December 31, 2013

Another Milestone...20,000 Unique Views

I just wanted to take a moment to thank those of you who regularly read this blog for your support, and especially those of you who share the posts on LinkedIn and Twitter.  The blog reached 20,000 unique views just prior to year-end, which tells me that people find the information posted here useful.  I hope to continue to provide relevant, accessible legal analysis through this blog for many years to come.  If you have a topic that is relevant to financial institutions or other business organizations that you would like to see addressed on the blog, please let me know!

Best Wishes,


December 26, 2013

Reminder: Several Changes to North Carolina Law Take Effect January 1, 2014

Don't forget!  Several changes to North Carolina law enacted by the General Assembly in 2013 will become effective on January 1, 2014.

1.  I have written about changes to North Carolina's corporate statute that will become effective January 1, 2014, here. They include:
  • Clarification of the authority of a board of directors to delegate to officers the authority to issue equity in the company. Clarification of the ways in which shareholders meetings can be conducted using newer technology (remote electronic communication).
  • Clear authorization of “force-the-vote” provisions in transactions requiring shareholder approval.
  • Creation of a safe harbor enabling corporations to know with certainty that certain sales of assets do not require shareholder approval. Provision for sister subsidiaries (corporations that are 90% owned by a common parent corporation) to merge with each other using a “short-form” process.
You can read about Senate Bill 239, enacted as Session Law 2013-153, in greater detail here.

2.  Chapter 57C of the General Statutes, which formerly governed limited liability companies, will be replaced by a new Chapter 57D effective January 1.  I wrote about the changes here.  The changes from existing law include the following:
  • Rights and duties of parties under the LLC Act can be modified or waived by an agreement.
  • Members' rights to access certain company information are spelled out in the statute, as are limitations.
  • The statute expressly allows for the appointment of "officials" besides Managers (e.g., President), and the officials need not also be Managers.
  • Provisions regarding contributions and distributions have been simplified.
  • The statute makes explicit the distinction between a purely economic interest in an LLC and a Membership interest (which confers authority).
  • Oral amendments to an operating agreement will not be enforceable if the operating agreement requires that amendments be in writing.
  • Oral agreements between parties to an operating agreement would not affect any inconsistent written provision in the operating agreement to the detriment of non-parties to the operating agreement that relied on the written operating agreement.
  • In the event of a conflict between the operating agreement and the articles of organization, the operating agreement would prevail as to parties to the operating agreement and company officials, and the articles of organization would prevail as to anyone else who reasonably relied on the filed document.
  • Provisions relating to low-profit LLCs were deleted.
  • Specific items governing out-of-state LLCs were made consistent with the treatment of out-of-state corporations under the Business Corporation Act.
The new statute will apply to existing LLCs.  You can read the full text here.

3.  Changes to North Carolina's tax laws also become effective on January 1.  Session Law 2013-316, also known as House Bill 467, or the Tax Reduction Act, can be read in full here

4.  Session Law 2013-403, also known as House Bill 565, amends the Real Estate Appraisers Act.  Changes that become effective on January 1 include new educational requirements.  New applicants for a real estate appraiser license will be required to have an associate's degree, and new applicants for certification as a residential real estate appraiser will be required to have a bachelor's degree.  You can read the full text of the legislation here.

You can see all of the North Carolina legislation that will become effective on January 1, 2014 here.

Best wishes for a prosperous 2014!

December 11, 2013

The Volcker Rule Is (Finally) Here

Back in 2011, I wrote about Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the "Volcker Rule."  (See Do Community Banks Need to Worry About the "Volcker Rule"?)  At that time, the SEC and the federal banking regulators had just issued a proposed rule for public comment.  Two years later, the final rule is being released.  To say the rule is behind schedule is a bit of an understatement--the Act required the agencies to promulgate a final rule by July 21, 2011. 

Remember the Volcker Rule?
Given the amount of time since the Volcker Rule was proposed, it seems appropriate to refresh our recollections as to the history and intent of the rule.  The Volcker Rule is a concept advocated by the eponymous former Federal Reserve Board Chairman Paul Volcker, who argued that proprietary securities trading by federally-insured banks introduced unacceptable risk to the Deposit Insurance Fund.  In simple terms, Volcker argued that because bank deposits are backed by a government assurance (the Deposit Insurance Fund), banks should not engage in trading that exposes the DIF to (much) risk. 


In 1933, the Glass-Steagall Act forced a separation of commercial banking from investment banking and brokerage activities. This division more or less remained the rule until the Gramm-Leach-Bliley Act of 1999.  Some observers attributed the repeal of the Glass-Steagall restrictions to the financial crisis of 2008, and the Volcker Rule found its way into the massive reform bill known as the Dodd-Frank Act.

The Final Rule

Section 619 of the Dodd-Frank Act contains restrictions on a financial institution's ability to engage in "proprietary trading" or be associated with a private equity/hedge fund.  Proprietary trading is defined as “trading activity” in which a “banking entity” acts as “principal” in order to profit from “near-term” price changes.   Banks often take positions in government securities as a way to invest cash productively and safely, or as a risk-management tool, and concerns arose that the Volcker Rule would cover such trading.

Following considerable input from the banking sector, the final rule differs from the original proposal in some important ways.  Below are some highlights of the final rule.

