President Obama recently announced his recess appointment of former Ohio Attorney General Richard Cordray to head the CFPB. This came despite the fact that the Senate held a series of “pro forma” sessions held over the congressional recess in an attempt to preclude a recess appointment. In response, the President dismissed the procedural requirements of a recess appointment, calling the pro forma sessions ‘gimmicks.’

Insiders have speculated some consequences of the recess appointment, including retaliation by Republicans in holding up the nominations of other agency heads. But more importantly, litigation is likely to stem from Cordray’s appointment, calling into question whether the specific requirements for a recess appointment were met. There is also the technical issue of whether the Dodd-Frank Act requirement of a “Senate-confirmed director” is met, which is key in establishing the CFPB’s authority over nonbanks. Despite Cordray’s appointment, it is unclear whether the bureau can legally exercise its full powers over nonbanks.

On January 6, 2012, the Advisory Committee on Small and Emerging Companies established by the Securities and Exchange Commission (“SEC”) recommended that the SEC take immediate action to permit general solicitation and general advertising in private offerings of securities under Rule 506 of Regulation D where securities are sold only to accredited investors. Relaxing the current restrictions on general solicitation and advertising would facilitate the ability of companies to raise capital from accredited investors, who are generally viewed as able to fend for themselves. For example, relaxing these restrictions would make it easier for companies to publicize their financing plans and seek funding from investors without any pre-existing relationship.

Rule 506 of Regulation D provides a widely-used safe harbor from the registration requirements of the Securities Act of 1933 for qualifying private offerings. Under current Rule 506, neither the issuer nor any person acting on the issuer’s behalf may offer or sell securities by any form of “general solicitation or general advertising,” and securities sold pursuant to Rule 506 may only be sold to “accredited investors” or persons who, either alone or with a representative, have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of a prospective investment.

The Advisory Committee is of the view that the restrictions on general solicitation and advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to capital sources and thereby materially limit their ability to raise capital through private offerings. The Advisory Committee noted that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings where the securities are sold solely to accredited investors. Because the concepts of general solicitation and advertising are vague, the prohibition increases compliance and diligence costs for issuers of securities who seek to avoid potential activities that might be deemed to constitute general solicitation or advertising and thereby destroy the availability of the Rule 506 safe harbor.

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Effective January 1, 2012, Bryan Cave LLP elected 14 new lawyers to partnership in the firm. Bryan Cave’s strength and depth in advising community banks is further enhanced by the election of Rob Klingler and Kim Civins to the partnership.

Rob Klingler is in our Atlanta office and is a partner in our Financial Institutions group. Rob regularly counsels financial institutions, with an emphasis on regulatory compliance, mergers and acquisitions, and securities law issues. Rob has advised community banks, as well as their officers and directors, concerning issues related to the current difficult financial and regulatory environment.  Rob is a frequent public speaker about federal and state banking regulations, the Troubled Asset Relief Program (TARP), and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Prior to joining the firm, he was an assistant coach of the University of Florida Speech and Debate Team. In addition, Rob is the founder and primary writer for BankBryanCave.com.

Kim Civins is also in our Atlanta office and is a partner in our Private Client service group.  In addition to advising individuals and families in the areas of estate planning and estate administration, Kim regularly advises trust and wealth management departments of banks of all sizes with regard to compliance with federal and state laws. Prior to attending law school, Kim worked for seven years for a national sports marketing company.

The lead-participant relationship arising from a loan participation has become a fairly contentious one over the last two years as the interests of the two have diverged. For example, loan participants that may be in a troubled condition are never terribly anxious to hear that the lead bank has obtained a current appraisal of the primary collateral. Likewise, a strong loan participant my push a weak lead bank to take more decisive action regarding collecting the loan and possibly foreclosing on the collateral. Throw in the implications inherent in a loss-share transaction where a lead bank’s losses may be reimbursed by the FDIC and things really get interesting. At the end of the day, however, the lead bank and the participants generally have the same economic interest in taking steps to maximize the economic recovery on the loan. Likewise, if bad things happen on the loan then lead and participants are all in it together.

What if participants could tell the lead that it had to keep the losses while they kept the loan payments? A recent bankruptcy case from Kansas provides an interesting illustration of that situation. In the case of In re Brooke Corp., the debtor filed bankruptcy after having made three payments to Stockton National Bank, the lead bank, totaling $487,973 in the 90 days prior to filing. Stockton kept its portion of those payments and forwarded the remainder to the participants. The Bankruptcy Trustee later sued Stockton for recovery of the three payments on the grounds that they were preferential transfers. Stockton, which had sold 94.44% of the loan to the participants, prepared to take the pretty standard defense of the matter arguing that it had merely served as a “conduit” for the payments and should thus have very limited liability. Interestingly, the participants filed pleadings arguing that the lead bank was in fact liable for the entire amount, arguing that the lead bank had dominion and control over the loan proceeds.

