalence and raising costs of electronic discovery (“e-discovery”). The revisions to the Guide also replace the current fourteen Production Lists with just two Production Lists of presumptively discoverable documents. One Production List will specify which documents firms/associated persons should produce. The other Production List will specify which documents customers should produce.…

IRS Releases Additional FATCA Guidance, Although Many Questions Remain

Posted in Regulation and Compliance

In Notice 2011-34 issued April 8, 2011, the IRS provided supplemental guidance regarding foreign financial account reporting requirements under the Foreign Account Tax Compliance Act (“FATCA”). All businesses that makes payments to foreign financial institutions should be aware of these rules which take effect in 2013.  The recently released supplemental guidance, which is expected to be part of extensive future regulations, clarifies certain withholding, documentation, and reporting requirements under FATCA. Because many questions remain, it is expected that the IRS will continue to release additional FATCA guidance.


Beginning on January 1, 2013, a 30% withholding tax will be imposed on certain U.S. source payments (“withholdable payments”) made to foreign financial institutions (“FFIs”). Withholding will be required on payments made to FFIs that do not enter into an agreement with the IRS to provide information on financial accounts held by certain U.S. persons. FATCA is another weapon in the IRS’s arsenal to track and monitor potentially abusive foreign account strategies, although FATCA applies to legitimate and routine business payments as well.…

Why You Should Care About FATCA

Posted in Commercial Lending, Regulation and Compliance

The Foreign Account Tax Compliance Act (FATCA) [Sections 1471-1474 of the Internal Revenue Code] was enacted to prevent U.S. taxpayers from evading U.S. tax obligations by parking funds in foreign accounts or with foreign investors. FATCA requires each U.S. entity to withhold 30% of certain payments made after 2012 to foreign investors or foreign lenders unless such foreign entities satisfy certain new disclosure and reporting requirements. 

Failure to comply with FATCA will subject the U.S. entity to penalties and fines. Domestic lenders and domestic borrowers alike should ensure that foreign entities are FATCA compliant by adding language to the parties’ credit agreement that obligates each existing and future foreign entity to provide tax documents, certificates and other tax information upon demand. An example of such language follows:

Promptly upon receipt of written request, each Foreign Lender shall deliver to the Borrower and the Agent any information, document, or certificate, properly completed and in a manner prescribed by law or satisfactory to the Borrower or the Agent, as the case may be, in order to permit the Borrower or the Agent to make a payment under this Agreement or the Loan Documents without any withholding on account of any tax otherwise required to be withheld under FATCA, and each Foreign Lender shall strictly comply with any disclosure or information reporting requirements (including entering into an agreement with the Internal Revenue Service) that are required to secure an exemption from any United States withholding taxes.

Depending on whether you are a domestic lender or …

Do Not Respond to “Ohio Corporate Compliance Corporate Minutes Disclosure Statement”

Posted in Regulation and Compliance

In its capacity as statutory agent for some of our client companies, our firm’s statutory agent corporation, Acme Agent, Inc., has recently received this “Corporate Minutes Disclosure
from a company called Ohio Corporate Compliance. You may have received a similar notice. You should not respond to this notice if you receive it. Despite containing a small
disclaimer that it is a solicitation from a private company, the notice is made to appear as if it were an official government document that requires a response. However, this is not a document required from any governmental agency, and the information requested is not information that the Ohio Secretary of State would be asking of the vast majority of companies. The notice is very similar to a notice sent by the same company in early 2009.

If you do respond to the solicitation, you will be providing Ohio Corporate Compliance with internal, confidential corporate information such as the names of your shareholders, directors, and officers, in addition to paying an unnecessary $150 annual fee. In return, you may only receive some form corporate document with your company-specific information inserted. The solicitor does not commit—nor is it authorized—to make any public filing. However, the private information you provide may be used by this company for other purposes.

We have informed the Ohio Secretary of State’s Legal Department that these notices are being sent so that they may investigate and respond as they deem appropriate. We understand that the matter may be referred to …

Community Banks Raise Capital, Face SEC Reporting Requirements

Posted in Regulation and Compliance

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 …

What Border Officials Can Do With Your Laptop And Cellular Phone

Posted in Corporate Law, Regulation and Compliance

Having your laptop or smartphone searched or detained by Customs on your way back from a business trip would be a nightmare for most travelers, including bankers and other finance professionals. However, this scenario is quite possible under new governmental policies. In 2009, Customs and Border Protection (“CBP”) and Immigration and Customs Enforcement (“ICE”) both issued their respective new policies on border searches of electronic devices. It was a coordinated effort of CBP and ICE to update and harmonize their border policies to detect an array of illegal activities, including terrorism, cash smuggling, contraband, child pornography, copyright, and export control violations.

With all the technology innovations that allow business travelers to carry massive amounts of information in small electronic devices, CBP and ICE are facing an enormous challenge. On the one hand, travelers have a legitimate right to carry information on electronic devices. In that respect, there are serious concerns regarding the traveler’s expectation of privacy. On the other hand, the government has a duty to combat illegal activities and to enforce U.S. law at the border. The difficulty is finding the right balance between the government’s duty to enforce the law and the rights of travelers.

The legal basis for ICE and CBP policies is the border search exception to the Fourth Amendment requirement that officers obtain a warrant before searching someone’s property. But, assuming that they have this power, another key issue is exactly what CBP and ICE are allowed to do with one’s laptop. In short, they