- The final rule exempts proprietary trading in securities issued by the U.S. Treasury, Government-Sponsored Enterprises, municipalities and the FDIC.
- Banks with less than $10 billion in assets that do not trade in covered instruments are exempt from the compliance program requirements of the rule, and CEOs are not required to submit an attestation that their banks have a sufficient compliance program in place.
- Banks under $10 billion that do engage in covered activities can meet the "compliance program" requirements by simply including references to the Volcker Rule in their existing policies and procedures addressing only the activities that the community bank actually conducts. 
- Also exempt are trading activities:
  • as agent, broker or custodian;
  • through a deferred compensation or pension plan;
  • as trustee or in a fiduciary capacity on behalf of customers;
  • to satisfy a debt previously contracted;
  • repurchase and securities lending agreements; and
  • risk-mitigating hedging activities. 
The Clock Is Ticking

The final Volcker Rule becomes effective April 1, 2014 (though the complete compliance deadline has been pushed back for banks under $10 billion to July 21, 2015).   

For more information, you can read the entire final Volcker Rule here (a mere 964 pages).

November 29, 2013

How To Verify the Status of a Securities Broker or Investment Adviser

Photo credit: Ahmad Navvavvi via foter
It is important that anyone selecting a securities broker or investment adviser obtains competent, ethical guidance from a properly-licensed professional. I have personally witnessed the devastating effects of failing to properly vet investment professionals, and perhaps you have as well.  As someone whose practice includes securities law, I am frequently asked by clients, (non-securities) lawyers, and friends to investigate the background of a securities broker or investment adviser. I typically perform the check myself (as a personal favor--not as a professional service) and report back with the results. However, this is the sort of research that doesn't actually require a lot of specialized education. As a public service, this post will share the information necessary to enable you to perform a very basic due diligence investigation of a broker or investment adviser on your own.

[Although most of my posts here on The North Carolina Business & Banking Law Blog are intended to be read by professionals, I sometimes explain basic concepts for the general public. This is one of those posts in which my aim is to inform everyone...including the uninitiated.]

Brokers vs. Investment Adviser

Let's begin by being clear about the terminology. People often use the terms "broker" and "investment adviser" interchangeably, but they do not mean the same thing.  At the most basic level, investment advisers provide advice about investments, while brokers handle transactions in securities.  (You can read a bit more about the differences here.)


A "broker" is defined by Section 3(a)(4)(A) of the Securities Exchange Act as "any person engaged in the business of effecting transactions in securities for the account of others." Often, it is easy to determine whether a person or entity is a broker. For instance, one who regularly executes transactions for others on a stock exchange clearly is a broker. (For purposes of this article, I am not going to explain the meaning of the term "dealer" and how it differs from the term "broker." Furthermore, I am not going to address the complex questions around the various service providers whose status as a broker is ambiguous. For purposes of this article, I am referring simply to people and businesses that execute trades in stocks and bonds for other people and businesses.) The individuals who work for a broker are called "associated persons" or "registered representatives."  This is the case whether they are employees or independent contractors. Although associated persons usually do not have to register separately with the Securities and Exchange Commission (SEC), they must be supervised by a registered broker, registered with FINRA, and, usually, licensed by a state securities regulator.

A broker is required to comply with a number of requirements. Brokers register with the SEC through the Central Registration Depository (CRD), operated by the Financial Industry Regulatory Authority (FINRA). A broker must also be a member of at least one self-regulatory organization (SRO): FINRA, a national securities exchange, or both. "Associated persons" of brokers, including salespeople, must also register with a SRO. In addition, each state in which a broker wants to operate may have its own registration requirements. Brokers must also be members of the Securities Investor Protection Corporation (SIPC), an organization that assists investors when their brokerage firms fail.

The best source of information about a registered broker is the FINRA BrokerCheck database, available here. Brokerage firms are required to disclose certain criminal matters, regulatory actions, civil judicial proceedings, and financial matters in which the firm or one of its affiliates has been involved. The information about brokers and brokerage firms available through BrokerCheck comes from the CRD, the securities industry online registration and licensing database. Information on approximately 1.3 million current and former registered brokers is accessible through BrokerCheck.  To check the registration status and background of an individual "associated person" in North Carolina, you must call the Securities Division of the North Carolina Department of the Secretary of State (1-800-688-4507) and ask to speak with a staff employee responsible for "broker-dealer registration."

Investment Advisers

People and companies who are paid to give advice about investing in securities generally must register with either the SEC or the state securities agency where they have their principal place of business. In 2010, the Dodd-Frank Act amended certain provisions of the Investment Advisers Act of 1940 by shifting responsibility over certain mid-sized investment advisers (those that have between $25 million and $100 million of assets under management) to state-level securities regulators.

To find out about an investment adviser, read the adviser's registration form, called a "Form ADV." Form ADV has two parts: Part 1 contains information about the adviser's business and whether the adviser has had problems with regulators or clients. Part 2, which is often called the “brochure,” describes the adviser’s business practices, fees, conflicts of interest, and disciplinary information. Before you hire an investment adviser, always read both parts of the adviser's Form ADV.  Brochures are also sometimes required to be accompanied by a “brochure supplement” that includes information about the specific individuals who actually provide investment advice to the client. (An adviser is required to deliver a brochure supplement to the client before or at the time that the adviser begins to provide investment advice.) You can view an adviser's most recent Form ADV online by visiting the Investment Adviser Public Disclosure (IAPD) website. The IAPD database contains background information on approximately 441,000 current and former investment adviser representatives and 45,700 current and former investment adviser firms. (You can also find information about investment advisers through FINRA's BrokerCheck.)

