Third Circuit Affirms Whistleblowers Must Arbitrate Under Dodd-Frank

On December 8, the U.S. Court of Appeals for the Third Circuit held that application of Dodd-Frank’s Anti-Arbitration provision did not apply to causes of action asserted under the Anti-Retaliation Dodd Frank Provision due to the limiting language of the arbitration law. Khazin v. TD Ameritrade Holding Corp, No. 14-1689 (3rd Cir. Dec.8, 2014). In 2013, the plaintiff filed suit in the District of New Jersey alleging that he had been fired in the preceding year for whistleblowing. According to the complaint, the retaliation occurred after the plaintiff questioned a supervisor about the pricing of a financial product that did not comply with relevant securities regulations. The District Court ruled that Dodd Frank’s Anti-Arbitration Provision did not prohibit the enforcement of arbitration agreements that were signed before the enactment of Dodd-Frank. Rather than deciding on the timing issue, however, the Court of Appeals upheld the decision on statutory construction grounds based on the limiting language of the Anti-Arbitration provision indicating that it only applied to causes of action contained within the same section, and not all allegations under Dodd-Frank.

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Fed Governor: “Tailor Regulations to the Institution”

On December 2, Fed Governor Brainard delivered remarks at the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) Outreach Meeting in California. Governor Brainard noted the significance of safety and soundness in the banking system, but noted that some Dodd-Frank regulations should target only larger institutions so that undue burdens are not placed on community banks: “Applying a one-size-fits-all approach to regulations may produce a small benefit at a disproportionately large compliance cost to smaller institutions.” The EGRPRA review, conducted every 10 years, provides an opportunity for federal financial regulators to consider whether current regulations are outdated, unnecessary, or unduly burdensome.

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Investment Banker Nominated For Treasury Under Secretary Post

On November 12, the Obama administration nominated Antonio Weiss as Under Secretary for Domestic Finance at the Department of Treasury. If confirmed as Under Secretary, Weiss would be responsible for coordinating policies on banking, debt financing, capital markets, and financial regulation – specifically overseeing implementation of the Dodd-Frank Act. Currently, Weiss serves as the global head of investment banking at a financial advisory and asset management firm.

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Fed Issues Final Rule Limiting Bank Mergers of Large Financial Firms

On November 5, the Board finalized Reg. XX thereby implementing Section 622 of the Dodd-Frank. The final rule, which was proposed in May, prohibits a financial company from combining with another company if the resulting company’s liabilities exceed 10 percent of the aggregate consolidated liabilities of all financial companies. The final rule also adds an exemption to clarify that a financial company may continue to engage in securitization activities if it has reached the limit and establishes reporting requirements for financial companies that do not otherwise report consolidated information to the Board or other Federal banking agency. Financial companies subject to the limit include insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision. The final rule will be effective on January 1, 2015.

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Interagency Guidance Regarding Unfair Or Deceptive Credit Practices

On August 22, the CFPB and the federal banking agencies (Fed, OCC, FDIC and NCUA) issued interagency guidance regarding unfair or deceptive credit practices (UDAPs). The guidance clarifies that “the repeal of the credit practices rules applicable to banks, savings associations, and federal credit unions is not a determination that the prohibited practices contained in those rules are permissible.” Notwithstanding the repeal of these rules, the agencies preserve supervisory and enforcement authority regarding UDAPs. Consequently, the guidance cautions that “depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.” The guidance also explains that the FTC Rule remains in effect for creditors within the FTC’s jurisdiction, and can be enforced by the CFPB against creditors that fall under the CFPB’s enforcement authority.

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Federal Appeals Court Affirms Dodd-Frank Whistleblower Protections Do Not Apply Outside U.S.

