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Regulators’ “No Stress” Message to Smaller Banks Only Tells Part of the Story

Jonathan Hightower — Mon, 14 May 2012 18:20:39 +0000

On May 14, 2012, the Federal Reserve, FDIC and the OCC released a joint statement confirming that that banking organizations with total consolidated assets of $10 billion and under will not be required to conduct formal stress tests. Management of many smaller banking organizations had been concerned that the stress testing required of larger banks would “trickle down” in an informal sense to smaller banks. With this regulatory statement, that concern is alleviated, at least in the official sense.

We continue to believe that the heightened (or perhaps renewed) emphasis on risk management by the regulators will affect banks of all sizes. It is likely that regulators, directors, and shareholders of all banks will want to confirm that management has identified the key risk factors affecting the institution and that the board has established the institution’s tolerance for accepting those risks and implemented any appropriate mitigants.

We recommend that banks of all sizes, even the smallest community banks, undertake an enterprise risk management analysis to identify the key risks facing the institution. The board of the institution, as a subpart of its strategic planning function, should review those risks and establish the institution’s risk tolerance with respect to each category of risk (many consultants will capture this analysis in a “risk appetite statement”). Establishing and understanding those risk tolerances will form a roadmap for setting and executing the institution’s strategic initiatives. In implementing this analysis, some institutions may undertake some level of stress testing with respect to certain risks.

This risk management analysis is a natural adjunct to the self examination process used we recommend using in preparing for a regulatory exam (see our prior “Self Exam” post). While the self exam process is typically more focused on the bank’s current position and past performance and this risk management analysis is more forward-looking, both processes require an introspective review. Senior regulators have repeatedly confirmed to us (and we have seen in practice) that where banks take the initiative in implementing credible risk management programs and other pre-examination preparation, the examiners are much more likely to defer to the judgment of management and the board of the bank – with the result being a much better interaction with regulators (who, in an ideal scenario, can be a partner in the risk identification process).

We believe the key for banks and bank boards is to conduct an honest, forward-looking, and customized analysis of the risks facing your institution. While the guidance related to development of a stress test framework for larger banks may serve as a useful data point in developing an approach to enterprise risk management, management of community banks should focus on developing a risk analysis that is totally unique to the institution and its business model. We believe that implementing this type of risk analysis will satisfy the regulators, better inform the board, and, most importantly, add economic value for the institution’s shareholders.

Sharing Directors Brings Added Experience to Your Board but Could Cause Problems

Jonathan Hightower — Thu, 03 May 2012 22:29:47 +0000

Many financial institutions, particularly community banks, have enhanced the experience level of their boards by adding a director who is a banker or serves on the board of another financial institution. In general, utilizing a director who has current experience with another financial institution is a great way to add valuable perspective to a variety of issues that the board may encounter. In addition, as private equity funds made substantial investments in financial institutions, they often bargained for guaranteed board seats. The individuals selected by private equity firms as board representatives often serve on a number of different bank boards. As market conditions have led to increased bank failures, however, a problem has resurfaced that may cause some financial institutions to take a closer look at nominating directors who also serve other financial institutions: cross-guarantee liability to the FDIC.

The concept of cross-guarantee liability was added to the Federal Deposit Insurance Act by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The pertinent provision states that any insured depository institution shall be liable for any loss incurred by the FDIC in connection with:

the default (failure) of a “commonly controlled” insured depository institution; or
open bank assistance provided to a “commonly controlled” institution that is in danger of failure.

This means that if two banks are “commonly controlled” and one of them fails, the other bank can be held liable to the FDIC for the amount of its losses or estimated losses in connection with the failure. As many of us see each Friday, the amounts of these estimated losses are often quite high. In fact, the FDIC’s estimated losses for 2011 bank failures were approximately 20 percent of total failed bank assets for the year. Accordingly, the prospect of cross-guarantee liability can be a tremendous financial issue for the surviving bank.