If an investment adviser provides advice with respect to less than $25 million in assets, it may not be required to register with the SEC. In that case, you should check with your state's securities regulator to obtain information about the adviser. In North Carolina, you must call the Securities Division of the North Carolina Department of the Secretary of State (1-800-688-4507) and ask to speak with a staff member responsible for or "investment adviser registration". The Securities Division staff can tell you if an adviser has a disciplinary record. Unfortunately, there is not currently a more convenient method for these sorts of inquiries.

Further Due Diligence

It is important to recognize that the information identified above is merely intended to tell you whether a broker or investment adviser is properly licensed and has a disciplinary history or a record of formal customer complaints. This may give you an indication of basic competency, but is no guarantee of solid performance. These steps are just the beginning of the inquiry. You should ask for, and check, references, and consult with others, including professionals, familiar with the broker's or investment adviser's work before beginning a financial relationship. A little effort on the front end may save a lot of heartache down the road.

November 28, 2013

Community Bank Outlook

KPMG has released the results of its 2013 Community Banking Outlook Survey, which summarizes the sentiments of more than 105 CEOs and other senior executives of regional and community banks.  This a rich source of information, and I encourage you to read the full report.  Here are the highlights:

Optimistic about Revenue

Two-thirds of respondents predicted an improved overall economic outlook in 2014, and 85 percent expect higher revenues.

Getting a Handle on Regulation

Fifteen percent said that regulatory changes would require the most time, energy, and resources from management (versus 27 percent last year). 

Forty-two percent identified regulatory and legislative pressures as a primary obstacle for growth (down from 47% last year). 

M&A Predictions (Again)

Sixty-five percent expect their bank to be involved in a merger or acquisition over the next year (buy or sell side).

The primary reasons for deals are regulatory reform, geographic expansion, and access to new markets.

Seventy-seven percent of the community bank executives surveyed believe the minimum asset level a community bank must achieve to remain independent is at least $1 billion or more.

Cybersecurity & IT

Forty-six percent of community banking executives said they would increase spending on IT (46 percent)

You can read the full report here.

November 23, 2013

Maintaining Your Professional Reputation Online

"Matt Cordell the worst lawyer in the state of North Carolina.  I don't know how he graduated from law school.  Plus, he's ugly and has no fashion sense."
What would you do if this, or something like it, were written about you and posted on the Internet for all the world to see?  Ignore it?  Respond with an explanation of why the poster was wrong?  Sue the poster?  Threaten the website host with a lawsuit?
As a professional, your reputation is among your most important assets.  Although many of us depend heavily on direct referrals from satisfied customers and other respected professionals, more and more people are turning to the Internet when searching for, or vetting, a professional. 
The Internet has radically decentralized and democratized the flow of information.  Although this affords opportunities for us, it also subjects us to public criticism in more ways than ever before.  Most of the professionals I interact with are smart, diligent people who go to great lengths to provide excellent customer service.  At some point, many of us will find ourselves in a position adverse to a vindictive person, and many of us will eventually make the mistake of agreeing to work with an unreasonable client.  If you haven't yet been the subject of a negative online review, tweet, blog post, or social media post, just wait — it may be coming.  Perhaps you have avoided becoming the subject of negative comments on the Internet so far, but it is unreasonable to believe it could never happen.  

Though there are many things you can do to minimize the risk of a negative online review, it is not a risk that can be eliminated.  If good customer service and ethical conduct alone are not sufficient to avoid all negative online comments, we must ask ourselves two important questions:  
(i)                 What can I do now to prepare for a negative comment about me or my professional services on the Internet; and,
(ii)               What can I do after the fact to minimize the impact to my reputation?

The Best Defense Is Preparation

The most important step you can take right now to address the risk of a future negative online comment is to saturate the Internet with high-visibility, positive information about yourself and your professional services.  You want the negative comment to be a mere needle in a haystack of positive content so that the negative comment is either unlikely to be found or at least outweighed by a mountain of positive publicity.  If you wait until you need positive publicity to begin generating it, you will have already lost.  (Just like your professional network, by the time you need it, it is too late to start building.)  You need to establish a positive professional reputation online now, before you need it to combat a negative comment.

There are a number of ways to establish a positive online reputation, some of which are fairly intuitive and some of which may not be.  The most obvious step is simply to have an online presence.  If there is nothing about you on the Internet and someone makes a negative comment, the first thing everyone searching the Internet will find out about you will be the negative comment.  You don't to create a circumstance in which someone's first impression of you will be the rantings of a bitter or unreasonable person.

Having a webpage, however, is probably not enough to give you the online presence and search engine result ranking you will want to have.  Search engines — especially Google, which accounts for a massive share of all US-based Internet searches — give priority in ranking results to recent information.  Therefore, review sites, blogs, and social media tend to get preferable rankings as compared to static webpages.  Accordingly, a ten-year-old company webpage lacking dynamic, updated content probably will not outrank an online review on a popular customer review website that mentions you by name.  A much more effective way to ensure that your name is associated with positive comments in search results is to consistently generate new content online, preferably using your own website (or blog) as well as other platforms.