On August 14, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s holding that the Dodd-Frank Act’s antiretaliation provision does not apply extraterritorially. Liu Meng-Lin v. Siemens AG, No. 13-4385, 2014 WL 3953672 (2nd Cir. Aug. 14, 2014). A foreign worker was allegedly fired by his foreign employer for internally reporting violations of U.S. anti-corruption rules, which he claimed violated the antiretaliation provision of the Dodd-Frank Act. This provision prohibits an employer from firing or otherwise discriminating against any employee who makes a disclosure that is required or protected under Sarbanes-Oxley or any other law, rule, or regulation subject to the SEC’s jurisdiction. The court first determined that the facts alleged in the complaint revealed “essentially no contact with the United States” and rejected an argument that the foreign company voluntarily subjected itself to U.S. securities laws by listing its securities on the New York Stock Exchange. The court also held that, given the longstanding presumption against extraterritoriality and the absence of any “explicit statutory evidence that Congress meant for the provision to apply extraterritorially,” the cited provision does not apply to purely foreign-based claims.

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Republican Committee Leaders Question CFPB On Recess Appointment Activities

On July 29, House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Senate Banking Committee Ranking Member Mike Crapo (R-ID) sent a letter to CFPB Director Richard Cordray questioning the CFPB’s authority to take certain actions during the period of Mr. Cordray’s recess appointment—January 4, 2012 through July 16, 2013—which was made in the same manner and on the same day as other appointments that were subsequently invalidated by the Supreme Court. Citing the Dodd-Frank Act, the letter asserts that new CFPB authorities created by the Act—as opposed to those transferred from another agency—could only be exercised by a Senate-confirmed director. The lawmakers state that as a result of the Supreme Court’s decision on recess appointments, two primary legal questions now exist regarding the CFPB’s authority during the relevant time: (i) whether the Director had authority to exercise CFPB powers as a recess appointee; and (ii) whether the Director’s ratification of actions taken during his recess appointment is valid. The letter asks the CFPB to produce by September 1, 2014: (i) “a full accounting of all CFPB actions taken” during the recess appointment period that were not derived from transferred authorities; (ii) all documents related to the validity or standing of CFPB actions taken during the recess appointment period that were not derivative of the transferred powers; (iii) all documents justifying the CFPB’s authority and the Director’s standing to ratify past actions; and (iv) all documents related to the impact of the Supreme Court’s recess appointment decision. The requests include internal documents and those involving outside counsel.

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Wisconsin Federal Court Holds Dodd-Frank Whistleblower Protections Not Available For Reported Violations Of Banking Laws

On June 4, the U.S. District Court for the Eastern District of Wisconsin held that a former bank executive cannot pursue a claim that, when the bank terminated his employment, it violated the whistleblower-protection provisions of the Dodd-Frank Act because those protections apply only to individuals who report violations of securities laws and not to those who report alleged violations of other laws, such as banking laws. Zillges v. Kenney Bank & Trust, No. 13-1287, 2014 WL 2515403 (E.D. Wis. June 4, 2014). A former bank CEO sued the bank and certain affiliated companies and individuals, and claimed that they conspired to terminate his employment and prevent him from earning stock options after he observed conduct that he believed violated federal banking laws and reported the allegedly illegal conduct to the bank’s board of directors, the FDIC, and the FTC. The court held that in order to qualify as a whistleblower under Dodd-Frank, the disclosure must relate to a violation of securities laws.  Accordingly, because the whistleblower disclosed alleged violations of only banking laws, the whistleblower provisions of Dodd-Frank did not apply. In doing so, the court explicitly side-stepped the question of whether a person is a whistleblower subject to Dodd-Frank protections if he or she makes a protected disclosure to someone other than the SEC. The court acknowledged the disagreement on that issue, which involves the interplay between the statutory definition of “whistleblower” and the protected actions listed in the statute, explaining that although the statute requires a person to provide information to the SEC in order to qualify as a whistleblower, some of the protected activities do not necessarily involve disclosures to the SEC. To date, some courts have reasoned that Congress could not have intended this result and have concluded that a person who makes a disclosure that falls within the protected activities, whether the disclosure is made to the SEC or not, is a “whistleblower” within the meaning of Dodd-Frank, while other courts have concluded that a person is a “whistleblower” only if the person makes the disclosure to the SEC.

