Recent Developments
By: BEAU J. HURTIG
March 2006
IRAs as Sub S Shareholders
Congress recently enacted the Gulf Opportunity Zone Act of 2005 ("GOZA"), primarily to provide relief to a number of states victimized by Hurricane Katrina. However, Congress also took the opportunity to make a technical correction to the American Jobs Creation Act of 2004 ("AJCA"). AJCA allows IRAs that owned bank stock as of October 22, 2004, to be considered qualifying Subchapter S shareholders, thereby enabling banks to elect S corporation status if all the bank's other shareholders also qualify as Subchapter S shareholders. Unfortunately, AJCA did not make the same exception applicable to IRA ownership of bank holding company stock. GOZA corrects this error by allowing IRAs owning stock in "depository institution holding companies" as of October 22, 2004, also to be qualifying Subchapter S shareholders. GOZA's correction does not apply to IRAs created after October 22, 2004, or an IRA's acquisition of holding company (or bank) stock after October 22, 2004.
Interagency Guidance on Sharing Suspicious Activity Reports with Head Offices
The Bank Secrecy Act and its implementing regulations require banks to file Suspicious Activity Reports ("SARs") under certain circumstances and generally obligate banks and their directors, officers, employees, and agents who file SARs to maintain in confidence the fact that they filed the SAR. The general exceptions to this rule include disclosures to bank supervisory agencies, law enforcement, and the Financial Crimes Enforcement Network. Confusion arose as to whether banks could share the SAR or the fact that the bank filed the SAR with other entities within its corporate structure. On January 20, 2006, the Banking Agencies issued Interagency Guidance on Sharing Suspicious Activity Reports with Head Offices and Controlling Companies ("Guidance") allowing U.S. banks or savings associations to disclose SARs to their controlling companies regardless of where the controlling company is located. In a global context, the Guidance also permits U.S. branches or agencies of foreign banks to share SARs with their head offices outside the U.S. The Banking Agencies justified this Guidance by stating "head offices and controlling entities or parties may have a valid need to review a branch's, officer's, or depository institution's compliance with legal requirements to identify and report suspicious activity" to "discharge its oversight responsibilities with respect to enterprise-wide risk management and compliance with applicable laws and regulations."
It is important to note that depository institutions filing SARs should share the SAR only with their head office and/or controlling entity. If more than one company controls the depository institution, the depository institution may share the SAR with each controlling company. However, depository institutions should not share the SAR with branches that are not head offices or anyone else except to the extent allowed by law. Further, the Guidance requires that, as part of their anti-money laundering program, depository institutions that share SARs maintain written confidentiality agreements or arrangements "specifying the head office or controlling company must protect the confidentiality of the [SAR] through appropriate internal controls." Finally, depository institutions should not share the SAR with head offices or controlling companies "if there is a reason to believe it may be disclosed to any person involved in the suspicious activity that is the subject of the [SAR]." For example, depository institutions should not disclose SARs to the head office if the subject of the SAR is employed there.
National Banks Have More Authority for Remaining in Federal Court
On January 17, 2006, the U.S. Supreme Court, in Wachovia Bank v. Schmidt, 126 S.Ct. 941 (2006), determined that a national bank shall only be deemed "a citizen of the State in which its main office, as set forth in its articles of association, is located." The ruling is important because it helps large national banks operating in more than one state to enter federal court rather than litigating in state courts. National banks often prefer litigating in federal courts because they view federal courts as being more friendly to multi-state banking operations and state courts as being more friendly to local plaintiffs.
To be able to litigate a case in federal court, parties generally rely upon "diversity jurisdiction," which means the dispute must involve more than $75,000 and the parties must be citizens of different states. Corporations are generally deemed to be citizens of the state where they are incorporated. Additionally, if the corporation has its principal place of business in a state other than where it filed corporate documents, the corporation will be deemed also to be a citizen of the state where its principal business is located. Therefore, a corporation can be a citizen of at most two states for diversity jurisdiction purposes. If a citizen of the remaining 48 states sues the corporation, it has a much better chance of moving its case to federal court.
The diversity jurisdiction rule was not directly applicable to national banks because national banks are incorporated nationally and not in any particular state. A federal statute states, however, that national banks are deemed to be citizens of the state in which they are located, and the lower court interpreted this to mean national banks are citizens of every state in which the bank maintains a branch office. The Supreme Court was disturbed by the fact that the lower court's decision "severely constricts national banks' access to diversity jurisdiction as compared to the access available to corporations generally." In fact, Wachovia Bank would have been considered to be a citizen of 16 states under the lower court's holding. Because national banks are now considered to be citizens of one state for diversity jurisdiction purposes, the Wachovia holding allows national banks much greater access to federal courts in cases involving diversity jurisdiction.