October 2011

Introduction from unduly burdensome and duplicative state regulation.” Additionally, Bank of America cited 12 The Dodd-Frank Reform and Consumer C.F.R. § 7.4008(d)(1), which, at the time the action Protection Act was enacted as a measure to promote was filed in November 2010, stated that “state laws financial stability and protection for consumers that obstruct, impair, or condition a ’s through increased regulation of nearly every ability to fully exercise its Federally authorized aspect of the consumer finance industry. Since its non-real estate lending powers are not applicable to enactment, the Dodd-Frank Act has already had national banks.” significant impact; yet, the great weight of this sprawling legislation is yet to be seen. Given the Addressing Bank of America’s arguments, the infancy of the Dodd-Frank’s provisions, as well as Court examined two important changes to NBA the recent transfer of authority over administration preemption following the Dodd-Frank Act. First, of a number of federal financial laws to the newly the Act added an entirely new provision to the NBA, created Bureau of Consumer Financial Protection, 12 U.S.C. §25b, addressing preemption. Second, the increased litigation seeking to clarify this new OCC, pursuant to the Act, published an amended legislation is inevitable. version of 12 C.F.R. § 7.4008(d)(1) with its principal preemption provision moved to subsection (e). The In an effort to stay apprised of these significant revised section 7.4008(e) provides: industry changes, Burr & Forman’s Dodd-Frank Newsletter will serve as a monthly update of recent State laws on the following subjects are not case law, news, and developments related to the inconsistent with the non-real estate lending Dodd-Frank Act. powers of national banks and apply to national banks to the extent consistent with the decision of the Supreme Court in Barnett Bank - - RECENT CASES - - of Marion County, N.A., v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 Preemption (1996): (1) Contracts; (2) Torts; (3) Criminal Cline v. Bank of America, N.A., No. 2:10-1295, law; (4) Rights to collect debts; (5) Acquisition 2011 WL 4857934 (S.D. W. Va. Oct. 13, 2011). and transfer of property; (6) Taxation; (7) Zoning; and (8) Any other law that the OCC Denying Bank of America’s motion for judgment on determines to be applicable to national the pleadings, the Court held that Plaintiff Mark banks in accordance with the decisions of the Cline’s claims were not preempted by National Supreme Court in Barnett Bank of Marion Bank Act (“NBA”). County, N.A., v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), or Cline asserted several state law claims and that is made applicable by Federal law. violations of the West Virginia Consumer Credit and Protection Act (“WVCCPA”) regarding Bank 12 C.F.R. § 7.4008(e). of America’s loan collection activities. Relying on Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007), In light of this new provision, the Court noted Bank of America argued generally that under the that a preemption determination is no longer NBA, “federal control shields national banking focused whether the state law “obstructs, impairs, DODD-FRANK NEWS or conditions” a national bank’s full exercise of claims were not preempted by the NBA. Because its lending powers. See Dodd-Frank Final Rule, neither section 25b nor section 7.4008 supported 76 Fed. Reg. 43549-01 (July 21, 2011). Instead, preemption of Cline’s claims, the Court denied the focus is on the preemption standard set out Bank of America’s motion for judgment on the in Barnett Bank of Marion County v. Nelson, 517 pleadings. U.S. 25 (1996). See id. The Court further stated that the Barnett Bank conflict preemption analysis focuses on whether the targeted statute either “(1) Shareholder Approval of Executive imposes an obligation on a national bank that is in Compensation direct conflict with national law, or (2) stands as an obstacle to the accomplishment and execution of NECA-IBEW Pension Fund ex rel. Cincinnati the full purposes and objectives of Congress.” 2011 Bell, Inc. v. Cox, No. 1:11-cv-451, 2011 WL WL 4857934 at *9. Applying this new standard, 4383368 (S.D. Sept. 20, 2001). the Court determined that the WVCCA provisions neither directly conflicted with the federal law, nor Plaintiff Phillip Cox, on behalf of shareholders, did they stand as an obstacle to the accomplishment sued the directors of Cincinnati Bell, Inc for breach and execution of the full purposes and objectives of the duty of loyalty after the directors paid $4 of Congress. Thus, 12 C.F.R. § 7.4008(e) did not million in bonuses and $4.5 million in compensation support preemption of Cline’s claims. to the chief executive. The board elected to make these payments after the company suffered a $61.3 Further, the Court analyzed Cline’s claims in million decline in net income, among other losses. light of the new section 25b to the NBA, which Cincinnati Bell moved to dismiss Cox’s claims of specifically provides that a state consumer financial breach of duty of loyalty and unjust enrichment. In law is preempted only if (i) its application would support, Cincinnati Bell argued that the board of have a discriminatory effect on national banks, directors was protected by the business judgment (ii) application of the Barnett Bank preemption rule, that Cox did not first make demand upon the analysis would require such preemption, or (iii) directors to sue themselves, and that Cox’s unjust it is preempted by some other provision of federal enrichment claim failed because the executives law. See 12 U.S.C. § 26b. Importantly, the Court rendered services to the company. noted that the preemption standard in section 25b was “rather narrow,” and applied only to “state Denying the motion to dismiss on all grounds, the consumer financial laws.” 2011 WL 4857934, at *9. Court first noted that under section 78n-1(a) of Further, in order to qualify as a “state consumer the Dodd-Frank Act, the “say-on-pay” provision, financial law,” a statute must “not directly or publically traded companies must include a indirectly discriminate against national banks” and separate shareholder resolution to approve must “directly and specifically regulate the manner, executive compensation in their proxies at content, or terms and conditions of any financial least once every three years. Pursuant to this transaction . . . or any account relate thereto, with requirement, the Cincinnati Bell Board included respect to a consumer.” Id. the shareholder resolution in its proxy. Despite the Board’s recommendation that the shareholders Applying this standard, the Court first found that approve the proposed executive compensation for the WVCCPA sections governing Cline’s claims 2010, 66% of the shareholders voted against it. applied generally to debt collectors, rather than only to national banks. Next, answering the more Regarding duty of loyalty, the Court stated that difficult question of whether the WVCCPA “directly section 78n-1(a) of the Dodd-Frank Act does not and specifically” regulated financial transactions, alter directors’ fiduciary duties. However, the the Court found that it did not, and that it “instead Court acknowledged commentators’ opinions focused on protecting West Virginia residents from that a negative “say-on-pay” vote gives the court unfair and abusive debt collection practices.” Id. evidence that the directors breached their duty. at *11. Accordingly, the Court held that Cline’s

