• the May 14, 2012 announcement by the Federal Reserve, FDIC and the OCC that  stress testing for banks with assets of more than $10 billion will likely be subject to a higher degree of scrutiny than smaller commercial banks

• JP Morgan Chase’s recent disclosure that it may have lost at least $2 billion in trading losses stemming from complicated and risky derivatives investments.

The JP Morgan disclosure adds to a growing sentiment that the nation’s largest banks operate very differently from smaller community banks and that Dodd-Frank and other regulations may be more effective when tailored between these two different market segments.

Community or regional banks are generally defined as having a local geographic scope, high amounts of loans and core deposits from their community, local directors and officers, a local corporate headquarters,  and other characteristics showing a strong connection to their local community.  Community banks often have less than $1 billion in assets, but also can include banks with up to $10 billion in assets if they exhibit the other characteristics of a community bank.

The business plan of a community bank primarily is focused on gathering deposits and making loans within the communities it serves.  The attached graphic provided by the Iowa Division of Banking compares the percentage of bank assets dedicated to loans by Iowa state chartered banks as compared to all U.S. commercial banks.

Community banks in Eastern Iowa have performed well during the past five years, as highlighted in a recent article in Business 380 Magazine. a notable point given the difficulties of the banking industry nationwide over the past five years.

What does this mean to our clients?  At least for now, stock investors appear to believe that community banks may more effectively manage their business through this economic recovery and the implementation of Dodd-Frank.  In the case of financial institutions, and particularly community banks, it also means a continued focus upon compliance costs.  For corporate clients, it is a reminder that not all banks are the same.  Some offer a wider array of products and services.  Others offer a greater focus upon relationship banking and customer service.

A final note: despite one of Dodd-Frank’s stated goals “to end ‘too big to fail’,” the largest U.S. banks slightly increased their market share of total deposits from June 2010 to June 2011.

The application of the CFIUS regulations is obvious when the sale involves military technology, but it can potentially apply to the sale of any type of business that might be deemed to implicate national security.  Past examples of sales involving CFIUS review (or its predecessor statute, Exon-Florio) include oil company sales and IBM’s sale of its laptop business to China-based Lenovo.  Other examples include the sale of a port management business to provide stevedoring services (loading and unloading of ships) as well as China-based Huawei’s difficulties with its unwound purchase of 3Leaf’s fiber optic business.

Factors that can come into play for the CFIUS Committee include whether the target U.S. company possesses technology subject to export controls (ITAR), has classified U.S. government contracts, owns technology critical to national defense, or if a case takes on particular political significance.

Specific factors that the CFIUS Committee may consider include whether the transaction involves (i) domestic production needed for projected national defense requirements, (ii) potential effects on United States international technological leadership in areas affecting United States national security, (iii) long-term projections of United States requirements for sources of energy and other critical resources and material; and the final all encompassing factor, (iv) such other factors as the President or the CFIUS Committee may determine to be appropriate, generally or in connection with a specific review or investigation.

The CFIUS process includes a pre-filing notification whereby the buyer and seller have the opportunity to notify CFIUS in advance of a filing.  After the actual filing is made, a 30-day waiting period commences for CFIUS to review the filing and request additional information.  In the event of more detailed review, this waiting period can be extended by an additional 45 days.

The CFIUS process need not be a laborious process in the overall context of a transaction, but it does require the inclusion of the CFIUS waiting period into the transaction timeline and a determination of the likely outcome of the CFIUS review process.  The CFIUS process also involves the handling of sensitive business and personal information for which special precautions are recommended in accordance with the Privacy Act of 1974, as amended.  The utilization of legal counsel versed in the CFIUS regulations can assist with streamlining the process.

Our firm has represented buyers and sellers in connection with CFIUS filings, most recently in 2011-12 when we prepared a joint CFIUS filing for buyer and seller in a transaction involving the purchase of a defense/aerospace business, as well as handling other regulatory matters and the transaction generally.

Another interesting note on CFIUS filings: they serve as an indirect indicator of the health of foreign direct investment in the U.S. economy.  CFIUS filings totaled 155 notices in 2008, followed by a 58% decline to 65 notices in 2009, and a 43% rebound in 2010 to 93 notices reviewed by CFIUS.  Final numbers for 2011 have not yet been released, but are anticipated to show an additional double digit increase from 2010.

From time immemorial, compensation reduction to executives engaging in bad acts has been a common provision in employment agreements.  The philosophy is simple; if an executive commits a malfeasance such as theft from the company or otherwise acts in direct conflict with the best interests of the company, then they don’t deserve to get paid.  But not all companies include such provisions in their employment agreements.  Not all such provisions provide the level of detail that eliminates ambiguity in their enforcement.  And many companies are not willing to enforce the provisions that they have, for fear of costly and time-consuming litigation or a desire to move on from the employee’s unfortunate departure and to devote their energies to improving the company’s future prospects.