The concept of cross-guarantee liability was developed in response to some perceived abuses by multi-bank holding companies during the 1980s. In those instances, one or more institutions owned by a multi-bank holding company failed, causing significant losses to the FDIC, while the other subsidiaries of the multi-bank holding remained open and viable, allowing the holding company to continue to profit from their operations while the FDIC was stuck with the losses from the failed institutions. With authority to assess cross-guarantee liability now in hand, however, the FDIC has shown a willingness to assert cross-guarantee liability under facts that would not be considered by most to be abusive. In this cycle, the FDIC appears to be willing to take full advantage of the assessment authority granted to it by FIRREA, using cross- guarantee liability as a “sword” to provide a recovery to the Deposit Insurance Fund.

The imposition of cross-guarantee liability starts with an assessment of control. Whether institutions are “commonly controlled” for purposes of determining cross- guarantee liability depends upon whether each institution is under the control of a common entity under the Bank Holding Company Act of 1956, as amended (BHC Act). Because the determination of control is made under the BHC Act, the Federal Reserve’s BHC Act control guidance is helpful. However, this guidance is very dense and can be quite complicated, requiring a review of the ownership structure, management practices, and other business affiliations of the two institutions. However, one thing is clear: In questions of control, institutions that share “management officials”—common directors and/or executive officers—are generally more likely to be found to be under common control than those that do not, all other factors being similar.

As a result, institutions with directors who serve on other bank boards or as officers of other banks should assess potential cross-guarantee risk through the director nomination process. Nominating committees (or other committees of the board reviewing director qualifications) should ask the following questions:

Does the individual serve on as a director or officer of another financial institution?
Is there a basis for determining that the two institutions are under common control? Answering this question will likely require consultation with legal counsel.
Is the other financial institution in a financial condition that is less than sound?

If the answer to all of these questions is “yes,” the nominating committee should think carefully about whether nominating that individual is a good idea. In addition, institutions guaranteeing board seats to investors (such as in connection with a private equity investment) should consider an exception to the nomination requirement when the election of the representative could create a risk of assessment of cross-guarantee liability.

A risk assessment requires an in-depth factual, legal and financial analysis. There are few organizations that will find out this issue places them at risk, but it’s worth attention because the consequences can be severe. As a result, an assessment of this risk should be an integral part of the annual nomination process.

This article was original published on BankDirector.com.

11th Circuit Upholds Deposit Agreement Arbitration Provision

Jerry Blanchard — Wed, 02 May 2012 14:40:17 +0000

The United States Court of Appeals for the 11th Circuit rendered an important decision on March 5, 2012, addressing the enforceability of binding arbitration provisions in consumer deposit agreements. The case began when Lawrence and Pamela Hough brought suit against Regions Bank for allegedly violating federal and state law by collecting overdraft charges under its deposit agreement. The deposit agreement contained an arbitration provision and Regions moved to compel arbitration. The federal district court hearing the case denied the motion to compel on the ground that the arbitration clause was substantively unconscionable because it contained a class action waiver. Regions appealed the decision to the 11th Circuit Court of Appeals and the appellate court vacated the ruling and sent it back to the trial court in light of a recent United States Supreme Court which held that the Federal Arbitration Act preempted a California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts. This time around the district court found other reasons to deny Regions’ motion to compel arbitration, holding that the arbitration clause was substantively unconscionable under Georgia law because it believed that a provision granting Regions the unilateral right to recover its expenses for arbitration allocated disproportionately to the Houghs the risks of error and loss inherent in dispute resolution.

The lower court decision was again appealed to the 11th Circuit. On appeal the Houghs argued that while the arbitration provision in the deposit agreement capped the Houghs’ costs for the arbitration proceeding at $125, another paragraph required the Houghs to reimburse Regions as a prevailing party for its costs of arbitration. The arbitration agreement permitted Regions, if it was “the prevailing party,” to obtain “reimburse[ment] for [its] costs and expenses (including reasonable attorney’s fees) … [in] arbitration” and to collect that amount by “charg[ing] [the Houghs'] account.” The district court concluded that the reimbursement provision was unconscionable because Regions had an exclusive right of setoff. The 11th Circuit disagreed, and noted that under Georgia law an arbitration provision is not unconscionable because it lacks mutuality of remedy. The district court also ruled that the arbitration clause had a degree of procedural unconscionability, but the 11th Circuit found that to be unconscionable under Georgia law, a contract must be so one-sided that “no sane man not acting under a delusion would make and that no honest man would participate in the transaction.” The court found that the arbitration clause in the Houghs’ agreement fell well short of that standard. Although the district court found it troubling that the clause was presented to the Houghs “on a take-it-or-leave-it basis with no opt-out provision,” the 11th Circuit noted that under Georgia law, an adhesion contract (i.e., one that is not truly negotiated between the parties such as a deposit agreement or a credit card agreement) is not per se unconscionable.

