In the wake of the largest financial crises in the nation's
history, everyone is looking to the person next to them, with a
knowing look, as we discuss exactly what happened. Certainly,
recovery is the desired result with basic elements of a lower
unemployment rate and increased consumer confidence. The
disagreement, however, is how to achieve the ultimate goal of a
stable and prosperous economy. Some say that the private sector
should be left alone to correct itself. Others think some measure
of private independence combined with limited government oversight
is just the right cocktail. For now though, government regulation
is king.
At the national level, the passage of the Dodd-Frank Wall Street
Reform and Consumer Protection Act has resulted in sweeping
regulation and oversight of the financial services industry. With
the passage of the Fraud Enforcement and Recovery Act of 2009,
President Obama created a Financial Crisis Inquiry Commission
charged with the responsibility of "reporting" to
Congress by December 15, 2010 on the "cause" of the
crisis. Not to be excluded from a role in the "recovery,"
states from coast to coast are taking a fresh look at their
regulatory framework as applied to the financial services
industries they govern. Kentucky is no exception. During the last
legislative session, several bills were passed that affect the
state banking institutions, securities broker-dealers and
investment advisors, just to name a few.
It is impossible to address all of the various pieces of
legislation in this article; however, a few highlights from those
affecting the financial services industry gives insight into the
role state regulators anticipate taking in the coming years.
Kentucky's Senate Bill 117, signed into law on March 25, 2010,
amends the statute governing financial services, which encompasses
state-chartered banks. In general, the legislation clarifies
various provisions in the existing law, but overall represents a
direct response to the financial crisis of 2008. For example, the
legislation raises the minimum capital stock of a newly organized
state bank to $5 million from the previously required $2.5 million.
Further, it prohibits a reduction of capital stock by any state
bank to under $2.5 million without obtaining prior approval of the
Department of Financial Institutions. Also, the official inclusion
of a category for rating a financial institution –
sensitivity to market risk – denoted by the "s"
present in the CAMELS rating system used to assess the overall
health of a bank.
While the legislation creates additional obligations and increased
oversight, a few provisions do encourage the development of
state-charted banks. For example, the procedures for chartering a
bank or trust company, converting a national bank to a state bank,
and for closing, consolidating or relocating branch offices have
been streamlined. There is a new catchall provision to authorize
banks to hold assets taken as security for debts previously
contracted not otherwise covered by the statute. Recently, the
Department also issued an opinion letter that authorizes de novo
branching into Kentucky by out-of-state banks.
The securities industry in Kentucky was also affected by recent
legislation. Kentucky's Senate Bill 130 was signed into law on
April 7, 2010. This legislation seeks to protect
"unknowing" investors from fraud. Over the past several
years, the Department of Financial Institutions has increased its
investigative and enforcement efforts to stop
"unregistered" and fraudulent securities offerings. It
seems Kentucky has been a hotbed for oil and gas schemes resulting
in investor fraud totaling at least $100 million dollars over the
past several years. Not surprisingly, the most significant changes
to the statute involve investor protection. First, the legislation
clarifies that all investors, regardless of financial status, must
receive all material information in connection with the purchase of
a security sold in a transaction that is exempt from registration
in Kentucky. Second, the Department now may impose a maximum fine
of $20,000 for each individual violation of the securities laws and
doubles the maximum fine for violations involving harm to anyone
over the age sixty. Lastly, the legislation created the
"Securities Fraud Prosecution and Prevention Fund" to be
funded with a portion of fees assessed for violations of the
Securities Act.
In addition, the Dodd-Frank Act, with some exceptions, limits the
SEC's regulatory authority to investment advisors with more
than $100 million in assets under management rather than the
previous $25 million floor. This drastically increases the role of
the state regulator and the interaction many businesses will have
with the compliance and enforcement arms of the state.
Finally, several changes impact those acting as guardians or
conservators by limiting the fees that can be charged. The Office
of the Attorney General increased its regulatory authority over
"debt adjustors" by requiring that companies involved in
"debt settlement" practices must register with their
office. In addition to the fee limitations and contractual
requirements with debtors, the Office can now pursue action against
problem companies under the Consumer Protection Act. Finally, all
of these statutes will be accompanied by administrative regulations
which further clarify the factors to be considered by the
regulatory authority in administering the statute.
Whether we are on the path to recovery is perhaps an open question.
Much of it is wait, see, and hope. In the meantime, however, the
financial services industry should prepare to meet its regulators
as Kentucky clearly intends to have an increased role in the
process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