Go Ahead…Google Yourself

"Google" yourself.  Then "Bing" yourself.  Go ahead — there is no shame in it.  In fact, in this era, it is almost irresponsible not to do so.  Searching for your own name on the major search engines (i.e., Google and Bing), with and without key terms describing your services or products, is an important part of understanding how customers and potential employers find information about you.  (Be sure to log out of the search engine and clear your cookies before running the search so that your results are not skewed by information the search engines already know about your search preferences.)  Do you appear on the first page of results?  Go through the first five pages.  Is there any negative information?  Is there any outdated information?  Do your competitors show up? 

Now that you know what your search results are like, it will be important to engage some search engine optimization ("SEO") techniques and monitor your online presence.  To monitor yourself online, repeat the exercise of searching for yourself and related terms on a regular basis — perhaps even monthly. 

Next, set up an "alert" using Google Alerts so that newly-created content using your name from all over the Internet will be brought directly to your attention.  If you are not familiar with Google Alerts, do a YouTube search for "Google Alerts" and watch an official video that explains this useful tool.  

You will quickly find tens of thousands of sources of advice on how to optimize your search engine results.  Many of them are outdated or simply wrong.  Some are even harmful.  Search engines are constantly adjusting their algorithms to prioritize the content they deem most relevant to their users and to penalize those who spread unwanted material ("spam").  Right now, the most reliable step you can take to optimize your search engine results is to generate relevant, timely content and distribute it using social media and similar websites.  
There are many more sophisticated SEO strategies that can be effective, but they tend to become outdated fairly quickly, and describing them is beyond the scope of this article.  Focus on the basics first:  Create interesting, useful content; share it with the world on a regular basis using a blog or other website; and share it with your network using social media.  In addition, you can curate content created by colleagues and others to share with your network.  Eventually, you will find that your search results begin to populate with interesting, relevant content that casts you in a favorable light.

When The Negative Comment Arises

For those of us who have long careers ahead of us, it seems almost inevitable that someone, somewhere, someday will post a negative remark about us online.  Our response, if any, should be appropriate to the circumstances.  I am reminded of Bruce Lee's famous remarks about a "mind like water."  Water ripples in proportion to the size and force of the stone thrown into it and then quickly returns to a state of calm.  Your response should be exactly proportional to the harm — no more and no less — and you should promptly return to a state of equilibrium. Of course, this is easier said than done.

Don't Feed The Trolls

Often, the worst thing you can do in response to a negative comment is to acknowledge it.  Some negative comments are nothing more than an attempt to bait you into a response.  Generally, your response will merely draw attention to the comment and give the commenter some credibility.  Therefore, you should ordinarily refrain from responding in the same online forum. 
Genuinely Harmful Comments

Occasionally, a comment could be so harmful to your professional reputation and so prominently featured in search results that it warrants a response.  Remember that you are likely to amplify the perceived harm in your own mind, so, before you conclude that a remark is worthy of a response, confer with some objective, trusted advisors.  If they are in agreement, proceed with an appropriate response.  The extent and form of the response will depend on the forum and the nature of the harmful comment. 

Generally, you are well-advised to communicate directly with the commenter to demand that the false or defamatory comment about you be removed (assuming you can identify the poster from the post).  When an online comment is not clearly false but is nonetheless harmful, and the poster refuses to remove it voluntarily or you cannot identify the poster, you may have success dealing with the provider of the forum. 

Comments on consumer review websites tend to achieve high search rankings and, therefore, high visibility.  Some consumer review websites allow offended parties to challenge negative reviews.  However, most review sites are less than helpful.  Google says that it provides a mechanism to flag inappropriate business reviews, but it "[does] not arbitrate disputes and more often than not, we leave the review up." Yelp, a popular review website, claims it will not remove a negative review unless the review violates the terms of use on its face, such as a review that explicitly states that it relies on secondhand information.  Comments on social media sites such as LinkedIn, Facebook, and Twitter are subject to policies and terms of use, and most provide a mechanism to report and limit offensive behavior.  Usually this process involves simply reporting a malicious or abusive comment to the provider of the social media platform.  LinkedIn's Use Agreement prohibits "unprofessional behavior by posting inappropriate, inaccurate or objectionable content."  It also prohibits the use of LinkedIn to "harass, abuse or harm another person" or post "unlawful, libelous, abusive, obscene, discriminatory or otherwise objectionable content."  The LinkedIn User Agreement further provides that "LinkedIn, in its sole discretion, may…remove content" and "restrict, suspend or close an account."  If you raise an objection with LinkedIn regarding another's comments about you, you will do well to adopt some of the forgoing key terms into your complaint. Facebook allows you to report a post "if you do not like [it]," which is not exactly restrictive.  The criteria Facebook will use in evaluating the reported post, however, are ambiguous.  According to Facebook's Community Standards:
Facebook does not tolerate bullying or harassment. We allow users to speak freely on matters and people of public interest, but take action on all reports of abusive behavior directed at private individuals.