This is a timely decision for banks, particularly in light of the announcement by the Consumer Financial Protection Bureau on April 24 that it is launching a public inquiry into how consumers and financial services companies are affected by arbitration and arbitration clauses. Financial institutions began using binding arbitration provisions in the late 1980’s as a means of managing legal risk. Arbitration provides for a neutral forum to hear customer complaints without the risk of a runaway jury swayed by an emotional appeal from a plaintiff’s counsel. To that end it has served an important role as part of the overall enterprise risk management program for financial institutions. When the arbitration provisions are fair procedurally, meaning that the venue for the arbitration is easy to get to and the costs imposed on the consumers are minimum, the courts, from the United States Supreme Court on down, have upheld the enforceability of such provisions. Banks are understandably concerned that the CFPB will now frown upon a process which the Supreme Court has upheld as both procedurally and substantively fair.

New Legislation Introduced on ATM Notices

Bill Custer and Jennifer Dempsey — Fri, 20 Apr 2012 20:52:04 +0000

Legislation has been introduced in the United States House of Representatives that, if passed, would relieve banks of the responsibility of installing and monitoring the presence of physical notices on their ATMs notifying customers about the imposition of ATM transaction fees.

On April 17, 2012, Representatives Blaine Luetkemeyer (R-MO) and David Scott (D-GA) introduced H.R. 4367 which seeks to amend the Electronic Fund Transfer Act to limit the fee disclosure requirement for operators of ATMs to the electronic notice alone. The electronic notice allows a consumer to choose whether the consumer wishes to continue with the ATM transaction and pay the fee or exit the transaction. This proposed bill comes in the wake of class action litigation filed against banks and other ATM operators nationwide (and most recently against several Georgia community banks) alleging that the banks failed to post or maintain the physical notice on their ATMs.

As currently written, the Electronic Fund Transfer Act requires both a physical notice at or on the ATM in addition to the electronic notice the customer receives on the computer screen when making the withdrawal. Currently, there are statutory penalties for failure to comply with the Act. While there is no minimum penalty proscribed for a class action, the statute provides that in a successful class action, plaintiffs may recover up to “the lesser of $500,000 or 1 percent of the net worth of the (ATM operator),” plus attorneys’ fees and costs. There may be a defense to such claims when the bank maintains procedures reasonably adapted to avoid a failure to comply with the Act and the failure to comply was a “bona fide error.”

While the mere introduction of this bill does not currently relieve banks from the need to install and closely monitor the presence of these notices on their ATMs, we remain hopeful that the Congress will eliminate this unnecessary regulation. For the time being, please take a moment to survey all of your ATMs to ensure that they have the necessary notice affixed to them and that the notice has not been removed. We also recommend that you periodically inspect your machines and photograph them so that you will have evidence of your compliance with the Act.

If you have questions about this proposed legislation, compliance with the statute, or the defense of these cases, please do not hesitate to call Walt Moeling (404.572.6629), Bill Custer (404.572.6828) or Jennifer Dempsey (404.572.6985).

