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.”
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.
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.
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.
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.
On September 16, 2010, the Senate adopted H.R. 5297, the Small Business Jobs Act of 2010, which includes the creation of the $30 billion Small Business Lending Fund. The House passed the Senate’s version of the bill in full on September 23, 2010, thereby sending it to President Obama for his signature. This legislation would (finally) implement the program described in President Obama’s State of the Union address (and first announced almost one year ago) from the beginning of the year to provide additional funds to community banks to lend to small businesses.
The version of the legislation is generally comparable to the version the Senate began considering in July but contains many differences from the version previously adopted by the House in June. Most significantly, the Senate-adopted bill does not permit eligible institutions to amortize losses and write-downs on certain OREO and NPAs secured by real estate. For convenience, we have posted the text of the Small Business Lending Fund provisions contained in the Senate-passed bill.
Eligibility.
Under the terms of the Senate-adopted bill, eligible depository institutions with $10 billion or less in consolidated assets (as of December 31, 2009) may apply to receive a capital infusion of up to between 3% and 5% of the institution’s risk-weighted assets, less any existing TARP CPP or CDCI funds. Institutions with $1 billion or less in consolidated assets are eligible for up to a 5% investment, while those institutions between $1 and $10 billion are only eligible for 3%. (Under TARP, only institutions with $500 million or less in consolidated assets were eligible for capital up to 5% of risk-weighted assets, so this potentially represents an increase in available funding for institutions between $500 million and $1 billion.)
Institutions on the FDIC’s problem bank list are explicitly excluded from eligibility under the Small Business Lending Fund. The bill defines the problem bank list as the list of depository institutions having a current CAMELS composite rating of 4 or 5, or such other list designated by the FDIC. The bill explicitly emphasizes that merely because a bank has a CAMELS rating of 3 or better does not limit the discretion of the Treasury Department to deny an application for funds.
Matching with Private Funds.
The Small Business Lending Fund explicitly authorizes the Treasury and federal regulators to consider making an investment conditioned on private matching investments. This authorization is not available for institutions that are specifically ineligible (i.e., those on the troubled bank list) but rather is only available to otherwise eligible institutions that the regulators or Treasury determine not to recommend to receive capital infusions.
On June 29, 2010, the Senate voted to commence debate on the Small Business Jobs and Credit Act of 2010, a bill passed by the House on June 17, 2010 which includes a $30 billion fund for small business lending through the provision of capital to community banks. This legislation would implement the program described in President Obama’s State of the Union address earlier this year. Obama has promoted the program by saying that it “takes money repaid by Wall Street banks to provide capital for community banks on Main Street” that can in turn help small businesses create jobs. In the latest version of the bill presented to the Senate, certain banks with less than $10 billion in assets would be eligible for government infusions of capital, dividend payments on which would decrease with increasing levels of small business lending. Banks are also generally permitted to use this capital to refinance existing TARP obligations. The substitute amendment currently before the Senate cuts out a provision of the House bill to permit eligible banks to amortize recent real estate loan losses over as many as 10 years.
The original Obama proposal called on Congress to transfer TARP money to create the fund, but the fund has evolved as a completely separate initiative. Acknowledging this possible confusion, Section 3111(a) of the bill specifically provides that the fund “is established as separate and distinct from the Troubled Asset Relief Program established by the Emergency Economic Stabilization Act of 2008” and that an institution “shall not, by virtue of a capital investment under the Small Business Lending Fund Program, be considered a recipient of the Troubled Asset Relief Program.” Proponents continue the political battle to detach this potentially negative association from a bill that would target recovery on Main Street.
The Small Business Lending Fund
Title III of the bill currently before the Senate establishes the fund and authorizes the government to make up to $30 billion in capital investments into eligible institutions. These investments would be similar to TARP infusions but would not result in executive compensation and other restrictions. Banks up to $10 billion in assets would generally be eligible to apply for funding. However, the Small Business Lending Fund will not be a source of capital for the banks most in need of additional capital. Banks on the FDIC’s Troubled Bank List (generally those with composite CAMELS ratings of 4 or 5) would be ineligible to participate. As with the Capital Purchase Program, the program is designed to provide assistance to otherwise healthy institutions. Each institution’s primary federal banking regulator will continue to have a significant say in whether the institution should receive any funds under the Small Business Lending Fund.