Therefore, though Facebook will allow you to report essentially anything, the post must generally rise to the level of bullying or harassment before Facebook will intervene.  In addition, Facebook allows you to "block" a user, which will prevent the user from being able to tag you in a post.  There appears to be no limit to your ability to use this feature.
Not All Pros Are Professionals
There are a number of reputation management companies in the marketplace now that claim to be able to build or rehabilitate one's online reputation.  Be careful about these companies.  Some of them do no more than "spam" the Internet with hollow blog comments and inane social media posts in a near-blind attempt to flood the Web with mentions of your name.  Search engines such as Google are on to these ham-fisted tactics and may penalize you in search rankings as a result.  For example, a Michigan law firm paid nearly $50,000 to an SEO company to improve its ranking in search results.  In a recent lawsuit against the SEO company, the law firm alleged that not only did the SEO company fail to improve the law firm's search engine ranking, it also actually caused harm.  If you must use a third party to assist you in this area, choose one with experience in your field and with credible references, and be ready to collaborate extensively to ensure that the content published on your behalf is relevant to your audience and reflects your own standards of professionalism. 
Keep Calm And Carry On
Finally, try not to get too distracted by a negative comment.  It is probably nowhere near as monumental as you think it is.  Rather than obsessing about it, focus on all the positive developments in your career and life and how you can enhance those positive items.  Think for a moment about five people whose life and work you admire.  With a little research online, you can probably find plenty of criticism about each and every one of them.  Criticism — even valid criticism — is often a sign you are doing enough right to have garnered attention in the first instance.  Remember, the only people who escape all criticism in this world are those who do nothing, say nothing, and achieve nothing.  

November 22, 2013

More on Elder Financial Abuse

I've written an article about North Carolina's new law designed to further protect older adults from financial exploitation, and it was published in Gray Matters (the official newsletter of the Elder & Special Needs Law Section of the North Carolina Bar Association) this week.  You can read it here or here.

You might also be interested to read the first column in the newsletter, the Chair's Comments, in which Bob Mason and I discuss the effects of the new statute on estate and Medicaid planning.

My friend and law school classmate Mike Anderson has written a more technical piece about the new law for the Estate Planning & Fiduciary Law Section's newsletter, The Will and The Way, focusing on criminal liability and the ability of agencies to obtain a subpoena.  (Mike's practice includes fiduciary litigation.)

If you read the North Carolina Business & Banking Law Blog regularly, you may recall that I first wrote about the new law in August, with related posts in September (addressing federal agency guidance for financial institutions) and October (sharing a PowerPoint presentation from a speech I gave on the topic at a joint seminar of the NC Bankers Association and the NC Credit Union League).

November 15, 2013

Should Financial Institutions and Other Businesses Be Active in Social Media?

Should financial institutions and other businesses be active in social media?
Photo credit:U.S. Army/ / Public Domain Mark 1.0

The promise of social media for business is immense: increased brand awareness and affinity, exponential growth through tacit endorsement ("sharing," "liking" and other forms of "social proof"), and a rich source of customer data.  It's no wonder so many companies are jumping into the Social Web.

Some consumer brands have a fun-loving image that easily lends itself to marketing the brand through social media.  Other businesses, like banks, have a much more staid brand, which means the free-for-all that is social media can be hazardous to the brand if mis-managed. 

The American Banker has compiled its list of the "Seven Biggest Social Media Blunders by Banks," and I must admit, they are perversly entertaining.

The most recent example of a social media disaster was JP Morgan Chase's Twitter Q&A with Vice Chairman Jimmy Lee this week, which used the hashtag #AskJPM.  The idea came following JP Morgan's role in the Twitter IPO, and was designed to capitalized on the relationship with Twitter.  Disgruntled customers, pranksters and political activists soon inundated the Twitterverse with unwelcome questions, comments and criticisms.  JPM cancelled the session abruptly, tweeting, "Bad idea. Back to the drawing board."

In July, Bank of America goofed after an Occupy Wall Street activist Tweeted a picture of himself being chased by police. BofA's Twitter account responded with the following Tweet: "we're here to help."  That led some commenters to remark that it appeared that the bank's Twitter account was being managed by a "robot." 

Barclays was criticized for creating a fictional character, "Dan," on its Facebook page, and then "talking down" to him.  Critics claimed Barclays appeared to take a condescending attitude towards its customers. 

In each of these cases, the root of the problem was a failure to understand the forum and the prevailing sentiments and culture.  There is no mathematical formula for success in social media.  It is more art than science.  Social media is best managed by an individual who is fully engaged in the space, not by a "n00b" (Internet slang for a newbie) or a slow-moving committee.  Identifying an employee to manage social media account who has the sound judgement to responsibly manage the brand as well as the social media savvy to read the mood of the medium can be difficult, but is worth the effort. 

...and this is to say nothing of the legal and compliance risks implicated by social media (but that's another post)!

The lesson is clear: Banks and other businesses need a savvy guide to navigate the minefield of social media.  My advice is to do it right, or don't do it at all.

November 2, 2013

(Yet Another) Update on Email Ethics for North Carolina Lawyers

Photo credit: Prad Prathivi @ Amodica:/ Foter
I have recently written (here and here) about legal ethics issues involved when a lawyer sends an email message to opposing counsel and copies the receiving lawyer's client (e.g., using the "cc" or "reply all" function).  (My first analysis of the State Bar Ethics Committee's opinion on the topic was published in The Business Lawyer in May 2013.)  There has been another development on this issue.  

At a meeting last week (October 25, 2013), the North Carolina State Bar Council adopted a revised opinion on this issue.  The opinion does not appear to have been officially reported yet, but yesterday, Charlotte healthcare lawyer Karen Gledhill reported to the members of the Business Law Section of the North Carolina Bar Association on the State Bar Council's decision.  Consistent with the revised proposal that I have previously described, whether a lawyer may copy a represented party on an email depends upon whether the lawyer can reasonably infer that the recipient's lawyer has consented, based on the facts and circumstances.

