On June 17, 2009, the Obama administration publicly announced its vision of regulatory reform. Among the key points for community banks and thrifts:
- Combine the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) into a new federal agency, the National Bank Supervisor, which would remain an office of the Treasury Department. The National Bank Supervisor would have all the powers of the OCC and the OTS. The Federal Reserve and FDIC would retain their respective roles with respect to state banks.
- Eliminate the federal thrift charter, subject to “reasonable” transition arrangements.
- Eliminate restrictions on interstate branching by national and state banks. States would not be allowed to prevent de novo branching into the state, or to impose a minimum age requirement of in-state banks that can be acquired by an out-of-state banking firm.
- Thrift holding companies and Industrial Loan Company (ILC) holding companies would both be required to become Bank Holding Companies supervised by the Federal Reserve.
- Create a new federal Consumer Financial Protection Agency (CFPA). The CFPA is proposed to have sole authority to promulgate and interpret regulations under existing consumer financial services and fair lending statutes, including TILA, HOEPA, RESPA, CRA, and HMDA. The CFPA is also proposed to assume from the federal prudential regulators all responsibilities for the supervision, examination and enforcement of consumer financial protection regulations.
- States would have the authority to adopt and enforce stricter laws, and federally chartered institutions would be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions.
As a reminder, we are the very beginning of regulatory reform; the final reforms are undoubtedly not going to be exactly as laid out in the President’s current proposal.
As part of the Interim Final Rule issued on June 10, 2009, there a couple of items of immediate concern that participating institutions should be aware of: a prohibition on tax gross-ups and the required reporting of certain perquisites. Both of these requirements are not found in the statute, but rather represent additional restrictions imposed by the Treasury Department.
Subject to a limited exception for foreign-tax equalization payments, institutions that have received TARP funds generally will not be permitted to pay any tax gross-ups to any senior executive officer or any of the next twenty most highly compensated employees. Accordingly, institutions receiving TARP capital will not be able to provide a tax gross-up to compensate executives for the taxes related to non-cash compensation, including company cars or non-qualified deferred compensation plans. The regulation also prohibits agreeing to make the gross-up payment in the future, after the institution has repaid its obligations under TARP.
Each participating financial institution will annually have to report to the Treasury and the institution’s primary regulator any perquisites whose total value exceeds $25,000 for any employee who is subject to a bonus limitation. The bonus limitations, and thus the perquisite reporting requirement, apply on a sliding scale as follows:
1. For institutions receiving less than $25 million, only the most highly compensated employee cannot receive a bonus.
2. For institutions receiving $25 million but less than $250 million, the five most highly compensated employees cannot receive a bonus.
3. For institutions receiving $250 million but less than $500 million, the senior executive officers and the ten next most highly compensated employees cannot receive a bonus.
4. For institutions receiving $500 million or more, the senior executive officers and the twenty next most highly compensated employees cannot receive a bonus.
On June 10, 2009, the Treasury announced an Interim Final Rule on the executive compensation standards for recipients of TARP funds. The Interim Final Rule supersedes all prior rules and guidance on executive compensation limitations.
The major elements of the Interim Final Rule include the following:
1. Clarification on the compensation limits to certain executives and highly compensated employees, including bonus payments, golden parachutes, and clawback provisions.
2. Appointment of a Special Master to review compensation plans of institutions receiving “exceptional” assistance.
3. Expansion of the analysis of risks posed by compensation plans for all employees, the luxury expenditures policies, and the “say-on-pay” requirement.
4. Addition of certain compensation and corporate governance standards including a prohibition on tax gross-ups, disclosure of perqs, and disclosure of the use of compensation consultants.
Treasury Secretary Timothy Geithner issued a statement to accompany the announcement. Geithner’s statement also provides summaries regarding the administration’s proposal to expand say-on-pay to all companies and the importance of independent compensation committees.
Federal False Claims Act Amended to Significantly Expand Liability
On May 20, 2009, President Obama signed legislation containing a number of significant amendments to the federal False Claims Act (“FCA”), the statute which permits private citizens to bring lawsuits on behalf of the United States against persons or entities accused of defrauding the government and keep a portion of any recovery. These amendments, which are part of the Fraud Enforcement and Recovery Act of 2009, substantially expand the range of conduct subject to liability under the FCA, provide greater protection for “whistleblowers”, and remove certain procedural hurdles that the government and whistleblowers have faced in pursuing FCA investigations and actions, as discussed further below.
For more information, read the client alert published by Bryan Cave LLP’s White Collar Defense and Investigations Client Service Group on May 27, 2009.
The deadline for banks (at least those other than the 19 participants in the Stress Test) to apply for the Capital Assistance Program has been extended again. The Capital Assistance Program is the second round of potential capital investments under the TARP umbrella, following the Capital Purchase Program. To date, the Treasury has not made any investments in banks under the Capital Assistance Program.
