Introduction

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted as a measure to promote financial stability and protection for consumers through increased regulation of nearly every aspect of the consumer finance industry. Since its enactment, the Dodd-Frank Act has already had significant impact; yet, the great weight of this sprawling legislation is yet to be seen. Given the infancy of the Dodd-Frank’s provisions, as well as the recent transfer of authority over administration of a number of federal financial laws to the newly created Bureau of Consumer Financial Protection, increased litigation seeking to clarify this new legislation is inevitable.

In an effort to stay apprised of these significant industry changes, Burr & Forman’s Dodd-Frank Newsletter will serve as a monthly update of recent case law, news, and developments related to the Dodd-Frank Act.

- - RECENT CASES - -

Preemption

Cline v. Bank of America, N.A., No. 2:10-1295,2011 WL 4857934 (S.D. W. Va. Oct. 13, 2011).

Denying Bank of America’s motion for judgment on the pleadings, the Court held that Plaintiff Mark Cline’s claims were not preempted by National Bank Act (“NBA”).

Cline asserted several state law claims and violations of the West Virginia Consumer Credit and Protection Act (“WVCCPA”) regarding Bank of America’s loan collection activities. Relying on Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007), Bank of America argued generally that under the NBA, “federal control shields national banking

from unduly burdensome and duplicative state regulation.” Additionally, Bank of America cited 12 C.F.R. § 7.4008(d)(1), which, at the time the action was filed in November 2010, stated that “state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized non-real estate lending powers are not applicable to national banks.”

Addressing Bank of America’s arguments, the Court examined two important changes to NBA preemption following the Dodd-Frank Act. First, the Act added an entirely new provision to the NBA, 12 U.S.C. §25b, addressing preemption. Second, the OCC, pursuant to the Act, published an amended version of 12 C.F.R. § 7.4008(d)(1) with its principal preemption provision moved to subsection (e). The revised section 7.4008(e) provides:

State laws on the following subjects are not inconsistent with the non-real estate lending powers of national banks and apply to national banks to the extent consistent with the decision of the Supreme Court in Barnett Bank of Marion County, N.A., v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996): (1) Contracts; (2) Torts; (3) Criminal law; (4) Rights to collect debts; (5) Acquisition and transfer of property; (6) Taxation; (7) Zoning; and (8) Any other law that the OCC determines to be applicable to national banks in accordance with the decisions of the Supreme Court in Barnett Bank of Marion County, N.A., v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), or that is made applicable by Federal law.

12 C.F.R. § 7.4008(e).

In light of this new provision, the Court noted that a preemption determination is no longer focused whether the state law “obstructs, impairs,

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or conditions” a national bank’s full exercise of its lending powers. See Dodd-Frank Final Rule, 76 Fed. Reg. 43549-01 (July 21, 2011). Instead, the focus is on the preemption standard set out in Barnett Bank of Marion County v. Nelson, 517 U.S. 25 (1996). See id. The Court further stated that the Barnett Bank conflict preemption analysis focuses on whether the targeted statute either “(1) imposes an obligation on a national bank that is in direct conflict with national law, or (2) stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” 2011 WL 4857934 at *9. Applying this new standard, the Court determined that the WVCCA provisions neither directly conflicted with the federal law, nor did they stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Thus, 12 C.F.R. § 7.4008(e) did not support preemption of Cline’s claims.

Further, the Court analyzed Cline’s claims in light of the new section 25b to the NBA, which specifically provides that a state consumer financial law is preempted only if (i) its application would have a discriminatory effect on national banks, (ii) application of the Barnett Bank preemption analysis would require such preemption, or (iii) it is preempted by some other provision of federal law. See 12 U.S.C. § 26b. Importantly, the Court noted that the preemption standard in section 25b was “rather narrow,” and applied only to “state consumer financial laws.” 2011 WL 4857934, at *9. Further, in order to qualify as a “state consumer financial law,” a statute must “not directly or indirectly discriminate against national banks” and must “directly and specifically regulate the manner, content, or terms and conditions of any financial transaction . . . or any account relate thereto, with respect to a consumer.” Id.

