Special Bulletin

At this time of year, we at Ward and Smith are reflecting on the major issues in the Financial Institutions legal arena that we saw develop in 2004 which will continue to be, in our opinion, critical issues in 2005. This bulletin is only an issue-based memo to express the issues rather than to provide any detailed solutions or analyses:

1. Wage and Hour Act Amendments - In 2004, the Federal Wage and Hour Act was amended and, for the first time, specific-to-Financial-Institutions Regulations were issued. Also, the rules on who can be paid a salary were changed. Remember: The amount you pay, either by the hour, by the week, or by the month, is not as important (provided you are paying minimum wage) as how you calculate the pay. This issue will certainly be getting more attention in the future.

2. How to Handle Employee Terminations - Yes, North Carolina still has "at will" terminations; however, the public policy exceptions are growing and the best protection is well-documented, thoughtful, and timely-shared evaluations -- both positive and negative. A person in a protected class is a real problem unless you have the "at the time" documentation in writing. Be sure you have a solid case before you pull the trigger.

3. Federal Tax Liens - The recent case of Fletcher vs. Bank of America held that a tax lien had priority over an advancement on a future advance loan arrangement. This case is not new law; however, it should be a wakeup call for all Financial Institutions to reexamine their procedures with regard to federal tax liens.

4. Compliance - 2004 saw some major payments from Financial Institutions to avoid criminal prosecution (Riggs National, Am South, and Bank of New York) and, in some cases, to avoid paying significant penalties. Compliance is here to stay. You must have a viable program of in-depth compliance with day-to-day monitoring and education, education, education.

   * BSA/AML/U.S. Patriots Act - The law has moved very quickly from objective CTR filings (still required) to more emphasis on SAR filings where required. The new emphasis is on "know your customer," due diligence follow-up to determine what your customer is doing, and direction of more resources for related investigations and filings. You can either comply and pay the fiddler or fail to comply, face criminal charges, pay penalties, and still pay the fiddler. Compliance is a lot cheaper in actual dollars -- not to mention the avoidance of reputation damage.

5. Corporate Governance - If you are a publicly traded company, the Securities and Exchange Commission, the appropriate stock exchange, and all of the banking regulators have taken active positions on corporate governance and the Sarbanes-Oxley Act requirements. Differences in approach do exist -- bottom line: You must comply.

   If you are not a publicly traded company, your banking regulators more than likely will be including corporate governance as a part of the next safety and soundness examination. The Federal Reserve of Richmond has done a study and has published a report showing the strengths, weaknesses, and generally what is expected of financial institutions as to corporate governance. We suggest that you do an in-depth study of this matter and be proactive or the regulators are going to write you up.

6. Grand Jury Subpoenas - When you get one for records of a customer, you CANNOT tell the customer or provide the customer with any information about the subpoena. Furthermore, we would advise that you make sure that you "know your customer," that you know what your customer is doing, and that you know what type of transactions you are conducting for that customer. Generally, grand juries do not subpoena records unless their target (your customer) has a problem of some criminal nature.

7. Frauds - The elderly continue to be the subject of attacks by wrongdoers. A number of schemes are being employed. If it looks too good to be true, it probably is. Again, educating your officers and employees is vitally important in this area. Be sure to report via SAR if appropriate.

8. Risk Assessment/Internal Controls/Audit - Not a new subject: Strong internal controls are being viewed as the means for deterring fraud, misappropriation, and terrorists actions. Section 404 of Sarbanes-Oxley has broad requirements and this will continue for an indefinite time. Audit resources must be allocated to high risk areas. In allocating resources, do not just leave the other areas completely open. Make sure that your internal controls are working. An objective test every now and then is often helpful.

9. New Products - Whether you are building a product based on an old format (i.e., payroll cards, stored value cards, etc.) or adopting a new product for your institution, make sure that concepts that have been in place for some time such as Regulation Z, usury, and other consumer disclosures really are not applicable if that is the position you want to take. If you have a question about whether a consumer will have a complaint or lead you into a class action lawsuit, you'd better take a hard objective and analytical look at the product before you jump in. Just because someone else is using it does not mean that it is a viable product for you. Be alert for guidance and regulation from the Federal Reserve and other regulators on existing or newly-introduced products in the market place. Some guidances have been seen as roadmaps for class action attorneys.

10. Harassment - Management is charged by law with responsibility for continuing a live and active anti-harassment policy and program. Make sure that you are current with your policy and related educational materials, that you are seeing to the education process, that your people understand your program, and that its enforcement is active and uniform. The thought process starts at the top.

We wish each of you a happy holiday season and hope that 2004 has been a productive and prosperous year for you. We also wish you the best for 2005. The issues listed above are, in many instances, very comprehensive; thus, a number of our attorneys are involved. Any of our offices can direct you to an appropriate attorney for any item of concern. If we can be of any service to you, please contact us at the address or telephone numbers listed to the right.

Ward and Smith, P.A. is the largest law firm based in eastern North Carolina, and serves as counsel for more mid- and large-sized businesses in the region than any other law firm. More than 60 attorneys comprise the firm and serve clients locally, regionally, nationally, and internationally from offices in Greenville, New Bern, Raleigh, and Wilmington. Honored with the distinction of being rated as one of America's Greatest Places to Work with a Law Degree by Harcourt Brace, Ward and Smith, P.A. is also home to 16 attorneys included in the publication The Best Lawyers in America and six attorneys selected as "Legal Elite" from a peer-review survey published in Business North Carolina.

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This newsletter is not intended to give, and should not be relied upon for, legal advice in any particular circumstance. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.