Maryland Legal Alert for Financial Services

In This Issue:

FDIC RELEASES SUPERVISORY HIGHLIGHTS

SURETY'S SUBROGATION RIGHT TO RETAINAGE TAKES PRIORITY OVER SENIOR LIEN OF LENDER

SEC ISSUES GUIDANCE ON PERMISSIBLE INVESTMENT ADVISORY SERVICES BY BROKERS AND DEALERS

FDIC Releases Supervisory Highlights

The Federal Deposit Insurance Corporation (FDIC) recently released a publication summarizing compliance supervision highlights from calendar year 2018. The FDIC indicated that the goal of the publication is to give a high level overview of the compliance issues the FDIC identified and provide best practice guidance. The publication lists these main areas of compliance concern: (1) overdraft program disclosure deficiencies (inadequately disclosed balance calculation methods, leading to point of sale overdrafts); (2) line of credit finance charge calculation problems (inaccurate periodic statement calculations); (3) Electronic Funds Transfer Act (EFTA)/Regulation E error resolution concerns (failure to properly investigate disputes and provide required notices); (4) Real Estate Settlement Procedures Act (RESPA) anti-kickback violations (office rentals/marketing agreements viewed as impermissible kickbacks); and (5) payment deferral programs (inadequate program disclosures).  For each compliance topic, the FDIC provided a list of steps financial institutions can take to mitigate compliance risk

Practice Pointer: Financial institutions should review the FDIC publication and compare the “best practice” mitigation steps to current operations to strengthen existing compliance programs related to the noted areas of concern.

Contact Christopher R. Rahl | crahl@gfrlaw.com | 410-576-4222

Surety's Subrogation Right to Retainage Takes Priority Over Senior Lien of Lender

A recent Mississippi bankruptcy court case serves as a reminder of the rights of a surety versus a lender. After a contractor filed for bankruptcy, a dispute arose between the contractor’s lender and the contractor’s surety under performance and payment bonds. The lender and the surety claimed a priority interest in the retainages.  The lender’s claim was based on its recorded security interest in the contractor’s receivables and the surety’s was based on the doctrine of equitable subrogation.  The bankruptcy court held in favor of the surety, reasoning that the surety’s right of subrogation to a contractor’s retainages takes priority over the lender’s lien on the contractor’s receivables, even where the lien is perfected before the bond was issued. Click here to read more about the case and its implications.

Practice Pointer: Although not ground breaking, the bankruptcy court’s decision highlights the risk that a lender takes by extending a loan secured by receivables which is made to a bonded contractor.  In a battle between the lender and the surety as to which can realize on retainage receivables, the surety will most likely prevail.

Contact Lawrence D. Coppel | lcoppel@gfrlaw.com | 410-576-4238

SEC Issues Guidance on Permissible Investment Advisory Services by Brokers and Dealers

On June 5, 2019, as part of regulatory reforms intended to improve the quality and transparency of investors’ relationships with securities professionals, the Securities and Exchange Commission (SEC) issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion to the definition of “investment adviser” contained in the Investment Advisers Act of 1940, as amended (IAA).  This interpretation became effective on June 12, 2019.  Section 202(a)(11) of the IAA defines an “investment adviser” as a person who, for compensation, engages in the business of advising others as to the value of securities or as the advisability of investing in, purchasing, or selling securities, or that issues or promulgates analyses or reports concerning securities.  Investment advisers are generally required to register with the SEC or with one or more of the states.  Under Section 202(a)(11)(C) of the IAA, however, a broker or dealer is excluded from the definition of “investment adviser” if its advisory services are “solely incidental” to the conduct of its business as a broker or dealer and it does not receive any special compensation for those advisory services.  The SEC’s interpretation reiterates the SEC’s view that the advisory services performed by a broker or dealer do not have to be “trivial, inconsequential, or infrequent” to meet the “solely incidental” prong.  Rather, an advisory service will be deemed “solely incidental” if it “is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions,” based on the totality of the facts and circumstances surrounding the broker-dealer’s business, the services that it offers and its relationships with customers.

Practice Pointer: The bulk of the SEC interpretation focuses on how the “solely incidental” prong applies in two contexts:  (i) investment discretion over customer accounts; and (ii) account monitoring and account reviews. Securities professionals should review the interpretation to evaluate whether their current operations align with the SEC’s recent guidance.

Contact Andrew D. Bulgin | abulgin@gfrlaw.com | 410-576-4280