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Financial Services Law Insights and Observations


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  • Fifth Circuit affirms dismissal of Fannie, Freddie shareholders’ claims related to FHFA removal restriction and funding


    On October 12, the U.S. Court of Appeals for the Fifth Circuit affirmed dismissal of Fannie Mae and Freddie Mac shareholders’ claims that the FHFA’s unconstitutional removal restriction caused them harm and that the FHFA’s funding mechanism is inconsistent with the Appropriations Clause. After the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, it entered into several preferred stock purchase agreements with the U.S. Treasury. As a result of these agreements, any value the companies generated would go to the Treasury and not to junior preferred and common stockholders such as plaintiffs.

    The plaintiff shareholders sued in 2016, arguing that the “for cause” removal protection for the director of the FHFA was unconstitutional. The district court granted summary judgment in favor of FHFA, but a panel of the 5th Circuit reversed. Sitting en banc, the 5th Circuit then determined that the removal provision violated the separation of powers, and held that the proper remedy was to sever the removal restriction from the rest of the authorizing statute. On further appeal, the Supreme Court held that for-cause restriction on the President’s removal authority violates the separation of powers, but it refused to hold that the relevant preferred stock purchase agreement must be undone.

    The Supreme Court remanded the case for lower courts to resolve whether the unconstitutional removal provision caused harm to plaintiffs as shareholders, and the 5th Circuit, again sitting en banc, remanded that question to the district court. Plaintiffs filed an amended complaint on remand, bringing claims under the Administrative Procedure Act (“APA”) and directly under the Constitution. The amended complaint also alleged, for the first time, that the FHFA’s financing structure violates the Appropriations Clause. Defendants moved to dismiss, and the district court granted the motion in its entirety and dismissed all claims with prejudice.

    The 5th Circuit determined that the removal claims were within the scope of the remand order, contrary to the district court’s conclusion, but that the plaintiff’s APA claim was barred by an anti-injunction clause in the authorizing statute. Turning to the Constitutional claim, the 5th Circuit concluded that judicial review was not precluded and proceeded to the merits of the claim.

    To show compensable harm from the unconstitutional removal provision, plaintiffs had to allege, among other things, a “nexus between the desire to remove and the challenged actions taken by the insulated actor.” More specifically, they had to allege a connection between the Trump Administration’s desire to remove the director of the FHFA and the Administration’s failure to have FHFA exit the conservatorships and return Fannie Mae and Freddie Mac to private control. The amended complaint, however, failed to plead facts demonstrating that the Trump Administration’s purported plan for re-privatization would have been completed if President Trump had been able to remove the existing FHFA director. Those allegations, the Fifth Circuit held, were insufficient.

    The 5th Circuit agreed with the district court that the plaintiffs’ Appropriations Clause argument was outside the mandate of the earlier remand order. The appeals court reasoned that the remand order “[left] no opening for plaintiffs to bring a challenge under a completely different constitutional theory for the first time on remand,” nor was there an intervening change in the law such that the mandate rule would not apply.

    Courts Fifth Circuit Appellate FHFA Fannie Mae Freddie Mac Shareholders Constitution U.S. Supreme Court

  • 8th Circuit lets GSE shareholders seek retrospective relief


    On October 6, the U.S. Court of Appeals for the Eighth Circuit held that Fannie Mae and Freddie Mac shareholders have standing to seek retrospective, but not prospective, relief related to their claims that they suffered damages as a result of the FHFA’s leadership structure. The shareholders alleged FHFA’s leadership structure and appointments violated the appointments clause, the separation of powers, and the non-delegation doctrine. Among other things, the shareholders claimed that (i) the Housing and Economic Recovery Act (Recovery Act), which created the agency, violated separation of powers principles because it only allowed the president to fire the FHFA director “for cause,” and (ii) FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). The district court dismissed the claims for lack of standing, and in the alternative, rejected them on the merits.

    The 8th Circuit began by rejecting the district court’s holding that the shareholders lacked standing. Relying on the U.S. Supreme Court’s recent ruling in Collins v. Yellen (covered by InfoBytes here), the appellate court held that the shareholders’ alleged injury flowed from the adoption of the agreement containing the net worth sweep by FHFA’s acting director, who did not properly hold office. However, the shareholders were limited to seeking retrospective relief, because prospective relief was mooted by the adoption of subsequent amendments to the agreement by validly-appointed directors.

    However, the appellate court went on to hold that the shareholders were not entitled to relief based on their argument that the acting director had been in office too long in an “acting” role when he adopted the agreement. Even if the shareholders were correct, the acting director’s decisions were valid under the de facto officer doctrine, which confers validity on the acts of persons operating “under the color of official title even though it is later discovered that the legality of that person’s appointment or election to office is deficient.” Moreover, even if the de facto officer doctrine did not control, “[a]ny defect was resolved when the subsequent FHFA directors—none of whose appointments were challenged—ratified the third amendment.”

    The 8th Circuit also rejected the argument that Congress unlawfully delegated authority to FHFA in the Recovery Act, finding that the statute directs FHFA “to act as a ‘conservator,’ with clear and recognizable instructions.”