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See Danielle Myles, Experts Disagree on Validity Considering TradingScreen, Inc.’s first motion of Say-on-Pay Lawsuits, INT’L FIN. L. REV., Aug. to dismiss, the Court found that Egan’s alleged 2011. cooperation with the outside firm could have met the Dodd-Frank definition of “acting jointly” to Finding that Cox pled sufficient, factual allegations provide information to the SEC. However, Egan for a breach of duty of loyalty claim, the Court failed to plead facts showing that the transmission denied Cincinnati Bell’s motion on this ground. of such information actually took place. Upon its Because the board of directors approved and renewed motion to dismiss, TradingScreen, Inc. recommended the pay hikes, the Court found that cited two recent developments that allegedly Cox was not required to make a demand on the clarified the phrase “acting jointly.” First, the board to sue. Finally, the Court found that because SEC adopted final rules for implementing certain Cox sufficiently pleaded a breach of the duty of whistleblower provisions of the Act. See Securities loyalty claim, it was axiomatic that he also pleaded Whistleblower Incentives and Protections, 76 Fed. a claim for unjust enrichment. Reg. 34,300 (June 13, 2011) (to be codified at 17 C.F.R. §§ 240.21F-1 to 240.21F-17). The rules require that reports submitted by a whistleblower Whistleblower Protections “be accompanied by sworn certifications by the whistleblower and counsel.” See id. Although Egan v. TradingScreen, Inc., 10 Civ. 8202, 2011 TradingScreen, Inc. argued that Egan failed to WL 4344067 (S.D.N.Y. Sept. 12, 2011). follow these procedures, the Court found that these requirements apply only to disclosures Plaintiff Patrick Egan brought claims against his filed anonymously with the SEC. Second, the former employer, TradingScreen, Inc., alleging Ninth Circuit ruled that individuals who reported violations of the Securities Whistleblower Protection information to the media with the expectation provision of the Dodd-Frank Act, 15 U.S.C. § that it would be reported to some federal authority 78u-6(h)(1)(B)(i), which affords a private cause were not whistleblowers. This case, however, did of action for whistleblowers alleging retaliatory not involve the media. discharge. Egan also brought claims under the Securities Exchange Act and various claims under Finding that Egan failed to identify the party with New York and Delaware law. The Court previously whom he was “acting jointly” under the Dodd- dismissed Egan’s Dodd-Frank and SEC claims, but Frank Act, the Court dismissed Egan’s second allowed him to re-plead them. TradingScreen, Inc. amended complaint. Additionally, the Court renewed its motion to dismiss. again dismissed Egan’s Securities Exchange Act claim. Because the court dismissed Egan’s federal In the complaint, Egan alleged that in early 2009, law claims, it declined to exercise supplemental he learned that Phillippe Buhannic, a named jurisdiction over his state law claims. defendant and CEO of TradingScreen, Inc., was diverting TradingScreen, Inc.’s corporate assets to another company that Buhannic solely owned. In Pre-Dispute Arbitration Agreements January 2010, Egan reported Buhannic’s activities to the president of TradingScreen, Inc., who through Ruhe v. Masimo Corp., No. SACV 11-00734 the board of independent directors, hired an outside (JCGx), 2011 WL 4442790 (C.D. Cal. Sept. 16, firm to conduct an external investigation. The firm 2011). confirmed Egan’s allegations. On March 15, 2010, Buhannic gained control of the board to prevent the Plaintiff Michael Ruhe brought suit against independent directors from forcing his resignation his former employer, Masimo Corporation, a and fired Egan in August 2010, denying him the medical device manufacturer, alleging retaliatory customary severance package. discharge in violation of the Dodd-Frank Act. In connection with his employment, Ruhe signed an