Statutorily-required compensation recoupment from executives as a result of accounting restatements first came into prevalence in 2002 with the enactment of the Sarbanes-Oxley Act.  Section 304 of Sarbanes-Oxley provides that in the event of an accounting restatement due to material noncompliance of the issuer, as a result of misconduct, with financial reporting requirements under the federal securities laws, the company’s CEO and CFO shall reimburse the company for (i) incentive-based and equity-based compensation that was paid out to them, and (ii) any profits from the sale of company securities, each during the twelve (12) month period following the filing which contained the financial statements requiring the restatement.

Compensation “clawbacks” of senior executives further expanded in 2009 for companies participating in the federal Troubled Assets Relief Program (TARP).  These companies were required to agree to clawback any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate, regardless of whether they had engaged in misconduct.

Section 954 of Dodd-Frank extends this compensation “clawback” concept to include a greater number of senior management over a longer time period than is present under Section 304 of Sarbanes-Oxley.  Questions remain regarding who exactly will constitute “executive officers,” and what will constitute “material noncompliance,” among other things.  Interesting legal questions may also arise regarding the enforceability of Section 954 vis-à-vis previously-awarded compensation arrangements that will have been in existence before the new rules are implemented.  All the same, companies can expect to be required to adopt a recoupment policy relating to accounting restatements and applying to certain of its senior management in 2012, and may also be advised to include recoupment provisions in employment agreements with senior management on a going-forward basis after these new SEC rules take effect in 2012.

As we await SEC rulemaking on this matter, public companies are advised to review their existing employment agreements and incentive-based compensation arrangements to ascertain how these arrangements will likely be impacted by the new SEC rules.  In particular, Compensation Committees will want to be mindful that these new rules may impact their decision-making process regarding how to structure compensation for senior management.  Public companies may also want to consider proactively implementing a recoupment policy that will further encourage a culture of sound financial reporting, and that can later be tuned to fit the new rules after they take effect.  Please contact Thompson & Thompson LLP if you would like for us to provide you with a form Compensation Recoupment Policy for preliminary review and discussion.  We will be updating our form Compensation Recoupment Policy after the proposed rules for this policy have been published by the SEC.

While many of the provisions of this new law do not take effect until 2012 or depend upon upcoming FDA rulemaking, the FSMA has a “whistleblower” provision which took effect immediately.  This provision provides sweeping protections to employees who report in good faith on food safety violations related to food manufacturing or other food supply chain activities.  If due to such good faith reporting, such an employee is unfairly discharged or discriminated against with respect to compensation or other terms and conditions of employment, very costly fines can result.

Whistleblower cases are rare but can be crippling to a company if they occur as they can be quite punitive in nature.  Many industries or categories of companies have similar whistleblower policies related to other areas of the law, but whistleblower protections with respect to food safety is a new development.

To reduce the risks relating to potential whistleblower claims, we recommend that companies in the food industry immediately implement an FSMA whistleblower policy that provides a procedure for the reporting and investigation of food safety complaints by employees, and that prohibits retaliation against good faith reporting of complaints.  In addition, we recommend that companies consider providing senior management with whistleblower training so that management properly responds to food safety complaints by employees.  If handled correctly, this new law can be turned from a possible negative into a huge positive – steps towards improving the quality of your products by providing accountability throughout the organization.

Thompson & Thompson LLP has prepared a model FSMA Whistleblower Policy that can be promptly tailored to your company’s particular circumstances.  Please feel free to contact one of our attorneys for more information.

Issued by the Iowa Finance Authority (or other governmental entities), these Midwest Disaster Area Bonds are similar to a traditional bank loan, but with special activity taking place on the back end of the transaction.  Instead of lending money directly to the borrower, bonds are issued by the Iowa Finance Authority (or other governmental entity), the bonds are typically purchased by a bank, and the proceeds of the sale of the bonds is then lent to the borrower.  Since the bank is earning tax-exempt interest, the borrower receives a lower interest rate.  It may sound complicated, but the extra paperwork is only marginally more complex than many typical loan deals.

For Iowa businesses looking to expand or businesses interested in relocating to Iowa’s favorable business climate, obtaining tax-exempt bond financing might be an option that would result in lower interest rates.  This story in the Cedar Rapids Gazette highlights the program.   Thompson & Thompson LLP’s attorneys have represented borrowers taking advantage of such programs.  Contact us if you are interested in learning more about this attractive financing option for your business.