Applying this standard, the Court first found that the WVCCPA sections governing Cline’s claims applied generally to debt collectors, rather than only to national banks. Next, answering the more difficult question of whether the WVCCPA “directly and specifically” regulated financial transactions, the Court found that it did not, and that it “instead focused on protecting West Virginia residents from unfair and abusive debt collection practices.” Id. at *11. Accordingly, the Court held that Cline’s

claims were not preempted by the NBA. Because neither section 25b nor section 7.4008 supported preemption of Cline’s claims, the Court denied Bank of America’s motion for judgment on the pleadings.

Shareholder Approval of Executive Compensation

NECA-IBEW Pension Fund ex rel. Cincinnati Bell, Inc. v. Cox, No. 1:11-cv-451, 2011 WL 4383368 (S.D. Ohio Sept. 20, 2001).

Plaintiff Phillip Cox, on behalf of shareholders, sued the directors of Cincinnati Bell, Inc for breach of the duty of loyalty after the directors paid $4 million in bonuses and $4.5 million in compensation to the chief executive. The board elected to make these payments after the company suffered a $61.3 million decline in net income, among other losses. Cincinnati Bell moved to dismiss Cox’s claims of breach of duty of loyalty and unjust enrichment. In support, Cincinnati Bell argued that the board of directors was protected by the business judgment rule, that Cox did not first make demand upon the directors to sue themselves, and that Cox’s unjust enrichment claim failed because the executives rendered services to the company.

Denying the motion to dismiss on all grounds, the Court first noted that under section 78n-1(a) of the Dodd-Frank Act, the “say-on-pay” provision, publically traded companies must include a separate shareholder resolution to approve executive compensation in their proxies at least once every three years. Pursuant to this requirement, the Cincinnati Bell Board included the shareholder resolution in its proxy. Despite the Board’s recommendation that the shareholders approve the proposed executive compensation for 2010, 66% of the shareholders voted against it.

Regarding duty of loyalty, the Court stated that section 78n-1(a) of the Dodd-Frank Act does not alter directors’ fiduciary duties. However, the Court acknowledged commentators’ opinions that a negative “say-on-pay” vote gives the court evidence that the directors breached their duty.

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See Danielle Myles, Experts Disagree on Validity of Say-on-Pay Lawsuits, INT’L FIN. L. REV., Aug. 2011.

Finding that Cox pled sufficient, factual allegations for a breach of duty of loyalty claim, the Court denied Cincinnati Bell’s motion on this ground. Because the board of directors approved and recommended the pay hikes, the Court found that Cox was not required to make a demand on the board to sue. Finally, the Court found that because Cox sufficiently pleaded a breach of the duty of loyalty claim, it was axiomatic that he also pleaded a claim for unjust enrichment.

Whistleblower Protections

Egan v. TradingScreen, Inc., 10 Civ. 8202, 2011 WL 4344067 (S.D.N.Y. Sept. 12, 2011).

Plaintiff Patrick Egan brought claims against his former employer, TradingScreen, Inc., alleging violations of the Securities Whistleblower Protection provision of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1)(B)(i), which affords a private cause of action for whistleblowers alleging retaliatory discharge. Egan also brought claims under the Securities Exchange Act and various claims under New York and Delaware law. The Court previously dismissed Egan’s Dodd-Frank and SEC claims, but allowed him to re-plead them. TradingScreen, Inc. renewed its motion to dismiss.

In the complaint, Egan alleged that in early 2009, he learned that Phillippe Buhannic, a named defendant and CEO of TradingScreen, Inc., was diverting TradingScreen, Inc.’s corporate assets to another company that Buhannic solely owned. In January 2010, Egan reported Buhannic’s activities to the president of TradingScreen, Inc., who through the board of independent directors, hired an outside firm to conduct an external investigation. The firm confirmed Egan’s allegations. On March 15, 2010, Buhannic gained control of the board to prevent the independent directors from forcing his resignation and fired Egan in August 2010, denying him the customary severance package.