4 DODD-FRANK NEWS arbitration agreement. Masimo moved to compel statutory provisions supporting that claim do not arbitration of Ruhe’s claims and stay proceedings take effect until after the newly created Bureau until after arbitration. In opposition, Ruhe of Consumer Financial Protection finalizes its argued that the Dodd-Frank Act bars arbitration implementing regulations, which do not occur for of claims arising under it. up to 18 months after the July 21, 2011 transfer date. In response, Williams argued that section The Court first acknowledged that federal 2605(m) took effect on July 22, 2010, which was law strongly favors arbitration agreements. several months before Wells Fargo Insurance, Inc. Regarding Ruhe’s argument that Dodd-Frank bars placed the new insurance on Williams’s property. arbitration agreements, the Court held that Ruhe must arbitrate his 15 U.S.C. 78-u claim because Sections 2605(k)-(m) of RESPA were enacted on the Dodd-Frank Act does not render pre-dispute July 21, 2010 by section 1463 of the Dodd-Frank arbitration agreements invalid. Explaining its Act. See Dodd-Frank, Pub. L. No. 111-203, 124 holding, the Court referenced the Dodd-Frank Stat. 1376 (2010), at § 1463. Relying on section Act’s whistleblower amendments to the Securities 4 of the Dodd-Frank Act, which provides that the and Exchange Act of 1934 and the Sarbanes-Oxley Act takes effect the day after enactment unless Act, both of which contain provisions that render otherwise specified, Williams argued that section pre-dispute arbitration agreements unenforceable 2605(m) took effect on July 22, 2010 and that no for claims arising under these sections. However, other effective date was applicable to section 1463. section 78-u contains no such provision. Conversely, Wells Fargo Insurance contended that section 1400(c), titled “Regulations; Effective In response, Ruhe argued that the absence of Date,” governs the effective date of section 1463. the provision was a drafting error on Congress’s Both sections 1400(c) and 2605(m) fall under part. But the Court declined to adopt Ruhe’s Title XIV of the Act. Reading the plain language line of reasoning, opting instead to apply the of section 1400(c), the Court stated that it was plain language of the statute. Accordingly, the clear that any section or provision of Title XIV Court granted Masimo’s motion to enforce the shall take effect on either the date on which final arbitration agreement. regulations implementing such section take effect or, if regulations are not issued for that section, on the date 18 months after the designated Effective Date transfer date. Rejecting Williams’s argument that section 1400(c) applies only to those provisions Williams v. Wells Fargo Bank, N.A., No. 11- that require regulations, the Court dismissed 21233-CIV, 2011 WL 4368980 (S.D. Fla. Sept. Williams’s RESPA claim. 19, 2011)