    Finally, the 8th Circuit did agree with the shareholders that FHFA’s leadership structure was unconstitutional because, as the Court held in Collins, it limited the president’s ability to remove the director. But the appellate court rejected the shareholders’ request that it vacate the adoption of the agreement containing the net worth sweep as a result, noting that the acting director was always “removable at will,” and that there was no allegation that subsequent agency directors (who took actions to implement the agreement) were appointed improperly. Still, the appellate court noted that, in Collins, the Court had remanded the case for a determination whether the constitutional violation “caused compensable harm” to the plaintiffs, and it did the same here.

    Courts Fannie Mae Freddie Mac GSE FHFA Single-Director Structure U.S. Supreme Court Shareholders

  • Louisiana Office of Financial Institutions issues declaration to state-chartered financial institutions

    State Issues

    On June 5, the Louisiana Office of Financial Institutions issued an emergency declaration granting parity to Louisiana state-chartered financial institutions with federally-chartered financial institutions as it relates to loans made under the Small Business Administration’s Paycheck Protection Program. As such, loans made under the program will be excluded from the legal lending limits of Louisiana state-chartered institutions. This guidance follows previous guidance issued by Louisiana on the same topic, which was previously discussed here. Further, the emergency declaration grants state-chartered financial institutions the authority to (i) temporarily close an existing branch office; (ii) establish a temporary location; and (iii) reduce operations, products, and services. Additionally, state-chartered financial institutions unable to comply with Louisiana law regarding annual meetings may, provided certain requirements are met, (i) permit shareholders or members to participate by means of remote communication or (ii) hold the annual meeting without a physical location. The declaration is effective until June 26, 2020, unless terminated sooner.

    State Issues Covid-19 Louisiana Financial Institutions SBA Shareholders

  • OCC permits remote director, shareholder, and member meetings

    Federal Issues

    On May 26, the Office of the Comptroller of the Currency announced an interim final rule that would permit national banks and federal savings associations to hold all board of director, shareholder and member meetings telephonically or electronically, including after the Covid-19 emergency ends. The OCC also published optional model bylaws for mutual savings associations and federal savings associations to authorize and govern telephonic and electronic meetings. The interim final rule takes effect on May 28, and comments must be received by July 13, 2020.

    Federal Issues Covid-19 OCC Shareholders Directors & Officers Bank Compliance

  • Tennessee extends timeline for bank examinations and authorizes virtual shareholder meetings during pandemic

    State Issues

    On May 12, Tennessee Governor Bill Lee issued Executive Order No. 36 suspending or amending a variety of statutory and regulatory requirements to facilitate the treatment and containment of Covid-19.  These include, among other things, extending examination cycles for financial institutions, extending timing requirements for securities registrations, and allowing for virtual shareholder meetings. The order will be in effect until June 30, unless amended or revised.

    State Issues Covid-19 Tennessee Banking Examination Shareholders Securities

  • Rhode Island extends Covid-19 executive orders

    State Issues

    On May 6, the governor of Rhode Island extended multiple executive orders related to the Covid-19 pandemic until June 5, 2020. These include, among others, orders related to quarantines, remote corporate and shareholder meetings, and unemployment insurance.

    State Issues Covid-19 Rhode Island Shareholders Insurance

  • Tennessee authorizes remote shareholder meetings

    State Issues

    On May 1, the governor of Tennessee issued Executive Order No. 32, which authorizes certain corporations to utilize remote communications for shareholder meetings.  For corporations holding remote shareholder meetings, the order suspends requirements that corporations make a list of shareholders entitled to receive notice of the meeting available at the meeting, provided the list is made available on an electronic network to which shareholders are granted access.

    State Issues Covid-19 Tennessee Shareholders

  • Minnesota issues executive order allowing shareholders flexibility to hold remote meetings

    State Issues

    On April 24, the Minnesota governor issued an executive order permitting Minnesota businesses and shareholders of corporations subject to the reporting requirements of sections 13(a) and 15(d) of the Securities Exchange Act of 1934 to conduct remote shareholder meetings, provided that certain requirements are met. Additionally, if it is impracticable for a corporation to convene a currently noticed meeting of shareholders at a physical location due to Covid-19, the corporation may adjourn the meeting to another date or time, to be held by remote communication, provided certain requirements are met.

    State Issues Covid-19 Minnesota Shareholders

  • NYDFS permits depository institutions to hold remote meetings

    State Issues

    On April 16, the New York State Department of Financial Services announced that it issued an order permitting state-chartered banks, credit unions, mutual savings and loan associations, and mutual savings banks to hold meetings virtually. These include stockholder, shareholder and accountholder meetings. The order also extends the timing requirement for annual stockholder meetings so that meetings may be held within seven months of the institution’s fiscal year end, instead of four months.

    State Issues Covid-19 NYDFS Bank Charter Credit Union Shareholders

  • North Carolina authorizes remote shareholder meetings

    State Issues

    On April 1, the North Carolina governor issued an executive order permitting corporations to hold shareholder meetings by remote communication. The order will remain in effect for 60 days unless rescinded or superseded with another order.

    State Issues Covid-19 North Carolina Shareholders


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