Category: Financial Services Law

Patents for Financial Services Summit

The National Law Review is pleased to bring you information about the upcoming Patents for Financial Services Summit:

The protection of patents and IP is critical to the financial services industry due to the increasingly competitive marketplace and the growth of patent trolls. You must ensure protection of your own innovation to remain competitive and take great care to avoid infringing on the patents of others. World Research Group’s 9th Annual Patents for Financial Services Summit, which is being held on July 25-26, 2012 in NYC is intended for in-house legal executives to engage in networking opportunities, shared best practices, hear cutting-edge case studies, and discuss new rules and regulations impacting financial services patent policies. This two-day Summit will consist of informative educational sessions and interactive panel discussions led by senior-level patent counsels and experts on patent trends and strategies.

Join our Patents for the Financial Services Summit and benefit from in-depth discussions on ways to grow patent strategies, practical case-studies and interactive panel discussions, featuring experienced and highly knowledgeable IP counsels, regulators, law firms and technology experts.

The 9th Annual Patents for Financial Services Summit addresses key issues and uncovers the latest developments including, but not limited to the following topics:

  • The America Invents Act and its impact on patent procedures and litigation
  • Implementing a successful monetization program to determine the most valuable and effective use of IP
  • Learning the newest updates from recent Supreme Court cases
  • Legal update on the US Patent Office Examination of financial services inventions post-Bilski
  • Aligning your IP department and outside counsel with corporate business objectives to impact the bottom line
  • Effectively managing your legal department activities and budget
  • Ensuring you consistently allocate resources to the right risks or opportunities, including identifying the cases to try and the cases to settle
  • Communicating with outside counsel to ensure an updated knowledge of the ever-changing legal landscape
  • Altering patent protection strategies to account for recent court decisions
  • Social media update on managing control over protected IP
  • Avoiding and managing patent litigation
  • Defending against patent trolls
  • Incentivizing employees and finding new ways to encourage creativity

The CFPB’s Consumer Complaint System: Key Points of Concern for Financial Services Companies

The National Law Review recently published an article by Stephanie L. Sanders and Richard Q. Lafferty of Poyner Spruill LLP regarding CFPB’s Consumer Complaint System:

The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to collect, investigate and respond to consumer complaints as part of its work in protecting consumers of financial products and services.  Over the past year, CFPB’s Consumer Response team has gradually begun taking complaints on credit cards, mortgages, private student loans, other consumer loans, and other bank products and services.  Because the complaint process could result in investigation or enforcement actions, financial services companies should be sure they understand the system and are prepared to respond promptly to complaints.  Below is a list of recommendations for financial service companies to deal with the complaint system.

Know How to Use the Complaint System

CFPB’s website now prominently includes a “Submit a Complaint” portal.  Consumers wishing to make a complaint in one of the above categories can simply click on the “Submit a Complaint” icon and follow the directions provided.  In addition, CFPB accepts complaints by telephone, mail, email, and fax.  The portal is the primary means of communication between CFPB and financial service companies, so companies should be familiar with the portal and establish procedures for fielding any complaints in a timely manner.  CFPB has provided aCompany Portal Manual explaining how the portal and the complaint process works.

Once a complaint is submitted, CFPB screens it to determine whether it falls within the agency’s primary enforcement authority, whether it is complete, and whether it is a duplicate submission.  If the complaint passes these tests, it is then forwarded to the company for response.  The company is notified of the complaint and can log into the portal to view all active cases.  Upon receipt of the complaint, the company must communicate with the consumer to determine the appropriate response.  The company’s response is submitted via the portal, and the consumer is invited to review the response.  The consumer can log onto the secure portal or call a toll-free number to receive status updates and review responses.  The consumer is then given an opportunity to dispute the response.

Be Prepared to Respond Quickly

CFPB requests that companies respond to complaints within 15 calendar days and resolve complaints within 60 days.  Failure to provide a timely response may trigger an investigation of the complaint by CFPB.  Since a complete response requires that the company correspond with the complaining consumer, companies should pursue a response quickly to ensure they meet CFPB deadlines.

Understand that Complaints May Result in Investigations or Enforcement Actions by CFPB

The Consumer Response Team prioritizes review and investigation of complaints where a consumer disputes the response or the company fails to provide a timely response.  In addition, the team analyzes groups of complaints to identify issue-specific trends.  In some cases, complaints are referred to CFPB’s Division of Supervision, Enforcement, and Fair Lending and Equal Opportunity for further action.  Financial services companies should thus be vigilant on the same matters, paying greater attention to disputed responses, ensuring that responses are timely, and monitoring for trends in the complaints received so that underlying problems are addressed before they are raised by the agency.

Understand that cCmplaints May Also Result in Investigations By Other Agencies

If a complaint is outside CFPB’s jurisdiction, it may be forwarded to the appropriate regulator (for example, while CFPB handles complaints on private student loans, it forwards complaints received about federal student loans to the Department of Education).

In addition, the Dodd-Frank Act requires CFPB to share consumer complaint information with the Federal Trade Commission (FTC) and other state and federal agencies.  For example, if CFPB receives a complaint about identity theft, it may share that with the FTC, which is the agency that has historically investigated such complaints.  As a result, financial services companies may need to anticipate receiving questions from the FTC about the effectiveness of their Red Flags program, which companies should have fully implemented in response to applicable FTC and other federal agency rules.  In addition, CFPB currently shares its complaints with the FTC’s Consumer Sentinel system, an online database of consumer complaints maintained by the FTC that is accessible by law enforcement.