Plaintiff Ray Williams brought suit against Wells Fargo Bank, N.A. and Wells Fargo Insurance, Inc. SEC Violations and Enforcement after Wells Fargo allegedly charged Williams for Securities and Exchange Commission v. Daifotis, force-placed insurance when he let his insurance No. C 11-00137, 2011 WL 4714250 (N.D. Cal. payments lapse. Williams alleged violations of Oct. 7, 2011) section 2605(m) of the Real Estate Settlement and Procedure Act (“RESPA”) and various other In an enforcement action by the Securities state law claims. Regarding the RESPA claim, and Exchange Commission (“SEC”) against Williams argued that Wells Fargo and Wells Defendants Kimon Daifotis and Randall Merk, Fargo Insurance violated section 2605(m) because the SEC requested leave to file a first amended charges related to force-placed insurance were complaint. The SEC brought an action for several not “bona fide and reasonable.” See 12 U.S.C. § violations of the Securities Exchange Act regarding 2605(m). Wells Fargo Insurance, Inc. moved to Daifotis’s alleged mismanagement of the Charles dismiss Williams’s RESPA claim, arguing that the Schwab YieldPlus Fund, an ultra-short bond fund.

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The SEC alleged that Merk, the Executive Vice - - NEWS & DEVELOPMENTS - - President at Charles Schwab and overseer of the YieldPlus Fund, similarly made misleading statements to dissuade investors from redeeming Dismantling Myths Around Wall Street their investments when the Fund began to decline. Reform.

In addition to amending its existing claims against Neil S. Wolin, Deputy Treasury Secretary, has Daifotis and Merk, the SEC sought to add a claim posted a number of entries on the Department against Merk for control-person liability under of Treasury’s Blog, “Treasury Notes,” rebutting section 20(a) of the Exchange Act. At the time criticisms of the Dodd-Frank Wall Street Reform of the conduct at issue, section 20(a) provided: Act. The posts are framed as dispelling certain “Every person, who directly or indirectly, controls “myths” surrounding the reform program, any person liable under any provision of this including the myths that Wall Street reform hurts chapter or of any rule or regulation thereunder small banks and puts the U.S. at a competitive shall also be liable jointly and severally with and disadvantage internationally, and will continue to the same extent as such controlled person to throughout the week. any person to whom such controlled person is liable. . . .” Securities Exchange Act of 1934, § To see Wolin’s posts, visit the Treasury Notes blog: 20(a), 15 U.S.C. § 78t(a). The 1975 amendments http://www.treasury.gov/connect/blog/Pages/default. to the Exchange Act defined “person” as “any aspx. natural person, company, government entity, or political subdivision, agency, or instrumentality CFPB Issues Supervision and of a government.” § 3(a)(9), 15 U.S.C. § 78t(a). The Examination Manual. Dodd-Frank Act amended section 20(a) by adding “(including the Commission in any action brought On October 13, 2011, the CFPB released a under paragraph (1) or (3) of section 78u(d) of Supervision and Examination Manual for its this title)” after the phrase “controlled person is examiners to use as a guide in overseeing companies liable.” Pub. L. No. 111-203, 124 Stat. 1376-2223, that provide consumer financial products and 1865 (2010). services. The manual provides examiners with direction on how to determine if providers of Merk argued that at the time of the conduct at consumer financial products and services are issue, the Commission was not considered a complying with consumer protection laws, and “person” in the phrase “to any person” under will be used initially in the examination of over section 20(a). Additionally, Merk argued that 100 “large” banks subject to CFPB supervision. Dodd-Frank created new enforcement powers for the Commission. Conversely, the Commission The manual is divided into three parts: the first argued that Dodd-Frank clarified a power that describes the supervision and examination process, already existed under the Exchange Act. The the second contains examination procedures, and parties agreed that under Dodd-Frank, the the third presents templates for documenting Commission is now considered a “person.” information about supervised entities and the examination process. Relying on the majority of precedent finding that the Commission was considered a “person” A copy of the manual is available at the following link: under the Exchange Act before the Dodd-Frank http://www.consumerfinance.gov/guidance/supervision/ amendments, the Court held that the Commission manual/ could add its claim for control-person liability under section 20(a). DODD-FRANK NEWS

