“We are seeing increasing scrutiny by the regulators on senior management compensation,” says Thomas Bieging, a partner with Bieging, Shapiro & Barber, LLP, Denver, Colo. “The issue [...]]]> Tom Bieging was interviewed for The Bank Safety & Soundness Advisor on increasing Fed scrutiny on the compensation of senior managers and executives in the banking industry.

“We are seeing increasing scrutiny by the regulators on senior management compensation,” says Thomas Bieging, a partner with Bieging, Shapiro & Barber, LLP, Denver, Colo. “The issue is not just incentive compensation, which has been addressed in Dodd-Frank, but rather base or salary levels. The attitude seems to be that if the bank declined under the existing senior management’s watch, then their core compensation should be adjusted downward or increases severely limited.”

“Examiners will continue to pressure bank boards to take action – to reduce or limit core compensation – even when presented with a compensation study from a third party showing compensation levels to be within the median range for the bank’s peer group,” he adds.

Read the complete article here.

By Kevin Funnell

A bipartisan group of representatives is trying to move forward through the House a bill (the “Financial Institutions Examination Fairness and Reform Act“) that would provide a modicum of due process for bankers who believe that they’ve been dealt an unfair report [...]]]> Regulators Warn of the Dangers of Due Process

By Kevin Funnell

A bipartisan group of representatives is trying to move forward through the House a bill (the “Financial Institutions Examination Fairness and Reform Act“) that would provide a modicum of due process for bankers who believe that they’ve been dealt an unfair report of examination by their federal banking regulator. The scheme involves the use of an ombudsman (actually, an ombudsman on steroids) and, if the bank wants to take it that far, an administrative law judge. It’s not as objective a forum as a federal district court, but it’s not as public a forum, either. When you’re dealing with a report of examination that contains adverse findings, especially findings you think are damaging and unfair, the confidentiality of the proceedings are likely an attractive trade-off.

As expected, the federal banking regulators have responded like they’d been prodded in their sensitive areas by a taser on “full-tilt-boogie” setting. According to an article in last week’s American Banker by Kevin Wack (paid subscription required), bank regulators warned of dire consequences should their “hands be tied” by that dreaded Fifth Amendment to the U.S. Constitution.

“The bill would, in certain instances, tie the hands of regulators when they believe a bank’s risk profile requires more capital,” Jennifer Kelly, the Office of the Comptroller of the Currency’s senior deputy comptroller for midsize and community bank supervision, said in testimony to the House subcommittee on financial institutions and consumer credit.

[...]

“A few months’ delay in implementing corrective measures, particularly in times of precipitous economic decline, can mean the difference between failure and survival for a troubled bank,” she said. “More fundamentally, we believe the authority granted to this office would compromise the independence of the banking agencies.”

Yes, I can see where having your hands tied by due process requirements can be annoying. Baby Doc Duvalier used to complain about the same thing, so he just had everyone he didn’t like shot. As to “the difference between failure and survival” boiling down to “a few months’ delay” during which a hearing must take place before someone more objective than either contestant, that’s a load of something you don’t want to step in, even if you work around cattle all day and are used to the smell. Please name one bank that failed over the last three years where the outcome would have been affected by a 60- or 90-day delay to contest an adverse examination report. Please name one troubled bank that did not fail during such period but would have failed if “corrective measures” mandated by an adverse examination report would have been delayed by 60-to-90 days.

[Sound of crickets chirping]

Committee members were, for the most part, unsympathetic to the regulators’ concerns.

“I kind of wonder if we’re a little bit in an alternative universe here,” Capito said, referring to the difference between the agencies’ testimony and the assertions of bankers that the regulators’ standards are tightening and inconsistent. “Is there a big disconnect here?”

Rep. Lynn Westmoreland, a Georgia Republican, whose home state has been hit particularly hard by bank failures, responded to the argument that Congress should not meddle with exam standards by asking the regulators: “So do you think we can screw up this more than ya’ll have?”

Kelly responded that the OCC is constantly talking to banks and soliciting their views on inconsistencies in exams. “So we are continuing to try to work these issues very aggressively,” she said.

