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Virginia Federal District Court Dismisses Shareholder Derivative Action Related to Credit Card Issuer's Settlements with OCC, CFPB
On June 21, the U.S. District Court for the Eastern District of Virginia dismissed a shareholder derivative action against a national bank’s officers and directors that was based on the bank’s settlements with the CFPB and OCC over allegedly deceptive marketing of ancillary products. In re Capital One Derivative S’holder Litig., No. 1:12-cv-1100 (E.D. Va. June 21, 2013). The shareholders, relying on Delaware law, alleged that the officers and directors breached their fiduciary duty of loyalty, committed corporate waste, and were unjustly enriched by failing to prevent the allegedly deceptive sales practices at the bank’s third-party call centers which led to the consent orders. The court held that the shareholders did not adequately allege corporate waste because the bank’s settlement payments were not “transfers of assets with no corporate purpose” but instead achieved final resolution of the investigations. The unjust enrichment claim failed because the shareholders did not allege any facts indicating a relationship between the officers and directors’ compensation and the settlements with the agencies. With respect to the duty of loyalty claim, the shareholders alleged two theories: (i) that the officers and directors failed to implement controls that would have prevented the alleged misconduct, and (ii) that defendants ignored numerous “red flags” that should have alerted them to the alleged misconduct. First, the controls theory failed because the shareholders could not satisfy the demanding Caremark standard, which requires an utter failure to implement any controls. Second, most of the alleged red flags were either not actually red flags at all or there were no allegations that the individual officers and directors were aware of them. However, as to a small number of the alleged red flags, the court found the claims sufficiently plausible to allow the shareholders an opportunity to amend their complaint to add additional facts.
OCC Issues Semiannual Risk Report, Highlights Cyber Security and Anti-Money Laundering Risk
On June 18, the OCC released its Semiannual Risk Perspective, which assesses risks facing national banks and federal savings associations with regard to: (i) the operating environment, (ii) condition and performance of the banking system, (iii) funding, liquidity, and interest rate risk, and (iv) regulatory actions. Among the many issues reviewed in the report, the OCC noted that cyber threats continue to grow in sophistication and require heightened awareness and appropriate resources to identify and mitigate the associated risks. It also stated that BSA/AML threats are increasing as a result of changing methods of money laundering and an increase in the volume and sophistication of electronic banking fraud, while compliance programs are failing to evolve or incorporate appropriate controls into new products and services.
OCC Publishes Community Bank Best Practices Booklet, Holds Webinar on Community Bank Cyber Threats
On June 13, the OCC published a booklet titled “A Common Sense Approach to Community Banking,” which offers best practices the agency believes distinguish high-performing community banks from those that barely survive or fail. The booklet, which previously was distributed to national banks and federal thrifts and now is available on the OCC’s website, focuses on three interrelated areas: (i) risk assessment and management, (ii) strategic planning, and (iii) capital planning. Earlier in the week, the OCC hosted a webinar on cyber threats and vulnerabilities to raise awareness for community banks, and provided a collection of existing regulatory guidance that addresses actions banks should take to help mitigate the risks associated with information security.
OCC Provides Minority Institutions Flexibility to Raise Capital
On June 11, the OCC revised its policy statement on minority institutions to make it easier for those institutions to raise capital. The OCC acknowledged that minority institutions may be unable to accept equity investment capital from some investors because their status as a minority institution would be jeopardized if the share of minority ownership fell below 50 percent. In response, the revised statement adds discretionary language that allows the agency to continue to treat an existing minority institution as such even if it no longer meets the 51 percent ownership criteria provided that the institution (i) primarily serves the credit and economic needs of the community in which it is chartered and (ii) that community is predominantly minority.
Federal District Court Denies OCC's Motion Seeking Reconsideration of Order Compelling Production of Materials Subject to Bank Exam Privilege
On May 23, the U.S. District Court for the Southern District of New York denied the OCC’s motion for reconsideration of an April 2013 order in which the court compelled a bank and the OCC to produce various investigative files and regulatory communications over the OCC’s objection that the bank examination privilege protected such production. Wultz v. Bank of China, No. 11-1266, 2013 WL 2284881 (S.D.N.Y. May 23, 2013). In support of its motion to reconsider, the OCC argued that (i) the court failed to properly weigh long-standing principles; (ii) the decision “will be construed as an erosion of the bank examination privilege that ultimately will undermine the bank supervisory process;” and (iii) the OCC never waived the privilege and appropriately and in good faith relied upon the procedures set forth under its Touhy regulation. The court disagreed and explained that, although the OCC argued that it did not waive its right to assert privilege over the documents, the OCC never affirmatively asserted privilege over any of the specific materials at issue, or even over clearly specified categories of documents. The court also reasoned that the OCC failed to support its positions that the Second Circuit’s approach to Touhy regulations should not apply in this case and that the court failed to properly weigh the risk of a chilling effect in overriding the bank examination privilege, stating that it is “not necessary for every judicial consideration of the chilling effect to be accompanied by a lengthy paean to the virtues of candor in regulatory communications.”