Raj Date Gives Speech at Mortgage testimonials from a number of community banks Bankers’ Association Conference. speaking out against the Obama administration’s position that the Dodd-Frank Act will have no At the 98th annual Mortgage Bankers’ Association impact on small town and mid-sized banks. Conference on October, 10, 2011, Special Advisor Notably, many of the testimonials express a to the Secretary of the Treasury on the CFPB similar concern for the ability of community banks Raj Date gave a speech addressing the CFPB’s to stay in business given the increased expense and approach to “smart regulation.” Date began by burdens imposed by the Act. These testimonials giving background on the CFPB and explaining add to already significant controversy regarding the three “serious, widespread deficiencies” in the unfair impact of the Dodd-Frank on small the financial products and services market: banks and businesses. transparency, incentives, and fair competition. Date continued to explain the CFPB’s plan for To see the full blog post, visit the following link: http:// “smart regulation,” and closed his speech with financialservices.house.gov/Blog/?postid=264807. an invitation for feedback on areas meriting immediate focus. Proposed Legislation. For a copy of Date’s full speech, visit the following link: A number of proposed bills have been recently http://www.consumerfinance.gov/speech/remarks-by- submitted in both the House and Senate raj-date-at-the-mortgage-bankers-associations-98th- addressing, and seeking to repeal, certain Dodd- annual-conference/. Frank regulations. A summary of the recent bills is below. SEC Issues Report on Examinations of Credit Rating Agencies. 1. Small Company Job Growth and Regulatory Relief Act