Rescission of Foreclosure Sales in Georgia

Jerry Blanchard — Mon, 09 Apr 2012 14:02:53 +0000

Georgia foreclosure law has been given a lot of attention over the last several years, both by the courts as well as the legislature. The Georgia Supreme Court has had to resolve the issue of whether a lender must sue on a note prior to foreclosing under a security deed and held that the choice is up to the lender. (See REL Development, Inc. v. BB&T, 699 SE2d 779 (2010).) Likewise, the legislature addressed a perceived problem in large loan servicing companies foreclosing on real property even though a division of the servicer was still negotiating with the borrower to cure the default. Thus, a lender can rescind a foreclosure, for among other reasons, the fact that it had entered into an agreement when the default was cured prior to the sale or the borrower had entered into an agreement to cure the default. (See OCGA 9-13-172.1.) What happens though if a lender actually conducts a foreclosure sale and then simply decides that it would rather sue on the note. Can it unwind the foreclosure even if its reasons for doing so do not fall with the statutory guidelines?

The Georgia Supreme Court has decided that a lender may in fact rescind a properly conducted foreclosure sale for its own internal business reasons.(See Tampa Investment Group, Inc. v. BB&T, 2012 WL 933110 (Ga.).) From 2005 to 2008, BB&T made 16 loans for residential housing development to two companies secured by various deeds to secure debt. After the borrowers defaulted on the notes, BB&T conducted non-judicial foreclosures on June 2, 2009 on nine of the notes. BB&T credit bid the properties in but later informed the borrowers that it was rescinding the sale. Most importantly, BB&T did not record a deed under power. On June 22, 2009, BB&T brought suit against borrowers and guarantors for more than $19 million then due under the notes.

At the trial on the enforcement of the notes the court found that BB&T could not pursue the notes since it had failed to confirm the initial foreclosure sale. The Georgia Court of Appeals reversed that decision on the basis that acceptance of a bid at a foreclosure sale under power creates an oral contract which is subject to the Statute of Frauds. The Statute of Frauds provides that certain contracts, such as for the sale of real property or an extension of credit, are not enforceable unless they are in writing. In this case, BB&T, either as borrowers’ attorney-in-fact or as the creditor on the notes, never executed a deed under power conveying the borrowers’ interest to itself or any writing showing that it had applied any foreclosure proceeds. The court further found that rescinding the foreclosures did not harm borrowers but left them in the same position as before the auctions.

Under these circumstances, the Court of Appeals ruled, the transfer of Borrowers’ rights of possession and equity of redemption to BB&T as the foreclosure sale purchaser never occurred and, thus, there had been no foreclosure sale, confirmation was therefore not required, and the failure to seek confirmation could not bar BB&T’s claims.

The case was then appealed to the Georgia Supreme Court. On March 19, 2012, the Georgia Supreme Court found that a “sale under power of real estate at public outcry does not become binding as between the mortgagee and the purchaser unless a memorandum is made as prescribed by the Statute of Frauds.” The court went on to note that until a deed under power is transferred and consideration is passed, the sale itself has not occurred; there is only a contract to buy and sell. Under the circumstances the borrowers have not been harmed. They still hold the same rights as they held prior to the attempted sale. A copy of the Georgia Supreme Court’s opinion is available here.

The case is an unusual one for several reasons. The decision does not discuss the back-story of why BB&T changed its mind after the foreclosure sale. It is not uncommon occurrence for a lender to advertise a foreclosure sale and then pull the foreclosure ad after negotiating with the borrower or to even simply not show up on the date of the advertised sale. It is a extremely rare occurrence though for a lender to seek to rescind an already conducted sale. Most practitioners would regard a foreclosure sale as a final event and certainly those lawyers who record the deed under power on the day of sale will continue to operate with that understanding. The opinions by the appellate courts do not address the question of how long a party might be able to take before deciding whether to actually rescind. In this case the lender acted to rescind within days of the sale. It is unclear whether the courts reach the same conclusion if a lender sat on its rights for months.

The take-away for lenders is that the Georgia courts have reaffirmed that lenders have a wide degree of latitude in the way they proceed to enforce loan documents. Any celebration over that should be tempered, however, by reviewing the most recent session of the Georgia legislature during which several bills touching on foreclosure or the methods in which a lender pursued borrowers or guarantors were introduced and seriously considered by both houses of the General Assembly.