Gledhill reports that the State Bar Ethics Committee voted on October 24, 2013, to recommend the Ethics Opinion to the State Bar Council, which adopted the Ethics Opinion on October 25, 2013. She also summarizes (here) the relevant factors used to infer consent, as well as the commonsense guidance provided by the Council (e.g., that it is prudent to obtain explicit consent rather than infer it.)

October 16, 2013

More on Protecting Older North Carolinians from Financial Exploitation

I had the honor of speaking today about the new law designed to help protect older North Carolinians from financial exploitation at the Elder Financial Abuse Summit co-sponsored by the North Carolina Bankers Association and the North Carolina Credit Union League. 

We had a great turnout of financial services professionals from banks and credit unions across the state.  If you were not able to attend, I am sharing my handouts here.

Please feel free to share these materials with anyone associated with a financial institution so that they will be aware of the tools and protections financial institutions now have to combate elder financial exploitation.

October 11, 2013

Security breaches, unauthorized transfers, and corporate account takeovers, oh my!

  • What are a financial institution's obligations under federal and North Carolina law when there has been a security breach involving customer information?
  • When does an incident involving customer information become a "security breach" for which the law requires specific responses?
  • Who must bear the loss when there is an unauthorized transfer of funds in a consumer's account?
  • If a company's bank account is compromised (e.g., by a hacker) in a "corporate account takeover" and funds are transferred from the account without authorization, is the bank required to refund the company's money?

Photo by NCBA
Some of the hottest topics in financial services law these days involve security breaches, unauthorized transactions, and corporate account takeovers.  I addressed the legal aspects of each of these today in a presentation at the North Carolina Bankers Association's Security Summit.  The Security Summit attracts a great group of committed banking professionals, and I received numerous questions and comments on the topics covered in my presentation.  It was a genuine pleasure to participate in this well-planned, well-executed conference along with other interesting, knowledgeable speakers and competent, diligent bankers. 

I am posting the slides from my presentation here so those who were not able to attend the Security Summit will be able to see the highlights of the talk.*  I hope both bankers and commercial bank customers will find this information helpful and will be prompted to take steps to protect themselves from avoidable losses.

(Please feel free to share this blog post with others who might benefit from this information.)

Available at

[*As with all of the information I post here on the blog, this is shared for general educational purposes only, and does not constitute legal advice.  I will not be updating this information as the law develops, and I reserve the right to change my position on any issue addressed in these materials in the future.]

September 29, 2013

Federal Financial Agencies Issue Guidance Relevant to New N.C. Statute Protecting Older Adults from Financial Exploitation

You may recall that shortly after Senate Bill 140, which creates new mechanisms to protect older adults and disabled adults from financial exploitation, was enacted by the General Assembly, I summarized and analyzed the legislation on this blogJust a few days ago, several federal agencies jointly issued official guidance designed to make it easier for financial institutions to cooperate in those efforts.

Photo credit: Ed Yourdon / Foter
The CFPB, FRB, FDIC, OCC, NCUA, SEC, CFTC and FTC all came together to issue "Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults" on September 24, 2013.  The guidance is meant to assure financial institutions that the Gramm-Leach-Bliley Act (GLBA), which controls the privacy of consumer financial information, will not prohibit the reporting of suspected elder financial abuse to appropriate governmental agencies.  It says that "reporting suspected financial abuse of older adults to appropriate local, state, or federal agencies does not, in general, violate the privacy provisions of the GLBA or its implementing regulations."  For example, the FDIC's privacy regulations, which apply to state-chartered banks that are not members of the Federal Reserve System, provides in Part 332, 15(a)(7)(i) an exception from the non-disclosure rules "[t]o comply with federal, state, or local laws, rules and other applicable legal requirements."  The guidance makes clear that the FDIC believes this would apply in cases where state law calls for the reporting of suspected elder financial abuse.

The guidance does not go as far as to sanction to disclosure of information to non-governmental persons, such as a suspected victim's family members or close friends.  Recall that the N.C. Act gives financial institutions permission to solicit a list of trusted individuals from older and disabled adults, and requires that those financial institution notify the named individuals when exploitation of the customer is suspected.  Despite this omission in the federal guidance, financial institutions may derive some relief from other language in the GLBA regulations that create exceptions for disclosure of consumer's information:
"With the consent or at the direction of the consumer, provided that the consumer has not revoked the consent or direction; or
To protect against or prevent actual or potential fraud, unauthorized transactions, claims, or other liability...."
The federal agencies' guidance closes with a reminder that the filing of a Suspicious Activity Report (SAR) by a financial institution may be appropriate in some instances of suspected elder financial abuse, and references a May 2013 FinCEN publication in which the CFPB's Office of Financial Protection of Older Americans discusses the use of SARs for elder financial abuse reporting and in which FinCEN points out the new box on the SAR form to indicate suspected elder abuse. 

When the N.C. Act becomes effective on December 1, 2013, financial institutions may be more willing to participate in the solicitation of lists of trusted individuals and to report suspected abuse given the federal agencies' statement of support in this new guidance. 