Considering TradingScreen, Inc.’s first motion to dismiss, the Court found that Egan’s alleged cooperation with the outside firm could have met the Dodd-Frank definition of “acting jointly” to provide information to the SEC. However, Egan failed to plead facts showing that the transmission of such information actually took place. Upon its renewed motion to dismiss, TradingScreen, Inc. cited two recent developments that allegedly clarified the phrase “acting jointly.” First, the SEC adopted final rules for implementing certain whistleblower provisions of the Act. See Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34,300 (June 13, 2011) (to be codified at 17 C.F.R. §§ 240.21F-1 to 240.21F-17). The rules require that reports submitted by a whistleblower “be accompanied by sworn certifications by the whistleblower and counsel.” See id. Although TradingScreen, Inc. argued that Egan failed to follow these procedures, the Court found that these requirements apply only to disclosures filed anonymously with the SEC. Second, the Ninth Circuit ruled that individuals who reported information to the media with the expectation that it would be reported to some federal authority were not whistleblowers. This case, however, did not involve the media.

Finding that Egan failed to identify the party with whom he was “acting jointly” under the Dodd-Frank Act, the Court dismissed Egan’s second amended complaint. Additionally, the Court again dismissed Egan’s Securities Exchange Act claim. Because the court dismissed Egan’s federal law claims, it declined to exercise supplemental jurisdiction over his state law claims.

Pre-Dispute Arbitration Agreements

Ruhe v. Masimo Corp., No. SACV 11-00734 (JCGx), 2011 WL 4442790 (C.D. Cal. Sept. 16, 2011).

Plaintiff Michael Ruhe brought suit against his former employer, Masimo Corporation, a medical device manufacturer, alleging retaliatory discharge in violation of the Dodd-Frank Act. In connection with his employment, Ruhe signed an

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arbitration agreement. Masimo moved to compel arbitration of Ruhe’s claims and stay proceedings until after arbitration. In opposition, Ruhe argued that the Dodd-Frank Act bars arbitration of claims arising under it.

The Court first acknowledged that federal law strongly favors arbitration agreements. Regarding Ruhe’s argument that Dodd-Frank bars arbitration agreements, the Court held that Ruhe must arbitrate his 15 U.S.C. 78-u claim because the Dodd-Frank Act does not render pre-dispute arbitration agreements invalid. Explaining its holding, the Court referenced the Dodd-Frank Act’s whistleblower amendments to the Securities and Exchange Act of 1934 and the Sarbanes-Oxley Act, both of which contain provisions that render pre-dispute arbitration agreements unenforceable for claims arising under these sections. However, section 78-u contains no such provision.

In response, Ruhe argued that the absence of the provision was a drafting error on Congress’s part. But the Court declined to adopt Ruhe’s line of reasoning, opting instead to apply the plain language of the statute. Accordingly, the Court granted Masimo’s motion to enforce the arbitration agreement.

Effective Date

Williams v. Wells Fargo Bank, N.A., No. 11-21233-CIV, 2011 WL 4368980 (S.D. Fla. Sept. 19, 2011)

Plaintiff Ray Williams brought suit against Wells Fargo Bank, N.A. and Wells Fargo Insurance, Inc. after Wells Fargo allegedly charged Williams for force-placed insurance when he let his insurance payments lapse. Williams alleged violations of section 2605(m) of the Real Estate Settlement and Procedure Act (“RESPA”) and various other state law claims. Regarding the RESPA claim, Williams argued that Wells Fargo and Wells Fargo Insurance violated section 2605(m) because charges related to force-placed insurance were not “bona fide and reasonable.” See 12 U.S.C. § 2605(m). Wells Fargo Insurance, Inc. moved to dismiss Williams’s RESPA claim, arguing that the

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statutory provisions supporting that claim do not take effect until after the newly created Bureau of Consumer Financial Protection finalizes its implementing regulations, which do not occur for up to 18 months after the July 21, 2011 transfer date. In response, Williams argued that section 2605(m) took effect on July 22, 2010, which was several months before Wells Fargo Insurance, Inc. placed the new insurance on Williams’s property.