JOBS Act Timing – Regulation D and Shareholder Thresholds

Robert Klingler — Thu, 29 Mar 2012 14:04:24 +0000

On March 27, 2012, the House of Representatives approved the version of the JOBS Act, as amended by the Senate, by a vote of 380 to 41. Accordingly the legislation has been sent to President Obama for signature, who has previously indicated his support of the legislation. The White House has indicated that the President anticipates signing the JOBS Act early in the week of April 2, 2012.

The text of the final JOBS Act is available here. We have previously summarized the provisions of the JOBS Act generally applicable to the community banks, as well as the impact of the Senate amendment to the JOBS Act. In this post we focus on the timing implications for effectiveness of the amendments to Regulation D and shareholder thresholds for SEC registration and deregistration.

With regard to Regulation D, Section 201 of the JOBS Act requires the SEC to eliminate the prohibitions on general solicitation and general advertising in connection with Rule 506 and Rule 144A offerings, so long as the securities are only sold to accredited investors and qualified institutional buyers, respectively. The JOBS Act requires the SEC to implement these changes no later than 90 days after the JOBS Act is signed by the President. Until the SEC amends the existing regulations, general solicitation and general advertising will remain prohibited.

With regard to the shareholder threshold changes, Sections 501 and 601 of the JOBS Act immediately amend the statutory provisions related to the number of shareholders of record at which a company must register and when the company is permitted to register. The statutory changes are effective immediately upon enactment of the JOBS Act. However, the SEC has also adopted regulatory requirements based on the original statutory language that will likely need to be amended in order to fully take advantage of the revised thresholds.

Section 501 and Section 601(a) of the Jobs Act collectively amend Section 12(g)(1) of the Securities Exchange Act of 1934 to read:

Every issuer … shall -

(A) within 120 days after the last day of its first fiscal year ended on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by either —

(i) 2,000 persons, or

(ii) 500 persons who are not accredited investors (as such term is defined by the Commission), and

(B) in the case of an issuer that is a bank or a bank holding company …, not less than 120 days after the last day of its first fiscal year ended after the effective date of this subsection, on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by 2,00 or more persons,

register such a security by filing with the Commission a registration statement….

These changes, related to when an issuer needs to register, would appear to be effective without further regulatory action. Accordingly, banks and bank holding companies that are not currently registered will be able to go up to 2,000 shareholders of record at December 31, 2012, and not be required to register with the SEC.

Section 502 of the JOBS Act amends the Exchange Act to provide that the definition of “held of record” shall not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of the Securities Act. While the SEC is required to adopt safe harbor regulations to clarify this statutory language, such regulation is presumably not necessary for the change to be legally effective. The JOBS Act does not place a time limit on the SEC for adopting such regulation.

Sections 601 and 602 of the JOBS Act also amend the Exchange Act to increase the deregistration thresholds for banks and bank holding companies. While these statutory amendments will be effective immediately, with limited exemption, the SEC will be required to amend its regulations for the changes to be effective. The JOBS Act requires the SEC to adopt implementing regulations within one year after the date of enactment. Presumably, the bank regulators may also have to adopt implementing regulations for banks without holding companies that currently have securities reporting obligations to their primary regulator.

Under the revised statutes, banks and bank holding companies will be able to terminate their registration requirements under Section 12 of the Securities Exchange Act and suspend their reporting requirements under Section 15 of the Securities Exchange Act so long as they have less than 1,200 shareholders of record (as compared to 300 shareholders under the former statute – and still the thresholds for non-banks.) As revised, Section 15(d) will provide an automatic statutory suspension of reporting under Section 15(d) for bank and bank holding company securities that are held by less than 1,200 shareholders of record as of the first day of a fiscal year. However, the SEC will need to act to amend its related regulations to allow banks and bank holding companies to suspend their reporting requirements under Section 15(d) during the year, as well as to terminate their reporting requirements under Section 12(g). Hopefully, the SEC will act before Form 10-K’s are due for fiscal year 2012, but the JOBS Act’s deadline will give the SEC sufficient runway to perhaps require banks to file another 10-K before being able to take advantage of the increased shareholder thresholds.