August 23, 2013

NC Lawyers: An Update from the NC State Bar on Email Ethics

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I've previously written about legal ethics issues involved when a lawyer sends an email message to opposing counsel and copies the receiving lawyer's client (e.g., using the "cc" or "reply all" function).  My earlier analysis of the State Bar Ethics Committee's opinion on the topic was published in The Business Lawyer in May 2013.  In that article, I explained the State Bar Ethics Committee's position:

"The second part of the Opinion addresses the issue of implied consent by asking whether a lawyer may "reply to all" when he or she has received an email message on which opposing counsel has copied his or her own client. The answer, again, is 'no.' The Opinion completely rejects the concept of "implied consent.' In concluding consent must be explicit, the State Bar considered recent opinions of the state bars of New York and California."
The State Bar has since reconsidered, and recently published revisions to the proposed opinion.  The opinion now reads:
"The fact that Lawyer B copies her own client on the electronic communication to which Lawyer A is replying, standing alone, does not permit Lawyer A to 'reply all.' While Rule 4.2(a) does not specifically provide that the consent of the other lawyer must be 'expressly' given, the prudent practice is to obtain express consent. Whether consent may be 'implied' by the circumstances requires an evaluation of all of the facts and circumstances surrounding the representation, the legal issues involved, and the prior communications between the lawyers and their clients."
Therefore, while the best practice is to obtain express written consent before copying an opposing party on an email to opposing counsel, it may be possible to correctly infer consent from the facts and circumstances. 

Transactional lawyers, who often copy one another's clients on emails when putting together deals, will likely be relieved by the flexibility of the revised opinion.  In my view, this is a prudent decision by the State Bar Ethics Committee, and I commend the Committee for its willingness to listen to the commenters and take a measured approach to this matter.

You can read the entire revised opinion here.

August 17, 2013

Changes to North Carolina's Consumer Finance Act

The General Assembly recently passed, and the Governor signed, legislation modifying the North Carolina Consumer Finance Act, the statute that has regulated consumer finance companies for half a century.

What is the Consumer Finance Act?

The Consumer Finance Act requires that anyone who is in the business of making small loans to consumers must obtain a license from the Commissioner of Banks.  One of the benefits of obtaining a license is that licensees may charge more than the amount allowed by Chapter 24 of the General Statutes.  Chapter 24 (captioned "Interest") is one of North Carolina's usury statutes.  It generally limits interest on loans of $25,000 or less to the rate published by the Commissioner of Banks on the fifteenth day of each month.  The rate published by the Commissioner is determined by taking the latest published rate paid on six-month U.S. Treasury bills and adding 6%.  (The rate can never exceed 16%, however.)  Obviously, in the current interest rate environment, the rate allowed by Chapter 24 is very low, and few would be willing to make personal loans at such low rates.
Photo credit: Thomas Hawk / Foter / CC BY-NC

How has the Consumer Finance Act been amended?

Amount The dollar amount allowed for consumer loans under the Act was raised from $10,000 to $15,000

Permitted Rates. The rates allowed by law have also changed.  A licensee may now make a loan (or loans) that are not secured by real estate, payable monthly, with a maturity between one and eight years, at the following interest rates:
  • For a loan exceeding $10,000, 18% (per annum) on the outstanding principal balance; or
  • For a loan up to $10,000, 30% (per annum) on the first $4,000, 24% (per annum) on the amount of principal that is between $4,000 and $8,000, and 18% (per annum) on the remainder of the unpaid principal balance. (However, the consumer finance lender must enter into an agreement with a consumer for interest at the single simple interest rate that would earn the same amount of interest as allowed by this provision.)
(Under the previous statute, rates were capped under Section 173, but alternate rates were permitted under an "optional" provision in Section 176.  In practice, most loans were actually being made under the Section 176.  The amendments to the Act removed the rate caps in Section 173 and changed the provisions of Section 176 so that all consumer finance loans will be Section 176 loans in the future.)

Application of Payments. All payments must be applied first to late charges and other charges, then to accrued interest, and then to principal.   Prepayment penalties are forbidden.

Late Fees.   Prior to the changes, the Act did not address late fees.  The amendments now expressly permit late fees, subject to the following limitations:
  • A late fee may only be charged when a payment is past due for 10 days or more after the due date.
  • No late payment fee may exceed $15.00.
  • A late payment fee may not be charged more than once with respect to a single late payment.
  • If a late payment fee has been charged for a particular late payment, no late fee may be charged with respect to any future payment which would have been timely had it not been for the previous default.
Application of Lender's Insurance A licensed lender may collect a fee to purchase a nonfiling or nonrecording insurance policy (to reimburse the lender for losses if the lender's security interest is not recorded as required by the UCC).  If the lender collects a payment from the insurer after making a claim under the policy, the lender will be required to do the following:
  • Credit the full amount of the insurance proceeds to the balance of the loan.
  • If the loan is paid in full by the application of the insurance proceeds, the lender must close the loan account and cease collection efforts.
  • Provide the borrower written notice that, among other things, the loan has been partially paid or paid in full by the insurance proceeds.
  • Cancel or credit, as appropriate, any judgments against the borrower arising from the loan.
  • Report any adjustments to the credit bureau(s) to which the lender reports.
 Other Businesses on Premises.  Consumer lenders were already prohibited from making consumer loans in a place where another kind of business is solicited or transacted.  The changes make clear that merely collecting insurance premiums or paying insurance benefits is not considered "another business."

How did this amendment come about?

