Federal Banking Regulators Take Steps to Allow Financial Services for Hemp-Related Businesses

Banking has been an impediment for the cannabis industry because the Bank Secrecy Act of 1970 (BSA) and related regulations―which seek to prevent money laundering and other financial crimes―place onerous requirements on banks when a transaction is suspected to involve illegal activity. 12 C.F.R. Section 21.11. Notwithstanding billions of state-legal cannabis dollars exchanging hands, the commercial banking industry, which is largely federally regulated, is virtually nonexistent in the cannabis space. In 2014, the Treasury’s Financial Crimes Enforcement Network (FinCEN) provided guidance intended to enhance the banking of cannabis-related monies by establishing a category of suspicious activity reporting for “marijuana related businesses.” But, according to FinCEN, as of June 30, 2019, just 553 commercial banks and 162 credit unions had filed an SAR for a “marijuana-related business.”

View the full Alert on the Duane Morris LLP website.

Unitranche Facilities – Continued Growth in an Uncertain Market: Part III

In two recent posts I discussed (i) the structure of unitranche facilities and their growing acceptance in the market and (ii) the uncertainty inherent in these facilities because they have not been tested by a troubled economic environment. Below I address certain of the substantive differences between common terms contained in agreements among lenders (or AALs) found in unitranche transactions and more traditional intercreditor agreements between first lien and second lien lenders. Note that because the unitranche market continues to develop, the standardization found in intercreditor agreements does not yet exist for AALs and many terms remain negotiable. Continue reading Unitranche Facilities – Continued Growth in an Uncertain Market: Part III

Unitranche Facilities – Continued Growth in an Uncertain Market: Part II

By Frederick D. Hyman

In an earlier post, I generally discussed the structure of unitranche facilities and their growth in popularity among borrowers since the credit crisis. Of course, this explosive growth has occurred in a relatively benign economic environment. As a result, the inherent limitations of the structure have not been tested by a downturn or, in turn, by bankruptcy courts. Lenders exploring the market must do so with some caution and a fulsome understanding of the rights of, and limitations on, “first out” lenders in a distressed scenario.

By their nature, unitranche debt does not easily allow senior lenders to silence junior lenders in times of distress based on collateral valuation alone because all the borrower’s obligations are secured by a single lien. Instead, protections must be carefully drafted into the AAL. These protections will include, for e.g., waivers of the ability of “last out” lenders to vote in favor of a contradictory plan of reorganization, restrictions on their rights to object to asset sales, and limitations on the rights of such lenders to provide post-petition financing. Similar provisions contained in first lien/second lien intercreditor agreements have been deemed enforceable “subordination provisions” in the context of a bankruptcy. The same should generally hold true for AALs. If an intercreditor dispute arises in the context of a borrower’s bankruptcy, lenders should be mindful that a bankruptcy court might decline to accept jurisdiction (particularly if the borrower is not a party to the AAL), leaving an unrelated state or federal court to address the matter. Continue reading Unitranche Facilities – Continued Growth in an Uncertain Market: Part II

Unitranche Facilities – Continued Growth in an Uncertain Market: Part I

By Frederick D. Hyman

A variety of factors have fed the rapid growth in the market for unitranche loans during the last few years.  These structures — a hybrid of a traditional single lien and a first lien/second lien facility – began in the lower middle-market and are now commonly found in loan transactions exceeding $100 million.

In this first in a series of posts addressing this quickly developing market, I discuss below the basic structure of unitranche facilities.  In later posts I will address certain of the intercreditor issues that necessarily arise when negotiating unitranche loans and the complexities that may be presented by the unitranche structure in a market downturn. Continue reading Unitranche Facilities – Continued Growth in an Uncertain Market: Part I

FIRREA: A Powerful Tool for the Government

The U.S. Department of Justice (“DOJ”) financial fraud enforcement program’s actions in the wake of the 2007–2008 financial crisis have led to some of the largest settlements in the history of the DOJ. To date, 10 financial institutions have reached settlements with the DOJ resolving allegations of fraudulent packaging and sale of residential mortgage-backed securities (“RMBS”) in the run-up to the crisis. The government has recovered a total of nearly $62 billion in fines and penalties from these cases. While a few institutions have yet to resolve their RMBS cases with the DOJ, the RMBS cases have largely run their course. A decade out from the crisis, it is worth taking a look back at the conduct that led to these cases, the reasons the government was able to extract such large penalties and how financial institutions can prepare for such enforcement actions in the future.

The full text of this article by Duane Morris partner Christopher H. Casey is available on the firm website.

House Passes Changes to Title III of the ADA

By J. Colin Knisely
On February 15, 2018, the U.S. House of Representatives passed the Americans with Disabilities (ADA) Education and Reform Act . The bill passed by a vote of 225 to 192, with 12 Democrats voting in favor of the bill. Most of the Democrats who joined with Republicans to support the bill were from California, where state law allows plaintiffs to recover actual damages and a statutory minimum of $4,000 for each time the plaintiff visited a business and encountered an access barrier, in addition to the attorney’s fees available under the ADA.