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Federal Reserve Board Proposes Liability Concentration Limit

On May 8, the Federal Reserve Board released a proposed rule that would prohibit certain financial companies from combining with another company if the resulting financial company’s liabilities would exceed 10% of the aggregate consolidated liabilities of all financial companies. The rule is required by section 622 of the Dodd-Frank Act and would apply to insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies subject to Federal Reserve Board supervision pursuant to FSOC designation. The proposal generally defines liabilities of a financial institution as the difference between its risk-weighted assets, as adjusted to reflect exposures deducted from regulatory capital, and its total regulatory capital, though firms not subject to consolidated risk-based capital rules would measure liabilities using generally accepted accounting standards. Under the proposal, the Board would measure and disclose the aggregate liabilities of financial companies annually, and would calculate aggregate liabilities as a two-year average. Comments on the proposal are due by July 8, 2014.

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U.S. House Approves Volcker CLO Fix

On April 29, the U.S. House of Representatives passed by voice vote HR 4167, a bill that would exclude certain debt securities of collateralized loan obligations (CLOs) from the so-called Volcker Rule’s prohibition against holding an ownership interest in a hedge fund or private equity fund. Section 619 of the Dodd-Frank Act—the Volcker Rule—generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. As implemented, that prohibition would cover CLOs, which banks and numerous lawmakers assert Congress never intended for the Volcker Rule to cover. Earlier in April, the Federal Reserve Board issued a statement that it intends to exercise its authority to give banking entities two additional one-year extensions, which would extend until July 21, 2017, to conform their ownership interests in, and sponsorship of, covered CLOs. HR 4167 instead would provide a statutory solution by exempting CLOs issued before January 31, 2014 from divestiture before July 21, 2017.

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CFPB Proposes Remittance Rule Amendments

On April 15, the CFPB issued a proposed rule and request for comment to extend a temporary exception to Regulation E’s requirement that remittance transfer providers disclose certain fees and exchange rates to consumers. Pursuant to Regulation E, as amended to implement section 1073 of the Dodd-Frank Act, insured depository institutions are permitted to estimate certain third-party fees and exchange rates in connection with a remittance transfer until July 21, 2015, provided the transfer is sent from the sender’s account with the institution, and the institution is unable to determine the exact amount of the fees and rates due to circumstances outside of the institution’s control. The CFPB is proposing to exercise its statutory authority to extend this exception for an additional five years, until July 21, 2020. The agency explained that, based on its outreach to insured institutions and consumer groups, allowing the initial temporary exception to lapse would negatively affect the ability of insured institutions to send remittance transfers. Comments on the proposed rule are due within 30 days of its publication in the Federal Register. Read more…

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D.C. Circuit Rejects Merchant Challenge To Higher Cap On Debit Card Transaction Fees

On March 21, the U.S. Court of Appeals for the D.C. Circuit held that the Federal Reserve Board’s final rule imposing a 21-cent per transaction limit on debit card interchange fees (up from a 12-cent per transaction limit in its proposed rule) was based on a reasonable construction of a “poorly drafted” provision of the Dodd-Frank Act and that the Board acted reasonably in issuing a final rule requiring debit card issuers to process debit card transactions on at least two unaffiliated networks. NACS v. Bd. of Governors of the Fed. Reserve Sys., No. 13-5270, 2014 WL 1099633 (D.C. Cir. Mar. 21, 2014). The action was brought by a group of merchants challenging the increase to the interchange fee cap and implementation of anti-exclusivity rule for processing debit transactions that was less restrictive than other options. In support of their challenge, the merchants argued that in setting the cap at 21 cents the Board ignored Dodd-Frank’s command against consideration of “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The court held, in a decision that hinged on discerning statutory intent from the omission of a comma, that when setting the fee cap the Board could consider both the incremental costs associated with the authorization, clearance, and settlement of debit card transactions (ACS costs) and other, additional, non-ACS costs associated with a particular transaction (such as software and equipment). The court further concluded that the Board could consider all ACS costs, network processing fees, and fraud losses. The court, however, remanded the question of whether the Board could also consider transaction-monitoring costs when setting the fee cap, given that monitoring costs are already accounted for in another portion of the statute. Finally, the court rejected the merchants’ argument that the Board’s final rule should have required the card issuers to allow their cards to be processed on at least two unaffiliated networks per method of authentication (i.e., PIN authentication or signature authentication) holding that the statute goes no further than preventing card issuers or networks from requiring the exclusive use of a particular network.