Sections 2605(k)-(m) of RESPA were enacted on July 21, 2010 by section 1463 of the Dodd-Frank Act. See Dodd-Frank, Pub. L. No. 111-203, 124 Stat. 1376 (2010), at § 1463. Relying on section 4 of the Dodd-Frank Act, which provides that the Act takes effect the day after enactment unless otherwise specified, Williams argued that section 2605(m) took effect on July 22, 2010 and that no other effective date was applicable to section 1463. Conversely, Wells Fargo Insurance contended that section 1400(c), titled “Regulations; Effective Date,” governs the effective date of section 1463. Both sections 1400(c) and 2605(m) fall under Title XIV of the Act. Reading the plain language of section 1400(c), the Court stated that it was clear that any section or provision of Title XIV shall take effect on either the date on which final regulations implementing such section take effect or, if regulations are not issued for that section, on the date 18 months after the designated transfer date. Rejecting Williams’s argument that section 1400(c) applies only to those provisions that require regulations, the Court dismissed Williams’s RESPA claim.

SEC Violations and Enforcement

Securities and Exchange Commission v. Daifotis, No. C 11-00137, 2011 WL 4714250 (N.D. Cal. Oct. 7, 2011)

In an enforcement action by the Securities and Exchange Commission (“SEC”) against Defendants Kimon Daifotis and Randall Merk, the SEC requested leave to file a first amended complaint. The SEC brought an action for several violations of the Securities Exchange Act regarding Daifotis’s alleged mismanagement of the Charles Schwab YieldPlus Fund, an ultra-short bond fund.

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The SEC alleged that Merk, the Executive Vice President at Charles Schwab and overseer of the YieldPlus Fund, similarly made misleading statements to dissuade investors from redeeming their investments when the Fund began to decline.

In addition to amending its existing claims against Daifotis and Merk, the SEC sought to add a claim against Merk for control-person liability under section 20(a) of the Exchange Act. At the time of the conduct at issue, section 20(a) provided: “Every person, who directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable. . . .” Securities Exchange Act of 1934, § 20(a), 15 U.S.C. § 78t(a). The 1975 amendments to the Exchange Act defined “person” as “any natural person, company, government entity, or political subdivision, agency, or instrumentality of a government.” § 3(a)(9), 15 U.S.C. § 78t(a). The Dodd-Frank Act amended section 20(a) by adding “(including the Commission in any action brought under paragraph (1) or (3) of section 78u(d) of this title)” after the phrase “controlled person is liable.” Pub. L. No. 111-203, 124 Stat. 1376-2223, 1865 (2010).

Merk argued that at the time of the conduct at issue, the Commission was not considered a “person” in the phrase “to any person” under section 20(a). Additionally, Merk argued that Dodd-Frank created new enforcement powers for the Commission. Conversely, the Commission argued that Dodd-Frank clarified a power that already existed under the Exchange Act. The parties agreed that under Dodd-Frank, the Commission is now considered a “person.”

Relying on the majority of precedent finding that the Commission was considered a “person” under the Exchange Act before the Dodd-Frank amendments, the Court held that the Commission could add its claim for control-person liability under section 20(a).

- - NEWS & DEVELOPMENTS - -

Dismantling Myths Around Wall Street Reform.

Neil S. Wolin, Deputy Treasury Secretary, has posted a number of entries on the Department of Treasury’s Blog, “Treasury Notes,” rebutting criticisms of the Dodd-Frank Wall Street Reform Act. The posts are framed as dispelling certain “myths” surrounding the reform program, including the myths that Wall Street reform hurts small banks and puts the U.S. at a competitive disadvantage internationally, and will continue throughout the week.

To see Wolin’s posts, visit the Treasury Notes blog: http://www.treasury.gov/connect/blog/Pages/default.aspx.