Later, upon learning that the FDIC bars retaliation against banks that complain about their exam results, Westmoreland resorted to a colorful analogy.

“That’s like your dog having its teeth into your neighbor’s leg, and you telling the neighbor, I don’t allow it to bite,” he said.

It’s hard to warm up to politicians these days, but those were some righteous licks those folks got in.

Here’s the bottom line, I think: this bill stands a chance of being passed this year that is somewhere between “slim” and “none.” Until the national elections in November, Congress is merely a frozen mass of brake lights clogging the legislative superhighway. On the other hand, these bills, and the fact that they’re receiving bi-partisan support, set down markers that can be useful in “persuading” regulators to ease up on the jackboots planted on the neck of the community banking business before their wings are seriously clipped by Congress. They can also point a path to a future legislative approach if partisan gridlock ever breaks free (for which some readers tell me I’m daffy to even hope). I expect to see similar bills proposed that will also take a “fundamental due process” approach in other areas of bank regulation where banks believe the regulators have seized “A Bridge Too Far.”

By Kevin Funnell, Bieging Shapiro & Barber

When word leaked out recently that the US Treasury Department was
considering selling the preferred stock it held in over 350 banks as a result
of its TARP capital injections, I think the remaining TARP banks [...]]]> Is the Treasury Department Contemplating TARP Closeout Sales?

By Kevin Funnell, Bieging Shapiro & Barber

When word leaked out recently that the US Treasury Department was
considering selling the preferred stock it held in over 350 banks as a result
of its TARP capital injections, I think the remaining TARP banks had a mixed
reaction. On one hand, there’s always the advantage of dealing with the devil
you know as opposed to the devil you don’t. It’s theoretically possible that
Treasury might sell the whole kit and kaboodle to Gordon Gekko, who might
downsize some his acquired banks with extreme prejudice.

On the other hand, there’s always the disadvantage of
continuing to deal with a federal bureaucracy that is motivated by factors that
focus less on the bottom line than on measuring the political wind’s speed and
direction. Ask a TARP bank that’s tried to negotiate a “haircut” on repayment
of TARP stock in connection with a merger or acquisition transaction how
political considerations (i.e., how Treasury can insulate itself from
being criticized during the period starting now and ending with The Rapture)
trump common business sense. If you have a savvy private equity investor owning
your stock, you might ultimately be screwed, but at least you’ll have a chance
of understanding why.

Opponents of the original TARP will never admit that they
might have been wrong about the need for the program to save the economy from
ruin. The fact that the Treasury has already made a profit on its original TARP
investments ($20 billion so far, according to the linked article) is
meaningless to them. I guess they wanted to let the “creative destructive”
forces of a “pure market system” work their magic on all of us, and
if we ended in standing in bread lines, they’d say that was a hard lesson
learned and that we’re all the better for it. I don’t have the energy to tell
them that not only is God dead, but so is Ayn Rand.

So, if I take pot shots from the peanut gallery at the
administrators of TARP, I still think that it was a good idea, albeit one that
could have been executed a heck of a lot better than it was.

As a firm, BSB was also recognized by US News Best Lawyers for its practice in:

At a meeting of the Board of the Colorado Department of Human Services held on May 7, 2004, a new rule (9CCR 2504-6.90.5) was adopted, which became effective July 1, 2004, and which pertains to the treatment of levies on joint accounts by the Division [...]]]> By: John E. Burrus, Esq., Bieging Shapiro & Burrus LLP

At a meeting of the Board of the Colorado Department of Human Services held on May 7, 2004, a new rule (9CCR 2504-6.90.5) was adopted, which became effective July 1, 2004, and which pertains to the treatment of levies on joint accounts by the Division of Child Support Enforcement for past due child support obligations.

In general, the rule provides as follows:

• When a bank receives a levy of this type, it is required to immediately freeze 50% of the assets on deposit in the account. The bank must do this no matter how many joint account holders there are and no matter what knowledge the bank may have as to the source of deposits into the account.