On September, 30, 2011, the SEC issued a report On October 14, 2011, Congressman Stephen summarizing its observations and concerns Fincher introduced a bill seeking to amend Section arising from the examination of ten credit rating 404(b) of the Sarbanes-Oxley Act of 2002, which agencies registered with the SEC as Nationally currently requires a duplicative audit of companies Recognized Statistical Rating Organizations with a public float of $75 million or more. (“NSROs”). The bill, titled the “Small Company Job Growth The SEC completed the examinations of these and Regulatory Relief Act,” would simply raise NSROs as required by the Dodd-Frank Act, the current $75 million threshold exemption in which imposed new reporting, disclosure, and section 404(b) to $350 million, in order to “provide examination requirements to enhance the additional exemptions from the internal auditing regulation and oversight of NSROs. The Dodd- requirements for smaller and newer companies.” Frank requires the SEC to conduct an annual examination of each NSRO and issue a report To see the full text of the bill, visit the following link: http:// summarizing the findings of each examination. www.aba.com/aba/documents/news/AuditorBill101411. pdf. For a full copy of the report, visit the following link: 2. Jobs Through Growth Act http://www.sec.gov/news/press/2011/2011-199.htm. On October 13, 2011, U.S. Senators John McCain, Community Bankers Speak Out Against Rand Paul, and Rob Portman, joined by other Dodd-Frank Regulations. Republican senators, introduced an alternative jobs bill titled the “Jobs Through Growth Act.” On October 17, 2011, the House Financial Services Senator Rob Portman explained the bill as “a Committee posted a blog entry containing pro-growth proposal to create the environment DODD-FRANK NEWS for jobs that stands in contrast to the short-term The bill, titled the “Freedom in Mobility and sweetener approach of the Obama administration, Banking Act,” would create a new section 51 to an approach that simply hasn’t worked.” Among the Federal Deposit Insurance Act titled “Right to other things, the Republicans’ plan calls for Close Personal Checking and Savings Accounts” regulation reform, including the repeal of the and would, among other things, prohibit depository Dodd-Frank Act. Specifically, the plan states: institutions from charging consumers any fee to close a checking or savings account. We need to lift the burdens the Dodd-Frank bill placed on community banks and the small To see the full text of the proposed bill, visit the following businesses that depend on them for financing, link: http://bradmiller.house.gov/images/stories/ from oppressive new regulations to the resulting Freedom_and_Mobility_in_Consumer_Banking_Act_ uncertainty that prevents growth. Repealing FINAL_July_27_2010_xml.pdf. Dodd-Frank will also significantly reduce financing costs for consumers and businesses, 5. Financial Regulatory Responsibility Act as well as reduce costs to manufacturers in hedging their risks in the financial markets. On September 22, 2011, Senator Richard Shelby introduced a bill to “require enhanced analysis For a summary of the bill, visit: http://mccain.senate. and justification of regulations proposed by gov/public/index.cfm?FuseAction=PressOffice. certain Federal banking, housing, securities, and PressReleases&ContentRecord_id=feb4d840-c3be- commodity regulators, and for other purposes.” 83b1-a1fb-b7f2a039e94d. The bill, titled the “Financial Regulatory 3. Consumer Debit Card Protection Act Responsibility Act,” will require financial regulators to provide clear justification for On October 13, 2011, Congressmen Jason Chaffetz proposed rules and to determine the economic and Bill Owens introduced a bill to the House of impact of the rules, including their effect on Representatives seeking to repeal the debit-card growth and net job creation. The bill also seeks interchange price control provisions of the Dodd- to improve the transparency and accountability of Frank Wall Street Reform Act and to “restore the regulatory process and reduce the burden of balance to the electronic payments system.” existing regulations.

The bill, titled the “Consumer Debit Card To see the full text of the proposed bill, visit the Protection Act,” would repeal section 1075 of the following link: http://www.bdamerica.org/wp-content/ Dodd-Frank Act and any regulations promulgated uploads/2011/09/Bill-Text-Financial-Regulatory- by the Board of Governors of the Responsibility-Act-bill-text.pdf. System pursuant to section 920 of the Act. No representation is made that the quality of services to be performed is greater than the quality of legal services performed by other lawyers. To see the full text of the proposed bill, visit the following link: http://chaffetz.house.gov/Text%20of%20 H.R.%203156.pdf

4. Freedom in Mobility and Banking Act

On October 6, 2011, Congressman Brad Miller introduced a bill proposing to amend the Federal Deposit Insurance Act to ensure that customers have the right to immediately close any account at any depository institution on demand and without cost.

6 - - ABOUT THE EDITORS - -

David A. Elliott Partner, Litigation

Ph: (205) 458-5324 n [email protected] About David: David practices in the firm’s Litigation section and handles all types of civil litigation, with a focus on financial services litigation. He currently serves as Chair of the firm’s Financial Services Litigation Section, and has represented banks, finance companies, and mortgage companies in all areas of statutory and common law litigation, as well as in asset based recovery actions. David also has extensive experience with enforcing arbitration agreements and with corresponding litigation before various arbitration associations.

Rachel M. Blackmon Associate, Litigation

Ph: (205) 458-5483 n [email protected] About Rachel: Rachel is an associate in the Financial Services Litigation practice group. She received her J.D., summa cum laude, from the University of Alabama School of Law, where she was Senior Editor of the Alabama Law Review and was selected as a member of Order of the Coif.

S. Kristen Peters Associate, Litigation

Ph: (205) 458-5169 n [email protected] About Kristen: Kristen practices in the firm’s Financial Services Litigation practice group. She received her J.D., magna cum laude, from the Cumberland School of Law at Samford University, where she served as the Writing Editor of the Cumberland Law Review. In addition, she was a Judge Abraham Caruthers Teaching Fellow and a Dean’s Merit Scholar. Kristen received her B.A. from the University of Virginia.