Proponents of the bill argue that the amendment to Title III of the ADA will curb the number of frivolous, “drive-by” lawsuits against businesses, which have increased dramatically in the past few years. H.R. 620 would create a “notice and cure” requirement before any legal action could be taken against a business for an alleged failure to comply with the standards set by Title III. Under H.R. 620, a claimant must first send a business owner or operator a written notice “specific enough to allow such owner or operator to identify the specific barrier.” The written notice must further specify “in detail the circumstances under which an individual was actually denied access to a public accommodation” and “whether a request for assistance in removing an architectural barrier was made.”

A claimant can only file a lawsuit if the business does not respond to the written notice within 60 days with “a written description outlining improvements that will be made to remove the barrier.” If the business responds, but “fails to make substantial progress” in implementing the improvements, a lawsuit can be filed.

Critics of the H.R. 620 have argued that it would effectively exempt businesses from compliance with Title III until the business receives notice of an alleged compliance issue, and that it would shift the burden of protecting access onto the person with the disability, whom critics have argued would have to become experts on the legal code in order to properly comply with the notice requirements of H.R. 620.

H.R. 620 has now moved to the Senate, where the fate of the bill is uncertain. However, there is currently no companion bill in the Senate, and Republicans in the Senate would still need to gain the support of several Democrats to meet the Senate’s 60 vote threshold.

Considerations for Banks Given New Guidance on Cannabis

In a January 4, 2018, memorandum regarding marijuana enforcement, U.S. Attorney General Jefferson B. Sessions rescinded, effective immediately, the previous guidance issued by the Department of Justice on marijuana, including the memorandum often referred to as the Cole Memo. To the extent a bank’s compliance program relating to marijuana-related businesses (MRBs) relied on the guidance in the Cole Memo, the bank should immediately re-evaluate what changes in that program, if any, may be appropriate.

To read the full text of this Alert, please visit the Duane Morris website.

FTC, FCC Flex Muscles

Duane Morris partner Joseph Burton was featured in a video on Bank Info Security  on the impact of regulators involved in cybersecurity.

The Federal Trade Commission and the Federal Communications Commission are among U.S. regulators now starting to flex their muscles when it comes to enforcing cybersecurity standards, says Burton. What enforcement trends might we expect to see in 2017?

To view the video, please visit the Bank Info Security website.

Webinar: The FDIC Loss-Share Program: How to Extract Every Last Dollar

Duane Morris LLP and FTI Consulting invite you to our webinar, The FDIC Loss-Share Program: How to Extract Every Last Dollar, to be held on Thursday, March 2, 2017  from 11:00 a.m. to 12:00 p.m. Central time.

Duane Morris lawyers and FTI Consulting professionals will discuss strategies that can help banks maximize recoveries under the FDIC Loss-Share Program. Generally, the FDIC will reimburse 80 percent of losses for a covered asset, while the acquiring bank absorbs 20 percent of the loss, provided certain conditions and reporting requirements are met. Our program will outline the common challenges that banks face with the FDIC Loss-Share Program and provide practical solutions that increase loss-sharing recoveries.

Please visit the event page on the Duane Morris website for more information or to register online.

New Interagency Rules on Expanded Examination Cycle to Take Effect on January 17, 2017

The OCC, Federal Reserve, and FDIC have published an interagency final rule amending the regulations governing eligibility for the 18-month on-site examination cycle which will take effect on January 17, 2017. 1 and 2 rated national banks, federal savings associations, and federal branches and agencies with less than $1 billion in total assets will now be eligible for an 18-month rather than a 12-month examination cycle.

Section 10(d) of the Federal Deposit Insurance Act generally requires that each insured depository institution undergo a full scope, on-site examination at least once during each 12-month period. This can be a time consuming, expensive and disruptive process for community banks and other institutions. In 2015, the FAST Act was enacted, Public Law 114-94, 129 Stat. 1312 (2015), which authorized bank regulatory authorities to extend the on-site examination cycle for certain insured depository institutions. Prior to the FAST Act and impending rules changes examination cycles were available only to qualifying 1 and 2 rated banks with less than $500 million in total assets. The FAST Act amendments and rules changes are intended to reduce regulatory burdens on small, well capitalized, and well managed institutions and allow the agencies to better focus their supervisory resources on those insured depository institutions and domestic branches and agencies of foreign banks that may present capital, managerial, or other issues of supervisory concern.

According to the final interagency rule, the FDIC analyzed the frequency with which institutions rated a composite CAMELS rating of 1 or 2 failed within five years, versus the frequency with which institutions rated a composite CAMELS rating of 3, 4, or 5 failed within five years. That analysis indicated that between 1985 and 2011, insured depository institutions with assets less than $1 billion and a composite CAMELS rating of 1 or 2 had a five-year failure rate that was one-seventh as high as institutions with a CAMELS rating of 3, 4, or 5. The analysis did not change when restricted to institutions with assets between $200 million and $500 million versus institutions with $500 million to $1 billion in assets.

For more information or to discuss legal concerns about your institution’s examination process contact Mark Bradford (mabradford@duanemorris.com) or Mark Belongia (mbelongia@duanemorris.com). Mark Belongia and Mark Bradford of Duane Morris LLP routinely advise insured depository institutions about regulatory compliance and related matters.