• Banking agencies issue rules on nonfinancial equity investments
• Bankruptcy Court limits use of tracking function
• Basel Committee issues audit guidelines
• California employers must accommodate lactating employees
• Contempt – Remedy for violation of discharge injunction
• Employee's e-mail spam is considered a trespass
• False stop payment request is found to be a crime
• FDIC gains intervention power
• FRB – HMDA reporting requirements
• FTC – identity theft tops list of complaints
• FTC restricts telemarketing
• IRS issues guidelines on bad debt conformity elections
• IRS issues rules on like-kind exchanges
• IRS – Tax Identification Number for foreign individuals
• Privatization of Sallie Mae
• Public Oversight Board ends its existence
• States may enforce Telemarketing Sales Rule for nonbank subsidiaries
• Student loans may be partially discharged
• Voice-Activated ATMs

The FRB, FDIC and OCC issued a joint press release in connection with the adoption of final rules governing the new capital requirements for equity investments in nonfinancial companies made by banks, bank holding companies and financial holding companies. Covered equity investments will be subject to a series of marginal Tier 1 capital charges, with the size of the charge increasing as the organization's level of concentration in equity investments increases. The highest marginal charge specified in the final rules requires a 25 percent deduction from Tier 1 capital for covered investments that aggregate more than 25 percent of an organization's Tier 1 capital. Equity investments through SBICs will be exempt from the new charges to the extent such investments, in the aggregate, do not exceed 15 percent of the banking organization's Tier 1 capital. The new charges would not apply to individual investments made by banking organizations prior to March 13, 2000. Grandfathered investments made by state banks under section 24(f) of the Federal Deposit Insurance Act also are exempted from coverage. The agencies reiterated their intent to apply heightened supervision to banking organizations as their level of concentration in equity investments increases. (FDIC Press Release 2-2002, 1/8/02). The new rule is effective on April 1, 2002.

According to the U.S. Court of Appeals for the Tenth Circuit, a bankruptcy court must weight the claims of other creditors (here, similarly-situated fraud victims) before employing an equitable fiction such as the "lowest intermediate balance rule" to return funds to one of the last victims of a ponzi scheme (In re Bryan K. Foster, 2001 U.S. App. Lexis 27194).

On 1/21/02, the Basel Committee on Banking Supervision issued new guidelines for bank auditing entitled "The Relationship Between Banking Supervisors and Banks' External Auditors". The rules detail the duties applicable to senior management, boards, audit committees and internal auditors (http://www.bis.org/bcbs/publ.htm).

California employers must provide break time to lactating employees who need to express milk during the work day. (AB 1025) The law affords employers an exemption from this requirement if the break seriously disrupts the employer's operations.

The U.S. Court of Appeals for the Ninth Circuit affirmed a lower court ruling that a creditor may be found in contempt for attempting to collect debts that are discharged in bankruptcy. No private right of action exists, however, under Bankruptcy Code § 524. A contempt finding not only ensures a creditor's adherence to a discharge injunction, but also provides the debtor with relief in the form of compensatory damages and attorneys' fees (Walls v. Wells Fargo Bank, N.A., 2002 U.S. App. Lexis 202 (filed 11/8/02)).

An employer was entitled to injunctive relief based on a theory of trespass in connection with a former employee's repeated flooding of a company's email system, following his termination of employment from the company (Intel Corporation v. Hamidi, 94 Cal. App. 4th 325 (Ca. Ct. App. 2001)).

The U.S. Court of Appeals for the Ninth Circuit reversed a lower court ruling, holding that 18 U.S.C. § 1014 not only criminalizes false statements made in connection with lending transactions, but extends to such statements made upon any application, advance, discount, purchase, purchase agreement, repurchase agreement or commitment to an institution insured by the FDIC. The court ruled that a request to stop payment on an official bank check is an "application" or "commitment" under the statute (United States of America v. Allan Boren, 2002 Daily Journal D.A.R. 789, 01/23/02) [In this case, the defendant falsely claimed that an officical check used to pay a gambling bet had been lost or stolen.].

The FDIC entered into an interagency agreement that will enable it to conduct an examination of any bank that has a Camels rating of 3, 4 or 5 or is deemed undercapitalized, without the express consent of the bank's primary federal supervisor. The FDIC intends to create a "dedicated examiner program" to improve access to supervision records and exams of the eight largest banking entities in the U.S.

