Iowa Banking Law Blog

The Dodd Financial Reform Bill’s Impact on Affiliate Transactions

Section 23A limits certain transactions between banks and their affiliates.  Under Senator Chris Dodd’s financial reform legislation, several new types of transactions would be subject to Section 23A limits. 

 

Currently, Section 23A limits “covered transactions” between banks and affiliates to 10% (as to any single affiliate) or 20% (as to all affiliates on an aggregate basis) of the bank’s capital stock and surplus. 

 

Loans or extensions of credit to affiliates, affiliate asset purchases, affiliate securities or debt instruments as collateral for a loan to anyone, guarantees, acceptances, letters of credit and so forth on behalf of an affiliated are subject to these limits.

 

Under Dodd’s bill, securities borrowing or lending transactions with affiliates that result in the bank’s having credit exposure to the affiliate would become “covered transactions” subject to the limits, as would any derivative transaction (i.e., not just credit derivative transactions) with an affiliate that caused the bank to have credit exposure to the affiliate.  While the Fed may exempt certain transactions from 23A’s applicability, it can do so only by regulation, and even then, the FDIC chair has veto power that can be exercised later.  Furthermore, while the Comptroller may exempt national banks and the FDIC may exempt state banks, the FDIC Chair can later veto such exemptions.

 

The bill does provide the Fed with some leeway to determine the effect of netting arrangements.

 

The Dodd legislation differs from the House bill on the 23A issue by including fewer derivative transactions.  In the House bill, in addition to derivative transactions that involve actual credit exposure to the affiliate, ones that may do so in the future are also included.  That is not the case in the Dodd bill, which contains a more limited definition.  The Dodd bill is stricter than the House bill, however, when it comes to the manner in which exemptions may be granted.  Unlike the House bill, which permits exemptions by order or regulation, Dodd's bill requires that exemptions be granted through regulation.  Importantly, Dodd's legislation permits the Fed to consider netting arrangements, which could help reduce credit exposure amounts.

 

For further information, please contact L. Allyn Dixon, Jr. at 515-246-4520 or adixon@dickinsonlaw.com.

Bank Employee Terminated for Refusing to Open Customer Account in Violation of Federal Regulations; Claims Retaliatory Discharge

This Tennessee appellate case is instructive for banks located in Iowa and elsewhere regarding employees who claim they have been terminated for failing to violate banking statutes and regulations.

 

In VanCleave v. Reelfoot Bank, 2009 WL 3518211 (Tenn. App. 2009), the plaintiff, Mary Beth VanCleave, had been employed by Reelfoot Bank as an Assistant Vice President for approximately 14 years.  A long-time customer of the bank asked VanCleave to open an account for him.  VanCleave was aware that the customer had previously had overdue loans and that the customer’s other accounts had been subject to executions. In meeting with VanCleave about opening the new account, the customer explained he wanted to open the  account in his employer’s name, with a check made payable to the employer, and that any checks written on the account could only be signed by the customer.  The customer further explained the check “was really [his] money,” not the employer’s.  VanCleave believed she would be violating banking laws by doing what the customer asked; therefore, she refused unless the customer would agree to sign a signature card and provide identification.  The customer refused.  After another bank employee set up the account at the direction of higher management (but only after the employer came in to set it up), VanCleave was terminated. 

 

VanCleave sued the bank for retaliatory discharge, alleging that she did not open the account in the manner the customer requested because she was protecting the bank, complying with banking laws, and acting in accordance with how she had been trained to set up accounts. The trial court dismissed VanCleave’s case on the bank’s motion for summary judgment because the Court concluded the underlying purpose of VanCleave’s actions was not “to protect the public,” but only to protect the bank. 

 

Under Iowa law, a cause of action for this type of claim requires that the plaintiff show: (1) the existence of a clearly defined public policy that protects employee activity; (2) the public policy would be jeopardized by the discharge from employment; (3) the employee engaged in the protected activity, and that this conduct was the reason for the employee’s discharge; and (4) there was no overriding business justification for the employee’s termination.  Tennessee law is similar in most respects to Iowa law regarding this type of claim, and the Tennessee appellate court found that VanCleave’s case should not have been dismissed, because she presented evidence that she believed her refusal to do what the customer wanted involved an important public policy concern, not that she was somehow protecting the public by her actions.  The Court further found that among the laws the employee believed were implicated was the Bank Secrecy Act.  In addition, whether VanCleave believed she was protecting herself, the bank, or the “public good” was immaterial.  The Court concluded it was sufficient that the basis for the refusal to participate was her belief that doing as the customer asked would violate banking regulations, go against her own training, and put the bank in jeopardy.  This case is instructive generally for claims of “retaliatory discharge” or “discharge in violation of public policy”; however, other jurisdictions may have different standards.

 

If you have questions, please contact Rebecca Boyd Dublinske at 515-246-4505 or rdublinske@dickinsonlaw.com.