For more than 50 years, the consumer finance industry in North Carolina has been regulated under the North Carolina Consumer  Finance Act.  Consumer finance companies have for many years lobbied the General Assembly to increase the legal limits on rates and fees on consumer loans, arguing that the market, through competition and consumer preferences, would adequately control the rates and fees.  In 2009, a House Committee on Unbanked and Underbanked Consumers conducted a study and issued a report on consumer finance and its regulation.  In 2010, a Joint Legislative Study Commission on the Modernization of North Carolina Banking Laws and the Consumer Finance Act also studied lending under the Consumer Finance Act and ultimately directed the NC Commissioner of Banks (then Joe Smith) to continue studying the matter and to issue a report and recommendations to the General Assembly during the 2011 session.  You can read the Commissioner's entire report here. The Commissioner acknowledged that the industry was "not thriving", but did not recommend any changes to the Consumer Finance Act.

The bill amending the Consumer Finance Act (also known as Senate Bill 489 and Session Law 2013-162) was sponsored by Daniel G. ClodfelterRick Gunn; E. S. (Buck) NewtonChad Barefoot; Tamara Barringer; Andrew C. Brock; Harry Brown; Bill Cook; Warren Daniel; Don Davis; Jim Davis; Thom Goolsby; Ralph Hise; Neal Hunt; Brent Jackson; Clark Jenkins; Earline W. Parmon; Louis Pate; Ronald J. Rabin; Shirley B. Randleman; Bob Rucho; Jeff Tarte; and  Tommy Tucker.

The amendments became effective on July 1, 2013.

For more information about lending under the Consumer Finance Act, see the website of the North Carolina Office of the Commissioner of Banks here.

[On a related note, I've previously written about the proposal to bring back "payday lending" to North Carolina with enhanced consumer protections. That bill did not move forward.] 

August 10, 2013

Ten Thousand Opportunities to Share

This blog was read for the 10,000th time yesterday.  Based on the analytic data I receive from the website host, most of those views came from search engine results or social media, which indicates to me that there is a genuine appetite for more accessible, relevant information about business law and banking law. 

I'm very honored that so many people have found this resource useful.  Thanks to those of you who take the time to share relevant content with your friends and colleagues through email and social media.  I appreciate your willingness to help me spread the word about the ways in which the law affects businesses in North Carolina and elsewhere. 

As always, your feedback is much appreciated.  Please let me know if there is a recent development or hot topic you'd like to see addressed here.



August 9, 2013

New Foreign Remittance Transfer Rules Become Effective Soon!

Consumers in the United States send billions of dollars overseas each year, according to the Consumer Financial Protection Bureau (CFPB).  The classic example is the immigrant or migrant worker who sends funds from the U.S. to support family members overseas.  The CFPB has issued rules under authority granted by the Dodd-Frank Act that are intended to protect consumers who send money electronically to foreign countries.  Financial institutions and "money transfer businesses" have only a matter of weeks to decide whether to continue to offer covered services, and if so, to establish processes and procedures to comply with the new rules.
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The CFPB promulgated a "final" rule in February of 2012, but that rule has already been modified by another "final" rule, which is being referred to as the "2013 Final Rule."  (There have been a total of six rulemaking releases on this topic, with the latest following the 2013 Final Rule to make technical corrections.)  The 2013 Final Rule takes effect on October 28, 2013.

Under the 2013 Final Rule, a “remittance transfer” is an electronic transfer of money from a consumer in the United States to a person or business in a foreign country. It includes wire transfers, automated clearing house (ACH) transactions, and other methods.  The rule applies to most remittance transfers if they are more than $15.00 (USD).

New Disclosures.  The 2013 Final Rule generally requires companies to provide disclosures to a consumer before the consumer commits to pay for the remittance transfer. The disclosures must contain the following:
  • The exchange rate.
  • Fees and taxes collected by the originating company (e.g., the
o   The 2013 Final Rule makes optional the disclosure of taxes collected by the foreign country, in some cases. 
  •  Fees charged by the company's agents and intermediary institutions.
o   The 2013 Final Rule makes it optional, in certain circumstances, to disclose fees imposed by a recipient’s institution in the foreign country for transfers to the recipient’s account.
  • The (net) amount of money expected to be delivered abroad (though not necessarily accounting for certain fees charged to the recipient or foreign taxes).
  • A disclaimer that additional fees and foreign taxes may apply.
After the consumer has received these disclosures and consented to initiate the remittance transfer, the company must provide a receipt that repeats the above information.  In addition, the receipt must tell the consumer the date on which the money is expected to arrive in the recipient's account and how the consumer can report a problem with a transfer.

Companies must provide the disclosures in English. Sometimes companies must also provide the disclosures in other languages.

Substantive Consumer Rights.  In addition to rights to information, the 2013 Final Rule also generally requires that:
  • Consumers get 30 minutes to cancel a remittance transfer after they have consented to the transfer. Consumers get their money back if they cancel within this timeframe.
  • Companies must investigate if a consumer reports a problem with a remittance transfer. For certain errors, consumers can generally (i) get a refund or (ii) have the transfer sent again without additional charge if the funds did not arrive as promised.  (This might not apply under the 2013 Final Rule if the consumer provides an incorrect account number or misidentifies the recipient institution.)  Companies that provide remittance transfers are responsible for mistakes made by those who work for them.
The 2013 Final Rule also contains specific provisions applicable to scheduled transfers, as well as recurring transfers.

Exemption.  There is an exemption from the Rule for companies that consistently provide fewer than 100 remittance transfers each year.  Companies should note, however, that some providers may decide not to continue to offer remittance transfers in light of the burdens imposed by the Rule, and therefore those companies that do continue to offer remittance transfers may see an increase in volume in the coming year.  

The 2013 Final Rule, which is far more detailed than this brief summary, can be viewed in its entirety here