Be Prepared for an Increase in the Volume of Complaints

Consumer use of the complaint system is off to a strong start.  CFPB recently issued a Consumer Response Annual Report summarizing the use of the complaint system from its launch in July 2011 through December 31, 2011.  The report indicates that CFPB received 13,210 consumer complaints during that time, including 9,307 credit card complaints and 2,326 mortgage complaints.  The most common credit card complaints involved billing disputes, identity theft, and APR or interest rates.  The most common mortgage complaints involved situations in which the consumer was unable to pay (loan modification, collection, foreclosure).  The complaint systems for bank products and services, private student loans, and other consumer loans only began in 2012, so the report did not cover those categories.  By the end of 2012, the CFPB expects that the complaint system will cover all consumer financial products and services.

Financial services companies should monitor these trends to identify issues that may affect their business.  They also should anticipate a significant increase in complaint volume as CFPB adds additional products to the complaint system and more consumers become aware of it.  By comparison, the FTC Consumer Sentinel fielded 1.8 million complaints in 2011.

© 2012 Poyner Spruill LLP

Once Is Not Enough: The Importance of Regular Communication Between Testators and Their Lawyers

 

When it comes to estate planning, an ounce of prevention is worth a pound of cure. Equally important, continuing consultation with a knowledgeable lawyer need not be time consuming or costly. Periodic reviews can ensure that estate papers provide for changes in circumstances and the law that would later prove difficult and expensive to resolve when the testator’s wishes must be implemented.

The example of George Wagner serves as a cautionary tale. In 1961, George, a childless bachelor, executed a last will and testament providing for a testamentary trust on his death, without a residuary clause. He appointed a corporate trustee as his trustee and executor, and bequeathed his property on his death to the trustee, in trust, for the benefit of his sister, Elizabeth, while she lived. On Elizabeth’s death, the trustee was to end the trust and distribute its property “only” to the “Ancient Free and Accepted Masons of Maywood, Illinois, Maywood Lodge No. 869,” with no interest to vest until the “the day upon which the Trust herein created shall terminate.” When George died in 1978, his will was admitted to probate, the trustee was appointed executor as he wished, and the trust was created with funds of $250,000.

Elizabeth died in 1986 in California, but nobody told the trustee, who administered the trust funds until 1995, when it learned Elizabeth had died. By then, the trust funds totaled over $500,000. The trustee also learned that the Maywood Lodge had been disbanded in 1982 and merged into another Masonic lodge, Pleiades Lodge No. 478.

The trustee’s duty was to fulfill George’s testamentary objectives, but because George did not say how to distribute the trust funds if the Maywood Lodge ceased to exist, the trust could be interpreted in different ways. If George meant to benefit any Masonic lodge into which the Maywood Lodge merged, the trust funds should go to the Pleiades Lodge. If George meant to benefit “only” the Maywood Lodge, his bequest lapsed when the Maywood Lodge was dissolved, and the trust funds should be distributed under the law of intestacy.

To resolve this issue, the trustee filed a complaint for construction of the trust in court, asking for directions on how to distribute the trust funds. A genealogical search found two paternal cousins of George in California, and the trustee named them and the Masonic lodges as defendants to the suit. George’s cousins and the Pleiades Lodge each asserted exclusive rights to the trust funds. There were no surviving witnesses who might have had insight as to George’s testamentary intent. The court was left to decide which legal doctrine to apply in the circumstances.

The court might have chosen the doctrine of deviation, which applies when a situation arises that is not covered by a trust’s specific provisions and was not anticipated by the settlor or testator. Under this doctrine, the court must gauge the overall purpose of the trust and fulfill the settlor’s intent by authorizing deviation from the trust’s terms, ascertaining as best it can what the settlor most likely would have done in circumstances that he or she did not contemplate. There are similar doctrines for charitable trusts, but those did not apply because George’s will did not contain an expression of charitable intent.

Alternatively, the court might have chosen the clear language rule, which holds that the court’s primary goal is to ascertain the settlor’s intentions, initially by looking to the trust language. If the words of the trust instrument are clear, the court must presume that they express the settlor’s intention and apply the language verbatim, without resorting to evidence of intent existing outside the trust instrument.

The court would have had a hard time making a decision. George plainly did not want his property distributed to strangers and had not anticipated that the Maywood Lodge would cease to exist before Elizabeth died. These circumstances would have occasioned application of the doctrine of deviation. But the language of the instrument was also unambiguous: the trustee was to distribute the trust property “only” to the Maywood Lodge, thereby excluding the Pleiades Lodge and leaving the trustee no choice but to distribute the trust funds under the law of intestacy. Either way, the court would at best have been approximating George’s intent.

In the end, the court did not need to resolve the controversy. The putative claimants settled the case, dividing the trust funds evenly. But the situation need not have arisen. Had George even occasionally consulted with a lawyer knowledgeable in estate planning, he could easily have updated his will and testamentary trust to include viable contingent beneficiaries if the Maywood Lodge ceased to exist before the time came to distribute his trust funds, and to include a residuary clause to distribute any remainder.

The case shows why clients should cultivate an ongoing relationship with lawyers who are well versed in estate planning, keep abreast of developments in the law, and will serve as a continuing resource as circumstances and needs change.

