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

On the first point, the complaint is the actual operation of the regulatory scheme in that it seems to have an inappropriately adverse impact at a very bad time – when the bank needs more liquidity. If a bank is adequately capitalized, the brokered deposit statute allows the bank to accept, renew or roll over brokered deposits with a waiver from the FDIC (but the bank is subject to interest rate restrictions). If the bank becomes undercapitalized, however, it cannot accept, renew or roll over brokered deposits at all. Bankers argued that liquidity problems inevitably result and contribute to the failure of a bank that would not otherwise have failed.

On the second point, bankers contended that some banks will not accept brokered deposits even when they are an optimal source of funds because examiners tend to criticize those banks that do accept them, regardless of the bank’s capital level or the appropriateness of the deposits as part of the bank’s asset and liability term and rate structure.

On the third point, bankers focused on the definition of brokered deposits, claiming that three types of deposits, reciprocal deposits, deposit sweeps from broker-dealers and referrals from affiliates and agents, are inflexibly defined as brokered deposits when they do not share the same characteristics as traditional brokered deposits. Accordingly, the argument is, they should not be treated in the same way, for supervisory purposes or for assessment purposes. Further, the contention of some bankers is that some deposits, such as high rate deposits and listing service deposits, do not meet the definition of a brokered deposit, but are in fact higher risk and should be included within the definition.

The FDIC's response – again, a recommendation of no change -- was based on a couple of overall conclusions. The FDIC concluded the existing regulatory framework permits enough examiner discretion to make appropriate adjustments in individual cases. The FDIC also concluded that its existing data is incomplete and insufficient to justify further regulatory action. Important here is the FDIC's observation that under its current system, adequately capitalized banks can seek waivers with respect to the use of brokered deposits. 

However, the summary language used by the FDIC suggests some adjustments to the definition of brokered deposits may ultimately be appropriate:

"Because of the lack of sufficient data, the analysis could not reach firm conclusions, but it suggests that reciprocal deposits based upon real customer relationships, deposits swept from affiliated broker-dealers, and referrals from affiliates appeared likely to pose fewer problems than other brokered deposits, although they should not be considered core deposits. The analysis also suggests that high rate deposits and non-brokered listing services appeared likely to pose problems similar to most brokered deposits." FDIC, Study On Core Deposits And Brokered Deposits, submitted to Congress, July 8, 2011, at 4.

Perhaps the most telling and in some ways useful aspect of the report is the comprehensive description of the legal development of the current system for regulating brokered deposits. The discussion makes it clear that much of the present system is based on a definition of "deposit broker" that was part of an older regulatory system in which deposit brokers registered with the FDIC. That language, part of long out-dated system that has been superseded in many ways, continues to control the definition of brokered deposits and based on this study, it appears likely this situation will continue for the foreseeable future.

The Dodd-Frank Act also protects the whistleblower from being retaliated against by the employer because the whistleblower provided information to the SEC. The Act gives the whistleblower a private right of action in federal court to try to establish the unlawful retaliation. Remedies for the successful whistleblower may include reinstatement, double back pay with interest, expert witness fees, and attorneys fees. Thus, Congress clearly intended for these remedies, coupled with a possible incentive bounty of at least $100,000, to encourage whistleblowers to come forward and assist the government attack corporate financial fraud.

Comparing Dodd-Frank with SOX

Unlike under Dodd-Frank, a whistleblower who is a victim of retaliation under the Sarbanes-Oxley Act of 2002 (“SOX”) must first file a complaint with OSHA of the U.S. Department of Labor and exhaust such administrative remedies before bringing an action in court. As under Dodd-Frank, however, SOX also provides whistleblowers protection from retaliation for providing, in good faith, information to the SEC about possible violations of any SEC rule or regulation. But SOX also provides whistleblowers even broader protection from retaliation, including for reporting information of a possible SEC rule violation within the company to “a person with supervisory authority over the employee” or, for example, to an audit committee.

The remedies available under SOX and Dodd-Frank to whistleblowers who have been retaliated against are similar, except Dodd-Frank expressly allows for the recovery of “double” back pay, while SOX does not. Of course, unlike under SOX, a Dodd-Frank whistleblower also has an opportunity to recover a “bounty” of 10% to 30% of any SEC recoupment over $1,000,000.

Also, the statute of limitations under Dodd-Frank is much longer than under SOX. Under Dodd-Frank, the whistleblower can bring a retaliation action up to six years after the date on which the retaliation occurred, or three years after “the facts material to the claim are known.” By contrast, and as now amended by Dodd-Frank, a SOX whistleblower only has 180 days from the date the employee becomes aware of the retaliatory decision to file a SOX retaliation claim with OSHA.

In addition, as amended by Dodd-Frank, SOX complaints, after administrative exhaustion, can now be tried before a jury and cannot be the subject of mandatory pre-dispute arbitration agreements. Finally, Dodd-Frank amends SOX to clarify that SOX covers whistleblowers who work for subsidiaries of publicly traded companies.

The Dodd-Frank Act – The Gift to Whistleblowers that Keeps on Giving

Dodd-Frank also enacted additional federal whistleblowing protections, including into the Commodity Exchange Act for whistleblowers who report information to the Commodity Futures Trading Commission. In addition, Dodd-Frank also created the new Bureau of Consumer Financial Protection and added protections to financial services industry whistleblowers who disclose information to the company or the Bureau about fraudulent or unlawful conduct by companies that extend consumer credit, provide real estate settlement or appraisal services, or provide financial advisory services to consumers. Similarly, Dodd-Frank broadened the existing anti-retaliation provisions under the Federal False Claims Act.

So, Be Careful If an Employee is Complaining About Financial Fraud in Your Organization

With the passage of Dodd-Frank, President Obama obviously is trying to make good on his administration’s promise to “clean up” the financial services industry. Dodd-Frank’s extensive encouragement of and protections for individual whistleblowers is one step toward trying to keep that promise. The federal government clearly is trying to enlist assistance from employees inside the industry who should be in the best position to know whether any fraudulent or unlawful financial conduct is occurring. Whether these incentives and protections under Dodd-Frank will prove to be an effective step will be determined through litigation in the years to come.