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Illinois AG Sues To Enforce Dodd-Frank “Abusive” Prohibition

On March 19, Illinois Attorney General (AG) Lisa Madigan announced a suit against a lender for allegedly offering a short-term credit product designed to evade the state’s usury cap. The AG claims the lender offers a revolving line of credit with advertised interest rates of 18 to 24%, and then adds on “account protection fees.” The AG characterizes those fees as interest substantially in excess of the state’s 36% usury cap. According to the AG, after a borrower takes out the short-term loan, the lender allegedly provides a payment schedule and instructs the borrower to make minimum payments, which consumers who filed complaints with the AG’s office believed was a timeline to pay off the full debt. The complaint is the AG’s first under the Dodd-Frank Act and claims that the lender’s practices take unreasonable advantage of consumers and constitute abusive practices. The complaint also alleges violations of the state Consumer Fraud and Deceptive Businesses Practice Act and seeks restitution, civil penalties, disgorgement, and an order nullifying all existing contracts with Illinois consumers and prohibiting the company from selling lines of credit and revolving credit in Illinois.

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Prudential Regulators Finalize Midsize Bank Stress Test Guidance

On March 5, the Federal Reserve Board, the OCC, and the FDIC issued final guidance for stress tests conducted by banking institutions with more than $10 billion but less than $50 billion in total consolidated assets. Under Dodd-Frank Act-mandated regulations adopted in October 2012, such firms are required to conduct annual stress tests. The guidance discusses (i) supervisory expectations for stress test practices, (ii) provides examples of practices that would be consistent with those expectations, and (iii) offers additional details about stress test methodologies. Covered institutions are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.

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SDNY Holds Whistleblowers Not Entitled To Retroactive Application Of Dodd-Frank Protections

On February 21, the U.S. District Court for the Southern District of New York held that the Dodd-Frank Act’s whistleblower protection provisions could not be applied retroactively to an alleged retaliation that occurred before the effective date of the statute. Ahmad v. Morgan Stanley & Co., Inc., No. 13-6394, 2014 WL 700339 (S.D.N.Y. Feb. 21, 2014). A former employee of a financial institution filed suit against his former employer under Dodd-Frank, alleging that he had been harassed and intimidated for his attempts to raise concerns during audits of loans made by the institution. Although the alleged retaliation occurred before the effective date of Dodd-Frank, the employee argued that the statute’s whistleblower provisions—which broadly prohibit employers from discriminating, harassing, terminating or otherwise punishing employee whistleblowers for their lawful conduct—were merely technical revisions to whistleblower protections that already existed under the Sarbanes-Oxley Act of 2002, and therefore the Dodd-Frank act protections apply retroactively. The court disagreed and held that the Dodd-Frank created an “entirely new whistleblower cause of action,” distinct from that provided by Sarbanes-Oxley. In particular, the court pointed to the plain text of Dodd-Frank, which identifies the relevant provisions as a “cause of action,” and allows plaintiffs to seek double back-pay for retaliation, a remedy not available under Sarbanes-Oxley. The court dismissed the former employee’s suit with prejudice.

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