• The other owner or owners of the account are given thirty (30) days within which to file an appeal with the Department contesting ownership of the funds which have been frozen. To prevail on this appeal, the other owner or owners must show “net contribution” of more than the 50% frozen by the levy. The rule does not address how these “net contributions” are computed, in terms of such things as how withdrawals or payments from the account are to be allocated between the child support obligor and the other owner or owners.

• If the appeal is granted, the Department will release its lien on the amount it determines to be appropriate and will require payment of the balance to the Department. If no appeal is taken or if the appeal is denied, the Department will collect the entire amount frozen by the levy. It is interesting to note that the rule does not address a situation where the child support obligor has contributed more than 50% to the account. Even in these instances, only 50% will be subject to levy and collection.

C.R.S. §16-3-301.1 was passed in the 2002-2003 legislative session and will have an impact on banks and other financial institutions whose customers are involved in criminal investigations. Prior to the passage of this statute, the only tool which sheriffs, police departments and other investigators had to compel production of documents [...]]]> By: John E. Burrus, Esq.

C.R.S. §16-3-301.1 was passed in the 2002-2003 legislative session and will have an impact on banks and other financial institutions whose customers are involved in criminal investigations. Prior to the passage of this statute, the only tool which sheriffs, police departments and other investigators had to compel production of documents in connection with a criminal investigation was a search warrant. These agencies had no subpoena powers and unless the investigation was being pursued by a grand jury or a state agency with subpoena powers, the available investigative procedures were often unsatisfactory. A search warrant does not specify particular documents to be produced but merely permits a law enforcement official to search premises. This search warrant power was sometimes abused by certain officials who have threatened to shut down entirely the premises to be searched (including banks) unless the owner of the premises cooperated in delivering documents being sought. This often placed banks in a difficult position, particularly after passage of Regulation P pertaining to customer privacy rights. If the bank voluntarily turned over records, then there was at least some issue as to whether this violated the privacy regulations and the bank’s own privacy policy unless the possibility of this type of voluntary surrender of information was revealed to customers in the privacy policy, in which case the customers may have had the right to “opt out” from such disclosures. On the other hand, if the bank refused to turn over the documents, the law enforcement officer had the legal right to search the premises himself and even to take possession of such objects as computer terminals which might contain the information. An additional problem existed with respect to institutions whose records were stored electronically at an offsite facility, particularly when the storage facility was located in another state outside the jurisdiction of the court issuing the search warrant.

The new statute helps to resolve these difficult issues. It permits a court to issue an order for the production of records “in the actual or constructive control” of a business entity provided certain grounds and criteria are met. These grounds and criteria are the following:

• The records being sought must be within certain categories, one of which is that the records “would be material evidence in a subsequent criminal prosecution in this state, another state or federal court”. This is the category that most orders of this type directed to bank records would usually fall within.

• The order can be issued only on receipt by the court of an affidavit (usually by the investigating officer) setting forth various facts identifying the records sought and the grounds upon which they are sought.

• If sufficient grounds are shown, the order is issued and must identify or describe the entity which is believed to have possession or control of the records, identify or describe the records, state the grounds or probable cause for issuance, and state the names of the persons whose affidavits or testimony have been taken in support of the order.

The order is then served on the business entity believed to have the records during normal business hours within 10 days after the date of the order. It is served in the same manner as other legal process. The entity served with the order has 30 days to deliver the records or copies of the records. The records must be accompanied by a notarized statement that they represent complete and accurate copies of all records identified in the order in the possession or control of the entity. If certain records are not produced, they must be identified. The affidavit must be signed by the “records custodian or an officer or director of the business entity, who shall attest to the truth of the statement to the best of that person’s knowledge, information and belief”.

In lieu of producing the records, the bank may file a motion stating reasons why the order cannot be complied with. A request for extension of time may also be filed and a hearing thereon held within 10 days unless the investigator seeking the documents agrees to production at a later time.

The records may be produced in any form or format convenient for the business entity which may be accessed by the investigator. The person being investigated may be ordered to pay the costs of production. An entity complying with the statute is given immunity against claims relating to the production of the records.

In general this new statute seems to provide a more definitive and orderly process for a bank’s production of records needed in criminal investigations and should help remove many of the uncertainties which existed under the prior practice.