CFPB Issues Supervision and Examination Manual.

On October 13, 2011, the CFPB released a Supervision and Examination Manual for its examiners to use as a guide in overseeing companies that provide consumer financial products and services. The manual provides examiners with direction on how to determine if providers of consumer financial products and services are complying with consumer protection laws, and will be used initially in the examination of over 100 “large” banks subject to CFPB supervision.

The manual is divided into three parts: the first describes the supervision and examination process, the second contains examination procedures, and the third presents templates for documenting information about supervised entities and the examination process.

A copy of the manual is available at the following link: http://www.consumerfinance.gov/guidance/supervision/manual/

DODD-FRANK NEWS

Raj Date Gives Speech at Mortgage Bankers’ Association Conference.

At the 98th annual Mortgage Bankers’ Association Conference on October, 10, 2011, Special Advisor to the Secretary of the Treasury on the CFPB Raj Date gave a speech addressing the CFPB’s approach to “smart regulation.” Date began by giving background on the CFPB and explaining the three “serious, widespread deficiencies” in the financial products and services market: transparency, incentives, and fair competition. Date continued to explain the CFPB’s plan for “smart regulation,” and closed his speech with an invitation for feedback on areas meriting immediate focus.

For a copy of Date’s full speech, visit the following link: http://www.consumerfinance.gov/speech/remarks-by-raj-date-at-the-mortgage-bankers-associations-98th-annual-conference/.

SEC Issues Report on Examinations of Credit Rating Agencies.

On September, 30, 2011, the SEC issued a report summarizing its observations and concerns arising from the examination of ten credit rating agencies registered with the SEC as Nationally Recognized Statistical Rating Organizations (“NSROs”).

The SEC completed the examinations of these NSROs as required by the Dodd-Frank Act, which imposed new reporting, disclosure, and examination requirements to enhance the regulation and oversight of NSROs. The Dodd-Frank requires the SEC to conduct an annual examination of each NSRO and issue a report summarizing the findings of each examination.

For a full copy of the report, visit the following link: http://www.sec.gov/news/press/2011/2011-199.htm.

Community Bankers Speak Out Against Dodd-Frank Regulations.

On October 17, 2011, the House Financial Services Committee posted a blog entry containing

testimonials from a number of community banks speaking out against the Obama administration’s position that the Dodd-Frank Act will have no impact on small town and mid-sized banks. Notably, many of the testimonials express a similar concern for the ability of community banks to stay in business given the increased expense and burdens imposed by the Act. These testimonials add to already significant controversy regarding the unfair impact of the Dodd-Frank on small banks and businesses.

To see the full blog post, visit the following link: http://financialservices.house.gov/Blog/?postid=264807.

Proposed Legislation.

A number of proposed bills have been recently submitted in both the House and Senate addressing, and seeking to repeal, certain Dodd-Frank regulations. A summary of the recent bills is below.

1. Small Company Job Growth and Regulatory Relief Act

On October 14, 2011, Congressman Stephen Fincher introduced a bill seeking to amend Section 404(b) of the Sarbanes-Oxley Act of 2002, which currently requires a duplicative audit of companies with a public float of $75 million or more.

The bill, titled the “Small Company Job Growth and Regulatory Relief Act,” would simply raise the current $75 million threshold exemption in section 404(b) to $350 million, in order to “provide additional exemptions from the internal auditing requirements for smaller and newer companies.”

To see the full text of the bill, visit the following link: http://www.aba.com/aba/documents/news/AuditorBill101411.pdf.

2. Jobs Through Growth Act

On October 13, 2011, U.S. Senators John McCain, Rand Paul, and Rob Portman, joined by other Republican senators, introduced an alternative jobs bill titled the “Jobs Through Growth Act.” Senator Rob Portman explained the bill as “a pro-growth proposal to create the environment

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for jobs that stands in contrast to the short-term sweetener approach of the Obama administration, an approach that simply hasn’t worked.” Among other things, the Republicans’ plan calls for regulation reform, including the repeal of the Dodd-Frank Act. Specifically, the plan states:

We need to lift the burdens the Dodd-Frank bill placed on community banks and the small businesses that depend on them for financing, from oppressive new regulations to the resulting uncertainty that prevents growth. Repealing Dodd-Frank will also significantly reduce financing costs for consumers and businesses, as well as reduce costs to manufacturers in hedging their risks in the financial markets.