The FRB approved amendments to Regulation C under the Home Mortgage Disclosure Act (HMDA) which will increase the number of nondepository institutions subject to HMDA's reporting requirements. The FRB emphasized the importance of requiring comprehensive reporting by lenders to fight predatory lending practices. Certain requirements of the final rule include:

• Reporting on the spread between the APR on the loan and the yield on the comparable Treasury security if the loan has an APR beyond a specified threshold;
• Identification of loans subject to the Home Ownership and Equity Protection Act;
• Reporting on whether the loan involves a manufactured home; and
• Reporting denials of applications for credit obtained through certain pre-approval programs.
  

The FTC announced that identity theft constituted approximately 42% of 204,000 complaints filed with the Commission, and rated the highest of the top ten consumer complaints during 2001. Internet auctions accounted for the next highest number of complaints.

On January 22, 2002, the FTC introduced a proposal to amend the Telemarketing Sales Rule and establish a nationwide "do not call" registry. The proposal sets forth new restrictions on telemarketers in connection with the sale of credit-card protection plans, limits consumer credit-card liability in connection charges arising from telemarketing, and increases restrictions on transfers of personal information. Comments on the proposal must be submitted no later than March 29, 2002.

On January 16, 2001, the IRS issued guidelines governing the audit of bad debt conformity elections by banks. The conformity election details an accounting method for banks to establish a "conclusive presumption of worthlessness for loans." The guidelines specify the following four requirements a bank must satisfy to be eligible for the presumption:

• Valid conformity election (Form 3115, Application for Change in Accounting Method);
• Valid express determination letter(s) from federal supervisory authorities;
• Debt is charged off for book purposes; and
• Debt is classified as a "loss asset" or that designation is ordered by the subject bank's regulator.

If these requirements are met, no additional audit steps are necessary. Certain loans fall outside the scope of regulatory loan loss standards and the conformity election (e.g., securitizations afforded sales treatment for book purposes, various restructured loans, and loans accounted for on a cost recovery basis).

The guidelines are a companion to Revenue Ruling 2001-59, 11/01, and not a formal declaration of the law (BNA's Banking Report, 1/21/02).

The IRS issued a rule, effective 2/1/02, that allows banks greater leeway in participating in like-kind exchanges even though they are affiliated with an investment banking or brokerage service that provided services to a party to the exchange (T.D. 8982).

The IRS issued temporary regulations to address situations in which an unexpected payment to a foreign individual claiming treaty benefits arises on short notice. Foreign individuals will be afforded a limited exception to the withholding rules that otherwise require them to provide a tax identification number to a withholding agent prior to obtaining a reduced rate of withholding tax under an income tax treaty. The IRS now permits certain withholding agents to apply for and secure an individual taxpayer identification number for such individuals on an accelerated basis (67 Federal Register 2327, 1/17/02).

Less than two years before the statutorily-imposed deadline passed by the U.S. House of Representatives, Sallie Mae's board declared its intention to fully privatize the company by September 2006. Sallie Mae is a government-sponsored institution and a leading provider of financial services for higher education.

The five member Public Oversight Board, which serves as the accounting industry's review board and is responsible for the oversight of auditors' peer reviews and failed audits, voted unanimously to "terminate its existence" by March 31, 2002. The Public Oversight Board's withdrawal from existence leaves no formal body in place to supervise audits of public companies.

A Minnesota federal court ruled that states may enforce the FTC's Telemarketing Sales Rule ("TSR") against national bank nonbank subsidiaries. The court rejected the OCC's contention that the Gramm-Leach-Bliley Act affords the OCC exclusive jurisdiction to enforce the TSR against nonbanks. Although the FTC lacks authority to regulate banks, the FTC's scope of authority extends to nonbanks, including operating subsidiaries of banks, for purposes of states' enforcement of the TSR.

A student loan may be discharged to the extent that the debtor would suffer undue hardship in connection with its repayment (Bankruptcy Law Reports, No. 586, 1/14/02).

The Architectural and Transportation Board, the federal agency responsible for issuing guidelines implementing the Americans with Disabilities Act, proposed final guidelines requiring all future ATMs be voice-activated to enhance accessibility to blind persons. The Board anticipates obtaining approval for the final guidelines, with the endorsement of the Justice Department, in early 2002.