Senate Adopts Slightly Amended JOBS Act Bill

Robert Klingler — Thu, 22 Mar 2012 17:33:24 +0000

On March 22, 2012, the U.S. Senate adopted H.R. 3606, the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act) by a vote of 73 to 26. Prior to its passage, the U.S. Senate adopted Amendment 1884 proposed by Senators Merkley and Brown that replaced the “Crowdfunding” exemption contained in the house-passed legislation with a narrower provision. As the Senate and the House have adopted different versions, the House will have to consider and pass the Senate amendment before a bill could become law, or convene a conference committee to reconcile the House and Senate versions of the bill. (The Senate rejected by a voice vote Amendment 1931 proposed by Senator Reed that would have changed the SEC’s shareholder counting rules from record holders to beneficial owners.)

As the bulk of the JOBS Act was approved without change, our summary of the impact of the JOBS Act on community banks remains accurate.

The amended “Crowdfunding” provision includes significant restrictions on the potential utility of the new exemption, particularly for how it may have utilized by community banks. The ultimate utility of the Crowdfunding exemption will largely be tied to the implementing regulations to be adopted by the SEC. Under the Senate’s version of the JOBS Act, the Crowdfunding exemption would be available for up to $1 million in issuances in any 12-month period, require investors to purchase no more than 5-10% of their net worth in the issuance, and require the use of either a broker or “funding portal” as that term is defined in the bill.

Significantly, the Senate’s version contains a number of required disclosures, prohibits general advertising of the terms of the offering (other than notices which direct investors to the funding portal or broker), and requires the issuer to file periodic reports with the SEC (as the SEC determines, by rule, to be appropriate). In addition, the Senate version of the Crowdfunding exemption makes existing public companies ineligible to rely on the exemption.

If the Senate’s version of the Crowdfunding provision is ultimately accepted by the House, the utility of the exemption for small, private community banks will largely depend on the scope of the implementing regulations and the costs to make use of the required funding portal or broker. Assuming the initial costs and ongoing reporting burden are minimal, private community banks may be able to utilize the Crowdfunding exemption to supplement annual capital growth with an equity investment that helps further engage the local community with the bank.

Impact of Proposed JOBS Act on Community Banks

Robert Klingler — Wed, 21 Mar 2012 14:48:15 +0000

While still in proposed form, and subject to significant political uncertainty, we offer this summary of the impact of the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act). This summary is based on the version that passed the House on March 8, 2012, and was brought to the Senate floor on March 19, 2012. On March 20, 2012, the Senate failed to achieve sufficient votes to substitute the JOBS Act for the INVEST in America Act of 2012 (technically, it would have been the “Invigorate New Ventures and Entrepreneurs to Succeed Today in America Act of 2012,” but I think the acronym is a LOT better in this case), which contained some similar, but not identical, provisions. Accordingly, it appears that the JOBS Act, as adopted in the House, may be voted upon by the Senate this week.

Emerging Growth Companies

The bulk of the JOBS Act, and focus of most of the congressional debate, is on the creation of a new class of registered companies deemed “Emerging Growth Companies.” These registrants are not limited by business operations, and banks and bank holding companies could quality. An Emerging Growth Company would generally consist of newly public companies (IPO registration statement effective after December 8, 2011), with market caps of less than $750 million and total gross annual revenues (presumably interest income plus non-interest income for banks) of less than $1 billion. New registrants could quality for Emerging Growth Company status for up to five years following their IPO, at which time they would lose the advantages of being an Emerging Growth Company even if they otherwise continued to qualify.

An Emerging Growth Company would be exempt for the say on pay vote, as well as pay vs. performance and pay equality disclosures, and would not be required to have independent auditors attestations regarding internal controls under SOX 404. In addition, they would be eligible to generally rely on the scaled disclosures otherwise permitted for smaller reporting companies. In addition, an Emerging Growth Company would be provided the opportunity to initially file their draft IPO materials confidentially with the SEC and otherwise have greater flexibility in communications with regard to their IPO.

Modification of Securities Offering Exemptions

Within 90 days of passage, the SEC would be required to amend Regulation D and Rule 144A to permit general solicitation and advertising in Rule 506/Rule 144A offerings so long as the securities are only sold to accredited investors or qualified institutional buyers, respectively.