Banking Agencies Delay Certain Changes to Call Reports
On May 23, the OCC, the FDIC, and the Federal Reserve Board published a notice to delay certain proposed changes to Call Report data collection pending further consideration of whether and how to proceed with the changes. The notice explains that Call Report revisions related to consumer deposit accounts, including (i) the screening question about an institution's offering of such deposits, (ii) consumer transaction and nontransaction savings deposit account balances for institutions with $1 billion or more in total assets, and (iii) data on certain service charges on consumer deposit accounts, would not take effect before March 31, 2014. Similarly, data collection regarding total liabilities of an institution’s parent depository institution holding company that is not a bank or savings and loan holding company would not take effect before the same date. Certain other changes still will take effect on the proposed June 30, 2013 date, while others will be delayed until the end of 2013.
Banking Agencies, Fannie Mae, Freddie Mac Offer Guidance Regarding Oklahoma Tornadoes
Last week, the FDIC, the OCC, Fannie Mae, and Freddie Mac issued guidance and information for banks, lenders, and servicers operating in areas impacted by recent tornadoes. The FDIC and the OCC encouraged banks to work with borrowers, extend repayment terms, restructure existing loans, or ease terms for new loans, provided such actions are consistent with sound banking practices, and to take other steps such as waiving ATM fees and late payment penalties. Fannie Mae and Freddie Mac reminded servicers of the range of borrower relief options available in the wake of a natural disaster.
Federal Reserve Board, Illinois Regulator Issue Joint Enforcement Action Against U.S. Subsidiaries of Foreign Bank, OCC Issues Parallel Action
On May 17, the Federal Reserve Board released an April 29, 2013 written agreement between the Federal Reserve Board, an Illinois state regulator, a foreign bank, and its U.S. bank holding company subsidiary (the Holding Company) regarding certain Bank Secrecy Act/Anti-Money Laundering (BSA/AML) deficiencies at the foreign bank’s Chicago branch (the Branch) and an OCC regulated subsidiary of the Holding Company. The OCC took parallel action on the same date against the Holding Company’s Chicago bank subsidiary. The Federal Reserve Board agreement requires that the Holding Company conduct a comprehensive review of its BSA/AML compliance program within 60 days, and within 90 days submit a report of its findings and recommendations, a written enhanced program, and a written plan to strengthen board oversight. Also within 90 days, the Branch must submit a written plan to improve its BSA/AML compliance, and the foreign bank, the Holding Company, and the Branch must submit an enhanced customer due diligence program. The OCC agreement requires that the Chicago bank’s board establish a compliance committee and within 90 days submit a compliance action plan. Within 30 days, the bank’s board must review its current engagement with an independent consultant, and within 90 days (i) develop a staffing plan for its internal BSA compliance department, (ii) conduct an MIS assessment, (iii) develop customer due diligence controls, and (iv) develop written suspicious activity policies and procedures. Both agreements require quarterly reporting, and neither includes a monetary penalty.
Senator Warren Pushes Federal Authorities on Bank Prosecutions
On May 14, Senator Elizabeth Warren (D-MA) sent a letter to Federal Reserve Board Chairman Ben Bernanke, Attorney General Eric Holder, and SEC Chairman Mary Jo White seeking additional information about the agencies’ respective approach to enforcement actions. Specifically, the letter asks whether the agencies have conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilt and going forward with litigation to obtain an admission. The letter notes that the OCC recently informed Ms. Warren that it does not have any such internal research or analysis and reiterates Ms. Warren’s concern that “if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial . . . the regulator has a lot less leverage in settlement negotiations.
OCC, FDIC Announce Overdraft Enforcement Actions
On April 30, the OCC and the FDIC announced parallel enforcement actions against a national bank and an affiliated state bank to resolve allegations that the institutions violated Section 5 of the FTC Act in their marketing and implementation of overdraft protection programs, checking rewards programs, and stop-payment processes for preauthorized recurring electronic fund transfers. The OCC claims that (i) bank employees failed to disclose technical limitations of the standard overdraft protection practices opt-out, (ii) the bank’s overdraft opt-in notice described fees that the bank did not actually charge, (iii) the bank failed to disclose that it would not transfer funds from a savings account to cover overdrafts in linked checking accounts if the savings account did not have funds to cover the entire overdrawn balance on a given day, even if the available funds would have covered one or more overdrawn items, (iv) the bank failed to disclose technical limitations of its preauthorized recurring electronic fund transfers that prevented it from stopping certain transfers upon customer request, and (v) the bank failed to disclose posting date requirements for its checking reward program. The OCC orders require the bank to pay approximately $2.5 million in restitution and a $5 million civil money penalty. In addition, the bank must (i) appoint an independent compliance committee, (ii) update its compliance risk management systems with appropriate policies and procedures, and (iii) adjust its written compliance risk management policy. The FDIC order requires the state bank to refund customers roughly $1.4 million and pay a $5 million civil penalty.