In effect, the participants sought to bifurcate the lead-participant relationship by arguing that the lead bank had a certain amount of discretion over what to do with the loan proceeds it received and the fact that it passed them along to the participants was a nice gesture but was no different than using the proceeds to pay salaries or the rent. In a lengthy opinion the bankruptcy court rejected multiple arguments by the participants and found that whatever discretion the lead had was solely as to the administration of the loan, not to whether it could decide to keep the loan proceeds for itself rather than passing them along to the participants. Ultimately, the Trustee would be allowed to pursue the participants if in fact all of the elements of preferential transfer were met.

If you are a lead bank how do you protect yourself in this type of situation?

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With offices all over the world, Bryan Cave attorneys are often quoted in the news.  Recent Media Mentions of Financial Institutions Group attorneys include:

Hightower on BankDirector.com

Atlanta Associate Jonathan Hightower authored an article Nov. 18 for BankDirector.com concerning the pitfalls for banks negotiating lease renewals with insiders. “During the mid-2000s, it was commonplace for a bank, particularly a de novo bank, to lease some or all of their bank facilities from an entity controlled by the bank’s directors,” he wrote. “Most bank directors understand their duty to act in the best interests of the bank, but they are also facing personal financial exposure if the lease is not renewed on terms that allow the [director-owned] entity to continue to service its debt obligations. In addition, given public scrutiny of directors and officers who are perceived to have profited at the expense of the bank they serve, creating a proper process to manage these situations has never been more important.”  Click here to read the full article.

McAlpin on BankDirector.com

Atlanta Partner Jim McAlpin authored the second article in a series on “best practices” for bank directors Dec. 2 for BankDirector.com.  ”A bank board is like any other working group in that the direction and decisions of a board can be heavily influenced by members who dominate the conversation, or by members who actively discourage discussion or dissent,” wrote McAlpin, who offers tips to help all board members achieve meaningful participation.  Click here to read the full article.

Moeling in Bank Director

Atlanta Partner Walt Moeling was quoted in the fourth quarter 2011 issue of Bank Director on challenges facing new directors now and in the near future. “Business plans become much more realistic when they start out with the big picture rather than “do we really want a Wal-Mart greeter in the lobby?”  Moeling said.  ”Are we going to build for five years and sell? Are we going to acquire? Are we going to stay local or expand?”

Are any of your bank branches and offices owned by directors? That could spell trouble but it can be handled well. Here’s how.

During the mid-2000′s, it was commonplace for a bank, particularly a de novo bank, to lease some or all of their bank facilities from an entity controlled by the bank’s directors. At the time, these arrangements truly represented a “win-win” situation. The bank was able to occupy built-to-suit facilities while conserving liquidity so that cash could be deployed through making loans with attractive yields. At the same time, the directors, many of whom were real estate professionals, were able to make a sound real estate investment with the knowledge that a very stable tenant would occupy the property.

As we know, much has changed since the mid-2000′s. Vacancies in commercial properties have caused market lease rates to plummet.  Similarly, market values of commercial properties have decreased substantially. Many banks have excess liquidity caused by soft loan demand, making a potential investment in fixed assets more attractive.

Because many of these leases were written with five-year initial terms, a number of banks are now weighing their options with respect to renewal, extension or renegotiation of the leases. To make matters more complex, many director-controlled entities borrowed money to construct the bank facilities. If those notes had five-year terms, they are coming up for renewal, and the lending bank may be eager to move the commercial real estate loans off of its books.

This fact presents a particularly difficult challenge for the affected directors. Banking regulations require that transactions with affiliates be made on terms at least as favorable to the bank as those terms prevailing at the time for transactions with unaffiliated parties. Most bank directors understand their duty to act in the best interests of the bank, but they are also facing personal financial exposure if the lease is not renewed on terms that allow the entity to continue to service its debt obligations. In addition, given public scrutiny of directors and officers who are perceived to have profited at the expense of the bank they serve, creating a proper process to manage these situations has never been more important.

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The international law firm Bryan Cave LLP and 113-year-old, Denver-based Holme Roberts & Owen LLP (HRO) will combine their practices effective Jan. 1, 2012, following a recent vote by the partners of both firms. Globally, the firm will continue to be known as Bryan Cave LLP. The combination will add exceptional legal capabilities in energy, natural resources and sports law to Bryan Cave’s international resources while expanding the firm’s worldwide presence into the Rocky Mountain region and adding significant new depth and experience in California.

The combined law firm will have more than 1,100 attorneys in over 30 law and professional service offices around the globe. It is expected to rank among the 25 largest in the world.  The combination with HRO will provide additional platforms for the continued expansion of Bryan Cave’s national community banking practice.

“Combining with HRO represents a unique opportunity for both firms to expand the resources we can offer to our clients while reinforcing a shared culture dedicated to superior client service,” said Don G. Lents, chairman of Bryan Cave. “Extending our geographic reach while expanding the range of our services in California are important steps in our firm’s long-term growth. We are very pleased to have as our colleagues lawyers coming from a firm with the stature of HRO, a name that has been synonymous with the highest-quality legal work in its region for more than a century.”