© 2012 Much Shelist, P.C.

Michigan Court of Appeals Issues Opinion Affecting Mortgages Foreclosed by Advertisement

The National Law Review published an article by Randall J. Groendyk of Varnum LLP regarding Mortgage Foreclosures:

Varnum LLP

The Michigan Court of Appeals has issued important opinion affecting foreclosure of mortgages by advertisement.

Michigan law prohibits starting a foreclosure by advertisement if a lawsuit has already been filed to recover payment of “the debt” secured by the mortgage.  Many have understood this law to mean that while a mortgagee may not file a lawsuit to recover a debt secured by a mortgage and at the same time foreclose the mortgage by advertisement, the mortgagee could simultaneously file a lawsuit against a guarantor based on a guaranty of the debt while at the same time foreclosing the mortgage by advertisement.  However, the recent Court of Appeals decision held that a bank could not foreclose by advertisement on a mortgage when at the same time it had filed suit against a guarantor.

The Court based its decision on the fact that the underlying loan documents contained language which defined “the debt” to include any guarantees, and held the bank violated Michigan law by foreclosing the mortgage by advertisement at the same time it was suing the guarantors.  The Court looked at the entire loan package, and not just the mortgage to reach its decision.  As a result, the Court held that the bank could not proceed with the foreclosure by advertisement.  Under the Court’s ruling, mortgagees may not foreclose a mortgage by advertisement while at the same time filing suit against guarantors.

© 2012 Varnum LLP

Why Your Qualified Plan – Isn’t

Recently The National Law Review published an article by Ben F. Wells and William M. Freedman of Dinsmore & Shohl LLP regarding Qualified Plans:

There are many generous tax benefits that come from having a “qualified” retirement plan (such as a section 401(k) plan). For example, as an employer, you can deduct your plan contributions, but participating employees don’t have to recognize the contributions as income until they receive a distribution; usually many years later. However, those tax benefits disappear if your plan loses its qualified status.

What can cause a plan to lose its qualified status?

Several things, but there are three types of problems that frequently arise:

  • Failure to adopt required plan amendments in a timely fashion. The IRS issues reams of guidance that require plan amendments. Fail to adopt even one on time, and your plan is technically disqualified.
  • Failure to administer the plan in accordance with its terms. Your plan document probably contains hundreds of pages of fine print and technical jargon. Most employers have never read it, at least not all the way through. But you are required to follow it to the letter. Slip up one time and your plan can be considered disqualified.
  • Failure to satisfy the Internal Revenue Code’s various tests. The Code contains a number of mathematical tests which specify who must benefit from the plan and what benefits must be provided. These tests also prohibit “discrimination” in favor of highly compensated employees and others. Many of those tests are extremely complex and easy to violate. Fail one of them, and fail to correct it within the allowable time periods, and your plan will be disqualified.

How to correct qualification failures

Luckily the IRS has provided ways to correct most qualification failures. For example, their “Employee Plans Compliance Resolution System” or “EPCRS” allows plan sponsors to correct qualification failures through a variety of methods, such as employer contributions, retroactive amendments and corrective distributions. Generally those corrections are designed to put the plan in a position as if the qualification error had not occurred. But these require experienced and knowledgeable advisors to navigate.

Conclusion

To help avoid disqualification, make sure that:

  • Your advisors are monitoring your plan to help eliminate potential causes of disqualification.
  • Your plan document is up to date, and matches the way you actually administer your plan. Don’t make a change to your plan without telling your document provider and third party administrator.
  • Someone in your organization is reviewing your plan’s discrimination testing and dealing with violations.

If you see a problem, correct it as soon as possible – before the IRS audits you. This way you can keep your qualified plan “qualified.”

© 2012 Dinsmore & Shohl LLP

With Form PF Compliance Dates Quickly Approaching, Advisers Managing $150 Million or More of Private Fund Assets Should Begin to Prepare

An article about Form PF Compliance written by Eric R. Markus, Victor B. Zanetti, and William L. Rivers of Andrews Kurth LLP recently appeared in The National Law Review:

On October 26, 2011, the Securities and Exchange Commission (the “SEC”) adopted Rule 204(b)‑1 under the Investment Advisers Act of 1940 (the “Advisers Act”) to require certain investment advisers that advise private funds to periodically complete and file the SEC’s new Form PF.1 Rule 204(b)-1 implements sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and is intended to provide the SEC with information relevant to assessing the risks that certain advisers and funds pose to the stability of the financial system. Although Form PF is filed confidentially and exempt from the Freedom of Information Act, the SEC is permitted to share this information with other federal agencies (most notably the Commodity Futures Trading Commission and the Financial Stability Oversight Council).

The requirements of the rule and Form PF are novel and the amount of information required to be assembled can be—at least in certain instances—quite substantial. With the initial compliance dates for investment advisers to certain large private funds approaching in June 2012, now is the time for investment advisers to become familiar with this new regulatory requirement, to determine when their initial Form PF filing will be due, and to identify and begin to assemble the types and extent of the information that will be required.

The full text of the adopting release and the final rule is available here. The full text of Form PF is available here.

What Investment Advisers Are Subject to Rule 204(b)-1 and Must File Form PF?