The original announced deadline of May 25, 2009 was extended until June 8, 2009 to coincide with the deadline for submitting capital plans under the Supervisory Capital Assessment Program. However, the Treasury has subsequently decided to extend the application deadline for the Capital Assistance program to November 9, 2009. This later deadline is memorialized in the answer to Question 12 of the Treasury’s FAQs on Capital Purchase Program Repayment and Capital Assistance Program, and has also been separately confirmed to us in writing by the Treasury Department.
On June 2, 2009, the Treasury announced the completion of the twenty-ninth round of TARP Capital infusions. The Treasury purchased a total of approximately $89 million in securities from 8 financial institutions on Friday, May 29, 2009, and has now invested in 614 institutions, totaling approximately $199.4 billion.
Citizens Bancshares, Co., Chillicothe, Missouri, received the largest infusion, $24.9 million. American Premier Bancorp, Arcadi, California, received the smallest infusion, $1.8 million.
On May 27, 2009, four institutions redeemed their securities from the Treasury: Washington Federal Inc. ($200 million), First Niagara Financial Group ($184 million), Berkshire Hills Bancorp ($40 million), and First Manitowoc Bancorp ($12 million). As of May 27, 2009, twenty institutions have re-paid approximately $1.7 billion, and Treasury’s outstanding investment equals approximately $197.6 billion.
On May 27, 2009, the Treasury announced the completion of the twenty-eighth round of TARP Capital infusions. The Treasury purchased a total of approximately $108 million in securities from 12 financial institutions on Friday, May 22, 2009, and has now invested in 606 institutions, totaling approximately $199.3 billion.
Diamond Bancorp, Inc., Washington, Missouri, received the largest infusion, $20.5 million. First Advantage Bancshares, Inc., Coon Rapids, Minnesota, received the smallest infusion, $1.2 million.
On May 20, 2009, Somerset Hills Bancorp and SCBT Financial Corporation redeemed their securities from the Treasury for $7.4 million and $65 million, respectively. To date, sixteen institutions have re-paid approximately $1.3 billion, and Treasury’s outstanding investment equals approximately $197.9 billion.
On June 3, 2009, the FDIC announced a postponement of the Legacy Loans Program component of the Public Private Investment Partnership for open banks to sell loans. Formally, development of the Legacy Loans Program will continue, but the previously planned pilot sale of assets by open banks will be postponed. Accordingly, the government is once again exploring whether the purchase of troubled assets should be part of the Troubled Asset Relief Program. The federal government appears to have now completed a 540 degree rotation under the Troubled Asset Relief Program. Observers are keen to determine whether the government will land an unprecedented 720, possibly earning an X Games gold medal in the process.
Chairman Bair explained, “Banks have been able to raise capital without having to sell bad assets through the Legacy Loans Program, which reflects renewed investor confidence in our banking system. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector.”
As a next step, the FDIC will test the funding mechanism contemplated by the Legacy Loans Program in a sale of receivership assets this summer. This funding mechanism draws upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage. The FDIC expects to solicit bids for this sale of receivership assets in July.
Earlier this year the FDIC published its Final Rule on Processing Deposit Accounts in the Event of an Insured Depository Institution Failure. One of the requirements of the Rule is that financial institutions are required to provide sweep account customers with information about what would happen to the customer’s funds in the event the institution failed. As a byproduct of the attention being paid to the new sweep account disclosure rules, the FDIC has also focused on the terms of the Master Repurchase Agreement used in certain sweep arrangements where the institution serves as the customer’s custodial agent for securities held at another financial intermediary.
The standard industry Repurchase Agreement contains a provision which allows the financial institution to substitute the originally purchased securities with different securities of the same type. The FDIC has recently taken the position that the right of substitution renders a Repurchase Agreement used in connection with such a sweep account defective based on the fact that the institution retains excessive control over the securities. The result of this is that the customer’s funds will be treated as if they never left the deposit account from which they originated. This could be devastating to a customer in the event of the failure of the institution.
In addition to the risk which a customer runs of having significant uninsured deposits, the financial institution runs the risk that the funds should have been reported on a Call or Thrift Financial Report as deposits for purposes of reserves and assessments. This then in turn raises issues of whether the financial institution has been in violation of Reg Q which prohibits the payment of interest on demand deposits.
On May 21, 2009, the Treasury Department (without any fanfare) published a FAQ on the expansion of the TARP Capital Purchase Program for small community banks. The FAQ expands slightly on Secretary Geithner’s remarks to the ICBA announcing the expansion.
Highlights of the FAQ include:
- Available to banks with less than $500 million in total assets (inclusive of all subsidiary banks for multiple bank holding companies);
- Deadline to apply is November 21, 2009;
- Maximum Capital Purchase Program investment is 5% of risk weighted assets;
- Institutions that currently have preliminary approval for 3% can seek expedited approval to receive up to 5%;
- No additional warrants need be issued beyond the warrants required for the investment of up to 3% of risk weighted assets; and
- Institutions will have six months from preliminary approval (but no later than December 31, 2009) to decide whether or not to accept the investment.