The following are some answers to frequently asked questions regarding the Family Medical Leave Act (“FMLA”):

Do I have to comply with FMLA if I have less than 50 employees?

No. FMLA applies only to employers with 50 or more employees. 29 C.F.R. § 825.104(a). However, you should be aware that [...]]]> BY: Julie Trent, Esq.

The following are some answers to frequently asked questions regarding the Family Medical Leave Act (“FMLA”):

Do I have to comply with FMLA if I have less than 50 employees?

No. FMLA applies only to employers with 50 or more employees. 29 C.F.R. § 825.104(a). However, you should be aware that employees can potentially rely on any policies, whether written or not, regarding health/childcare-related leave. So, for example, if you provide six weeks of maternity leave to some employees, you could be legally obligated to provide six weeks of maternity leave to all employees. It is therefore a good idea to regularly review your policies (whether written or merely “this is how we’ve done it in the past”) to make sure that they accurately reflect the benefits you intend to provide.

If I have 50 or more employees, under what circumstances do I have to grant FMLA leave, who is eligible for such leave, and is it paid or unpaid?

If you have 50 or more employees, you must grant FMLA leave to any “eligible employee” under the following four scenarios: (1) for the birth of a child; (2) when a child (or an adult who is incapable of “self care”) is adopted or placed with an employee for foster care; (3) to care for a spouse, son, daughter or parent with a serious health condition (in some instances including substance abuse treatment); and (4) when the employee has a serious health condition that makes him or her unable to perform their job functions (also including substance abuse treatment in some instances). 29 C.F.R. § 825.112. Leave for any one of the above situations is available to eligible male and female employees equally. 29 C.F.R. § 825.112(b). “Eligible employees” are those employees who have been employed for at least 12 months and 1,250 hours during the 12-month period preceding the leave. Such employees are allowed to take up to 12 weeks of job-protected, unpaid leave in a given year. 29 C.F.R. §§ 825.100(a), 825.110(a), and 825.207. Note that the unpaid nature of FMLA leave does not preclude an employee from using accrued paid sick or vacation days during their leave. 29 C.F.R. § 825.207.

When can I hire a replacement employee to perform the job duties of someone on FMLA leave?

The answer is: anytime. However, the catch is that the employee on FMLA leave is entitled to return to the “same or equivalent” position with equivalent pay, benefits and working conditions at the conclusion of the leave.” 29 C.F.R. § 825.100(c). While this can obviously create havoc with an employer’s internal structure, hiring practices, and division of job duties, it is clear that “[a]n employee is entitled to such reinstatement even if the employee has been replaced or his or her position has been restructured to accommodate the employee’s absence.” 29 C.F.R. § 825.214(a) (emphasis added). “Equivalent position” means “one that is virtually identical to the employee’s former position in terms of pay, benefits and working conditions . . . [and] must involve the same or substantially similar duties and responsibilities, which must entail substantially equivalent skill, effort, responsibility, and authority.” 29 C.F.R. § 825.215(a).

There is one notable exception to an employer’s duty to reinstate an employee after FMLA leave: “an employer may deny job restoration to salaried eligible employees (‘key employees’ . . .) if such denial is necessary to prevent substantial and grievous economic injury to the operation of the employer . . .” 29 C.F.R. § 825.216(c). Very few employees fit the “key employee” description contained in 29 C.F.R. § 825.217. To be a “key employee,” the employee must be salaried and, more importantly, among the highest paid 10% of all employees employed by the employer within 75 miles of the worksite. 29 C.F.R. § 825.217(a).

At the end of the leave, “if the employee is unable to perform an essential function of the position because of a physical or mental condition . . . the employee has no right to restoration to another position under the FMLA. However, the employer’s obligations may be governed by the Americans with Disabilities Act.” 29 C.F.R. § 825.214(b).

Can an employee who is on FMLA leave be terminated/laid-off, or do I have to wait until they return from their leave?