The new rule requires any investment adviser registered (or required to register) with the SEC under the Advisers Act that advises one or more “private funds” and has, in aggregate, $150 million or more in private fund assets under management to file Form PF. For purposes of determining whether they meet certain regulatory thresholds established by Form PF, related advisers must aggregate their assets under management; however, related advisers do not need to aggregate their assets if they are “separately operated.”2

What is a “Private Fund”?

The term “private fund” is defined in Section 202(a)(29) of the Advisers Act as any issuer “that would be an investment company,” as defined in the Investment Company Act of 1940, as amended (the “ICA”), but is excepted by virtue of the exemptions provided in Section 3(c)(1) (funds with fewer than 100 beneficial owners) or Section 3(c)(7) (funds owned exclusively by qualified purchasers) of the ICA. Real estate funds relying on the exemption provided in Section 3(c)(5) of the ICA are not required to file Form PF (although many real estate funds, because of the nature and structure of their investments, rely on the exemptions provided under Section 3(c)(1) or (7) and therefore may be required to file).

Form PF establishes different treatment—in terms of initial filing dates, the frequency of filings and the content of those filings—based on the characteristics of the private funds involved and their advisers. The most important distinction that Form PF draws in this regard is between “Large Private Fund Advisers” and all other investment advisers to private funds.

What is a “Large Private Fund Adviser”?

A “Large Private Fund Adviser” is defined as a private fund adviser that meets any one or more of the following criteria:

  • it has at least $1.5 billion in regulatory assets under management attributable tohedge funds as of the end of any month in the most recently completed fiscal quarter;
  • it has at least $1.0 billion in combined regulatory assets under manage­ment attributable to liquidity funds and registered money market funds3 as of the end of any month in the most recently completed fiscal quarter; and/or
  • it has at least $2.0 billion in regulatory assets under management attributable toprivate equity funds as of the last day of the adviser’s most recently completed fiscal year.

How are Regulatory Assets Under Management Calculated?

The term “regulatory assets under management” has the same meaning given to it in the SEC’s recent amendments to Part 1A, Instruction 5.b of Form ADV. This definition measures assets under management gross of outstanding indebtedness and other accrued but unpaid liabilities.

In addition, in order to prevent an adviser from restructuring the way it manages money to avoid compliance with Form PF, the rule requires regulatory assets under management to include (a) assets of managed accounts advised by the adviser that pursue substantially the same investment objective and invest in substantially the same positions as private funds advised by the firm unless the value of those accounts exceeds the value of the private funds with which they are managed; and/or (b) assets of private funds advised by any of the adviser’s “related persons” other than related persons that are separately operated.

What is a “Hedge Fund”?

Form PF defines a “hedge fund” as any private fund that is not a securitized asset fund4 if it meets any of the three following criteria:

  • it is permitted to pay one or more investment advisers (or their related persons) a performance fee or allocation calculated by taking into account unrealized gains;
  • it is permitted to borrow an amount in excess of one-half of its net asset value (including any committed capital); and/or
  • it is permitted to sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration).

Note that for purposes of the first criteria above, the fund must only be authorized to pay a fee based on unrealized gains (the classification applies whether or not the performance fee is actually paid). In the Adopting Release, the SEC clarified that the periodic calculation or accrual of performance fees based on unrealized gains solely for financial reporting purposes (as many private equity funds do) will not cause a private fund to be classified as a hedge fund. For purposes of the second and third criteria cited above, the private fund must be authorized to undertake such activities; actually undertaking the activities is not required.5

What is a “Liquidity Fund”?

Form PF defines a “liquidity fund” as any private fund “that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.” Thus, a liquidity fund would be a private fund that resembles a registered money market fund.

What is a “Private Equity Fund”?

Form PF defines a “private equity fund” as any private fund that is not a hedge fund, liquidity fund, securitized asset fund, real estate fund,6 or venture capital fund7 and does not provide investors with a right to redeem their interests in the ordinary course.

Does the SEC’s Focus on Hedge Funds, Liquidity Funds and Private Equity Funds Mean that Other Types of Private Funds are Not Subject to Rule 204(b)(1) and Form PF?

No. As the charts below show, an investment adviser that is not a Large Private Fund Adviser and that does not advise any hedge funds, liquidity funds or private equity funds must still prepare and file Form PF if it advises private funds with $150 million or more in private fund assets.

What are the Initial Compliance Dates for Form PF?

Form PF and Rule 204(b)-1 establish June 15, 2012 as the initial “compliance date” for any registered investment adviser (or an adviser that is required to register) that meets one or more of the following criteria:

  • it has at least $5.0 billion in regulatory assets under management attributable to hedge funds as of the last day of its fiscal quarter most recently completed prior to June 15, 2012;
  •  it has at least $5.0 billion in combined regulatory assets under management attributable to liquidity funds and registered money market funds as of the last day of its fiscal quarter most recently completed prior to June 15, 2012; and/or
  • it has at least $5.0 billion in regulatory assets under management attributable to private equity funds as of the last day of its first fiscal year to end on or after June 15, 2012.

An adviser subject to the June 15, 2012 compliance date as a result of its advice to hedge funds and/or liquidity funds/money market funds will need to file its initial Form PF for the first fiscal quarter ending after June 15, 2012. For most such advisers, this will be for the fiscal quarter ending June 30, 2012 (and will be due August 29, 2012 for hedge fund advisers and July 15, 2012 for liquidity fund advisers). An adviser subject to the June 15, 2012 compliance date as a result of its advice to private equity funds will need to file its initial Form PF for the first fiscal year ending after June 15, 2012. For most such advisers, this will be for the fiscal year ending December 31, 2012 (and will be due April 30, 2013).