The JOBS Act would also create a new Section 4(6) exemption under the Securities Act of 1933 to permit “Crowdfunding.” Generally, issuers would be able to sell, without registration or reliance on an another exemption, up to $1 million in any 12 month period (or $2 million if audited financial statements are provided to investors). Individual investors would be limited to not invest, in any 12 month period, more than the lesser of $10,000 or 10 percent of the investor’s annual income. Any investors participating in such an offering would also be excluded from the “holders of record” calculations for purposes of SEC registration. The new “Crowdfunding” exemption includes a number of procedural steps that would need to be complied with, but will also provide preemption from applicable state securities law registration requirements. Accordingly, it could provide a means for small community banks to raise up to $2 million in any given 12 month period with minimal legal cost and without needing to limit themselves to accredited investors. While not initially designed for community banks, it could help private community banks better integrate with their communities via their shareholder base.

“Super” Regulation A Authority

The JOBS Act would create an additional exemption under Section 3(b) of the Securities Act to permit aggregate offerings of up to $50 million in any 12-month period (up from the existing $5 million requirement under the existing statute and Regulation A). The JOBS Act merely authorizes the SEC to establish this exemption, so the details (and attractiveness) of the exemption are still be determined. Based on the statutory language and history of Regulation A, it would appear that compliance with the exemption would likely require the filing (and review) of offering materials with the SEC, but then generally permit public sales of securities without resale restrictions. Like the existing Regulation A, issuers relying on the exemption would presumably not become subject to the periodic reporting requirements applicable to public companies, although the statute does require that issuer file audited financial statements with the SEC annually.

Increased Thresholds for SEC Registration and Deregistration

Under the JOBS Act, the statutory threshold for SEC registration for banks and bank holding companies would be increased from 500 shareholders of record to 2,000 shareholders of record. (For companies that are not banks or bank holding companies, the threshold would be 2,000 total shareholders of record or 500 non-accredited shareholders of record.) This will allow banks and bank holding companies to increase their shareholder base without triggering SEC registration (and shareholders obtained through the “Crowdfunding” exemption would be further excluded from the count of shareholders of record. No other changes are proposed as to how to count “shareholders of record.”

The statutory threshold for exiting SEC registration would also be increased for banks and bank holding companies (but not for other companies). For banks and bank holding companies, the statutory cap before a registrant can terminate their registration under Section 12(g) and suspend their registration under Section 15(d) has been increased from 300 to 1,200 shareholders of record. If passed, this could cause a significant number of community banks to reconsider whether SEC registration is an appropriate cost for their shareholders, and may enable a significant number of public bank holding companies to “go dark” without engaging in a “going private” transaction, while also increasing the possibility of larger institutions that may exceed the new 1,200 trigger considering a going private transaction.

Class Actions Filed Against Four Georgia Banks Over ATM Physical Fee Disclosure

Bill Custer and Jennifer Dempsey — Thu, 15 Mar 2012 17:40:03 +0000

Four class action complaints have been filed in the last two weeks against four different Georgia community banks alleging that the banks have violated the Electronic Fund Transfer Act. The complaints were filed in the federal courts and all allege that the banks imposed fees on consumers who withdrew cash from the bank’s ATMs and that the banks allegedly failed to post a physical notice on the ATMs that a fee would be imposed for such services.

The Electronic Fund Transfer Act requires both a physical notice at or on the ATM in addition to the electronic notice the customer receives on the computer screen when making the withdrawal. There are statutory penalties for a failure to comply with the Act. While there is no minimum penalty proscribed for a class action, the statute provides that in a successful class action, plaintiffs may recover up to “the lesser of $500,000 or 1 percent of the net worth of the (ATM operator),” plus attorneys’ fees and costs. There may be a defense to such claims when the bank maintains procedures reasonably adapted to avoid a failure to comply with the Act and the failure to comply was a “bona fide error.”

The attorneys associated with these cases have filed similar class actions, alleging the same violations of the Electronic Fund Transfer Act, against other banks, hotels and retailers around the country.

