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Nutter Bank Report, November 2010

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11.30.2010 | Legal Update

Headlines
1. FDIC Expects Banks to Monitor Customers’ Use of Automated ODP Programs
2. Proposed Rules Would Implement Dodd-Frank Act Changes to the Assessment System
3. Final Rule Implements Unlimited Coverage for Noninterest-Bearing Transaction Accounts
4. Federal Reserve Proposes Timeline for Conformity with the Volcker Rule
5. Other Developments: SARs and Whistleblowers

1. FDIC Expects Banks to Monitor Customers’ Use of Automated ODP Programs

The FDIC has issued final guidance (entitled FDIC Overdraft Payment Supervisory Guidance) addressing risks associated with overdraft payment (ODP) programs, which includes specific supervisory expectations for the management of automated ODP programs. The guidance released on November 24 says that the FDIC expects depository institutions to monitor accounts for excessive, chronic use of ODP coverage and, if a customer overdraws his or her account on more than 6 occasions where a fee is charged in a rolling 12-month period, “undertake meaningful and effective follow-up action.” The FDIC suggests that in such cases the institution should consider contacting the customer to discuss less costly alternatives to the automated ODP program and giving the customer a reasonable opportunity to decide whether to continue the fee-based ODP program or choose another alternative. According to the guidance, the FDIC expects institutions to promptly honor customers’ requests to opt out of ODP coverage for non-electronic transactions and give customers the opportunity to affirmatively choose the ODP product that overall best meets their needs. The guidance says that the FDIC also expects institutions to impose daily limits on overdraft fees and to consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount. The guidance also warns institutions not to process transactions in a manner designed to maximize the cost to consumers, such as by processing checks from the largest to the smallest. The FDIC expects institutions to take any additional efforts necessary to mitigate risks posed by ODP programs in conformity with the new guidance by July 1, 2011.

      Nutter Notes: Although the guidance focuses on automated OPD programs, it also provides information about compliance with existing regulatory requirements, including requirements to identify, manage and mitigate risks associated with ODP programs, such as risks that could result in serious financial harm to consumers. According to the guidance, the FDIC expects that compliance and risk management systems, policies, and procedures will ensure that an institution’s ODP programs will be managed in accordance with the 2005 Joint Guidance on Overdraft Protection Programs (FIL-11-2005) and the Federal Reserve’s November 12, 2009 amendments to Regulation E. Under the new Regulation E requirements that took effect on July 1, 2010, depository institutions must provide notice and a reasonable opportunity for customers to opt-in to the payment of ATM and point-of-sale (POS) overdrafts for a fee. The new FDIC guidance says that institutions should avoid steering frequent users of fee-based overdraft products to opt-in to ODP programs while obscuring the availability of alternatives and that any such steering activity raises potential legal issues, including fair lending, and concerns about unfair or deceptive acts or practices, and will be closely scrutinized by examiners. The guidance also states that overdraft payment programs that are found to pose unacceptable safety and soundness or compliance risks will be factored into examination ratings.

2. Proposed Rules Would Implement Dodd-Frank Act Changes to the Assessment System

The FDIC has approved two proposed rules that would amend its deposit insurance assessment regulations. The first proposal issued on November 9 would change the assessment base from one based on domestic deposits to one based on total liabilities, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Under the proposed rule, the assessment base would be defined as “average consolidated total assets minus average tangible equity.” The proposed rule would also permit certain reductions for banker’s banks and custodial banks, revise existing adjustments to assessment rates, and revise deposit insurance assessment rate schedules in light of the changes to the assessment base. Comments on the proposed rule are due by January 3, 2011. The second assessment-related proposal replaces a proposed rule revising the deposit insurance assessment system for large institutions (those with at least $10 billion in assets) that was approved by the FDIC on April 13. In addition to conforming changes required by the Dodd-Frank Act, the large bank proposal would eliminate risk categories and debt ratings from the assessment calculation for large banks and would instead use scorecards that include financial measures that are predictive of long-term performance. Comments on the large bank proposal are due by January 10, 2011.

      Nutter Notes: The Dodd-Frank Act requires that the FDIC amend its regulations to redefine the assessment base used for calculating deposit insurance assessments from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Average tangible equity would be defined as average end-of-month Tier 1 capital for all institutions, but institutions with less than $1 billion in assets could use end-of-quarter Tier 1 capital. Since the new assessment base would be much larger than the current base, the FDIC is also proposing to lower assessment rates to avoid significantly altering the total amount of revenue collected from the industry. Changes to existing adjustments to assessment rates would include conforming changes to the unsecured debt adjustment and brokered deposit adjustment, eliminating the secured liability adjustment, and creating a new adjustment that would increase the assessment rate for an institution that holds long-term unsecured debt issued by another insured depository institution (Depository Institution Debt Adjustment). Under the proposed rule, effective April 1, 2011, the initial and total base assessment rates (in basis points) would be as follows:

PROPOSED INITIAL AND TOTAL BASE ASSESSMENT RATES*

Risk  Category I
 Risk Category II
 Risk Category III Risk Category IV
Large and  highly  complex institutions
Initial base assessment rate
 5–9
 14
 23
 35
 5–35
Unsecured debt adjustment **
 (4.5)–0
 (5)–0
 (5)–0
 (5)–0
 (5)–0
Brokered deposit adjustment
 -
 0–10
 0–10
 0–10
 0–10
Total Base Assessment Rate
 2.5–9
 9–24
 18–33
 30–45
 2.5–45

* Total base assessment rates do not include the proposed Depository Institution Debt Adjustment.
** The unsecured debt adjustment could not exceed the lesser of 5 basis points or 50 percent of an institution’s initial base assessment rate; for example, an institution in Risk Category I with an initial base assessment rate of 5 basis points would have a maximum unsecured debt adjustment of 2.5 basis points.