For all investment advisers that are not subject to the June 15, 2012 compliance date, the compliance date will be December 15, 2012. However, whether such advisers will be filing with respect to the first fiscal quarter or first fiscal year ending after that date (and the deadline for such filing) will depend on the type of private funds advised and the amount of assets under management as set forth in Table I below.

TABLE I

Regulatory assets under management for the fiscal quarter or year (as the case may be) ending immediately after June 15, 2012 are, for hedge funds and liquidity funds, measured as of the last day of the fiscal quarter ending immediately prior to such date, and for private equity funds measured, as of the last day of the fiscal year ending immediately prior to such date. For any other Form PF filing under Rule 204(b)-1, regulatory assets under management, for quarterly Form PF filers, are measured as of the end of each month in the immediately preceding fiscal quarter (and the threshold is passed if, as of any month end, the assets under manage­ment exceed the relevant threshold), and, for annual Form PF filers, are measured solely as of the last day of the immediately preceding fiscal year.

What Type of Information Must Be Included in the Form PF?

As with other issues under the new Form PF, the answer to this question depends on the size and nature of the private funds advised. Investment advisers to private funds (other than Large Private Fund Advisers) have much more limited disclosure obligations than Large Private Fund Advisers. In addition, as it relates to Large Private Fund Advisers, the additional disclosures required have been tailored to whether the private fund advised is a hedge fund, liquidity fund or private equity fund. Table II below summarizes the information requirements imposed by Form PF.

TABLE II

Investment Advisers should start now to determine whether they will be required to file the new Form PF, to determine the applicable filing date for any form PF filing, and to identify and begin to assemble the required information necessary to complete the form.

1. See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Release No. IA-3308; File No. S7-05-11 (October 31, 2011) (the “Adopting Release”).

2. An adviser is not required to aggregate its private fund assets with those of a related person if the adviser is not required to complete Section 7.A of Schedule D to its Form ADV with respect to such related person. The criteria for excluding a related person from Section 7.A of Schedule D to an adviser’s Form ADV include (i) the adviser having no business dealings with the related person in connection with advisory services provided to its clients; (ii) the adviser not conducting shared operations with the related person; (iii) the adviser not referring clients or business to the related person, and the related person not referring prospective clients or business to the adviser; (iv) the adviser not sharing supervised persons or premises with the related person; and (v) the adviser having no reason to believe that its relationship with the related person otherwise creates a conflict of interest with its clients.

3. An adviser that manages liquidity funds and registered money market funds must combine the assets in those funds for purposes of determining whether it qualifies as a Large Private Fund Adviser.

4. A securitized asset fund is a private fund whose main purpose is to issue asset backed debt securities.

5. This test does not require that the fund’s organizational documents expressly prohibit such leverage or short-selling as long as “the fund in fact does not engage in these practices … and a reasonable investor would understand, based on the fund’s offering documents, that the fund will not engage in these practices.” SeeAdopting Release at page 28.

6. A real estate fund is defined as a private fund that invests primarily in real estate and real estate-related assets as long as it is not a hedge fund and does not provide investors the right to redeem in the ordinary course.

7. A venture capital fund is defined by reference to Rule 203(l)-1 of the Advisers Act. That rule is complex, subject to various exceptions, definitions and other discussions, and easily could be the subject of its own client alert. In short, a venture capital fund is defined as a private fund that: (i) holds no more than 20 percent of the fund’s capital commitments in certain non-qualifying investments; (ii) does not incur leverage, other than limited short-term borrowing; (iii) does not offer its investors a right to redeem except in extraordinary circumstances; (iv) represents itself as pursuing a venture capital strategy; and (v) is not registered as a business development company.

8. For purposes of calculating the amount of regulatory assets under management by a manager to a liquidity fund, regulatory assets under management include the combined assets under management attributable to all liquidity funds and registered money market funds.

9. A “Large Private Fund Adviser” includes (i) any adviser that has at least $1.5 billion in regulatory assets under management attributable to hedge funds, (ii) any adviser that has at least $1.0 billion in regulatory assets under management attributable to liquidity funds and registered money market funds, or (iii) any adviser that has more than $2.0 billion in regulatory assets under management attributable to private equity funds.

10. An adviser solely to private funds other than hedge, liquidity and private equity funds would not be a Large Private Fund Adviser regardless of the assets under management in those funds.

11. See Note 9.

12. Form PF requires additional disclosures in Section 2b by Large Private Fund Advisers with respect to any hedge fund that has a net asset value of at least $500 million.

13. See Note 10.

© 2012 Andrews Kurth LLP

FTC Obtains Injunction, Asset Freeze on Alleged Mortgage Scam

The National Law Review recently published an article by Steven Eichorn of Ifrah Law regarding a Recent FTC Injunction:

The Federal Trade Commission has obtained an order from the federal court for the Central District of California for a preliminary injunction and asset freeze against all the defendants in an alleged mortgage modification scam.

The complaint was filed against California-based Sameer Lakhany and a number of related corporate entities for violating the Federal Trade Commission Act and the Mortgage Assistance Relief Services Rule, now known as Regulation O.This was the first FTC complaint against a mortgage relief scheme that falsely promised to get help for homeowners who joined with other homeowners to file so-called “mass joinder” lawsuits against their lenders.