Even where banks have been in full compliance with the physical notice requirements, many banks have found that their fee notice placards have mysteriously disappeared or have been removed by persons as yet unknown in the time periods preceding the institution of litigation against them. Please take a moment to survey all of your ATMs to ensure that they have the necessary notice affixed to them and that the notice has not been removed. We also recommend that you photograph each ATM when it goes into service and that you periodically inspect your machines and photograph them so that you will have evidence of your compliance with the Act, if subsequently needed. Additionally, if you utilize a servicing company to maintain your ATMs, we recommend that you confirm that the servicing company is periodically inspecting your machines and photographing them. The Act does provide banks with a defense when the notices are removed by third persons other than bank employees.

Bryan Cave has been defending similar class actions across the country and is fully prepared to assist its banking clients in the defense of these new actions in Georgia. If you have questions about this litigation, compliance with the statute, or the defense of these cases, please do not hesitate to call Walt Moeling (404.572.6629), Bill Custer (404.572.6828) or Jennifer Dempsey (404.572.6985).

The Next Wave of FDIC Consent Orders

Jonathan Hightower — Tue, 13 Mar 2012 18:49:51 +0000

Just as many bankers believed that the worst of the enforcement environment was behind them, a threat of “new” Consent Orders for some state non-member banks has arisen. These “new” orders are not reflective of banks for which the regulators have identified new problems but are instead based upon the FDIC’s apparent decision that orders that were “led” by state regulators are not adequate for the FDIC’s enforcement purposes. To illustrate this point, the new orders we have seen thus far have been substantively consistent with the existing state orders.

This movement by the FDIC comes at an unfortunate time given overall downward trend in the number of FDIC consent orders being issued as banks continue to identify and manage their problems. From a practical standpoint, the publication of a new FDIC order may result in perception that a bank’s condition is worsening when in fact the bank is well on its way to compliance with the existing state order.

As background, in some states, including Georgia and Florida, it has been the common practice of state regulators to issue a Consent Order (formerly referred to as an Order to Cease and Desist) following an examination led by the state regulator at which deficiencies were identified. If the FDIC led the examination, the FDIC would issue the order. If the state issued the order, the FDIC would acknowledge the order, specifically stating that the acknowledgement represented a commitment by the bank’s board of directors to the FDIC to comply with the order.

The FDIC has apparently concluded, however, that it needs to have an order in place that it issues (and not simply acknowledges) in order to meet its internal enforcement objectives. For banks receiving an order for the first time, this goal is being accomplished through the issuance of joint orders by the FDIC and the state regulator. We believe that a significant part of the FDIC’s analysis is centered on the definition of “well capitalized” in 12 C.F.R. §325.103, which requires that a bank not only meet or exceed the 5%, 6%, and 10% capital ratios that we are all familiar with but also that the bank not be subject to a written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC to maintain specific capital levels.

The FDIC believes that a bank meeting the statutory capital ratios could be deemed to continue to be “well capitalized” even if subject to a state-led order with a capital requirement. Because there are a number of important implications associated with a bank’s being less than well capitalized, including automatic application of interest rate caps on deposit products, we believe the FDIC wants to be sure that all institutions subject to orders are deemed less than well capitalized. There are also other legal implications of being subject to an order issued by a federal regulator, including those related to further enforcement actions such as civil money penalties.

If your institution is the subject of a state-led Consent Order or Order to Cease and Desist, you should expect the FDIC to ask your institution to consent to a “new” order following your next examination or in connection with any pending application. As is the case with all enforcement actions, we recommend that you consider the overall impact to your institution of consenting to the order as opposed to seeking an administrative hearing, keeping in mind that many of the order’s requirements are likely consistent with your goals to restore the condition of the bank.

In addition, we recommend that banks in this situation take measures to ensure that the new FDIC order is consistent with, or no broader than, the existing state-led order unless your bank’s circumstances justify broadening the scope of the existing order. We understand that some states are willing to take actions that eliminate duplication of regulatory burdens. Finally, because the FDIC-led orders will be published on the FDIC’s website, we recommend that institutions prepare a thoughtful public relations strategy to address any adverse publicity associated with the order.