An employee is not protected from termination, lay-offs, etc. while on FMLA leave. “An employee has no greater rights to reinstatement or to other benefits and conditions of employment than if the employee had been continuously employed during the FMLA period.” 29 C.F.R. § 825.216(a). The burden is on the employer to demonstrate that the employee would have been laid-off/terminated regardless of being on leave. Id. “If an employee is laid off during the course of taking FMLA leave and employment is terminated, the employer’s responsibility to continue FMLA leave, maintain group health benefit plans and restore the employee cease[s] at the time the employee is laid off,” assuming there is no collective bargaining agreement to the contrary in place. 29 C.F.R. § 825.216(a)(1).

Contact Julie Trent at jtrent@bsblaywers.com

What do Enron, Worldcom, Qwest and Anytown Community Bank have in common? The answer is that each can be expected to feel the impact of the Sarbanes–Oxley Act of 2002, regardless of whether it is a publicly-traded company.

Congress’s response to corporate fraud, greed, and slip-shod accounting practices was quick [...]]]> By: I. Thomas Bieging, Esq.

What do Enron, Worldcom, Qwest and Anytown Community Bank have in common? The answer is that each can be expected to feel the impact of the Sarbanes–Oxley Act of 2002, regardless of whether it is a publicly-traded company.

Congress’s response to corporate fraud, greed, and slip-shod accounting practices was quick in election year 2002. The Sarbanes-Oxley Act of 2002 passed by Congress on July 30, 2002 was Congress’s response to the headlines appearing daily in the business sections of newspapers chronicling corporate mismanagement and SEC laxness. The response was not unlike one with which all bankers are familiar.

In 1989, Congress responded to the savings and loan crisis with a “quick response”, which has come to be known as FIRREA – the Financial Institution’s Reform, Recovery and Enforcement Act of 1989. While both pieces of legislation can be criticized for their excesses, one thing is certain. Just as the effects of FIRREA have lingered over a decade and have permeated all levels of the financial institution industry, so will the effects of Sarbanes-Oxley be felt for years to come and ultimately impact both publicly and non-publicly traded financial institutions. The purpose of this article is to provide the managers and directors of non-publicly traded financial institutions with a “heads up” as to how they may experience the impact of Sarbanes-Oxley.

Predictions such as those contained in this article are not difficult in light of current pronouncements from various regulatory agencies. Recently, a panel of federal regulators in Ohio made up of representatives of the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corporation speaking to a group of accountants stated that corporate governance would be a “chief supervisory concern” in the year to come. In this same vein, FDIC Chairman Powell announced in October that the FDIC was considering mandating that all FDIC-insured banks comply with the new law. The Federal Reserve has already advised financial institutions that it is working to develop policies in accordance with Sarbanes-Oxley. Recently, Federal Reserve Governor Susan S. Bies, commenting to the National Conference on Banks and Savings Institutions conducted by the American Institute of Certified Public Accountants, stated that recent events leading to Sarbanes-Oxley serve as a “wake up call” to corporate boards, management, accountants and auditors. From these opening salvos, the handwriting on the wall is apparent: Be aware of the provisions of Sarbanes-Oxley.

Financial institutions that are affected directly by Sarbanes-Oxley fall into two categories. First are those institutions (banks, thrifts and their holding companies) that have a class of securities registered under Section 12 of the Securities Act of 1934, or are otherwise required to file periodic reports (10-K’s and 10-Q’s) under Section 15d of the Securities and Exchange Act of 1934. A second category of banks, thrifts, or holding companies that will be affected, somewhat less, are those top tier holding companies required to file forms FRY-6 and that have total assets of $500,000,000 or more, or insured depository institutions with total assets of $500,000,000 or more.

The statutory and regulatory requirements do not extend to community banks that are outside the categories described above. However, based on the regulators’ comments, we anticipate that certain provisions of Sarbanes-Oxley will indirectly have an impact on all financial institutions through adoption of analogous “safety and soundness” standards similar to Sarbanes-Oxley by the various financial institution regulatory agencies.