For a summary of the bill, visit: http://mccain.senate.gov/public/index.cfm?FuseAction=PressOffice.PressReleases&ContentRecord_id=feb4d840-c3be-83b1-a1fb-b7f2a039e94d.

3. Consumer Debit Card Protection Act

On October 13, 2011, Congressmen Jason Chaffetz and Bill Owens introduced a bill to the House of Representatives seeking to repeal the debit-card interchange price control provisions of the Dodd-Frank Wall Street Reform Act and to “restore balance to the electronic payments system.”

The bill, titled the “Consumer Debit Card Protection Act,” would repeal section 1075 of the Dodd-Frank Act and any regulations promulgated by the Board of Governors of the Federal Reserve System pursuant to section 920 of the Act.

To see the full text of the proposed bill, visit the following link: http://chaffetz.house.gov/Text%20of%20H.R.%203156.pdf

4. Freedom in Mobility and Banking Act

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

The bill, titled the “Freedom in Mobility and Banking Act,” would create a new section 51 to the Federal Deposit Insurance Act titled “Right to Close Personal Checking and Savings Accounts” and would, among other things, prohibit depository institutions from charging consumers any fee to close a checking or savings account.

To see the full text of the proposed bill, visit the following link: http://bradmiller.house.gov/images/stories/Freedom_and_Mobility_in_Consumer_Banking_Act_FINAL_July_27_2010_xml.pdf.

5. Financial Regulatory Responsibility Act

On September 22, 2011, Senator Richard Shelby introduced a bill to “require enhanced analysis and justification of regulations proposed by certain Federal banking, housing, securities, and commodity regulators, and for other purposes.”

The bill, titled the “Financial Regulatory Responsibility Act,” will require financial regulators to provide clear justification for proposed rules and to determine the economic impact of the rules, including their effect on growth and net job creation. The bill also seeks to improve the transparency and accountability of the regulatory process and reduce the burden of existing regulations.

To see the full text of the proposed bill, visit the following link: http://www.bdamerica.org/wp-content/uploads/2011/09/Bill-Text-Financial-Regulatory-Responsibility-Act-bill-text.pdf.

No representation is made that the quality of services to be performed is greater

than the quality of legal services performed by other lawyers.

David A. ElliottPartner, Litigation

Ph: (205) 458-5324 n delliott@burr.com

About David: David practices in the firm’s Litigation section and handles all types of civil litigation, with a focus on financial services litigation. He currently

serves as Chair of the firm’s Financial Services Litigation Section, and has represented banks, finance companies, and mortgage companies in all areas of statutory and common law litigation, as well as in asset based recovery actions. David also has extensive experience with enforcing arbitration agreements and with corresponding litigation before various arbitration associations.

Rachel M. BlackmonAssociate, Litigation

Ph: (205) 458-5483 n rblackmo@burr.com

About Rachel: Rachel is an associate in the Financial Services Litigation practice group. She received her J.D., summa cum laude, from the

University of Alabama School of Law, where she was Senior Editor of the Alabama Law Review and was selected as a member of Order of the Coif.

S. Kristen PetersAssociate, Litigation

Ph: (205) 458-5169 n kpeters@burr.com

About Kristen: Kristen practices in the firm’s Financial Services Litigation practice group. She received her J.D., magna cum laude, from the

Cumberland School of Law at Samford University, where she served as the Writing Editor of the Cumberland Law Review. In addition, she was a Judge Abraham Caruthers Teaching Fellow and a Dean’s Merit Scholar. Kristen received her B.A. from the University of Virginia.

- - ABOUT THE EDITORS - -