Based in Denver, HRO also serves clients from offices in Boulder, Colorado Springs, San Francisco and Los Angeles. For more than 100 years, the firm has had a tradition of developing lasting relationships with the entrepreneurial businesses which built the Rocky Mountain West, including numerous energy, mining, natural resource and telecommunications and technology clients. In more recent times, the firm has been a leader in providing counsel for complex business and securities transactions, emerging tech and environmental matters. In addition, HRO has developed a nationally recognized litigation group that has handled numerous multimillion dollar cases for some of the best-known companies in the United States. With the combination, the newly formed firm will be the only international firm with full-service capabilities on the ground in Colorado.

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In recent exam cycles, bankers have generally been no strangers to heightened scrutiny by FDIC examiners on a variety of topics.  In the past several months, the insurance policies carried by banks have been added to the list of potential hot-button items.

Specifically, FDIC examiners have begun to scrutinize bank insurance policies to determine whether the policies provide coverage for civil money penalties (“CMPs”) that may be assessed against bank officers or directors. If any bank insurance policies are found on examination to contain an endorsement extending coverage for CMPs to officers or directors, the FDIC is citing such policies as being in violation of Part 359 of the FDIC’s Rules and Regulations.

Part 359, among other things, prohibits banks and affiliated holding companies from making certain “prohibited indemnification payments.” These prohibited payments include any payment or agreement to pay or reimburse bank officers or directors for any CMP or judgment resulting from any administrative or civil action which results in a final order or settlement in which that officer or director is assessed a CMP, removed from office or ordered to cease and desist from certain activities. As a matter of public policy, this provision is designed to prevent banks from bearing the costs of penalties assessed against individuals for actions that could result in harm or potential harm to a bank or to the safety and soundness or integrity of the banking system more generally.

Part 359 explicitly permits reasonable payments by banks to purchase commercial insurance policies, provided that the policy not be used to pay or reimburse an officer or director the cost of any judgment or CMP assessed against him or her. However, Part 359 does permit the insurance paid for by the bank to cover (1) legal or professional expenses incurred in connection with such a proceeding and (2) the amount of any restitution to the bank, its holding company, or its receiver.

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Today’s banking industry is constantly being buffeted by waves of financial, regulatory and operational challenges. The increased regulatory burden and related costs impact every financial institution in both the approach to doing business and the expense of doing business. The industry is in transition, with no clear path forward. As a result, there has never been a greater need for well functioning, informed and courageous boards of directors of banks and bank holding companies. There has also never been a more important time for board members to keep in mind that their responsibilities can be boiled down into one simple goal: the creation of sustainable long-term value for shareholders.

Achieving long-term value for shareholders may seem an elusive goal in the current environment. On more than one occasion, bank board members have commented to me that they feel they are now working for the benefit of the regulators. However, as with any time of turmoil and change, the challenges we now face will pass. As bank boards look for ways to strengthen their institutions, they should not overlook the opportunity to strengthen themselves as a group. One way of doing that is to adopt the practices of the most effective boards of directors.

Over the past several decades my partners and I have attended hundreds of bank board meetings, for institutions ranging in size from under $100 million in assets to well over $10 billion. Regardless of the size of the entity, we have noticed a number of common characteristics and practices of the most effective boards of directors. This is the first in a series of articles which will describe the 10 best practices we have observed among highly effective boards of directors. In this article I focus on two fundamental best practices — selecting good board members and adopting a meaningful agenda for the board meetings. 

Best Practice No. 1―Selecting Good Board Members

Some of the most challenging and distracting issues a board can face are those related to its own members. These issues typically arise in connection with conflicts of interest between board members and the banks they serve, or when board members experience financial stress. They can also arise when there are personality clashes in the boardroom, or when one or more board members seek to dominate the conversation. The best time to avoid such issues is during the selection process for new directors. Compromise and wishful thinking in the selection of directors will almost always dilute the effectiveness of the board as a whole. Key characteristics of good directors include:

• Independence―being free of conflicts.
• Time to devote to the job — including time to gain a knowledge of the industry, to prepare for board meetings, and to participate in committees
• Attention — being fully engaged and proactive as a board member.
• Courage―having a willingness to deal with tough issues.
• Curiosity — possessing an intellectual curiosity about the bank, the financial services industry and the trends impacting both.

A group of good, solid and dependable board members is, in my experience, preferable to a big-hitter, all-star line-up of directors. A board is most effective when it acts as a group, with a culture in which all members can voice their opinions, and in which probing, and sometimes difficult questions can be asked. Dominant personalities and board cultures in which constructive debate never occurs have contributed to the demise of many banks in the current downturn. Careful selection of new board members, keeping in mind the strengths and weaknesses of the other members of the board, is well worth the time and effort involved.
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