Those sections of Sarbanes-Oxley which we are referencing, and a brief description of their potential impact on non-reporting financial institutions are described below:

1. Section 201. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS. This section limits the role of auditors to that of auditing. A public accounting firm that provides auditing services may not provide such additional services such as bookkeeping, development of financial information systems, appraisals, fairness opinions, internal audit outsourcing or management functions. The trends at all levels will be to assure that independent auditors are not auditing the impact of their other services to their audit customers. Non-reporting companies should review their auditor relationships and consider whether additional relationships between the auditor and the financial institution may adversely impact independence and the quality of the audit.

2. Section 204. AUDITOR REPORTS TO AUDIT COMMITTEES. This section requires that the public accounting firm report directly to the audit committee all critical accounting policies and practices; alternative treatments of financial information that have been discussed with management, including the ramifications of the use of such alternative treatments; and any material written communications between the public accounting firm and management (e.g., the management letter). This section is consistent with the theme of Section 203 and may be deemed advisable as a way to ensure that the board is fully aware of material accounting issues and to benefit the financial institution with the perspectives of non-management directors.

3. Section 206. CONFLICTS OF INTEREST. Reporting companies are prohibited from employing a public accounting firm if the reporting company’s chief executive officer, controller, chief financial officer, or chief accounting officer was employed by the public accounting firm within one year of the date of the initiation of the audit.

4. Section 302. CORPORATE RESPONSIBILITY FOR CORPORATE REPORTS. This is the section of Sarbanes-Oxley that requires the principal executive officer and principal financial officer of a reporting company to certify annual reports. The certification indicates that to the officer’s knowledge, the report does not contain any untrue statements of material fact or omit material facts. Additionally, among other requirements, the signing officer must indicate that in his or her opinion the financial report fairly presents in all material respects the organization’s financial condition and results of operation. Boards of directors of non-reporting financial institutions may well request of their own senior management such assurances in this era of renewed accountability to shareholders by management and boards of directors.

5. Section 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS. The effectiveness of internal controls has been a concern for financial institution regulators since at least the enactment of the Federal Deposit Insurance Corporation Improvement Act of 1991. Sarbanes-Oxley has a similar theme requiring that a reporting company’s annual report contain a section regarding the responsibility of management for establishing and maintaining adequate and internal controls along with an assessment of the effectiveness of those controls. Renewed emphasis can be expected at all levels of the financial institution industry on such internal controls.

6. Section 407. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT. Reporting companies are required to have at least one member of the audit committee who is deemed to be a “financial expert”. Such financial experts are considered to be someone who, through education and experience as a public accountant, auditor or principal financial officer, has an understanding of generally accepted accounting principles and financial statements, along with experience in the preparation or auditing of financial statements of generally comparable organizations. With the increased responsibilities and accountability of boards of directors, the wisdom of including a “financial expert” on any board cannot be challenged. The devil is in the detail as to how to attract such a financial expert in the current environment.

While the Sarbanes-Oxley Act of 2002 limits its scope of applicability to reporting banks, thrifts and holding companies there can be little doubt that the principles contained in the Act will be carried down by federal regulatory agencies to all levels of the financial institution industry. Those banks, thrifts and holding companies that begin now to assess their corporate governance in light of Sarbanes-Oxley will be in a better position to respond to regulatory concerns which will be expressed in the months and years come.

©2002, Bieging Shapiro & Burrus LLP. All rights reserved.

Contact I. Thomas Bieging, Esq. at tb@bsblawyers.com

On April 1, 2001, regulations became effective which apply to financial institutions’ consumer insurance activities. This article will outline the principal areas of coverage but should not be used as a substitute for the regulations themselves. The regulations can be found at 12 C.F.R. Part 14 (OCC); 12 C.F.R. Part [...]]]> By: John E. Burrus, Esq.

On April 1, 2001, regulations became effective which apply to financial institutions’ consumer insurance activities. This article will outline the principal areas of coverage but should not be used as a substitute for the regulations themselves. The regulations can be found at 12 C.F.R. Part 14 (OCC); 12 C.F.R. Part 208 (Federal Reserve); 12 C.F.R. Part 343 (FDIC); and 12 C.F.R. Part 536 (OTS).

What Do the Regulations Generally Apply To?