The complaint listed two separate alleged schemes that collected over $1 million in fees and used images of President Obama to urge consumers to call for modifications under the “Obama Loan Modification Programs.”

The first scheme was a loan modification plan under which the defendants allegedly promised substantial relief to unwary homeowners from unaffordable mortgages and foreclosures. Their website featured a seal indicating that it was an “NHLA accredited mortgage advocate” and that NHLA is “a regulatory body in the loan modification industry to insure only the highest standards and practices are being performed. They have an A rating with the BBB.” Unfortunately, the NHLA is not a “regulatory body” and it actually has an “F” rating with the BBB.

The defendants reinforced their sales pitch by portraying themselves as nonprofit housing counselors that received outside funding for all their operating costs, except for a “forensic loan audit” fee. According to the FTC, the defendants told consumers that these audits would uncover lender violations 90 percent of the time or more and that the violations would provide leverage over their lenders and force the lenders to grant a loan modification. The defendants typically charged consumers between $795 and $1595 for this “audit.” Also, if the “audit” did not turn up any violations, the consumers could get a 70 percent refund. Unfortunately, there were often no violations found, any “violations” did not materially change the lender’s position, and it was nearly impossible to actually get a refund for this fee.

The second alleged scheme was that the defendants created a law firm, Precision Law Center, and attempted to sell consumers legal services. Precision Law Center was supposed to be a “full service law firm”, with a wide variety of practice areas. It even claimed to “have assembled an aggressive and talented team of litigators to address the lenders in a Court of Law.” However, the FTC charged that the firm never did anything besides for filing a few complaints, which were mostly dismissed.

To assist Precision Law Center in getting new clients, the defendants sent out direct mail from their law firm that resembled a class action settlement notice. The notice “promised” consumers that if they sued their lenders along with other homeowners in a “mass joinder” lawsuit, they could obtain favorable mortgage concessions from their lenders or stop the foreclosure process. The fee to participate in this lawsuit was usually between $6,000 to $10,000. The material also allegedly claimed that 80 to 85 percent of these suits are successful and that consumers might also receive their homes free and clear and be refunded all other charges.

The defendants’ direct mail solicitation also contained an official-looking form designed to mimic a federal tax form or class action settlement notice. It had prominent markings urging the time sensitivity of the materials and it requested an immediate response.

Obviously, these defendants employed many egregious marketing techniques that crossed the FTC’s line of permissibility. However, in light of the FTC’s renewed focus on Internet marketing, even a traditional marketing campaign should be carefully crafted with legal ramifications in mind.

As a final note, it is always smart not to antagonize the FTC by proclaiming (like the defendants here did) that they are “Allowed to Accept Retainer Fees” because it was “Not covered by FTC.” We couldn’t think of a better way to get onto the FTC’s radar screen!

© 2012 Ifrah PLLC

Protecting Your Rights as an Additional Insured: Why a Certificate of Insurance Is Not Enough

An article by Daniel J. Struck and Neil B. Posner of Much Shelist, P.C. regarding Certificates of Insurance recently appeared in The National Law Review:

When entering into some types of contracts, you likely require that your business be named as an “additional insured” on the other party’s insurance policies. You might do this so that your insurance will not be depleted by defense and indemnification costs for losses for which you might be legally liable by virtue of your relationship to the other party, rather than due to your own direct negligence.

There are many situations in which it makes sense to be named as an additional insured. If you are a building owner, for example, you want to be an additional insured on the property and general liability insurance of your tenants in case one of them damages your building or an accident occurs involving a visitor. If you are a mortgagee, you want to be an additional insured on the property and general liability insurance of your mortgagors in case there is damage to the mortgaged property that reduces its value. If you are the owner or a contractor on a construction project, you want to be an additional insured on the general liability insurance of your contractors and subcontractors in case there is an injury to one of their employees. If you are a distributor or a retailer, you may want to be an additional insured on the insurance programs of the manufacturers of the products that you sell. Other examples abound. Despite the ubiquity of additional insured requirements, however, misconceptions about them are numerous.

Your efforts to protect your business cannot stop at simply including an additional insured requirement in your commercial contracts. Even the strongest possible additional insured provision does little good if the other party does nothing to secure your status as an additional insured with its insurers. Nor are your interests served if you do nothing to confirm that your business has indeed been named as an additional insured. In this context, trust is never a suitable substitute for concrete verification, and otherwise careful and responsible businesses are too often surprised because one of two very basic pre-conditions have not been met: (1) they never actually became additional insureds, or (2) there is no insurance in effect that provides coverage for a particular accident or loss. How is it possible that such basic conditions can trip up sophisticated businesses? And what can be done to avoid these pitfalls?

A Certificate of Insurance Is Not Insurance

It is not unusual that the only evidence of additional insured status is a form document—known as a certificate of insurance—that is usually prepared by the insurance broker for the named insured. The standard certificate of insurance generally states that the additional insured is an insured under the listed policy(ies) and that nothing in the certificate supersedes, changes or replaces what is contained in the identified policy(ies). All too frequently, certificates of insurance are collected, stored away and quickly forgotten. But a certificate of insurance does not create insurance coverage or confer status as an insured, nor is it part of an insurance policy.