3. Final Rule Implements Unlimited Coverage for Noninterest-Bearing Transaction Accounts

The FDIC has approved a final rule to implement provisions of the Dodd-Frank Act to provide temporary unlimited coverage for noninterest-bearing transaction accounts. The final rule adopted on November 9 provides that separate, unlimited coverage for qualifying accounts will become effective on December 31, 2010, and will end on December 31, 2012. As of the effective date, all funds held in noninterest-bearing transaction accounts will be fully insured, without limit. This coverage is separate from, and in addition to, the coverage provided to depositors for other accounts at an insured depository institution. The final rule includes notice and disclosure requirements that all insured depository institutions must implement by December 31, 2010. Insured depository institutions will be required to post a prescribed notice in their main office, each branch and, if applicable, on their Web site. In addition, any institution that currently participates in the Transaction Account Guarantee Program must notify NOW (negotiable order of withdrawal) account depositors and IOLTA (Interest on Lawyer Trust Accounts) depositors that, beginning January 1, 2011, those accounts no longer will be eligible for unlimited protection. Institutions must also notify customers individually of any action they take that affects the deposit insurance coverage of funds held in noninterest-bearing transaction accounts.

      Nutter Notes: The FDIC’s current Transaction Account Guarantee Program expires December 31, 2010. The new temporary provision for unlimited coverage of deposit insurance for noninterest-bearing transaction accounts is similar to the Transaction Account Guarantee Program but differs significantly in the definition of “noninterest-bearing transaction account.” The Transaction Account Guarantee Program includes low-interest NOW and IOLTA accounts. Noninterest-bearing accounts, as defined in the Dodd-Frank Act, include only traditional, noninterest-bearing demand deposit accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held by a business, individual or other type of depositor. The final rule expressly states that NOW and IOLTA accounts are not covered under the Dodd-Frank Act definition of noninterest-bearing transaction accounts and do not qualify for temporary unlimited coverage. Under the Transaction Account Guarantee Program, institutions could choose whether to participate in the additional coverage, but the Dodd-Frank Act does not permit institutions to opt-out of the new coverage for noninterest-bearing transaction accounts. The FDIC will not charge a separate assessment for the insurance of noninterest-bearing transaction accounts required by the Dodd-Frank Act. The FDIC had imposed a separate assessment on institutions that participated in the Transaction Account Guarantee Program.

4. Federal Reserve Proposes Timeline for Conformity with the Volcker Rule

The Federal Reserve has requested comments on a proposed rule that would give banking organizations a certain period of time to conform their activities and investments to the prohibitions and restrictions on proprietary trading and relationships with hedge funds and private equity funds imposed by the provisions of Section 619 of the Dodd-Frank Act commonly referred to as the “Volcker Rule.” Under the proposed rule released on November 17, banking organizations would generally have 2 years after the earlier of July 21, 2012 or the date that is 12 months after the date on which the Federal Reserve adopts final rules implementing the Volcker Rule to wind down, sell, or otherwise conform their activities, investments, and relationships to the requirements of the Volcker Rule. Certain defined terms and other issues related to implementation of the Volcker Rule are the subject of a separate interagency rulemaking process; the current proposed rule only addresses those matters that are related to implementation of the conformance period provisions of the Volcker Rule. Comments on the proposed rule are due by January 10, 2011.

    Nutter Notes: The Volcker Rule generally prohibits banking organizations from engaging in proprietary trading in securities, derivatives, or certain other financial instruments, and from investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The Dodd-Frank Act allows the Federal Reserve to extend the 2-year conformance period by up to 3 additional 1-year periods, for an aggregate conformance period of 5 years. In order to grant any extension under the proposed rule, the Federal Reserve must determine that the extension is consistent with the purposes of the Volcker Rule and would not be detrimental to the public interest. The proposed rule requires that any banking organization that seeks a 1-year extension of the conformance period submit a written request to the Federal Reserve. Any such request must provide the reasons why the banking organization believes the extension should be granted and provide a detailed explanation of the banking organization’s plan for divesting or conforming the activity or investment. The proposed rule would allow the Federal Reserve to impose conditions on any extension to protect the safety and soundness of banking organizations or the financial stability of the United States, among other reasons.

5. Other Developments: SARs and Whistleblowers

  • Final Rule Strengthens SAR Confidentiality; Guidance Provides for Affiliate Sharing

The Financial Crimes Enforcement Network (FinCEN) released a final rule on November 23, along with an advisory and guidance documents, that together clarify and strengthen the scope of Suspicious Activity Report (SAR) confidentiality, and expand the ability of certain financial institutions to share SAR information with most affiliates.

       Nutter Notes: The final rule clarifies the scope of the statutory prohibition against the disclosure by a financial institution or by a government agency of a SAR or any information that would reveal the existence of a SAR. FinCEN’s previous guidance permitted the sharing of SARs with head offices and parent companies. Among other changes, the new guidance allows for the sharing of a SAR with a domestic affiliate that is subject to a SAR rule and is under common ownership.

  • SEC Proposes Whistleblower Award Program Under the Dodd-Frank Act

The Securities and Exchange Commission on November 3 issued a proposed rule under the Dodd-Frank Act to create a whistleblower program to reward individuals who provide the SEC with high-quality tips that lead to successful enforcement actions. Comments on the proposed rule are due by December 17.

    Nutter Notes: To be considered for an award, a whistleblower must voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.
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Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

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