• The sale, solicitation, advertisement or offer of an insurance product or annuity by a “covered person” to a “consumer”.
• “Insurance product or annuity” is not defined.
• A “consumer” means an individual who purchases, applies to purchase, or is solicited to purchase an insurance product or annuity primarily for personal, family or household purposes.

Who is affected by the regulations?

• A “covered person” is defined as:
  • Any financial institution; or
  • Any other person who sells, solicits, advertises or offers an insurance product or annuity to a consumer at an office of a financial institution or on behalf of a financial institution.
• An activity is done “on behalf of” a financial institution if:
  • A representation is made to a consumer that the activity is by or on behalf of a financial institution; or
  • A financial institution refers a consumer to another person under a contractual arrangement to receive commissions or fees from the sale of an insurance product or annuity; or
  • Documents evidencing the activity identify or refer to a financial institution.

What is Prohibited?

• Any practice which would lead a consumer to believe that an extension of credit is conditioned upon either (i) the purchase of an insurance product or annuity from a financial institution or its affiliates, or (ii) an agreement not to obtain or a prohibition on obtaining an insurance product or annuity from an unaffiliated entity.
• Any activity which could mislead a person with respect to:
  • The fact that an insurance product or annuity is not “backed by” the federal government or the bank and is not insured by the FDIC; or
  • For products involving investment risk, the fact that there is a risk, including the potential that principal may be lost and the product may decline in value.
  • The fact that an extension of credit to a consumer may not be conditioned on the purchase of an insurance product or annuity from the financial institution or its subsidiary and that the consumer is free to purchase the product from another source.
• The sale or offer for sale (as principal, agent or broker) of any life or health insurance product with regard to which underwriting, pricing, renewal or scope of coverage is affected by the insured’s status as a victim of domestic violence or as a provider of services to victims of domestic violence.
• The failure to keep segregated the area where the financial institution conducts transactions involving insurance products or annuities from areas where retail deposits are routinely accepted, or to identify and clearly delineate insurance product or annuity sales areas from retail deposit-taking areas.
• A financial institution’s permitting any person to sell or offer for sale any insurance product or annuity in any part of its office or on its behalf unless the person conducting such activity is appropriately qualified and licensed.

What must be disclosed?

• In connection with the initial purchase of an insurance product or annuity, the following must be disclosed:
  • That the product is not a deposit or other obligation of or guaranteed by the financial institution or its affiliate.
  • That the product is not insured by the FDIC or any other federal agency or by the financial institution or its affiliate.
  • For products involving investment risk, that there is investment risk associated with the product, including the possible loss of value.
• In connection with a credit application which includes the solicitation, offer or sale of an insurance product or annuity, disclosure must be made that the financial institution may not condition an extension of credit on either (i) the consumer’s purchase of an insurance product or annuity from the financial institution or its affiliate, or (ii) the consumer’s agreement not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity.
  • The required disclosures must be made both orally and in writing before completion of the initial sale of the product or at the time the consumer applies for an extension of credit associated with the solicitation, offer or sale of an insurance product or annuity.
  • Oral disclosures are not required if the product is sold by mail or the application for credit is taken by mail.

• Special rules apply to sales conducted and applications taken by telephone or by electronic transmission.
• Disclosures must be “readily understandable” and “meaningful”. These terms are defined in greater detail by the regulations.
• Written acknowledgement of receipt of the disclosures must be received from the consumer. Acknowledgements may be received “electronically or in paper form.”
• For telephone transactions, acknowledgement of receipt may be received orally provided that the financial institution maintains “sufficient documentation” to show receipt of acknowledgment and makes “reasonable efforts” to obtain written acknowledgement from the consumer.
• The required disclosures must be included in advertisements and promotional material except those of a general nature describing or listing the services or products offered by the institution.

Contact John E. Burrus at jeb@bsblawyers.com

(Updated as of August 20, 2002)

A recent article circulated by Kansas Bankers Surety Company has prompted questions from a number of IBC members concerning a bank’s right of setoff against deposited Social Security benefits and for advice on approaches which might be taken on overdrafts by Social Security recipients.