Additional insured status is effectively conferred through an additional insured endorsement (i.e., an amendment to the terms of an insurance policy that is expressly incorporated into the relevant insurance policy). These amendments can take the form of an endorsement that specifically names a particular additional insured, or a general endorsement that identifies some class of parties as additional insureds.

If there is a dispute about whether the necessary additional insured endorsement was actually issued, the certificate will only be one of the factors that is taken into account. For example, if there is evidence that the insurer failed to act on a request to add an additional insured, the putative insured may be able to establish that it actually is an insured. If no endorsement was ever issued, and all the intended additional insured has is a certificate of insurance, the frustrated party may have a basis for a declaratory judgment claim against the insurer, as well as claims against the named insured and its insurance broker. But being forced to sue to establish insured status is not the same as being provided with a defense against an ongoing claim.

Here are a few best practices that a party can implement to help make certain its status as an additional insured is in place:

  • At a minimum, always insist on receiving a copy of the relevant additional insured endorsement because this is the instrument that establishes its status. A certificate of insurance is not enough.
  • An additional insured endorsement does not, however, state an insurance policy’s terms and conditions. In order to avoid being surprised by unexpected policy terms (e.g., a strict notice requirement or unfavorable notice of cancellation provisions), require a copy of the entire insurance policy under which you are an additional insured and be sure to read it.
  • Retain additional insured endorsements and the relevant insurance policies for as long as there is any potential that claims triggering those policies might be made.

A Certificate of Insurance Does Not Necessarily Entitle You to Notice of Cancellation

When you require that you be named as an additional insured, is it reasonable to expect that your status will remain in effect throughout the stated term of the insurance policy? Not necessarily. For example, what if you are a landlord and there is a fire at a restaurant operated by a financially troubled tenant in one of your properties? Unknown to you, the first-party property insurance policy to which you are an additional insured was cancelled two months before the fire. You may still be able to recover under your own property insurance policy, but that will affect your loss experience.

In order to avoid such situations, additional insured provisions in commercial contracts often contain a requirement that the additional insured receive notice of a cancellation at the same time as the named insured. If your business, however, relies only on a certificate of insurance as proof of its status, you run a heightened risk of an unwanted outcome.

Certificates of insurance are form documents. The most recent version of the standard certificate of insurance—often referred to as an ACORD certificate—contains a change in its terms that has the potential to surprise unsuspecting additional insureds. The current form states that “should any of the above described polices be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions.” In contrast, the pre-2009 version provided that “should any of the above described policies be cancelled before the expiration date thereof, the issuing insurer will endeavor to mail…written notice to the certificate holder in the event the insurance policy is cancelled.”

On its face, the old ACORD certificate at least appeared to support the expectation that an additional insured should receive a notice of cancellation from the insurer. However, it was dangerous to rely on those terms because the certificate itself was not part of an insurance policy. Insurers regularly took the position that the ACORD certificate could not modify the terms of an insurance policy.

The new form, however, is even more problematic. The current ACORD certificate refers to the notice of cancellation provisions of the relevant insurance policy. If the relevant insurance policy provides that the only party entitled to receive notice of cancellation is the named insured, then the new ACORD certificate is not likely to support the argument that an additional insured is also entitled to receive notice of cancellation. It is all well and good that your commercial contracts require that you receive advance notice of any cancellation But remember that an insurer has no reason to know the terms of the contract between you and its insured. If you never insist on reviewing the actual additional insured endorsement and the relevant insurance policy, you have no way of knowing whether or not you are entitled to notice of cancellation from the insurer.

What can an additional insured do to make certain that it receives advance notice of the cancellation of an insurance policy? Following are some things you should consider and steps you can take to protect your interests as an additional insured:

  • The preferred approach is to request that the insured have its insurer provide an endorsement stating that you, as an additional insured, are entitled to the same rights as the named insured in the event of cancellation. This can take the form of a separate endorsement or an amendment to an additional insured endorsement. Although you may receive pushback from the insured and its insurers, with suitable counsel and persistence, you may be able to obtain the requested endorsement.
  • Your contractual additional insured provisions should be revised to reflect the foregoing requirements.
  • If it is not possible to secure the requested notice provisions via endorsement, the best alternative is to require that the insured provide prompt notice of cancellation and/or regular confirmations that the relevant insurance remains in force.

Additional insured status is an asset that imposes certain obligations on the party enjoying that status. Furthermore, it should not be regarded as a “freebie” to be treated in a passive manner. It is important to take an active interest in securing and knowing your rights—or risk erosion of their value. Ultimately, to be sure that you have the additional insured protection that you expect consistent with your needs, consult with your lawyer and insurance broker before signing on the dotted line.

© 2012 Much Shelist, P.C.

Process Improvement Can Drive Shareholder Returns: Is Your Institution Ready for Process Improvement?

Recently an article by The Financial Institutions Group of Schiff Hardin LLP regarding Process Improvement was published in The National Law Review:

Many banks have been fighting for their lives since the financial crisis began in 2008—focusing on improving credit quality, finding capital and persuading the regulators to release enforcement actions. As the economy slowly improves and bank balance sheets stabilize, boards and CEOs will start to focus on growth opportunities and improving their banks’ operating efficiency, all with the goal of driving shareholder returns. With challenging revenue prospects going forward and increasing compliance costs, banks need to reduce the cost of their operating models while improving customer service and sales. This requires a laser focus on process improvement.

Reviewing your organization’s processes increases the likelihood that you can eliminate redundancy, reduce risk and expense, address regulatory requirements and take advantage of technology to better serve your banking customers. In this article, guest author Kristin Kroeger of Fifth Star Consulting LLC, reviews the criteria for assessing whether or not your bank is ready for an effective process improvement program.

Real Life Examples of Process Improvement Opportunities

  1. A community bank with a focus on C&I (commercial and industrial) lending survived the financial crisis and remains well capitalized. As its focus returned to organic growth in a very crowded and competitive market, the bank undertook a review of its end-to-end commercial lending processes with a goal of reducing its delivery cost and increasing its market responsiveness. By increasing the use of technology through adoption of a workflow tool and electronic document storage, as well as a realignment of its client-facing support staff, the bank was able to remove costly rework and improve its credit risk management process while reducing response time to client requests.
  2. A community bank that experienced a significant contraction in business during the financial crisis found itself with excess real estate and decentralized operations across multiple functions. By undertaking a process review of its deposit and retail operations, the bank determined it could consolidate certain functions, reduce headcount, eliminate a(non-target) leased location, and reduce operating risk within a better controlled environment.
  3. A community bank with new executive leadership decided to centralize its operations functions that historically had been managed within each line of business. This transition required the bank to examine each process it owned, challenge the status quo, and address existing technology and control deficiencies. As a result of the process review, redundant positions and processes were eliminated and a new operating culture emerged, which was better focused on the customer with a lower overall cost to the bank.

Success Begins by Asking the Right Questions Early

Before embarking on a process improvement effort, ask yourself these questions:

  • Does the bank’s executive management team fully support this effort?
  • Does the bank have a culture that rewards performance?
  • Does the bank understand how to effectively change management and, if so, does it have the capacity to make it happen?
  • Does the bank have the people with the right skills aligned with the process improvement project?
  • What value-based outcomes do we expect from the process improvement project?

Executive Management Engagement

Process improvement, by definition, invites an organization to question why it does things a certain way. Management support is critical to the success of these initiatives. Bank leadership must champion the value of becoming process-focused and provide the necessary resources—both time and money—to enable the success of the program. Having the CEO repeatedly remind employees why the process improvement program is valuable to the bank, its customers and shareholders, and the employees’ livelihood will motivate and drive employee commitment and performance.

To this end, bank management needs to focus on process improvement as a core initiative and tie it to the strategic vision, shared goals of the organization and compensation program. In doing so, you ensure that process improvement has the continuous focus of the management team and becomes part of the culture and fiber of the organization.

Culture of Success and Commitment To Managing Change

From the lowest paid employee to the top levels of management, a passion for doing the right thing breeds success in a company. Banks will benefit from using their reward and recognition program to complement process improvement plans. Recognize employees who embrace the program early. Continue to build a following by repetitive recognition of early wins and contributions.

Additionally, one of the biggest obstacles to a successful process improvement initiative is resistance from those who may benefit the most. Organizations that are most successful at getting results from process improvement have change management as a core discipline. First, banks should embed a readiness approach into their project plan that addresses training and communication to impacted employees. Second, ensure that affected employees have the time and training they need to learn the new methods. They need to know that management supports time away from daily activities if it is dedicated to learning new skill sets. Finally, be aware that organizations can only absorb so much change at one time. Plan your initiative so that impacted employees have time to adjust prior to adding more change to their environment.

Cross-Functional Engagement

One of the cornerstones of successful process improvement projects is to select what processes to study and then define where they start and where they end. When one particular bank department is sponsoring the improvement initiative, it is easy to become internally focused. Rarely, however, does the same department own the start point, handoffs and end point. Truly transformational change comes from evaluating an organization’s processes across functions. This requires interdepartmental involvement and a commitment to the same vision and goals through proper resourcing and support.

The Right People

While all of the prerequisites for a successful process improvement initiative are important, having the right people resourcing your project is critical to its success. How do you select the right people? Think about your bank organization and the people within it, and ask yourself the following questions:

  • Who is already improving processes on an informal, undirected basis?
  • Who amongst our employees has the credibility and courage to question the status quo?
  • Are there natural leaders in the organization who can establish rapport easily with other departments?
  • Which employees understand our banking business and have the ability to capture processes and document them?

While your employees may be great at what they do, often they may not be good at documenting what they do and explaining why it is done that way. Flourishing process improvement programs select employees who have the respect of their own team, can establish rapport with other departments, have the trust and credibility with management to question and interrogate current processes, and can document them with the level of specificity required by the project team. Lack of properly qualified resources will quickly grind your program to a halt.

Patience and Avoiding Perfection

Process improvement is a journey, and depending on the state of your organization it may take several iterations to achieve the smooth-running, well-oiled machine you are envisioning. If you are considering embarking on this journey, understand that it can be a multi-year voyagerequiring patience and commitment to achieve the long-term vision that enables a series of early wins to grow into an engine of continuous improvement.

Evaluate, Review, Audit

Regardless of your approach, any process improvement effort becomes dated and ineffective without a culture of continuous review. Banking organizations that truly embrace process improvement are evaluating their processes on a regular schedule, reviewing the processes with their business partners, and auditing how the employees perform their jobs against the documented processes.

© 2012 Schiff Hardin LLP